[Senate Hearing 107-90]
[From the U.S. Government Publishing Office]
S. Hrg. 107-90 (Pt. 1)
U.S. ENERGY TRENDS
=======================================================================
HEARINGS
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
TO REVIEW CURRENT U.S. ENERGY TRENDS AND RECENT CHANGES
IN ENERGY MARKETS
__________
MARCH 21, 2001
APRIL 3, 2001
APRIL 26, 2001
__________
PART 1
Printed for the use of the
Committee on Energy and Natural Resources
______
U.S. GOVERNMENT PRINTING OFFICE
74-059 DTP WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON ENERGY AND NATURAL RESOURCES
FRANK H. MURKOWSKI, Alaska, Chairman
PETE V. DOMENICI, New Mexico JEFF BINGAMAN, New Mexico
DON NICKLES, Oklahoma DANIEL K. AKAKA, Hawaii
LARRY E. CRAIG, Idaho BYRON L. DORGAN, North Dakota
BEN NIGHTHORSE CAMPBELL, Colorado BOB GRAHAM, Florida
CRAIG THOMAS, Wyoming RON WYDEN, Oregon
RICHARD C. SHELBY, Alabama TIM JOHNSON, South Dakota
CONRAD BURNS, Montana MARY L. LANDRIEU, Louisiana
JON KYL, Arizona EVAN BAYH, Indiana
CHUCK HAGEL, Nebraska DIANNE FEINSTEIN, California
GORDON SMITH, Oregon CHARLES E. SCHUMER, New York
MARIA CANTWELL, Washington
Brian P. Malnak, Staff Director
David G. Dye, Chief Counsel
James P. Beirne, Deputy Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Bryan Hannigan, Staff Scientist
Dan Kish, Professional Staff Member
Howard Useem, Senior Professional Staff Member
Shirley Neff, Staff Economist
C O N T E N T S
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Page
Hearings:
March 21, 2001............................................... 1
April 3, 2001................................................ 69
April 26, 2001............................................... 133
STATEMENTS
March 21, 2001
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 4
Burns, Hon. Conrad, U.S. Senator from Montana.................... 4
Caruso, Guy F., Executive Director, Strategic Energy Initiative,
Center for Strategic and International Studies................. 16
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 6
Hoover, Frederick H., Jr., Director, Maryland Energy
Administration, on behalf of National Association of State
Energy Officials............................................... 40
Hutzler, Mary, Director, Office of Integrated Analysis and
Forecasting, Energy Information Administration................. 9
Kyl, Hon. Jon, U.S. Senator from Arizona......................... 7
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 6
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 1
Nugent, William M., Commissioner, Maine Public Utilities
Commission, on behalf of National Association of Regulatory
Utility Commissioners.......................................... 32
Placke, James A., Director, Middle East Research, on behalf of
Cambridge Energy Research Associates........................... 23
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 7
April 3, 2001
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 73
Burns, Hon. Conrad, U.S. Senator from Montana.................... 74
Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado........ 71
Cantwell Hon. Maria, U.S. Senator from Washington................ 76
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............ 72
Hayes, David J., Former Deputy Secretary of the Interior......... 89
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 76
Leahy, Dr. P. Patrick, Associate Director for Geology, U.S.
Geological Survey, Department of the Interior.................. 79
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 69
Rubin, Mark, General Manager, Upstream, American Petroleum
Institute...................................................... 96
Simmons, Matthew R., President, Simmons & Company International.. 84
Stanley, Neal A., Vice President, Western Region, Forest Oil
Corporation, on behalf of Independent Petroleum Association of
Mountain States................................................ 105
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 75
April 26, 2001
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 135
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 139
Daigle, D.H., Director of Americas Refining, ExxonMobile Refining
and Supply Company
Statement of................................................. 155
Letter from.................................................. 183
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............ 137
Greenbaum, Daniel S., President, Health Effects Institute,
Cambridge, MA.................................................. 153
Heminger, Gary, Executive Vice President, Supply, Transportation
and Marketing, Marathon Ashland Petroleum...................... 142
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 140
Moyer, Craig, Executive Director, Western Independent Refiners
Association.................................................... 160
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 133
Robinson, Thomas L., Chief Executive Officer, Robinson Oil
Corporation.................................................... 148
Schumer, Hon. Charles E., U.S. Senator from New York............. 140
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 137
U.S. ENERGY TRENDS
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WEDNESDAY, MARCH 21, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:36 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Frank
Murkowski, chairman, presiding.
OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,
U.S. SENATOR FROM ALASKA
The Chairman. Good morning, ladies and gentlemen. We will
call the hearing to order.
The Committee on Energy and Natural Resources is here to
review the current U.S. energy trends and recent changes in
energy markets. And we have a very distinguished group of
witnesses today, who I understand are willing to basically put
their reputation behind their recommendations. So we ought to
have something substantive to reflect on the reality that we do
have an energy crisis in this country.
We have one panel of witnesses. We would ask you to try and
keep your presentation to approximately 7 minutes. And we will
refrain from asking questions--it will be difficult, but we
will try anyway--until all the panel has concluded its
statement.
We have Ms. Mary Hutzler, Director of the Office of
Integrated Analysis and Forecasting, Energy Information
Administration, Washington. Mr. Guy Caruso is the executive
director for the Strategic Energy Initiative, the Center for
Strategic International Studies, a group that just completed, I
believe, a three-volume study that I would recommend reading
not only for members of the committee, but those in the
audience, with regard to the future forecasts and our future
areas of dependence, particularly in the unstable areas of the
world. Mr. James Placke is the director of the Middle East
Research, Washington, D.C., on behalf of the Cambridge Energy
Research Associates.
And we have Mr. William Nugent. Mr. Nugent is the
commissioner of the Maine Public Utilities Commission, Augusta,
Maine, on behalf of the National Association of Regulatory
Utility Commissioners. Mr. Frederick Hoover, a director of the
Maryland Energy Administration, Annapolis, Maryland, on behalf
of the National Association of State Energy Officials.
I hope, Mr. Placke, you could tell us a little bit about
sanctions, too, in your presentation today, because we have
that as an issue before the committee relative to U.S.
interests overseas and the existing sanctions and those
companies that are looking for relief and those that are also
concerned about the human rights and proliferation issues.
As a consequence of the staffs of the professional minority
and majority working together, I think we have something from
the standpoint of meaningful testimony today on the current
state of our energy markets, international and national and
regional, and what current trends mean for the economic growth
and ultimately the American consumer, which, I might add,
includes the American taxpayer.
At least that is the way most of us view it, although there
are some exceptions, perhaps, in California, where they seem to
distinguish between the taxpayer and the consumer. But I do not
want to get too far down that rabbit trail.
This is the first in a series of hearings that are intended
to explore the need for a comprehensive national energy policy.
And we have bills that the minority is proceeding with. We have
a bill, and we intend to pursue the particulars of those bills
later on before this committee. So we will have plenty to do.
The panel of witnesses will explore energy trends and what
we can expect for the future, in particular what the future
holds if we do nothing. So do not eliminate that as a
possibility. By the end of this hearing I think it will be
quite clear that we need to act.
But before we hear from witnesses, one of the opportunities
you have as chairman is to make your views known. And I think
it is fair to say that sometime ago we kind of lost direction
in regard to our obligation to look to the future requirements
for energy in this nation. And I think it is time we regain
control of that.
We risk threatening our economic prosperity, our national
security, and our very way of life. Now that was pretty much a
quote from the Secretary of Energy, but I think it is rather
thought-provoking to again consider the merits of our economic
prosperity at stake, our national security, and our way of
life.
We have kind of lost control, as a consequence, of a number
of things. Supply and demand, the demand is increasing, the
supply is decreasing. Infrastructure, we have suddenly found
ourselves victimized by our own shortsightedness. We do not
have adequate transmission facilities, pipelines.
We suddenly find ourselves with reduced refining capacity,
insufficient to meet the growing needs. So we seem to have
compounded, if you will, from just a shortage to finding we do
not have adequate transmission, we do not have adequate
refineries. As a result, at no time in our history have we
relied upon others for more of our energy supplies, namely
foreign countries.
Twenty years ago, the United States imported just over one-
third of our oil. Today, that has increased to about 57
percent. I think the predictions in the CSIS report indicate
that trend is going to continue. By the year 2020, nearly half
of the estimated global oil demand will be supplied by
countries with high risks of instability, countries that are
known to foster terrorism. We recognize the increased reliance
of foreign oil and its effect on our foreign policy.
We fought a war over oil in 1991. We need only to look to
California for an example what can happen when we become too
reliant on outside sources of energy. We have seen electricity
being imported into that State from outside, and the price
spirals that result. The problems in California, of course, are
spilling over to the other States. Yet, we still do not seem to
get the awareness of the American people to the extent that we
ought to.
It is understandable in California, because a consumer
still has not felt the effect of the increased price. It is not
related in the structure of what is loosely called
deregulation, when you have a cap on retail. And the utilities
have basically come to the threshold of bankruptcy, and the
State is guaranteeing indebtedness. I do not know what is going
to happen to the teachers' or the employees' retirement program
that have invested in those utilities. It goes on and on and
gets worse and worse.
What we need to have is a clear-cut recommendation of how
to systematically get out of this mess over a period of time.
And I do not think government is capable of coming up with
those answers. That is why it is so important that we have
recommendations from you folks, who are experts in this area.
New York is facing similar problems. I guess they are going
to have to increase their generating capacity by about 25
percent in the next 5 years, or they are going to face
blackouts.
We seem to have forgotten our conventional resources, our
oil, in the sense of just drifting along and increasing our
dependence. Our natural gas, nine out of ten new power plants,
I am told, will use gas. We need more gas, more pipelines for
transportation. We seem to have lost sight of coal. We know we
have a lot of it. We have no new coal fire plants since 1995.
Electricity demand has grown 43 percent. We are going to
have to have 1,300 to 1,900 new powerplants, I am told. It goes
on and on. We have not built a single refinery in 25 years.
Refining capacity is a regional issue. We are looking at
increased prices of gasoline this summer, $1.50, $2, whatever.
And the question is: What does the future hold?
We seem to be somewhat at the whims of the weather with
regard to our energy capability, of meeting--if we have a warm
winter, we might slip by. If we have a hot summer, we are going
to have problems. It is the first time, I think, that we have
ever had the weather as a main factor in determining just where
we will be in terms of an inadequate supply of energy. It is
rather curious that we passed that threshold.
As a consequence, we are seeing all kinds of things happen
that are irregular. We are seeing aluminum plants shut down.
Instead of producing aluminum, they are selling their
electricity. We have seen urea facilities that ordinarily would
make fertilizer simply selling their gas instead. They have a
long-term contract. Things are out of kilter.
We must use all our energy options for future needs. We
simply cannot produce or conserve our way out of this. We have
to work on a balance. And I think the bottom line is that we
must act. What will happen if we do not act? What are the
international and regional consequences?
Senator Bingaman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Well, Mr. Chairman, thank you very much
for having the hearing.
This is the first of several hearings, and this one is to
look at the big picture issues, sort of where we are headed,
how we got to the place we are at today. Everyone seems to
agree that we have entered a period of relatively high and
volatile energy prices. We need to better understand how the
changes in policy, the movement toward market-oriented
policies, have contributed to that volatility.
We also need to better understand how we got to the
circumstance we are now in of shortage, at least with regard to
some of our energy needs in certain parts of the country. I do
not think the remedies are simple. You just indicated, and I
totally agree with you, that we cannot just produce our way out
of this problem. And at the same time, we cannot just conserve
our way out of this.
We have to have a combination. We have to do what we can
with renewable energy but recognize that we will remain
dependent upon energy from fossil fuels, from nuclear power,
from hydro, for the indefinite future, and find ways to
increase our supply from those areas.
We also, I think, need to acknowledge and recognize that we
cannot produce our way to independence from the world oil
market. We spend a lot of time around here talking about energy
independence. That might have made some sense to talk about 20,
30, 40 years ago. Even then, it was questionable.
But whether we import 36 percent of our oil, as we did in
1973, 50 percent of our oil, as we did a few years ago, or it
gets even to a higher number. The price of that oil is going to
be set by forces outside our control.
We need to recognize that we are part of this global
economy. And particularly with regard to petroleum products and
oil, we are in many ways buffeted by what goes on around the
world. So I believe we need to focus on short-term responses to
the immediate problems we have. But we also need to understand
the long-term framework that will help us avoid problems in the
future.
We also need to understand how we can address these issues
in an environmentally responsible way. I am persuaded that
whatever we decide to do related to energy policy does impact
on climate change policy, does impact on what we will do in the
environmental arena in the future. We need to recognize that
interaction.
So again, I thank the witnesses for being here and thank
you for having the hearing.
The Chairman. Thank you very much, Senator.
Senator Burns.
STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR
FROM MONTANA
Senator Burns. Thank you, Mr. Chairman. I am just going to
have my statement put in the record.
The Chairman. Without objection.
Senator Burns. And if you wanted to have a hearing to
attract a crowd, we should have been in California. You could
probably attract a pretty good crowd out there. But, you know,
as we look at this situation, I am interested in hearing from
the folks we have here and their insight and some of their
forecasts. So I am just happy to be here and looking forward to
their testimony.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
Mr. Chairman, I want to thank you for this hearing. It is very
important that we understand the reasons for the price spikes in all
energy commodities in the past year. The energy crisis continues to
dampen the economy of our nation, and we all must work tirelessly until
we find a way to help American energy consumers through this time of
crisis.
First, we need to understand that the prevailing mind-set must
change in order to solve this crisis. Don't let anyone tell you
different, we are in the midst of the worst energy crisis since the
1970s. I remember the long gas lines and forced reductions in heating
energy that we faced. Also, I remember the financial hurt it placed on
all Americans, but especially Montanans. Farmers, ranchers, over-the-
road truck drivers, manufacturing companies, loggers, and their
families, were all hurt considerably. I do not want to see this happen
again, but I am afraid it is too late. In Montana we have already seen
the impacts, Columbia Falls Aluminum Company closed its doors for the
year, Montana Resources in Butte closed its doors, and many others may
have to do the same if price signals do not change.
The first three things we need to start doing are the following:
CONSERVATION, CONSERVATION, CONSERVATION. The energy trade press
has made a lot of Republican and Democrat differences on energy related
issues. I want to make it clear that the press has a duty, along with
each Senator here today, to start pushing conservation. Instead of
concentrating on our differences, let us all here today make a pact
that we are going to do everything we can to push conservation. This is
something we all can do that won't have a detrimental impact on our
economy and it will help us through this very tough time.
Next, we must take an intense look at the reasons we are in an
energy crisis today. It is not only electricity prices that are
skyrocketing. We are seeing hurtful gasoline prices, oil prices,
natural gas prices, and heating oil prices as well. In fact, the price
per barrel of oil has gone from $15.99 in 1992 to well over $30.00 this
year. Natural gas prices have gone from $1.74 per thousand cubic feet
at the wellhead to nearly $5.00 per thousand cubic feet today.
Electricity prices in the Northwest have gone from roughly $20.00 per
megawatt hour in 1992 to nearly $250.00 per megawatt hour right now.
Gasoline prices were around 93 cents per gallon in 1992 and now sit at
nearly $1.40 per gallon and these prices are before taxes are added.
Prices are up across the board, and we must figure out why. I don't
believe you have to look very far.
I believe the policies, or lack of a clear national energy policy,
by the previous Administration are an enormous part of the reason we
are in this predicament today. The Northwest region of the United
States has seen a nearly 24% increase in electricity consumption since
1992, while only seeing an increase in generation of 4%. If you add
California into the mix, the discrepancy grows much larger. Further,
the Electric Power Research Institute recently found that there is
going to be a 20-25% growth in electricity demand in the next decade,
but only a 4% increase in power lines and electric-grid equipment. The
statistics speak for themselves, if we do not see more generation and
transmission come on-line, high energy prices are here to stay. We must
lose the mentality that electricity comes from a switch.
Common-sense must return to our regulation policies so that supply
can meet demand. The environmental agenda of the Clinton/Gore
Administration strengthened regulatory burdens to such a degree that
siting new power generation and transmission is not even worth the
effort. Simple economics tell potential investors that you just can't
make it work. We must remove some of the regulatory burdens.
Next, we need to be able to access some of the vast resources that
our public lands contain. The federal government currently manages 650
million acres of land; more than 90% of this land is west of the
Mississippi River. In fact, 52% of the U.S. land in the west is managed
by federal and state governments. In Montana, nearly 50% of our land is
owned by the federal government. Folks, 95% of undiscovered oil and 40%
of undiscovered gas is estimated to be located under these lands. Part
of our solution to energy dependence on foreign sources must come from
a plan that finds ways to develop our natural resources on public lands
in an environmentally friendly manner.
We must be able to site generation facilities in a timely manner.
We must be able to site transmission lines in a timely manner. Finally,
we must remove the barriers that stifle incentives for investment in
our power markets, while at the same time providing incentives to do
the same. We have worked ourselves out of crisis situations in the
past, and we will do it again now, through a bipartisan effort that
uses common sense and our shared American values.
Mr. Chairman, I ask that my comments be place in the record.
The Chairman. Senator Landrieu.
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. I am impressed with the chart that the
staff gave out that says the U.S. total production of oil is
down in the last 10 years by 17 percent. However, it is up 65
percent on offshore oil and gas.
I want to point out to the panelists, and of course the
chairman and ranking member know, probably 85 percent of that
production takes place off the shores of the State that I
represent, Louisiana. There are some tremendous, positive, as
well as negative, impacts associated with this activity.
So, I hope that this committee will continue, as they have,
to remain sensitive that these communities that are serving as
a platform for this oil and gas exploration, which is necessary
to solve the short-, medium- and long-term energy challenges
that our Nation faces, are in need of proper compensation for
this work that is taking place.
The Chairman. Thank you very much, Senator Landrieu.
Senator Craig.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. Well, once again, Mr. Chairman, thank you
for keeping our attention front and center on this energy
crisis that America has stumbled into.
I really do look at it as an opportunity for us to get
smart again, both in the sense of affordable and
environmentally sound energy sources. We have all of the talent
and technology to do it. We simply have disallowed it to be
applied or put to use over the last decade or so with the
attitude that somehow we conserve our way out of this and that
new technologies would take us all the way out of it. That is
now clearly evident not to be the case.
At the same time, to build the new and safe and smaller
nuclear reactor makes awfully good sense to me. Finding a way
to manage that waste stream in a productive way makes awfully
good sense. Re-licensing hydro in a way that does not reduce
its capacity by 20 percent and increase its cost by 30 percent
seems to make pretty good sense to me. How about clean coal
technology that we have denied ourselves or have not forced
ourselves to look at? That seems to make a lot of good sense.
What we are learning is that we do still need large sources
of energy to apply to the economy of this country. The feds
dropped rates again yesterday. The stock market is stumbling
around. Economic reports are probably going to show that these
big companies have had to downgrade their profits dramatically
because of input costs, dramatic increases in energy costs.
Somehow we have kind of quietly assumed the economy could just
take care of that. Well, it is taking care of it, taking care
of it in the form of less profits and layoffs and
readjustments. That happens when you create spikes in inputs in
the cost of doing business.
So, Mr. Chairman, let us hear from this panel of experts
and folks who watch this energy economy very, very closely,
building a record for our Congress to look at and to react to
as we shape new policy as critical.
Thank you.
The Chairman. Thank you very much, Senator Craig.
We have been joined by Senator Thomas, the Senator from
Wyoming, at least one of them. Oh, and there is one from
Arizona down at the end that snuck in. Well, for heaven's
sakes. We have them outnumbered, so go ahead, fellows.
[Laughter.]
Senator Landrieu. It only takes one of me sometimes,
though.
The Chairman. I know. I know.
[Laughter.]
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Well, I, too, want to hear the testimony.
And I know that you have covered where we are and the fact that
we need more domestic production and so on. But we need to move
on access. We need to move on the opportunity to be able to
move energy through rights of ways and easements, both for
power lines and for pipelines. We need diversity. We need to
have conservation. And we need to move.
I am anxious to hear from our panel. And as you know, for
Wyoming this is a great issue we are very much interested in.
With our gas production going up substantially, we can produce
more mine mountain electricity. We need a way to get it where
it needs to go to the market.
We need access to public land so that we can do that. And
we can take care of the land at the same time. We do not need
to have this environment or use as being two opposite things.
They do not need to be.
And so I will stop there and look forward to your comments.
The Chairman. Yes. Thank you very much.
Senator Kyl.
STATEMENT OF HON. JON KYL, U.S. SENATOR FROM ARIZONA
Senator Kyl. Thank you, Mr. Chairman. I know these
witnesses will help us in our job of helping to provide
information to our public, which needs to be informed about the
costs that the over-regulated energy sector has imposed upon
us.
In my State of Arizona this summer, whereas we are an
exporting State of energy and ordinarily would have no
difficulty at all, there could be some issues of brownouts or
blackouts, simply because the power that ordinarily would be
acquired on the margins in the middle of the summer from the
Northwest will probably have to go to California. And as a
result, Arizona, which, as I said, has invested and has tried
its best to meet its own needs, is going to suffer right along
with the people in California.
Until this country comes fully to appreciate the fact that
there is no free lunch, when it comes to energy, you cannot
just consume, you have to produce as well, we are going to
continue to face this problem. And I think our witnesses today
can help provide that base of information that will enable the
public to judge what will need to be done in order to solve
this problem.
And I thank you, Mr. Chairman, for holding this hearing.
The Chairman. Thank you very much, Senator Kyl.
I would respectfully request that the panel consider three
questions, in addition to your presentation. One is a concern
brought up by the ranking member, and that is the global
warming issue. And obviously, one answer to that clearly from
the standpoint of generating more power is the role of nuclear
energy. We do not seem to be able to get over the threshold of
what to do with the waste.
You know, there seems to be more of an awareness in the
public, at least to some extent, that, yes, maybe we should
look at nuclear again. But the question is, how do you unwind
it? Nobody in their right mind would finance a nuclear plant
today. The permitting time, the exposures associated with
overruns, nobody would give you a firm contract to build one.
But nevertheless, we need to have some input on that issue.
The other is the merits of trying to reduce our dependence
on imported oil. There is no question that we cannot drill our
way out, but the merits of reducing our dependence from a
positive point of view of identifying areas in the domestic
front, the United States, where we can develop more oil and
reduce that dependence, the merits of that, how important it
is, or is it okay to just drift on and increase our dependence
on imports from 56, 59, 60, 65. The Department of Energy says
we are going to be at 65 percent by 2010.
The last one is, for those of us who feel that we are kind
of identified as the answer, whether it be the State of
Louisiana, the State of Mississippi, Alabama. But, you know, we
talk about energy, and we suddenly find that the entire east
coast from Maine to Florida is off limits. It has moratoriums
on it, different types, different days that they come about.
The same is true on the west coast of the United States,
from the Canadian border north of Washington State through
California, moratoriums. Where is this energy going to come
from, if we have these moratoriums? I wonder if my friend for
Louisiana and a couple of others would consider the merits of a
bill that would open up everything. Everything is closed. Open
it up. And then re-prioritize. Because, you know, can we
address relief if we on one hand say we are committed to
producing more, and then suddenly find that we have all these
areas closed?
So if you can wander into those areas, that would be
enlightening. Who wants to go first? Anybody catching an
airplane today?
I guess we will let Mary--are you----
Mr. Nugent. At 2:20.
The Chairman. Oh, well. You will make it.
Mr. Nugent. I hope we'll be through.
The Chairman. You only have 7 minutes. So----
[Laughter.]
The Chairman. Mary, go ahead.
STATEMENT OF MARY HUTZLER, DIRECTOR, OFFICE OF INTEGRATED
ANALYSIS AND FORECASTING, ENERGY INFORMATION ADMINISTRATION
Ms. Hutzler. Thank you, Mr. Chairman and members of the
committee. I appreciate the opportunity to appear before you
today to discuss current energy trends in the United States.
The Energy Information Administration is an autonomous,
statistical, and analytical agency within the Department of
Energy. We are charged with providing objective, timely, and
relevant data analysis and projections for the use of the
Department of Energy, other government agencies, the U.S.
Congress and the public.
The projections in this testimony are from the Short-term
Energy Outlook released this month and from the Annual Energy
Outlook 2001 published in December. The Short-term Energy
Outlook provides quarterly projections through 2002 on a
national basis. And the Annual Energy Outlook provides annual
projections through 2020 on a national and regional basis. Our
long-term projections are based on technological and
demographic trends, current laws and regulations, and consumer
behavior.
[Chart.]
Ms. Hutzler. Energy markets in the United States today are
characterized by high prices for both petroleum and natural
gas, due in large part to tight supplies of both fuels.
Reductions in oil production by OPEC and several non-OPEC
petroleum exporting nations have contributed to the low stocks
for the industrialized nations.
The Chairman. Well, why do you not walk us through that
chart?
Ms. Hutzler. The blue part of the chart shows the normal
range of where stocks are for the industrialized nations. These
are the OECD countries. The black shows where they were
actually, and then the red shows where we are projecting. And
you can see that the projection is below where the normal
ranges are.
The Chairman. Yes. That means what?
Ms. Hutzler. That means that markets are very tight.
Therefore, they are going to be very volatile in that you can
have high prices as a result of that volatility.
Senator Thomas. That is not production then.
Ms. Hutzler. No. Those are stocks.
Senator Thomas. Stocks.
The Chairman. Those are refined stocks.
Ms. Hutzler. These are oil stocks.
The Chairman. Crude oil.
Ms. Hutzler. Yes, crude.
The Chairman. And where are those stocks?
Ms. Hutzler. They are in the OECD countries that we are
talking about. And these are both crude and petroleum stocks,
total stocks.
The Chairman; Yes, but do they have to be pumped or are
they in transit or are they storage or----
Ms. Hutzler. Storage.
The Chairman. They are in storage. So they have been pumped
out of the oil fields.
Ms. Hutzler. Yes. You also have copies of these charts at
hand too, if you want to get a closer look at them.
[Chart.]
Ms. Hutzler. Tight natural gas supplies are also
contributing to high electricity prices in California, along
with high electricity demand relative to capacity, high
generation outage rates, transmission bottlenecks, and low
hydroelectric resources.
At its March 17 meeting, OPEC members agreed to reduce
production quotas an additional 1 million barrels per day
effective April 1. This follows an earlier production quota cut
of 1.5 million barrels per day announced in January that was
effective February 1.
Prior to the March 17 meeting, the average imported price
of oil was projected to fall slightly from its 2000 value of
$27.70 per barrel. Based on these imported crude prices, we
projected an average price for motor gasoline for this summer
of $1.47 per gallon.
The Chairman. Where do you--does that include tax?
Ms. Hutzler. Yes. It is an average including taxes.
These new production cuts by OPEC may result in higher
price projections, which will be incorporated in our next
Short-term Energy Outlook to be released early next month. Warm
spells in January and February and declining crude oil prices
in December and January helped to ease heating oil prices,
which have been declining from their winter peak of $1.41 per
gallon in December. Nevertheless, heating oil prices remain
high compared to history.
Natural gas prices began increasing last summer primarily
due to high demand and low levels of natural gas storage, as
you can see in this chart.
The Chairman. Tell us what working gas in storage is.
Ms. Hutzler. That is gas that is in storage that has
already been drilled and has been put in storage areas so that
it can be gotten to very quickly. And the blue on this graph
also shows where normal region levels were. The black is where
we have seen it over the past period on that chart, starting in
April of 1998. And you can see we are projecting also for it to
be a problem in the future.
The Chairman. So it is the same as for OECD oil stocks,
essentially.
Ms. Hutzler. Yes. It is a similar concept for natural gas.
Okay. So since late June, spot prices increased more than
$4 per thousand cubic feet. The wellhead price of natural gas
is currently estimated to have more than doubled this heating
season from the previous season's price. Due to projected high
levels of demand growth for natural gas, particularly for
electricity generation, the average wellhead price is projected
to be about $4.70 per thousand cubic feet in 2001, compared to
an annual average of about $3.60 per thousand cubic feet in
2000.
Electricity demand is expected to grow at a rate of about
2.2 percent in 2001 and in 2002, compared to an estimated
growth rate of 3.6 percent between 1999 and 2000. Slower growth
is expected in part due to slower projected economic growth.
Electricity demand for this past winter is expected to be
higher than the previous winter, due to higher residential and
commercial demand and the cold temperatures in November and
December.
Today, petroleum, natural gas and coal make up about 85
percent of total energy consumed in the United States. And we
project that these fuels will increase their share slightly
over the next 20 years. Petroleum represents 40 percent of
today's consumption and is mainly used for transportation fuels
and in the industrial sector, for petrochemical feed stocks,
plastics and asphalt, areas where little substitution potential
exists.
Coal represents about one-quarter of our consumption, and
90 percent is used for electricity generation. We are expecting
about a 45-percent increase in electricity generation over the
next 20 years, as all sectors increase their demand for
electricity. While the largest portion of the additional
generation is expected to come from natural gas, coal is
expected to provide 44 percent of total generation in 2020, a
decrease from its current share of 52 percent.
Natural gas consumption for electricity generation is
projected to triple between now and 2020, resulting in a 62-
percent increase in its total consumption that you see on this
chart.
[Chart.]
Ms. Hutzler. The next chart shows our domestic supply of
fuels. Coal is our Nation's most abundant fossil fuel resource,
providing 31 percent of our current domestic production. We
expect domestic natural gas production to surpass coal by 2015,
increasing its share of production from 23 percent today to 35
percent in 2020. Our domestic petroleum supply is projected to
remain roughly flat for the next 20 years, resulting from
decreasing domestic crude production and increasing production
from natural gas plant liquids and refinery gains. However,
because of our increasing demand for petroleum, net imports
will increase from its 52-percent share today to 64 percent in
2020.
The United States is and will remain one of the top oil
producers in the world. We are third in the world behind Saudi
Arabia and Russia. However, while we will be a significant oil
producer, our consumption will be outstripping our production.
[Chart.]
Ms. Hutzler. My final chart highlights the regional
projections for electricity capacity additions. Our forecast
calls for 413 gigawatts of additional capacity needed by 2020.
That is almost 1,400 300-megawatt units. It will be needed to
meet our projected 1.8-percent growth rate in electricity
demand and projected capacity retirements of about 9 percent of
our current capacity. You can see that we are forecasting the
need for large increases in capacity additions for the
Southeast, Texas, California, and parts of the Midwest.
Thank you, Mr. Chairman and members of the committee, and I
will be happy to address the questions you have.
[The prepared statement of Ms. Hutzler follows:]
Prepared Statement of Mary Hutzler, Director, Office of Integrated
Analysis and Forecasting, Energy Information Administration
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before you today to discuss
the near- and long-term outlook for energy markets in the United
States.
The Energy Information Administration (EIA) is an autonomous
statistical and analytical agency within the Department of Energy. We
are charged with providing objective, timely, and relevant data,
analysis, and projections for the use of the Department of Energy,
other government agencies, the U.S. Congress and the public. We do not
take positions on policy issues, but we do produce data and analysis
reports that are meant to help policy makers determine energy policy.
Because we have an element of statutory independence with respect to
the analyses that we publish, our views are strictly those of EIA. We
do not speak for the Department, nor for any particular point of view
with respect to energy policy, and our views should not be construed as
representing those of the Department or the Administration. However,
EIA's baseline projections on energy trends are widely used by
government agencies, the private sector, and academia for their own
energy analyses.
Each month, EIA updates its Short-Term Energy Outlook, which
contains quarterly projections through the next two calendar years,
taking into account the latest developments in energy markets. The
Annual Energy Outlook provides projections and analysis of domestic
energy consumption, supply, prices, and energy-related carbon dioxide
emissions through 2020. The projections in this testimony are from the
Short-Term Energy Outlook March 2001 (STEO) and from the Annual Energy
Outlook 2001 (AEO2001), published by EIA in December 2000. These
projections are not meant to be exact predictions of the future, but
represent a likely energy future, given technological and demographic
trends, current laws and regulations, and consumer behavior as derived
from known data. EIA recognizes that projections of energy markets are
highly uncertain, subject to many random events that cannot be
foreseen, such as weather, political disruptions, strikes, and
technological breakthroughs. In addition to these short-term phenomena,
long-term trends in technology development, demographics, economic
growth, and energy resources may evolve along a different path than
assumed in the AEO2001 reference case. Many of these uncertainties are
explored through alternative cases in both the STEO and AEO.
THE OUTLOOK TO 2002
Energy markets in the United States today are characterized by high
prices for both petroleum and natural gas, due in large part to tight
supplies of both fuels. Reductions in oil production by OPEC and
several non-OPEC petroleum-exporting nations have contributed to low
oil stocks. Tight natural gas supplies are also contributing to high
electricity prices in California, along with high electricity demand
relative to capacity, high generation outage rates, and low
hydroelectric resources.
Crude Oil. At its March 17 meeting, OPEC members agreed to reduce
production quotas an additional 1 million barrels per day effective
April 1, 2001. This follows an earlier production quota cut of 1.5
million barrels per day announced in January that was effective
February 1, 2001. OPEC has scheduled an extraordinary meeting for June
5-6, 2001 to review their production quotas. The monthly average U.S.
imported crude oil price for February 2001 is estimated to be about
$26.40 per barrel, slightly higher than the estimate of $25.75 per
barrel in January. EIA's current forecast reflects our belief that the
January production cut by OPEC 10 (OPEC, excluding Iraq) would maintain
the world oil price within and toward the high end of OPEC's target
range of $22 to $28 per barrel in 2001 and 2002 (Figure 1).* Prior to
the March 17 meeting, average imported prices were projected to fall
slightly from the estimated value of $27.70 per barrel in 2000 to about
$26.60 per barrel in 2001 and about $25.40 in 2002, all prices being
expressed in nominal dollars. EIA expects that oil stocks in the OECD
countries will continue to be tight compared to normal levels,
preventing prices from falling significantly (Figure 2). With the new
production cuts, further uncertainty has now been introduced.
---------------------------------------------------------------------------
* The attachments have been retained in committee files.
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Motor Gasoline. The retail price for regular unleaded motor
gasoline has fallen about 10 cents per gallon since September. However,
with crude oil prices increasing by about $1.20 per barrel from their
December low of $25.19 per barrel combined with lower than normal stock
levels, EIA projects that prices will rise to about $1.49 per gallon
during the peak months of the 2001 driving season. For the summer of
2001, we are projecting an average price of $1.47 per gallon, compared
to $1.53 per gallon in the previous driving season, in nominal dollars.
Motor gasoline stocks are expected to be slightly lower during this
year's driving season compared to last year; however, crude oil prices
are also expected to be lower. The annual average retail price of
regular unleaded motor gasoline is projected to decline from $1.49 per
gallon in 2000 to $1.46 per gallon in 2001 to $1.41 per gallon in 2002,
with all prices being in nominal dollars.
Heating Oil. The heating season of October through March is nearly
over, so retail heating oil prices have seen their seasonal peak. Warm
spells in January and February and declining crude oil prices in
December and January helped to ease heating oil prices, which have been
declining from their winter peak of $1.41 per gallon in December.
Nevertheless, heating oil prices remain high compared to history. The
average price for October through December 2000 was almost 40 cents per
gallon higher than the same period in 1999. Due to the relatively warm
weather in the Northeast during the last half of January and parts of
February and heating oil production that is several hundred thousand
barrels per day more than last year's level, heating oil stock levels
have remained fairly steady over the past two months. For the first
time since November 1999, U.S. distillate stocks are within the normal
range. With crude oil prices expected to be lower in 2001 than in 2000,
lower heating oil prices are projected as well. Retail heating oil
prices are expected to be $1.28 per gallon in October through December
2001 compared to $1.40 per gallon in the same period for 2000, in
nominal dollars. The annual average retail price of heating oil is
expected to decline slightly from $1.31 per gallon in 2000 to $1.28 per
gallon in 2001 to $1.22 per gallon in 2002, with all prices in nominal
dollars.
Natural Gas. Natural gas prices began increasing last summer,
primarily due to low levels of natural gas storage (Figure 3), with
spot prices increasing more than $4 per thousand cubic feet since late
June. During the heating season from October 2000 through March 2001,
the wellhead price of natural gas is currently estimated to have more
than doubled from the price during the previous season, averaging about
$5.60 per thousand cubic feet, in nominal dollars (Figure 4). When the
heating season ends, average wellhead prices are projected to decline,
averaging about $4.05 per thousand cubic feet for the spring and
summer. Due to projected high levels of demand growth for natural gas,
particularly for electricity generation but also in the industrial
sector, it is highly unlikely that wellhead prices will decline to the
level of $2 per thousand cubic feet of one year ago. In 2001, the
average wellhead price is projected to be about $4.70 per thousand
cubic feet, compared to an annual average of about $3.60 per thousand
cubic feet in 2000, in nominal dollars. However, hot summer weather in
regions with high levels of natural gas-fired electricity generation
could reduce storage injections for next year's heating season and lead
to higher seasonal price increases. In 2002, we expect the storage
situation to improve somewhat with increases in production and imports,
leading to a modest decrease in the average annual wellhead price to
about $4.30 per thousand cubic feet, in nominal dollars. Domestic
natural gas production for 2001 and 2002 is expected to rise as
production responds to the high rates of drilling experienced over the
past year. In 2000, drilling for natural gas in the United States
increased by 45 percent over the 1999 level of 10,500 wells, in
response to a 66-percent increase in the average natural gas wellhead
price from 1999 to 2000 (Figure 5). Production is estimated to have
risen by 3.1 percent in 2000 and is projected to increase by rates of
3.3 percent in 2001 and 2.5 percent in 2002 as higher natural gas
prices are expected to encourage a moderate growth in supply. In
contrast, natural gas production declined slightly from 1997 to 1998
and from 1998 to 1999.
Electricity. Electricity demand is expected to grow at a rate of
about 2.2 percent in 2001 and 2.3 percent in 2002, compared to a
estimated growth rate of 3.6 percent between 1999 and 2000. Slower
growth is expected in part due to slower projected economic growth.
Electricity demand for this winter is expected to be 4.6 percent higher
than the previous winter, due to higher residential and commercial
demand and the cold temperatures in November and December. Natural gas
deliverability problems in California have helped to increase natural
gas prices and have frequently caused interruptible customers,
including electricity generators, to be cut off in that State. The
current situation in California is characterized by low natural gas
storage, natural gas pipeline bottlenecks, high electricity demand, and
low availability of hydropower resources, combined with no significant
capacity additions in the last ten years. In addition, the San Onofre 3
nuclear unit is currently offline due to a fire in early February and
may not return to service for several months. The average residential
price of electricity in the United States is projected to increase from
8.2 cents per kilowatthour in 2000 to 8.3 and 8.4 cents per
kilowatthour in 2001 and 2002, respectively, in nominal dollars,
largely due to fuel costs.
THE OUTLOOK TO 2020
AEO2001 provides an integrated projection of U.S. energy market
trends for the next two decades on an annual basis. The following
discussion highlights the major categories of domestic energy demand
and supply.
Consumption. Total energy consumption is projected to increase from
96.1 to 127.0 quadrillion British thermal units (Btu) between 1999 and
2020, an average annual increase of 1.3 percent. Transportation energy
demand is expected to increase at an average annual rate of 1.8 percent
to 38.5 quadrillion Btu in 2020 and is the fastest growing end-use
sector. The growth in transportation use is driven by 3.6-percent
growth in air travel, the most rapidly increasing transportation mode,
and 1.9-percent annual growth in light-duty vehicle travel, the largest
component of transportation energy demand, coupled with slow growth in
vehicle efficiency.
Residential and commercial energy consumption is projected to
increase at average annual rates of 1.2 and 1.4 percent, respectively,
reaching 24.4 quadrillion Btu in 2020 for residential demand and 20.8
quadrillion Btu for commercial demand. In both sectors, the growth in
demand is led by electricity consumption for a variety of equipment--
telecommunications, computers, office equipment, and other appliances.
Electricity use is projected to increase at annual rates of 1.9 and 2.0
percent, in the residential and commercial sectors, respectively.
Industrial energy demand is projected to increase at an average rate of
1.0 percent per year, reaching 43.4 quadrillion Btu in 2020, as
efficiency improvements in the use of energy help to offset growth in
manufacturing output. The projections incorporate promulgated
efficiency standards for new energy-using equipment in buildings and
for motors, as authorized by the National Appliance Energy Conservation
Act of 1987 and the Energy Policy Act of 1992. Since AEO2001 included
only those laws, regulations, and standards in effect as of July 1,
2000, the new standards for residential clothes washers, water heaters,
and central air conditioners and heat pumps and commercial heating,
cooling, and water heating equipment issued in January 2001 are not
included. In addition to the impact of efficiency standards,
improvements in efficiency are projected as a result of expected
technological improvement and market forces.
Petroleum demand is projected to grow at an average rate of 1.4
percent per year through 2020, led by the growth for transportation,
which uses about 70 percent of the total (Figure 6). Growth in travel
more than offsets efficiency gains, and economic growth increases
petroleum use for freight and shipping through 2020. Natural gas
consumption is expected to increase at an average rate of 2.3 percent
per year. Increases are expected in all sectors, but the most rapid
growth is for electricity generation, where natural gas use (excluding
cogenerators) is projected to grow from 3.8 to 11.3 trillion cubic feet
between 1999 and 2020. Total coal consumption is expected to increase
from 1,035 to 1,297 million tons per year between 1999 and 2020, an
average annual increase of 1.1 percent. About 90 percent of the coal is
used for electricity generation. Coal remains the primary fuel for
generation, although its share of generation is expected to decline
from 51 to 44 percent between 1999 and 2020. Electricity consumption
overall is projected to grow by 1.8 percent per year through 2020.
Efficiency gains in the use of electricity partially offset the growth
of new electricity-using equipment. Renewable fuel consumption,
including ethanol used in gasoline, is projected to increase at an
average rate of 1.1 percent per year through 2020. In 2020, about 55
percent of renewable energy is used for electricity generation and the
rest for dispersed heating and cooling, industrial uses, and fuel
blending.
Energy Intensity. Energy intensity, measured as energy use per
dollar of gross domestic product (GDP), has declined since 1970, most
notably when energy prices have increased rapidly (Figure 7). Between
1970 and 1986, energy intensity declined at an average rate of 2.3
percent per year as the economy shifted to less energy-intensive
industries and more efficient technologies. Without significant price
increases and with the growth of more energy-intensive industries,
intensity declines moderated to an average of 1.3 percent per year
between 1986 and 1999. Through 2020, energy intensity is projected to
decline at an average rate of 1.6 percent per year as efficiency gains
and structural shifts in the economy offset growth in demand for energy
services. Energy use per person generally declined from 1970 through
the mid-1980s, and then tended to increase as energy prices declined.
Per capita energy use is expected to increase slightly through 2020, as
efficiency gains only partly offset higher demand for energy services.
Electricity Generation. Generation from both natural gas and coal
is projected to increase through 2020 to meet growing demand for
electricity and offset the decline in nuclear power expected from
retirements of some existing facilities (Figure 8). As noted above, the
share of coal generation is expected to decline through 2020 because
assumptions about electricity industry restructuring, such as higher
cost of capital and shorter financial life of plants, favor the less
capital-intensive and more efficient natural gas generation
technologies. The natural gas share of total generation is expected to
increase from 16 to 36 percent between 1999 and 2020. The use of
renewable technologies for electricity generation, including
cogeneration, is projected to increase slowly at an average rate of 0.7
percent per year, primarily due to moderate fossil fuel prices. State
renewable portfolio standards are the cause of a significant amount of
the expected penetration. Hydropower is expected to decline slightly by
2020 as regulatory actions limit capacity at existing sites, and no
large new sites are expected to be available for development.
Supply. Total domestic petroleum supply, including refinery gain
and natural gas plant liquids, is projected to remain nearly flat
through 2020 (Figure 9). Domestic crude oil production is projected to
decline at an average rate of 0.7 percent per year, from 5.9 million
barrels per day in 1999 to 5.1 million barrels per day in 2020. As a
result, net petroleum imports are expected to rise through 2020, to
meet growing demand (Figure 10). Between 1999 and 2020, net imports of
petroleum are projected to increase from 51 percent to 64 percent of
domestic petroleum demand. In 2020, the United States is expected to
require net imports of crude oil and petroleum products totaling 16.5
million barrels per day.
Unlike oil, domestic natural gas production, with its larger and
more accessible resource base, is expected to increase from 18.7
trillion cubic feet in 1999 to 29.0 trillion cubic feet in 2020.
Increased production comes primarily from lower 48 onshore conventional
nonassociated sources, although onshore unconventional production is
expected to increase at a faster rate than other sources. In order to
fill the gap between domestic production and consumption, net natural
gas imports are expected to increase from 3.4 trillion cubic feet in
1999 to 5.8 trillion cubic feet in 2020, mostly pipeline natural gas
imports from Canada. Net liquefied natural gas imports are projected to
increase from 0.1 to 0.7 trillion cubic feet by 2020.
Coal production is expected to increase from 1,105 million tons in
1999 to 1,331 million tons in 2020, an average of 0.9 percent per year,
to meet rising domestic demand. From 1999 to 2020, low-sulfur coal
production is expected to increase while the production of high- and
medium-sulfur coal declines, due to the need to reduce sulfur dioxide
emissions from coal-fired electricity plants. As a result, western coal
production the primary source of new low-sulfur coal is expected to
continue its historic growth, reaching 787 million tons in 2020, an
annual growth rate of 2.2 percent. Western coal is surface mined and
less costly to produce than eastern coal.
Carbon Dioxide Emissions. Energy-related carbon dioxide emissions
are projected to increase at an average of 1.4 percent per year from
1999 to 2020, reaching 2,041 million metric tons of carbon equivalent,
35 percent higher than in 1999 and 51 percent higher than in 1990
(Figure 11). Projected increases in carbon dioxide emissions primarily
result from continued reliance on coal for electricity generation and
on petroleum fuels in the transportation sector.
Alternative Cases. In order to show the impact of alternative
assumptions concerning the key factors driving energy markets, we
include a number of alternative cases in AEO2001. Two sets of these
cases illustrate the impacts of improved technology in energy-consuming
equipment and in the production of oil and gas.
One alternative case assumes more rapid improvement in new
technologies for end-use demand, through lower costs, higher
efficiencies, and earlier availability for new technologies, relative
to the reference case, as well as more rapid improvement in the costs
and efficiencies of advanced fossil-fired and new renewable generating
technologies. As a result, projected energy demand in 2020 is 8
quadrillion Btu lower than in the reference case, reducing carbon
dioxide emissions to 1,875 million metric tons carbon equivalent in
2020, compared to 2,041 million metric tons carbon equivalent in the
reference case (Figure 12). Such technology improvements could result
from increased research and development, but should not be considered
the most optimistic improvements that could occur with a very
aggressive program of research and development. The AEO2001 reference
case assumes continued improvements in technology for both energy
consumption and production; however, it is possible that technology
could develop at a slower rate. In the 2001 technology case, it is
assumed that all future equipment choices will be made from the
equipment and vehicles available in 2001, with new building shell and
industrial plant efficiencies frozen at 2001 levels. Also, new
generating technologies are assumed not to improve over time. In this
case, efficiencies improve over the forecast period as new equipment is
chosen to replace older stock and the capital stock expands; however,
projected energy demand in 2020 is 6 quadrillion Btu higher than in the
reference case, increasing carbon dioxide emissions to 2,157 million
metric tons carbon equivalent.
Another alternative case assumes more rapid technological
improvement in the exploration and production of petroleum and natural
gas. By 2020, these assumed improvements are expected to raise natural
gas production by 1.1 trillion cubic feet and raise lower 48 crude oil
production by nearly 300 thousand barrels per day compared to the
reference case. The more rapid technology progress would also be
expected to reduce the average wellhead price of natural gas in the
United States from $3.13 per thousand cubic feet (1999 dollars) in the
reference case to $2.50 per thousand cubic feet in 2020 (Figure 13).
Conversely, slower technological improvements are assumed in another
case, which reduce natural gas production by 1.9 trillion cubic feet
and reduce lower 48 crude oil production by nearly 400 thousand barrels
per day in 2020 relative to the reference case. In this slow technology
case, the average wellhead price of natural gas in 2020 reaches $4.23
per thousand cubic feet.
Conclusion. In the near term, we expect crude oil and petroleum
prices to decline slightly from their current levels by the end of the
year and to decline further next year. Stock levels of both petroleum
and natural gas remain tight. In the long term, continuing growth in
the U.S. economy is expected to stimulate more energy demand, with
fossil fuels remaining the dominant source of energy. As a result, our
dependence on foreign sources of petroleum is expected to increase and
domestic natural gas production and natural gas imports are expected to
grow significantly. These forecasts incorporate an expectation of
efficiency improvements in both demand and supply although different
paths for technological development could lead to slower or more rapid
efficiency gains.
Thank you, Mr. Chairman and members of the Committee. I will be
happy to answer any questions you may have.
The Chairman. Thank you very much, Ms. Hutzler. I
appreciate that excellent presentation.
Our next witness will be Mr. Guy Caruso, executive director
of Strategic Energy Initiative. I am going to have to step out
for a moment, but please proceed.
And, Senator Bingaman, I will be back in just a moment. I
have a constituent that I have to shake hands with.
STATEMENT OF GUY F. CARUSO, EXECUTIVE DIRECTOR, STRATEGIC
ENERGY INITIATIVE, CENTER FOR STRATEGIC AND INTERNATIONAL
STUDIES
Mr. Caruso. Good morning, Mr. Chairman. Thank you very much
for this opportunity to present the results of the Center for
Strategic and International Studies report, the Geopolitics of
Energy into the 21st Century.
The chairman was one of the congressional co-chairs on this
report, along with his colleague across the aisle, Senator
Lieberman. And I will briefly summarize the key findings of the
report in the oral remarks. And the full statement will be
submitted for submission into the record.
Our report examined the global energy trends projected to
2020 and analyzed the implications of those trends for
geopolitical developments during that same time frame. Let me
highlight just several of the most important energy trends,
which were drawn very heavily from the work of the EIA and Mrs.
Hutzler's office. So I will not belabor them.
The robust economic growth and the population growth
projections and expanded global trade are expected to lead to
more than a 50-percent increase in world energy demand by 2020.
And the most rapid growth in that demand will be in developing
countries, which we believe has important geopolitical
implications.
In terms of supply, the Persian Gulf suppliers will become
even more dominant in world trade. According to some
projections, Persian Gulf oil would represent as much as 60
percent of world oil trade in 2020 with Saudi Arabia by far
being the leading oil exporter, as it is today. And the reason
for that concentration is the rapid and steadily growing oil
imports, not only in this country but in Europe and, more
importantly I think for this forecast, in the developing
countries of Asia.
The third trend which has important geopolitical
implications is the rapid growth in electricity demand and
natural gas demand, as Mary pointed out in her forecast, not
only in the United States, but globally. The global
infrastructure of electricity and natural gas is stretched
thin. As well as we have witnessed in this country, it is also
true globally.
The study reaches three very broad conclusions. The first
is that the United States has and will continue to have a
special responsibility for preserving worldwide energy supply,
which will become increasingly difficult if world oil
developments play out as these forecasts indicate.
Secondly, in order to develop an adequate and reliable
energy supply to meet the projected demands mentioned, we are
going to need massive investments in the global energy
infrastructure, and they must begin now. It is not just the
United States. It is around the world that some of these same
constraints are beginning to be felt.
And the third point is following up the points several of
the Senators made in opening remarks, that we need to balance
economic growth with environmental concerns. And that presents
a special challenge in this geopolitical outlook. The
integration of energy and environment policy is essential in
order to achieve a balanced and diverse national and
international energy policy.
And in the report we do list a number of policy issues for
consideration. I will just mention a few of them in the oral
remarks, but they are listed in their complete recommendations
and considerations in the written submission.
On energy availability, the United States will need to
retain as far as possible its ability to defend open access to
energy supplies and international ceilings. And this will
become increasingly difficult. And we may have to seek some
burden sharing from our allies to accomplish this, given this
outlook.
Secondly on the availability issue, the report recommends
that we avoid indiscriminate use of sanctions. In particular,
unilateral sanctions have not been an effective policy tool and
should be dropped. They have not been effective, and they only
harm U.S. commercial interests abroad.
With respect to energy reliability, governments should
maintain and, where appropriate, expand government financed and
controlled strategic petroleum reserves, reserving their use
for supply disruptions. And with respect to supply disruption
mitigation, international cooperation with organizations, such
as the International Energy Agency, will continue to be
essential in order to mitigate those risks.
On the energy and environment issue, the report recognized
this is a long-term issue, particularly the global
environmental concerns with respect to greenhouse gas
emissions, but also air and water concerns as well. And that
one way to begin dealing with this and recognizing the long-
term nature of it is the need to make economically and
environmentally sound technologies available to developing
countries in order to meet their increasing energy demands,
which, as I mentioned, are growing dramatically, and will also
affect the environmental side of the issue.
In the report we specifically single out the possibility of
nuclear power being utilized in developing countries to deal
with both the environment issue and their increasing
electricity needs.
On the question of what do we do about reducing our oil
imports and our dependence and the issue that several of you
mentioned earlier about dependence versus vulnerability, it is
clear that we will continue to be dependent. The real issue is,
what can we do about reducing our vulnerability. One way is
with strong emergency preparedness procedures and having a
strong strategic petroleum reserve.
But another way is taking care of our own business, because
OPEC is going to continue to take care of their business. And
the idea that we have a balanced access to our own energy
resources is certainly a step in the right direction. So I,
again, agree with the statements made that we need to diversify
our fuel sources within this country, as well as from abroad
and have a balanced approach.
Let me conclude there my oral remarks, and I would offer to
make available the full three-volume study to any members who
would so desire. Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Caruso follows:]
Prepared Statement of Guy Caruso, Executive Director, Strategic Energy
Initiative, Center for Strategic and International Studies
Good morning, Mr. Chairman, members of the committee, thank you for
this opportunity to testify today and to present the results of the
Center for Strategic and International Studies (CSIS) study ``The
Geopolitics of Energy into the 21st Century'' which was released on 15
February 2001.
Today I want to share with you some of the more important findings
of this study, because these findings have policy implications not just
for the United States but for all energy producing and consuming
countries.
Our Geopolitics study was cochaired by former Senator Sam Nunn, who
also chairs our Board of Trustees, and by Dr. James Schlesinger, former
Secretary of Energy. For this project we had four Congressional
cochairs: Senator Frank Murkowski and Senator Joe Lieberman; and
Representatives Benjamin Gilman and Ellen Tauscher. We also formed a
Senior Advisory Panel, supported by a number of special task forces,
comprised of individuals drawn from both the public and private
sectors, approximately 100 experts contributed to the project.
We began work in July 1998 in response to concerns that a lengthy
period of secure energy supplies had led U.S. policy makers to pay
relatively little attention to the changing relationship between
geopolitics and energy at the turn of the century. This changing
relationship required a rethinking of U.S. foreign policies,
environmental policies, and the broader national security strategy. Our
completed report responds to these concerns.
The geopolitics of energy is rarely static. Events of the day carry
implications for energy supply consumption, and prices--sometimes
immediate, sometimes delayed, sometimes hidden. By attempting to
define, in advance, the form these events may take--and the resulting
impact on energy--the report may remove some surprise from the future
and ease the way for decision makers in both the public and private
sectors.
THE MESSAGE
``One of the ironies at the turn of the century is that, in an age
when the pace of technological change is almost overwhelming, the world
will remain dependent, out to the year 2020 at least, essentially on
the same sources of energy--oil, natural gas, coal--that prevailed in
the twentieth century.''
This message carries our assessment that for renewable and
alternative forms of energy, although increasing in absolute terms
during the coming years, their relative contribution to total energy
supply is not likely to increase substantially.
We came to three broad conclusions based on our analysis of the
geopolitics of energy into the twenty-first century.
First, the United States, as the world's only superpower, must
accept its special responsibilities for preserving worldwide energy
supply.
Second, developing an adequate and reliable energy supply to
realize the promise of robust global economic growth early in the
twenty-first century will require significant investments, and they
must begin to be made immediately.
Third, decision makers, in both the public and private sectors,
face the special challenge of balancing the objectives of economic
growth with concerns about the environment. This challenge is probably
the most contentious of any of the challenges which lie ahead and it is
going to be difficult to secure agreement by the protagonists on how to
proceed.
WHAT'S NEW?
Let me begin my review of our findings by describing for you What's
New? For those who closely follow the energy industry, these findings
may not necessarily be new. Rather, the real question is, how will
energy producers and consumers alike respond to each?
NGOS
First, we found that the influence of nongovernmental organizations
or NGOs on public and private energy-related policy decisions will
considerably expand in the coming years. Nongovernmental organizations
are broad in definition, ranging from terrorist groups to radical
activists to well-intentioned environmentalists and human rights
monitors. By adroitly using new information technologies, opposition to
a particular project or idea can be mobilized quickly and effectively,
backing shareholder resolutions and disinvestment campaigns against
offending oil companies, for example.
One recent example can be cited, and that is how widely separated
NGOs came together against the proposed Chad-Cameroon pipeline. This
pipeline is the largest infrastructure project underway in Africa
today. What is interesting is this. For three years, until construction
began last October, NGOs set the agenda. First, NGOs opposed the
pipeline, then recognizing that the people wanted the pipeline, began
to set demands on the oil companies if the project were to move ahead.
Probably the greatest victory for the NGOs was agreement that 80% of
the oil revenue be spent on education, health, infrastructure, and
rural development. Whether that turns out to be the case is
questionable.
DEVELOPING COUNTRIES TAKE THE LEAD
At some point in time before the year 2020, the consumption of
energy by the developing countries of the world is expected to exceed
energy consumption by the developed world. Last year the developed
world accounted for 53% of all energy consumed; the developing world
for just 34%, economies in transition account for the remainder. Twenty
years later, the picture will change rather dramatically, as the
developed world share drops to 43%, while the developing world share
rises to 46%.
This shift in consumption patterns carries tremendous political,
economic, and environmental implications. Among other issues, what
kinds of energy will the developing world be consuming? Will it be
natural gas, or local coals? Where will the oil and gas come from? The
Persian Gulf, Russia? Closer energy ties will likely translate into
closer political ties. As China, for example, relies increasingly on
Persian Gulf oil, would that country be willing to intervene to protect
oil flows from disruption?
CYBERTERRORIST ATTACKS
The spread of information technology and use of the Internet
drastically change the way business is conducted, and this change
carries with it a new set of vulnerabilities. One such vulnerability is
the prospect of cyberterrorist attacks on energy infrastructure. These
prospects are very real, and such attacks, in our estimation, may be
one of the greatest threats to energy supply during the years under
review.
The U.S. Central Intelligence Agency, along with our Department of
Defense, has been working for years to perfect ways to electronically
meddle with other countries' banking systems and electricity grids. I
think we can safely assume that others are targeting our own
electricity grids and banking systems.
No enemy would be foolish enough to engage the United States in a
way that would allow us to use our vastly superior military force. But
a handful of computer hackers, given the opportunity, could play havoc
with our economy, at minimal cost to the host country.
POLICY CONTRADICTIONS
While we may voice our strong opposition to the use of oil as a
political weapon by oil exporting countries, the United States, in its
own way, uses oil as a political weapon on a quite broad scale. How so?
As an importing country, the United States could refuse to buy crude
oil originating from a particular country, but that clearly would have
no discernable impact. That embargoed oil would simply be directed to
another market, and would be replaced in the U.S. market by crude oil
of a different origin.
No, it is through our broad application of sanctions that we employ
oil as a political tool. We have unilateral sanctions against Libya and
Iran, and we join in the multilateral sanctions against Iraq, with
these three sanctions then encompassing a total of 7 million barrels
per day. Do these sanctions really work? Have they caused the
sanctioned countries to alter their behavior as originally intended?
The answer is no, and no.
The greater need for oil in the future is at odds with current
sanctions on oil exporters Iran, Iraq, and Libya. If our estimates of
world oil demand in the year 2020 are reasonably correct, then Iran,
Iraq, and Libya will have to substantially expand their current
productive capacity and to produce at or very near full capacity if
that demand is to be satisfied.
GLOBALIZATION
There is another policy contradiction that I want to bring to your
attention. The United States deals with energy policy in domestic
terms, not international terms. The U.S. policy is therefore at odds
with globalization. U.S. consumers have primarily one concern, and that
is price. Our consumers do not care where our oil comes from. That we
are presently importing about 57% of the oil we consume is of no
concern at all. Although most certainly view Saddam Hussein as an
enemy, would they then reject Iraqi oil? They almost certainly would
not. We import in excess of 700,000 b/d of Iraqi oil, to no one's
objection. Moreover, one of the great ironies of the day is that we
refine this Iraqi crude, producing some volumes of jet fuel, and
presumably use some of that jet fuel in our military aircraft sent out
to bomb Iraq. The circle is closed; we are returning their oil to them,
but in a slightly different form.
Some time ago, at a CSIS-sponsored conference, Mack McLarty, former
White House chief of staff under President Clinton, presented a very
perceptive--and commonly-held view of how globalization will work.
``When a Brazilian brews her morning coffee today, she is likely to
use electricity from a power plant in Uruguay that runs on natural gas
provided by a Chilean company. She drives to work in a Ford fueled with
Venezuelan gasoline, and her Canadian-owned factory may soon be powered
by a 2,000 mile natural gas pipeline from Bolivia.''
But I would like to offer another view of globalization. There is a
downside to globalization that, at least in energy terms, affects all
of us. For globalization makes us vulnerable to events around the
world, anywhere, anytime, over which we have no control.
Indeed, one astute observer has written that globalization actually
helps terrorists. The lowering of borders, the rise of a global
economy, the revolution in information technology, all these great and
wonderful things have enormous benefits for terrorists.
A major oil exporting country sneezes, so to speak, and the rest of
the world catches a cold. The so-called ``Asian flu,'' if you will
recall, was one of the triggers leading to the oil price collapse of
several years ago. We can no longer hide behind national boundaries.
SECURITY OF SUPPLY
Any energy importing country must concern itself with security of
supply and, because we do, we seek security through diversity of
supply. The energy policy of the United States encourages the search
for oil outside the country, but away from the Persian Gulf. All in an
effort to reduce our dependence on those exporting countries. But as we
work to reduce our reliance on Persian Gulf oil, others are raising
theirs.
We have intervened militarily in the Persian Gulf in the past to
protect oil supply and likely would do so again. But if U.S. military
power were committed to a limited but extended protection effort in
Northeast Asia, for example, the capacity to respond to a crisis like
that of 1990 in the Persian Gulf would be severely limited. As a
result, the United States will need to rebalance its security relations
and other consuming countries will have to weigh in. The United States
cannot go it alone.
ENERGY SUPPLY AND DEMAND INTO THE 21ST CENTURY
As we looked ahead in our study to the year 2020, in terms of
proportional shifts in energy supply, what did we find?
We found that the relative shares of crude oil, of coal, and
of nuclear electric power all will decline, compared with
relative contributions made in the year 2000.
Indeed, nuclear electric power was seen as the only form of
primary energy to decline both in absolute and relative terms.
We found that renewables will hold their own, in relative
terms.
Natural gas, to no one's surprise today, was the only form
of energy to demonstrate both absolute and relative gains.
Looking more closely at crude oil, would the geographic
distribution of production change much during the intervening 20 years?
The Persian Gulf would substantially increase its dominance
of global oil trade by the year 2020.
The contributions from the former Soviet Union, particularly
from Kazakhstan and Russia, plus from Africa, would show
considerable gain.
But for the United States and the North Sea, the future was
one of continued decline.
On an individual country basis, Saudi Arabia would maintain its
leadership, at about 17% of the world total, followed by the former
Soviet Union, then Venezuela, Iraq and Iran, all three at around 5
percent each. No real surprises here, although for the former Soviet
Union we need to separate out Russia, Kazakhstan, Azerbaijan, and
Turkmenistan. These countries warrant individual attention.
The potential of the Caspian Sea is a subject of considerable
attention and continues to attract heavy media coverage. Just what can
we expect in the years ahead? Looking just to the year 2010, and
presuming that oil exploration and development programs are successful
and that pipeline carrying capacities are adequate, then the new oil
from the Caspian might represent as much as 3% of world oil supply that
year. Not pivotal, by any means, and certainly not a substitute for
Persian Gulf oil, but nevertheless important at the margin, and for
adding to diversity of supply, which is a main theme of U.S. foreign
policy towards that region.
ELECTRICITY, NUCLEAR POWER, AND THE ENVIRONMENT
We found that electricity would be the most rapidly growing form of
energy use during the years 2000-2020. This growth will be concentrated
in the developing countries, where electricity use will more than
double.
Clearly, access to adequate and reliable electricity supply is
essential for modern civilized life. But two concerns emerge.
Substantial capital investments will be required to build power plants
and grids, and will NIMBYism (Not in My Back Yard) intrude in a way to
interfere with the timely construction of power generators and
supporting grid?
Moreover, can adequate electricity supply be developed while
protecting the environment? This question particularly pertains to
developing countries.
Nuclear power currently accounts for 16% of worldwide electricity
generation. But by the year 2020 that contribution is expected to
decline to just 10%. This decline will lead to a commensurate increase
in worldwide carbon emissions, at a time when the world is increasingly
aware of the need for emissions-free energy, and at a time when the
developing world is confronted with dramatically large future energy
requirements. To protect the environment, do we provide the poorer
coal-burning countries with the latest in clean coal technology? Do we
encourage them to take up the nuclear electric power option? Perhaps
both approaches are needed.
THE EXPORTING COUNTRIES
Volume 3 of our Geopolitics study deals in large part with the
geopolitical situation in the key oil exporting countries.
Unfortunately, pessimism prevails when longtime observers consider the
outlook for stable political systems in many of these oil exporters.
Any geopolitical analysis of world oil inevitably begins with a
survey of Saudi Arabia, and includes a scenario under which its oil
exports are reduced or even eliminated. We began with Saudi Arabia
because of its dominant role as an oil supplier and in recognition that
no other supplier can replace Saudi Arabia should the need arise.
Several sources of Saudi instability quickly come to mind: structural
economic problems; ethnic and social tensions; and problems of royal
succession.
Russia is the number two oil exporter, at roughly 4 million b/d.
Today, Russia is weak, and a weak Russia is just as much concern to the
world as was a strong Russia during the Cold War, in large part because
of its large arsenal of weapons of mass destruction. In 1998 Russia was
producing more oil than anyone else--11.5 million b/d. Then a collapse
in production set in, eventually to 6 million b/d, not because of war
or developments in the market place, but because of field mismanagement
and the lack of investment capital. Foreign oil companies are prepared
to invest in Russia, but only if the investment climate is attractive
and if the investment is properly protected under the law. These two
conditions have not yet been met.
The oil future of Venezuela is a bit uncertain because of
uncertainty regarding President Chavez. The uncertainty regarding the
sanctioned states of Iran, Iraq, and Libya has already been mentioned.
We want to be optimistic about Mexico as an oil supplier and
potentially of natural gas, and there are signs of change and progress.
But these come slowly. In western Africa, all the unwelcome attributes
of a petro-state are to be found in oil-rich Angola, where its natural
resources are used to fund a civil war.
But there is good news out there. The U.S. neighbor to the north,
Canada, is our leading supplier of energy, surpassing all others. Last
year our imports of Canadian oil averaged 1.7 million b/d, accounting
for 15.2% of all oil imports. Canada supplies most of the natural gas
imported by the United States a bit more than 97%, representing in turn
some 15% of marketed U.S. natural gas production. The coincidence of
U.S. and Canadian national interests protects these supplies.
POLICY CONSIDERATIONS
In order to assist decision makers in the public and private
sectors the CSIS study offers the following policy considerations:
Energy Availability
Avoid the indiscriminate use of sanctions. The value of
multilateral sanctions should be weighed against the value of
engagement and dialogue. When their use is deemed admissible in
the support of international interests, ensure that the
coverage of sanctions is as targeted as possible. Unilateral
sanctions are not an effective policy tool.
Do not obstruct the development of economic routes that
would ultimately offer Caspian and Central Asian exporters a
diverse set of options for transporting oil and gas to foreign
markets.
Encourage energy-producing countries to ensure their energy
sectors attract and support greater foreign investment.
Energy Reliability
The United States should retain as far as possible its
ability to defend open access to energy supplies and to
international sea-lanes.
U.S. allies in Europe and Asia should be prepared to
shoulder a greater burden of the financial cost of protecting
energy supply, including sea-lane protection.
Governments must find ways to work with the private sector
to minimize the vulnerability of energy infrastructure to
sabotage or terrorist attack, including cyberterrorism.
Governments should maintain and, where appropriate, expand
government-financed and controlled strategic petroleum
reserves, reserving their use for supply interruptions.
Energy and the Environment
Economically and environmentally sound technologies must be
made available to help developing countries meet increasing
energy demands.
Western nations should assess the conditions under which
nuclear power could make a significant contribution to
electricity generation in the developing world.
OECD governments should expand basic research on energy
technologies while concurrently policymakers should eliminate
those environmental regulations that inhibit bringing
technological innovation to market. All governments should
review the extent to which domestic energy subsidies are
inconsistent with global energy policies.
A FINAL THOUGHT
Let me leave you with this final thought. There are troubles ahead.
Where is the growth in energy demand coming from? Unstable countries.
Where is the growth in energy supply coming from? Unstable countries.
All this makes for a somewhat uncomfortable and unpredictable future.
Moreover, the end of the Cold War discipline has enhanced the prospects
for increased volatility, which in turn may constrain investment
levels, resulting in tight supplies.
In retrospect, our assessments stress prospects for instability and
interference in energy supplies during the coming years. But we did so
only to alert policymakers as to how fragile timely supplies really
are. The larger task, however, will be to convince the consuming public
that there is a cost to reliable supplies of energy and to a protected
environment, and that this cost must be reflected in the prices they
pay. But how to convince the consuming public that higher prices may be
in their longer-term interests? This is a critically important
challenge before policy makers and legislators at all levels.
The Chairman. Thank you very much.
Is the pronunciation ``Placke''?
Mr. Placke. Placke, sir.
The Chairman. Placke. Why do you not go right ahead, Mr.
Placke? Welcome.
STATEMENT OF JAMES A. PLACKE, DIRECTOR, MIDDLE EAST RESEARCH,
ON BEHALF OF CAMBRIDGE ENERGY RESEARCH ASSOCIATES
Mr. Placke. Thank you very much, Mr. Chairman. And like the
other members of the panel, I appreciate the opportunity to be
here today.
I have submitted a statement to the members of the
committee, which I will simply draw on in a way that will
highlight some of the points made in that statement that I hope
will be helpful to the members of the committee.
Let me begin by painting a very general picture. We see
sources of primary energy supply around the world, that is, the
natural resources themselves, the coal, the gas, the oil, as
not only adequate currently but adequate to support rising
consumption into the indefinite future. The issue is not
resource availability. The issue is getting the energy to the
consumer in the form at the time and the place where it is
needed. And that is part of the problem. It is really the heart
of the problem that we confront today in the United States.
That is the issue in California. It is the issue in gas supply
this past winter.
I think we are not trying to be proscriptive, but in
general the things that need to be done are to maintain an
investment climate that will encourage development of the
facilities necessary to delivery the energy in a timely manner.
And that requires a regulatory environment, and regulation
continues to be necessary to protect the public interest,
clearly, but an environment that keeps in mind as well the
objective, which is to deliver the energy in an efficient
manner.
These are very general characteristics. Let me turn to a
couple of specifics in each of the areas that we have under
review, oil, electricity, and natural gas. The good news on oil
is that, despite rising oil consumption, world oil reserves
have more than doubled over the last 30 years. In the United
States, as members of the committee have already noted, as well
as members of this panel, U.S. production has continued to
decline over a very long period of time. We passed the point of
self-sufficiency in 1973. And in general, with very few
exceptions, the trend has been consistently downward ever
since.
The good news is we are about to turn around. For the first
time in nearly 30 years, we anticipate an actual increase in
U.S. domestic crude oil production this year. We see that
continuing through the rest of this decade. And by the end of
the decade, we anticipate that U.S. crude oil production will
be more than a million barrels a day higher than it is now.
At the same time, of course, consumption continues to grow.
And indeed, consumption will grow faster than the increase in
supply. At the end of the decade, we think there will be a
modest growth in U.S. dependence on foreign oil sources, which
for the past year, the year 2000, we put at about 56 percent of
consumption. And by the year 2020 we see that rising to 57
percent. A modest increase, but the trend, I think, is clear.
The question of security supply hinges on not only the
amount of oil produced in the United States, but where the
imported oil is coming from. And here again, the news is not
all bad. Increasingly, imports into the United States are
coming from western hemisphere sources, Canada, Mexico, and
Venezuela principally. They are three of the top five suppliers
to the U.S. market.
The largest supplier to the U.S. market is Saudi Arabia,
with which the United States has had a long and, I think,
satisfactory relationship in the energy area. And finally, the
fifth supplier is Nigeria, which, in terms of transportation,
is relatively well located on the west coast of Africa.
In the end, however, it is really price that is the issue.
It is not the resource itself. And if the price of oil is $50
in Tokyo Bay, it will be $50 in New York Harbor. So the world
oil market is unitized in a way that we cannot simply escape
from.
Turning to electric power, a great deal of attention, of
course, has been focused in this area because of the events in
California over the last 6 months. Really, the origins, I
think, of the issue nationally go back to the beginnings of the
1990's when questions of deregulation and restructuring of the
industry began to come onto the public agenda.
This induced a good deal of caution into investors because
the investment climate was uncertain. It was not certain what
the rules of the game were going to be. And as a consequence,
very little new capacity was built in the United States during
the 1990's.
That, however, began to turn around toward the end of the
decade of the nineties, as the regulatory and restructuring
environment and the directions in which the country was going
became clearer. We added 27 gigawatts of electric power
generating capacity nationally last year. We anticipate that
over the next 5 years, we will add another 300 gigawatts, which
is equal to 40 percent of our total generating capacity
currently.
On a national basis, the capacity is certainly adequate.
That, of course, does not deal with the issue of getting it,
again, to the consumer when it is wanted. And that is really
the problem. The transmission system is not capable of shifting
the power around from where there is surplus supplies to where
there are deficits.
Prices are also going to increase because increasingly, in
part for environmental reasons and in part simply because of
economic efficiency, most of the new generating capacity is gas
fired. Gas prices are already high. And as power demand grows
and new plants come on, more gas will be required. So those
higher gas prices will be supported by generation demand. And,
as far as electric power is concerned, they will be passed
through to the electric power consumer.
As has already been noted, the principal problems in the
United States are California in the first instance, and that is
on everybody's front page these days. So very little more needs
to be said about it, I think. It is a supply and demand issue.
There simply was not adequate new capacity being built at a
time when California was growing at an extraordinarily high
rate. The consequence is the power now is not available.
We anticipate, as has already been noted as well, perhaps
as early as this summer, power shortages in downstate New York.
That is, New York City and immediate counties around the New
York area. Here again, the transmission system is inadequate to
transport power from New England, where we see a power supply,
into downstate New York, where we see a deficit.
The California problem will be with us. It is going to be a
difficult year in California this year and probably next year.
On the basis of what we can see today, we would expect that the
situation may return to something like normal in about three
years; that is, about the year 2003.
On the natural gas side, the picture is perhaps even more
mixed. We have had an actual decline in gas produceability in
the United States. And that has been masked by three
consecutively warm winters beginning in 1997. The winter of
2000/2001, as we all know, was one of the coldest on record.
And it really pressed the system very hard. So hard, in fact,
that gas prices tripled at their high point. They have now
fallen into a range that has about double what had been the
norm. And they are likely to stay there for the foreseeable
future.
The positive side of that is that this has created a
climate in which gas well drilling is at record levels, having
fallen dramatically in 1997 and 1998 and 1999. The questions,
however, many of which this committee will need to deal with,
of the permitting environment for construction of additional
gas transmission capacity and expansion of existing gas lines
will be important to bring supply to where it is needed. Where
the supply will come from is also changing. It is not going to
come, as it has, so much from the traditional producing areas,
but rather areas that are only now beginning to appear on the
horizon, such as arctic gas, for which there is a growing
supply. Then reinjection into the fields in Alaska is
approaching capacity. Something really needs to be done to
facilitate transmitting that gas from where it is to where it
is needed.
And this does not get into questions of ANWR. These are
fields that are already developed and are producing. A
coordinated policy involving our neighbor to the north, Canada,
is likely to have to be part of that solution, because a
pipeline would have to cross Canadian territory.
As well, deep well drilling in the Gulf of Mexico is the
primary promising frontier for U.S. domestic gas production.
And that increasingly will take, I think, our attention and
absorb larger and larger amounts of investment.
Finally, liquified natural gas imports, which were
fashionable in the 1970's, are back on the agenda. There are
four terminals in the United States that are capable of loading
liquified natural gas. And at today's price levels, which we
expect to be with us for some time, it has become economically
feasible to import natural gas in liquified form from supply
points around the Atlantic basin.
Mr. Chairman, you asked in particular for a comment on
sanctions, which I will be happy to do. It is something that I
devote actually a good bit of attention to. Several points have
already been made, which I would endorse. And that is, that, in
general, and this is a generalization, multilateral sanctions
are much more effective than unilateral sanctions. The General
Accounting Office has produced at least two studies on this
issue, as have a number of other institutes. And I think that
is a generally accepted principle.
But unfortunately, it is not a guarantee. Multilateral
sanctions have been applied to Iraq for more than 10 years
following Iraq's invasion of Kuwait in 1990. Saddam Hussein is
still in office in Baghdad and likely to remain there.
I think what the administration is doing to address that
issue to re-figure, reconfigure sanctions in a way to make them
more effective, focusing on the arms issue and the control of
the oil revenue, which is a means of directing expenditure by
the Iraqi government and preventing them from doing as much as
they might otherwise do in the area of developing weapons of
mass destruction. So it is limited, but it does have its uses.
Perhaps the most dramatic case where sanctions have had an
effect is Libya. We have had a serious tension in our
relationships with Libya going back to the early 1980's. And we
have virtually totally sanctions on Libya by presidential
executive order since 1986. But it was not until 1994, when the
Security Council acted to impose multilateral sanctions, that
the pressure really began to be felt by the Libyan authorities
and ultimately resulted in the release of the two Libyans
accused in the bombing of Pan Am 103 in 1988 last year. The
trial, as we all know, concluded in January with the conviction
of one of the two accused and the release of the other.
Those sanctions have been suspended, but not removed. And
they remain, I think, an issue in U.S.-Libyan relations that
needs to be dealt with in a way that takes into account Libya's
past record of involvement with international terrorism, the
legitimate and urgent claims of the families of the Pan Am 103
victims, and, finally, some degree of acceptance of
responsibility for the incident by the Libyan authorities,
which has yet to be forthcoming.
That is a subject, Mr. Chairman, that could absorb a lot of
time. I think I probably have said enough on it. If members of
the committee wish to go into it further, I would be happy to
answer questions. Thank you.
[The prepared statement of Mr. Placke follows:]
Prepared Statement of James A. Placke, Director, Middle East Research,
on Behalf of Cambridge Energy Research Associates
OVERVIEW
The world's energy resources are sufficient to fuel a rising living
standard for a growing world population for the indefinite future. This
view is based on what is known about energy sources today, what is
projected for future resource discovery and development, and the
additions to world energy supply that can reasonably be expected from
advancing technologies. Uncertainty about meeting energy demand at
specific places and times comes about because of the need for
continued--even rapid--development of the processing and delivery
systems to make energy available in acceptable forms where and when it
is wanted.
Meeting energy demand in the United States as well as globally
involves more than just identifying adequate primary fuel sources.
Since a large and growing proportion of the world energy supply system
is privately owned and operated, the investment climate must be
attractive for rising demand to be met. Delivery means, such as
shipping terminals, oil and gas pipelines and power transmission lines
need to be regulated to protect the public interest, but in ways that
do not inhibit responding to consumers' needs. Finally, environmental
standards need to promote the public welfare, but in the context of
enabling economic growth, including energy consumption, to support
rising standards of living.
Clearly, government has a role to play in reconciling these
parallel and sometimes competing interests. For the United States, in
particular, there is a need for government to facilitate the further
development and delivery to consumers of domestic energy as well as
access to needed, and growing, amounts of imported energy resources.
Both an informed vision and policy leadership are required.
OIL TRENDS
Over 30 years from 1970 through 1999, the world consumed
approximately 657 billion barrels of oil. The world's proved oil
reserves stood at 470 billion barrels in 1970. Yet, despite consuming
nearly half again this amount of reserves by 1999, world proved oil
reserves had grown to 1,038 billion barrels. Moreover, our research
indicates that oil will remain the world's dominant source of primary
energy to at least 2020, although declining slightly in its share of
primary energy demand from 41 percent in 2000 to 39 percent in 2020--
with the difference largely taken up by greater use of natural gas.\1\
---------------------------------------------------------------------------
\1\ See: 2020 Vision: Global Scenarios for the Future of the World
Oil Industry (CERA, 2000)
---------------------------------------------------------------------------
Unites States' oil production has trended steadily downward since
1973, except for a few years in the late 1970s and mid-1980s reflecting
Alaskan production peaks. United States' crude oil production averaged
5.8 million barrels per day in 2000--a little less than two-thirds of
the 1973 rate. However, primarily because of advances in deep-water
production technology being applied to the Gulf of Mexico, we estimate
that the rate of U.S. crude oil production will rise by more than one
million barrels per day by 2010. This is apart from any new production
that may come from areas presently closed to oil operations.
Rising U.S. oil demand is, however, expected to exceed forecast
production increases, and U.S. dependence on imported oil--although
increasingly from sources within the Western Hemisphere--is expected to
continue to grow, but at a slower rate. The United States imported a
net 56 percent of its oil consumption in 2000. Imports are estimated,
on the basis of present trends, to grow slightly to 57 percent of
consumption by 2010.
Government and Industry Efficiency
In the oil arena, the role of government remains one of:
being an arbiter among competing interests, such as
environmental concerns that restrict resource exploitation or
impose standards on combustion emissions that increase costs or
limit the availability of fuels;
providing a buffer against supply emergencies, such as
through the strategic petroleum reserve;
regulating the industry's interstate operations as
necessary, but in a manner that does not detract from
investment incentives and that is consistent with competition.
Innovation has been, and remains, the key both to meeting rising
U.S. and world oil consumption while controlling, or even reducing,
costs. For example, a rising proportion of additions to world oil
reserves is from discoveries made in deep water (below 2,500 feet) on
the continental margins of North and South America, West Africa and the
outer reaches of the North Sea where exploration and production was not
technically feasible only ten years ago. At the same time, the price of
oil in constant dollars is now about the same as it was 15 years ago,
while world oil consumption has grown by 16 million barrels per day
since 1985, or about 1.6 percent per year. For the oil industry to
continue this performance, an open, competitive business environment is
essential.
ELECTRIC POWER TRENDS
Little new generating capacity was added in the United States
through most of the 1990s because of investor uncertainty due to
discussion of industry deregulation and restructuring. Over the past
few years, as U.S. restructuring plans and rules began to take shape,
many power plant developers shifted their development efforts from Asia
and Latin America to the United States. Now, a new wave of generating
supply has arrived. In 2000, about 27 gigawatts (GW) of new generating
capacity came on line. Another 300 GW of capacity is under development
and is scheduled to come on-line within the next five years. This
represents about 40 percent of today's total U.S. capacity of 770 GW,
which is much more than forecast demand growth.
About 80 of the projected 300 GW addition to capacity is already
under construction and is scheduled to come on-line by the end of 2002.
More than 90 percent of the 300 GW total will be gas-fired. As these
power plants come on-line, pressure on natural gas supply will
intensify. High gas prices over the past year have already affected
power prices, particularly in regions more dependent on natural gas for
power generation.
This large increase in power generating capacity, which is a
virtual supply tsunami, is uneven--not enough in California and
downstate New York and more than sufficient in Texas and New England.
We see Texas and New England having excess capacity as soon as this
year. Transmission limitations, however, have prevented movement of
electricity from regions with a surplus to regions with a shortage. A
transmission system set up for one kind of electric power industry
needs to be adapted to a different, competitive industry. This
structural transition will require at least another five years and
probably much longer. This is because, after more than a decade of low
investment in transmission capacity, a great deal of uncertainty about
transmission restructuring remains. Major physical upgrades will likely
not happen until institutional arrangements are settled.
The Special Case of California
The source of California's power crisis is a shortage of supply.\2\
Over the past five years, California's economy grew 29%, driving
electricity consumption up by 24%. But no major power plant was built
over the past decade. Flawed market design turned a surplus at the
beginning of deregulation in 1996 into a shortage now. The shortage
will likely get worse before it gets better. This summer will be very
challenging. Given that hydroelectric capacity is about 80 percent of
normal, Californians are fated to endure blackouts if summer weather is
normal. The summer of 2002 will likely be difficult too. It took a long
time to produce the current shortage--ten years of inadequate additions
to generating capacity--and it will take several years to work out of
it. California may not be back to normal before 2003. Downstate New
York is likely to see shortages beginning as early as this summer--
again because no major power plant has been built there recently, and
transmission limitations prevent tapping surplus capacity elsewhere.
---------------------------------------------------------------------------
\2\ See Beyond California's Power Crisis: Impact, Solutions, and
Lessons, CERA 2001 (retained in committee files)
---------------------------------------------------------------------------
California's experience is affecting the speed of restructuring in
other states. Already more than ten states have decided to review
whether to delay planned restructuring, of which four have recently
decided to delay.
Summary of the Near-term Outlook
Except for California and downstate New York, we do not
expect power shortages for the United States in the near term.
Downstate New York is likely to be the hot spot this summer
along with California. Because of transmission limitations, it
is not possible to move a significant amount of additional
power into downstate New York, despite present and projected
capacity availability elsewhere.
Most existing coal (330 GW) and nuclear plants (100 GW) can
operate economically for at least the next five years, and most
likely much longer. We expect that these plants will remain the
backbone of the generating fleet even though some of them will
need retrofits for environmental compliance with
NOX, SOX, Mercury and fine particles
standards. Any C02 restrictions would add to these
requirements and pose a different challenge.
Some have claimed that Internet-related electricity
consumption represents about 9-13 percent of total electricity
consumption and argue that, since Internet use is still growing
fast, we will see higher growth in electricity demand than the
historical trend would indicate. We take a different view. Over
the past five years, computers and Internet use have penetrated
significantly into U.S. businesses, households, and schools.
But electricity intensity--measured by kWh consumption per real
dollar of GDP--has continued a decline that began in the mid-
1970s. This suggests that the new economy is less electricity
intensive than the old economy, i.e., it is economically more
efficient.
Natural gas prices have been high over the past year
(averaging $4.23 MMBtu at Henry Hub), and we expect them to
remain relatively high for at least the next three years.
Regions that rely heavily on gas-fired power plants, such as
New England, New York, Texas, and Florida will continue to see
higher power prices because of high natural gas prices.
NATURAL GAS TRENDS
The natural gas price shock is ongoing. Wholesale prices this past
winter reached a peak of as much as $10.00 per million British thermal
units (MMBtu) at the Henry Hub--nearly four times the level of the
previous winter. Prices have moderated to near $5.00 per MMBtu, but are
still nearly double the price level of just one year ago. While this
rapid price jump has been shocking to customers and to the economy as a
whole, it is, in fact, the result of longer term forces that have
strained gas supply availability in North America. Tightening natural
gas production capacity was masked by three warm winters beginning in
1997. At the same time, lower cash flows--owing to the oil price
collapse of 1998 and low gas prices because of weaker demand--resulted
in a fall-off of drilling activity and a decline in U.S. production. In
2000, very cold early winter weather and growing demand for gas use in
power generation resulted in a sudden upsurge of demand and a heavy
draw-down of storage inventories. When combined, this was the perfect
mix for a dramatic price shock.
Deregulation of natural gas prices served consumers well--with a 30
percent decline in real prices from 1985 to 1999. Without a doubt the
natural gas price shock this past winter has caused intense pain for
customers. Homeowners are facing heating bills that have nearly
doubled--costing the typical family $500-600 in disposable income.
Businesses are also hard hit--often unable to pass their higher energy
costs on to customers. Energy intensive industries, such as steel and
fertilizer manufacturers, are seeing higher energy costs devour their
profit margins to the extent that some have curtailed production.
The good news is that the gas market worked this past winter:
There is no threat to reliability. Customers faced sticker
shock, but the reliability of gas service has been preserved
despite the coldest November/December period in the 106 years
that this weather data has been tracked.
There is no financial crisis among gas utilities. By and
large, rates are being adjusted through cost pass-through
mechanisms, preventing utilities from being squeezed between
high wholesale costs and low retail prices. Many utilities are
preparing ``risk mitigation'' proposals for the consideration
of their state commissions in order to prepare for the 2001-
2002 heating season.
The market is pushing off demand. During the peak of the
demand pressure in December and early January, more than 7
percent of ``base'' gas consumption was pushed off the market
through a combination of switching to alternative fuels, plant
closures, and through processors and pipelines leaving certain
gas liquids in the gas stream to boost the Btu's available for
customers (``ethane rejection.''). While gas prices have
moderated since the peak, much of the curtailed demand remains
off, as gas prices remain at or above the equivalent level of
distillate oil prices, one of the principal alternative fuels.
The result is impressive. Despite fundamental market conditions
(low storage, record cold) that were more extreme than the ``gas
shortage'' of the 1975-1977 period, the market managed the shock this
winter without the extensive interruptions of businesses and schools
that occurred in the previous crisis. While prices are still high, the
market has worked to moderate the extremes that were experienced
earlier this winter.
The Gas Market Pressure Continues
Despite moderating gas prices, pressure on the market continues
and, with it, the potential for additional price shocks in the year
ahead. Spring has finally arrived and the gas market has already
shifted its focus to the daunting challenges that lie ahead:
specifically, the need to refill storage inventories for next winter
while at the same time meeting potentially higher demand for gas use in
power generation this summer. At the same time, there is a need to
store at least 400 billion cubic feet (Bcf) more than was stored in
each of the previous two summers--representing roughly 4 percent of
total gas supply. With production only slowly increasing, storage
demand will keep pressure on the gas market.
To provide an adequate supply for storage, gas prices need to
remain high enough to continue to suppress demand. Specifically, this
means price levels above those of residual fuel and distillate oil--the
alternative boiler fuels. Given current oil prices, this means a gas
price above $4.50 per MMBtu. Prices must continue to discourage demand,
for if demand returns to gas from oil it will cut into storage
injections, and the risk of extreme price volatility next winter will
increase. Indeed, reaching even last year's low storage inventory level
heading into next winter will prove challenging, and there is little
margin for any interruption in what must be a consistent and aggressive
pace of injections into storage.
The beginning of the injection season will prove especially
critical this year, because there is little prospect to make up later
ground lost in April. Unless injections start strongly this season,
inventories next autumn are not likely to reach even last year's record
low level, and the market could be exposed yet again to crisis pricing
in colder-than-normal circumstances. As a result, there will be little
price relief for customers until 2002 at the earliest.
Injections this spring will be closely watched for another reason
as well: as an indicator of the health of U.S. wellhead supply. If
injections are higher (or lower) than demand and imports would appear
to imply, the injection rate will be interpreted as a leading indicator
of the state of the long-awaited supply response in the United States,
just as last year's low injections early in the season indicated a
supply decline. This will only add to price volatility this spring and
summer.
Longer-term
While the gas market has proven remarkably resilient in managing
the price shock, many of the underlying market pressures that caused
the shock are not abating, principally because the underlying demand
pressure in the market from power generation continues to grow. While
electric power and gas supply issues are largely separate in terms of
their underlying causes, but the solutions are interwoven.
Specifically, the more that power generation needs are addressed by a
wave of new gas fired power generation capacity additions, the more
pressure will be exerted on the gas market. This means a growing
probability that gas prices over the next several years will remain in
a high and broad price band--principally between $3.00 and $6.00 per
MMBtu.
Behind this is a longer term challenge that will test the ability
of the gas industry to draw forth new supply. Specifically:
The power wave. There is a wave of new gas fired generation
being built across the nation, with the result that annual
demand growth for gas is likely to average between 1.5 and 2.0
Bcf per day. This is more than double the pace of growth in the
1990s.
The supply challenge. Satisfying this demand pressure will
require connecting up to 20 Bcf per day of net new supply
capacity during the course of this decade--more than a 30
percent increase in the size of the gas industry. We estimate
that more than $400 billion of capital investment, nearly twice
the level of the 1990s, will be required for production
development alone.
Discouraging signs from traditional producing regions.
Recent trends in production in several key regions point to how
difficult meeting this growth imperative will be. There is a
gas well drilling boom, but this has occurred in previous
years. Typically such a boom increases production by 1.0 to 1.5
Bcf per day within one year. When demand growth was lower, this
was more than enough to correct an imbalance and knock prices
down, more will be needed this time. At the same time, key
regions, such as the Gulf of Mexico shallow water area and the
Western Canadian Sedimentary Basin, have experienced an
increase in decline rates. For instance, production in the
shelf area of the Gulf of Mexico has fallen more than 5 Bcf per
day (30%) since the mid-1990s. In Canada, production growth has
slowed dramatically despite record levels of drilling in the
last several years.
With current high prices and record drilling levels, overall U.S.
production is showing signs of a rebound in several promising
developments in the Rocky Mountains and parts of East Texas. But this
is unlikely to be enough to do more than offset potential demand
growth; it will not return the market to surplus. As a result, prices
are likely to remain abnormally high ($4-6 range) until there is a more
significant addition to North American gas supply.
The Importance of New Supply Frontiers
With the limitations on production growth from traditional
producing basins, we must increasingly turn to the supply frontiers to
bridge the gap. These tend to be capital intensive projects with longer
lead times and greater market risk. United States' energy policy needs
to be directed toward facilitating the development of several of these
``frontiers''. The good news is that these regions are highly
prospective and potentially highly profitable to develop.\3\ Highlights
of these alternatives include:
---------------------------------------------------------------------------
\3\ See Towards New Frontiers: The Future of U.S. Natural Gas
Supplies (CERA 2001)
---------------------------------------------------------------------------
The deepwater Gulf of Mexico. The deepwater Gulf of Mexico is a
preeminent exploration and production hot spot. It is already in active
development--with exploration pushing the technological frontier
associated with development in water depths of more than 5,000 feet
(and potentially as much as 10,000 feet). This area already is
producing more than 4 Bcf per day and has the potential to grow to over
10 Bcf per day--with annual growth exceeding 1 Bcf per day over the
next several years.
LNG imports. With recent or pending reactivation of the four
existing LNG import facilities in the United States, we expect a
significant increase in imports, particularly after 2002. With
expansions, these terminals could accommodate 3-4 Bcf per day of total
imports--principally from Atlantic Basin suppliers such as Trinidad,
Nigeria, Algeria, and possibly Venezuela. Beyond this, several new
``greenfield'' LNG facilities have recently been proposed--including
projects on the west coast to serve constrained gas and power markets
in California. While these will be challenging to site, they can
provide a foundation for additional growth.
Atlantic Canada gas. Major discoveries in offshore Nova Scotia can
add to the recently completed Sable Island/Maritimes and Northeast
project--which is now delivering nearly 0.5 Bcf per day to New England.
These supplies have the advantage of being reasonably close to high
value eastern U.S. gas markets. With additional development and major
pipeline expansions/looping, Atlantic Canada gas supplies could climb
to over 2.0 Bcf per day.
Arctic gas. The highly prospective regions of the northern frontier
and arctic represent a tremendous long term resource for the North
American market. In Prudhoe Bay alone, more than 8 Bcf per day of gas
is already being reinjected. Of course, connecting these supplies will
require a major and complex pipeline project--costing at least $6-10
billion and taking more than five years to develop. Nevertheless, this
could provide a major new source of supply (2.5-4.0 Bcf per day) before
the end of the decade.
Collectively, these frontier sources can account for the majority
of incremental gas supplies in North America. Best of all, they are
competitive at prices well below current levels, potentially as low as
$3.00 to $3.50 per MMBtu, but they are highly complicated and capital
intensive projects. Timely implementation will require cooperation
among industry members, local communities, and governments, but they
have the potential to bring what consumers really need: a low cost,
reliable and environmentally attractive form of energy.
Policy Implications
Natural gas can and should become a vital part of the nation's
energy solution. Long-term policies need to be developed to encourage
the environmentally friendly and balanced development of this resource.
We, therefore, encourage consideration of five long-term policy
objectives pertaining to natural gas:
1. Streamline the infrastructure approval process. All of the new
frontiers will require significant investment in gas transmission and
handling infrastructure--such as LNG terminals, pipelines and storage
fields. Some of these, such as the Arctic pipeline and LNG, have not
been seriously examined for over 20 years--having been last considered
during the 1970s. But they are not totally new either. State and
Federal governments should take steps to ensure the balanced but
expeditious consideration of these new facilities.
2. Add economics to the land access issue. Federal land access
considerations have become a polarizing issue in North America. Rather
than treating this in black and white terms, we need to move to a more
deliberate case by case approach to land access considerations--with
more balanced consideration of the economic and environmental costs and
benefits.
3. Promote environmental flexibility relative to fuels. One lesson
of the California power crisis is the growing importance of fuel
flexibility during times of shortage or constraints. Natural gas
markets go through boom/bust cycles with periods of relatively
constrained supply. During these periods there needs to be flexibility
to ease emissions restrictions and allow switching to alternative
fuels, such as oil.
4. Develop an energy policy with a continental perspective. Many of
the most pressing energy issues for gas and power are not limited to
the United States--they play out against a continental backdrop.
Therefore, U.S. energy policy must be developed in dialogue with Canada
and Mexico.
5. Bring a portfolio strategy to energy. If we have learned
anything from the energy cycles of the past several decades it is the
need for diversity. Whether it is through term contracting for gas and
power, mixing new supply with conservation, or in fuel choice, a
comprehensive energy policy needs to promote and balance all of the
resources and options.
The Chairman. Thank you very much, Mr. Placke. I appreciate
that statement.
We will next move to Mr. William Nugent, commissioner of
the Maine Public Utilities Commission. Please proceed.
STATEMENT OF WILLIAM M. NUGENT, COMMISSIONER, MAINE PUBLIC
UTILITIES COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF
REGULATORY UTILITY COMMISSIONERS
Mr. Nugent. Thank you, Mr. Chairman. I have provided
written testimony that addresses the topics that my colleagues
have already addressed here today. And I would like to take
this opportunity to add a dimension to the testimony before the
committee, and would appreciate your including my written
statement in today's hearing record, as if I had read it.
The Chairman. Without objection.
Mr. Nugent. What I would like to add to this is, the next
thing I would like to add is, the impact on consumers at the
local level. Maine restructured its electricity market a year
ago.
On March 1, 2000, we opened to all customers the retail
markets, retail competition. To serve customers who chose not
to choose a supplier or could not find one, the Maine PUC
arranges so-called standard offer service. Our customers' bills
now show two separate lines; one for generation service, the
other for transmission and distribution service, T&D.
T&D prices have been constant. But as a direct consequence
of national energy price increases, the generation prices in
our two largest service territories rose sharply from March
2000 to March 2001. There is a table, which staff has put
before you, which is titled Generation Prices. And it includes
in the top left-hand corner Central Maine Power Company. You
will see three categories for Central Maine and Bangor Hydro.
And with the exception of the residential and small
business customers in Central Maine's service territory, who
have a 2-year contract arrived at prior to March 1, 2000, you
can see the price increases for the remaining five customer
classes whose contracts were newly arranged to start March 1,
2001. And the price increases, as you can see in the right-hand
column, range from 45.3 to 62.2 cents--or percent, I should
say.
Generation prices may appear less dramatic when combined
with T&D rates to produce an all-inclusive bill, but there is
no disguising for Bangor Hydro's residential customers a 2.8-
cent per kilowatt hour increase in the price in the past year.
That is a 20-percent increase when you come down to even an
all-in rate, a double digit, big impact. People are not happy.
To match market circumstances, we let medium and large
customer prices vary by season and time of use. CMP's large
industrial standard offer customers will see summer peak
generation prices this year of 14.6 cents per kilowatt hour
plus T&D charges. And a large paper mill can easily use 13
million kilowatt hours in a month.
The story is similar for natural gas customers. The typical
bill of a customer who heats with natural gas has increased 85
percent from the winter of 1998/1999 to this coming summer. And
equally important for many of them, the numbers do not stand
still. The cost of gas adjustments are coming twice as rapidly
now as they have in the recent past.
Maine restructured its electricity and gas industries
because we believe that in the long run competition will
provide Maine consumers with lower prices than traditional cost
of service regulation. We could not responsibly promise lower
prices, but we could, and we did, promise that we would do
everything to bring about a healthy, vigorously competitive
market.
And in choosing to restructure, the one clearly
unacceptable outcome for Maine commissioners, as well as
regulators across the country, is the elimination of price
regulation without competition to take its place.
A fair, well-functioning, competitive wholesale market is a
must. No amount of brilliance in designing the retail market
will correct defects at the wholesale level.
And remember, these are regional wholesale markets. How
much consumers in any one State pay is driven not by supply and
demand in that State alone, but by supply and demand throughout
the region and, to some extent, in adjacent regions. There is
but one hourly clearing price for an entire region.
State commissioners have no legal jurisdiction over retail
markets. That authority and responsibility ultimately rests
with the Federal Energy Regulatory Commission, the FERC. Now
having established the structure for the retail market, I
suppose we State commissioners could back away and say that
whether or not restructuring works is out of our hands. But we
cannot do that. We have to make certain that truly competitive
markets, free of market power and gaming, replace price
regulation.
As a State regulator who spends, and as do my colleagues
across the country, a great deal of time trying to figure out
regional energy markets and how to improve them, I cannot tell
you today that I believe that they are truly competitive, free
of market power and gaming, and that your consumers, as well as
mine, are paying just and reasonable prices.
Now do not get me wrong. Markets are functioning. Markets
will always function. The question is how stably and reasonably
will they operate. They are not yet, in my view, truly
competitive and free of that market power.
Now transforming the electricity markets, wholesale and
retail, is a difficult process. Each regional wholesale market
is different. The markets are still just forming. And the
players in the markets need to know the ground rules in order
to make decisions that have extraordinarily large financial
consequences. You and the FERC, pursuant to the authority you
grant it, write the rules. Right now, in my view, the FERC is
overwhelmed by the task before it. The regional markets need
prompt, informed decision making, not forced compromises among
monied interests.
The issues before the FERC have major financial
implications for inadequately represented rate payers,
typically residential and small businesses. For example, the
FERC must pay additional attention to the installed capability
matter in New England, an issue which could cost Maine rate
payers as much as $90 million a year and ten times that amount
across the New England region.
I did a back-of-the-envelope calculation last night as to
what that would mean for households in Maine. My estimate comes
up to about $84 a year per household. And that is just the
household impact, not the business impact.
New England continues to wait for the FERC's decision on
complaints regarding last May 8's--this is 10 months ago now--
$6,000 megawatt hour price spike. Some people estimate that the
incorrect pricing at that time resulted in a cumulative, an
additional cumulative, $90 million overcharge to the spot
market.
At last count, ISO-New England's website revealed 20 market
rules filed with the FERC that are still pending decision. If
we are to have competitive wholesale markets, the FERC must
give prompt decisions to market participants.
Now let me tell you how fast that moves. When we were
buying supplies to start March 1, 2000, we set a 2-month
process to evaluate the offerings and pick a winner. In the
wake of that process, the supplier said: Too slow; markets move
faster.
We condensed it from 2 months to 2 weeks. And let me tell
you, that was too slow. And at one time trying to buy supply
for this year, we had suppliers offering to call us, in fact
calling us, at 11:15 every day and telling us they had to have
our yes or no on the offer they made to us by 11:20. We had 5
minutes to examine very complex offers that would commit Maine
rate payers for a year.
And if we have to make more rapid decisions, we need a
market rules, as determined by the FERC, that will do that.
The Chairman. Could you react that fast?
Mr. Nugent. We did not to--to some extent, at first blush,
when those prices were instituted, they were not the best
prices. But we did arrange our procedures so that we met at 11
o'clock, were there to receive the bid that came at 11:15, and
had an official notice deliberations of our commission set
immediately after we received them. So we could have, had that
been a competitive price.
It is not a usual position for someone that many people
describe as kind of a bureaucrat. Right? I mean, we do not
normally move like that. But we have to, and at least we are
trying to do that. But we also need market rules, which more
clearly spell out the alternatives in advance and do so in a
way that protects the rate payer interest.
The Chairman. Now that worked because they knew that there
was a competitive market out there to bid that power in. If
everybody had said no, obviously some people would have been
without energy, but the people that were promoting this would
not have been able to make their deals.
Mr. Nugent. Yes. Their concern is that they get in in the
morning and they scan the availabilities and then they fashion
a bid. I mean, they were acting very quickly, too. This is not
a scheme to squeeze us. Well, maybe it was. But in any event--
--
The Chairman. Well, the question is--what they are saying
is whatever the traffic will bear is the price.
Mr. Nugent. That is right. And that is what we have stepped
up to, as you can see by the price increases.
The Chairman. That is called a free market.
Mr. Nugent. I understand.
The Chairman. You know, you pay through the nose if you are
caught in a bind. And the idea is you are supposed to be smart
enough to make sure that does not happen.
Mr. Nugent. Well, Mr. Chairman, a free market is one in
which people price uncertainty. And to the extent that one
writes clear rules on which suppliers, as well as consumers,
can rely, you will wring that uncertainty out of the market.
And right now I think what is happening in the market and the
reason I can say that it is not fully fair and competitive and
the prices are not just unreasonable right now is that there is
too much uncertainty.
And I think we, as government have to step up and form
those rules so as to give greater certainty to suppliers, as
well as rate payers. And I think that will lead to lower prices
and greater confidence in the market.
The Chairman. Well, go ahead and tell us how to do it then.
Mr. Nugent. Well, we are still working on that one, too.
And we hope we would have a continuing dialogue with you and
your colleagues. And I think one thing that would help would be
two members on the FERC.
The Chairman. I agree with you.
Mr. Nugent. And we need a FERC that will also work closely
with State commissioners in addressing regional problems. We
are not special interest litigants pleading before the Federal
commission. We are the only representatives appearing there,
sworn to pursue and exceed the public interest in these
matters.
To that end, the New England utility commissioners have
asked the FERC to establish a regional market monitoring
structure. The Maine commission has proposed going even beyond
that to establish a regional organization that could advise and
comment to the FERC on critical matters here.
We recognize that such an organization's advice would be
fully subject to final determination by the FERC and might in
fact be rejected. But to the extent that we have an identity of
interest, the public interest, the efforts of an expert,
informed, and independent regional body could help ease the
FERC's burden and aid the development of those competitive
markets.
The FERC must perform its role as a fact finder and decider
of these important and complex issues. Every day it does not,
rate payers are paying far more for power than even long-run
marginal costs would suggest they might.
Now finally, a word about the EIA, the Energy Information
Administration. Recently it proposed to treat certain power
generation information as confidential and not release it in
individually identifiable form. To the extent that State
commissions must protect the public interest and help develop
markets, we must have access to those data with appropriate
safeguards. We deal all the time with commercially sensitive
information. And we grant legally binding protective orders.
But today, when gaming and market power abuse are more
possible than ever, to deny those charged with protecting the
public interest access to the information we need to protect
that interest makes no sense at all. That is not in the public
interest.
I thank you, Mr. Chairman and members of the committee, for
giving me that extra minute or two past your red light.
[The prepared statement of Mr. Nugent follows:]
Prepared Statement of William M. Nugent, Commissioner, Maine Public
Utilities Commission, on Behalf of National Association of Regulatory
Utility Commissioners
Mr. Chairman and members of the committee: Good morning. My name is
Bill Nugent. I am a Commissioner on the Maine Public Utilities
Commission and First Vice President of the National Association of
Regulatory Utility Commissioners, commonly known as NARUC. I greatly
appreciate the opportunity to appear before the Senate Energy and
Natural Resources Committee on behalf of NARUC and I respectfully
request that NARUC's written statement be included in today's hearing
record as if fully read.
NARUC is a quasi-governmental, nonprofit organization founded in
1889. Its membership includes the state public utility commissions for
all states and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. NARUC's members regulate the retail rates and services of
electric, gas, water and telephone utilities. We have the obligation
under State law to ensure the establishment and maintenance of such
energy utility services as may be required by the public convenience
and necessity, and to ensure that such services are provided at rates
and conditions that are just, reasonable and nondiscriminatory for all
consumers.
NARUC's membership has been and continues to be central to the
development and implementation of policy initiatives affecting the
nation's energy industry and its consumers. For better or worse, the
States are the proving grounds for innovations in energy policy. One
observation that can be made regarding State energy policy activities
is that one size does not fit all. States and their energy industry
stakeholders are experimenting with many different solutions to the
energy challenges that are confronting this Nation. These proposals
range from retail competition implementation to demand side and
renewable energy incentives to the use of new technology applications.
Clearly, in light of the difficulties being experienced not only in the
Western region, additional solutions are necessary.
As policy makers we all must be cognizant of the fact that, as we
explore solutions to the challenges before us, the main obstacle that
the energy industry faces is a paucity of predictability and certainty.
When the right economic or market signals are sent there is an
appropriate corresponding response by the market participants. If the
market participants perceive that the rules are constantly changing and
therefore the market will never develop or mature, the participants
will not invest in development of the market or the production
mechanisms to participate in that market.
HISTORICAL PERSPECTIVE
As the electric power industry developed the technical generation
and transmission capability in the early part of this century, the
industry was transformed from a local and urban industry into one
capable of producing large amounts of power at a central location and
transmitting this power vast distances. As efficiencies improved prices
declined. For most of the twentieth century States have regulated all
aspects of bundled retail electric service and rates.
The inability of the States to regulate prices and other aspects of
electricity sold in interstate commerce under the Constitution and the
absence of Federal regulation of those activities created a vacuum of
regulation over electricity flowing in interstate commerce. The
enactment of the Federal Power Act in 1935 constituted the first
comprehensive effort to bring interstate aspects of the electrical
power industry under governmental regulation.
As a consequence of major power outages during the late 1960's-
early 1970's and the energy crisis of the 1970's, Congress held
extensive hearings looking into specific electricity blackouts and
capacity shortages. Much of this attention focused on the matter of
interconnection of utilities as a method of assuring greater
reliability and coordination among utilities. Out of these
congressional reviews, more formalized planning responsibilities and
wheeling requirements were incorporated into the Public Utility
Regulatory Policies Act of 1978 (PURPA).
PURPA provided that State public utility commissions should
consider and determine whether to adopt cost-of-service and other
standards that were contained in PURPA section 111 and 113. Section 201
and 210 of PURPA provided that certain qualified facilities (QFs) could
sell their power to their host utility at that utility's State-
determined avoided cost. There are two categories of QFs: cogeneration
facilities, and renewable facilities. The Federal Energy Regulatory
Commission promulgated general rules in 1980 on avoided cost
calculations, and by 1982 all the State commissions had developed
specific formulas and methods to administratively-determine and
implement avoid costs. One State early on, New Jersey, set its avoided
costs at the Pennsylvania-New Jersey-Maryland (PJM) wholesale market
rate.
While other PURPA provisions purported to encourage wheeling of
electricity, they were for the most part ineffective. Wheeling of
electricity took place only voluntarily. Wholesale electricity markets
were limited, except where State commissions encouraged and utilities
formed tight power pools, such as PJM and the New England Power Pool
(NEPOOL). To break down the barriers to a more robust wholesale power
market, Congress enacted Title VII of the Energy Policy Act of 1992
(EPACT).
EPACT provided that FERC could mandate wheeling of electricity.
This provided generators with open transmission access to any wholesale
buyer of electricity. EPACT also created Exempt Wholesale Generators
(EWGs). These EWGs could, subject to State siting and environmental
review, build power plants to sell electricity on the wholesale
markets.
By 1994, the wholesale price of electricity fell dramatically
because of the surplus of generation capacity. Large industrial
customers in high cost States asked their State legislatures or State
commissions to allow retail customers to have direct access to
wholesale markets. Today, 25 States, plus the District of Columbia, are
in the process of implementing retail competition laws and/or
regulations. These States have also provided for recovery of stranded
costs. Most of these States have also either allowed or required their
host utilities to divest themselves of their generation capacity, in
order to break up vertical market power.
Independent System Operators (ISOs) were set up in PJM, California,
and New England to coordinated regional wholesale markets. After the
initial success of these ISOs, FERC required all jurisdictional
utilities to organize themselves into Regional Transmission
Organizations (RTO) in FERC Order 2000. These RTOs will help to
coordinate regional transmission systems and regional power markets.
They are also intended to monitor regional markets and plan regional
transmission expansion.
State commissions must have a greater role in RTO governance and
oversight than is now provided by FERC Order 2000. In particular, State
commissions are the entities most directly concerned with monitoring
local and regional markets because retail customers are most affected
by market power abuses. In addition, the State commissions typically
are the entities that must coordinate and approve transmission
expansion and siting consistent with regional plans. State commissions
have consistently expressed a willingness to work with FERC on such
regional issues, but thus far the FERC has taken a position that it can
and should preempt the field. Congress should provide an appropriate
State role for regional oversight of RTOs concerning market power
monitoring and transmission expansion planning, and for other areas
where State commissions in a given region can cooperate and have the
distinct advantage of knowledge of the region and the workings of its
energy industries.
On the gas side, in 1977 the nation had just suffered through
natural gas shortages and curtailments that were caused by an imbalance
of supply and demand in the interstate gas market. This supply-demand
imbalance can be traced to the 1954 Philips Supreme Court decision,
which interpreted the Natural Gas Act of 1938 to extend federal
authority to regulate the wellhead gas price of gas sold in interstate
commerce.
Congress, as part of the Energy Policy Act of 1978, enacted the
Natural Gas Policy Act of 1978 (NGPA) and the Fuel Use Act (FUA). The
NGPA provided for phased deregulation of wellhead gas. By 1985, the
wellhead price of natural gas was effectively deregulated. The FUA
provided that there would be no new gas-fired electric generation after
1978. However in 1985 the FUA was repealed. Thus, for seven years there
was a federally mandated moratorium on new gas-fired electric
generation.
As the phase-in for deregulation ended, wellhead prices dropped
because the supply of gas was more than adequate for the demand and
higher-cost gas wells were shut down. To encourage further gas
consumption, the FERC issued FERC Order 436 (in 1985) and Order 500 (in
1987). Specifically, with these two orders, the FERC provided for
voluntary open access to gas pipeline transportation, coupled with
offering take-or-pay gas wellhead contract relief for high cost gas.
This was the equivalent of allowing for a stranded cost recovery. It is
worth noting that end use gas customers only paid about 11 cents for
each dollar of take-or-pay relief, contrasted with the $1 for $1
stranded cost recovery for electric utilities in FERC Order 888.
During this period, gas supplies remained abundant when compared to
gas demand; this was reflected in the continued low wellhead price of
natural gas. In 1992, the FERC issued Order 636, which mandated
unbundling of gas as a commodity for the transportation service
provided by interstate pipelines. Order 636 also provided for pipeline
capacity release and a secondary market for released pipeline capacity.
In FERC Order 637, issued in 2000, FERC removed the rate cap on short-
term secondary pipeline capacity. This resulted in the development of a
spot market for natural gas, a secondary market for capacity, ancillary
gas services (such as storage), and 40 gas transportation hubs that are
market centers for gas.
Since the late 1980s, nearly all State commissions have allowed
large industrial and commercial customers to have unbundled gas
service, through which they can purchase gas transportation from their
distribution company and directly purchase wellhead gas. Currently
(either as a pilot program or part of a broader customer choice
program), 23 states and the District of Columbia now allow retail
residential customers to purchase gas directly from the wellhead
(typically through aggregators or marketers).
ENERGY TRENDS AND MARKETS
The following observations are not listed in any particular order
because many build upon each other; they should be considered as a
whole, not separately. While these trends do not provide us easy
answers to our Nation's energy policy challenges, but these
observations may help to identify the problems that we must soon
confront.
Natural Gas Trends
Trend 1--Gas demand has increased, production has not kept
pace, and there is no ``quick fix''
Natural gas wellhead prices more than doubled for the fourth
quarter of 2000 compared to the fourth quarter of 1999, and working gas
storage was down in 2000 compared to 1999. Additionally, from 1994
through 1997 while the growth in domestic gas reserves exceeded
incremental gas production, domestic gas production was projected to
increase by only .05 percent in 2000 compared to 1999 (from 18.66 to
18.76 Tcf). At the same time, nearly all new electricity generation
being is gas-fired. Therefore, a principal reason for the increased gas
prices is the increased demand for gas caused by new gas-fired electric
generation (gas peaking turbines and combined-cycle gas turbines).
Domestic gas production is likely to increase in response to higher gas
prices, but in the short and mid-term most of the increased supply is
likely to come from existing gas fields in Canada. While it might take
only six months to explore and drill a gas well, it takes years to
build a pipeline to transport it, if the gas does not come from
existing or nearby existing gas sources which have pipelines in place.
These trends are well illustrated in Maine. In 1997 the closure of
the Maine Yankee Nuclear Generating Station reduced Maine's electric
generating capacity from 3,100 megawatts (mW) to 2,200 mW. Over the
last three years we have added more than 1,600 mW of new, gas-fired
generation, bringing our total to 3,800 mW, more than double Maine's
peak demand.
This was made possible by the construction in 1999 and 2000 of two
new gas pipelines, the Portland Natural Gas Transmission System, which
brings western Canadian natural gas through Maine to the New England
Market, and the Maritimes and Northeast Pipeline, which transports gas
from the Sable Islands gas fields, 150 miles off the coast of Nova
Scotia. These pipes were planned, sited, and permitted before today's
higher natural gas prices. There is reason to believe that, in response
to today's market opportunities, M&NE will boost its capacity by more
than 50 percent through higher compression. And further increases in
production off the Canadian Maritimes may be in the offing.
Trend 2--Convergence
In 1998, over $30 billion in convergence mergers transpired as
electric utilities merged with gas pipelines, gas providers, and local
gas utilities. These mergers provide the converged companies an
opportunity to vertically integrate and also to market BTUs in the form
of natural gas or electricity, whichever is more lucrative. This allows
the energy industry stakeholders to respond to market demand and
preference, while providing them an opportunity to hedge against the
uncertainty confronting this industry today.
Trend 3--Though the majority of natural gas is still being
bought on the spot market, market participants are
increasing their use of risk management tools
Retail gas customer choice programs have been established in nearly
half of the states, but nearly 60 percent of the natural gas consumed
is still being bought on the spot market. Without hedging, forwards, or
futures contracts, most retail customer prices will continue to be
volatile placing a heavy burden on many small customers. However, in
response to this winter's price increases, gas companies and their
affiliates, as well as gas marketers, are increasingly emphasizing
hedging and other risk management tools.
Trend 4--States have increased their assistance to
residential ratepayers
Nationwide, as a result of increased gas prices, State commissions
have redoubled their efforts to inform consumers of the likelihood of
increased prices and ways they can lower their gas bills through more
efficient usage. State commissions have also been re-examining their
disconnection policies for gas customers, provided information on the
availability of levelized or budget billing, and energy weatherization
and conservation programs. State commissions have also informed
customers of low-income energy assistance programs and in many
instances have expanded those programs.
Electricity Trends
Trend 1--Customers are demanding increased reliability
Recently there have been an increased number of major utility
interruptions as a result of a lack of generation capacity or the
result of problems with equipment failures at the distribution system.
Because of our increasing reliance on electro-technologies, including
the manufacture of solid state electronic silicon chips, there is an
increasing customer desire for fewer electricity interruptions and for
higher quality of power, that is, power without voltage sags, surges,
spikes, interruptions, or harmonics. Internet farms and informational
services are particularly sensitive to power disruptions. As our
economy increasingly depends on technologies driven by electricity,
reliability becomes exceedingly important to our economic health.
Trend 2--Reserve Margins
Reserve margins are low in several regions in the country. They are
particularly low in California, where utilities are projected to not
have enough capacity to serve their customers at times if this summer
is average or warmer than normal. And at least according to one major
electricity marketer (Dynegy), most regions of the country (the sole
exceptions are Texas and New England) will be in a capacity deficit
situation through next year.
Trend 3--Gas fired generation
During 1999, about 80 percent (11,073 mW of the 13,763 mW) of new
capacity additions by utilities and non-utilities were gas-fired. Gas-
fired units drew heavily on gas supplies during the summer of 2000, the
season when a time gas utilities and pipelines traditionally put
natural gas in storage. This led to higher gas prices during the
summer, lower inventories last fall, and even higher gas prices this
winter. While gas prices have since moderated somewhat, this pattern is
likely to repeat itself until increased gas supplies reach the market.
While it might take as little as six months for gas production to
increase, if new gas supplies are located such that additional pipeline
capacity is needed, the period for new gas supplies to reach the market
could be two years or more.
Nearly all of the additions of generation capacity that are planned
for 2000 through 2004 are gas-fired electric generation. Of the 44,410
MW of planned generation capacity, 41,339 (93 percent) are gas-fired.
This additional planned electricity capacity, if completed, will
provide upward pressure on natural gas prices. If the capacity fails to
come on-line as scheduled, most electric reliability regions throughout
the country will face electricity capacity shortages, if not
immediately, then within the next few years. While it only takes two
years for a gas-fired plant to be built once sited, it takes coal
plants several years. Petroleum-fired plants also have high fuel
prices, and currently no nuclear plants are planned. New hydro capacity
is limited; and the amount of capacity from waste heat (cogeneration)
and renewables is also limited.
Trend 4--Generation jurisdiction shift from State to FERC
During 1999, three quarters (10,266 mW of the 13,763 mW) of new
capacity added was added by non-utilities. Most of this capacity is
being sold on regional wholesale electricity markets, which are
regulated by the Federal Energy Regulatory Commission (FERC). As State
commissions allow retail electricity competition, they often also allow
or require generation plant divestiture by the host utility. Most of
these generation assets are acquired by non-utilities and the power is
sold on regional wholesale markets, regulated by FERC.
This is, I believe, the right model. But it requires a clear vision
on the part of the FERC, consideration of the facts on the ground in
each of the different regions of the country, and prompt decisions by
the Commission. Delay costs ratepayers--the people you and we serve--a
great deal of money. At stake right now before the FERC in a current
controversy over installed capability is $90 million for Maine
ratepayers alone, and perhaps ten times that amount across the six New
England states.
Trend 5--Competitive markets require States to have access
to more information not less
State public utility commissions around the country, but
particularly in the West, increasingly are faced with refusals by
utilities and non-utilities that own generation facilities to provide
data. Without requested data, State regulators are severely hampered in
their efforts to determine whether there is gaming of the market,
through bids that are many multiples of production costs, by
withholding of capacity at or near peak, or withholding of available
transmission capacity. State commissions need to know which units (not
plants) are down and/or at what output in megawatts are all units
producing. This information needs to be given in a timely manner as a
useful average.
Additionally, the Energy Information Administration of the U.S.
Department of Energy is proposing to aggregate its data form reports
and to withhold data that might be confidential. Without such data,
State commissions, State attorneys general, and the FERC will be unable
to monitor the markets to ensure the market is free of market power,
and that market rates are just and reasonable.
Trend 6--Nuclear plants are being re-licensed
Ten years ago it seemed certain to many that the operating nuclear
plants in this country would be shut down rather than renew their
licenses. But today, two have been renewed, additional license renewals
are pending, and generating companies are purchasing nuclear units that
could not be given away in the late 1980's and early 1990's.
Increasingly, nuclear units are seen as a cost effective way to produce
electricity in a competitive electricity market. This trend can
continue only if the Federal government meets it's statutory obligation
to begin excepting spent fuel for disposal and if the Congress
appropriates the necessary monies that America's ratepayers have
already paid into the U.S. Treasury for the purpose of building a
nuclear waste disposal facility.
In conclusion, I would like to leave you with one last trend that I
will call a ``general energy trend,'' which I believe is accurate
regardless of the energy source. Demand for energy is at an all time
high and, if current estimates are accurate, each year this demand will
continue to increase. Prices for energy have followed suit and
increased as well. This trend has placed a severe financial burden on
many consumers across the nation.
NARUC believes that the impact of the current energy price
increases can be mitigated, in a number of ways. First, for our most
vulnerable citizens, Congress should provide substantial increases in
funding for the Low Income Home Energy Assistance Program (LIHEAP). We
believe that LIHEAP should receive a ``core'' appropriation of at least
$3.4 billion as is proposed in Senator Bingaman's bill (S. 352) plus
emergency contingency funding of at least $1 billion as is proposed in
Chairman Murkowski's legislation (S. 388 and S. 389).
Second, Congress needs to take action to promote development and
encourage the production of renewable energy sources and technologies.
Congress must also balance supply/production policies targeted at
conventional energy sources (nuclear, coal, gas, oil and hydroelectric)
with meaningful incentives and policy to encourage demand reduction and
conservation.
Thank you for your attention and availing me the opportunity to
testify today. I look forward to your questions.
The Chairman. Thank you very much, Mr. Nugent.
Our last presentation will come from Mr. Frederick Hoover,
director of the Maryland Energy Administration. Please proceed.
STATEMENT OF FREDERICK H. HOOVER, JR., DIRECTOR, MARYLAND
ENERGY ADMINISTRATION, ON BEHALF OF NATIONAL ASSOCIATION OF
STATE ENERGY OFFICIALS
Mr. Hoover. Mr. Chairman, members of the committee, I am
Frederick Hoover, Jr. I am pleased to testify on behalf of the
National Association of State Energy Officials. I serve as an
officer of NASEO and a director of the Maryland Energy
Administration, the State energy office in Maryland.
We congratulate you for holding this hearing on energy
trends. As an initial matter, I want to emphasize that we did
not get into our energy problems overnight. And they will not
be solved overnight. But as many of you have stated today, we
must act.
We know that the general public and most of Congress and
various administrations do not worry about energy prices until
they go up. At the State level, the energy offices attempt to
keep the focus on energy and support a balanced set of policies
at the State, regional and national levels. The major trend we
see, and what you have heard stated today, is tighter supplies
of natural gas, oil, and other distillate fuels and propane.
Another major problem is price volatility, especially tied
to extremely low inventory levels of these products. In
addition, the interrelationship between fuels has never been
greater. For example, natural gas is dramatically expanding its
use in electric generation. And interruptible contracts in this
area put enormous pressure on heating oil supplies during the
winter season. We must focus on fuel diversity.
Whatever action we take at the national and State levels
must expand our supply mix, increase inventory levels, and
reduce price volatility. Ultimately, extremely high or low
prices hurt consumers, business, and energy industry alike.
Supply and demand side measures should not be seen as
conflicting. We need both.
There are certain actions we can take. Many of the elements
in both Chairman Murkowski's and Senator Bingaman's bills are
positive and should move forward. For example, tax incentives
for new gas pipeline development and energy efficiency tax
credits for new and existing buildings, regional approaches of
the type suggested by Senator Bingaman. Expansion of funding
for the low income home energy assistance program, the State
energy program, and the low income weatherization assistance
program are needed.
Creation of a new program for energy efficiency in schools
is a critical need and passage of reliability legislation,
included in basic form in both bills.
The Chairman. Are you talking about Price-Anderson
liability legislation?
Mr. Hoover. No. I meant to say reliability legislation.
As Commissioner Nugent mentioned, FERC must take a more
aggressive role in market monitoring, and strong consideration
should be given to the cost of service pricing for wholesale
sales in the West. The market is broken, and insufficient
supply is present in the market.
If generators think that FERC is not serious, excess
profits will be made. The two refund orders and the market
orders FERC just issued head in the right direction but do not
go far enough. There are enough incentives to build powerplants
in California and the West now. It just cannot be ramped up
quickly enough. With wholesale price regulation at FERC, the
States are put in a very difficult position, if market
participants do not take the commission seriously.
The energy emergency function at the Department of Energy
needs to be revitalized and funded. We also support
Commissioner Nugent's position reflecting the concern on the
new EIA proposal issued on March 13. It would make a great deal
of powerplant data confidential and make it more difficult to
deal with market problems.
At the State level, NASEO is working with NARUC and our
sister organizations representing State environmental
commissioners and State air directors and have begun the
difficult process of attempting to integrate our energy and
environmental policies, programs and regulations. Greater
coordination at the Federal level is warranted as well.
Finally, there is an enormous disconnect between
authorizations and appropriations. We must set priorities. In
addition, information on the preliminary budget numbers raises
concerns on our part that if we are in an energy crisis, why is
the budget not being produced to reflect that? Cuts in fossil
energy programs, other than clean coal, and cuts in energy
efficiency programs and renewable energy programs are
inconsistent with a smart, comprehensive energy policy.
We need both short- and long-term solutions to this
problem. We support the pipeline that was discussed by Mr.
Placke earlier to bring natural gas from existing resources in
Alaska. And we are attempting to do things at the State level
to try and increase the supply of energy.
In my own State, we have a proposal in front of the Federal
Energy Regulatory Commission to reopen one of the liquified
natural gas terminals that was mentioned earlier as a way of
bringing new gas supply into the country. The States are doing
their part to try and step up to this. And we look forward to
working with the Congress and the administration to solve this
problem.
With that, I will conclude and answer any questions you may
have.
[The prepared statement of Mr. Hoover follows:]
Prepared Statement of Frederick H. Hoover, Jr., Director, Maryland
Energy Administration, on Behalf of National Association of State
Energy Officials
Mr. Chairman, members of the Committee, my name is Frederick H.
Hoover, Jr., and I am pleased to testify before the Committee to
discuss the views of the National Association of State Energy Officials
(NASEO) on current energy trends and changes in energy markets. I am
Director of the Maryland Energy Administration. I am also an officer of
NASEO, which represents forty-nine of the state energy offices, as well
as the territories and the District of Columbia. NASEO's objective is
to support balanced national energy policies and to provide state
perspectives on important energy issues.
INTERNATIONAL AND NATIONAL ENERGY TRENDS
Complete energy independence is not going to happen. As the
Committee knows, our energy markets are tied to the world markets,
especially in the oil sector. That is not to say we are helpless as a
Nation. On the other hand, we must recognize that we fought the Gulf
War to protect our strategic interests, i.e., access to oil. OPEC has
now cut production by 2.5 million barrels/day this year, which should
push oil prices up this summer. The real cost of energy is much higher
than most of us would like to believe.
At a national level we have an energy infrastructure (e.g.,
production capacity, refinery utilization, pipeline capacity and
terminal storage) that is stretched to its limits. We have seen
historically low inventories of important energy products in the past
year, and we have seen tremendous price volatility for more than two
years. Consumers benefited from such downward price swings as $11/
barrel oil in 1998, only to face the reality of historically high
heating fuel and gasoline prices a year or more later. We would argue
that energy price volatility, both up and down, hurts consumers,
businesses and the energy industry as each is forced to adjust to boom
and bust cycles. For example, when energy prices dropped to the very
low levels of 1998, drilling stopped and supply began to tighten. Even
with the high prices we are seeing, new significant supply will take
months to come on line.
We saw natural gas prices for the past few years slip to the $2-
2.50/mcf range, and this winter spike to $10/mcf, much higher in the
West on the spot market, and now hopefully settling down to a range of
$4-6/mcf for the foreseeable future. This means the average Midwest
household saw yearly heating costs go from $540 to $950. We are
concerned that prices will go up much higher later this year.
Last year it was heating oil that spiked to over $2/gallon. While
prices dropped back, the average consumer in the Northeast is paying
approximately $1,000, up from $760 last year and $520 the year before.
Propane, a critical fuel in rural America for heating and in the
agricultural sector for crop drying, hit its highest levels of over $2/
gallon in places like North Carolina. While propane has fallen back, it
is still high.
What does this tell us? Energy price volatility is the big problem
for everyone. Inventories are well below historic levels. Low
inventories of a critical commodity, a logical business response to
avoid carrying charges with volatility in place, is not acceptable for
consumers and businesses alike. Many energy economists tell us that is
the way of the markets and is the right way to go. This is not
acceptable. Low inventories put consumers and businesses at risk.
As we look at comprehensive energy legislation, we must examine
incentives, both tax and direct financial incentives, to encourage
inventory build-up for all these fuels. Massachusetts instituted a
state-based program this Winter to expand heating oil inventories. With
only a few million dollars in state funds, this market-oriented program
helped ensure a reasonable level of heating oil in storage so that all
consumers could purchase the product they needed. This program should
be examined as a model.
Natural gas has experienced explosive growth as the fuel of choice
for new electrical generation. Historically we saw inventory build-up
in the summer months in natural gas stocks so that the fuel could be
used for heating in the winter. Now natural gas is running electrical
generation to power air conditioning. We need expanded inventories and
we need expanded gas infrastructure. This may require tax incentives to
install this infrastructure. Inventories of natural gas stand at 711
billion cubic feet, down by 37% from last year at this time, and 36%
lower than the five-year average.
For example, the construction of a gas pipeline from Prudhoe Bay
(where gas production rivals that of the lower 48 states) through
Canada is a necessity. Accelerated depreciation for this effort would
be a good idea.
The tie between natural gas and heating oil/No.2 oil is also clear.
As interruptible customers shift from higher priced natural gas they
shift to No.2 oil, driving up the price of heating oil. New York
established a program to require interruptible customers to hold 7-10
days of supply of alternative fuels in stocks to help protect
consumers. This is a good idea. Other states are examining options in
this area.
Refining capacity is down in this country. We are concerned with
the closure of a major refinery in Chicago and the impact that might
have on higher reformulated gasoline prices in the mid-west this
summer. Incentives for refining capacity expansion is important.
With lower inventory levels across fuels, we are expecting more out
of our transportation sector. This is not a perfect market. For
example, the Coast Guard has a reduced capacity to provide ice-breaking
services in the Northeast due to budget reductions. With lower
inventory levels, ice breaking becomes a critical necessity. As we look
at Coast Guard appropriations, we need to examine energy infrastructure
to ensure that sufficient funds are provided for ice breaking.
The Northeast Heating Oil Reserve should be helpful in ameliorating
future supply problems. It is small, but it could help.
We cannot forget about the value of the Strategic Petroleum
Reserve. The idea of tapping the reserve to cover budget shortfalls
should never happen again. We should try to expand the reserve and
obviously to buy low, not high. The royalty-in-kind effort for filling
the reserve is an excellent idea and we applaud both Chairman Murkowski
and Senator Bingaman for supporting it.
In FY '96, the energy emergency function at the Department of
Energy was slashed. It was done on a bi-partisan basis, with the
support of the last Administration. While we complained, energy didn't
seem like a big deal to people. We need to focus on appropriations for
a vibrant energy emergency function at the Department of Energy. We
urge you to encourage your appropriations colleagues to support this
effort within the DOE, including regional and national emergency
exercises. These are very helpful. We had states, federal officials and
industry in attendance at emergency exercises in New Hampshire in
December 2000 and in Nevada earlier in 2000.
Finally, we cannot forget about the impact on consumers and
businesses. Moratoriums on utility shut-offs are coming off in the next
two months and individuals homeowners will be shut-off. This will lead
to consumer reaction and political problems. Low-Income Home Energy
Assistance (LIHEAP) funds in FY 2001 are drained in many of the states
and the advance appropriations for FY 2002 were eliminated this past
year. Quick action on supplemental appropriations will be critical this
year. Inclusion of the expanded authorizations for LIHEAP,
Weatherization and the State Energy Program in the Chairman's bill and
Mr. Bingaman's bill is very positive. Senator Bingaman's amendment on
the bankruptcy bill, supported by Senator Murkowski and Senator
Domenici, among others, should also be retained in conference. Now we
must move to quick appropriations in this area.
ELECTRICITY MARKETS
You have had hearings on California and the House Energy and Air
Quality Subcommittee is holding two hearings this week on the same
subject. We need to look at this situation and understand how it is
both a symptom evidencing problems, but also how it can instruct us how
to act differently at the state and federal level, while recognizing
political realities.
We have heard much talk about the ``failure of incomplete
deregulation'' in California. We all recognize problems in the
California market, principally the failure to permit utilities to enter
into long-term contracts; but we must try to remember the context of
how we got to this position today. Can this type of problem occur in
other places: yes (but probably not exactly in the same way).
We will not provide comprehensive views on why California got to
this point, but suffice it to say, the twenty-five states that have
moved on restructuring, including my own, are being very careful to
look again at our legislative and regulatory mix to evaluate our risk
factors. It should be noted, however, that the 1996 California
legislation (A.B. 1890), probably would not have passed without retail
price caps in place. That is political reality. In many states the
trade of stranded cost recovery for retail competition, required retail
rate freezes to pass muster. This was driven by the widely held view
that residential consumers would be the last to see the benefits of
competition.
At the state level we recognize that wholesale price regulation
resides at FERC, and that has caused enormous problems. If market
participants do not believe that FERC will examine market monitoring
seriously, then a free-for-all of market manipulation may be the order
of the day. While I am not here suggesting a definitive conclusion, one
must wonder how wholesale prices can be permitted to escalate twenty
times above the cost of production. While we have not had a full
opportunity to review FERC's decisions of last week on refunds, we are
concerned that California not be a precursor of what might happen in
many other jurisdictions, especially where generation has been divested
from incumbent providers.
If the market is not working and prices are set in an un-capped
way, consumers and taxpayers are picking up the tab. The Federal Power
Act has not been repealed; just and reasonable prices, possible cost-
of-service pricing and possibly regional rate caps, should be
considered. New generation takes time to bring on line--no amount of
price signals will make it happen in a big way by this summer. The
state is moving aggressively to permit new generation and to impose new
energy efficiency programs to reduce demand.
Certainly environmental rules should be examined, though it does
not appear that this was a significant part of the problem in terms of
power plant development. Power plants simply were not ordered in
California very much during the past decade, because there was not a
perceived need.
Whatever is done in California, the west, mid-west, northeast and
mid-Atlantic, must include demand responsiveness measures. These are
being initiated by state officials and Independent System Operators
(ISOs), and should be encouraged.
We also must focus on fuel diversity in the generation mix. Over-
reliance on natural gas is not healthy. Clean-coal technology is an
important component of a national energy policy. We must promote new
generation from a number of conventional and non-conventional sources,
utilizing state-of-the-art environmental controls.
Another area which deserves attention is in the area of regional
regulation. We have read with interest Senator Bingaman's promotion of
regional approaches. We understand that energy markets cross state
lines. We must do a better job, both at the federal and state levels,
of encouraging regional efforts.
As you examine comprehensive energy legislation, at a minimum we
would encourage support for the modified Gorton bill (S. 2071) from
last year on electricity reliability. This is basically contained in
Chairman Murkowski's bill. This approach, with suggestions from the
states and PJM, is necessary to establish uniform standards for
reliability. This legislation should move. We would also suggest
consideration of a public benefits program so that we can address
demand responsiveness issues in a more comprehensive way at the state
and federal level. Overall, the electricity sector needs more state-
federal and regional coordination and cooperation.
While not directly related to these electricity issues, we also
cannot ignore the transportation sector. With two-thirds of our oil use
in this sector, we must act on transportation. A simple action would be
to allow hybrid vehicles (for purposes of qualifying under EPACT) to
clearly fit the definition of alternative fuels. NASEO strongly
supports ethanol production, but also supports hybrid gasoline-electric
vehicles that are already available in the marketplace and achieving
great than 50 miles per gallon. These high-mileage, hybrids can
significantly reduce our dependence on imported oil. With the
Committee's assistance, the Department of Energy should move to include
hybrids as an option for meeting state fleet alternative fuel mandates.
This no-cost action can deliver immediate and cost-effective reductions
in oil consumption.
The new proposal from the Energy Information Administration (EIA),
issued in the Federal Register on March 13, 2001, would provide
confidential treatment for power plants of data on fuel quantity, fuel
quality, useful thermal output and financial data. This must be
reversed. It would prevent the states and FERC from effectively
evaluating whether market manipulation is occurring in the wholesale
and retail electric markets. It is precisely this information that we
need today in order for regulators to monitor market activity.
ENERGY AND ENVIRONMENT CONNECTIONS
NASEO, along with the National Association of Regulatory Utility
Commissioners (NARUC), the Environmental Council of the States (ECOS--
state environmental commissioners) and the State and Territorial Air
Pollution Program Administrators/Association of Local Pollution Control
Officials (STAPPA/ALAPCO), initiated an effort almost two years ago to
begin coordinating programs, policies and regulations in the energy and
environment area. Just as the federal agencies involved have generally
not coordinated well, so the state agencies have not necessarily
coordinated. We held a meeting in March 2000 and again in September
2000, to first understand the ``vocabulary'' of the other officials and
then to plan programs. This includes pilot state efforts in a number of
jurisdictions, including my own, Maryland.
The concept is that if energy and environmental policy is moved in
concert then better programs will be developed. With the U.S. Supreme
Court's recent decisions regarding the State Implementation Plans for
NOX and the eight hour rule for ozone, this effort should
have new immediacy. In my own state of Maryland, we have been working
closely with the Maryland Department of Environment to promote joint
activities.
There are many areas where energy and environment meet: 1) new
power plant siting; 2) fuel sources for generation; 3) siting of gas
and electric transmission and distribution; 4) reliability
requirements; 5) use of distributed generation (diesel versus other
sources); 6) role of energy efficiency and renewable energy; 7) use of
tradeable credits, such as NOX; 8) environmental
requirements for new generation; 9) transportation sector issues, etc.
The states are interested in streamlining processes for moving forward
in these areas, with an eye on efficiency and the cost-effectiveness of
energy management, while recognizing the need for environmental
protection. Individual states may have different priorities, but the
need for coordination is there for all. This coordination also extends
to regional activities.
Another area where energy and environment meet is in efforts to
expand Brownfields development. This is generally positive. While we
need to be mindful of environmental justice requirements, these sites
could be excellent for development of power plants.
We look forward to working with this Committee as well as the
Environment and Public Works Committee on developing rational programs
and ensuring state-federal cooperation. We have received support from
DOE and EPA in this area, and we hope this will continue and expand.
AUTHORIZATIONS AND APPROPRIATIONS
As Congress and the Administration move forward in crafting
comprehensive energy legislation, we have a few cautionary words. As
this Committee knows, the energy problems we are facing today were not
created overnight and will not be solved overnight. There is also a
risk to promising too much.
As we review Chairman Murkowski's legislation and the legislative
proposals of Senator Bingaman, we are pleased that there are many
positive features in both bills. However, simply authorizing important
legislative initiatives does not produce, in many cases, accompanying
appropriations. It would be instructive for us to look back on the
Energy Policy Act of 1992 and review the programs that were authorized
and then subsequently not funded.
Many of the tax provisions are positive and should be strongly
considered. In addition to some of the elements noted above, we would
suggest investment tax credits for renewable resources.
On the other hand, we must examine budget and appropriations
matters. On the basis of what we are hearing with respect to the
President's budget, due to be submitted on April 3, 2001, we are seeing
many troubling signs that those developing a comprehensive energy
policy are not talking with OMB. We hear of proposed cuts in fossil
energy budgets of 30%, with the exception of clean coal technology. We
hear of proposed cuts of 30% in energy efficiency funding, absent a
very positive increase of $120 million in Weatherization. We hear of
proposed cuts of 40-50% in renewable energy programs, absent biomass
programs. These budgets should be increasing not decreasing.
The major energy emergency response mechanism for the states
involving federal-state cooperation is funded through the State Energy
Program (SEP). In FY 2001 SEP received $38 million, down from $53
million in FY'95. The President during the campaign proposed a doubling
of the Weatherization Program from $153 million to $306 million and a
doubling of SEP from $38 million to $76 million. The President is
proposing a $120 million increase in Weatherization, but apparently no
increase in SEP. We assume this is either an oversight by OMB, and/or a
lack of understanding of the important role of SEP. SEP is the vehicle
not only for emergency response, but for leveraging state and private
funds to implement energy projects in all sectors of the economy,
including businesses, homeowners, industry, schools, agricultural, etc.
The failure to support this campaign promise would be a highly
unfortunate event. Senator Bingaman's bill (S. 352), which increases
funding for LIHEAP, Weatherization and SEP, along with sound changes in
the Federal Energy Management Program and promotion of energy savings
performance contracts is sound legislation, and should also be passed.
Chairman Murkowski's legislation (S. 389) supports similar
authorizations for these programs. We support funding of $3.4 billion
for base LIHEAP funds and up to $1 billion in emergency funds. Under
existing funding, without increases, LIHEAP only serves 20% of the
eligible population. Chairman Murkowski and Senator Bingaman also
support a new program for addressing the energy problems of our
nation's schools. This should be authorized and appropriations should
be provided. We have seen dramatic cost increases for schools, while we
all recognize education as one of our highest priorities.
The Interior and Related Agencies and Energy and Water Development
Appropriations Subcommittees are under a great deal of pressure.
Without increases in 302b allocations and support for higher
appropriations levels to accommodate energy needs this year, we will be
stepping into even greater problems.
Many suggestions have been made for national energy policy
development and a national energy summit. These are good ideas, but a
summit that needs to occur is one between the energy committees and the
appropriators, possibly in the form of a joint hearing to discuss
energy priorities. Otherwise, this national energy policy effort will
be a hollow exercise, in many ways.
We understand there is a proposal to cut the Energy Information
Administration's budget at DOE, included among these cuts would be
reductions in state level data and cuts in the State Heating Oil and
Propane Program (SHOPP). The so-called ``SHOPP'' allows approximately
one-half of the states to cooperate with EIA to share data and warn of
upcoming problems so actions can be taken. This type of cut would be
ludicrous.
MARYLAND
Governor Glendening has taken a leadership role in ``smart growth''
efforts. This is a specific area where the interface between energy and
environment needs to be promoted. As we expand our suburbs and outer
suburbs we expand our use of single occupancy vehicles. With two-thirds
of our petroleum use in the transportation sector, we must focus
nationally and in each of our states, on reducing the impacts of
unchecked growth. This is an energy issue.
The Governor, just this past week issued a ``green'' procurement,
construction and operating policy for state government. We are
attempting to construct energy efficient buildings in Maryland and
setting goals for solar and wind power. We are concerned about
protecting the Chesapeake Bay and the development of on-site storm
water treatment, conservation infrastructure, natural lighting and the
use of recycled materials are non-partisan ideas.
Last year Maryland passed the ``Maryland Clean Energy Incentive
Act, which provides tax credits for energy efficient appliances,
promotes renewable energy generation and for the purchase of electric
and hybrid vehicles. We will be working to push those credits even
harder this year.
CONCLUSION
Thank you for the opportunity to testify. I stand ready to answer
any questions you might have. We are also still reviewing the
Chairman's bill as well as Senator Bingaman's legislation. We hope to
provide more comprehensive comments at a later date.
The Chairman. Thank you very much, Mr. Hoover. I do not
know that I necessarily agree with your generalization on the
budget process.
The pass back has gone back from OMB, but it does not
necessarily reflect the congressional budget, nor does it
reflect what is going to be in the energy bill when it is
ultimately debated by the House and Senate, because in both
these bills there is significant assistance for new technology,
clean coal, and so forth and so on. But your point is well
made.
I am going to go through the questions briefly. We will
allow members 7 minutes.
But quickly, if we assume that we have an increase in
demand and a shortage of supply, and government ability to
respond with specifics is limited to a snail's pace, depending
on the involvement of a lot of people in many areas of
responsibility, in your opinion what is the first thing that we
should do, one thing that we should immediately do to try and
alleviate this crisis relative to relief? And relief, to me,
suggests that you make a drastic improvement in your
conservation or you do something immediate about supply.
Now, Mr. Hoover, you are talking about reopening that old
Columbia gas facility on the Western Shore, which has been
utilized to store gas, but not bring gas in. And the question
is, how long is it going to take you to get permits? And you
can answer that when it comes down to you. But I think that is
one of the problems. But let us take the first question first.
What would you suggest we do right now to get relief?
Do you want a pass, Mary, for 30 seconds?
Ms. Hutzler. Yes. We do not really deal with total policy
issues. We do analysis.
The Chairman. We do not either deal with policy issues. We
have to start somewhere.
Okay. Mr. Caruso?
Mr. Caruso. I think immediately the problem is electricity
and, more specifically, California. But as Jim pointed out, it
could be New York this summer. So I think we need to do
something to stimulate the production of electricity and to
remove obstacles and bottlenecks to----
The Chairman. That may mean cutting temporarily some
environmental oversights.
Mr. Caruso. It may, yes.
The Chairman. Are people ready to support that, or do they
have to go in the dark for a while in order to accept it?
Mr. Caruso. And the other side of that, of course, is the
price issue, that the price signals were not appropriate. And
that is one of the reasons we are facing the kind of demand
situation that we are. And whatever can be done to allow
appropriate price signals to be passed to the consumer, that
would be another----
The Chairman. Well, the Governor of California said he
could fix this thing in, what, 3 minutes. He made a statement
to that effect, maybe it was 7 minutes--10 minutes or 12
minutes, by simply passing through the price and done.
Obviously, there is a political consequence associated with
that. But, I mean--go ahead, Mr. Placke.
Mr. Placke. Well, I think in the first instance, Mr.
Chairman, to do something immediate about the only alternative
is conservation.
The Chairman. Conservation.
Mr. Placke. In an immediate sense. In the sense of----
The Chairman. Now let us talk about that in the sense of
California. Because what is the incentive for a Californian to
go down and buy a new energy-saving refrigerator when the other
one is not worn out yet? And the California consumer is paying
a relatively low rate that they have been paying for some time,
because they have not felt the price increase. So there is no
incentive, is there? So how are you going force--how do you
force conservation under that scenario?
Mr. Placke. Well, passing through the real cost of energy
is obviously part of the solution. Without that market signal,
consumers simply will not respond. That is quite correct.
Ultimately, industrial users, I think, probably are easier to
influence and to monitor than individual households. But it has
to be a broad collective effort.
The Chairman. So if one were a real critic, and objective
critic, you are not going to force California to conserve
unless there is an incentive, is that right?
Mr. Placke. Certainly.
The Chairman. And the incentive is to pass on the true cost
of power, which California's political structure refuses to do.
Mr. Placke. Then the problem is just going to drag out,
sir.
The Chairman. The problem will drag out.
Mr. Nugent?
Mr. Nugent. Mr. Chairman, I do not think there is any one
single thing. You have to attack this on a number of fronts.
This is----
The Chairman. But we have to get started. We cannot even
figure out how to get started.
Mr. Nugent. This is too urgent a problem. Obviously, you
need some additions to supply, but they take time. I think
passing through the price signals, as Mr. Placke has indicated,
is a very appropriate response. And you can look to Maine for
having done that. Fourteen cents for large industrial users on
peak, 50, 60 percent increases in the price of generation.
We have no deferrals in the rates to be recovered, or the
bills to be recovered, to pay to generate it. So the signals
are out there, and I expect that we will see the public
responding.
On the other hand, we, as regulators in government, must
give mechanisms to the public which enable them to have the
information in real time and to be able to respond. Large users
in Maine are doing that. They have suspended operation at
certain peak hours, sold the obligations they had back into the
market. They have benefitted, and they have also eased the
ultimate energy clearing price spike in the region.
The Chairman. And you have no caps.
Mr. Nugent. There is--we have no caps. New England has a
$1,000 cap, which I think is not an unreasonable one. I mean,
you are not going to get hurt bumping your head too often on
$1,000. It happened on maybe one or two----
The Chairman. $1,000 per----
Mr. Nugent. $1,000 per megawatt hour in the regional market
clearing price. It exists up till April 1. We are looking for
it and expect it to be extended. That--this is kind of
reinsurance or catastrophic insurance. It keeps you from being
really mortally wounded, but enables the market to function and
to give the incentives to producers to go out and build new
supply. They apparently have that inducement. Maine increased
its generating capacity in the last three years by 75 percent.
And we are not big, but we built twice as much as California
did.
The Chairman. That is big in comparison. How close have you
come to that $1,000 in bids?
Mr. Nugent. I do not know that off the top of my head. I
will get the information for the committee, if you care. I
will.
The Chairman. Now that is electricity, your capacity. Was
it gas fired or----
Mr. Nugent. Yes. We have had the benefit in Maine, which
has been at the end of the road and down a little narrow path
when it comes to gas. We have two new pipelines, 22-inch, 24-
inch pipelines, with Canadian supply. And we have put in five
new generators of more than 1,600 megawatts within a two- or 3-
year period.
The Chairman. I am not going to ask you whether you
recommend $1,000 for California. But clearly, there are some
things that are working out there. We look at Pennsylvania
sitting there with both retail and wholesale caps. But they are
so high that there is enough flexibility, so that they have
been able to attract companies to come in and put in
generation. And now they have adequate generation, and it
works.
Mr. Hoover, did you have----
Mr. Hoover. The only addition I would make to the
conservation issue is, in my own State, as a way of trying to
move the market, the question you asked earlier about how do
you get people to buy these higher efficiency appliances, we
eliminated the sales tax on Energy Star appliances in the State
of Maryland.
Retailers can now say to consumers, if you buy this
appliance and upgrade, not only will you save money over the
long term in the operation of it, but, you know, the State of
Maryland is not going to take their traditional cut from the
price.
We have a number of programs to try and encourage people to
do that. We tie a lot of our energy efficiency situations to
our environmental ethic with the Chesapeake Bay, because of our
concern about air pollution to the bay and the amount of money
that Congress and the State of Maryland have spent in trying to
restore the Chesapeake Bay.
We use a combinational approach to try and give financial
incentives for people to do the right thing, but also to appeal
to their better nature.
The Chairman. I think it was Mr. Caruso's reference--and my
time is almost up. But the implication that people really do
not care where the oil comes from, as long as it comes.
You gentlemen, Mr. Nugent and Mr. Hoover, come from parts
of the United States that, from the standpoint of developing
oil in my State of Alaska for the most part are pretty much
opposed. The environmental activism has been very prominent.
And as a consequence, those of us who produce the oil and
feel we can do it safely are rather provoked, if you will, by
the observation that we have, that you really do not care where
the oil comes from as long as you can get it.
You just do not reflect on whether it is coming from the
rainforests of Colombia, where there is no environmental
sensitivity, but since you are motivated by an environmental
concern, you do not question the legitimacy of that concern,
you just say no.
So, you know, from the standpoint of the Northeast, you are
very dependent on heating oil. Where it comes from is
incidental. Am I missing something there, or is there an old
adage that charity begins at home, if indeed you can keep your
house clean?
Mr. Nugent. No. I think you fairly characterize the
problem. The public and its views on things is not always
consistent.
The Chairman. I would agree with you there. Well, if you
can enlighten me, you have more time. If not, I will go to Mr.
Hoover.
Mr. Hoover. Well, I know in my State, I mean, it is
difficult to site energy producing facilities. I mean, we have
a relatively small coal industry in the western part of my
State. Now we have brought on line a coal plant. The people in
that part of the State actually saw that as a great benefit
because of the economic impact, and we were able to bring it on
line and mitigate the environmental consequences of it.
I do not think that people are to the extent that they do
not care, because I think they understand the geopolitical
concerns that we have about energy production. I mean, a lot of
American citizens sent their sons and daughters to the Persian
Gulf to defend those supplies and understand the commitment we
have to make there.
I think overall the American people feel that we need a
balanced approached to this and do not think that it is any one
region's responsibility to take care of our energy needs.
The Chairman. Senator Bingaman.
Senator Bingaman. Let me ask Mary Hutzler about the
criticism of EIA that we have heard here about your decision to
keep data on powerplants proprietary. I think most of the trend
in government seems to be toward more transparency. This seems
to be an aberration from that.
Could you explain how that decision was made or whether
that is still subject to review or what your position is?
Ms. Hutzler. In competitive markets it can be detrimental
to producers if certain statistics are published on an
individual basis. So what we do is we aggregate these
statistics and release them in an aggregated fashion. We do
this in the oil and gas area, for instance. And this would be
following up in the electricity area in the same way.
Now those forms are out for review. There was a public
register notice in March, earlier this month. And I do
encourage people to comment, and we could still discuss the
issues. But we do have to deal with the issue of
confidentiality. Otherwise we do not get the data, and without
the data, we could not even provide aggregate statistics.
Senator Bingaman. As I understand Commissioner Nugent's
point, the State utility commissioners need that information.
Even if they have to obtain it on a confidential basis, it is
useful for them in making their decisions. Is that something
that is being considered?
Ms. Hutzler. That is something that we can look into. There
have been Federal Government agencies who have asked us for
certain data, which we were allowed to release. So we will
evaluate that.
[The information follows:]
Over the past three years, the Energy Information Administration
has been evaluating its data collection forms in light of the many
changes occurring in the electric power industry. It particular, EIA
wanted to assess the impact of these changes on its data
confidentiality policy.
From our analysis of the industry, we have determined that the
wholesale trade of electricity and the retail sales in a number of
States have become increasingly competitive. Because of this, EIA is
proposing to not disclose data that could result in competitive harm to
companies participating in competitive electricity markets. This is
consistent with the Trade Secrets Act and Exemption 4 of the Freedom of
Information Act. Therefore, EIA has proposed to hold the following
types of information confidential: quality and quantity of fuel
receipts and consumption, fuel stocks, useful thermal output (i.e.,
heat or steam), plans (i.e., retirements, capacity additions), selected
financial and cost data, heat rates, amount of purchased power, amount
of power exchanges between companies and information from energy
service providers who only provide electricity. While EIA is proposing
to hold the individual data confidential, we would still make
aggregated data available to everyone.
Our proposal for changes to our data collection forms and
confidentiality policy was published in the Federal Register on March
13, 2001, for the express purpose of soliciting comments from all
concerned parties. The comment period lasts until May 11, 2001. After
that period closes, we will evaluate comments and determine how to best
address them. We will then submit our final proposal to the Office of
Management and Budget for its approval. If someone disagrees with our
proposed confidentiality policy, it is important that they tell us why
a particular data element is needed in the public domain, despite
possible competitive harm, demonstrate that public disclosure would not
result in competitive harm, or suggest measures which would permit
release while mitigating competitive harm. We can then consider those
comments in our final evaluation.
It should be noted that over the past three years, EIA has met with
a variety of stakeholders to obtain their input to our evaluation
process. This was done using several methods. First, 11 focus groups
met to discuss what information EIA should provide in the future. These
groups included State and Federal officials, investor-owned utilities,
publicly owned utilities, media, nonutilities and renewable energy
companies, investment bankers, consumer organizations, academic
consultants, and congressional staff. In addition, EIA staff has
briefed over 20 organizations representing these types of groups on our
project. In particular, the National Association of Regulatory Utility
Commissioners and the National Association of State Energy Officials
participated in the focus groups and were briefed on a variety of
occasions on EIA's work. While the proposal that EIA is now sharing
with the public was not made public prior to March 13, it was developed
with input from all interested parties and we look forward to hearing
their comments on it.
Subsequent to the hearing, Commissioner William Nugent of the Maine
Public Utility Commission was contacted by ETA. He explained that they
are in the process of collecting comments from within his agency, from
the other New England public utility commissioners and from members of
NARUC. In their reply, he plans on explaining the needs of the States
for the individual data elements that ETA proposes to hold
confidential. ETA offered to give a technical briefing to a NARUC
subcommittee on the ETA data collection forms to help them better
understand how to use ETA electric power data. Commissioner Nugent will
investigate the need for such a briefing and coordinate with ETA.
Senator Bingaman. Okay. I have sort of a printout of an
article in Megawatt Daily, dated March 14, entitled ``Deutsch
Bank Sees Excess Capacity by 2005.'' It goes on to say ``Power
generation capacity will be tight across the United States for
the next few years, but the Nation as a whole should be faced
with a glut of power by 2005, according to this new analysis.''
I just wondered, Mr. Placke or anybody else or Ms. Hutzler,
any of you, do you agree or disagree with this analysis? Are
you familiar with it?
Mr. Placke. I am not familiar with that specific article,
Senator. But in general, it sounds like it is consistent with
our analysis that, as I indicated, we anticipate that 300
gigawatts, which is 40 percent of our capacity nationally, will
be added over the next 5 years. In part, I suppose, as usual,
it depends upon the definition of excess or surplus.
I think California illustrates more than adequately the
point that you cannot program your generating capacity to equal
exactly demand. There has to be a cushion in electric power,
unlike other forms of energy where you can gauge it more
closely to the rate of consumption. But power demand is a
variable. It varies with season and other conditions. And there
has to be a cushion.
Now I do not know whether that definition includes a
cushion or if it does not. But I do not think we would regard
the additions to generating capacity as excessive or likely to
produce an unwanted surplus. And I think one of the keys to
gauging that is the reaction of investors themselves. Investors
do not have a habit of building plants that are not going to
produce a profit.
Senator Bingaman. Yes. This article does go on to say that
by 2004 they project that the national average capacity reserve
will be about 15 percent.
Commissioner Nugent, let me ask you about--we have a bill
that was developed by two of our members here on the committee.
Senator Feinstein and Senator Smith jointly have put together a
bill to try to deal with the situation in California. I did not
know if you have had a chance to look at that.
The bill directs FERC to control wholesale prices of power
coming into the State contingent upon the State passing through
a significant portion of that cost to the rate payers in the
State. Have you had a chance to look at that? Have you taken
any position on it?
Mr. Nugent. No, sir. I have not seen it.
Senator Bingaman. That would be useful to the committee, I
think, if you do get a chance to look at that legislation.
Do any of the rest of you, who have looked at the bill,
have a comment on it? I would be anxious to get any expert
advice we could on that issue.
Let me also ask any of you to respond. I know several of
you criticized FERC. Is there something that we need to do with
regard to the Federal law governing FERC to allow them to
consider demand responsiveness in their review and FERC's
review of wholesale rates? Is there something that we should be
doing to change the law related to FERC? Or do you think that
the law is not the problem and that they have just not
aggressively enforced or implemented the authority they have?
Mr. Nugent?
Mr. Nugent. Mr. Bingaman, I am unaware of any shortcoming
in the Federal law with regard to demand responsiveness. New
England has mounted a demand responsive program for its
wholesale markets. And I will go back and ask the people who
know it in greater detail if there are any points at which that
was abrading against Federal law limited in its effectiveness
by that.
But as a matter of fact, we do have buy-backs that are
possible when one is able to forecast moments of peak demand
coming. So I think we are able to operate all right.
Senator Bingaman. Okay.
Mr. Hoover, I think you alluded to this perhaps. But we do
have some provisions in this bill that I have been working on
with other Senators that try to move us toward this region-wide
coordination and planning process. Any of you have thoughts as
to changes we need to make in Federal law to accomplish that
more effectively?
Mr. Hoover. The proposal that we have seen in your bill we
think goes in the right direction to do this. As these boundary
lines sort of disappear as electricity starts going across the
country, I mean, a regional approach to doing this is going to
be the only way to really figure this out. I mean, States
cannot become islands in and of themselves, either from an
electricity supply standpoint or the demand standpoint.
So the communication and coordination among State
regulatory commissions and the regional power authorities is
going to be a necessity.
Senator Bingaman. Do you have any thoughts on this, Mr.
Nugent?
Mr. Nugent. I think cross-regional effects are important as
well, because while we may be able to perfect the market within
the New England region, if market power is being demonstrated
in adjacent areas, or dysfunctional elements are apparent in
those adjacent areas, you can see suppliers flee our market,
driving our price up, to take advantage of even higher prices
in adjacent regions.
We have to give some more attention and look forward to
continuing our----
Senator Bingaman. Mr. Placke, you mentioned there are
likely to be power shortages in New York this summer,
particularly in the New York City area, not because there is
inadequate power, but because of transmission problems getting
the power from New England to New York. What, if anything, can
the Congress do or should FERC do to solve that problem? Is
there anything?
Mr. Placke. Again, I am afraid there is probably not a very
short-term solution. But in the longer term, facilitating the
construction of transmission facilities, which means expediting
the permitting process and perhaps dealing with the right of
eminent domain, I think, are the areas that I would point to.
Senator Bingaman. You believe those permitting problems and
the difficulty of getting eminent domain has been the major
factor that has kept that transmission capacity from being
built.
Mr. Placke. I would say that--I would look to those
prospectively. I think those are the areas that could expedite
a solution to the problem.
Senator Bingaman. Okay. Anyone else have a comment on that
point?
Mr. Nugent. There are moves to meet that need. There are
proposals for building generation, both within the New York
City load pocket and out on Long Island. And there is also a
proposal for a merchant transmission line to be built, my
recollection is, between New Haven and the central part of Long
Island to bring power in that way. And they are working through
the siting problems, you know, through the New Haven oyster
beds, right now.
It is a value judgment as to whether you want to ride
roughshod over those interests or whether you want to give them
a full hearing. I am not sure how I would suggest you intervene
at this time. I think the problem is being worked.
Senator Bingaman. Thank you very much, Mr. Chairman.
The Chairman. Thank you very much, Senator Bingaman.
I believe, Senator Craig, you were next, and then Senator
Thomas.
Senator Craig. Thank you, Mr. Chairman.
Let me thank all of you for your testimony. You have added
a great deal of information to and thought to our concerns and
our thought processes, and we appreciate it. A couple of
questions and appreciate your reactions. Mr. Nugent, you struck
a sensitive positive chord with me when you talked about
regional concerns. Everybody is focused on California at this
moment. California is dragging the whole Pacific Northwest down
with it. It is very much a regional problem. California is not
feeling the price shock, but California's price shock is
hitting the wholesale market in the Pacific Northwest. And
Oregon and Washington and Idaho's prices are going up
dramatically.
The bill that Senator Bingaman mentioned and produced by
Senator Feinstein and Senator Gorton is a regional bill, would
have a regional impact. I know he mentioned California. It is
not just California that it would impact. It would be a
regional hit or positive or negative, I think. And so I would
appreciate you looking at it. I mean, obviously it is
sensitive, it attempts to be sensitive, to the short-term
reality.
And, of course, in the Pacific Northwest we remain fairly
heavily hydro. We have something else going on out there this
year. It is called a drought. And our hydro capacities could be
substantially lessened, even with just a slight warming trend
in the L.A. Basin and a little pull-back by Pacific Northwest
production in the last week, we can see what happens. Wait
until it gets hot this summer, if California does not get real.
And I agree. I do not know how we get California to
conserve. Finally, I heard someone out there talking about in
the 24 hours, but the marketplace is not reacting. Testimony
from the investor-owned utilities would demonstrate to us that
quite the opposite has happened.
As they have leveraged down their retail price and then
capped it, conservation went away. And it is not back yet in
California, and it will not be back until they begin to feel
the bite of the market in part, I would have to think. And of
course, that is the reaction that that legislation deals with.
So I would appreciate your reaction to that. And as a State
PUC person, I think that would be extremely valuable for us.
Mr. Nugent. Senator Craig, I am in touch from time to time
with my colleagues, Mr. Alan Becker in Wyoming, those in
Montana, Idaho, and throughout the Pacific Northwest. But for
me to give testimony or to offer it would be really somewhat
hearsay evidence. We will work to get their views and try to
give you the comments you seek.
Senator Craig. Well, I think all of us--I have been
somewhat resistant to restructuring. Coming from our least-cost
state with a hydro base, I did not see that our costs could go
down much further. And now, of course, quite the opposite is
happening. They could go up pretty dramatically.
But in other words, my point is, and the point you have
made, is that regional realities are there. And something
happening outside your State clearly has, could have, a
substantial impact in your State. And that is appreciated.
You mentioned in the State of Maine that you had new gas
capacity, new gas pipelines, and therefore new gas generation.
Do you remember how long it took from the time the gas
pipelines were an idea until they were in place and functional?
Mr. Nugent. Well, some of these ideas go back 15 years or
more.
Senator Craig. But I mean----
Mr. Nugent. But as a practical matter, I would say it was
about 3 years.
Senator Craig. It took you only 3 years to site those and
get it out of the ground.
Mr. Nugent. You are dealing here with--when you go back 15
or 20 years, you are dealing with Sable Island offshore
production. To some extent what happened was the economics of
offshore production coming down because of experience gained in
the North Sea. So things became economically possible.
At some point, the energy companies pulled the trigger and
said, we can make a go of this. And it first appeared, really,
with us in 1996 or 1997. And the lines were in place and
operating by 2000.
Senator Craig. Because I know in an effort to bring gas
into the Northeast, especially in those areas where they are
still dependent upon oil for space heating, several of those
gas pipeline companies finally just walked away. They could not
cost it out. It became so economically unfeasible, based on
environmental concerns and regulations and----
Mr. Nugent. Well, actually here I think you have an
illustrative contrast between the siting, which is controlled
by the FERC in the gas area and what goes on in electricity.
And my sense is that once the decision was to go forward with
that pipeline that those problems were worked through in fairly
reasonable order. And we are including in that 3-year period
construction. That is a year and a half.
Senator Craig. No, I am aware of that. That is why I asked
you the question. And that is why I thought 3 years is short
term, really.
Mr. Nugent. Yes.
Senator Craig. And you are right. The FERC, in fact, it
appears they were quite busy trying to front load some of these
things. And we think that could change a bit now. And certainly
we are encouraging that the FERC get under way with full
employment. And I think it will get there fairly quickly.
Mary, a question of you, and it comes from--well, John Kane
of NEI sent a letter to Representative Boehlert on March 14
relative to your testimony of February 28 before the House
Science Committee. Mr. Kane suggests that EIA is modeling
nuclear in such a way that disadvantages nuclear with respect
to coal and natural gas. Are you familiar with the letter? And
how do you respond to Mr. Kane's assertion?
Ms. Hutzler. Yes, I am familiar with the letter. We do not
believe that we are modeling nuclear to be in a negative
situation compared to gas and to coal. We looked at nuclear
plants in terms of what it would cost to keep the capacity
operating. We cost that out, and we take a look at it in terms
of what the competition is, that is building a new plant.
Combined cycle plants today can be built for $400 to $500 a
kilowatt.
So when you look at the economics of it, we do retire some
of the existing nuclear plants. But we also retire some of the
existing coal and oil and gas steam plants as well. As a matter
of fact, our forecast has about 70 gigawatts of retirements.
And more of that is in the fossil category than it is in the
nuclear category.
Senator Craig. Obviously, your figures and your modeling is
important to us. And all of us, not all of us, some of us are
of the belief that in the pursuit of clean energy that nuclear
can play a role, and an increasing role.
And as these costs go up, if we can do new generation
nuclear and license it, site it and license it, more
expeditiously, then those costs come down. In fact, there are
some interesting models out there now that can show that some
of these current operating plants are actually operating below
costs of other types of energy. And I think that is why we are
concerned.
Kane asserts that you are not factoring in future clean air
compliance costs. Is that true?
Ms. Hutzler. In our Reference Case, we look at current laws
and regulations. We do look at the Clean Air Act Amendments.
Anything that has passed is included where the specifications
are such that we can represent them.
Senator Craig. Then you can factor them in.
Ms. Hutzler. Right. Right.
Senator Craig. But any additional or any new plants would
not be a factor there yet.
Ms. Hutzler. Not in our reference case. We have done other
studies at the request of House congressional committees. But
in those studies, they have asked us not to build new nuclear
capacity.
Senator Craig. Mary and gentlemen, thank you very much.
The Chairman. Thank you, Senator Craig.
Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman.
Mr. Nugent, I do not quite understand your arrangement in
Maine. Have you re-regulated at all? What is your process?
Mr. Nugent. Effective March 1, 2000, all or the two large
investor-owned utilities had to divest themselves of their
generating----
Senator Thomas. Why? Why did they have to?
Mr. Nugent. Because--and they would continue to operate as
transmission and distribution companies. And anyone, any
licensed seller of generation, could sell to any customer they
chose.
Senator Thomas. So that is your State regulation.
Mr. Nugent. It is State regulation. And the attempt here
was to provide a level playing field for all sellers of
generation. There was a concern that a special relationship
between one seller and the transmission and distribution
company would unfairly influence that market and would inhibit
the entrance of other players.
Senator Thomas. Well, it has not been a market. It has been
controlled, has it not, by your PUC?
Mr. Nugent. I mean, it is fully open. And it----
Senator Thomas. I mean, I am talking about where it was.
You had the distribution and generation were provided by the
same person, and they serve----
Mr. Nugent. Transmission and distribution are provided by
one company. That is correct.
Senator Thomas. And they--no, and generation.
Mr. Nugent. Well, historically, prior to March 1, 2000.
Senator Thomas. Okay. So then they serve their service area
under a price that you all establish.
Mr. Nugent. That is correct.
Senator Thomas. You separated it so you could have
competition, then, among the wholesale.
Mr. Nugent. Correct.
Senator Thomas. Then I do not understand your role in the
pricing of it, if you wanted competition.
Mr. Nugent. We have no role directly on the pricing between
customers and competitive energy supplies. But believing that
many customers, typically residential and small business
customers, would either not choose or would be unable to find a
supplier----
Senator Thomas. Well, it is not up to the customer, is it?
It is the distribution system, is it not?
Mr. Nugent. No.
Senator Thomas. You mean each customer gets to select his
own wholesale supplier.
Mr. Nugent. Every customer in Maine has the right to go out
and find his own competitive energy----
Senator Thomas. So you essentially have tried to deregulate
it and give choice.
Mr. Nugent. That is correct. And we have a default category
for people who do not.
Senator Thomas. But then you still have your position of
controlling the wholesale price.
Mr. Nugent. We do not control the wholesale price.
Senator Thomas. Then why do you have to find out 11:20 and
do something by 11:50?
Mr. Nugent. That is for the category of customers who make
no choice and still want to be served. I mean, there are a lot
of people out there who do not understand this and do not want
to be in the middle of it, others who cannot find a supplier.
So to cover them, we have a default category.
Senator Thomas. I am sorry. I do not understand that. If
they cannot find a supplier--they have a supplier, do they not?
If they do not choose to do it differently, they have a
supplier.
Mr. Nugent. As selected by the State pursuant to
competitive----
Senator Thomas. So you are halfway re-regulated.
Mr. Nugent. It is not a regulated price. It is the market
price we find.
Senator Thomas. Okay.
Mr. Nugent. We go into the market, and we try to get the
best price. But it is the market that determines it.
Senator Thomas. It does not sound like you are really into
the market business, but that is okay.
Mary, you are part of the Energy Department, correct?
Ms. Hutzler. Yes.
Senator Thomas. As you went through this and we are at $1,
$1.50 gas, was that a market message? Did they share that with
the department? Would you not imagine that production would go
down at $1.50 wellhead price?
Ms. Hutzler. Yes, that is correct.
Senator Thomas. What did they do about it?
Ms. Hutzler. What did the Department of Energy do about it?
Senator Thomas. Yes.
Ms. Hutzler. I cannot speak for the Department of Energy.
Senator Thomas. Are you not part of the Department of
Energy?
Ms. Hutzler. We are an independent agency within the
Department of Energy. We supply data and forecasts, but we do
not deal with policy issues.
Senator Thomas. I see. We have not had a policy on this
then, have we?
Ms. Hutzler. On natural gas pricing?
Senator Thomas. On energy.
Ms. Hutzler. I believe the policy of the last
administration was competitive markets, and that is what they
have indicated in their testimony.
Senator Thomas. Okay. I do not quite understand why you use
storage as the component, as opposed to production.
Ms. Hutzler. Storage is an indicator of price volatility.
If storage levels are very low, then that means that to meet
your demand; you either have to produce or you have to take
more from storage. And as storage gets lower, your prices are
going to go higher.
Senator Thomas. You would not have storage if you did not
have production, would you?
Ms. Hutzler. Well, that is correct. You do need to produce
it. But what is happening now is we are withdrawing from
storage faster than we are producing. Our production is not
keeping up with demand.
Senator Thomas. So production is the key.
Ms. Hutzler. All factors, all those factors, are keys.
Senator Thomas. Okay.
Ms. Hutzler. But if you want to look at pricing----
Senator Thomas. It is interesting that you list storage all
the time, when there is relatively little storage available
often in a gas field. And indeed, if you do not have a place to
go with it, you just do not produce it. So storage is kind of
iffy, is it not?
Ms. Hutzler. It depends on what factor you are looking at.
If you want to look at price volatility, it is an extremely
important factor.
Senator Thomas. Storage went down there, and the price
stayed the same for the last several years until recently.
Ms. Hutzler. You are talking about natural gas markets?
Senator Thomas. Right.
Ms. Hutzler. Yes. We need to go back to the chart and look
at the precise timing. But I believe that storage was fairly
high during the period when production was up. But then we had
the severe weather patterns.
Senator Thomas. Yes.
Ms. Hutzler. And that weather pattern meant that demand was
higher than what was anticipated.
Senator Thomas. Did you not mention 1,400 3-megawatt
plants?
Ms. Hutzler. Fourteen hundred 300-megawatt plants.
Senator Thomas. Three hundred megawatt plants.
Ms. Hutzler. Right.
Senator Thomas. And so you are expecting that they will be
gas fired and relatively small.
Ms. Hutzler. When I gave that statistic, it was an average
statistic. These plants will vary in size over time. But it is
one way for me to show the magnitude. The total capacity that
we are talking about is 413 gigawatts, 92 percent of which we
think will be gas fired.
Senator Thomas. I guess, you know, what we really--
certainly we have an immediate problem. But it seems like what
we ought to be doing is looking at the future a little bit. And
if the gas price is what it is now, it is interesting to see.
It seems coal is our best opportunity over time, I think, for
stationary generation. And yet we seem to not be dealing with
that at all. We just seem to think, well, we are going to go
for gas. And that was kind of the plan when gas was $1.50 at
the wellhead. It is not now. And it is interesting that that is
your projection.
Ms. Hutzler. When we did these forecasts, we did not
anticipate the very high natural gas prices that we are seeing
right now in 2001. We were very close to the price that we
anticipated in 2000. We were about 20 cents from the actual
price in that year.
The coal plants that we do build are built in the earlier
time horizon of our forecast because of the higher gas prices
right now. But we do believe that the resources are there for
the natural gas prices to come down over time.
And because of the resources and because there are other
benefits for natural gas, which include the lower capital cost,
the friendlier environmental issues associated with natural
gas, the shorter lead times to construct and also to get
permits, that natural gas is going to be favored in markets
that have deregulated electricity.
Senator Thomas. Well, I think that is a great thing, but I
do not think that looks ahead. We really ought to be looking at
our most--our greatest volume resource, which happens to be
coal. We can do some more research on the cleanliness part. I
think if you talk about a 2,000-megawatt plant, the idea that
it is cheaper is probably not true.
If you want to build a small plant, then gas is probably
easier. If the idea is going to go to close to the market
instead of having a national transmission grid, then perhaps
that is right. But we ought to be talking a little bit about
what we want, where we want to be over time, do you not think?
Ms. Hutzler. Our forecasts, as I mentioned, are based on
current law and regulations and also based on current
economics. So based on those economics, as we see them, that is
where the future will be over the next several years.
Senator Thomas. Well, I hope all of us will give some
thought to the future, as to how we see it in 15 years, what
kind of energy is going to be the most useful for us, and where
can we do it, where can use a flexible energy source like gas,
as opposed to coal. Some of these kinds of things, I think, are
part of the mix, and we really ought to be--and we need people
like you in research to be able to at least stimulate some
thought in those kinds of directions, it seems to me.
One more question. What about the Middle East? Did we work
as closely as we could? Do we not have any leverage with OPEC?
Mr. Placke. With OPEC as an organization, I do not think
so, Senator.
Senator Thomas. Of all the things we do for the countries
in OPEC, and we do not have any leverage.
Mr. Placke. No. The rest of my statement was that within
individual members of OPEC, indeed we do. And I would point in
particular to Saudi Arabia, which continues to be the largest
foreign supplier of crude oil to the U.S. market.
And the relationship with Saudi Arabia that goes back,
really, to the end of the Second World War, the tradeoff
between an implicit and an increasingly explicit U.S. guarantee
of Saudi Arabia's external security, in exchange for a
preferential treatment of American companies in the early days
of the oil development there, and increasingly Saudi commitment
expressed through price to maintain itself as the leading and
reliable supplier of crude to the U.S. market.
When I say price, Saudi Arabia deliberately maintains its
position as the number one supplier, when it could in fact get
another 50 cents a barrel or so by sending that crude oil to
Far Eastern markets. So in that sense, there is even a subsidy
built into it.
Senator Thomas. A subsidy.
Mr. Caruso. Senator, could I add to what Jim said?
Senator Thomas. That is pretty hard to accept. But you can
try it, yes.
Mr. Caruso. I agree that the best way to deal with OPEC is
on a bilateral country basis and certainly with the Saudis. But
probably more importantly, since they are going to do what is
in their best interest, is for us to pursue what is in our best
interest. And that is diversifying our resources.
Senator Thomas. Absolutely. But we have allowed ourselves--
and we have all been involved in it, including you guys, for
years we have allowed ourselves to become dependent to almost
60 percent on OPEC. And I have not heard a lot of complaining
about it before, and here we are.
I guess that is why I am saying, you know, it is pretty
easy to get up now and talk about where we are and how we got
there, but we ought to be thinking a little more about the
future and see if we want that. Do we? I do not think so.
And so we ought to be talking about what we are going to do
in terms of production and access and a few things here, which
we have not heard much about until very recently.
Anyway, yes, sir.
Mr. Placke. The United States is approximately 60 percent
dependent upon foreign sources of crude. Actually, we estimated
56 percent for the last year. But that is all sources, OPEC and
non-OPEC.
Senator Thomas. I understand.
Mr. Placke. Two of the largest suppliers to the U.S. market
are Canada and Mexico, neither of which, of course, are members
of OPEC.
Senator Thomas. No, that is true. But we also have friends
like Venezuela and others that it seems like maybe we could get
a little more pressure there somehow. At any rate, thank you,
sir.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Let me just bring out a couple of points, and I would ask
if you agree. If you agree, there is no necessity of commenting
further. But the statement was made by Mr. Caruso in his
presentation that the irony of the 21st century, with all our
technological advantages, is that through the year 2020, at
least, we will depend on the same basic energy sources, namely
coal, oil, natural gas, that prevailed in the 20th century.
Would you agree with that?
Well, since nobody is saying otherwise, I think it is
important to recognize that, because there is a significant
portion of the public that assumes that through technology
alternatives, renewables, we can substantially relieve
ourselves of our conventional sources of energy. Now you and I
know that we have expended about $5 billion to $6 billion in
grants, subsidies, to bring on and assist alternative
renewables, but they are still less than four percent of the
market.
So if we can generally agree upon that, then I would hope
that we would establish that as a premise that we are going to
continue to develop alternatives and renewables, but they are
not going to replace for the next 20 years our conventional
sources of energy.
Now, Mr. Nugent, you feel uncomfortable with that. If you
have something to say, please say it, because I want to try and
move through this in a way that at least draws some
conclusions.
So if we have no objection to that, then--also, Mr. Caruso,
you indicated that developing an adequate and reliable energy
supply to realize the promise of robust global economic growth
will require significant investments that must be made
immediately. Obviously you are talking about domestic
investments in power generating facilities, transmission and so
forth.
Further, you state decision makers in both the public and
private sectors face the special challenge of balancing the
objectives of economic growth and the legitimate concern about
the environment.
Now, we have in the area of nuclear energy an environmental
opposition, clearly. We cannot come to grips with what to do
with the waste. Yet obviously nuclear has something to offer,
as far as emissions are concerned. Coal, we cannot come to
grips with currently the permitting process necessarily, so we
are not building coal-fired plants. We have the coal and
environmental objection.
Again, certain areas, if you look at the Overthrust Belt,
where you have energy resources, a lot of it is withdrawn. The
east coast has been withdrawn from offshore production through
moratoriums, also the west coast. These are environmental
objections.
Is there a way to bring the environmental community into a
realization that we are an electronic society, we use more
energy in spite of our efforts to conserve, and they are going
to have to join with us? Otherwise, we are going to continue
to, you know, dance the dance of the crab going down the beach
sideways. We will not achieve what our objective is, which is
to clearly get some reasonable relief from the four
conventional resources of energy that we have had.
Am I missing something? How do we bring the environmental
community into an awareness that conservation is not going to
do it alone? Is there a way, or does the shoe have to pinch to
the point where the public is inconvenienced with gas lines
around the block or power outages or--anybody want to try that
one? Yes, Mr. Placke?
Mr. Placke. Well, being a research organization, Senator,
that is part of what we would suggest might contribute to the
solution.
The U.S. Geological Survey could perhaps do a more complete
analysis of the Overthrust Belt that you mentioned, for
example, and come up with a more precise estimate of what the
hydrocarbon resources are in these environmentally sensitive
areas, and I think also contribute--and you might bring in the
national laboratories to analyze more fully the environmental
impacts and how they could be mitigated. That might begin to
form the basis for a dialogue with the environmental
organizations.
Ultimately, they are dependent upon public opinion. And I
think in the end it is public opinion that has to be persuaded.
The Chairman. But does public opinion have to be determined
by public inconvenience and public price increases?
Mr. Placke. Well, again, California provides a case where
that is exactly what has happened.
The Chairman. I mean, I do not know if you have seen this,
but I think this is food for thought. Okay? It says, ``The last
thing California needs is more powerplants.'' Now somebody is
either misreading reality or knows something the rest of us do
not know.
Mr. Placke. Well, as you had pointed out, Mr. Chairman, the
consumers in California and the voters, as well, they are the
same, have been protected from the impact of price. I think if
there were less of that, perhaps that ad would read
differently.
The Chairman. I know, but these are well-meaning people.
And we assume that the people who, in the New York Times, take
these ads and read them before they allow them to be printed
and that they make some sense, even though I am sure the New
York Times is happy to get the revenue. Maybe this same thing
is playing in the State of California. I do not know. But it is
inconceivable to me that--this is called the Energy Foundation
Towards a Sustainable Energy Future, which is something we all
want. But if California has a supply problem, these people are
not buying it. And these people represent a portion of public
opinion, which they are certainly entitled to do.
This is part of the problem, ladies and gentlemen. And I do
not know what we can do here, and we are supposed to be able to
fix things through changes in Federal law. But if the public is
not inconvenienced or does not believe that they really need
more supply, I do not know.
Anyway, the last point I want to make--we have been joined
by Senator Dorgan. And we appreciate his participation--is, you
say, Mr. Caruso, on the issue of sanctions, which is a
legitimate concern relative to bilateral sanctions, Iran, Iran,
Libya, if our estimates of world oil demand in the year 2020
are reasonably correct, then these countries will have to
substantially expand their current production.
By the same token, they are members of OPEC now. Saudi
Arabia has a tremendous capacity for increased production.
Cannot Saudi Arabia and the other OPEC countries, with the
exception of these two or three, meet the demand?
Mr. Caruso. Not according to the projections we have
reviewed, including those of Mary Hutzler's office and the
International Energy Agency. CERA's outlook, I think, indicates
that Saudi Arabia alone would not be able to meet the demand
increase.
The Chairman. Now we have oil companies, American oil
companies, we are going to lose a position over in Libya or
some of these countries relative to the sanction issue. And the
question is, do we take off the sanction law, which expires in,
what, August? And is called what, the law? Anybody know?
Staff. The Iran/Libya Sanctions Act.
The Chairman. Yes, the Iran/Libya sanction law. Do you have
any opinion on whether we should continue the sanctions when
they expire or leave the matter of foreign policy up to the
President?
Mr. Caruso. It should be allowed to expire, in our view.
The Chairman. And leave it up to the President. Now Israel
does not like that.
Mr. Placke. Well, I would also, I think, Senator--it would
be worth looking into how effective the Iran/Libya Sanctions
Act has been. There has not been a single country, that is, a
single company, foreign company, investing in either of those
two countries that has been sanctioned during the nearly 5
years that the law has been in effect.
The Chairman. You are absolutely correct.
Mr. Placke. So it would not seem to me that the purpose of
the legislation has been served.
The Chairman. Well, you conclude with your statement, there
are troubles ahead. Where is the growth of energy demand coming
from? Unstable countries. Where is the growth in energy supply
coming from? Unstable countries.
I could not agree with you more. You indicate that people
do not care where the oil comes from in the United States, as
long as it comes. It can be coming from the scorched earth of a
rainforest in Colombia. They do not care. They are unconscious.
They do not care whether it comes in a foreign leaky tanker. As
long as it does not leak on our shores, they do not care who
has it, as opposed to the ability to develop oil domestically,
keep it in U.S. tankers, under U.S. flag, with U.S. jobs.
And I think it is a responsibility of the media, who are
supposed to tell the American people both sides of an issue
relative to the exposure of the continued increasing our
dependence on foreign oil.
Senator Dorgan, you can wind up the hearing. You can have
the gavel. You can answer every question that ever came to
mind.
Senator Dorgan. Mr. Chairman, let me just say that you are
sounding a little bit like a protectionist here.
The Chairman. I am.
Senator Dorgan. We have this debate on globalization, and
anyone who says that the interests of this country somehow
ought to be considered is called a protectionist. And now I
come here, and, on this energy issue, you sound a little like I
do on some of the trade issues. So----
The Chairman. Well, like on the farm issues, we believe
charity begins at home.
[Laughter.]
The Chairman. Thank you.
Senator Dorgan [presiding]. I will only ask two brief
questions. I was at a committee hearing on defense
appropriations this morning, and so I was unable to be here,
but thank you for holding this hearing.
I mentioned this issue of globalization. And there is an
interesting tension here with respect to energy supply and
energy demand and to the robust discussion about globalization
in other areas. All of a sudden, we are very concerned about
our interests, but there is this tension now on the issue of
globalization. And I think that it is interesting for us.
Let me ask any one of you who is able to answer this--there
is a discussion among Middle Eastern OPEC countries about
opening opportunities for private capital investment in oil
expiration in those countries. If that were to happen, what
impact would that have on investment in the United States by
the major oil companies? Anybody have any observation about
that?
Mr. Placke. Well, Senator, the process that you referred
to, the so-called upstream opening in Iran, Kuwait, Saudi
Arabia, has been moving very slowly.
Given the growth that we anticipate in world demand for
petroleum, which we see continuing to grow at about 1.6 to 1.8
percent annually, from a base of now 76 million barrels a day
of consumption worldwide, there is plenty of room for
investment and development of resources around the world. Those
areas attract investment because they are the low-cost
producers.
Senator Dorgan. Money moves where it has its best return.
So the reason I am asking the question is, if that is open to
private investment in the future, that you make decisions about
those investments based on return you expect. And better
returns will exist in areas where it is less expensive to
explore and to find oil. Would that not be the case?
Mr. Placke. That is certainly true.
Senator Dorgan. Would it not be the case, then, that there
would be a shift in investment potential from here to there?
Mr. Placke. If it were an uncontrolled market, but it is
not really on either end. Foreign investment--this may sound
bizarre--is still regarded with some suspicion in each of those
areas, or at least it is regarded as something that needs to be
controlled, so that the national influence over the national
resources is not lost. So it is not likely that the investment
opportunities are going to be fully opened to the extent that
the kinds of tradeoffs that you describe will take place.
Also, there are advantages to investing in the United
States, not only locational, but the political risk factor in
the United States is as close to zero as it can get. That is
not true anywhere outside the United States. And as you get
into riskier areas, I think companies simply would be careful
about how much of that risk they chose to absorb in all of
their investment alternatives.
Senator Dorgan. Ms. Hutzler, your conclusion is fairly
bleak on page seven. You do, however, say that the forecasts,
which you have made here, incorporate an expectation of
efficiency improvements in both demand and supply, although
different paths for technological development could lead to
slower or more rapid efficiency gains.
What kinds of things do you think are on the horizon that
could lead to more rapid efficiency gains? And what kind of
public policy requirements would have to exist to make that
happen?
Ms. Hutzler. What we look at in those cases are different
rates of new technologies coming on line and different capital
costs and performance for them. In our Reference Case, which is
based on historical trends in technology development, we see
that intensity changes could decline by about 1.6 percent per
year.
In the High Case that you are looking at, if we could
develop some of these technologies to come on at a lower cost
and greater performance, you could in fact improve that
intensity to about a 1.9 percent decline rate. So it does deal
with development of technologies.
Senator Dorgan. Let me make just a concluding comment. The
chairman held up, I believe it was, the Washington Post ad
asking a question about powerplants in California. Whether it
is California or the general energy outlook for this country, I
think we have to do a lot of things and do them right. Frankly,
this may well come from one side of the debate that believes
that we ought not build more powerplants, we ought to do more
in conservation, radically more in conservation.
On the other hand, there are those on the other side who
could probably just as easily put an ad in and probably say,
no, no, what we need to do is just build, build, build. I mean,
that is the only issue. Go find and produce.
Well, that is one side of the equation, but neither of
these approaches provide an answer. If we do not do a lot of
everything and do it right, we are not going to begin to
address this country's energy issue.
I do not know whether you put up Senator Bingaman's chart
today, the one that shows energy usage and shows the
transportation line going up and shows production over a long
period of time and shows that either stable or going down. It
seems to me that you have to address all of these issues, such
as transportation usage.
Well, the next time you pull up to somebody that is driving
a huge gas hog full of chrome and weight, belching smoke and
getting 8 miles to the gallon, and who is complaining because
they have to stop at the gas station every few miles, you know,
we might ask ourselves--does this contribute to the problem? Do
we have a right to drive these things? Yes. But should we
complain about them? If we drive them, probably not.
We need conservation. We need aggressive, robust
conservation efforts in this country. We need renewable
resources. And frankly, I am a little sick and tired of the
energy companies telling us renewable energy sources are
largely irrelevant. They have done most of what they can to
depress renewable energy sources for a long while. We need to
use them, and we need to encourage them. And I think they will
become commercially successful, viable, and important.
And we also need to find more and to produce more energy,
oil, natural gas, and coal, using clean coal technology. We
need to do a lot of things. And I just think that the voices
coming down in one crevice or one corner saying ``this is my
position, this is what I am going to sit on,'' I am just
telling you, is the wrong way to address this issue.
Mr. Caruso, your statement, I thought, was very
interesting, because you really talk about the tensions I tried
to describe to the Chairman with some mirth here about the
global economy and domestic needs and our dependence and so on.
So this is a highly complicated issue. It is not going to
be solved any time soon. We can go back 10, 20 or 30 years, or
perhaps 70 years, and find a similar debate that was held in
this U.S. Senate with just as distinguished folks testifying
and folks at the dais here. And we would all be talking about,
yes, we need to cut this cord, and we need to move in another
direction. And perhaps 20 years from now, we will be having
similar hearings.
But my hope is--I think, Mr. Caruso, you said it in your
testimony. One of the ironies at the turn of the century is
that, at an age where the pace of change, technological change,
is almost overwhelming, the world will remain dependent up to
the year 2020. And the same sources of energy, oil, natural
gas, and coal, everything, virtually everything in our lives,
has changed except most of the engines in our vehicles. You
have to drive up to a gas pump and stick a hose in and pump
some gas in. That has not changed much at all. But everything
else has changed.
And there ought to be ways for us, as a society, to think
our way through these problems to branch out, and give us ample
opportunity to find new sources of energy and new approaches.
And even as we do that, reach agreement between the parties
and the philosophies about how to do a lot of things right in
developing an energy strategy that is comprehensive, and do
that soon.
Thank you all for being here. I regret the brevity of my
appearance, but it was a necessity caused by another hearing.
This hearing is adjourned.
[Whereupon, at 11:52 a.m., the hearing was recessed, to be
reconvened on April 3, 2001.]
U.S. ENERGY TRENDS
----------
TUESDAY, APRIL 3, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:43 a.m., in
room SD-628, Dirksen Senate Office Building, Hon. Frank
Murkowski, chairman, presiding.
OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,
U.S. SENATOR FROM ALASKA
The Chairman. Good morning, ladies and gentlemen. We will
call the hearing to order on the Energy and Natural Resources
Committee. I apologize for being tardy, and I have already been
taken to task by my colleagues, so we will start off even.
The purpose of the hearing today is to consider the role of
our domestic oil and natural gas resources that play such an
important part of our overall energy security. We want to talk
about what impediments exist to domestic production. We are
pleased to have, I think, an outstanding panel of witnesses to
provide expertise on the topic and look forward to their
testimony.
I would encourage you as you address energy and oil
specifically to address the issue of our continued dependence
on oil for transportation. In spite of what you believe, even
when we leave Washington, D.C., to go home, we do not go home
on hot air. We have to get some gasoline for that airplane, and
it has to come from some place. As we look at relief and
relieving our dependence on that fuel, we need to look at some
specifics. What are the alternatives, or are there any in the
foreseeable future? I would hope that you can enlighten us.
The same is true as we become more dependent on natural gas
for our homes and for our power generation. We look forward to
the findings of a study currently be conducted by the
Department of the Interior under legislation which I authored
that will further define the impediments to production, or
limiting production.
This last week Secretary Gale Norton, as you know, Senator
Bingaman, Mary Matalin, representing the Vice President, and a
group of staff were part of a delegation that visited my State
of Alaska, visited the Arctic North Slope. It was a relatively
quick visit; we left Friday and came back Sunday. I think we
had twelve take-offs and landings, if I am not mistaken. You
counted them, Jeff, on Saturday, but we went from Fairbanks to
Deadhorse to Kaktovik to Nuigsut, to Alpine back to Nuigsut, to
Barrow. It must have been about sixty or seventy below in
Barrow on Sunday, and even for Alaska it was a little chilly.
The ranking member here finally found a pair of gloves and got
some relief, but it was like it is. It is interesting to see a
place like it is for most of time. There has been some
criticism we did not take the group up during the summer, but I
assure you there is going to be another group.
We have, as you know, considerable gas reserves in Alaska.
I think there's about 12 billion barrels have been recovered
from Prudhoe Bay, and there were supposed to be 10 billion
barrels in the field. It is estimated by responsible geologists
that about 35 trillion cubic feet of natural gas are associated
with discoveries in Prudhoe Bay, and the natural petroleum
reserve in Alaska, 4.5 million acres have been opened for
exploration. Of course, the 1002 area of ANWR is unknown, but
it is clear if we look to reducing our dependence on foreign
oil, a good deal of the energy wealth of North America lies
above the Arctic Circle, and we also need to use our petroleum
products more efficiently to get greater conservation and, of
course, develop alternative fuels. Maybe you can enlighten us
on that.
There are other promising areas, of course, for development
of natural gas--OCS, overthrust belt--that are necessary given
our growing demand for gas, but it is interesting to look at
some of the charts and recognize that OCS availability offshore
on the East Coast from Maine to Florida is pretty well covered
by moratoriums that mandate that there shall be no development.
The same is true on the West Coast of the United States:
Washington, Oregon, California. So the question is where are we
going to find it?
So we have several barriers that prevent use of these
resources to meet our growing energy needs. Many areas, as I
have indicated, are under moratoria. Even when leases are
granted, it gets hard to get the permits through. We have got
administrative inaction and duplicate regulatory environment
processes, disputes and legal challenges by stakeholders, local
communities, environmental groups, regulatory structures not
keeping pace with technology. The reduced footprint is
relatively dramatic, relative to the technology available. I am
told that when two thousand acres was developed in 1973, today
we do it in two hundred acres. We have 3D seismic mapping,
which we did not have a decade ago; horizontal drilling allows
one well to replace several.
We saw this this weekend in Alaska. We have seen wells that
reach out using directional drilling as much as 15 miles. So we
have a technology to find and develop our oil and gas reserves
in a way that minimizes impact on the environment, and we can
respect the land that both people and animals depend on for
their welfare. So we have got the potential here to preserve
and develop at the same time, and we must preserve cultures and
ecosystems alike. Some would suggest that this particular issue
has become so politically polarized that it is very difficult
to get people to objectively view it. It has been threatened
with filibusters, and I would hope that we would rise above
that and use sound science and factual information to make our
decisions.
I have said before we cannot produce and cannot drill our
way out of this. We need all the sources of energy to address
the shortfalls, but we must look at the barriers, review them
with the ways to streamline leasing while encouraging
stakeholders' dialogue to ensure safe environmental
responsibility.
It is kind of interesting to see where we have been on this
area. Some say progress has been made, particularly in the deep
waters of the central and western Gulf of Mexico. Nearly 35
million offshore acres were leased from 1993 to 1998,
representing over a 50 percent expansion in the cumulative
leasing prior to that time. However, this was not due to
increased access to those areas, the areas had been previously
available. The increase was due to the combined effects of
major technological breakthroughs and deep water royalty
incentives passed by Congress in 1995 and passed, I might add,
by this committee. At that time, Senator Bennett Johnson was
chairman of this committee, and I supported him on that effort.
That was a considerable consequence, I think, for much of the
offshore development that we see today.
It is interesting to note that Western States contain 45
percent of the proven oil reserves, 35 percent of the proven
gas reserves, and even a larger share of the estimated
undiscovered oil and gas in the lower 48 onshore. It is kind of
interesting to reflect on the reality that when we have seen
moratoriums designed from time to time to accommodate some of
the special interests within those States, while obviously
there is a certain sensitivity, it simply takes these promising
areas and puts them off-limits and we do not go back and
prioritize them again.
Some of the problems that we have had continually that we
are going to have to overcome are the delays by BLM in
processing applications for permits, expansive interpretations
of The Endangered Species Act by the BLM, Forest Service, U.S.
Fish and Wildlife Service which have led to the creation of de
facto critical areas which unreasonably restrict oil and gas
activities by imposing dramatically reduced drilling windows.
BLM's designation of previously studied wilderness study areas
have become again de facto. We seem to be going through a de
facto process without the Congress making the determination.
The administrations and the agencies have been doing it.
In the absence of cooperation and coordination between BLM,
Forest Service, EPA, FERC and other agencies in implementing
national environmental policies or NEPA requirements, it has
led to tremendous interagency disputes, delays for permitting,
leasing. I could go on and on with what the problems are, but
the problems result in obviously it becoming more difficult,
more time-consuming, and more expensive. The question is, is
this done in the interest wholly of environmental sensitivity
and compatibility, and is it all necessary? Hopefully today we
will find out a little bit more about that process--what is
holding up the development and why we are becoming more and
more dependent upon foreign sources for energy.
Senator Bingaman, good morning.
[The prepared statements of Senators Campbell and Dorgan
follow:]
Prepared Statement of Hon. Ben Nighthorse Campbell, U.S. Senator
From Colorado
Thank you, Mr. Chairman. I would like to welcome all of the
witnesses and my colleagues for appearing before the committee today. I
am looking forward to the testimony that you all will be providing us
shortly. I am delighted to see that so many of you are here to address
this critical problem.
In the past, public lands were locked up, and were prohibited from
oil and gas exploration and extraction, often without legislative
oversight. Known resources are sifting idly by when our nation is
reeling from a dwindling supply of energy. And, our crisis is only
going to get worse this summer from our inadequate supply of energy.
Granted, some of the lands which are locked up are worthy of the
protection, but others were locked up for the sole purpose of
prohibiting exploration and extraction of oil and gas. These are the
lands and regulations that need to be revisited. Since 1992, U.S. crude
oil production is down while our consumption has substantially climbed.
We can help ourselves get out of this mess, but we have to be allowed
to do so, even if that means opening up more lands.
Don't get me wrong, we have to have environmental safeguards so
that we do not do more harm than good. The technology is there to
accomplish this goal. We just have to be able to prove it. Many people
think that mining operations are all big open pit mines, which is not
the case. There are mining operations that are environmentally sound
and have minimal degradation to the surrounding areas.
Many are going to say that even this isn't good enough, that any
environmental harm is unacceptable. But, we have to be realistic. Many
want the cheapest and cleanest form of energy, but they do not have any
``real'' solutions to replace our traditional types of power. Sure they
claim that renewables are up-and-coming, but they are not in full swing
yet. We have to deal with what is in front of us.
We are a nation that could use our land to supply a majority of our
power needs, which would also help us to decrease our dependence on
foreign oil. Our locked lands have discouraged many from trying to do
what is right and now our nation is reaping the bitter fruits of this
practice. I will have some questions for the witnesses that I would
like them to address so that we can further explore this issue during
the time for questions.
Thank you Mr. Chairman.
______
Prepared Statement of Hon. Byron L. Dorgan, U.S. Senator
From North Dakota
Mr. Chairman, I am concerned that we are having yet another hearing
pertaining to the supply side of energy policy.
While I believe that we do, in fact, need to examine oil and gas
exploration and development options, I also emphatically believe that
we must have a balanced energy policy. That means we also need to focus
on the demand side of the energy equation. I am pleased that at least
one of our witnesses, Mr. Hayes, agrees with this policy approach.
We cannot drill our way out of our energy problems. Even my
colleague, Chairman Murkowski, will agree with me in this regard. We
must do more to promote renewable energy and energy efficiency. Yet,
the Administration is proposing to cut renewable energy and energy
efficiency research and development funding by approximately 30-50
percent.
Moreover, the Administration is considering delaying or doing away
with proposed efficiency standards, at this very moment. These
standards would improve the efficiency of clothes washers, water
heaters, air conditioners and commercial heating and cooling systems.
These standards, combined with others for refrigerators and room air
conditioners completed earlier, would cut residential energy use by
about 13% by 2020. The air conditioner standard would be the single
most effective standard in reducing residential energy use. Further,
the new standard for washing machines is projected to save the
equivalent of the annual energy use of 21 million households, with
water savings of as much as 11 trillion gallons. Not enacting these
standards during an energy crisis is incomprehensible to me.
Unfortunately, the Administration instead seems to want to open up
public lands and drill our way out of this problem. Opening up every
last public land is not the answer. In addition, one must only look at
the facts to realize that there do not appear to be so many obstacles
to drilling on public lands, either, as some would have us believe.
Drilling on public lands actually increased during the past eight
years, while having decreased on private lands. In fact, public lands
provide a greater percentage of oil and gas to meet U.S. energy needs
today than at any time in the past two decades. In 1992, during the
first Bush administration and following eight years of Reagan policies,
oil and gas production from the Federal lands provided 13% of overall
domestic oil and gas production. By 1999, the contribution of oil and
gas production from the Federal lands as a percentage of overall
domestic oil and gas production had risen to 25%. Moreover, the Bureau
of Lands Management (BLM) is in the process of granting more than a
thousand permits to drill for oil and gas in the Powder River Basin in
Wyoming, an extremely prospective area for western oil and gas
production. Again, one of our witnesses will testify to these facts.
Opening up the Arctic Refuge also is not the answer. Even President
Bush is realizing this, as he stated last week. Drilling in the Arctic
Refuge would take years to access and would produce only a small amount
of petroleum supply. What we need instead is natural gas. I support
exploring natural gas supplies in Alaska's North Slope. But this
proposal, too, will take time to see to its fruition. We also need to
examine exploration and development on private lands.
In the interim, the most effective steps we can take to address our
immediate problems is to implement alternative conservation and
renewable energy measures. These measures can be put in place far more
quickly than pipelines or power plants.
So, rather than exploring impediments to oil and gas exploration
and development, which are limited, we should instead be exploring ways
to expedite and facilitate means to improve efforts for energy
efficiency and alternative energy resources.
Thank you, Mr. Chairman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Good morning, and thank you for having
the hearing, Mr. Chairman. I do think this is an important
issue. I believe that there is a real need to inventory our
public lands and our private lands as well and look at where
the opportunities are for additional production of oil and gas
in particular. I think we need to look at the various
moratoria, which you have alluded to, and see whether there is
any genuine prospect for relaxing any of them.
My sense is that there probably is not in most cases, at
least the offshore moratoria. Those are moratoria that the
previous administration supported. I believe former President
Bush supported those when he was in office. I believe that
current President Bush has indicated his support for those
moratoria, so I do not know how far we get in trying to pursue
relaxation of those moratoria. I do not know if that would be
wise or productive on the part of the committee.
I do think that we need to look at all opportunities for
increasing oil and gas production in an environmentally-
sensitive way. I think that in addition to looking at Federal
lands, we need to look at private lands. My impression is that
we have seen increases in production from Federal lands in the
last decade. At the same time we have seen decreases in
production from State lands and private lands, and we need to
see if anything can be done about that.
I also agree with you that there are enormous resources on
the north slope of Alaska where we were this weekend and we
need to find ways to develop some of those resources. One
specific that I know the chairman is very interested in, and I
also support, is to try and find a way to bring that natural
gas to the lower 48 as quickly as possible and build a pipeline
to accomplish that. Therefore, we have a provision in the
energy bill that I introduced a week or so ago that tries to
provide an incentive for early construction and use of that
pipeline. I would be interested in anyone's reaction to that as
to whether that is the correct direction to go in or not, but I
do think we should hear some good testimony and hopefully
understand the issue better when the hearing is over.
Thank you, Mr. Chairman.
The Chairman. Thank you, very much. In the order of Senator
Burns, Senator Thomas, Senator Cantwell, and Senator Landrieu.
STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR
FROM MONTANA
Senator Burns. Thank you, Mr. Chairman, and I will just put
my statement to record.
The Chairman. Without objection.
Senator Burns. I think that never at a time since I have
been around has there been so much interest in energy, and this
shortage that we have this time covers all bases. Not only is
it the production of electricity, our transportation fuel, and
the overall costs--and I come from the agricultural community,
and right now it has hit all segments of our ability to produce
food for this nation. We do not want to forget about that for
the simple reason that I do not know what the first thing you
do when you get up every morning, but I know what the second
thing you do is, and that is eat, and we must not forget about
that. Our ability to produce a food supply, fertilizers,
transportation costs, processing, purveying is all equally hit
in this country, and that is going to start showing up right
away, so thank you for holding this hearing, and I am
interested in listening to the witnesses today.
Thank you.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
Mr. Chairman, I'd like to thank you for holding this hearing to
look at impediments to domestic oil and gas development. We have been
spending a lot of time lately discussing this energy crisis and I
appreciate that, but in my mind this hearing is different in one very
significant way. Up to this point we have talked a lot about the
problem, and I see this hearing as focusing on potential solutions.
I know that Montana can be part of this solution, because we are
fortunate to possess great quantities of gas, oil, coal and coal bed
methane reserves within our state. In fact, I held a hearing in Montana
on March 10 to investigate what coal bed methane could mean in our
State, and what we need to do before we proceed. Coal bed methane is
one promising possibility in the range of federal land use, but that is
what makes it rare. Unfortunately, most of our stories about energy
development in Montana have had one common theme: lost opportunity at
the hand of federal land use restrictions.
Today we have with us some folks who are very experienced in the
gas and oil business, and I am looking forward to what they have to
say. I think they will tell us we have the opportunity to make this
country more energy independent by using some of our vast energy
reserves. I believe that these energy resources can be tapped to help
bring energy prices back down to a reasonable level. A great deal of
these reserves exist on public land, and we owe it to the public to use
these lands wisely. To me, it is only common sense that energy
production should be seen as a legitimate use for public lands where
that is appropriate. We seem to have forgotten that part of the
equation in the last few years.
I am glad the U.S. Geologic Survey has released its report on
potential energy reserves within recently declared monuments. From that
report, you will see what we have known in Montana for quite a while,
which is that there are significant energy reserves underlying the
Upper Missouri River Monument. There is a great deal of natural gas in
that area, and considering that it is in high demand as a clean-burning
fuel and as an input into agricultural fertilizer, I believe we need to
do what we can to use it well. Prudent development is already taking
place just north of the Breaks and a reasonable boundary must be
established for the Monument to allow access to this known resource and
even natural gas development within the Monument.
To further this access discussion there is already a gas pipeline
crossing the Missouri. Expansion of the pipeline because of increased
future volumes and routine maintenance must be able to continue for
both safety and continuing power generation and heating needs. This
infrastructure consideration must be dealt with in any document that is
finalized on the Missouri Breaks.
The Upper Missouri River Monument is a good example of how the
federal government has restricted oil and gas exploration on public
lands. The declaration of this monument in north central Montana was
one of President Clinton's last actions in office. The monument is
about 495,000 acres and includes BLM land, state land, and private
land, much of it along the Missouri River. It is beautiful, remote,
remarkably well-preserved, and home to some of the most promising land
for natural gas in all of Montana.
Within the monument are thousands of acres of valid leases, mainly
natural gas, numerous producing wells, and gas pipelines. Under the
current arrangement, these have been tied up from any further
development. Even though the draft management plan states that the
``designation does not affect valid oil and gas leases'' the truth is
that without access to pipelines, and reasonable turnaround time for
permit approval, leaseholders will not be able to pursue their rightful
ownership to the gas within monument boundaries. According to current
leaseholders, the permit approval for these leases has averaged about
60 days, up until word leaked that the Monument designation was being
considered, and since then some have been waiting for a year or more.
When we look at States like Montana and others like it, the careful
extraction on natural gas and oil could contribute significantly to the
tax base of the State and local governments. When we tie that land up
and bar development of the resource base, we also limit the ability of
state and local governments access this valuable source of income.
Instead, the federal government locks it up, and pays the counties PILT
money for the lost revenue. That just doesn't make any sense. There is
a very real economic impact to the State treasury, and to the Federal
tax rolls (the State would receive one-half of Federal revenues from
royalties and land sales).
Continued restriction on the Federal land base and the contribution
it makes to western States treasuries needs to end. The tax burden
continues to shift back to the State level without due compensation
from the Federal government. The Federal government cannot afford to
take revenue sources off the table and continue writing checks to cover
bad policy decisions and extremely poor management. That just isn't
right.
I support careful management, and that includes looking at all
options for a piece of land. The mindset that no management is good
management does not sit well with me, and that is the attitude I have
seen in regard to energy resources on public lands. I look forward to
hearing the testimony of our witnesses today, and finding out how we
can improve the viability of energy development on public lands.
The Chairman. Thank you very much, Senator Burns.
Senator Thomas.
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Thank you, sir, and I too appreciate this
hearing. I am very much interested in today's topic, of course,
which is how we improve and increase our domestic oil and gas
production. Obviously one of the things that has to be done is
dispel this myth that development versus environment is the key
issue. I am persuaded we can do both; we have shown that we can
do that, I think, in Wyoming. There is substantially less of
the mineral reserves that is leased now on Federal lands than
there was. It has declined by more than 65 percent since the
early 1980's, only about 17 percent of the total estate
compared to 72 before. I am not suggesting it ought to be back
where it was, but we have to take a look at it.
I think the broader thing--and I have said this over and
over again, but I feel very strongly--if we are going to have a
policy that brings us in energy where we want to be, we have to
improve domestic production, we have to have access to public
lands, the same time protect the environment. That's our task.
I think we have to have diversity in the kinds of sources that
we have. We have to begin to use them in that way. We have
produce renewables. They are a very small factor now but can be
larger. We have to have some conservation as part of that
policy. We have to do something about rights of way so that we
can move this energy from one place to another so that it can
be used. I think there is a possibility for incentives when
they have low production wells and things of that kind.
Regulations need to be reasonable, and we have to respond as we
go along to some of the market signals which we failed to do in
California.
In any event, there is a lot we can do. I look forward to
it. I was listening to the radio--something about his reaction
was a little less talk and a little more action. Maybe we need
to do that.
The Chairman. Thank you very much.
Senator Cantwell, good morning.
Senator Cantwell. Good morning, Mr. Chairman. Thank you.
And I too will submit my comments for the record.
The Chairman. Would you speak a little more in the
microphone, please? It doesn't pick up very well.
STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR
FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman. Please excuse
the fact that I will not be here for part of the hearing. I
also have a Judiciary hearing and I think some of our other
members are doing double duty too.
This is an important hearing, and I would like to associate
myself with the comments of Senator Bingaman. We have to look
at this energy crisis that we are facing in the Northwest, not
only on the supply side but also making sure that we do not put
undue pressures, permanent strains, on our environment. This
past weekend we just had a day-long conference of the entire
delegation on conservation. I was most impressed by a group of
students from a middle school in Seattle who said, ``What have
we learned from the last energy crisis that we are going to
apply today so as not to make the same mistakes?''
We also have a group of high school students from Port
Townsend who are in the audience, and who will provide various
members here with research that they have done on recyclable
materials. While today we are going to hear about the supply
side and appreciate the chairman's dedication to the supply
side of this issue, we need to remember that there is a
delicate balance here both in the short term and the long term.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Cantwell.
Senator Landrieu.
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. Mr. Chairman, I thank you and the ranking
member for holding this hearing, and I look forward to hearing
from our distinguished panelists and am hopeful they can shed
some additional light on this important issue for our nation. I
am going to submit my statement for the record.
The Chairman. Without objection.
Senator Landrieu. I would just like to make a couple of
brief comments. First, the chairman has held hours of hearings
over the last year and I am convinced that the most immediate
problem is the transmission grid. Before we even work on supply
or demand, the transmission grid, the transmission lines, the
way that we move from the production to the use, whether it is
gas lines or electricity lines, is something that has to be a
priority in any legislative initiative that we take up in this
committee.
Secondly, I agree with our chairman and ranking member that
the diversity, quality and quantity of our supply are
important, and that one lesson we can learn from the last
energy crisis is we have to emphasize diversity of supply and
cannot be over-reliant on one source of energy. As a State that
has been a proud producer of oil and natural gas and continues
to advocate for their use, I also support other sources of
energy such as clean coal and nuclear.
In addition, I do think that we must focus our efforts on
efficiency and conservation. However, we should continue to
look at opportunities to expand our supply. The question is
should one or two States stand in the way of a Nation that
needs a steady supply of energy to keep our economy moving?
I know these are tough issues, and there are some
delegations that feel very strongly about moratoria, but we
must evaluate whether these moratoria are serving our Nation's
best interest. I believe we need to look at all opportunities
for production whether in the Rocky Mountains, the Gulf of
Mexico, or even Alaska, while still emphasizing energy
efficiency and conservation.
Thank you, Mr. Chairman.
[The prepared statement of Senator Landrieu follows:]
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator
From Louisiana
Thank you, Mr. Chairman. I want to thank you for holding this
hearing today on the development of domestic oil and natural gas
resources as part of a national energy policy.
We are well aware that the U.S. is currently experiencing unusually
high and volatile energy prices. Residents of my state of Louisiana as
well as citizens across the country faced abnormally high gas prices
this past winter and often could not pay their bills. Most of the
forecasts for this summer are even more ominous. While there are some
steps we can take in the short run to help, the situation is complex in
nature and any attempt at an overall solution will require a number of
different remedies over the long run focusing on both the supply and
demand side of the equation. However, the need to increase our domestic
supply of energy is apparent.
One of the great strengths of the electric supply system in this
country is the contribution that comes from a variety of fuels such as
coal, nuclear, natural gas, hydropower, oil and renewable energy. The
diversity of available fuels we have at our disposal should enable us
to balance cost, availability and environmental impacts to the best
advantage. Unfortunately, we have not made adequate use of this supply.
Today our focus is domestic oil and natural gas resources. In 1998,
natural gas and petroleum combined for approximately 65% of total
energy consumption in the U.S. I am hopeful that during today's hearing
we can explore any and all reasonable opportunities for potential
development of these respective resources.
We have available in this country plentiful natural gas and oil
resources that can be developed in an efficient and environmentally
sensitive manner. One area with great potential is the deep water of
the Gulf of Mexico which has had an explosion of development in recent
years. The Mineral Management Service (MMS) is scheduled to hold a
lease sale, Lease Sale 181, in December of 2001 for an area in the
Eastern planning area of the Gulf. The lease sale would cover a narrow
strip of federal waters directly south of the Alabama coast line which
expands into a broader area a hundred miles out in the Gulf. Industry
has developed oil and gas in this huge expanse of federal waters for
years in a safe and environmentally sound manner. The MMS estimates 240
million barrels of oil and 1.8 trillion cubic feet of natural gas will
be developed from this area. Those figures could go as high as 370
million barrels of oil and 3.2 trillion cubic feet of natural gas. When
the MMS prepared the leasing plan for this five year period, extensive
public meetings and consultations with states were conducted. This area
is a huge expanse of federal waters where industry has developed oil
and gas for years in a safe and environmentally sound manner. The
Minerals Management Service (MMS) should proceed with Lease Sale 181 in
December of this year as planned.
The waters of the Gulf of Mexico have proven to be a plentiful
source of oil and natural gas and are predicted to remain so in the
immediate future. Nearly 80% of the Federal oil and gas that is
produced annually from the Outer Continental Shelf is produced from the
waters adjacent to the State of Louisiana and I am happy for this
development to continue. However, the supply in the Gulf is not without
limits. One day this supply will cease. We owe it to ourselves and
future generations to at least consider other areas both on and
offshore for prospective development. While we cannot recklessly cast
aside any restrictions to development on certain lands and off certain
shores that are in place out of concern for the environment, an
analysis of the costs and benefits of such development which takes into
account advances in exploration and production technologies does not
seem unreasonable.
One area in particular that I am interested in hearing about from
the witnesses is the Rocky Mountain region and its potential natural
gas supply. The 1999 National Petroleum Council study on Natural Gas
found that, in addition to the Gulf of Mexico, the other most promising
region for future gas production was the Rocky Mountains. The report
estimated that an estimated 40%--or 137 TCF--of potential gas resource
in the Rockies is on federal land that is either closed to exploration
or is open under restrictive provisions. To ignore the potential of
this area does not seem like good policy.
Thank you, Mr. Chairman.
The Chairman. Thank you very much. I appreciate your
statement, and we will proceed with our witnesses now. Let me
introduce them at this time. We have Panel One, Dr. Patrick
Leahy, a good Irishman, Associate Director of Geology, U.S.
Geological Service from Reston, Virginia; Mr. Matt Simmons,
president, Simmons & Company International from the great State
of Texas, downtown Houston; the Honorable David Hayes, who is
no stranger to us, although he is wearing a new badge--he has
joined the fraternity of lawyers which is expanding all the
time in Washington--as a partner with Latham & Watkins here in
Washington, D.C.; Mr. Mark Rubin, who is general manager of
Upstream. And do you want to explain the difference between
upstream and downstream?
Mr. Rubin. Upstream is exploration and production.
The Chairman. And downstream is?
Mr. Rubin. Refining, marketing, that kind of thing.
The Chairman. I wanted to make sure because some of our
colleagues, including myself, have been both upstream and
downstream, but not necessarily in the petroleum business.
Mr. Rubin. It is up the creek.
The Chairman. It is up the creek? Okay. Well, I was
maintaining the metaphor here, and I thought it was appropriate
for this distinguished group, but he comes to us as general
manager, Upstream, American Petroleum Institute in Washington,
D.C. Mr. Neal Stanley--Mr. Stanley is vice president, Western
Region, Forest Oil Corporation of Denver, on behalf of the
Independent Petroleum Producers of America. If we have got that
right, we will proceed and would ask that you try to keep your
statements to about seven minutes, and then when we are all
through, we will have some questions for you. Is that fair
enough? Thank you.
STATEMENT OF DR. P. PATRICK LEAHY, ASSOCIATE DIRECTOR FOR
GEOLOGY, U.S. GEOLOGICAL SURVEY, DEPARTMENT OF THE INTERIOR
Dr. Leahy. Mr. Chairman and distinguished members of the
committee, thank you for this opportunity to present on behalf
of the U.S. Geological Survey, testimony regarding our
assessment of oil and gas resources nationally, and our
assessment strategy of Federal lands as called for in the
recently enacted Energy Act of 2000. I will summarize my
written statement in the interest of time.
The USGS is responsible for assessing undiscovered oil and
gas resources of all onshore and State offshore areas of the
Nation. In February 1995, the USGS released the National
Assessment of the U.S. Oil and Gas Resources. We are updating
that assessment in selected regions thought to have high
potential for undiscovered natural gas, including coal bed
methane and gas hydrate. This update will be completed in 2004
with interim products available in early 2002. The updated
assessment will include allocations of undiscovered oil and gas
resources to Federal lands. Additionally, the USGS is
completing a national coal resource assessment during 2001.
Assessments of some areas have already been released relative
to the coal.
The 1995 USGS assessment of the Nation's undiscovered oil
and gas was conducted in collaboration with the State
geological surveys, the Minerals Management Service, and other
Federal agencies, and industry geologists under the auspices of
the American Association of Petroleum Geologists. Assuming
existing technology, there are approximately 113 billion
barrels of technically recoverable oil on shore and in State
waters. The technically recoverable conventional natural gas
equals approximately 716 trillion cubic feet. When one includes
unconventional gas resources, the total increases to 1,074
trillion cubic feet.
The total technically recoverable oil and gas resource base
on shore and in State waters of the United States is displayed
in the table on page two of my written statement.
In January 1998, the 1995 assessment was used and USGS
published a report that provided estimates of the volumes of
undiscovered oil and gas on Federal lands. Estimates of oil in
undiscovered conventional fields ranged from 4.4 to 12.8
billion barrels, with a mean value of 7.5 billion barrels.
Estimates of technically recoverable gas in undiscovered
conventional fields ranged from 34 to 96 trillion cubic feet.
The Chairman. What is the difference between a conventional
field and a nonconventional field?
Dr. Leahy. Nonconventional fields make our continuous gas
resources. They are not in structural traps or sedimentary
traps, so things like coal bed methane would be considered
unconventional.
The Chairman. What is conventional?
Dr. Leahy. Conventional are those gases that are in
stratigraphic traps so that you drill into the trap and
structural traps, so they are discrete resources.
As before when unconventional gas resources are included,
the volume increases. Estimated volumes of undiscovered oil and
gas and natural gas liquids in onshore Federal lands of January
1994 are displayed in the table on page three of my statement.
[Chart.]
Dr. Leahy. I would like to refer to this poster now. This
shows the 113 billion barrels of oil, as well as the 1,074
trillion cubic feet of natural gas in onshore and State waters.
It also shows the breakdown as a percentage into four major
categories: crude resources, reserve growth in known fields,
and undiscovered resources on both Federal lands and non-
Federal lands. And the colors that were used are identical in
both graphs.
What I would like to do now is talk a little bit about the
Energy Act of 2000. Section 604 of that Act requires the
Secretary of the Interior to conduct an inventory of energy
resources and the restrictions and impediments to their
development on Federal lands. It is our understanding that the
role of the USGS will be to assess the oil and gas resources of
basins with Federal land ownership using USGS assessment
methodology. Then USGS geologists will allocate resource
estimates to those specific land parcels owned by the Federal
Government. USGS resource assessments will be combined with
reserve volumes from the Department of Energy and will be
incorporated into a geographic information system which shows
the spatial distribution of potential resources as well as the
known reserves. The resource and reserve information will be
integrated with geographic information on the restrictions and
impediments constructed by BLM and the Forest Service, and the
inventory will be provided to Congress within two years of the
enactment of the legislation which was this past November.
I have also been asked as part of my testimony to talk a
little bit about the Minerals Management Service, and I will
provide to you the results of the Mineral Management Service
2000 assessment of the Federal Outer Continental Shelf
undiscovered oil and gas resources. The part I have not talked
about are shown in these graphs.
MMS estimates that the total mean undiscovered
conventionally-recoverable resources for the United States OCS
are 75 billion barrels of oil and 362 trillion cubic feet of
gas.
Mr. Chairman, thank you for the opportunity to testify, and
I will be happy to respond to any questions the committee has.
[The prepared statement of Mr. Leahy follows:]
Prepared Statement of Dr. P. Patrick Leahy, Associate Director for
Geology, U.S. Geological Survey, Department of the Interior
Mr. Chairman and Members of the Committee, thank you for this
opportunity to present, on behalf of the U.S. Geological Survey (USGS),
testimony regarding our national assessment of onshore oil and natural
gas resources. Additionally, the Committee has requested that we
include information recently provided by the Minerals Management
Service (MMS) to the Congress concerning estimates of the undiscovered
oil and natural gas resources of the Outer Continental Shelf (OCS).
Within the Federal Government, the USGS is responsible for
assessing undiscovered oil and gas resources of all onshore and State
offshore areas of the Nation. In February 1995, the USGS released the
National Assessment of United States Oil and Gas Resources. Currently,
we are updating that assessment in selected regions thought to have
high potential for undiscovered natural gas, including coal-bed methane
and gas hydrate. This update will be completed in 2004, with interim
products available in early 2002. The updated assessment will include
allocations of undiscovered oil and gas resources to Federal lands.
Additionally, the USGS is completing a National Coal Resource
Assessment during 2001. To date, coal resource assessments of the
Colorado Plateau and of the Northern Rocky Mountains and Great Plains
have been released, and coal resource assessments of the Appalachian
and Illinois Basins, and Gulf Coast Region will be available later in
2001. USGS coal assessments also identify volumes of coal under
Federally owned lands, and of Federally owned coal under privately
owned lands, where present.
MMS is responsible for developing estimates of Federal offshore
crude oil and natural gas resources. The most recent MMS resource
assessment was completed in 2000, and I will discuss some of the
highlights of that assessment later in my testimony. I would also like
to submit for the record a copy of the testimony MMS presented on its
most recent resource assessment before the House Resources Subcommittee
on Energy and Mineral Resources on March 22, 2001.
usgs 1995 national assessment of united states oil and gas resources
The 1995 USGS assessment of the Nation's onshore undiscovered oil
and gas was published in digital format on a CD-ROM (USGS Digital Data
Series-30) and in a non-technical summary, as USGS Circular 1118. The
Assessment was conducted in collaboration with State Geological
Surveys, with MMS, and with industry geologists under the auspices of
the American Association of Petroleum Geologists. Additional
cooperation with the Bureau of Land Management, National Park Service,
U.S. Forest Service, and Bureau of Indian Affairs was essential for the
USGS to generate information regarding oil and gas resources on Federal
lands. The current update of the 1995 assessment is being conducted
with many of the same partners.
Assuming existing technology, there are approximately 112 billion
barrels of technically recoverable oil onshore and in State waters,
according to the USGS's most recent assessment. Technically recoverable
resources are those that may be recoverable using current technology
without regard to cost. Economically recoverable resources are that
part of the technically recoverable resource for which economic factors
are included and which can be recovered at a given market price. This
includes measured (proved) reserves, future additions to reserves in
existing fields (reserve growth), and undiscovered resources. The
technically recoverable conventional resources of natural gas in
measured reserves, future additions to reserves in existing fields, and
undiscovered accumulations equal approximately 716 trillion cubic feet
of gas.
In addition to conventional gas resources, the USGS has made an
assessment of technically recoverable resources in continuous-type
(largely unconventional) accumulations. We estimate about 308 TCFG
(trillion cubic feet of gas) of technically recoverable natural gas in
continuous-type deposits in sandstones, shales, and chalks, and almost
50 TCFG of technically recoverable gas in coal beds. The total
technically recoverable oil and gas resource base onshore and in State
waters of the United States is displayed in the table below.
RESULTS OF THE USGS 1995 NATIONAL OIL AND GAS ASSESSMENT
------------------------------------------------------------------------
Natural gas
Oil Gas liquids
Resource category (billion (trillion (billion
barrels) cu. ft.) barrels)
1995 1995 1995
------------------------------------------------------------------------
Undiscovered resources
Conventional Accumulations........ 30 259 7
Unconventional Accumulations......
Sedimentary reservoirs.......... 2 308 2
Coal-bed methane................ NA 50 NA
Anticipated Reserve Growth.......... 60 322 13
------------------------------------------------------------------------
Total........................... 92 939 22
Proved Reserves (in 1994)........... 20 135 7
------------------------------------------------------------------------
Total........................... 112 1,074 29
------------------------------------------------------------------------
The estimates presented in this testimony reflect USGS
understanding as of January 1, 1994. They are intended to capture the
range of uncertainty, to provide indicators of the relative potential
of various petroleum provinces, and to provide a useful guide in
considering possible effects of future oil- and gas-related activities
within the United States.
The geographic information system (GIS) coverages contained in this
assessment and related databases provide the capability to estimate oil
and gas resource potential on specific tracts of land, including those
owned and/or managed by the Federal Government. This process is called
allocation, based on expert opinion, and is accomplished using a
methodology that takes into consideration all geologic information
available about the basin.
1995 national oil and gas assessment and onshore federal lands (1998)
In January 1998, the USGS published an Open-File Report (OFR 95-
0075-N) that reported estimates of volumes of undiscovered oil and gas
on Federal lands. Estimates of oil in undiscovered conventional fields
range from 4.4 to 12.8 billion barrels (BBO), with a mean value of 7.5
BBO. Estimates of technically recoverable gas in undiscovered
conventional fields range from 34.0 to 96.8 trillion cubic feet (TCF),
with a mean value of 57.9 TCF. Almost 85 percent of the assessed
natural gas in undiscovered conventional accumulations was non-
associated gas, that is, gas in gas fields rather than gas in oil
fields. Estimates of technically recoverable resources in conventional
(continuous type) accumulations for oil are from 0.2 to 0.6 BBO, with a
mean value of 0.3 BBO, and for gas, from 72.3 to 202.4 TCF, with a mean
value of 127.1 TCF. These ranges of estimates correspond to 95 percent
probability (19 in 20 chance) and 5 percent probability (1 in 20
chance) respectively, of a least those amounts occurring.
An economic evaluation was applied to these technically recoverable
estimates. Our study concluded that at $30 per barrel for oil and $3.34
per thousand cubic feet of gas, 3.3 BBO oil and 13.6 TCF in
undiscovered conventional fields can be found, developed, and produced.
In addition, at these estimated prices, 0.2 BBO oil and 11.4 TCF in
continuous-type accumulations and 11.8 TCF of coalbed gas can be
developed.
Estimated volumes of undiscovered oil, gas, and natural gas liquids
in onshore Federal lands, as of January 1994 are displayed in the table
below.
----------------------------------------------------------------------------------------------------------------
Technically Economically
recoverable recoverable*
---------------------------------------------
$18/bbl $30/bbl
F95 Mean F05 $2/mcf $3.34/mcf
----------------------------------------------------------------------------------------------------------------
Conventional
Oil (BBO) **.................................................... 4.4 7.5 12.8 1.6 3.3
Gas (TCF)....................................................... 34.0 57.9 96.8 9.7 13.6
NGL (BBL)....................................................... 1.1 1.8 2.7 0.7 0.9
Unconventional
Oil (BBO)....................................................... 0.2 0.3 0.6 0.1 0.1
Gas (TCF)....................................................... 72.4 127.1 202.4 6.1 11.4
NGL (BBL)....................................................... 0.1 1.5 2.6 0.0 0.1
Coalbed methane (TCF)........................................... 13.0 16.1 19.6 7.0 11.8
----------------------------------------------------------------------------------------------------------------
* Includes cost of finding, developing, and producing the resource. Based on mean values of technically
recoverable estimate.
** BBO=billion barrels oil; TCF=trillion cubic feet; BBL=billion barrels liquid, mcf=thousand cubic feet.
applications of the usgs 1995 national oil and gas resource assessment
The results of the USGS National Oil and Gas Resource Assessment
have been used by the Energy Information Administration for its Annual
Energy Outlook, by the California Energy Commission and Canadian Energy
Board to model inter-regional natural gas supply and demand and the
resulting economic impacts, and by numerous petroleum companies as a
basis for evaluating risk associated with exploration and development
of domestic oil and gas resources.
Many Federal agencies use the information in the USGS National Oil
and Gas Assessment for land-use planning, energy policy formulation,
and economic forecasting. Customers include the Department of the
Interior, Bureau of Land Management, National Park Service, U.S. Forest
Service, Bureau of Indian Affairs, Energy Information Administration,
and the Department of Energy, among others. In addition, most State
Geological Surveys and/or State Divisions of Oil and Gas use the USGS
assessment for regional and local resource evaluation and lease
planning purposes. Many private sector organizations also use the
digital oil and gas assessment results, including environmental
protection advocacy groups, petroleum exploration companies, and
utility companies (including natural gas and electricity utilities).
SEC. 604 ENERGY ACT OF 2000
The Secretary of the Interior is charged with conducting an
inventory of energy resources and the restrictions and impediments to
their development on Federal Lands in Section 604 of the Energy Act of
2000, signed into law on November 9, 2000. The exact text is given
below:
SEC. 604. SCIENTIFIC INVENTORY OF OIL AND GAS RESERVES.
IN GENERAL.--The Secretary of the Interior, in consultation with
the Secretaries of Agriculture and Energy, shall conduct an inventory
of all onshore Federal lands. The inventory shall identify--
(1) the United States Geological Survey reserve estimates of
the oil and gas resources underlying these lands; and
(2) the extent and nature of any restrictions or impediments
to the development of such resources.
(b) REGULAR UPDATE.--Once completed the USGS reserve estimates and
the surface availability data as provided in subsection (a)(2) shall be
regularly updated and made publicly available.
(c) INVENTORY.--The inventory shall be provided to the Committee on
Resources of the House of Representatives and to the Committee on
Energy and Natural Resources of the Senate within 2 years after the
date of the enactment of this section.
(d) AUTHORIZATION OF APPROPRIATIONS.--There are authorized to be
appropriated such sums as may be necessary to implement this section.
It is our understanding that the role of the USGS will be to assess
the oil and gas resources of oil and gas-bearing basins with Federal
land ownership, consistent with the USGS assessment and allocation
methodology. Then, USGS geologists will allocate resource estimates to
those specific land parcels owned by the Federal government. The USGS
resource estimates will be combined with reserve volumes from the DOE/
EIA, and will be incorporated into a geographic information system
(GIS) that shows the spatial distribution of those potential resources
and known reserves. The resource and reserve GIS will be integrated
with a GIS of restrictions and impediments constructed by BLM and USFS.
The USGS has met several times with representatives of the Bureau of
Land Management (BLM), the US Forest Service, the US Department of
Energy and their Energy Information Administration and the staff of
this committee to discuss plans to produce this inventory.
The USGS intends to use some of the resource estimates from the
1995 National Oil and Gas Assessment, for which there are not
significant new data, and will update resource estimates for the gas-
prone areas of the country for which we have new data and are
developing improved assessment methods.
the minerals management service's 2000 ocs resource assessment
As background, MMS's mission consists of two major programs:
Offshore Minerals Management and Minerals Revenue Management. The
leasing and oversight of mineral operations on the Outer Continental
Shelf (OCS) and all mineral revenue management functions for Federal
(onshore and offshore) and American Indian lands are centralized within
the bureau. In 2000, OCS oil and natural gas production accounted for
roughly 25 and 26 percent, respectively, or our nation's domestic
energy production--oil production was over 500 million barrels and
natural gas production was over 5 trillion cubic feet. The amount of
oil and natural gas production in 2000 was the most ever produced on
the OCS. In addition, in fiscal year 2000, MMS collected and
distributed about $7.8 billion in mineral leasing revenues from Federal
and American Indian lands.
In its role as manager of the Nation's OCS energy and non-energy
mineral resources, MMS is responsible for assessing those resources;
determining if they can be developed in an environmentally sound
manner; and if leased, regulating activities to ensure safety and
environmental protection. An integral element in that mission is to
identify the most promising areas of the OCS for the occurrence of
crude oil and natural gas accumulations and to quantify the amounts of
oil and natural gas that may exist in these areas.
Since its creation in 1982, MMS has completed four systematic
assessments of Federal OCS undiscovered oil and natural gas resources,
including its most recent assessment. The 2000 resource assessment was
done to support staff work and analysis needed in formulating the next
5-Year Oil and Gas Leasing Program covering the timeframe 2002-2007. It
should be noted that the methodology for the 2000 assessment has not
changed significantly from that used in the previous 1995 assessment.
The 2000 assessment presents the updated assessment results since
the 1995 assessment for the Alaska, Atlantic, and Gulf of Mexico OCS
Regions. In the Alaska Region only the Beaufort and Chukchi Seas, Hope
Basin, and Cook Inlet areas were updated, as other planning areas
lacked new data and changes since the last assessment. The Pacific OCS
Region was not updated for the same reasons. The Atlantic OCS Region
was re-evaluated to reflect recent exploration results offshore Nova
Scotia, current exploration and production technologies, and to make
the water depth divisions compatible with the ones now being used in
the Gulf of Mexico.
The MMS has recently made public the 2000 assessment, and I have
included a copy of the assessment with my written testimony for the
hearing record. MMS estimates that the total mean undiscovered,
conventionally recoverable resources for the United States OCS are 75.0
billion barrels of oil and 362.2 trillion cubic feet of natural gas.
Within that total, MMS determined that the undiscovered conventionally
recoverable resources foregone by the 1998 moratoria (i.e., the
President's June 1998 OCS decision) would be approximately 16 billion
barrels of oil and 62 trillion cubic feet of gas.
The total mean undiscovered economically recoverable resources for
the United States OCS are 26.6 billion barrels of oil and 116.8
trillion cubic feet of gas at prices of $18 per barrel and $2.11 per
thousand cubic feet, respectively, and 46.7 billion barrels of oil and
168.1 trillion cubic feet of gas at prices of $30 barrel and $3.52 per
thousand cubic feet, respectively.
Mr. Chairman, this concludes my remarks. However, I would be happy
to respond to any questions members of the committee may have.
The Chairman. I think when we get to your questions, we
will probably get some questions relative to how much of this
OCS is off-limits because of moratoria, and how much is
actually available.
Mr. Matt Simmons.
STATEMENT OF MATTHEW R. SIMMONS, PRESIDENT,
SIMMONS & COMPANY INTERNATIONAL
Mr. Simmons. Chairman Murkowski and Senators, I first of
all commend this important committee for conducting hearings on
the impediments to developing added oil and gas supplies. For
far too long this topic lingered on the sidelines of America's
critical issues. America no longer has the luxury of debating
whether domestic energy is important or not because we are now
in the early stages of, in my opinion, the most serious energy
crisis this country has ever faced. It will become more serious
over time, and if we do not correct the severe energy problems
we now face, America's economic future is grim.
As our energy crisis unfolds, it could become the most
critical threat to our economy since World War II. The energy
crisis is very real, as we have run out of virtually all spare
energy capacity in all three basic forms of energy: oil,
natural gas, and electricity. And we have run out of all three
almost simultaneously. We accidentally created a perfect energy
storm.
There are still many skeptics--most well-intended but
simply misinformed--who say the energy crisis is not real.
Other skeptics argue that even if the problem is real, the
solution is not on the supply end. This is merely a bad policy
of draining America first. Instead they would argue that we
should either conserve our way out of this problem or finally
embrace renewable energy which has been ignored for too long.
These concepts would be worthy topics to debate had we not
allowed a true crisis to arise. It is now time to buckle down
to the real energy issues we face, to roll up our sleeves and
finally solve our current energy mess.
Winter is finally coming to an end, and it became a true
energy winter of discontent, causing the most prosperous State
in the most affluent country on earth to suffer through
frequent energy blackouts. The Northeast got through the winter
without running out of heating oil but had Europe's winter been
colder, the record levels of Russian and European heating oil
we imported would not have spared yet another energy crisis on
our east coast, too. With winter ending, America now needs to
shift its focus to the threat of a potentially hot and humid
summer. If this summer's weather is as hot as the summer of
1999, peak electricity demand will be far higher than last year
and we could get ultimately get a wake up call with blackouts
that potentially stretching on both of our coasts at the same
time.
To make matters worse, our gasoline stocks are lower than
the low levels of a year ago, and reformulated additives are at
far lower levels. The grim reality is that we are now in the
early stages of a very serious energy crisis. For years America
had a comfortable cushion of spare energy capacity. In the
petroleum market, this was a combination of commercial
petroleum stocks with days or even weeks of extra supplies, but
we've whittled this down to less than a day, or even a few
hours, in too many aspects of our petroleum system. In natural
gas, our spare margin was a massive underground system of
natural gas storage. Today, natural gas storage levels are also
at historic lows.
In electricity margins, the reserve margins are now gone in
most States whenever weather reaches hot or cold extremes.
These energy problems cannot be ignored. I certainly do not
need to remind this committee that the U.S. economy has never
grown when energy consumption has declined. There are only two
ways to solve this problem. The easy way is to merely use a lot
less energy. On the surface, this sounds like a plea for energy
conservation, but anyone doing any hard analysis of the real
numbers will see the numbers do not work.
Let me give just two examples to illustrate this point. If
we suddenly had a fleet of one million 80-mile-per-gallon
vehicles on our roads taking the place of one million average
automobiles, this would only save 50 thousand barrels of oil
use each day. Ten wells or less in the deep water Gulf of
Mexico produces an equivalent energy amount. Refrigerator----
The Chairman. Could you repeat that?
Mr. Simmons. If we created a fleet of one million 80-mile-
per-gallon cars and they replaced one million conventional
cars, that would save 50 thousand barrels a day. Not much.
Refrigerators are the single biggest energy consumption
unit in all of our homes. If a new generation of refrigerators
using 50 percent less electricity suddenly took the place of
all 100 million refrigerators in all of our homes, this would
save 2.5 percent of the electricity use we use each day, or 1
percent of America's daily energy use.
Conservation is extremely important for America to embrace,
but it does not provide a silver bullet to solve our energy
crisis. Renewable energy sources are an important ingredient of
our long-term energy mix, but we need to be extremely realistic
about how tiny these future energy sources are. Less than one-
tenth of 1 percent of the electricity we use this year came
from wind, solar, and biomass. Take away biomass, and the
balance provides only one-thousandth of 1 percent of our
electricity use.
There is only one way to solve our energy problems, and the
solution involves increasing our energy supplies in all forms
of energy, including an ultimate return to more nuclear power
in the United States, and major increases in coal use,
hopefully accompanied by startling breakthroughs in clean coal
technology.
We can also never wean the country from imported oil and
imported natural gas, but it is a dangerous assumption to
believe that foreign imports of oil and gas will always solve
our severe energy crunch. Our infrastructure is simply not
plumbed for any additional foreign supplies, and the foreign
oil and gas markets are also getting very tight. No country is
ever going to supply our needs before taking care of their own
energy demands first. At the end of the day, we have to
increase our domestic supply of oil and natural gas, but
getting this done requires fast action by both public and
private sectors to begin eliminating all of the obstacles that
now make it so hard to make real gains in the supply of either
domestic gas or oil.
Access to where these reserves reside is obviously
extremely important. While it is politically popular to attack
the need to open up a few thousand acres of ANWR, this
important area could create several hundred thousand barrels a
day of extra oil and natural gas, and possibly even far more.
So it is too important to abandon. It is time for ANWR's
opponents to stop broadcasting photographs of pristine alpine
mountain meadows of areas within the 19 million acre reserve
which happen to be hundreds of miles away from where any oil
and gas development would ever take place.
Lease Sale 181 in the eastern portion of the Gulf of Mexico
is just as vital as ANWR, perhaps even more so. This highly
gas-prone area is over 100 miles west of Florida at its closest
point, but it is right next to the most efficient
infrastructure to bring these reserves to where they can be
consumed.
The Department of the Interior is just beginning a
critically important survey or inventory of all of the reserve
prospects to the lower 48 States. I would highly encourage
expanding this inventory assessment to the entire Outer
Continental Shelf of the United States, including the waters
offshore of California. This exercise does not commit any area
to development, it would merely help identify where emergency
relief might be found.
How tragic it would be to see the economy of a State like
California destroyed through a lack of natural gas and
electricity, all because natural gas lying just off its coast
was never developed. Access is not the only impediment to
increasing domestic supplies. The list of other barriers is
very lengthy. Many of these obstacles involve a fragile
capacity throughout most of the private sector. Few of the
various parts of the energy business have any near-term ability
to respond in any quick matter to creating more domestic supply
if all the access issues were resolved, but no private sector
participant is likely to begin a costly and complex expansion
of its capacity on the mere hope that access will someday be
granted.
Solving our energy crisis will take a long time. The
quicker our country gets started on this task, the sooner the
first signs of relief will occur.
Mr. Chairman, thank you for the opportunity to address this
hearing.
[The prepared statement of Mr. Simmons follows:]
Prepared Statement of Matthew R. Simmons, President,
Simmons & Company International
Chairman Murkowski and members of the Senate Energy and Natural
Resources Committee, I am Matthew Simmons, president of Simmons &
Company International, a specialized energy investment bank. I have
spent the past 28 years focusing exclusively on energy related
investment banking and energy research. I am a member of the National
Petroleum Council and was a member of the Bush-Cheney Energy Transition
Advisory Committee. I also am a past Chairman of the National Ocean
Industry Association. I served as the Demand Task Force Chairman on the
National Petroleum Council's extremely important review of natural gas
and the challenges we face in addressing a future market likely to
exceed 30 tcf per year.
I commend this important Senate Committee for conducting these
hearings today on the impediments to developing added domestic oil and
natural gas supplies. For far too long this topic lingered on the
sidelines of America's critical issues. While some would occasionally
warn that the country was taking its energy issues far too casually, as
long as cheap energy prices persisted and no energy shortages occurred,
it was hard for most Americans to focus on energy issues, particularly
if a serious review implied the need to ultimately pay higher prices
for a key resource that had become virtually free.
America no longer has the luxury of debating whether domestic
energy is important or not. We are now in the early stages of the most
serious energy crisis this country has ever faced. It will become more
serious over time and if we do not correct the severe energy problems
we now face, America's economic future is grim. As the energy crisis
unfolds, it could become the most critical threat to our economy since
World War II.
Many are still skeptical about the actual severity of this crisis.
Some think all of our energy problems are contained within the state of
California. But the problem is now not only nationwide, it is spreading
to most other parts of the globe. So, the USA makes a critical mistake
by assuming we can solve our nation's energy problem by simply
consuming more foreign energy supplies. This was one of the classic
energy mistakes California made. It assumed states like Arizona,
Nevada, Utah, Idaho, Oregon and Washington would always have ample
spare energy supply, on the slight chance California's internal
supplies ran out.
Our Energy Crisis is very real. We have run out of virtually all
spare energy capacity in all three basic forms of energy: oil, natural
gas and electricity and we ran out of all three almost simultaneously.
We accidentally created a perfect ``Energy Storm.''
America must take the lead in solving this crisis. There is no
other country with the resources, or the likely intent, to bail us out.
The idea of America continuing its economic expansion without being
able to expand its energy use is a true oxymoron. For the U.S. to
remain the leader of the world and also struggle with a chronic energy
shortage is just as far fetched. So we have now created a true crisis.
But true crises are when American ingenuity has historically been at
its best.
There are still many skeptics, most well intended but simply
misinformed, who say that the energy crisis is not real. Time Magazine
took a savage poke at the Bush Administration on this thesis just last
week. Other skeptics argue that even if the problem is real, the
solution is not on the supply end. This is merely a bad policy of
``Draining America First.'' Instead, we should either ``conserve'' our
way out of this problem or finally embrace renewable energy which has
been ignored for too long. Some argue that we need to do both and then
all our energy woes will be solved.
These concepts would also be worthy topics to debate, had we not
allowed a true crisis to arise. But, we failed to postpone this event
so the debate would be fruitless effort. It is now time to buckle down
to the real energy issues we face, to roll up our sleeves and finally
solve our current energy mess. After we solve the energy crisis, we can
return to a polite and gentlemanly debate on theoretical issues.
Winter is coming to an end. It became a true ``Energy Winter of
Discontent,'' causing the most prosperous state in the most affluent
country on earth to suffer through frequent energy blackouts. This
caused billions of dollars of lost productivity and took two first rate
triple A electric utilities to a point of insolvency. This should have
been a classic wake-up call for all Americans that something had gone
very wrong on our energy front. But too many viewed these problems as a
unique situation in California.
The Northeast got through the winter without running out of heating
oil, but had Europe's winter been colder, the record levels of Russian
and European heating oil we imported would not have spared yet another
energy crisis on the east coast too.
With winter ending, America needs to shift its focus to the threat
of a potentially hot and humid summer. If this summer's weather is as
hot as the summer of 1999, peak electricity demand will be far higher
than last year and we could get the ultimate wake-up call with
blackouts that potentially stretch from coast to coast.
To make matters worse, our gasoline stocks are lower than the low
levels of a year ago and reformulated additives are at far lower
levels. Unless a poor economy begins to slow America's driving habits
way down, we could face gasoline shortages, or at least high price
spikes at the same time as electricity problems envelope the country.
The grim reality is that we are now in the early stages of a very
serious energy crisis. It was no single entity's fault. Rather, it is
the cumulative effect of multiple energy mistakes stretching over the
past two or three decades. At the heart of the problem is that we all
consumed more energy than anyone planned to produce. So, energy demand
is constantly bumping against the daily ability to create energy
supply. There is only one irrefutable physical law about energy demand.
It cannot exceed supply without triggering shortages.
For years, America had a comfortable cushion of spare energy
capacity. In the petroleum markets, this spare capacity was a
combination of commercial petroleum stocks with days or even weeks of
extra supply. But, we whittled this down to less than a day, or even a
few hours in too many aspects of our petroleum supply. In natural gas,
our spare margin was in the massive underground system of natural gas
storage that gets built-up during the 7 months when heating needs are
minimal or non-existent. Today, natural gas storage levels are also at
historic lows, running a third less than last year's levels. In the
electricity market, various regional regulatory commissions mandated
stiff ``reserve margins'' of spare power generating capacity. Through
bad supply estimates and ultra-strong demand growth, these reserves are
now gone in most states whenever the weather reaches hot or cold
extremes.
These energy problems cannot be ignored or they will severely harm
our economy and cause pain and hardship to virtually every American. I
do not need to remind any of this committee that the U.S. economy has
never grown when energy consumption has declined. There are only two
ways to solve this problem. The easy way is to merely use a lot less
energy. On the surface, this sounds like a plea for energy
conservation. But if anyone does hard analysis of the real numbers, no
technology available within the next ten years eliminates enough energy
demand to make a dent on the severity and magnitude of the problem.
Let me give just two examples to illustrate this point. If we
suddenly had a fleet of 1 million 80-mile per gallon vehicles on our
roads, taking the place of 1 million average automobiles, this would
only save 50,000 barrels of oil use each day. Ten wells in the
deepwater Gulf of Mexico produces an equivalent energy amount.
Refrigerators are still the single biggest energy consumption unit in
many homes. If a new generation of refrigerators using 50% less
electricity suddenly took the place of all 100 million refrigerators in
all of our homes, this would only save 2.5% of the electricity we use
each day or only 1% of America's total daily energy use.
Conservation is important for America to embrace. But it does not
provide a ``silver bullet'' to solve our energy crisis. The only
available conservation measure that really works would be a major
shrinkage of our economy, possibly including cutting demand through
energy rationing and blackouts. Not a single American would wish this
on our country.
Renewable energy sources are an important ingredient of our long-
term energy mix but we need to be extremely realistic about how tiny
these future energy sources are. Less than 1/10th of 1% of the
electricity we used this year came from wind, solar, and biomass
burning. Take away biomass burning and the balance provides only one-
thousandth of 1% of our electricity use.
While some well-intentioned Americans would like to argue
otherwise, there is only one real way to solve these problems and the
solution involves increasing our energy supplies in ALL forms of
energy, including an ultimate return to more nuclear power in the USA
and major increases in coal use, hopefully accompanied by startling
breakthroughs in clean coal technology.
We can also never wean the country from imported oil and imported
natural gas but it is a dangerous assumption to believe that foreign
imports of oil and gas will always solve our severe energy crunch. Our
infrastructure is not ``plumbed'' for any additional foreign supplies
and the foreign oil and gas markets are also getting very tight. No
country is ever going to supply our needs before taking care of their
own energy demands first.
At the end of the day, we have to increase our domestic supply of
oil and natural gas as long as there is any reasonable prospect of
being able to do so.
But getting this done requires fast action by both public and
private sectors to begin eliminating all the obstacles that now make it
so hard to make real gains in the supply of either domestic oil or
natural gas.
Access to where these resources reside is obviously extremely
important. While it is politically popular to attack the need to open
up a few thousand acres of ANWR, the prospect that this important area
could create several hundred thousand barrels a day of extra oil and
possibly even far more, is too important to our economic future to
abandon this key resource because it is not politically popular to do
so. It is also important to realize that extra natural gas from ANWR
could help make one or even two pipelines economic, bringing additional
supplies to the gas-starved lower 48 states.
It is time for ANWR's opponents to stop broadcasting the
photographs of pristine alpine mountain meadows of areas within the 19
million acre wildlife reserve which happens to be hundreds of miles
away from where any oil and gas development would ever take place and
seriously examine the importance of these valuable reserves to our
country. Prudhoe Bay has demonstrated for over 30 years that oil
developments, the environment and ecology can live in harmony.
Lease Sale 161 in the Eastern portion of our Gulf of Mexico is just
as vital as ANWR, or even more so. This highly gas-prone area is over
100 miles west of Florida at its closest point. But, it is right next
to the most efficient infrastructure to bring these reserves to where
the will be consumed by all of America. If our natural gas supply turns
out to be as fragile as I worry it will be, the reserves lying beneath
Lease Sale 181 just might prevent Florida and Georgia from becoming the
next California.
The Department of the Interior is just beginning a critically
important survey or inventory of all the reserve prospects throughout
the lower 48 states. I applaud this effort but would highly encourage
expanding this inventory assessment to the entire Outer Continental
Shelf of the USA, including the waters offshore California. This
exercise does not commit any area to development. It would merely help
identify where emergency relief might be found. How tragic it would be
to see the economy of a state like California destroyed through a lack
of natural gas and electricity: all because natural gas, lying just off
its coast, was never developed.
Access is not the only impediment to increasing domestic supplies.
The list of other barriers is lengthy. Many of these obstacles involve
the fragile capacity through most of the private sector. Few of the
various parts of the energy business have any near term ability to
respond, in any quick manner, to creating more domestic supply if all
access issues were resolved.
But no private sector participant is likely to begin a costly and
complex expansion of its capacity on the mere hope that access will
someday be granted.
Solving our energy crisis will take a long time. The quicker our
country gets started on this task, the sooner the first signs of relief
will occur.
I applaud this committee for the comprehensive energy bills that
both sides of the aisle have tabled. In my opinion, energy is as just
as bipartisan an issue as our foreign policy. It is one of the few
issues that literally impact every single American. When we have
plentiful energy, everyone benefits. When we do not, we all suffer.
Mr. Chairman, thank you for the opportunity of addressing this
hearing.
The Chairman. Thank you very much, Mr. Simmons. I
appreciate that statement.
David Hayes, please proceed.
STATEMENT OF DAVID J. HAYES, FORMER DEPUTY SECRETARY OF THE
INTERIOR
Mr. Hayes. Thank you, Mr. Chairman. It is a pleasure to be
here back again. Thank you. I am the former Deputy Secretary of
Interior now, and on the private side I have submitted a
written statement for the record, Mr. Chairman.
The Chairman. It will be included in the record.
Mr. Hayes. Thank you.
I will make a few points orally. My focus will be on the
Federal lands piece this morning, Senators. I am not qualified
to speak on the general issue of what is obviously a very
serious energy situation, and there is obviously a need for
comprehensive policy. I know that Senators Bingaman, Daschle
and others have submitted a bill, and that the chairman and
others also have done so, and that the President will.
What I would like to talk about is give a little
perspective on the Federal lands piece, because I think there
are some great expectations about the potential for new energy
development on the Federal lands, and I would like to talk
about some of the realities of it, and also some of the
potential constraints per the subject of today's hearing.
First, a bit of history. There is a sense that oil and gas
development on Federal lands has been in decline. That is, in
fact, not the case. While there has been a long-term decline in
domestic oil production across the board since 1970, the high
water mark, and in fact the low point came in 1992 when oil
prices were extremely low, and then oil and gas drilling
activity in the United States was at its lowest level since
1942--since then on the Federal lands there have been
significant increases in oil and gas production.
Those statistics are laid out in our written statement, and
let me give a few examples. Chairman Murkowski, you mentioned
an important aspect of the increase has been in the deep water
Gulf where, in 1995, supported by this committee and signed by
President Clinton, deep water royalty relief led to very
significant increases in both oil and gas production in the
Gulf. In the last 2 years alone, gas production in deep Gulf of
Mexico waters increased by 80 percent. And overall in addition
to the Gulf increases, there have been significant oil and gas
drilling on both on-shore lands and in Alaska leading to, over
the 8 years of 1992 to 1980, an actual increase in the
contribution of energy from the Federal lands for the total
domestic energy picture.
In 1992, 13 percent of domestic oil and gas production came
from the Federal lands; last year, it was up to 25 percent. So
the contention that the Federal lands are essentially closed
for business is simply not correct. And, in fact, I would like
to talk about that a little bit more, if I can. There have been
efforts in the last few years that I think we should build on
to continue to open up some public lands for energy production.
One, in addition to the Gulf of Mexico example, where seven
thousand new leases were issued on the Outer Continental Shelf.
The National Petroleum Reserve in Alaska was opened up in 1998,
and up to 4 million new acres area available for oil and gas
production. A lease sale was held that netted 100 million
dollars in terms of bonus bids for those leases. Exploration is
only now beginning, but there should be great productivity from
that very large oil field.
Also in the Powder River basin there has been significant
new oil activity. BLM has issued over one thousand new permits
in Senator Thomas' backyard and is geared up to issue several
thousand more if we can get BLM the funding and the wherewithal
to help them proceed in that manner. They certainly have the
willingness, and had a green light from our administration, and
I am sure do from Secretary Norton as well. Also, the Clinton
administration in front of this committee agreed with Senator
Bingaman and the chairman that there should be a natural gas
pipeline from Alaska, and suggested that the Joint Pipeline
Office in Alaska would be a good forum for helping to expedite
permitting for such a pipeline.
As you know, there are 25 trillion cubic feet of natural
gas in the current Prudhoe Bay fields that are simply being
wasted, and it is appropriate to get a pipeline to bring
those----
The Chairman. Did you say wasted?
Mr. Hayes. Well, not utilized by Alaskans or for the lower
48.
The Chairman. Are they utilized for the recovery of oil?
Mr. Hayes. Yes, there is some reinjection. Wasted is too
strong a term.
The Chairman. I think you are right. I think it is too
strong a term.
Mr. Hayes. Let me amend my statement by saying that there's
25 trillion cubic feet of natural gas that could be
productively utilized by consumers in the lower 48 at Fairbanks
and in Alaska--I think there is strong bipartisan support for
that.
Now with regard to the issue of lands that are unavailable
for oil and gas drilling in the Federal domain--I would like to
talk about some of the areas. There is a potential here to
issue sweeping statements about unavailability of lands. It is
true that there are significant potential reserves that are
currently unavailable, but it's not helpful I do not think to
talk about large numbers.
Instead it is more helpful to look in breakdowns where
those lands are located. Perhaps the most significant lands
that are not available for oil and gas drilling are the
offshore resources that Dr. Leahy discussed--offshore
California, Washington and Oregon, also the east coast and down
into Florida. Most of that area was established as a moratorium
in 1990 by then-President George Bush and confirmed in an
Executive Order in 1992 which was reconfirmed by President
Clinton. The issue of opening up that moratorium is obviously
an important public policy issue, but to suggest that it can
easily be opened up as Senator Bingaman questioned is an issue
that will involve the public policy interests of all of the
members of those delegations in those States. I know that
Governor Jeb Bush and Governor Davis and many others feel very
strongly about the importance of maintaining those moratoria.
Let me close by mentioning the national monuments. This is
another area where there has been criticism of President
Clinton's naming of national monuments and a suggestion that
very large reserves of oil and gas were thereby put aside from
potential development. The Interior Department recently
reconfirmed a survey of oil and gas prospects in the 21
national monuments that were named during the Clinton
administration, and it confirmed that of those 21, only five
had potential oil and gas reserves.
One of the five are the offshore rocks in California which
are already subject to a moratorium; another of the five was in
the Canyon of the Ancients, southwest Colorado, where in fact
the monument designation allows continued leasing. The other
three, there were moderate oil and gas capabilities there--
Hanford Reach, Corizo Plain, and the upper Missouri River
Breaks, but the Interior Department analysis that was just
reached last month demonstrates that the quantities involved
are quite insignificant, particularly when compared with the
environmental values that are incorporated in those monuments.
So again, my main message here is that it's not helpful, I
do not think, to the debate to make sweeping statements about
lands that have been withdrawn from potential oil and gas
development. The facts show that concerted good policy can lead
to significant increases in oil and gas development on the
Federal lands, and on appropriate offshore areas. That is what
the track record has been in the 8 years of the Clinton
administration, and I am convinced that with your guidance it
can continue in that way.
I know the MMS has continued to promote the deep water Gulf
activity with new regulations that it came out with in working
with industry last fall, and I think it will be very helpful to
have the inventory that is now being conducted by the
Department of the Interior to see if there are further
administrative changes that can be done to help streamline the
permitting process to make sure that oil and gas reserves are,
and can be, productively produced with environmental
sensitivity, that those opportunities in fact do come on line,
because energy needs in the United States certainly are acute,
and the Federal lands have to play their part, but we need to
be realistic about what that part is.
Thank you very much.
[The prepared statement of Mr. Hayes follows:]
Prepared Statement of David J. Hayes, Former Deputy Secretary
of the Interior
My name is David J. Hayes. I am the former Deputy Secretary of the
Department of the Interior. I currently am practicing law in
Washington, D.C., as a partner at Latham & Watkins. I am appearing
today in my personal capacity, at the request of the Committee.
I appreciate the opportunity to testify on the important subject of
the development of domestic oil and gas resources in the United States.
My expertise on this issue relates to oil and gas development on the
public lands in the U.S., and I will focus my testimony on that
subject.
I would like to address four primary points in my testimony today:
1. Significant efforts have been made over the past few years to
enhance, where appropriate, oil and gas production from our public
lands. Even though energy prices remained very low throughout the
1990s, the pace of oil and gas production on federal lands increased
during the Clinton Administration, rising from 13% of total domestic
production in 1992 to approximately 25% of total domestic production in
1999.
2. Important new areas have been opened up for oil and gas
exploration in recent years and additional opportunities are available
for development including, in particular, 4 million acres in the
National Petroleum Reserve in Alaska that are newly available for oil
and gas production. Also, more than 25 trillion cubic feet of existing
natural gas supplies currently are available for export from Alaska''s
North Slope without any additional exploration or production
activities.
3. Although significant oil and gas opportunities continue to exist
on federal lands, some sensitive public lands are, and should be, off
limits for oil and gas production, in accordance with our nation's
longstanding recognition that some public lands and offshore resources
are inappropriate for oil and gas drilling. In addition, even if we
were to reverse course and impose a new federal mandate to engage in
new oil and gas drilling in, for example, the offshore waters of
California and Florida (to name two protected areas that have the most
significant potential reserves), opening up these protected areas for
new oil and gas production would not ``make the difference'' and lead
to energy independence for the United States.
4. A balanced energy policy is needed--one that continues to
address supply side needs by promoting responsible oil and gas
development on public and private lands in the United States and
encouraging the development of renewable energy sources, and a policy
that gives equal weight to demand side issues by addressing energy
efficiency and energy conservation. Our nation cannot and should not
expect new drilling activities on our federal lands to address and
resolve long-term supply and demand imbalances that have been in place
for several decades.
oil and gas production on public lands: the track record
There is a significant amount of revisionist history that is being
written regarding oil and gas production on our public lands. A myth is
being perpetuated that oil and gas development activities on federal
lands have been shut down in recent years, with the shut-down occurring
based on one-sided environmental concerns.
I would like to address the history as it stands, and take on the
myths that are being conjured up on this important issue.
First, for the history.
Domestic oil production in the United States has been declining for
several decades, after peaking in 1970 at 9.6 million barrels per day.
During the prior Bush Administration, domestic oil production decreased
by an average of 250,000 barrels per day each year. During the last
year alone (1992), domestic gas and oil drilling activity decreased by
nearly 17%, and was at its lowest level since 1942.
The causes for these declines are varied including, in particular,
plentiful global oil supplies, including significant new sources of
supplies from non-OPEC nations, and correspondingly depressed prices.
Except for the oil price spike associated with the Gulf war, the
average price of crude oil during the 1990s approximated $15 per
barrel. The price of natural gas, while less volatile, also was quite
low at $1.83 per million cubic feet (mcf) due to a ``gas bubble'' of
excess supply following restructuring in the natural gas markets.
Indeed, the Asian recession which began in late 1997, coupled with an
increase in OPEC production, caused the world oil price to fall to $10
per barrel by the end of 1998.
Despite these severe price pressures, several steps were taken in
the Clinton Administration to maintain healthy levels of oil and gas
production on federal lands. Deep water royalty incentives, proposed by
former Senator Johnston and supported by the Clinton Administration,
contributed to a 65% increase in offshore oil production over the last
eight years. This new incentive system also boosted natural gas
production dramatically, with gas production in deep Gulf of Mexico
waters increasing by 80% in the past two years alone. The previous
administration also implemented royalty reductions on marginal oil
wells and heavy oil on federal lands to maintain production and ensure
maximum recovery. (Other proposals, including President Clinton's
request for nearly $1 billion in tax incentives for the oil and gas
industry unfortunately were not implemented by Congress.)
I have attached an exhibit that was prepared by career staff at the
Department of the Interior which tracks overall oil and gas production,
and outer-continental shelf leasing activity, during the past twenty
years. The data confirm that oil and gas production on federal lands
have continued at a robust pace, despite unfavorable world prices,
throughout the past decade. Indeed, as I summarized in testimony that I
presented to this Committee on July 26 of last year, the contribution
of oil and gas production from the federal lands, as a percentage of
overall domestic oil and gas production, increased from 13% in 1992, to
25% of total domestic production in 1999.
``CLOSING OFF'' FEDERAL LANDS FOR OIL AND GAS PRODUCTION:
SOME ADDITIONAL FACTS
In addition to the myth that oil and gas production declined
unacceptably during the Clinton Administration, a corollary myth has
developed: namely, that the Clinton Administration inappropriately and
without balanced decisionmaking--closed off large areas of productive
lands from oil and gas production due to one-sided environmental
concerns.
At the outset, it is important to note that the previous
Administration took significant steps to open up significant new areas
of federal lands for exploration and production. The vast expansion of
deep water natural gas production in the Gulf of Mexico is one notable
example. From 1992 to 2000, 7,091 new leases were issued on the Outer
Continental shelf, covering approximately 38 million acres.
Of equal note is the opening up of nearly 4 million acres of the
National Petroleum Reserve in Alaska for oil and gas exploration and
production in 1998. Exploration of these vast new lands, adjacent to
the existing Prudhoe Bay fields, is now underway, following an initial
lease sale that netted more than $100 million dollars for the U.S.
treasury.
Likewise, when it appeared that the Powder River Basin could become
a productive oil producing region, the Bureau of Land Management geared
up its permitting effort in the area. BLM is in the process of granting
more than a thousand permits to drill in that Basin, with many more
expected to follow.
Finally, the Clinton Administration indicated its willingness last
year to help facilitate the construction of a new natural gas pipeline
from the North Slope of Alaska that would bring to market the more than
25 trillion cubic feet (tcf) of known natural gas reserves that
currently are available at Prudhoe Bay. These unutilized natural gas
supplies can, and should, be made available to Alaskans, and to
Americans in the lower 48.
With regard to potentially productive public lands that are closed
to development, many of these lands have been unavailable to oil and
gas development for many years, based on a recognition that not all of
the nation''s shared landscapes are appropriate for oil and gas
drilling activity. The National Arctic Wildlife Refuge illustrates this
point. In 1980, Congress explicitly stated that ``production of oil and
gas from the Arctic National Wildlife Refuge is prohibited and no
leasing or other development leading to production of oil and gas from
the range shall be undertaken until authorized by an Act of Congress.''
(See Section 1003 of ANILCA; 16 U.S.C. 3143.) In accordance with
Congress' explicit instruction, the Arctic Refuge has been, and
continues to be, unavailable for oil and gas production activity.\1\
---------------------------------------------------------------------------
\1\ In previous testimony before this Committee, on April 5, 2000,
I outlined the reasons why it is appropriate to continue to honor the
long-standing restriction on exploration and production activities in
the Arctic Refuge. The area proposed for drilling is the coastal plain
that has been called the ``biological heart'' of the Refuge because it
is the primary calving grounds for the Porcupine Caribou Herd. Unlike
the Prudhoe Bay area, the coastal plain narrows significantly in the
Arctic Refuge, inviting a direct conflict between the untouched
wilderness and proposed oil and gas drilling, pipeline infrastructure,
and related industrial activities. In addition, because it appears that
oil and gas reserves in the Arctic Refuge are spread out in several
pools, rather in one large formation like Prudhoe Bay, additional
``footprints'' and pipeline connections may be required to develop oil
and gas resources in the area. Finally, water resources are much more
limited in the coastal plain area of the Arctic Refuge, as compared
with the Prudhoe Bay region. Substantial water consumption is required
for oil and gas activities; utilizing the limited available water
supplies would likely negatively impact the existing ecosystem. (The
construction of ice roads requires approximately 1.35 million gallons
of water per mile and 30,000 gallons of water per day is necessary to
support a drilling rig. Exploratory wells require approximately 15
million gallons of water per well.)
---------------------------------------------------------------------------
Likewise, long-standing concerns have led to the imposition of a
moratorium on additional oil and gas production off of the California
coast, and in the offshore waters of Florida, and other East Coast
states. These moratoria are not new, and they do not represent ill-
considered policy choices that can or should simply be reversed.
The moratorium on oil and gas leasing activity in offshore
California, for example, was initiated by President Bush in 1990, and
reaffirmed in a 1992 presidential directive. (President Bush's
presidential directive also covered waters offshore of Washington,
Oregon, Florida, and New England (George's Bank)). When campaigning,
now-President Bush indicated that he intends to continue to honor his
father's actions, at least as they relate to the continued ban on new
drilling in California's offshore waters.
Limitations on drilling offshore of the Eastern States likewise has
a bipartisan history. The current dispute regarding potential lease
sale 181 in the eastern Gulf of Mexico illustrates the point. The USGS
and MMS have indicated that a very large reservoir of natural gas is
available at this lease location, but Governor Jeb Bush of Florida has
objected to moving forward with proposed development of that site. I
assume that President Bush will honor Governor Bush's wishes and
decline to proceed with drilling in this gas-rich area.
As these examples demonstrate, important facts lie behind the
``restrictions'' on oil and gas development on federal lands that
typically are presented in sweeping, unqualified terms (as, for
example, in the National Petroleum Council's recent report). No one
should assume that lease restrictions reflect arbitrary decisionmaking
that can or should be easily undone or reversed through broad policy
pronouncements.
Finally, of course, our nation has a long history of restricting
oil and gas leasing activity on sensitive landscapes. We would not
accept drilling for oil or gas in our National Parks, or in many other
treasured public lands. Because we have made this policy choice, our
nation loses the potential energy potential associated with the
extraordinary geothermal resources in Yellowstone Park, the potential
hydropower available if we were to flood the Grand Canyon, or potential
oil or gas production from the red rock canyons of Bryce or Zion, or
from the Indian ruins at Mesa Verde. But in all of these cases we have
recognized, and are honoring, competing values associated with
conserving these lands in their natural state.
Against this historic backdrop, President Clinton set aside
approximately 5 million acres of public lands as national monuments
that should be protected from further development. The United States
Geological Survey recently confirmed that only 5 out of the 21 national
monuments had moderate to high probability for the occurrence of oil
and gas resources. Of these five, one of the monuments (California
Coastal National Monument) is covered by the existing moratorium on
off-shore California lease sales, three of the others allow continued
oil and gas development under existing leases (Carrizo Plain National
Monument; Hanford Reach National Monument; Upper Missouri River Breaks
National Monument), and the fifth monument, Canyons of the Ancients, is
open to further leasing.
While new exploration and production activities will not be allowed
in most of these special places, this limitation is fitting, and
consistent with long-standing American values, given the unique
treasures that these lands hold. In any event, the total acreage
covered by these four national monument is less than one million
acres--far less than 1 percent of the Bureau of Land Management's land
base.\2\
---------------------------------------------------------------------------
\2\ One of the witnesses testifying today alleges that the
designation of the Grand Staircase-Escalante Monument in Utah in 1996
withdrew promising valid oil and gas leases on state lands. A recent
USGS report confirms that oil and gas reserves in Grand Staircase-
Escalante are not significant. Recent history confirms this
observation. Pursuant to the Utah Schools and Land Exchange Act of
1998, state leases in the monument were converted into federal leases,
and were allowed to be developed. Conoco subsequently drilled wells in
the monument, but it is my understanding that none of the wells
produced viable quantities of oil or gas, and that leaseholders are
allowing existing leases in the monument to expire.
---------------------------------------------------------------------------
The story is the same for other areas that are being protected for
environmental purposes. In connection with the limitations on
development in the roadless areas of our National Forests, for example,
it is my understanding that the oil and gas industry historically has
demonstrated limited interest, over the years, in pursuing these remote
areas for oil and gas production. (In those limited areas in which the
oil and gas industry has shown interest, and where they have leased
federal lands for oil and gas exploration or production purposes, such
activities will remain unaffected by the roadless rule.) I understand
that additional studies of these areas are now underway, and I will
defer further discussion of these points to those who are more
knowledgeable than I am about these National Forest lands.
CONSTRUCTING A BALANCED ENERGY POLICY
As the testimony indicates, reversing public policy decisions and
seeking to open up protected lands for new oil and gas production--be
they in offshore waters, in the Arctic Refuge, or in national
monuments--would raise fundamental public policy issues. While it
certainly is appropriate to discuss these policy issues, it would not
be responsible, in my view, to assert that there are economically and
politically realistic opportunities to increase oil and gas production
on our public lands so as to achieve domestic ``energy independence.''
Our nation is consuming 9.6 million barrels of oil per day. While
domestic production on public lands has held its own in recent years
(see Attachment A), we have been importing more than 50% of our
nation''s oil needs for many years. Even if we were able to reverse the
long-term declining trend of domestic oil production, and greatly
increase our oil production on federal lands, there is no plausible
scenario by which new oil production from our federal lands (which
supplies approximately 10% of our total oil needs) could enable the
United States to become independent of the foreign oil markets, or even
to reduce our oil imports to less than 50% of our total needs.
A balanced energy policy is needed--one that continues to address
supply side needs by promoting responsible oil and gas development on
public and private lands in the United States, and provides incentives
for the development of renewable energy sources, and a policy that
gives equal weight to demand side issues by addressing energy
efficiency issues, and energy conservation needs.
Thank you for the invitation to present testimony on this important
topic.
ATTACHMENT A
PRODUCTION OF OIL, GAS, AND COAL FROM OFFSHORE AND ONSHORE FEDERAL &
INDIAN LANDS--1981 TO 2000
------------------------------------------------------------------------
Oil Coal
(Barrels Gas (short tons
x 10\6\) (BCF) x 10\6\)
------------------------------------------------------------------------
Clinton Administration (1993-2000 *)... 18,615 156,705 8,477
Bush Administration (1989-1992)........ 10,788 73,933 4,004
Reagan Administration (1981-1988)...... 25,154 142,674 6,983
------------------------------------------------------------------------
* (CY2000 data is preliminary)
OUTER CONTINENTAL SHELF LEASING
----------------------------------------------------------------------------------------------------------------
Reagan Bush Clinton
administration administration administration
1981-1988 (8 1989-1992 (4 1993-2000 (8
years) years) years)
-----------------------------------------------
Gulf Gulf Gulf
Total of Total of Total of
OCS Mexico OCS Mexico OCS Mexico
----------------------------------------------------------------------------------------------------------------
Tracts Leased................................................... 6,509 4,948 2,754 2,669 7,091 7,032
Million Acres Leased............................................ 34.7 26.0 14.2 13.8 37.7 37.5
----------------------------------------------------------------------------------------------------------------
The Chairman. Mr. Mark Rubin. Mr. Rubin is upstream
manager, American Petroleum Institute.
STATEMENT OF MARK RUBIN, GENERAL MANAGER, UPSTREAM, AMERICAN
PETROLEUM INSTITUTE
Mr. Rubin. Thank you. I appreciate this opportunity to
discuss oil and natural gas issues on behalf of API's over 400
member companies. We are very appreciative of the efforts by
the chairman and ranking member of the committee to forge
energy legislation and are encouraged by much of what we see in
the two bills that have already been introduced.
Federal offshore production now supplies 24 percent of the
oil and 27 percent of the gas produced in the United States,
and DOE forecasts that offshore production will rise to nearly
a third of our domestic oil and gas supply within a decade.
Clearly we must maintain access to those areas currently open
to development in the Gulf of Mexico and elsewhere, including
that small portion of the eastern Gulf included in Federal OCS
Sale 181 scheduled for December.
We are encouraged that Senator Bingaman's legislation S.
596 endorses this lease sale. We continue to believe, however,
that the sale should include all of the tracts planned for the
sale volume in this. To do otherwise would significantly reduce
the amount of energy, natural gas in particular, that Sale 181
is expected to provide.
The 3,900 oil and gas platforms operating offshore have an
outstanding safety environmental record. U.S. offshore
exploration production are among the most heavily-regulated
activities in this country and meet the world's most stringent
government regulations and industry standards. Protecting the
environment is a national imperative, and our operations have
an impressive record of protecting coastal waters.
Moving to onshore, last fall this committee directed the
Departments of the Interior and Energy and the Forest Service
to conduct an inventory of oil and natural gas resources on
onshore government lands and identify the restrictions limiting
access as part of the reauthorization of the Energy Policy and
Conservation Act. This inventory is critical to creating a more
informed decision-making process that will allow Congress and
the agencies to focus attention on providing access to the
areas with the greatest potential for oil and natural gas
production.
Over the last several years, we have seen numerous
decisions that have eliminated access to millions of acres with
high potential for oil and natural gas exploration. DOE studied
the recently-adopted Forest Service roadless moratorium and
identified significant oil and natural gas resource potential.
What is more, the vast majority of these resources could have
been developed if the Forest Service had merely withheld a
small amount of the roadless area from the final rule. In the
Rocky Mountains, for instance, access to 83 percent of the
total gas resources in the roadless areas could have been
preserved with a less than 5 percent reduction in the acreage
included nationwide.
Recently, as Mr. Hayes mentioned, the USGS conducted an
assessment of the new national monuments designated since 1996
and found that five of these monuments had moderate to high
potential for oil and gas resources. We believe that these
actions underscore the importance of understanding the resource
potential of government lands before such far-reaching
decisions are made, not afterwards. And although, as Mr. Hayes
mentioned, production from Western U.S. lands has actually
increased over the last several years, the actual amount of
producing acreage in the West on Federal lands has actually
declined since 1990.
Alaska still holds much promise for new energy development,
not only in ANWR, but in also in the National Petroleum Reserve
in Alaska west of Prudhoe Bay. These are areas where advanced
technology has allowed us to make great strides in developing
fields with little impact to the environment.
For example, in Phillips' Alpine field, only 97 acres are
needed on the surface to produce from 40 thousand sub-surface
acres. North Slope exploration takes place during the winter
using ice roads and ice pads that melt in the spring, leaving
no trace of exploration activities.
These technological advances would allow us to limit our
impact in the coastal plain of ANWR, should Congress decide to
allow development. In spite of the claims to the contrary by
those who oppose opening ANWR, the resource potential in ANWR
is enormous. The EIA predicted that if oil is found in ANWR,
the area could produce well over 1 million barrels per day for
over 20 years. Anyone who doubts the positive impact this could
have for consumers should consider the fact that when OPEC
recently decided to reduce production to affect the price of
oil, they cut their production by 1 million barrels per day.
If our industry is given the opportunity to explore for and
produce our country's oil and natural gas resources, it is the
U.S. consumer who will derive the greatest benefit. We are
willing to make enormous investments to increase domestic
production of both oil and gas, and to do so in a manner that
minimizes environmental impacts, but we must have access to our
national resources for exploration and production. Thank you.
[The prepared statement of Mr. Rubin follows:]
Prepared Statement of Mark Rubin, General Manager, Upstream,
American Petroleum Institute
The American Petroleum Institute (API) welcomes this opportunity to
present the views of its member companies on the question access to
government lands for the United States. API is a national trade
association representing over more than 400 companies engaged in all
sectors of the U.S. oil and natural gas industry, including
exploration, production, refining, distribution, and marketing.
We are gratified that this committee is working towards a national
energy policy. For too long, energy has been an afterthought, rather
than a key component of government decision-making. This has to change.
The events of the past year--heating oil problems in New England,
gasoline shortfalls in the Midwest, and the California electric power
disruptions--have forced us to start thinking comprehensively about the
energy issues facing our country. The only way we can deal with these
issues is by forging an effective national energy policy.
Fundamentally, a sound national energy policy will be market-based,
rely on all forms of energy, encourage technological advancement,
improve energy efficiency and conservation, and ensure environmental
quality.
We applaud the Bush Administration for creating a cabinet-level
task force on the subject, and we are encouraged that you and other
members of Congress of both parties are putting energy policy at the
top of your agenda.
It is important to emphasize one point: Americans can be provided
with reliable and affordable energy supplies and a clean environment.
This is not an either-or situation. We are confident that, with the
proper changes in the policy arena, we can help keep the nation
supplied with fuel while at the same time continuing to improve our
technology for the future--technology that will also enable further
extraordinary environmental gains.
That is the encouraging news. The sobering news is that there are
no quick fixes to a serious situation that has developed over the last
25 years. It will take some years to rectify our energy problems.
Our nation is going through a period of economic uncertainty. We do
not know whether this will turn out to be a bump in the road or the
beginning of an economic downturn. What we do know is that every 2-
percent growth in Gross Domestic Product requires an almost 1-percent
growth in energy usage. If we are to continue America's economic
prosperity, creating jobs and wealth for our growing population, we
must have the affordable, reliable energy that fuels our economy and
supports our way of life.
We must face the fact, though, that our energy infrastructure is
straining at the seams and barely keeping up. Let me cite some
examples:
U.S. crude oil production peaked in 1970 at 9.6 million
barrels per day (B/D). During 2000, it averaged 5.8 million B/
D, some 40 percent less than 30 years earlier;
U.S. oil imports are meeting 57 percent of U.S. needs,
compared to 47 percent 10 years ago and 35.7 percent 20 years
ago;
In the face of tremendous demand, U.S. production of natural
gas declined 14 percent between 1973 and 1999;
Half the nation's refineries closed their doors over the
past 20 years, and not a single new major refinery has been
built in the U.S. in more than 20 years. The refineries we do
have operate at well more than 90 percent capacity on average,
at times exceeding 95 percent.
The continuing California crisis underscores the serious
electric supply problems we face; and
No orders for new nuclear units have been placed since 1978,
and no construction permits have been granted since 1979.
Today I will focus on the two energy sources provided by my
industry: oil and natural gas--and what we see ahead.
CRUDE OIL
The petroleum industry is vertically integrated. That is, we finds,
produces, and transports crude oil, and then refines it into a wide
variety of products that we deliver to the retail level. A
comprehensive national energy policy requires that we address both our
capacity to produce crude oil and natural gas as well as our capacity
to refine and distribute petroleum products.
Chart No. 1 shows how the Department of Energy forecasts U.S.
energy consumption by fuel between 1999 and 2020. Natural gas rises
from 23 percent of consumption in 1999 to 28 percent in 2020, while oil
maintains its current share. This reflects the reality that 70 percent
of petroleum consumed in the United States is for transportation. Most
recent energy studies agree that this share is likely to continue well
into this century--even with strong increases in energy efficiency and
a rapid infusion of new technology. Thus, we need to focus on our
future needs for reasonably priced petroleum products and not be misled
by the false hope that new and dramatically cheaper sources of
renewable fuels are available just around the corner. Such hopes have
led us in the past to waste billions of dollars on government efforts
to develop and promote so-called renewable and alternative fuels that
turned out to be expensive and unavailable. However, renewables used in
gasoline--ethanol--play an important role and will continue growing
well into the future.
Chart No. 2 shows how we are becoming more and more dependent on
oil imports. This dependency now amounts to about 57 percent of U.S.
oil demand. DOE projects that 64 percent of oil demand will be met by
imports in 2020.
In order to ensure reliable and secure sources of oil, we have no
choice but to diversify the sources of our supplies, both domestic and
foreign, and to increase both. To do this, we must remove the barriers
that currently impede the U.S. oil and natural gas industry's ability
to compete both domestically and abroad.
THE NEED FOR ACCESS
What is access to government lands? The U.S. oil and gas industry
does not ask to drill on parklands or in wilderness areas set aside by
acts of Congress. Rather, we seek access to areas offshore, in Alaska
and in the American West that have been designated as ``multiple-use''
by Congress so that numerous activities can take place there.
Most of these multiple-use areas are simply vast expanses of
nondescript federal lands. However, because they lack the beauty and
grandeur of the Grand Canyon or the Grand Tetons does not mean that we
treat them with less respect than we do any other lands entrusted to us
by the government, or by private landowners. Most people driving near
or hiking in one of these areas would be hard-pressed to locate one of
our facilities once the drilling rig is removed. Safety and
environmental protection are critical concerns, regardless of the
location of drilling, and where our contractual obligations with the
government require us to, we return the land to its original condition
once drilling and production cease.
Yet, despite our record of sound stewardship, President Clinton
used his executive powers under the Antiquities Act to bar oil and gas
exploration and other activities on vast regions of government lands.
For example, the designation of the Grand Staircase-Escalante
Monument in Utah in 1996 summarily withdrew promising valid oil and gas
leases on state lands without even notice to or consultation with state
and local authorities, or affected communities. Likewise, the U.S.
Forest Service recently banned our companies from exploring for oil and
natural gas on promising government lands when it published rules to
bar road building on nearly 60 million acres in the Forest System that,
according to a Department of Energy study, could hold 11 trillion cubic
feet of natural gas.
In the lower-48 states, a study by the Cooperating Associations
Forum found that federal lease acreage available for oil and gas
exploration and production in eight Western states (California,
Colorado, Montana, Nevada, New Mexico, North Dakota, Utah and Wyoming)
decreased by more than 60 percent between 1983 and 1997--and that does
not count the major land withdrawals, such as Monument designations,
since 1997.
Approximately 205 million acres of federal lands in these states
are under the control of two federal agencies with broad discretionary
powers. The Bureau of Land Management (BLM), whose land management
planning authority is derived from the FLPMA of 1976, and the U.S.
Forest Service (USFS), whose jurisdiction is derived from the National
Forest Management Act, administer these federal, non-park lands. (Chart
#3 shows the extent of government lands.)
Both agencies are required to manage lands they administer under
the congressionally mandated concept of multiple use. Yet, BLM and USFS
discretionary actions have withdrawn federal lands from leasing, and
long delayed other leasing decisions and project permitting.
Congress has directed the BLM and Forest Service to allocate non-
wilderness lands for resource use, identify areas that are available
for oil and gas leasing, identify important wildlife habitat areas, and
inventory wilderness candidate lands among other uses. Each agency has
completed land resource management plans for the lands they administer,
including lands that are candidates for wilderness designation. Yet,
some lands found unsuitable for wilderness designation are, however,
managed as ``wilderness study areas,'' effectively removing
approximately 28 million acres inappropriately from consideration for
resource development. Further, these agencies often dictate
extraordinary lease stipulations as conditions of approval for
exploration and production. Stipulations are intended to protect
resource values in conjunction with proposed projects, such as
exploratory wells, yet many conditions required, such as ``no surface
occupancy,'' essentially preclude exploration and production from
occurring.
Moreover, Congress has refused to authorize exploration on the
small section of the Arctic National Wildlife Refuge (ANWR) that was
specifically set aside by law for exploration in 1980. DOE's Energy
Information Administration estimates that the ANWR coastal plain
contains between 5.7 billion and 16 billion barrels of technically
recoverable oil. The coastal plain provides the best prospect in North
America for a new giant, Prudhoe Bay-sized oil field.
As a result of the enormous technological advances of recent years,
only an estimated 2,000 acres would be affected by ANWR development--
out of the 1.5 million-acre coastal plain and the total ANWR area of
19.8 million acres. Moreover, Prudhoe Bay oil operations, located 60
miles to the west of ANWR, have been underway for nearly a quarter
century and have produced more than 10 billion barrels of oil during
that time. Prudhoe Bay is among the most environmentally sensitive oil
operations in the world. For example, the Central Arctic caribou herd
at Prudhoe Bay has grown from 5,000 to 27,000 over the last 25 years.
The industry's North Slope record provides overwhelming evidence that
ANWR coastal plain development would not be harmful to the Arctic
ecology and wildlife.
We have heard, repeatedly, the charge that ANWR represents only 6
months (or some finite amount) of U.S. consumption. There are several
analyses that put this erroneous charge in perspective.
The United States consumes 20 million barrels of oil a day. Today,
no source supplies more than 8.4 percent (Canada's share in 2000) of
U.S. consumption. Prudhoe Bay, which was estimated to hold 9.6 billion
barrels when discovered, represented only 261 days supply. But, in
reality, it has supplied an average of 9 percent, and as much as 12
percent, of our daily consumption for the last 24 years. ANWR reserves
may be in the same ballpark.
If all the oil in Prudhoe were delivered at once, we would have
consumed it in 9 months. That, of course, is a physical impossibility
and distorts the true value of oil discoveries.
Prudhoe production, though representing only 9 percent of
consumption, has allowed the U.S. to avoid importation of 1.6 million
barrels per day, keeping $289 billion from flowing out of the United
States.
And we know that small changes in supply can have dramatic impacts
on price. For example, in March 2000, OPEC increased production by 1.7
million barrels per day (2 percent of world supply) and crude oil
prices dropped by $10 a barrel. Thus, a permanent increase in world
supply because of ANWR is likely to have a significant impact on world
crude oil prices. This price impact is important since for every dollar
decline in world prices, the U.S. import bill declines by $4 billion
per year.
Offshore, the OCS has assumed increasing importance to U.S. energy
supply over the past half century. The federal portion of the OCS now
supplies 24 percent and 27 percent of the gas produced in the United
States. Offshore production promises to play an even more significant
role in the future. The Department of Energy forecasts that offshore
production will rise to nearly a third of our domestic oil and gas
supply within a decade.
Technological revolutions, such as 3-D seismic profiling of
promising structures, coupled with astounding computer power and
directional drilling techniques which allow numerous reservoirs to be
accessed from one drill site have driven down the costs of finding oil
and gas. And at the same time these technologies allow development with
much less disturbance to the environment. Tremendous advances in our
ability to drill and produce in the deep waters of the Gulf have also
resulted in vast new reserves being added to our resource base. The
Deepwater Royalty Relief Act developed by this Committee, and passed by
Congress in 1995, has significantly aided that endeavor. Those in the
federal government who are most familiar with our industry have lauded
our technological advances.
A 1999 DOE report, Environmental Benefits of Advanced Oil and Gas
Exploration and Production Technology, stated that, ``. . . innovative
E&P approaches are making a difference to the environment. With
advanced technologies, the oil and gas industry can pinpoint resources
more accurately, extract them more efficiently and with less surface
disturbance, minimize associated wastes, and, ultimately, restore sites
to original or better condition. . . . [The industry] has integrated an
environmental ethic into its business and culture and operations . . .
[and] has come to recognize that high environmental standards and
responsible development are good business. . . .''
However, there is now accumulating evidence that resource depletion
is overtaking the effects of technical advances on the cost structure
of OCS development. The volume of reserves added per dollar of capital
spent in the OCS has been falling steadily since the early 1990s.
Because of increased demand, reserves are being depleted at an ever-
increasing rate. Because of more efficient extraction technologies, the
decline from new gas wells is now estimated to be as high as 40 percent
per year.
This does not suggest the imminent collapse of OCS production, but
it does suggest that the drilling and capital expenditures required to
replace and augment reserves will become increasingly important. We
must increase deepwater development, and provide access to areas
presently restricted. Currently, presidential moratoria, and annual
Interior appropriations bill riders preclude leasing in most of the
Eastern Gulf of Mexico, the entire Atlantic and Pacific federal OCS,
and portions of offshore Alaska.
Moreover, the ``consistency'' provisions of the Coastal Zone
Management Act (CZMA), under the guise of due process and consultation,
have caused serious duplicative and incredibly costly delays to federal
OCS leasing and production activities that would have no adverse
environmental impacts on states' coastal zones. And regulations issued
by the National Oceanic and Atmospheric Administration (NOAA) in the
last days of the Clinton Administration appear to add impediments to
environmentally compatible energy development in the OCS, contrary to
the balancing of competing interests directed by Congress when it
enacted the CZMA. Both the summary withdrawal of multiple use
government lands without stakeholder consultation under the Antiquities
Act, and the endless due process used by opponents to block federal
offshore production that does not affect a state's coastal zone are
extreme, and must be moderated.
The nation will soon have a great opportunity to augment its
reserves. Federal OCS Lease Sale 181 represents a plan for leasing by
the Department of the Interior in the Eastern Gulf of Mexico Planning
Area. Scheduled since the mid-1990s, Sale 181 is slated to be conducted
in December 2001. The sale area is based on comprehensive environmental
reviews, and consultations between former Secretary of the Interior
Bruce Babbitt and then-Governors Lawton Chiles of Florida and Fob James
of Alabama. We are encouraged that Senator Bingaman and the other
sponsors of S. 596 have endorsed the lease. We continue to believe,
however, that the sale As such it is already a middle-ground agreement
and the deletion of 120 blocks, as has been proposed in S. 596, would
seriously undermine the spirit of the good-faith negotiations that led
to it. More important, it would significantly reduce of the amount of
energy--natural gas in particular--that Sale 181 is expected to
provide.
Congress in the past several appropriations bills understood the
importance of Sale 181 going forward and did not include it in the
areas placed off-limits by moratoria. The area available in Sale 181 is
estimated by the National Petroleum Council to contain 7.8 trillion
cubic feet of natural gas and 1.9 billion barrels of oil. This means
that natural gas from the Sale 181 area could satisfy the current
electricity needs of Florida's 5.9 million households for the next 13
years. Lastly, the crude oil from the Sale 181 area (most of which is
expected to come from the deepwater areas, far removed from the
coastline) could fuel 74,000 cars for 20 years.
These resources can be produced cleanly, for advances in technology
have made offshore oil and natural gas exploration and production safer
than ever. For the 1980-1999 period, 7.4 billion barrels of oil have
been produced in the OCS with less than 0.001 percent spilled--a 99.999
percent near perfect record.
We applaud the action taken in the last Congress when it
reauthorized the Energy Policy and Conservation Act (EPCA) (Section
604) directing the Departments of the Interior and Energy and the
Forest Service to conduct an inventory of the oil and gas resources on
federal lands and the restrictions that prevent access to these
critical resources. We urge Congress to fully fund this inventory in
the FY 2002 appropriations bill so that adequate information will be
available on resource availability. This is an important step in
bringing about increased development of U.S. oil and gas resources and
an important component in any effective national energy policy.
NATURAL GAS
The petroleum industry finds and produces the natural gas, moves it
through the nation's pipelines, processes it, and delivers it to the
distributors. The attached Chart No. 4 illustrates the basic problem we
face on natural gas. The middle line shows how U.S. production has been
virtually flat for more than a decade, while demand (the top line) has
steadily grown. The bottom line shows how imports have also continued
to grow to help meet demand.
If we are to have an effective national energy policy, we must
recognize the steadily growing role of natural gas in meeting our
energy needs. Natural gas is a clean, safe, efficient and reliable
fuel. Consequently, demand from all customer segments is rising,
particularly as the fuel of choice for new power plants.
Since natural gas markets are regional, rather than global, 86
percent of the natural gas consumed in the United States is produced
domestically. Most of the remainder comes from Canada. Although our
domestic gas supplies are adequate for the near-term, significant
challenges will have to be overcome to meet the increasing demand. The
landmark natural gas study issued over a year ago by the National
Petroleum Council--a DOE advisory committee--projected that producers
would have to invest about $658 billion in upstream capital between
1999 and 2015 to meet the growth in gas demand.
The growing demand for natural gas underscore the urgent need for
increased access to potentially gas-rich government lands.
However, many government lands with the best prospects for new gas
discoveries are off limits to development: 100 percent of resources
offshore on both coasts; 56 percent of the eastern Gulf of Mexico
resources; and 40 percent of the Rocky Mountain region resources. As
Chart 5 shows, 21 trillion cubic feet (Tcf) are estimated to lie in the
federal waters beneath the Pacific, 346 Tcf in the Western states, 43
Tcf in the Eastern Gulf of Mexico, and 31 Tcf beneath the Atlantic OCS.
Clearly, we cannot increase our reliance on natural gas, while
continuing to prevent development of these potentially vast gas
resources within our borders.
Often, getting a lease is not the most significant problem for
producers. Difficulties in acquiring permits to drill wells on onshore
government lands and overly restrictive lease stipulations are
responsible for limiting natural gas production. These are
restrictions, such as ``no surface occupancy'' or seasonal
stipulations, that go above and beyond the normal environmental
stipulations and can prevent economic development of the lease without
commensurate environmental benefit.
Almost half of the untapped natural gas on multiple-use government
lands in the Rockies is in areas either off limits or restricted by
this type of stipulation laid down by one federal agency or another.
This information is important because the facts are often ignored
and often distorted by those who do not believe greater access to
government is needed by our industry. In recent testimony before the
House Commerce Committee's Subcommittee on Energy and Mineral
Resources, for instance, we heard material distortions by witnesses for
the Natural Resources Defense Council (NRDC) and for the Wilderness
Society.
In particular, the NRDC witness, in her testimony and in the study
submitted by the Wilderness Society witness for the record, concluded
that only a small percentage of BLM lands in five western states is off
limits to leasing and development.
Those conclusions gloss over the most significant point: the
percentage of government lands available for leasing is a meaningless
figure without knowing whether the leases can be developed.
In many instances, lessees cannot obtain the permits needed to
develop leases. In others, development is rendered uneconomic by
unnecessarily restrictive operating stipulations. An appropriate
analogy would be leasing a car without a starter motor or keys. Or
renting a house and being allowed to use only the roof. Would a person
really have a car if he or she cannot drive it? And what good would it
do anyone to rent a house if it can't be lived in? Similarly, a lease
that cannot be developed is a lease in name only.
The NRDC and Wilderness Society witnesses surgically selected
certain data, and omitted other significant data to attempt to prove
their inaccurate assertions. For example, while the numbers presented
by the Wilderness Society do show that only about 3.5 percent of the
BLM lands in Wyoming, Utah, New Mexico, Montana, and Colorado is
strictly off limits to development, oil and gas resources in those
states are not distributed uniformly across BLM lands. Specifically,
while the Wilderness Society says only 3.5 percent of BLM lands are
off-limits, the Wilderness Society identifies another 3.2 percent that
are subject to No Surface Occupancy. The NPC study indicates that this
6.7 percent of BLM lands represents 15 percent of the BLM natural gas
resources, which are either off-limits or significantly impinged.
More important, however, is the role of non-standard lease
stipulations. The Wilderness Society's data show that seasonal and
other non-standard stipulations restrict access to an additional 32
percent of BLM lands. However, this impacts access to 47 percent of the
natural gas resources estimated to exist on BLM lands in the Rockies.
When all of these restricted and off-limit BLM lands are combined they
total 38.7 percent, affecting 62 percent of the natural gas resources.
Further, BLM is not the only federal land management agency making
such restrictions. These witnesses have omitted the U.S. Forest
Service, the Bureau of Indian Affairs and the departments of Defense
and Energy in their computation of federal multiple-use lands that are
restricted to oil and gas development. In total, the National Petroleum
Council estimates that some 137 Tcf of natural gas resources lie
beneath Federal land in the Rockies that is either off limits to
exploration, or heavily restricted. This is 48 percent of the natural
gas on Federal land in the region.
In addition to this total, a recent Department of Energy study
concluded that more than 11 trillion cubic feet (Tcf) of natural gas
was summarily placed off limits late last year alone by the USFS
``Roadless'' rule.
But stipulations are not the only impediments to bringing the oil
and natural gas to America's consumers. Inadequate agency resources in
many BLM offices and required but outdated resource management plans
often make it difficult to get drilling permits, seriously delaying
viable projects for up to 100 days, or sometimes years. In the Rawlins,
Wyoming BLM office, for example, thousands of Applications for Permits
to Drill are awaiting action because of manpower shortages. In the
Buffalo, Wyoming office, thousands more are not being accepted by BLM
because of limitations of the resource management plans (RMP) for the
area. This is because the ``Reasonable Foreseeable Development'' (RFD)
figures, estimates of future development, failed to recognize the
interest in developing coal bed methane. Updating these RMPs and RFDs
takes the BLM two or more years to complete thus preventing any further
oil and gas activity in that area until the plans are finished.
With natural gas in short supply, it is essential that industry and
government work together to increase production from all areas,
including multiple-use government lands. Ultimately, it is the American
consumer who is likely to suffer from a failure to address this
critical situation.
The NPC study on natural gas referred to earlier also points out
that vast reserves of natural gas in the form of coal bed methane (CBM)
lie beneath federal lands, especially in Wyoming and Montana. However,
BLM's inability to grant permits in a timely manner has greatly
hindered CBM development, and may contribute to further shortfalls in
necessary future gas production. In some instances, we recognize that
individual BLM offices may be understaffed and therefore are simply
unable to efficiently process permitting requests. We therefore support
increased funding for BLM to adequately address these critical
permitting backlogs.
As supply adjusts to greater demand, liquefied natural gas looks to
become a more significant source of natural gas. Liquefied natural gas,
largely imported from outside North America, requires a complex
infrastructure, including specialized terminals and additional
pipelines. If this source of supply is to be relied on more heavily,
policy-makers will need to ensure that necessary regulatory and
permitting decisions are expedited.
ROYALTY-IN-KIND
Royalty-in-kind is another important component for an effective
national energy policy. The Department of the Interior, working with
the states and other federal agencies, should pursue the most efficient
means at its disposal to use the United States' energy resources for
the good of the American people. One way to do this is for the
Department's Minerals Management Service (MMS) to expand its use of
royalty-in-kind (RIK) as its standard method for collecting royalties.
Existing mineral leasing statutes already allow the government to
take its royalties for natural gas or oil produced from government
lands either in value (cash) or in kind, actual barrels of oil or cubic
feet of natural gas. Until now the government has favored taking its
royalty in value, even where complex and controversial valuation
procedures must be used. However, over the last few years a number of
pilot (trial) RIK programs have been conducted with considerable
success. A robust RIK program would short-circuit these contentious
valuation procedures and provide simplicity, greater certainty,
efficiency and transparency in the collection of federal royalties.
RIK results in major cost savings to the government by streamlining
the administrative process and avoiding many costly and time-consuming
audits, agency appeals and court litigation. With the simplicity and
finality it offers, RIK also makes drilling on federal lands more
attractive for producers, especially small producers, at a time when
the nation needs to encourage stable and adequate sources of domestic
energy.
LESSONS LEARNED
We are encouraged about the possibilities for a new era of
cooperation between industry, government and consumers to align our
nation on a path toward energy stability. However, we cannot be
successful at forging a workable energy policy if we do not learn from
the mistakes we have made in the past.
Price controls, allocation schemes, limitations on natural gas use,
and massive subsidies to synthetic fuels are all measures that were
tried at one time or another because it was believed that they were
sure-fire answers to our problems. All of them failed. They failed
because the key premise on which these programs were based--namely that
oil and gas were nearing exhaustion and that government ``guidance''
was desirable to safely transition to new energy sources--is now
recognized as having been clearly wrong and to have resulted in
enormously expensive mistakes.
The wrong energy choices made by government intervention in energy
markets increase costs, hurt the nation in terms of lost economic
growth, stifled innovation, limited consumer choice and slowed progress
in achieving other societal objectives.
Over the past two decades, we have, fortunately, come to rely
increasingly on markets to sort out technologies and fuel choices--and
markets have moved us impressively forward. Technology has led us to
find more oil and gas in more places and in larger quantities than was
ever dreamed imaginable 50 years ago. It has led to increased use of
natural gas in a wide variety of ways.
We can continue to prosper and grow in this new century, but only
if government follows a positive and cooperative approach. Government
should recognize the vital role that markets play and avoid the
intrusiveness that has proven so damaging in the past. It should
provide a level playing field on which fuels can compete--and recognize
the cost trade-offs that are so essential in a global economy.
A NATIONAL ENERGY POLICY
What is needed from government decision-makers is a serious effort
to address these problems and shape a fair and effective national
energy policy. That's why we at API welcome the energy policy
initiatives now underway in both Congress and the Administration.
A successful national energy policy must be comprehensive in order
to be effective. It must seek to ensure enough energy to support
economic growth by promoting responsible development of both domestic
and foreign resources. It should recognize that sophisticated new
technology developed by the oil and natural gas industry greatly
reduces adverse impacts on the environment by exploration and
production, both onshore and offshore.
A successful national energy policy will recognize that there is no
quick fix to our energy problems. It must reflect the reality that we
need to increase supplies of all forms of energy to fully support our
growing economy. It is important to encourage responsible use of energy
and increase supplies of all fuels, including both fossil fuels and
alternative fuels.
A successful national energy policy must be flexible to allow
companies to adapt to new energy and environmental challenges. It
should recognize that our refinery and delivery infrastructure
continues to be stretched to its limit, restraining the industry's
capability to meet new energy demands. It should remove unreasonable
and complex regulations on cleaner energy production and transportation
to accommodate growth and the continued high demand for energy--and to
meet seasonal or unexpected requirements.
A successful national energy policy must rely primarily on the
private sector working through free markets, and it must recognize the
value of diversified energy sources. To that end, it should encourage
competitive trade practices and international investment.
Finally, a successful national energy policy must create a
predictable operating and investment environment for energy suppliers.
Government must work to create a more stable regulatory environment so
that producers can invest with the confidence that they will be able to
get a fair return on their investment.
CONCLUSION
Having said that, we should understand that it took some 25 years
to get into today's energy situation--and the problems will not be
solved overnight. Moreover, supply cannot be matched to demand without
massive capital investment, construction and turnover in equipment and
this requires long lead times. In order to ensure that these
adjustments are made as soon as possible with the least amount of
disruption, we must start making the necessary policy decisions now. So
it is absolutely critical that energy be fully represented at the
government decision-making table and that the energy impact of
environmental and other decisions be fully considered.
After more than two decades of inaction, the American public can no
longer afford the luxury of not coming to grips with U.S. energy needs
while maintaining a clean environment. We can, as a nation, do both--
and we cannot afford to heed those negativists who tell us otherwise.
Meeting U.S. energy needs and protecting the environment are both
critical to our nation's continued economic growth--and critical to
achieving the future prosperity and wellbeing we all seek.
API and its members look forward to working with you in the coming
months.
The Chairman. Thank you very much, Mr. Rubin.
Mr. Neal Stanley.
Mr. Stanley. Thank you, Mr. Chairman.
The Chairman. On behalf of the Forest Oil Corporation,
please proceed.
STATEMENT OF NEAL A. STANLEY, VICE PRESIDENT, WESTERN REGION,
FOREST OIL CORPORATION, ON BEHALF OF INDEPENDENT PETROLEUM
ASSOCIATION OF MOUNTAIN STATES
Mr. Stanley. For the record, I did submit a written
testimony, but I have some oral testimony also. I am senior
vice president of Forest Oil and President of the Independent
Petroleum Association of Mountain States, both based in Denver,
Colorado. Forest Oil is a producer of oil and gas from the
offshore Gulf coast, Louisiana, Oklahoma, Texas, New Mexico,
Rocky Mountain States, Canada, and in the Alaskan Cook Inlet. I
would like to thank this committee for focusing its attention
on the impediments to the development of our domestic oil and
natural gas resources.
Policies that either limit or encourage energy development
on government land have very real consequences. As such, I
imagine we all desire land policies that will provide for human
needs, contribute to the sustainability of our nation's
economic vitality, and concurrently help secure the health of
the land for the benefit of current and future generations.
The United States' economic expansion over the past 15
years has been fueled by low energy prices. Since there was
sufficient energy supply during this time, no real attention
was paid to the problems that face the oil and gas industry. In
1981, 89 thousand wells were drilled in the United States. This
declined to 19 thousand wells in 1999. So there is no wonder
that our oil and gas production decreased significantly during
this time. With these declines in production and with our
expanding economy, it should also be no surprise that we
consumed our surplus energy capacity, and prices have
dramatically increased as a result.
I believe the oil and gas industry can meet the Nation's
growing demand for natural gas, but the price of natural gas
will be dependent upon a number of factors, most notably having
adequate access to the resources in a timely manner. Policies
that promote reasonable access to the Nation's abundant
supplies of natural gas will bring gas to market more quickly
and also lower the price of this energy. It is important to
understand that increased drilling will result in an increased
supply of oil and gas. However, this increased supply will be
added one well at a time.
Some critics that say that areas that only supply 5, 10 or
15 percent of our oil or gas are not significant enough to
pursue. This is erroneous logic. It will require the sum of all
of these areas to supply our energy needs.
[Handout.]
Exhibit One in my handout shows a map of the United States
that 52 percent of the land in the West is government land.
Exhibit Two shows the estimated percentage of those
resources that are subject to severe, if not outright,
prohibitions on access. In the Rocky Mountains where abundant
supplies of natural gas exist, Federal policies prohibit access
to an estimated 137 trillion cubic feet of natural gas. Without
access to such areas, the gas industry will not be able to keep
pace with steeper decline rates in the mature basins.
Impediments to gaining that access for natural gas
development come in many forms. Recent monument designations,
new policies prohibiting road construction, and continuous
wilderness reviews prohibit access to some areas. Outdated
resource management plans and overly-restricted surface use
requirements also prevent access.
Exhibit Three in my handout shows surface use restrictions.
A natural starting point for looking at limits on access is
with the restrictions and effectively reduced access where oil
and gas leasing has already occurred. Please notice in Exhibit
Three the length of time associated with each restriction shown
in the red bars, and also that the time required to drill a
well is 20-30 days.
Companies exploring for natural gas have a very short
window to build their wells when all these restrictions are in
place. We should be able to obtain a balance between
development of the resource and conservation. Look at the
common restriction on drilling during winter months to protect
the big game winter range. We do support the protection of big
game. However, we should seek to strike a balance that will
protect game and also allow drilling during the winter months.
This effort to find a way to meet both needs has been missing,
but it does not have to be.
If a balance between both resources could be found,
hundreds of wells could be drilled in the winter months to help
meet natural gas demand pressures that we will have each
summer. Examples like this point out an important shortfall in
land management policy. There has been no clear direction for
land managers with respect to energy development on government
land.
In conclusion, I would remind the committee that natural
gas resources are not uniformly distributed across the
landscape. Even so, natural gas development can co-exist with
the other values. We do not need to choose between this or that
use of public land. Responsible management can allow for this
and that use. Responsible management can provide a low-cost,
reliable and sustainable energy supply to fuel our economy for
many years and concurrently help secure the health of the land
for the benefit of current and future generations.
Mr. Chairman, I view the balance between energy supply and
its price and access to government land as somewhat of a
teeter-totter. If the energy industry is shut out from
government land, then the price will be much higher. If we have
access to more land, then the price will be much lower. It is
really up to the American people and this Congress to establish
that balance of the trade-offs of allowing reasonable access to
government land with the tangible benefits of securing an
adequate supply of natural gas to meet the nation's growing
energy needs.
Mr. Chairman, members of the committee, I thank you for
hearing me today.
[The prepared statement of Mr. Stanley follows:]
Prepared Statement of Neal A. Stanley, Vice President, Western Region,
Forest Oil Corporation, on Behalf of the Independent Petroleum
Association of Mountain States
Mr. Chairman, members of the committee, I am Neal Stanley, Senior
Vice President of Forest Oil Corporation, and President of the
Independent Petroleum Association of Mountain States (IPAMS). Both
Forest Oil and IPAMS are based in Denver, Colorado. Today, I am
testifying on behalf of the Independent Petroleum Association of
America (IPAA), and IPAMS. IPAA and IPAMS represent thousands of
independent oil and natural gas producers across the nation.
Independents drill 85 percent of the wells in the U.S., and produce 40
percent of the oil and two-thirds of the natural gas.
I would like to thank this committee for focusing its attention on
the impediments to the development of our domestic oil and natural gas
resources. Policies that either limit or encourage energy development
on government land have very real consequences. As such, I imagine that
we all desire land policies that will provide for human needs,
contribute to the sustainability of our nation's economic vitality, and
concurrently help secure the health of the land for the benefit of
current and future generations.
Despite our best conservation efforts, electricity demand in the
United States will continue to increase as a function of our growing
population and the role of computers in our new economy. The role of
natural gas in meeting this new demand cannot be understated. Ninety-
five percent of all the new power plants now scheduled to be built will
run on natural gas. Electricity produced from natural gas fired
generation will increase from 15 percent to 40 percent by the year
2020. In 1999, the National Petroleum Council forecast natural gas
consumption increasing from 22 trillion cubic feet (TCF) this year to
35 trillion cubic feet (TCF) in 2020.
In the United States, the economic expansion over the past fifteen
years has been fueled by low energy prices. These low prices have been
good for everyone, except for the 400,000 American oil and gas company
workers that have lost their jobs. Since 1981, exploration and
production employment has decreased from 700,000 to 300,000, a decrease
of 57%. Since the oil price collapse of 1986, the domestic oil and gas
business has been in a severe depression. In most areas, wells could
not be drilled economically due to the low oil and gas prices. Many
companies went broke by drilling wells with the hope that higher prices
would appear in the near term. In short, the oil and gas industry is a
small shadow of its former self.
Since there was sufficient energy supply during the past fifteen
years, no attention was paid to the problems that faced the oil and gas
industry. Rules and regulations that further restricted the industry
were applied with vigor. In 1981, 89,000 wells were drilled in the U.S.
This declined to 19,000 wells in 1999. It is no wonder that our oil
production decreased from 8.6 million to 5.8 million barrels a day and
our gas production decreased from 19.2 to 18.7 trillion cubic feet per
year over this time frame. With these declines in production, and with
our expanding economy, it should be no surprise that we consumed our
surplus energy capacity, and prices have dramatically increased as a
result. This is basic Economics 101, supply and demand.
The oil and gas industry can meet the nation's growing demand for
natural gas, but the price of natural gas will be dependent upon a
number of factors, most notably, having adequate access to the resource
in a timely manner. Policies that promote reasonable access to the
nation's abundant supplies of natural gas will bring gas to market more
quickly and also lower the price of this energy. It is important to
understand that increased drilling will result in an increased supply
of oil and gas. However, this increased supply will be added one well
at a time. Some critics say that areas that only supply five, ten, or
fifteen percent of our oil and gas are not significant enough to
pursue. This is erroneous logic. It will require the sum of all of
these areas to supply our energy needs.
Exhibit #1 * is a map showing government lands. The various colors
represent the different agencies with surface management
responsibility. A map showing the federal government's mineral interest
in the western United States would encompass an even larger portion of
the West than is depicted on this map. Fifty-two percent of the land in
the western United States is managed by federal and state governments.
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* The exhibits have been retained in committee files.
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Exhibit #2 shows the total estimated natural gas resources in the
lower 48 states, with the corresponding percentage of those resources
that are subject to severe, if not outright, prohibitions on access.
Developing the substantial domestic natural gas reserves in
offshore areas of the Eastern Gulf of Mexico, Atlantic Ocean, and
California is prohibited by moratoria. President Clinton extended these
moratoria for another ten years in 1998 saying, ``First, it is clear we
must save these shores from oil drilling.'' This is a flawed argument
ignoring the state of current technology. It results in these moratoria
preventing natural gas development as well as oil. In fact, both the
Eastern Gulf and the Atlantic reserves are viewed as primarily gas
reserve areas, not oil. Those coasts are not at risk. Too often, these
policies seem to be predicated on the events that occurred 30 years
ago. Federal moratoria policy needs to be reviewed and new policies
need to be based on a sound understanding of today's technology.
Offshore Lease Sale 181 is scheduled for December 2001 and is
outside the areas covered by moratoria. The resources contained in this
sale area, approximately 7.8 TCF of gas and 1.9 billion barrels of oil,
are important to the nation and surrounding coastal states. We strongly
recommend the sale stay on schedule. This sale includes much needed gas
resources for the Gulf of Mexico to even partially meet this country's
natural gas needs.
In the Rocky Mountains, where abundant supplies of natural gas
exist, federal policies prohibit access to an estimated 137 trillion
cubic feet of natural gas. Long-term sustainable gas production will be
achievable only through the development of frontier areas such as the
Rockies. Without access to such areas, industry will not be able to
keep pace with steeper decline rates in the mature basins.
Impediments to gaining access for natural gas development come in
many forms. Recent monument designations, new policies prohibiting road
construction, and continuous wilderness reviews prohibit access to some
areas. Administrative withdrawals, inaction, and extensive delays work
similarly to restrict access. Outdated resource management plans and
overly restrictive surface-use requirements also prevent access. The
constraints differ in severity, but in each case, these impediments
work individually and cumulatively to prevent the development of
natural gas.
A natural starting point for looking at limits on access is with
the restrictions that effectively reduce access where oil and gas
leasing has already occurred. We should be able to obtain a balance
between development of the resource and conservation. Take for example
a common restriction on drilling during winter months to protect Big
Game Winter Range. We support the protection of big game. However, we
should seek to strike a balance that will protect game and allow
drilling during winter months. This effort to find a way to meet both
needs has been missing, but it does not have to be. My personal
experience of sitting on many drilling rigs throughout the Rockies over
the past 20 years has been that these animals are not the least bit
bothered by our activity and we can easily coexist. If a balance
between both resources could be found, hundreds of wells could be
drilled in the winter months to help meet natural gas demand pressures
that we will have each summer.
Examples like this point out an important shortfall in land
management policy. There has been no clear direction for land managers
with respect to energy development on government land. Accordingly,
each land manager assigns a relative value to the development of energy
with no sense of how his or her actions contribute to or detract from
the nation's energy sustainability. Mixed messages and a lack of
accountability have led to a situation where land managers focus
entirely on process with no apparent regard for the outcome. If left
unattended, this lack of direction will become even more disastrous.
Another example that illustrates the BLM's failure to recognize the
urgency to develop natural gas can be seen in a recent wildcat well
Forest Oil drilled in southwest Wyoming. In this case, the BLM's
interpretation of field rules ended up costing Forest Oil $120,000, and
even more when you consider the opportunity costs associated with
delays. The well site was six miles from an improved road with an
existing two-track road that went directly to the location. The BLM
required Forest Oil to design and construct an improved road to the
location at a cost of $90,000, even though the well was only going to
take 20 days to drill. If drilling proved it to be a dry hole, we would
not need to continue to go to that location. Indeed, the well was a dry
hole that cost the company $800,000 to drill. After we plugged the
well, the BLM required Forest to either maintain the road forever, or
reclaim the road to its previous two-track status. It will cost Forest
another $30,000 to reclaim the road. The money wasted, $120,000, could
have been spent drilling more wells and hopefully supplying more
energy.
Natural gas companies rely on federal land managers to process
their permit requests in a timely manner. Without the necessary
environmental studies, permits, and authorizations, access to drill on
federal lands is prohibited. Throughout the gas-rich basins of the
Rocky Mountain Region, backlogs for issuing permits to drill and
rights-of-way for roads and pipelines continue to grow. Many resource
management plans are outdated and revisions are being required before
any leasing and development can occur.
Staffing is short in many offices and the problem seems to get
worse with time. The use of sophisticated mapping tools and other
technologies could ameliorate some of these problems but, as with many
other issues, addressing agency priorities and goals is a necessary
first step.
Exhibit #3 shows the surface use restrictions and seasonal
restrictions on a southwestern Wyoming federal lease. Please notice the
length of time associated with each restriction and also note the
amount of time required to drill a typical 8,000-foot well and a
horizontal well. Companies exploring for natural gas have a very short
window to drill wells. If the BLM has not processed the permits in time
to meet that window of opportunity, the company will have to release
the drilling rig they have contracted and wait another year before
drilling.
Exhibit #4 demonstrates the time requirements associated with
operating on private land and federal land. The table shows the
timeframe to get a well permitted and drilled. The difference between
developing energy on private land and federal lands is 3 months versus
1-5 years.
To further illustrate the pervasiveness of land access problems
throughout the Rocky Mountain Region, the following four examples are
provided.
Exhibit #5 is a map of the newly designated Canyons of the Ancients
National Monument in southwestern Colorado. Canyons of the Ancients
encompasses McElmo Dome, one of the Rocky Mountain region's most
significant sources of natural gas used for advanced oil and gas
recovery in Colorado, New Mexico and Texas. On the map, of the 183,000
acres within the Monument's boundary, there are nearly 155,000 acres of
active federal oil and gas leases, 141,000 acres of which are held by
oil and gas production or are included in four federal oil and gas
production units.
When the monument was designated, the BLM proposed stringent
surface use restrictions on 79,000 acres, including a No Surface
Occupancy stipulation. Given the BLM's predilection for restricting
access, the Resource Management Plan that will be developed for the
monument creates even more uncertainty for producers.
Exhibit #6 is a map of Jack Morrow Hills Resource Area in
southwestern Wyoming. The Environmental Impact Statement for the Green
River Resource Management Plan, which includes the Jack Morrow Hills
area, was started in 1989, with the Record of Decision finally issued
eight years later, in October 1997. The decision of whether to lease
for oil and gas exploration and development in Jack Morrow Hills area
was deferred in the ROD until a Coordinated Activity Plan for the area
could be completed, which took another four years. When the Draft EIS
for the CAP was issued, the preferred alternative was for ``staged
leasing,'' effectively postponing leasing decisions indefinitely. On
the map, areas designated as potential Wilderness Study Areas (WSA) are
shown in light blue stippling. Note that there are active leases and
leases held by production within the new WSAs.
The attached map of the Jack Morrow Hills area shows the BLM-
managed mineral estate with active oil and gas leases in yellow. Of the
623,000 acres within the red boundary of the Jack Morrow Hills area,
there are 239,000 acres of active federal leases, 36,000 acres that are
productive. Also note that within the CAP area, there are 137,890 acres
recommended as Wilderness Study Areas.
Exhibit #7 is a map showing the entire state of Utah. Current
leases are shown in yellow, a total of 3,567 active federal leases.
Also shown on the map are the BLM's 1990 recommendations for three
million acres of new Wilderness Study Areas, as well as former Interior
Secretary Babbitt's reinventory of an additional three million acres,
described in the map's legend as ``HR1500 Boundaries''. Note that the
proposed Wilderness Study Areas include lands that are already leased,
making development as difficult as the examples of Jack Morrow Hills
and Canyons of the Ancients. Not shown on the Utah map are the nearly
29,000 leases that were previously leased in the past but were not
renewed as a direct result of administrative direction from Washington.
Exhibit #8 is a map of the Upper Missouri Breaks National Monument.
On January 17, 2001, President Clinton signed a proclamation
establishing the Upper Missouri River Breaks National Monument for the
primary purpose of protecting the corridor along the Missouri River
traveled by Merriwether Lewis and William Clark nearly 200 years ago.
The Monument was formed under the authority of Section 2 of the
Antiquities Act of June 8, 1906. This Act states that lands reserved
shall be ``in all cases be confined to the smallest compatible with the
proper care and management of the objects to be protected.'' Although
the members of the expedition rarely explored more than two miles away
from the river through this region, the new Monument encompasses over
495,000 acres of federal, state and private land and extends, in some
instances, more than fifteen miles on either side of the river.
This new Monument is located in the most prolific natural gas
producing province in the State of Montana. Within the Monument are
thousands of acres of valid private, state and federal oil and gas
leases, numerous producing and shut-in wells and several natural gas
pipelines. In a recent Bureau of Land Management publication, the
promise is made that the Monument designation does not apply to
``private or state land, inside the boundary'' and that ``the
designation does not affect valid oil and gas leases.'' Despite this
rhetoric, the reality is that applications for permits to drill within
and adjacent to the Monument have sat in limbo, without any action by
the Federal regulators for over a year. Development of the natural gas
resources on private and state lands within the monument is impossible
because pipelines to transport the gas will not be allowed to cross the
surrounding federal lands.
These examples are only a few of many examples of the overzealous
application of singular surface uses that preclude other resource
development. Some even more egregious examples would include 1) the
backlog of drilling permits and rights of way applications in
northeastern Wyoming, 2) de facto wilderness management of Wyoming's
Bridger/Teton National Forest and Montana's Rocky Mountain Front, and
3) excessively stringent applications of NEPA planning documents and
subsequent delays in Utah, Colorado, Montana, and the Dakotas.
My final point is that the employment of advanced technology for
both land managers and industry must occur if we are to reach our
goals. Research and development spending by the oil and gas industry
has decreased from $10 billion to $2 billion per year over the past
twenty years as the large integrated companies have shrunk in size. Yet
we know that past innovations from this R&D, such as horizontal
drilling and 3-D and 4-D seismic, have provided significant increases
in the recovery of oil and gas. Frontier areas like the Rocky Mountain
region will require new and sophisticated technologies to develop a
large portion of the unconventional gas resources found in the region.
Federal efforts to aid the R&D effort by directing a portion of federal
oil and gas royalties to a research fund would be a significant win-win
program. Increased R&D spending will increase oil and gas production,
resulting in a commensurate increase in federal royalties.
In conclusion, I would remind the committee that natural gas
resources are not uniformly distributed across the landscape. Even so,
natural gas development can coexist with other values. We do not need
to choose between ``this or that'' use of public land. Responsible
management can allow for ``this and that'' use. Responsible management
can provide a low cost, reliable, and sustainable energy supply to fuel
our economy for many years and concurrently help secure the health of
the land for the benefit of current and future generations.
I view the balance between energy supply, and hence, price and
access to government land as a teeter-totter. If the energy industry is
shut out from government lands, then the price of energy will obviously
be much higher. If we have access to more land where the resource
exists, then the price of energy will be much lower. The American
people and this Congress must balance the perceived trade-offs of
allowing reasonable access to government land with the tangible
benefits of securing an adequate supply of natural gas to meet the
nation's energy needs.
Mr. Chairman and members of the committee, thank you for the
opportunity to appear before you today.
The Chairman. Thank you, Mr. Stanley. I noted on page seven
of your testimony you have this exhibit, and I would like the
young lady to hold this up, because I think it represents to
some extent the reality. Here is the east coast which you
indicate is 100 percent restricted, and that goes from Maine to
Florida. And then we have the west coast, which you have 100
percent restricted, which goes from Washington to the end of
California--the Mexican border. There is kind of the over-
thrust belt that we refer to that has been substantially
restricted as a consequence of withdrawals, and then we have
this area off Florida that currently is under debate. It is
Lease Sale 181 that is discussed. So as we look at what we have
done with moratoriums, we have pretty much excluded a
significant amount of area that would otherwise have the
potential of energy-bearing oil and gas. Is that right?
Mr. Stanley. Yes, sir.
The Chairman. And a lot of this has to do with the
attitudes associated with the risk of OCS drilling. Is that
correct?
Mr. Stanley. Yes.
The Chairman. This area here--Texas, Louisiana, Alabama,
Mississippi--that is where most of our activity is coming from
as far as OCS. How do you as a professional manager of oil and
gas relate to the fact that it is okay here--or seems to be
okay here, and we are out in three thousand feet of water now,
and we are selling leases at six thousand feet, when it is not
okay here and it is not okay there.
Mr. Stanley. I do not have a good answer for that.
Certainly the oil and gas industry has operated in the Gulf of
Mexico for many years, and without very many problems. Forest
Oil has been an operator----
The Chairman. Is it local support? Why should this area
have to carry the burden for the United States when this area
and this area benefit but do not have to put up with any oil
and gas activity?
Mr. Stanley. I agree.
The Chairman. I do not know that equity has anything to do
with the argument.
Mr. Stanley. I agree.
The Chairman. In my State of Alaska, for that matter.
Mr. Stanley. In my opinion, we need to go after all of the
resources that are available. It would help to supply more
energy----
The Chairman. Would it help to reprioritize these areas off
either coast and say now we have them all closed, could you
reprioritize them and say some have a higher environmental
value than others, therefore they should be closed and other
areas should be opened? Is that a reasonable approach? I mean,
it is going to have to come from somewhere. If it does not come
from here, it is going to come from overseas. We are going to
import it, right?
Mr. Stanley. That is correct.
The Chairman. We are importing 56 percent of oil now, 57,
we are going to be up to 60. I mean, I do not know what the
American people want to believe, but there is a certain reality
to this, is there not? Where is it going to come from? Well,
thank you.
Mr. Leahy, you indicated--that is fine, thank you--an issue
of CAFE standards and, in your professional opinion, while we
have got to conserve more, there is a certain impracticality
associated with that being the answer. Would you enlighten us a
little bit more? You used some rather startling figures here,
and I do not know whether we could all turn our cars in and get
56 or 86 mile per gallon cars. Many people say production is
not the answer; it is CAFE standards.
Dr. Leahy. Basically the numbers I quoted were the
technically recoverable volumes of oil and gas. Let me explain
what technically recoverable means. Basically, technically
recoverable is the amount of oil and gas that can be extracted
using current technology--current drilling techniques and so
forth. There is obviously an economic piece that influences the
volume of oil and gas that is practical, and that changes with
the economy. Essentially what we are doing is defining the
resource base, and actually we have done some economic analyses
to put those numbers in a little better practical context for
the decision-makers.
The Chairman. I am sorry. Mr. Simmons, you were pretty much
highlighting CAFE, too.
Mr. Simmons. The 80-miles-per-gallon car.
The Chairman. Go ahead.
Mr. Simmons. You know, first of all I did that analysis
myself, so I know the number is right. It is actually 49,600
barrels per day.
The Chairman. Just give us--slow us down again so we pick
it up.
Mr. Simmons. You take an 80-mile-per-gallon car----
The Chairman. An 80-mile-per-gallon car. Do we have any of
those now?
Mr. Simmons. No, we have a prototype that will be out in
2004. It is an imaginary----
The Chairman. We have got a 56-mile-per-gallon car if you
want to buy one. Toyota makes one, Nissan makes one.
Mr. Simmons. And what we do is we replace that car with a
car that gets an average of 17 miles a gallon, because if you
take the vehicle fleet, that is our average today, and the
delta is the savings. So a million 80-mile-per-gallon cars is a
phenomenal concept, but it does not make a dent, a single dent.
The Chairman. A million 80-gallon cars would save us how
much oil?
Mr. Simmons. 50 thousand barrels a day.
The Chairman. 50 thousand barrels a day, and we consume
19----
Mr. Simmons. Well, we are getting up a little over 20
million during the seasonal peaks, so it has absolutely no
relevance. It is a great concept.
The Chairman. Okay, well--50 thousand barrels a day is what
you would save if you had one million cars that go to 80. And
how many cars do we have in this country? Somebody figured it
out.
Mr. Simmons. 220 million vehicles.
The Chairman. 220 million. Well, I do not know if you could
stretch the car buyers to that point. Mr. Hayes, you indicated
that you--would you hold this up here, please? You indicated
that significant portion under your direction of the Naval
Petroleum Reserve had been opened for oil and gas leasing.
Would you care to indicate the percentage that had been opened?
Mr. Hayes. Yes, I believe that the environmental impact
statement was done on 3.9 million acres of the 25 million acres
of the National Petroleum Reserve. That was the area that is
the closest to Prudhoe Bay.
The Chairman. This is the area here?
Mr. Hayes. Yes, yes. Well, I am not sure that is correct.
That looks like it is offshore or just barely onshore.
The Chairman. It is onshore. There is nothing out there.
Mr. Hayes. Okay. The area that is opened--now, that may be
the area that is currently--there are about six wells in the
last 2 years that have been put in. That may be where the wells
have been put in but, in fact, 3.9 million acres are open now
for leasing under that 1998 Environmental Impact Statement.
The Chairman. Well, the record will indicate that there
were 4.3 million acres that were studied. Would you agree with
that?
Mr. Hayes. That sounds right.
The Chairman. Okay. Good. And only 861,318 acres were
actually leased.
Mr. Hayes. So far. We just had the first lease sale in 1999
that netted over 100 million, presumably with prices now at $28
a barrel, there will continue to be more interest.
The Chairman. Yes, but I do not want to mislead people, and
I think there is a certain assumption out there that this area
is open for leasing when, in reality, less than 25 percent of
the four million acres has been leased and there is only 4.3
million that has been studied. Factually, much of the area that
industry asked to be leased was taken out of the proposed lease
sale because of environmental objection. So I want the record
to note the reality that this area is not all open for oil and
gas. Much of this coastline here, as you know, has been
excluded because of environmental objections.
The point is 14 percent of Alaska's Arctic shoreline is
actually open for exploration. Obviously ANWR is closed. This
white area is open here. That happens to be State land. This
little spot here which represents 861,000 acres is the only
area that has been open for competitive bids that have been
leased, and that is all. And then obviously we have got this
huge area. This is about 1200 miles from here to here, so I do
not want to have any more misunderstandings, particularly from
the media, that suggest that only--95 percent of the coastal
plain is open. It is not.
Now let me ask you, Mr. Hayes--if you were approached by
the Governor of the Virgin Islands, Governor Turnbull, and
asked to explain why under your stewardship the Department of
the Interior withdrew 12,700 acres of the Virgin Islands
National Park and 18,000 acres in the Buck Island National
Monument without any consultation to the Governor or the
Delegate, Donna Christianson, how would you explain that
action? When the Governor comes into this committee and says,
Senator, my entire commercial fisheries have been eliminated by
this action in the closing days of the Clinton administration
with no consultation with me, no consultation with the
Delegate. What am I supposed to do? What would you tell him,
Mr. Hayes?
Mr. Hayes. Well, I would have to check the record on that.
I know that after the----
The Chairman. That is the record.
Mr. Hayes. Well, after the Grand Escalante issue, a new
approach was taken to national monuments because of the
concerns about the way that the Grand Escalante Monument was
created. In each of the monuments, there were trips to the
areas, stakeholder discussions. Senator Burns will remember up
in Missouri Breaks there were several meetings.
The Chairman. We are talking about this area specifically.
Mr. Hayes. Well, I will check the record on this.
The Chairman. This Governor specifically, this Delegate who
was elected and the attitude of your administration, and
particularly the Department of the Interior----
Mr. Hayes. I know that Bruce Babbitt went to the Virgin
Islands at least three or four times and had discussions on
this point.
The Chairman. They have got great beaches down there.
Mr. Hayes. Well----
The Chairman. I mean, what did you tell this Governor?
Mr. Hayes. I cannot help you on that one, Chairman.
The Chairman. Well, you were there.
Mr. Hayes. No, I did not go to any of those meetings.
The Chairman. Well, I know, but it was under your
stewardship. You were in a responsible position.
Mr. Hayes. I would be happy to supplement the record, look
into it, and provide the facts as I can reconstruct them.
The Chairman. Well, I am going to go for a second round.
Excuse me.
Senator Bingaman. Thank you very much, all of you, for
being here to testify. Let me see that chart again that we had
of the North Slope. Since we were just up there, it is sort of
on my mind. Still thawing out.
My impression, and tell me if I am wrong about this--maybe
Mr. Hayes could respond, or any of the rest of you--my
impression is that administratively the Department of the
Interior now has about 95 percent of the North Slope available
to it, which can be made available for lease if it determines
to do so. The only part that is off-limits for leasing is this
1002 area over here in the ANWR. Is that correct?
Mr. Hayes. Right.
Senator Bingaman. On the coastal plain. Is that right?
Mr. Hayes. That is correct, Senator, and I appreciate the
question because I would like to clarify this. The vast
majority of the Federal lands there are open and potentially
available for leasing. In order to lease, there has to be an
Environmental Impact Statement that will be done to evaluate
the area to essentially provide the basis for opening it up for
leasing, and then there has to be a lease sale, and then
production can happen.
What happened on the National Petroleum Reserve in Alaska
is Governor Knowles approached the President and asked that
this area begin to be opened up because of the downsizing of
the Prudhoe Bay field. The administration responded, scoped
NEIS, and the chairman's numbers sound right--I think it was
about 4.25 million acres which is what industry wanted and the
Governor wanted the initial leasing to look at. As a result of
the EIS, 85 percent of that 4.25 million was opened up for
potential lease sales. Only 15 percent of that approximately
four million acres was set aside because of environmental
concerns.
Then the first lease sale occurred, and over eight hundred
thousand acres already have been leased, but there are still
available--and I am sure BLM is willing to schedule if it has
not already scheduled--additional lease sales. And if there is
industry interest, there can be further Environmental Impact
Statements done, and other areas of the National Petroleum
Reserve--the balance of the 25 million--can also be potentially
opened up.
Senator Bingaman. My impression is that there have been
leases in the National Petroleum Reserve previously that
expired because the drilling did not indicate that those were
promising areas with the technology they had, and then all that
you described is recent.
Mr. Hayes. Right.
Senator Bingaman. It is a new effort to go back in and say,
let us lease again, because we now think new technology has
persuaded us that maybe we can do better with 3D, seismic and
all of those kinds of technology. Is that your thought?
Mr. Hayes. That is right. In fact, I think we are going to
get some important feedback. The first exploratory wells were
just put in the winter before this, and I believe a couple more
are coming in this winter. We are going to have the results of
six to eight exploratory wells based on the new areas just west
of Prudhoe Bay that were opened up.
Senator Bingaman. Let me ask Mr. Stanley. You had some
interesting testimony where you basically pointed to some of
the deficiencies in staffing, as I understand it, in getting
some of these permits approved. You cited the backlog in
drilling permits and rights-of-way applications in northeastern
Wyoming, for example, and indicated that you think we need
additional staffing. Is that within BLM land about which you
are talking?
Mr. Stanley. Yes, sir, in the BLM regional offices.
Senator Bingaman. Could you elaborate a little bit on that
point? Am I understanding your point correctly that there is
this backlog there and in other places, particularly in the
Rocky Mountain region?
Mr. Stanley. Yes, sir. The overall permitting process is
quite cumbersome and quite slow, which----
Senator Bingaman. So that needs to be streamlined.
Mr. Stanley. Yes, sir, it does.
Senator Bingaman. But you also believe that additional
staff would help get those permits processed?
Mr. Stanley. Yes. In the Powder River basin, the coal bed
methane activity has been a wonderful happening for increased
energy, but it has put a real burden on the existing BLM
infrastructure and, frankly, the oil and gas industry to try to
ramp up and handle that activity.
Senator Bingaman. You also referred to the importance of
maintaining research and development funding for increased
supply.
Mr. Stanley. That is correct. Over the last 20 years as the
major oil companies have shrunk in size, their research and
development programs have also shrunk in size, so I think it
would be really a win/win process to take some of the royalty
money and fund research and development which should,
therefore, create more production and therefore more royalty.
So it should be a self-fulfilling type of an endeavor.
Senator Bingaman. All right. Let me stop with that, Mr.
Chairman.
The Chairman. Thank you, Senator. I believe Senator Burns
is next.
Senator Burns. I just have a couple of questions. We have
more people working for BLM in Montana than ever before in the
history of it, and we are still not getting anything done? I
think the same thing is happening, not just in--I had a hearing
in Montana to explore the possibilities of coal bed methane and
it was a very big finding down there and it will be part of the
energy mix in that basin, as soon as we figure out how to
handle the water. What are we going to do? Are we going to go
back in the ground with the water, or are we going to handle
it? Right now it does contain a lot of salt, but most of it is
potable and can be used.
Mr. Hayes, I want to straighten out one thing. The USGS
report in the upper Missouri tells us that gas reserves are
higher than you would indicate in your testimony today. Do you
take issue with that? With the USGS folks?
Mr. Hayes. No, no. I do not take issue with their report. I
was saying that those three monuments, including the one in
your State, their reserves when compared against the energy
needs of the country are not significant. The USGS did say in
their study that those five monuments had moderate to high
potential reserves, and the numbers are in the report and they
speak for themselves.
Senator Burns. The thing about it is that in the upper
Missouri--and I am pretty familiar with that country--I think
Secretary Babbitt flew across that pipeline where it crosses
the river three or four times and never could find it. So the
way we move our supply and the way we lift supply, and even the
way we discover or hunt for it is a lot different now than it
ever has been in the history of the business. Even though you
say there are inside these monuments there are inholders and
leases, and they are going to be allowed to proceed, I would
caution you to say that for the simple reason that that has not
been the case when these monuments have been established.
In other words, we get some land manager who has no
interest in energy production or even grazing for that matter
and has for the first time in his whole life a fiefdom, and he
is going to prevent this from happening, and they do it. That
is what concerns me about the staffing as far as getting out--
we had to change the law in order for the BLM to get their work
done on our grazing permits, and we finally got that done. I do
not know whether they are catching up or not, and I would
imagine that the same thing is happening in the oil and gas.
But I am concerned that there is a lot of misinformation
floating out here, and one sort of contradicts the other.
I can remember going through the years of Gloria Flora. She
was in Montana and worked with the Forest Service on the
withdrawal of the eastern front, of which we have some
production up there now and you cannot find it, but yet in that
overthrust belt contains great reserves and should be--if
nothing else, like Mr. Simmons says, it should be at least
inventoried and we know that it is there, and we have got a
pretty good shot.
I wish I had gotten Dr. Bill Ballard from Billings on this
panel today, and I know most of you know Bill, and I do not
know that there is anybody who is as knowledgeable about the
West and oil and gas supplies as Dr. Ballard is, so I am
concerned about this information. But I know up there that they
are causing a lot of heartburn in our State. I think coal bed
methane and our ability to produce gas is very important, and I
am not going to say it just for electricity.
Folks, I am going to tell you--fertilizer is going to cost
30-40 percent more this year than it did a year ago, and the
urea--in other words, the nitrogen that we take all comes from
natural gas. We cannot afford that in agriculture and still be
a viable producing industry like we have been in the past. So I
am still concerned about that, and I was very interested in
your testimony today. Thank you, Mr. Chairman.
The Chairman. Senator Thomas.
Senator Thomas. Thank you. Dr. Leahy, what involvement do
you have in the decision-making process with respect to the
Department of the Interior and the Energy Department, and so
on?
Dr. Leahy. Basically the U.S. Geological Survey is a
scientific and information organization. Our role is to provide
the resource estimates.
Senator Thomas. I understand that, but do you have a part--
your information in their decision-making?
Dr. Leahy. Our information is used by many different groups
in terms of their role in decision-making, so I think we are
viewed as unbiased provider of information.
Senator Thomas. I think one of the problems--and I am
delighted that Vice President Cheney is on a work group that
brings together some of these agencies. We have had Energy up
here for all 8 years, and Interior has more to do often with
energy than Energy does, and we need to get some coordination
so that there is some work there, I think.
Dr. Leahy. I will say that we are providing information to
those groups that you mentioned.
Senator Thomas. I am urging you to participate in some of
the decision-making, as well. Mr. Simmons, you are pretty down
on conservation, then, are you not?
Mr. Simmons. No, I think conservation is a terrific
concept. I think the proponents of the conservation issue,
though, are suggesting that it is a solution as opposed to
supply, and they literally must have never done any numbers. I
am a numbers person, you cannot be in investment banking and
not do numbers.
I think that if we had vast energy capacity, it would not
really even matter, but I literally think that the conservation
argument is equivalent to snake oil sales back in the days
before Rockefeller. What is disturbing to me is every time I do
some analysis like the refrigerator numbers--first of all, who
will create a 50 percent more efficient refrigerator. It is
just a dream. But if you did, to save 1 percent of daily
energy, or 2.5 percent of electricity is stunning. I would have
actually thought it would have been a lot more than that.
Senator Thomas. Many people would think it would be more
than that, but in any event, it seems to me from a political
standpoint of getting some of the things done we need to do,
conservation has to be something we are for, as well as the
environment.
Mr. Simmons. Absolutely.
Senator Thomas. This idea that all you do is production is
not going to work in terms of the politics of this issue. You
talked about production, which obviously we are for. What about
refining and transportation? We can produce all of the
electricity or coal in Wyoming that you can handle, but if you
cannot get it to where the market is, you did not mention that.
Mr. Simmons. Well, in 7 minutes it is hard to--we are out
of capacity right across the face of energy. There is almost no
data on what transmission capacity is in electricity, for
instance. In Houston we added our last transmission lines of
any significance in 1983. We are out of refining capacity.
Virtually every finished product pipeline in the United States
operates at virtually 100 percent all of the time. We must be
bumping up against the literal logistics to bring any more
foreign imports into the United States, so right across the
face of energy we are out of capacity.
Senator Thomas. We talk a lot about production, but you
cannot put oil in your 80-mile-a-gallon car.
Mr. Simmons. Absolutely not.
Senator Thomas. Mr. Hayes, you obviously are sensitive
about the last 8 years in which we have not had an energy
policy, but don't you think that the increase in production on
Federal land has been more a function of the price than it has
been on any change that was made in the last administration?
Mr. Hayes. Well, the price increases, as you know, did not
really kick in--as late as 1988, oil was still $18 a barrel.
Senator Thomas. True, but most of the changes you are
talking about in production are a result of the price.
Mr. Hayes. Certainly. I agree with your proposition that
the market is a huge driver in all of this and is probably the
reason why the overall production has declined in the United
States pretty steadily since 1972, plus a lot of the fields are
mature.
One of the reasons why there have been increases on the
Federal side are the incentive side. This committee and the
Congress and the President put in place a deep royalty
incentive, and there are other incentives that where put in
place over the last eight years. Of course, that is an
important part of your consideration of an overall energy
policy.
Senator Thomas. It is pretty tough, and I understand your
defense of Babbitt, but someone mentioned Jack Morrow Hills.
Well, we went through a whole EIS--Secretary Babbitt came out
and said, we want you to change your results. Now, you cannot
do that.
Mr. Stanley, yours and Mr. Rubin's comments were not
consistent with Mr. Hayes'. Would you like to comment on that?
Mr. Stanley. Well, I think there is some confusion over the
accessibility of land. As I stated, many lands have been leased
but, in effect, but are almost off-limits because of all the
severe restrictions.
Senator Thomas. Roadless.
Mr. Stanley. Roadless. Even all the various surface use
restrictions, and no surface occupancy. Some of those
restrictions make drilling wells uneconomic, so you may have a
lease but then you decide it really does not make economic
sense to do it because of the severe restrictions. The timing
of the restrictions where we only have a small window in the
year to drill many leases plays real havoc with the drilling
contractors. They cannot hire a crew that only wants to work
two months out of the year, and so there is a tremendous run on
the drilling contractors in the late summer to drill wells, and
then----
Senator Thomas. We ran into that just recently in western
Wyoming. Jonathan Field, isn't it? At any rate, it might be
Piney where the contracts--they cannot do it at certain times
of the year.
Mr. Stanley. Right. Exactly.
Senator Thomas. Mr. Rubin, do you have any reaction to Mr.
Hayes' comments?
Mr. Rubin. Yes. I think it is really critical to advance
this inventory of western lands as quickly as we can so that we
can sort of end some of the debate and get something on paper
that everybody can look at and agree on.
The Chairman. Can you pull your microphone closer?
Mr. Rubin. Yes, sir.
Senator Thomas. Will we be confused about the availability
to lease against the practicality of leasing?
Mr. Rubin. Right. The fact that you have got a lease does
not mean that you can actually develop that lease in a lot of
cases. Even more subtle problems compared to no surface
occupancy or something like that are the difficulties in
getting permits. We would be pleased if the BLM could do as
good a job of getting permits out as quickly as the States do.
We would like to see their performance improve, and whether
that takes more resources or a reprioritization of resources--
whatever it takes, it is important to do that if we are going
to increase gas production.
I understand that at least the initial part of this lands
inventory has started, and preliminarily from what I understand
they are looking at the Green River basin right now. They are
actually finding leasing or resource restrictions significantly
greater than what we found in the NPC report, so we are looking
forward to seeing more of that information.
Senator Thomas. We have been working on that for about 4
years, as I recall, or more. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you. We have been joined by Senator
Craig. Senator Craig is one of the senior members of this
committee from the State of Idaho, another Western State with a
lot of public land.
Senator Craig. Mr. Chairman, a lot of public lands, but we
became volcanically too active about 11 million years ago, so
we do not have many hydrocarbons left under our structures.
Just a little lip of the overthrust over in southeastern Idaho,
but it apparently does not hold a great deal of potential.
David, 17 percent of the National Petroleum Reserve in
Alaska is in itself valuable, but that is not to suggest that
the world is now open to exploration, and I believe that 3.9
million acres that did receive recognition in your tenure
represents 17 percent. Is that correct?
Mr. Hayes. That sounds about right, because that was the
request of the Governor and the industry in terms of the first
bite of analysis to open it up. The assumption was that the
industry would prefer to have the access close to the current
infrastructure of Prudhoe Bay, and obviously as you move
further west, the production costs go up higher. I am sure that
Secretary Norton would be happy to, and we would have been
happy to, to start an EIS process to open up additional areas
in the National Petroleum Reserve. That is really what the
reserve is for.
Senator Craig. And therefore you would advise her to do so?
Mr. Hayes. She is not asking for my opinion, Senator, any
more.
Senator Craig. I would have a comment to that, but it would
probably be less than honorable.
Mr. Hayes. No, no, I do not feel it is appropriate for me
to advise her, but obviously if there is--I do not think there
is any question that the National Petroleum Reserve is a very
important piece of our energy future, and that if there are
potential additional reserves that industry is interested in
developing, it certainly should be explored.
Senator Craig. Well, we can all debate on what is or is not
available. I do not know a great deal about the agencies
functioning in oil and gas because it is of direct interest to
me, but it is not of direct impact to my State. But I do watch
very closely a strategy that was employed over the last eight
years that dramatically declined the ability to offer up timber
sales.
About an 89 percent decline in timber production on public
lands occurred in an 8-year period. One of the ways of doing
that is to basically disallow and/or diminish the ability of
the on-ground staff to put up, or make available, or to review,
and that is exactly what happened. In fact today, as a result
of the last 8 years, it is almost impossible for some of my
force in Idaho to muster people of any talent that would put up
a timber sale, or could, that would have the basic knowledge to
do so. So it is one thing to suggest there is a green sale
program; it is another thing to suggest that we have the staff
to do it.
It was an interesting strategy, but it worked. I am not
sure that is true in oil and gas, because I do not know, but I
know that Senator Burns is suggesting that in Billings there
are, I believe, 557 BLM employees, and yet they are incapable
of or less than capable of, or less than timely, in their
ability to deal with the applications in a way that is
meaningful. So there are a lot of ways of dealing with this,
and certainly all of the environmental standards must be met.
In the mid-1980's while we were still active in the
overthrust belt, I was serving in the House, and I felt it was
important that my colleagues from Eastern States go West and
look at the oil production that was going on in the overthrust
belt. I had people like the late John Siberling--certainly a
devout environmentalist--and others who traveled with us. I
wish my colleague from Wyoming was still here, because I will
never forget the morning that we lifted off from Jackson Hole,
and we all know about Jackson Hole, Wyoming, a beautiful,
pristine valley up against the backdrop of the Tetons. And we
were flying south of Jackson Hole and slightly west, still in
the State of Wyoming, looking for a drill site in which
drilling had gone on but nothing had been discovered.
So the drill rig had been pulled, the reclamation had gone
forward about 2 years before that, and the road had been
obliterated, seeded in, and we overflew the area a couple of
times. The pilot and the Federal person could not find the
site. So we finally circled a clearing, and as we dropped down,
we lost sight of Jackson Hole which was in the distance. We
could still see the city, and we landed in a clearing and
scared out a cow, a elk and her calf and found the drill site.
My point is simply this: The technology and the ability we
have today to recover and reclaim and make safe is so real
compared to where we were decades ago--and this was still
nearly 2 decades ago, 15 years ago, I would guess--that the
tragedy of an unwillingness to look at reality today is that
the American consuming public and the economy often times gets
put through what they should not have to be put through. I am
often times interested when people say, Mr. Chairman, will we
develop an energy policy if the Senate cannot support ANWR? And
why should ANWR be a part of an overall energy strategy?
Why should any of us as public policy makers debate energy
without laying all of our potential energy cards on the table?
I think that is what my colleagues were talking about when they
talked about areas offshore that are restricted today. That is
not to suggest that we would not restrict them in the future,
but if we are really going to be honest with the American
public, then we ought to lay all of the cards on the table and
once again decide based on our ability and technology, and not
emotion and not politics, what is or is not doable, what is
right or wrong in the current economy, and in the current
environmental technology that is available. Hopefully someday
we will get there; I would hope that it is not driven by $3 or
$4-a-gallon gas, but it may well be in time.
So we have got a job to do, and Mr. Chairman, thank you for
your willingness to pursue it in a very direct way. But to be
dishonest with the American people at this time, and to suggest
to them that they spend ever-increasing amounts of their income
for their energy needs in an absence of a responsible and
honest dialogue is in fact false policy, and I hope that we can
adjust that.
The Chairman. Thank you very much, Senator Craig.
Mr. Hayes, relative to your comments with regard to what
action your administration under your stewardship took--I think
we have a few differences of opinion. I would ask you a
specific question whether the Department of the Interior--the
Department responsible for OCS leasing--supported deep water
royalty relief within the Clinton administration initially.
Mr. Hayes. I cannot speak to initially. I know the
President signed the bill and supported it. Of course, Senator
Johnston is the key to that.
The Chairman. I was ranking member then and worked with
Senator Johnston. The fact is--and perhaps we ought to ask
Senator Johnston, but the Department of the Interior fought
this issue, and it was the Department of Energy that prevailed.
Mr. Hayes. Yes.
The Chairman. So, to suggest that it is appropriate that
the Department of the Interior take credit for this I think is
a bit misleading, and we would be happy to have any comments
that Senator Johnston might care to make as to the
concentration of efforts to prevail during the Clinton
administration. You know, it is kind of interesting between
monument designation withdrawals and a last-minute 60 million
acre roadless policy, the amount of lands closed to energy
exploration and development almost doubles--almost doubles the
total OCS acreage leased during the past 8 years.
There were approximately 38 million acres of OCS area land
leased, and there were about 65 million acres that were closed
in the monuments and roadless on shore. So while you point out
with some pride what you accomplished, I do not think you are
giving the American people a fair evaluation of what you closed
in the process of accomplishing it. Your role in this probably
was not of significance, but nevertheless I think it reflects a
reality that clearly the Department of the Interior was opposed
to OCS royalty relief, and the Department of Energy was the one
that prevailed as a consequence of the good works of Senator
Bennett Johnston. If you care to dispute that, please proceed.
Mr. Hayes. Mr. Chairman, it is rare that I would dispute
anything you say. I respect you very much, but let me just say,
if I can--my statement was that the administration supported
the Royalty Relief Act, and the President signed the bill and
the Interior Department moved out very quickly and aggressively
in implementing it, and the leasing numbers show the result.
If I could comment very briefly on the amount of land
designated in national monument status. As I said in my
testimony, prior to the designation of national monuments, we
obtained oil and gas survey and mineral survey information from
the USGS. That information has recently been confirmed in
another U.S. report that was done in March of this year by the
new administration, and they confirm that less than one million
acres of the monument-designated areas have any significant
potential for oil and gas, and I have laid that out.
With regard to the roadless rule, I would just like to
point out that that is now underway--the analysis of how much
potential oil and gas there might be. The Department of Energy
study suggests about 11 TCF of natural gas. I would just like
to point out that that is less than 1 percent of the total
reserves as identified in the National Petroleum Council
report.
The Chairman. Do you recall the figures that were given to
this committee in the overthrust area, Rocky Mountain West,
that there was probably somewhere in the area of 21 trillion
cubic feet of recoverable gas reserves that were eliminated by
the roadless withdrawal, and did you have any role in that, or
did you have any knowledge of it?
Mr. Hayes. No. My knowledge of this is based on the record.
Of course, it was the Forest Service that did that rule. My
understanding is that the record includes the study the
Department of Energy commissioned which indicates that the
potential loss--and this was disputed by the Forest Service--is
11.3 trillion cubic feet of natural gas, which would be less
than 1 percent of the potential available gas according to the
National Petroleum Council report.
The Chairman. Well, I think there is some reasonable
dispute on that, and obviously that withdrawal had a dramatic
affect on the domestic prospects for gas, particularly to
discoveries in the overthrust belt. The fact that it was made
roadless put it off-limits, and I think it is fair to say that
there was very little consideration given from the standpoint
of--I do not know. Mr. Rubin, can you comment on that at all?
Mr. Rubin. Yes. I think that part of what Mr. Hayes is
saying makes our case in that it would have been fairly easy to
consider the impacts on energy from these decisions, and just
to have modified their decisions a little bit, and we could
have captured most of the natural gas, for example, that was in
the roadless moratoria by just modifying the moratoria a little
bit in the Rockies by limiting the moratoria by about 5
percent, and by taking a look at the few monuments that had
significant resource potential, and actually modifying what
they did beforehand rather than having to get information after
the decisions are made to indicate what the resource potential
was.
The Chairman. I am looking, Mr. Hayes, at the study of
Advanced Resources International, and the conclusions. And it
says the vast majority of natural gas resources in IRAs--IRAs--
are found in the Rocky Mountain region. These resources, 11.3
trillion cubic feet, are mostly contained in the largest nine
plays in the Rocky Mountain region.
Implementation of the roadless policy will close to
development 9.4 trillion of natural gas, increasing the total
estimate by the 1999 NPC study from 29 to 38 trillion cubic
feet, a significant 32 percent increase. Now, to me the only
way I can read this is that areas of potential oil and gas have
been taken out of development by this roadless action, and it
was under your watch.
Mr. Hayes. That's correct. Those are the same figures, and
just to put that into perspective, if you add those two figures
together plus the west coast and the Gulf and the east coast,
the offshore resources together, it is about 100 trillion cubic
feet of gas that largely because of the offshore moratorium, is
unavailable for drilling. And that total is about 7.5 percent
of the Natural Petroleum Council's estimate of the reserves. I
should mention that the USGS apparently is potentially upping
that estimate.
The Chairman. Well, to a large degree I do not think you
can dodge the reality that our energy crisis is due, in some
portion, to the idea of a death of thousand cuts. Whether it is
what is done in the overthrust belt, what has been done with
the moratoriums, what has been done, and done, and done, and
yet we are crying for energy. Mr. Leahy, I was hoping that one
of you would give us a little information on when we could
expect to relieve our dependence on oil for transportation.
Well, look at conservation--it is important. We look at
alternative energy and it is important. But oil flies the
airplanes, the ships, the trains, the automobiles, the trucks.
When are we going to get some relief?
Dr. Leahy. I guess the way I would answer that question,
Senator is, as you know, we are dependent on foreign sources
for more than or about 50 percent of our consumption.
The Chairman. And we are just going to import it?
Dr. Leahy. Well, the point is it will require, I believe,
all of the issues in terms of conservation and development that
this group has talked about.
The Chairman. Well, I know what Mr. Simmons just told us of
50 thousand barrels that we could save if we put a million cars
in there. Do we have an answer? Are we going to continue to
depend on fossil fuels, particularly oil, for transportation in
the foreseeable future?
Dr. Leahy. I do not see our dependence on oil disappearing
quickly.
The Chairman. Well, that is supported. I assume some of you
have seen the CSIS study that came out here a short time ago.
It said for the next 20 years just not the United States--and I
think that is part of our problem, we think of ourselves as a
little island, that everything circulates around us--but there
are developing countries, and then there is China, and the
demand for oil is going to increase, and we are either going to
produce more and relieve our dependence, or we are going to
import more in spite of the efforts and the necessity of
conservation.
I wish these people that say conservation is the answer
would give us a formula for achieving it. Indeed the answer is
we can do more, but we use more. We have more airplanes flying,
whatever.
Now a couple more questions and I think we can break this
up because it has been valuable. I think we have had some
conversation about leasing lands, and that does not necessarily
make then suitable for exploration and production. Permitting
time and development time are significant, and we have had
problems in this area where we try and balance legitimate
environmental consequences, but is there in your collective
opinions--and maybe Mr. Stanley, you are in the oil business--
can we take steps, still protect the environment and the
legitimate concerns and still expedite the process that you
would specifically recommend?
Mr. Stanley. Yes, sir, I think we can. The footprint is so
much smaller today than it ever has been, and drilling gas
wells in the Rocky Mountain region where you usually have one
gas well per every 160 acres, the size of the drill site is
only two to three acres, so it is a very small part of the land
that is used to drill a well. And then after we finish
drilling, most of that two to three acres is reclaimed, and the
resulting producing pad is maybe only a half an acre or a third
of an acre, so it is a very small imprint on the land.
The Chairman. Has government made it easier or more
difficult as time has gone on? In other words, you have had
experience in this for some time. Is it getting easier, or is
it getting tougher?
Mr. Stanley. It is getting much tougher. An example is I
guess I keep talking about the big game winter range, but that
is a significant problem. In the old days--5, 10, 15 years
ago--we were only precluded from drilling if the animals were
actually in the area and then moving in, and then only on part
of a lease. More recently, that restriction has been much more
widespread, so that stops a lot of wells from being drilled in
the winter time.
The Chairman. Mr. Leahy, the proven reserves of oil for the
United States--did you include--I think you used something like
23 or 24 billion barrels of proven reserves?
Dr. Leahy. Let me go back to my notes. Based on our 1995
assessment for onshore and State waters, our proven reserves
were 20 billion barrels.
The Chairman. 20 billion. And that is onshore?
Dr. Leahy. And State waters.
The Chairman. And State waters. Can you differentiate
onshore and State waters of your 20 or so?
Dr. Leahy. We should probably answer that for the record,
Senator. I cannot----
The Chairman. Most of it is onshore?
Dr. Leahy. Yes. I would say so.
The Chairman. Did you include any estimate for ANWR in
there? In that figure? The ANWR figure being a low of 5.6 and
high of 16, maybe a mean of ten?
Dr. Leahy. Okay, the ANWR figures are basically
undiscovered resource base, not proven reserves.
The Chairman. Right.
Dr. Leahy. So it would be----
The Chairman. So you are only using proven reserves?
Dr. Leahy. Yes.
The Chairman. Are you using the ANWR figures in your
unproven reserves?
Dr. Leahy. Not in 1995. The 1995 numbers that I quoted did
not include the more recent estimates of ANWR that were done in
1998.
The Chairman. Now would you explain--there were three
estimates on ANWR over the last decade.
Dr. Leahy. Uh-hm.
The Chairman. And one of them was done in less than a week?
Dr. Leahy. Yes.
The Chairman. To accommodate the Department of the Interior
at a time when they wanted a different figure. Is that about
right?
Dr. Leahy. That is correct. Well----
The Chairman. Well, whatever. And can you elaborate for us
the different figures that were used and how long it took
roughly for each estimate to be developed?
Dr. Leahy. I can provide some insights but, again, probably
not figures. Basically the national assessment was done in
1994. The numbers used in that were based on a 1987, I believe,
assessment of ANWR. But clearly in the 1994 assessment, they
ranked the Alaska north shore as having high potential, but
there was not much known about ANWR at that point in time.
The Chairman. Well, there has not been any more known about
it since then.
Dr. Leahy. Well, there was geophysical data that was
available and was basically used in the 1998 assessment, so we
were able----
The Chairman. Well, you are not----
Dr. Leahy. There was more geological information than there
was----
The Chairman. Well, there was not any exploration that went
on.
Dr. Leahy. No, no, but there were some geophysical lines
that we were able to take a look at, and there were some wells
drilled.
The Chairman. So what did you come up with in 1987 on the
1987 figure which came out in 1994?
Dr. Leahy. I do not have that--I would have to answer it
for the record, but clearly in the 1998 assessment in terms of
technically recoverable resources, if we look at the entire
assessment area----
The Chairman. 1002 area is what we are talking about.
Dr. Leahy. You want the 1002 area?
The Chairman. Well, that is----
Dr. Leahy. Well, let me do the entire assessment area. At
the 95 percent probability----
The Chairman. When you say the entire assessment area, are
you telling me that consists of all of the million-and-a-half
acres?
Dr. Leahy. It is all of ANWR, yes.
The Chairman. Okay. So it is all of the 1002 area.
Dr. Leahy. Well, yes. 1002 was----
The Chairman. And this was in 1998?
Dr. Leahy. This is the 1998 number. At the 95 percent
probability, 5.7 billion barrels of oil, at the mean 50 percent
probability, 10.36, and at the 5 percent probability, about 16
billion barrels of oil.
The Chairman. Okay, now for the record, if it were 10.36,
where would that ranking in size in the standpoint of oil
fields found?
Dr. Leahy. It would be--this is multiple fields, keep in
mind.
The Chairman. I am saying a million-and-a-half were 1002
area, if you say it is 10.36, what would it rank with?
Dr. Leahy. Well, just to give you some perspective, Saudia
Arabia--the giant oil fields----
The Chairman. I am talking about the United States.
Dr. Leahy. I believe the east Texas field is about five
billion.
The Chairman. Well, obviously this 10.36 is bigger than
five, so it is bigger than the east Texas field. Is it bigger--
--
Dr. Leahy. That is one of the larger ones.
The Chairman. Are you suggesting it is the largest if it is
10.36?
Dr. Leahy. Yes.
The Chairman. I have to deduce that unless you come up with
something else.
Dr. Leahy. Keep in mind that the number I quoted you was
basically for multiple fields; it is the volume of the
undiscovered resource.
The Chairman. It is in--I know. The issue before the
Congress is whether to open the 1002 area, the million-and-a-
half acres or not.
Dr. Leahy. Okay.
The Chairman. And I assume you have given us a mean of
10.36.
Dr. Leahy. For the entire assessment area. For the ANWR
area which is smaller, as you know----
The Chairman. Now, just a minute. You just told me the
assessment area was a million-and-a-half acres, which is the
question here. It is not the 19 million acres that are in ANWR.
Dr. Leahy. Okay. Let me just quote the 1002 area, which is
the smaller area. That would be 7.7 billion barrels of oil at
the 50 percent probability. I believe the Prudhoe Bay field is
something on the order of 13 billion barrels.
The Chairman. It was 10 originally; it has produced 12.
Dr. Leahy. And there are some estimates that there are
three left.
The Chairman. So you are taking in 19 million acres of ANWR
in your mean of 10.36? Is that correct?
Dr. Leahy. Yes, that is for the 19 million.
The Chairman. So you are picking up roughly 3 million acres
outside the 1002 area in your calculation?
Dr. Leahy. Correct.
The Chairman. Okay. And what would be the high then for
just ANWR?
Dr. Leahy. 11.8 at the 5 percent probability level.
The Chairman. So if you took the mean it would be 7.7?
Dr. Leahy. Correct.
The Chairman. And if you took the high it would be 11.8.
And the largest field in North America is----
Dr. Leahy. Prudhoe Bay.
The Chairman [continuing]. Prudhoe Bay, and that was 10
initially, and it has produced 12. So what I am attempting to
draw from you--and I am having some difficulty in doing it--
even if it were the mean of 7.7, it would be the largest field
found in the United States in the last three or four decades?
Dr. Leahy. It is not a field; it is multiple fields. But
certainly the volume of oil----
The Chairman. It is in the 1002 area, and the only thing
Congress can address is whether to open the 1002 area or leave
it closed. The question I continually ask is how much oil is
there, and obviously we do not know and we have to depend on
you and you are telling me that there is a mean of 7.7 and a
high of 11.8.
Dr. Leahy. That is correct. Senator, I think a way to
appropriately look at the relative size is that in 1989 in
Colombia, the Cuciana Field turned out to be the second largest
field discovered in all of the western hemisphere. They thought
it was going to be about the size of Prudhoe Bay, and it turned
out to be half that size, so I would guess that this area would
rank number two.
The Chairman. Okay, well, it is hard to get a guess out of
the professionals, but we have a guess out of the financiers,
which are the ones that have to finance this development.
How important is the energy problem to our economy, Mr.
Simmons, and relate to the fact that we are now looking at
natural gas as our savior.
Mr. Simmons. I do not think you can have any form of
economy that makes any sense----
The Chairman. What kind of an economy?
Mr. Simmons. Any form of an economy that makes any sense at
all without reliable and dependable energy. When Henry
Kissinger wrote his last book, when he reflected back on the
1970's, with the benefit of 25 years of hindsight, he described
the 1973 oil shock as the second worst threat to the economies
of the world since World War II. I think what we are in now is
significantly worse than the 1973 oil shock once it plays out.
The Chairman. Why do you say it is worse now than the 1973
oil shock? We had lines around the block in 1973. The public
was outraged.
Mr. Simmons. Yes.
The Chairman. They were pointing their fingers at everybody
and government was ducking. Why is it worse now?
Mr. Simmons. The 1973 oil shock lasted 65 days. It was
consumers panicking, topping off their tanks, and it was
strictly related to oil. We had ample supplies of natural gas
and electricity. By the time this plays out, I am afraid we
will look back and say this was far worse, because it is all
three forms of energy at the same time.
The Chairman. Well, how is this going to play out in your
vision? You made a broad statement there that we will look back
on this and it could be worse than 1973.
Mr. Simmons. When we have hot weather this summer--if we
have hot weather this summer--we are going to find the
electricity problems in California are going to spread to many
other parts of the country. I am afraid that we are not likely
to see any supply response from natural gas, despite the high
prices, for quite some period of time.
The Chairman. No supply response?
Mr. Simmons. To natural gas.
The Chairman. Why do you say that?
Mr. Simmons. Because we have basically had a rig count
drilling for natural gas that exceeded 600 rigs 16 months ago,
and it has now hit a 20 year high, and so far we have had
absolutely no supply response to the increased drilling. Canada
is a year ahead of us----
The Chairman. You say that we are drilling more, we are
putting more in, but we are using more?
Mr. Simmons. We are drilling--we are finding smaller
prospects, and the decline curves in almost all the basins of
North America are now so high that we created a treadmill that
created a need for an exponential amount of wells to be
drilled, and we are now just about out of drilling rigs.
The Chairman. Do you gentlemen agree with this statement
that we are going to look back at this time--weather patterns
obviously, we are now dependent for our energy policy on the
uniqueness of weather patterns--are we going to look back at
this time and say it is worse than it was in 1973? Mr. Leahy,
do you agree with that?
Dr. Leahy. I do not know.
The Chairman. Mr. Hayes?
Mr. Hayes. I do not know.
The Chairman. Mr. Rubin?
Mr. Rubin. I think we do have the unique situation in that
we do have tight supplies of a number of forms of energy. I am
not capable of predicting the future, but I am certainly
concerned about what is going to happen over the next several
months.
The Chairman. Mr. Stanley.
Mr. Stanley. Yes, sir, I agree with Mr. Simmons that we
have a shortage of oil, we have a shortage of gas supply, and
we have a shortage of electricity, and it is going to take a
tremendous effort to increase that supply. We are going as fast
as we can trying to drill more wells wherever we can, and as
Mr. Simmons said, we are just really holding our production
flat. We are not increasing it.
The Chairman. Well, Mr. Simmons, you predict a very bleak
picture. We have got a few people in this room that are
students of energy or are associated with energy, and a few
that are associated with the environmental community. We have a
few press that are left, and we have some television stations,
but this message is not getting across to the American people.
Why, Mr. Simmons, is it not getting across?
Mr. Simmons. I think there is embedded in too many energy
economists, and a lot of industry executives, a denial of the
fact that we are out of capacity. I think there is some
confusion about the difference between being out of energy
capacity and people think you are saying that we have run out
of energy.
A week from this coming Thursday, the Council of Foreign
Relations and the Baker Institute will be releasing an energy
White Paper, and there was a lot of debate among the forty or
fifty of us in what the energy issues were, but within about 12
hours I was incredibly pleased with the clarity that came out
of this group. I think that basically over the next few months
America will be starting to open its eyes more to the problems,
but they are very real, and as the months progress, they are
not going to get any better. They are just going to continue to
get worse.
The Chairman. You know, I am at a loss to know how to
communicate the likelihood of this problem occurring and
affecting our economy, our standard of living, our
vulnerability from the standpoint of our national security.
When I say that, I mean that we import 56 percent. In 1973 we
were at 37 percent. We created SPRO. We were concerned enough
to do something; we said we would never, ever allow ourselves
to be over 50 percent. Now we have lulled ourselves into a
complacency; we are at 56, 57. The Department of Energy is
saying we are going to be 60. We have seen OPEC develop a
discipline that they had not had before where when they want to
constrict the supply, they do, and the price goes up as we have
seen--it is $22 to $28, floor and ceiling? We still don't get
the message.
And as we look at our transportation system where I can see
relief potentially if we can develop more natural gas,
recognizing that we are now having a transmission problem, and
you heard the lady from Louisiana, distinguished Senator
Landrieu, say that she feels strongly that before we go off and
increase the supply, we better go off increasing delivery, and
she is right in that sense. We are constricted by transmission
adequacy in both pipeline and electric transmission.
So we are heading for this inevitable clash, and we are not
addressing it. They are going to blame government--they are
going to blame you and I as to how this could happen, and they
are going to blame our new President. We cannot seem to wake
anybody up. It is absolutely incredible, but I guess until the
squeaky wheel really squeaks or there are gas lines around the
block, or there are blackouts and there is no air conditioning
in certain parts of the country, they are going to get the
message.
If you look at the economy and the threat to the economy,
you look to the threat to our national security--we are
importing oil from Saddam Hussein. I keep telling you as a
general rule, what do we do? We take the oil from him, put it
in our airplanes and enforce the no-fly zone. We have flown
234,000 individual sorties over Iraq, endangered our men and
women. We have been very lucky.
Sometimes we bomb targets over there. He takes our money,
develops a missile capability, delivery capability, and aims it
at Israel, and the American people say, oh, gee, he shouldn't
do that. Where is it going to end? I do not know. Does anyone
want to add anything?
Mr. Simmons. I commend you for your speaking out very
loudly on this, and I share your frustration at the inability
to have people hear. A lot of denial going on.
The Chairman. For the record, Mr. Hayes, I did a little
checking so that we can work off the same song sheet, and with
regard to the Naval Petroleum Reserve in Alaska--you can put up
that chart while I speak--the record will note that 4.6 million
acres are available in the sense of leasing; 2.3 million acres
were set aside with the explicit provision of no leasing would
occur, and those are primarily in this area right here--on the
coastal area because of concern over our fish and wildlife.
There is a significant wildlife--particularly bird population--
over here. There is not much in this area. Three hundred
thousand acres of no surface occupancy, 220,000 acres
available, but with strict stipulations. 1.8 million acres
available with no restrictions, and 861,000 acres that were
ultimately leased.
The factual reality is that only 12 percent were leased, or
861,000 acres. One of the things that a lot of people forget is
they see this whole land mass here and assume there is oil on
all parts of it, and therefore if this is closed, NPR ought to
be able to supplant the idea that it would offset what
potentially might be in ANWR.
As Mr. Hayes knows, Husky drilling under a contract with
the Federal Government did extensive oil and gas exploration
without 3D seismic in the 1960's, and it was not very
promising. A geologist will tell you where you look for oil
based on rock formations and the likelihood. This is a hot
prospect but, nevertheless, I do not want to disclaim the value
of NPRA because clearly there is a potential.
One of the interesting things from the standpoint of
Alaskans is this used to be called Naval Petroleum Reserve
Number Four when we were a territory. This was set aside by
Congress with great wisdom back around the turn of the century.
Of course, you can have a Naval Petroleum Reserve at the top of
the world for our Navy that was sailing around the world at
that time on oil, but (a) they didn't know what was there, and
(b) they had no capacity to deliver it. Now we still do not
know what is there, and we do not have the capacity to deliver
it.
I would hope that this hearing had some value in the
relationship to communicating to the American people the
inevitability of what is going to occur, and I just hope that
somehow this message is going to get through, but so far we
have not had much luck. Hopefully your contribution is like
adding one more weight to the camel, and maybe we are going to
have to keep doing this until the camel collapses. I just hope
that the American economy and our national security interest is
not under the camel when the camel comes down. I wish you well.
Thank you.
[Whereupon, at 11:52 p.m., the hearing was recessed, to be
reconvened on April 26, 2001.]
[Subsequent to the hearing, the following was received for
the record:]
American Gas Association,
Washington, DC, April 4, 2001.
Hon. Frank Murkowski,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Chairman Murkowski: The American Gas Association requests that
the attached portions of the Potential Gas Committee's (PGC) biennial
report on long-range supplies of natural gas, which was released today,
be included in the record of the Senate Energy Committee's hearings on
domestic oil and natural gas resources, which was held on Tuesday,
April 3rd, 2001.
The PGC's report shows that the U.S. natural gas resource base is
estimated to be even larger than previously thought, but that the size
of the resource base is immaterial unless the nation can access
supplies and can build the infrastructure needed to deliver it. The
committee's report showed 1,258 trillion cubic feet (Tcf) in total
natural gas resources in the United States at the end of 2000. That is
the equivalent of a 63-year supply of natural gas at current rates of
production.
The size of the resource base actually increased since the
committee's last report in 1998, even though, since that time, 38 Tcf
of natural gas have been drawn down. During the past 10 years the PGC
has increased its estimate of the U.S. natural gas resource base with
each successive report. This year's increase is attributable to 4
percent growth in traditional reserves and 10 percent growth in coal
bed methane resources.
The Potential Gas Committee consists of more than 170 volunteer
members from the natural gas industry, government agencies and academic
institutions. It functions independently, but with the guidance and
technical assistance of the Potential Gas Agency of the Colorado School
of Mines. The committee receives financial support from AGA, the Gas
Technology Institute and other companies, organizations and
individuals.
Thank you for your consideration of this matter.
Sincerely,
Richard D. Shelby,
Executive Vice President,
Public Affairs.
Attachments:
Overview of Potential Gas Supply in the United States and
Limitations on Access to Public Lands have been retained in committee
files.
U.S. ENERGY TRENDS
----------
THURSDAY, APRIL 26, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:38 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Frank
Murkowski, chairman, presiding.
OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,
U.S. SENATOR FROM ALASKA
The Chairman. Good morning, ladies and gentlemen. I would
urge the witnesses to come together with us. And I wish you all
a good morning. Let me introduce the one panel that Senator
Bingaman, through our collective staff efforts, has extended
invitations to, and we appreciate your attendance.
Mr. Gary Heminger, executive vice president, Supply,
Transportation and Market, Marathon Ashland Petroleum, Findlay,
Ohio. Our next witness is Mr. Thomas Robinson. Mr. Robinson is
the CEO of Robinson Oil Company, San Jose, California. Good
morning.
I went to Bellarmine and Santa Clara. So I know something
about your prune orchards, or at least the prune orchards you
use to have. And I understand you are going to testify on
behalf of the Society of Independent Gasoline Marketers and
National Convenience Stores. You do not sell cigarettes to
minors, is that right?
Mr. Robinson. Absolutely not.
The Chairman. And Mr. Daniel Greenbaum, president of the
Health Effects Institute, Cambridge, Maryland. That is a rather
interesting title, ``health effects.'' I have a pollen problem.
So if you can address that in your testimony, provide some
relief, it would be most appreciated.
[Laughter.]
The Chairman. And it will take some pressure off the Senate
physician.
[Laughter.]
The Chairman. Mr. Don Daigle, director of Americas
Refining, ExxonMobil Refining and Supply Company, Fairfax,
Virginia, joined by Mr. Craig Moyer, executive director of the
Western Independent Refiners Association, Los Angeles,
California.
Good morning, gentlemen.
Today is a hearing, which is a part of a series of hearings
which Senator Bingaman and I have agreed to. And for those of
you who were not present yesterday, Senator Smith on the
Commerce Committee, Senator Wyden, both of whom are on this
committee, held a rather interesting hearing on why gasoline
prices were so high on the west coast. I think Senator Boxer
showed a picture of one of the stations in San Francisco with
prices up to, what was it, $2.35, which is rather startling.
I happened to mention on the side that if they got up to
$3, would she support opening up ANWR. And she ducked that
issues. But nevertheless, it was a good opportunity.
[Laughter.]
The Chairman. In any event, out of that hearing there was a
good deal of finger pointing. But there was some substantive
discussions on the reality of supply and demand. And the demand
has increased, and the supply has shortened as a consequence of
some of the things that hopefully you will bring about today.
We talked about reformulating gasoline, the duplications in
various areas of the country and the cost associated with
transporting and refining and batching. We talked about the tax
issues relative to various States.
We talked about the lack of refining facilities, which I
think to some extent came about publicly as a consequence of
the previous administration when they called down 30 million
barrels from SPR and found that, as we took that 30 million
barrels and sent it to the refiners, we found we did not have
any excess capacity. So really all we did with that was offset
what we are importing and did not get any net new supply.
I hope some of you will be able to amplify that, because I
am not sure the media and the public really understand the
severity of the issue with regard to the adequacy of our
refining capacity in this country.
We also touched a little bit about not in my backyard. The
entire east coast offshore of the United States is off limits
to OCS drilling. The entire west coast, with the exception of
Alaska, is off limits. So the question is: Where is this magic
going to come from?
We are going to look at fuel specifications infrastructure
and their impacts on the energy supply and the price. I hope we
will get a better understanding that gasoline is no longer just
gasoline, as a result of the State, local and Federal
regulations. I am told there are now 34 different types of
gasoline. I am surprised that the standard car can take them
all.
But nevertheless, we have this situation. And the
legitimate question is: Is this all necessary? Is there some
average witches brew that could be concocted that would lessen
the amount of reformulated gasolines we have? For example, fuel
made for consumption in Oregon is not suitable for California.
I know in Chicago, they have to use a different fuel than they
use in Springfield, Illinois.
The EIA reports that one Eastern U.S. pipeline operator
handles 38 different grades of gasoline, 7 grades of kerosene,
16 grades of home heating and diesel fuel, and 1 grade of
trans-mix. Maybe that is--well, we will not ask what that is.
But in any event, I think it is startling to recognize the
complexities that have occurred over an extended period of time
and the rationale behind those.
Refiners do not have the flexibility to move supplies
around the country to respond to local or regional shortages.
We have the issue of MTBE on one hand and then the throwing it
out and going to Iowa for ethanol, which makes Senator Grassley
very happy.
Now refining capacity we have talked a little bit about.
But the last significant refinery of any consequence, with the
exception of one that was built in my State, which is not as
big as the marathon refinery in Louisiana, which was built in
1976, was the refinery that Williams Brothers has in Fairbanks,
but it is a smaller refinery. So it is not in the same class.
In any event, we have not built any refineries for a long
time. Between 1990 and 1999 refining capacity actually
increased in the United States from 15 million barrels to 16
million barrels a day, but during the same time that
consumption went from 17 to almost 20. As a result, in 1990,
U.S. refineries could supply 94 percent of our needs, and in
1999 it is about 84 percent.
Now over the next 8 years, I am told the situation, unless
we do something about it, is obviously going to get worse. The
refining industry will be asked to comply with over, I gather,
dozens of new regulatory programs that will impact both the
cost to the consumer and the supply of fuels to the motoring
public.
Some of the regulatory programs directly impact
manufactured fuels, while others require new standards for
operation of refineries. As a consequence, refiners around the
country, already unable to keep up with the demand for product,
are being asked to make significant investments to supply
seasonal product for specific markets. And the cost of this is
added to the complexities and supply restrictions and is passed
on to the consumer.
Now we have not had the input from the administration yet
on their task force report. And so we are looking forward,
because we understand that some of the things we will be
discussing today will be addressed by the administration and
what they are for and what they are basically opposed to.
I want to thank my colleague, Senator Bingaman, for the
concern he shares in this hearing. I know there has been
concern about the state of our fuel delivery and our refining
system for a long time. We have watched the impacts on the
Nation's energy supplies, as Federal laws were passed and
implementation by administrations of both parties, in ways that
obviously added to the burden of American taxpayers.
But if the United States is to have an energy policy that
gives the American people some degree of certainty, the least
the American public should expect from its leaders. And I think
it is time to look at the impacts of all our decisions that
have been made on our fuel delivery system and determine where
the priorities are. So I look forward to hearing more from our
witnesses today.
Senator Bingaman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Well, Mr. Chairman, thank you very much
for scheduling the hearing. And I also believe it is very
timely and very important. And when we scheduled it, we did not
realize how timely it would be, at least as far as the news is
concerned. But there are a combination of factors that I think
have a part in creating this tight inflexible market we are in.
[Chart.]
Senator Bingaman. I have a few charts I wanted to just
briefly go through here. The first of them shows the problem we
have talked before, and that is the escalating consumption of
petroleum by gas, by light duty passenger vehicles. Of course,
this is led by the growth in the sports utility vehicles, which
the EIA projects to increase over two million barrels a day
within the next ten years. So that chart, I think, is one we
have shown before here. And I think it reminds us of a lot of
where the problem is.
[Chart.]
Senator Bingaman. A second chart relates to the number of
different fuel specifications that need to be produced and
distributed around the country. I think this is an instructive
chart that just shows at least part of the problem that we have
to try to deal with and legislation that I hope we can move
through this committee here in the next month or so.
[Chart.]
Senator Bingaman. A third deals with the difficulty of
siting new facilities, whether--I guess we do not have a chart
on that. But we do have a chart that shows the different
regions, called the PADDs. That is a--it is interesting that we
still use that phrase, ``petroleum administration for defense
districts.'' The map identifies the different PADDs that we
have in the country.
[Chart.]
Senator Bingaman. The other chart shows how reliant some
regions are on other regions for their refined products. I
think this chart here makes the case pretty dramatically that
the Gulf Coast region is providing by far the largest portion
of our refining product. And that, of course, creates the need
to transport those fuels hundreds of miles. That increases the
opportunity for something to go wrong somewhere in the system.
If we cannot produce enough gasoline, then we need to
obviously rely on greater imports. It is my understanding that,
given the number of different fuel formulations in this
country, it is very difficult for us to import gasoline from
anyplace but Europe.
Another complication, which you mentioned, Mr. Chairman, is
the concern about MTBE as an oxygenate, as required for
reformulated gasoline. California has banned MTBE beginning in
2003. Other States are seeking to do the same because of
concerns about groundwater contamination. I appreciate Dr.
Greenbaum being here to give us his views as to the science
related to that issue.
In the energy bill that I introduced with many of the
members as cosponsors here, we did propose streamlining the
number of fuel specifications around the country. And I hope we
can hear from the witnesses as to their views on that proposal
and whether it is appropriate or needs to be changed.
We also proposed increasing fuel efficiency for passenger
vehicles. I have serious concerns that without action to deal
with that demand growth, that soon we are going to see even
higher and more volatile gasoline prices. The public does
expect us to take some action to prevent that from happening. I
am sure the industry would also like to see that prevented.
And I look forward to hearing the testimony from the
witnesses on these very important issues.
The Chairman. Thank you, Senator Bingaman.
I think Senator Dorgan--were you next? I am sorry. Senator
Thomas.
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. Thank you, Mr. Chairman. I appreciate the
hearing. I am going to have to leave. We are having one on the
assistant secretary in Foreign Relations. So I have a statement
that I will submit.
But I just, I guess, wanted to say that we have talked a
lot about the problems. We have spent a lot of time trying to
identify what the problems are, and I think we know those
pretty well. I think it is time we found some solutions. And we
are going to have to do it in a short time. We are going to be
really pressed this summer; we already are.
We see the gas prices going up. It has an impact, not only
on tourism and all those things. But I just had some
contractors in my office. You can imagine the impact on
contractors.
As a matter of fact, the State is beginning to change their
contracts a little to reflect the prices. There is an electric
shortage. We know that that is going to happen. What are we
going to do in the short time? Those are hard questions. And I
think most of us have a pretty good grasp on what we want to do
over time, more production, more drilling, more movement,
transmission grid, all those things. That is not going to
happen right away.
So when people start banging on our doors more than they
are now and on yours, what are we going to do in the short
time? Heating fuel, very high. We have a lot of impacts. And,
of course, as I said, the impact on the economy may be more
severe than interest rates have been.
So I think we really--and I hope that you all will today.
What are your solutions? What are we going to do? Let us not
talk all about the problem, but let us start talking about some
of the solutions. Talk about the high prices, what is the high
profit that is being reported on the big companies? How does
that relate? What can we do on that?
So that is pretty tough stuff. I understand. And I am a big
supporter of energy and energy production. But I can tell you,
we have talked enough about the problems. We need to spend a
little time on the solutions. So as someone said, my reaction
is, a little less talk and a little more action.
Thank you, sir.
The Chairman. Thank you very much, Senator Thomas.
Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR
FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much.
I think we are all for less talk and more action. The
question is: What action? And I must say that I think our
energy policy, to the extent we have one, is a colossal mess in
this country. I think all of us understand that.
This hearing is on the issue of fuel specifications and
infrastructure constraints and so on. You know, it is
interesting. We come here now short of breath about this
problem, and we should be. But, you know, we were pretty
apathetic when oil went to $10 a barrel and people stopped
looking for oil and natural gas.
You know, we probably ought to understand in the future,
when oil goes to $10 a barrel, well, it might feel good in the
short run, but is it going to mean you are going to dry up the
funds and the incentive to search for oil and natural gas?
We sat around and yawned while people started buying gas
hogs that looked like armored cars in this country. And, you
know, the fact is that has a profound impact. People have a
right to do that, but that has a profound impact on
consumption.
Mr. Bingaman put up the transportation chart up there, or
the usage chart, that showed transportation on the top line
growing rather substantially. It has a significant impact. And
we have largely sat on our hands in this country and in this
Congress while the largest oil companies in the world decided
that they wanted to fall in love and get merged and get
together and pervert the marketplace. And if anybody does not
think that the larger and larger enterprises are not perverting
the marketplace, I say just take a look behind the headlines
and see what is happening.
On a related energy issue, I might note, yesterday I
received some information about the California situation.
Admittedly this is electricity, but it relates back to natural
gas. Californians paid $7 billion for power in 1999, $28
billion in the year 2000, and it is estimated to run as high as
$70 billion in 2001. Let me say that again. In 2 years $7
billion to $70 billion. Somewhere behind these figures is
something called grand theft. And as we evaluate what kind of a
policy and strategy we should develop, we ought to understand
where that comes from as well.
But we need to do a lot of things. We need to do a lot of
things right in order to address these issues. The absolute
number of refineries in this country has declined. We have
expanded capacity to existing refineries and facilities to help
them meet growing demand. And one of the questions is: What
kind of expansion can be expected with existing refineries?
The import of refined products has been relatively flat. We
have the flexibility to import more refined product or not. The
array of fuel specifications, as the chairman and the ranking
member have described, has reduced the flexibility in these
markets. I think that is a serious problem and one that we have
to address.
Are there alternative fuels that we could use as well to
address some of these issues? There are a whole series of
things that we need to deal with with respect to these energy
issues. And I think someone mentioned the issue of price
gouging and profits and so on. We ought to take a look at that
as well in a significant way.
Mr. Chairman, you and Senator Bingaman have done a great
job in trying to put together a series of hearings on all of
these issues. And I appreciate it. I am on the appropriations
subcommittee that is holding a hearing at 10 o'clock. And I am
the ranking member and have to be there. I regret I cannot be
at this entire hearing, but I want to thank you for these
hearings and am happy to play a role in them.
The Chairman. Thank you, Senator Dorgan.
Senator Craig.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. Well, Mr. Chairman, I, too, join with you in
obviously having tremendous interest about this hearing. I
thought it was fascinating yesterday morning. I was listening
to Matt Lauer interview our new President. And the question of
$3 gas in California this summer came up, recognizing that it
is already over $2 for premium. And the immediate response of
Matt Lauer was open up the Strategic Petroleum Reserve. And the
President tried to suggest to him that that was not the
problem, that it was much more involved, much more in detail.
And I think we are going to hear from some of our witnesses
today that that is absolutely the case. America will want a
very quick, short remedy to a problem that has been building
now, in part by some of our own doing, for a good long while.
And the question is: Can we move quickly to get out of what we
have seen as a kind of balkanization of the gas markets and do
a variety of things?
I am pleased that Thomas Robinson is back with us. I am
reading his testimony. I see that in 1996 he sat before this
very committee and suggested exactly what would happen, if we
did not respond, and it has happened. And somehow we have not
been willing to recognize the impact of our decisions or our
failure to make decisions on the impacts of those.
The ITCs looked at price gouging in California and would
suggest that that is not the case. While those tremendous run-
ups in energy costs were going on out in California, the
Federal Energy Regulatory Commission under the last
administration failed to respond. We have a new Chairman. He is
responding. And we are going to have to determine whether we
can give them the just and reasonable language within the
wholesale deregulation law to move in phase three and possibly
phase two without deterring investment into a market that
dramatically needs investment and new supplies.
There is a great deal out there to be dealt with. But in
the short run, turning on the spigot of the SPR is not the
answer. Recognizing that we have had a deteriorating
infrastructure and a rapidly increasing demand, or at least a
modified infrastructure, is a part of what we ought to be
about. And I think that is what we are going to hear from our
witnesses today.
Thank you.
The Chairman. Thank you very much, Senator Craig.
Senator Hagel.
Senator Hagel. No statement.
The Chairman. Obviously you are anxious to hear the
witnesses.
Senator Hagel. Let us get at it.
The Chairman. All right. We will move over Senator Bayh,
who has left us briefly. So we are down to Senator Schumer,
followed by Senator Landrieu. And we would appreciate brevity,
if it is possible.
Senator Landrieu. Down to us?
Senator Schumer. We do not think it was down to us.
Senator Landrieu. It is just including us.
Senator Schumer. It is over to us.
The Chairman. To the left of me.
[Laughter.]
Senator Schumer. Anyway, thank you, Mr. Chairman. I
appreciate it. I will be brief.
The Chairman. Good.
STATEMENT OF HON. CHARLES E. SCHUMER, U.S. SENATOR
FROM NEW YORK
Senator Schumer. This is a very important hearing. And it
is important for a whole lot of reasons. It is important in the
short term because, for the second summer in a row, Americans
are going to face the prospect of paying record high prices for
gasoline at the pump.
We have called a whole bunch of experts. Very few think it
is going to be less than $2 a gallon for high test. That is 20
cents higher than last year. And then each winter home heating
oil is higher than it was the year before, as well. So these
are very, very serious, serious problem.
And, frankly, Washington has been deadlocked for the last
several years on the energy crisis. Republicans talk about
drilling and increasing supply. Democrats talk about
conservation. We talk past each other, and nothing much is
done. And it is about time that we came together. Each of us is
going to have to give some. Democrats are going to have to be
willing to increase supplies in ways that they were not before,
environmentally friendly, if you will, but still more supply.
Republicans are going to have to be talking more about
conservation than before. Because in my judgment we are on the
edge of a crisis. We are not there yet, but if we twiddle our
thumbs a little longer, it will be upon us. And then we will
have to do all sorts of things that nobody wants to do.
So I just hope that this hearing, which talks about our
gasoline markets, is not the end-all and be-all, important as
it is. We have a serious problem that affects every faction and
every part of the energy equation, whether it be oil products,
natural gas, or electricity. And until we come up with some
kind of policy that both deals with supply and demand, we are
not going to succeed.
And I have a feeling each side would be willing to move a
little in the other direction, if they thought the other side
was moving a little in their direction. And that will be the
job of this committee, in my judgment, under your leadership,
Mr. Chairman, over the next several years.
Thank you.
The Chairman. Thank you very much, Senator.
Senator Landrieu, good morning.
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. Good morning. And thank you, Mr. Chairman
and our ranking member, for calling this important hearing. And
I would like unanimous consent to submit my written remarks for
the record.
The Chairman. Without objection.
Senator Landrieu. And just to add a brief comment, to agree
actually, with Senator Schumer, a new member of our committee,
but one that is well-versed in this area, that we are going to
have to really compromise and be more vigorous in our
compromise, both sides moving to the middle, so that we can
increase production, increase exploration, increase refining
capacity, and transporting the fuel and the energy from one
part of the country to the next, as well as on the conservation
side.
But I would, as I do regularly, just note what a
contribution that the gulf coast is making overall, and that we
need help and support and reinvestment in the gulf coast region
of this Nation, so that we can continue to produce oil, to
produce gas, minimize the environmental footprint, do it in a
way that conserves, also, but how the contribution in this
chart, which will be part of the hearing this morning, shows
how much moves from the gulf coast area, primarily from
Louisiana and Texas, to supply the east coast and to the
Midwest.
So I thank the panel for being here and just would hope
that we would continue to be sensitive how important it is to
reinvest some of these tax dollars from the oil and gas
industry back to the gulf coast area to help us with our
environmental challenges that are presented, as well as
environmental infrastructure necessary to supply this Nation in
this way.
Thank you, Mr. Chairman.
[The prepared statement of Senator Landrieu follows:]
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator
From Louisiana
Today's hearing on the present and future state of our country's
motor fuel market provides an excellent forum for us to focus some much
needed attention on the crucial role infrastructure plays and will
continue to play in energy policy. Without pipelines and refineries we
are simply unable to distribute necessary energy to consumers.
Most, if not all, of us are anticipating high and volatile gas
prices at pumps across the country this summer. Not only does the
evidence before us support this less than promising outlook for the
short term but it also extends to the long term. The Energy Information
Association expects demand for transportation fuel in the United States
to increase by almost 1.5% a year through 2020. To keep pace with this
growth our refineries will have to increase their production. However,
while the number of refineries in the U.S. has fallen sharply from 320
in 1980 to 150 in 2001, the ones that remain are operating at almost
full capacity.
This balance between supply and demand is fragile at best. The
probability of even the slightest problem causing supply shortages and
a sharp increase in price is too real to ignore any longer. It is
unacceptable for us to expect this system to continue to operate at a
level where there is no room for error. We are placing too much strain
on too few refineries. Without increased refinery capacity through new
construction or expansion of existing capacity, problems seem
unavoidable. In fact, in a recent report, the Federal Trade Commission
predicted price spikes for consumers unless refining capacity is
increased substantially. I am hopeful that today's hearing will stress
this point but also provide other options.
I also look forward to examining the other equally important
component of the process, distribution. Three of the country's top ten
gasoline consuming states are in the Midwest. The Midwest imports 25%
of its total demand from the Gulf Coast. While the Gulf Coast refining
centers handle half of the total barrels processed in the U.S. today,
there are only two pipeline systems in place to move the product from
the South to the Midwest. This is a tremendous amount of pressure on
Gulf Coast refining to meet demand in the Midwest. What happens if one
or both of these systems experiences problems? We must take the
appropriate steps to ensure that adequate infrastructure is in place in
order to guarantee the delivery of fuels to wherever they are needed.
Siting new pipelines can and should be efficient yet provide whatever
information is necessary so that proper consideration is given to any
potential environmental implications as well as the interests of the
community.
The Chairman. Thank you very much.
Before we bring on our witnesses, I would encourage people
who are interested in energy conservation go down on The Mall
at Seventh and Madison. There is a home built there, 3,000
square feet, by an outfit called Solar Strategies. And the
interesting part of this home is it is constructed in such a
way as to produce the energy is consumes.
Now that is done through solar panels and storage and
batteries and so forth, but it is a relatively interesting
advancement in technology. And it also has a capability,
through the switch gear, that at a time when the home is not
consuming energy through the utilization of the various washer,
dryer and so forth appliances, it has a switch gear capability
to kick back, if you will, onto the power source that comes
into the house, so it can be a net contributor to energy. It is
rather interesting. It is going to be down there for the
balance of this week. It is on the mall at Seventh and Madison.
I was caught by Senator Bingaman's reference to the larger
vehicles, the Suburbans and so forth. And it reminds me of
something that I picked up along the way. It says to the effect
that sometimes public policy has to reach a point of high
comedy or satire before this Nation can regain any sense of
respective to make intelligent decisions.
The national energy issue has reached that point, perhaps,
because last week the comedian Dennis Miller commented that
``every other vehicle in this country is a Lincoln Navigator.
And on that Lincoln Navigator's bumper is an Earth First
sticker.''
[Laughter.]
The Chairman. So I do not know whether you can blame our
new President George W. Bush for not being able to let you have
it both ways.
With that profound observation, I would encourage our
witnesses to come up with a solution.
Please, Mr. Heminger.
STATEMENT OF GARY HEMINGER, EXECUTIVE VICE PRESIDENT, SUPPLY,
TRANSPORTATION AND MARKETING, MARATHON ASHLAND PETROLEUM
Mr. Heminger. Good morning, Mr. Chairman and members of the
committee.
My name is Gary Heminger. I am the executive vice president
of Supply, Transportation and Marketing for Marathon Ashland
Petroleum, which we refer to as MAP. MAP was formed in 1998 by
combining the refining, marketing and transportation assets of
Marathon Oil Company and Ashland, Inc., to make the Nation's
fifth largest refiner.
We sell our products at all marketing levels through our
Marathon and Speedway stores, as well as to other retailers and
spot markets mainly in the Midwest. We are also the Nation's
largest blender of ethanol in motor fuel.
First, I would like to thank the committee for scheduling
today's hearing. Often we speak of energy issues. There is a
tendency to think only in terms of the upstream part of the
petroleum business. I am very pleased to have this opportunity
to present an overview of key aspects of the so-called
downstream part of our business.
We believe that these factors must be taken into account in
any discussion of national energy issues. We believe that we
can best serve the Nation's need for fuel delivery with minimal
interruption or inconvenience to the consumer by improving and
expanding our existing supply and distribution network. This
system is called upon to work flawlessly each day and every
day, despite ever changing market conditions.
The key point I would like to make today is that current
U.S. supply and demand is at a delicate balance. And any type
of disruption can cause local supply shortages and resulting
price spikes. EPA's recent tier two gasoline and highway diesel
regulations are a perfect example of rules that we believe will
increase the likelihood and duration of these supply
disruptions and move the entire U.S. gasoline and diesel
markets into the mode that California has experienced during
the last four years, one of volatility and high prices.
What the entire refining marketing and transportation
industry needs instead is a regulatory approach that will lead
to investment certainty, a fair and responsive permitting
system, and market sensitivity on the part of government
agencies.
Every day more than 60 million barrels of crude oil are
produced and shipped around the world with approximately 8
million barrels landing in the United States, which depends on
imports for nearly 60 percent of crude oil needs. At 18 miles
an hour, the trip from the Persian Gulf takes 45 days. That is
only the first step of a very long journey.
Pipelines transport crude oil to refineries, refineries
manufacture gasoline, diesel and other products, and the liquid
refined products then move to market over more than 70,000
miles of pipeline. All in all, it takes between 1\1/2\ and 2
months of detailed planning and adjustments to put the end
product where it needs to be when the consumers pull into our
service stations to fill their tanks.
Because today's available crude is high in sulfur and heavy
in gravity, the ever-increasing requirements for cleaner fuels
force us to make very large capital investments just to stay in
business. It is important to understand that the Midwest, where
my company is centered, is chronically short of product. This
area imports as much as 1 million barrels a day or 25 percent
of its total demand from the gulf coast.
Twenty-five Midwest refineries have been idled during the
last 20 years, the most recent closing, Premcor's Blue Island
refinery in Illinois.
The Chairman. Would you tell us why?
Mr. Heminger. Most of them were smaller refineries that
cannot hurdle the investment, the new EPA investment, for new
fuels and lower sulfur diesel, lower sulfur gasoline.
Senator Bingaman. Could I also ask a question there? Has
the actual output of refiners in your region decreased during
that same time, or has the output increased?
Mr. Heminger. Other refineries, the larger refineries, some
of those have increased.
Senator Bingaman. Overall has it increased or decreased?
Mr. Heminger. Overall it would have decreased marginally.
Senator Bingaman. In your region.
Mr. Heminger. In what I call PAD 2.
Senator Bingaman. Right. Thank you.
Mr. Heminger. Getting product from the gulf coast to needy
Midwest markets in the spring and summer is an obvious
priority. Yet there are only two major pipeline systems
handling this south to north traffic today. If one of these
lines is shut down during this critical time of the year for
damage repair, as was the case with Explorer pipeline last
year, the disruption is likely to be critical.
Even after the disruption, when the line is again fully
operational, the replacement volumes will only move to market
at about four miles per hour. And there is no pipeline capacity
or excess refining capacity to make up for that last volume.
Ethanol shipments by pipeline is not possible because of
contamination problems resulting from alcohol's affinity for
bonding with water. Ethanol, therefore, is blended mainly in
areas close to corn stills, most of which are in the Midwest.
Where RFG areas are far from the corn belt, ethanol
transportation costs increased significantly.
Within the pipeline industry, products move in batches.
That is, we operate somewhat like freight train. A batch of
unleaded gasoline may be followed by diesel and then maybe jet
fuel and back to gasoline. Because some products may contained
elevated sulfur levels, the ultra-low sulfur fuel requirements
will likely be difficult to meet due to product contamination.
Our company is planning two important projects. One is the
construction of a products pipeline from our Catlettsburg,
Kentucky refinery into the Columbus, Ohio market. And the other
is the conversion of a natural gas pipeline to liquid products
use. This project, dubbed Centennial Pipeline, will add another
vital link between the Midwest and gulf coast refining centers.
Major investment will be required to upgrade and enhance
our Nation's supply and distribution system. We want to provide
clean, cost-effective fuels for our customers. And we are
willing to do our part. But in order to make the necessary
investment, we need an improved regulatory climate. We need an
end to unreasonable permitting delays and final rules that are
unambiguous. Regulations must also provide adequate lead time
and an appropriate phase-in period, as well as sufficient time
to recover the investments required.
Finally, the Government should refrain from interference in
the marketplace. Our industry has traditionally opposed
mandates, such as the requirement for oxygenates in RFG,
because such requirements only add inefficiencies to an already
complex system designed to supply America's fuels needs.
I appreciate the opportunity to appear before you today,
and I look forward to answering any further questions. Thank
you.
[The prepared statement of Mr. Heminger follows:]
Prepared Statement of Gary Heminger, Executive Vice President, Supply,
Transportation and Marketing, Marathon Ashland Petroleum
Good morning. My name is Gary Heminger. I am the Executive Vice
President of Supply, Transportation & Marketing for Marathon Ashland
Petroleum LLC.
MAP Statistics
My company, which we refer to as MAP, was formed in 1998 by the
combination of the refining, marketing and transportation assets of
Marathon Oil Company and Ashland Inc. Marathon Ashland Petroleum is the
nation's fifth largest refiner. We operate seven petroleum refineries
in the U.S. with a combined throughput capacity of 935,000 barrels of
oil a day. In addition we operate 93 marketing terminals in the Midwest
and Southeast U.S. which distribute gasoline, diesel and asphalt, and
we operate over 5,400 retail outlets in 20 states. We are also the
nation's largest blender of ethanol in motor fuel.
The Need to Improve Transportation Systems
I appreciate the opportunity to discuss motor fuel market
conditions and logistical challenges with you. It is our view that we
can best serve the nation's need for fuel delivery--with minimal
interruption or inconvenience to the consumer--by improving and
expanding our existing supply and distribution network. The supply and
distribution system is called upon to work flawlessly, each day, every
day, though the context of market conditions changes constantly. The
key point that you should take away from my testimony is that current
U.S. supply/demand is at a delicate balance, and any type of major
disruption can cause local supply shortages with their resultant price
spikes.
EPA's recent Tier 2 gasoline and highway diesel regulations, plus
their non-road diesel rule under development, will increase the
likelihood and duration of these supply disruptions and move the entire
U.S. gasoline and diesel markets into the mode that California has
experienced during the last four years--one of volatility and high
prices.
What MAP and the whole refining, marketing and transportation
industry need to minimize these potential disruptions is: Regulatory
Certainty, a Fair and Responsive Permitting System, and Market
Sensitivity on the part of government agencies. I will elaborate on
these later in my testimony.
Major Tanker Movements Around the World
Every day more than 60 million barrels of crude oil are produced
and shipped around the world, with approximately eight million barrels
landing in the U.S., which depends on imports for nearly 60 percent of
its crude oil needs. At 18 miles an hour, the trip from the Persian
Gulf takes 45 days.
Value Chain
Pipelines transport crude oil to refineries, a process that takes
ten days on average. Refineries then manufacture gasoline, diesel,
asphalt, petrochemicals and other products.
Refined Products
The refining process takes roughly five days on average. During
this time, for example, federally mandated reformulated gasoline (RFG)
goes through up to ten processing steps at temperatures and pressures
as high as 1000 degrees and 2000 pounds per square inch.
U.S. Products Pipeline & Barge System
The liquid refined products, such as gasoline and diesel, move to
market over more than 70,000 miles of pipeline, accounting for
approximately two trillion barrel miles of product movement at roughly
four miles per hour . . . that's right, four miles per hour. Products
also move along the nation's inland waterways. This step alone,
including the hauling by transport truck to service stations, adds 10
to 15 days to the entire process.
Time From Oil Well to Gas Pump
This means that about 1\1/2\ to 2\1/2\ months of detailed planning
and adjustments are required so that our customers have the fuel to
fill their vehicles when they pull into our service stations.
As a major petroleum refiner, Marathon Ashland refines nearly one
million barrels of crude oil per day, including a significant portion
from the national oil companies of Saudi Arabia, Kuwait and Mexico.
With the available crude being higher in sulfur and heavier in gravity,
the ever-increasing requirements for cleaner and cleaner fuels force
refiners to make very large capital investments just to stay in
business.
We buy additional intermediate feedstocks so that our refined
product yield increases to about 1 million barrels per day. We also buy
products from other refiners so that our total products-for-sale equals
1.25 million barrels per day, or 19 billion gallons annually. We sell
our products at all marketing levels; through our Marathon brand and
Speedway brand stores, as well as to other retailers and spot markets.
Midwest Material Balance
Please note that the Midwest--which includes three of the nation's
top ten gasoline consuming states--is chronically short of product. The
Midwest imports as much as 1 million barrels a day or 25 percent of its
total demand from the Gulf Coast. This volume will increase as fuel
needs in the Midwest return to historic norms: 2% growth or 280,000 new
barrels per day.
Midwest Refineries Idled
Twenty-five Midwest refineries have been idled during the last 20
years--the most recent closing--Premcor's Blue Island refinery in
Illinois--came in February of this year. These smaller plants could not
perform in an environment of increasingly costly regulation. Gulf Coast
refineries fared better. America's Gulf Coast refining center now
handles one out of two barrels processed in the U.S., thanks to the
area's economies of scale, lower labor costs and access to crude oil.
Teppco, Explorer Proration Days
Getting product from the Gulf Coast to needy Midwest markets in the
spring and summer is an obvious priority. Yet there are only two major
pipeline systems handling this south to north traffic today. They are
full during the nine months of the year that surround the peak summer
gasoline demand, and routinely turn down nominations for additional
shipments. If one of these lines is shutdown during this critical time
of the year for damage repair, as was the case with Explorer last year,
the disruption is likely to be critical. Even after the disruption,
when the line is again fully operational, the replacement volumes will
only move to market at about four miles per hour, and there is no
pipeline capacity or excess refining capacity to make up for the lost
volume.
The Inland Waterway
Movement on the inland waterway is similarly constrained. The
waterway system includes 25,000 miles of navigable rivers and canals,
but only 12,000 miles are commercially and actively maintained. Despite
technological innovations, system utilization is restricted due to
weather, outmoded locks, dams, low bridges, and waterway deposits. Over
50 percent of the locks and dams created by the Corps of Engineers are
over 50 years old. Many built in the 20's and 30's are at the end of
their design lives. In fact, 8 of 20 locks and dams on the Ohio River
are scheduled for repair.
Because Corps of Engineers funding for lock and dam maintenance and
dredging operations has been cut for 2001, it is doubtful the Ohio
River maintenance program can be completed in a timely fashion. We
believe it is imperative to ``catch up'' and increase investment in
waterway infrastructure because this mode of transportation moves
commodities valued at $33 billion to the Midwest's Ohio River basin,
$3.3 billion in petroleum alone.
No Ethanol Movements With Pipeline Sign
Ethanol movements by barge are limited by waterway, weather, and
infrastructure problems. In addition to physical infrastructure
problems, chemistry can frustrate our operations. Ethanol shipment by
pipeline is impossible because of contamination problems resulting from
alcohol's affinity for bonding with water. Water is present in all
pipelines. Without low cost pipeline movement, ethanol proves expensive
to transport, and it is blended mainly in areas close to corn stills, a
majority of which are in the Midwest. Where reformulated gasoline
markets are far from the corn belt, ethanol trucking costs increase
significantly.
Cumulative Regulatory Impacts on Refineries, 2000-2008
Regulatory restrictions ranging from oxygenate requirements in RFG
to urban air toxics requirements have imposed additional burdens on our
business in terms of cost and infrastructure. Of immediate concern are
EPA's requirements for dramatically lowering the sulfur content in
gasoline--30 ppm by 2006 for highway diesel--15 ppm in the same
timeframe, while off-highway diesel regulations are still under
development. To date, only the refinery process has been studied. Just
as important is the transportation process. Within the pipeline
industry, products move in batches; that is, we operate somewhat like a
freight train. A batch of unleaded gasoline is followed by diesel fuel
and then maybe jet fuel and back to gasoline. Because some products may
contain elevated sulfur levels, there is a high probability the ultra
low-sulfur fuel requirements will be difficult to meet, due to product
contamination in pipeline or tankage.
We are in the process of evaluating what additional investments
will be needed for our pipeline and terminal systems to avoid
contaminating these ultra clean fuels as they move through a
distribution system not designed to maintain this low level of sulfur.
High Consequence Area Testing
At the same time that we are dealing with pipeline investment
related to new fuels, we are required to establish new and more
frequent testing programs for environmental risks associated with
pipelines moving through what the Office of Pipeline Safety calls High
Consequence Areas. What worries some of us in the industry is whether
there are enough resources available to test, interpret, and analyze
the data generated by the line tests. By implementing a date certain
timetable, rather than phasing in the testing, regulators have assured
a ``gold rush'' for scarce and expensive testing equipment. Costs will
skyrocket and deadlines will be missed.
Cardinal and Centennial Projects
Our company is planning two projects that will address some of the
problems I have reviewed with you this morning. One is a products
pipeline from our large Catlettsburg Kentucky Refinery into the
Columbus, Ohio area--the fastest growing fuels market in the state. The
second is the conversion of a natural gas pipeline to liquid products
use, a project--dubbed Centennial Pipeline--that will add another vital
link between the Midwest and the Gulf Coast refining centers. We are
grateful for government assistance on both projects--we particularly
appreciate being commended for site surveys and environmental care in
the case of Cardinal and the rapid approval for abandonment that is
allowing us to move forward with the conversion of the Centennial
Pipeline to refined products use.
How Can the Government Help?
As I stated earlier, the current supply/demand equation in the U.S.
is balanced on a knife's-edge. Any type of disruption can push this
delicate balance off center, and price spikes may result. What can the
government do to minimize these problems and help us to continue to
meet the needs of our customers?
Major investment will be required to upgrade and enhance our
nation's supply and distribution system. Companies like Marathon
Ashland want to provide clean, cost effective fuels and are willing to
do our part, but in order to make the hundreds of millions of dollars
of investment, we need:
1. Regulatory Certainty
2. Fair and Responsive Permitting
3. Market Sensitivity
By regulatory certainty we mean that rules should be unambiguous
and not subject to revision simply to serve a new regulatory agenda.
For example, our Cardinal Pipeline project was stymied while parties
argued over whether the term ``petroleum'' included gasoline. A similar
ambiguity significantly affects expenditures involving control of
refinery fuel gas, a term that customarily has been used to indicate
natural gas burned for fuel, but which is now being interpreted to mean
vapors combusted for any purpose on refinery grounds.
By fair and responsive permitting, we mean there must be an end to
unreasonable delays. For example, we currently face a potential air
quality permit application period of one and a half years to install a
new gasoline loading rack at one of our refineries. This type of delay
is clearly unreasonable.
By market sensitivity we mean new regulations must provide adequate
lead time and an appropriate phase-in period, as well as sufficient
time to recover the investments required. Market sensitivity would also
encourage examining regulatory effects on an entire system--refining
and distribution--rather than only one portion of one process
component, as was the case in regulating highway diesel formulations.
Finally, market sensitivity means discouraging any interventions,
such as fuel subsidies, that frustrate free market dynamics. Mandates
and subsidies only add inefficiencies to the process of supplying
America's fuel. Renewable and alternative fuels need to be economically
competitive. It is appropriate for the federal government to support
research into these fuels, but it is inappropriate for the government
to intervene in the marketplace. This intervention places government in
the position of picking market winners and losers. Not only does this
repress industry investment in the most efficient technologies, but
history has shown that governments do not do a particularly good job in
picking the best technologies because politics rather than technology
tend to drive the process.
The current MTBE situation is a prime example of this problem. MTBE
is added to RFG because of a politically driven RFG oxygen mandate. Now
with public concern over MTBE in groundwater, the U.S. Congress appears
to be unable to provide a simple, direct resolution of the problem.
Every time a bill proposing a solution to the MTBE issue emerges, a
myriad of alternative fuels, renewable fuels, and new fuel
specification requirements get added. These provisions do not resolve
the MTBE situation, they compound the original problem.
I appreciate the opportunity to appear before this committee and I
look forward to answering any questions the committee may have either
now or at a later date.
The Chairman. Thank you very much, Mr. Heminger.
Mr. Robinson, please proceed.
We have a time light on here. And you notice Mr. Heminger
stayed within the limits. And we would encourage the rest of
you to do the same thing.
Mr. Robinson. I will try to be quick.
STATEMENT OF THOMAS L. ROBINSON, CHIEF EXECUTIVE OFFICER,
ROBINSON OIL CORPORATION
Mr. Robinson. Good morning, Mr. Chairman and members of the
committee. Mr. Chairman, I was not a Bell, but I am a graduate
of Santa Clara.
My name is Tom Robinson. I am CEO of Robinson Oil of San
Jose, California. Our company owns and operates 28 Rotten
Robbie retail gasoline outlets located in the San Francisco Bay
area of California.
I appear before this committee today as a representative of
the National Association of Convenience Stores, NACS, and the
Society of Independent Gasoline Marketers of America, SIGMA.
Collectively NACS and SIGMA members sell more than 65 percent
of the gasoline and diesel fuel purchased by American consumers
each year. The companies I represent today are different from
the other witnesses. For all practical purposes, we are a
surrogate for the Nation's gasoline and diesel fuel consumers.
My company is not involved in the exploration or production
of oil, nor does it refine oil. Instead, we are an independent
marketer. If independent marketers of motor fuels, like my
company, are unable to secure adequate supply, then we cease to
be a competent force in the marketplace. And if independent
marketers cease to be an effective, competitive force in the
marketplace, then consumers lose as retail gasoline and diesel
fuel prices rise to unnecessary high levels in response to the
supply shortage.
NACS and SIGMA have two primary messages for this committee
today. First, we must collectively and aggressively address the
motor fuels supply problems that are facing this Nation.
Otherwise the fuel price spikes we have witnessed for the past
decade in California and for the past 2 years in other parts of
the Nation will become worse and more frequent. Our failure to
act has, is, and increasingly will cost consumers more at the
pump.
Second, the debate over the future of the Nation's energy
policy need not be confrontational. Our Nation can have both a
clean environment and affordable, plentiful supplies of
gasoline and diesel fuel.
However, in order to achieve these twin goals, all sides of
the current debate, industry, government, consumers and
environmentalists, must approach this debate in the spirit of
cooperation, compromise, but not confrontation. This includes a
reasonable attitude and an understanding of the tradeoffs.
These are not new points for the associations I represent
or for me. In fact, I have had the opportunity to present these
points to Congress in the past. Five years ago, I was invited
to appear before this committee in the wake of the gasoline
price increases in the spring of 1996. At that time, I stated,
``The Federal and State governments regulate the gasoline
refining and marketing industry with little or no thought given
to costs, distribution difficulties, or market efficiencies.
Congress must acknowledge that future EPA and State actions, if
the present course is followed, will lead to further market
disruptions and higher gasoline prices at the pump.''
My prediction in 1996 was pretty accurate. It is my
personal hope that the renewed attention to the need of a
national energy policy will produce the results NACS and SIGMA
have been calling for for years. The challenge facing this
committee and your colleagues in Congress today is
straightforward.
We must preserve current and future improvements in air
quality while at the same time maintaining and expanding
supplies of motor fuels. Otherwise our Nation's consumer will
pay an exorbitant price when supply shortages occur and retail
prices at the pump spike, as they have done repeatedly over the
past few years. As a Californian, I have become only too
familiar with this routine.
It should not surprise policy makers that after tens of
billions of dollars in environmental compliance costs borne by
refiners and marketers, after the complete fragmentation of the
motor fuels distribution system, and after the politically
motivated diverse gasoline formulations adopted by various
States that there is a price to pay, a price that ultimately
must be paid by consumers of gasoline and diesel fuel.
As long as the motor fuels refining and distribution
systems works perfectly, supply and demand stay roughly in
balance and retail prices remain relatively stable. However, if
a pipeline or refinery goes down, overseas crude oil production
is reduced, the weather disrupts smooth product deliveries, or
a new regulatory curve ball is thrown at the motor fuels
refining and marketing industries, we do not have the
flexibility to react and counterbalance these forces.
The public policy solution to the current motor fuels
supply crisis will not be simple, but it must be addressed.
NACS and SIGMA submit that the solution is not a rollback of
environmental protections. That proposal is a non-starter and
should be discarded. Alternatively, NACS and SIGMA encourage
Congress to consider restoring fungibility to the Nation's
distribution system and an effective plan to assist our
Nation's domestic refining industry to meet the challenges
posed by ever more stringent environmental mandates. This will
increase gasoline and diesel fuel supplies and keep retail
prices down.
NACS and SIGMA do not have a specific legislative proposal
to put forward at this time. Instead we offer the following
principles, which we are convinced must be part of any
legislative initiative. One, greater fungibility in motor fuels
and a stop to the balkanization of our Nation's gasoline and
diesel fuel markets. I cannot overemphasize the importance of
this point.
Two, fuel requirements that recognize the limitations and
the strengths of the motor fuel distribution system in the
United States. Three, reasonable implementation plans for new
environmental initiatives. Four, fuels programs that set
performance goals, rather than specific formulas or mandates.
And five, it must be economically feasible to upgrade the
Nation's refining capacity to make these clean fuels.
NACS and SIGMA commend Chairman Murkowski and Senator
Bingaman and their colleagues for introducing comprehensive
national energy policy legislation that includes many of the
legislative principles outlined above. Such legislation,
however, needs to give increased attention to the downstream
portion of our Nation's petroleum supply and distribution
industry. Without such attention, a national energy policy will
not succeed.
We look forward to working with this committee and other in
Congress. We certainly offer assistance to this committee.
Thank you for allowing me to present this testimony.
[The prepared statement of Mr. Robinson follows:]
Prepared Statement of Thomas L. Robinson, Chief Executive Officer,
Robinson Oil Corporation
Good morning, Mr. Chairman and members of the committee. My name is
Tom Robinson. I am Chief Executive Officer of Robinson Oil Corporation
of San Jose, California. Our company owns and operates 28 ``Rotten
Robbie'' retail gasoline outlets located in the San Francisco Bay Area
of California.
I appear before this committee today as a representative of the
National Association of Convenience Stores (``NACS'') and the Society
of Independent Gasoline Marketers of America (``SIGMA''). NACS
represents an industry of more than 120,000 retail outlets, 75 percent
of which sell motor fuels. In 1999, convenience stores sold more than
117 billion gallons of motor fuels, which accounts for more than 60
percent of American consumption.
SIGMA is an association of approximately 260 motor fuels marketers
operating in all 50 states. Together, SIGMA members supply over 28,000
motor fuel outlets and sell over 48 billion gallons of gasoline and
diesel fuel annually--or approximately 30 percent of all motor fuels
sold in the nation last year.
Collectively, NACS and SIGMA members sell more than 65 percent of
the gasoline and diesel fuel purchased by American consumers each year.
I appreciate the invitation to appear at this hearing to present
testimony on our nation's energy policy and the role that diverse
gasoline and diesel fuel specifications have on motor fuel supplies and
prices. The companies I represent today are different from all of the
other witnesses at today's hearing. For all practical purposes, we are
a surrogate for the nation's gasoline and diesel fuel consumers. Our
primary mission is to secure adequate supplies of gasoline to sell to
consumers at a competitive price. My company is not involved in
exploring for oil or in the production of oil. Nor does it refine oil.
Instead, we are an independent gasoline marketer. If independent
marketers of motor fuels, like my company, are unable to secure this
adequate supply, then we cease to be a competitive force in the
marketplace. And if independent marketers cease to be an effective
competitive force in the marketplace, then consumers lose as retail
gasoline and diesel fuel prices rise to unnecessarily high levels in
response to the supply shortage.
NACS and SIGMA have two primary messages for this committee today.
First, we must collectively and aggressively address the motor fuels
supply programs that are facing this nation. Otherwise, the fuel price
spikes we have witnessed for the past decade in California and for the
past two years in other parts of the nation will become worse and more
frequent. Our failure to act has, is, and increasingly will, cost
consumers more at the pump.
Second, the debate over the future of our nation's energy policy
need not be confrontational. Our nation can have both a clean
environment and affordable, plentiful supplies of gasoline and diesel
fuel. However, in order to achieve these twin goals, all sides of the
current debate--industry, government, consumers, and
environmentalists--must approach this debate in a spirit of
cooperation, not confrontation. This includes a reasonable attitude and
an understanding of the trade-offs.
These are not new points for either the associations I represent or
for me. As a California marketer I personally have witnessed these
events happening over and over again. In fact, I have had the
opportunity to present these points to Congress in the past. Five years
ago, I was invited to appear before this committee in the wake of
gasoline price increases in the Spring of 1996. At that time, I stated:
``The federal and state governments regulate the gasoline refining and
marketing industry with little or no thought given to costs,
distribution difficulties, or market efficiencies. Congress must
acknowledge that future EPA and state actions, if the present course is
followed, will lead to further market disruptions and higher gasoline
prices at the pump.'' \1\
---------------------------------------------------------------------------
\1\ Testimony of Thomas L. Robinson before the Senate Committee on
Energy and Natural Resources, May 9, 1996.
---------------------------------------------------------------------------
My prediction in 1996 could not have been more accurate.
Unfortunately, our warnings were ignored in 1996 and continue to be
ignored today. However, it is my personal hope that the renewed
attention to the need for a national energy policy will produce the
results NACS and SIGMA have been calling for over the years.
The challenge facing this committee and your colleagues in Congress
today is straightforward. We must preserve current and future
improvements in air quality while at the same time maintaining and
expanding supplies of motor fuels. Otherwise, our nation's consumers
will pay an exorbitant price when supply shortages occur and retail
prices at the pump spike, as they have done repeatedly over the past
few years. As a Californian, I have become only too familiar with this
routine.
The prices facing consumers during these spikes will not be limited
to the additional expense of producing the new cleaner fuels. Rather,
they will be multiples of this amount when, in times of short supply,
the market drives prices far above the additional cost of manufacture.
I firmly believe that our nation is facing a serious energy
situation in the motor fuels refining and marketing industry. Dozens of
petroleum refineries have closed over the past two decades and new
environmental protection mandates, such as low sulfur gasoline and
diesel fuel, are likely to exacerbate this trend. Operating inventories
of diesel fuel and gasoline are at historically low levels and the
nation's refineries are operating at or near maximum capacity. Gasoline
and diesel fuel demand is increasing by between one and two percent
each year, and yet the number of refineries operating to meet this ever
increasing demand is decreasing. In 1990, there were essentially six
different types of gasoline being sold nationwide. Now, there are more
than 25 different gasoline formulations, all being transported and
distributed through the nation's motor fuel infrastructure. The
pressure of overlapping federal, state and local regulations has
crippled what was previously one of the most efficient commodity
distribution systems in the world--the United States' fungible grade
motor fuels distribution system.
As the saying goes, there is no free lunch. It should not surprise
policy makers that after tens of billions of dollars in environmental
compliance costs borne by refiners and marketers, after the complete
fragmentation of the motor fuels distribution system, and after the
politically-motivated diverse gasoline formulations adopted by various
states, there is a price to pay. A price that ultimately must be paid
by consumers of gasoline and diesel fuel. As long as the motor fuels
refining and distribution system works perfectly, supply and demand
stay roughly in balance and retail prices remain relatively stable.
However, if a pipeline or refinery goes down, overseas crude oil
production is reduced, the weather disrupts smooth product deliveries,
or a new regulatory curve ball is thrown at the motor fuels refining
and marketing industries, we do not have the flexibility to react and
counterbalance these forces.
If there is one point that I really want to emphasize it is the
point of ``no free lunch''. Our country can have clean and
environmentally friendly fuels and it can have plentiful supplies--
there will be a cost and it will be borne by the consumer (that is a
given)--our job is to make the lunch, if not free, at least as
inexpensive as possible.
Californians have become somewhat accustomed to motor fuels price
volatility over the past five years because California is, in fact, the
laboratory for the fuels programs that EPA currently is imposing on the
rest of the country. When a refinery in California goes down, or a
pipeline breaks, the impact on prices is almost immediate. In
California, gasoline prices can increase by 40 cents per gallon within
two to three weeks. When prices get high enough to attract supply from
other markets, then eventually the supply shortage is alleviated and
prices start to fall.
This is the reason I am appearing before you today. The motor fuels
supply problems we have witnessed in California over the past decade
are now being visited on the rest of the nation. If we do not act,
independent motor fuels marketers (about whom I am very concerned), and
gasoline consumers (about whom we all should be very concerned), will
suffer in the near future.
The public policy solution to the current motor fuels supply crisis
will not be simple, but it must be addressed. NACS and SIGMA posit that
the solution is not the rollback of environmental protections. That
proposal is a non-starter and should be discarded. Alternatively, NACS
and SIGMA encourage Congress to consider restoring fungibility to the
nation's distribution system and an effective plan to assist our
nation's domestic refining industry to meet the challenges posed by
ever more stringent environmental mandates. This will increase gasoline
and diesel fuel supplies and keep retail prices down.
We must collectively arrive at a public policy that assures that
our nation's refineries, both large and small, stay in business, expand
to meet increases in demand, and produce clean, affordable motor fuels.
But this policy cannot be achieved without enlightened government
policies and programs. The capital expenditures that refineries must
make over the next six years in order to meet new environmental
mandates are huge. And many refineries, particularly small, regional
refineries, will be unable to justify those expenditures and will cease
operation--further straining motor fuels supplies. Already, this year,
Premcor announced that it would close its Blue Island refinery rather
than undertake the upgrades necessary to make low sulfur gasoline and
diesel fuel. Other refineries, owned by both large and small companies,
will follow suit in the next few years.
NACS and SIGMA urge Congress to work to streamline the permitting
process for refinery upgrades and to assist these refineries in making
these upgrades. This assistance will be particularly important to
small- and medium-size ``regional'' refineries. Environmental upgrade
costs fall more heavily on these smaller refineries because they do not
enjoy the economies of scale that some larger refineries possess to
make these upgrades. In many cases, these smaller refineries represent
the ``marginal'' gallon of gasoline and diesel fuel in many
marketplaces--the gallon that is the difference between adequate
supplies and supply shortages.
Motor fuels marketers and refiners are not always on good terms. We
compete daily in the marketplace for customers and market share. So it
may seem odd to have motor fuels marketers recommend to Congress that
assistance must be given to our nation's domestic refining industry.
However, without adequate and diverse sources of gasoline and diesel
fuel supply, independent marketers cannot exist. Thus, the solution we
are proposing to Congress is the only way our segment of the marketing
industry can survive and can continue to provide consumers--your
constituents--with the most affordable, clean gasoline and diesel fuel
in the world.
NACS and SIGMA do not have a specific legislative proposal to put
forward at this time. Instead, we offer the following principles which
we are convinced must be a part of any legislative initiative: (1)
greater fungibility in motor fuels and a stop to the balkanization of
our nation's gasoline and diesel fuel markets (I cannot over-emphasize
the importance of this point); (2) fuel requirements that recognize the
limitations and strengths of the motor fuel distribution system in the
United States; (3) reasonable implementation plans for new
environmental initiatives; (4) fuels programs that set performance
goals, rather than specific formulas; and (5) it must be economically
feasible to upgrade the nation's refining capacity to make these clean
fuels.
NACS and SIGMA commend Chairman Murkowski and Senator Bingaman and
their colleagues for introducing comprehensive national energy policy
legislation that includes many of the legislative principles outlined
above. Such legislation, however, needs to give increased attention to
the ``downstream'' portion of our nation's petroleum supply and
distribution industry. Without such attention, a national energy policy
will not succeed. It will be irrelevant that domestic crude oil
production increases by 50 percent if our nation does not have the
refining capacity to convert that additional crude into gasoline and
diesel fuel or if our nation's motor fuel distribution system, already
stressed to the breaking point, cannot handle additional volumes of
finished products.
We look forward to working with this committee and others in
Congress to explore legislative options in the months ahead. We
certainly offer our assistance to this committee in this exploration.
As a final note, NACS and SIGMA encourage this committee to embrace
long-term solutions to our nation's current motor fuels supply crisis.
While it may be tempting or politically expedient to seek a quick,
short-term solution to this crisis, such quick fixes are only rarely
effective. Our current situation stems from over two decades of decline
in the motor fuels manufacturing and distribution industries. The twin
goals of ample gasoline and diesel fuel supplies and affordable retail
motor fuels prices will not be reached in 2001, but rather over a
period of years. Just as the damage did not happen overnight, the cure
will not happen overnight.
The debate over our nation's energy policy is just starting. But
the crisis has been on the horizon for some time. We can either discuss
potential solutions collectively now, or we can wait until the next
price spike, and the outraged response of consumers. We encourage all
parties to this debate to adopt fresh approaches to the problems our
nation is facing. Both the environment and our nation's motor fuel
consumers can be the winners in this debate, but only if all sides
agree with the premise that environmental protection and affordable
energy are not inherently contradictory goals. NACS and SIGMA assert
that these goals need not be irreconcilable.
Thank you for inviting me to present this testimony. I would be
pleased to answer any questions my testimony may have raised.
The Chairman. Thank you very much, Mr. Robinson.
Our next speaker, Mr. Greenbaum.
STATEMENT OF DANIEL S. GREENBAUM, PRESIDENT,
HEALTH EFFECTS INSTITUTE, CAMBRIDGE, MA
Mr. Greenbaum. Thank you, Mr. Chairman. I am pleased to
have the chance to appear before you today.
I will say, Mr. Chairman, that I cannot guarantee that I
can find you a total solution for the pollen problem, but I
wish I could, because I, too, am a sufferer. Although if we had
to do without springtime, it may be a little harder.
The Chairman. Well, you know, we have spring in Alaska, and
we do not have pollen.
[Laughter.]
Mr. Greenbaum. Well, I do not think you would like us all
to move up there either.
The Chairman. No, that is for sure.
Mr. Greenbaum. I speak today both as the president of the
Health Effects Institute, which is an independent scientific
institute funded jointly and equally by government and
industry, to provide impartial health effects science on air
pollution, and also as the chair of the Blue Ribbon Panel on
Oxygenates in Gasoline, with which you may be familiar. The
panel consisted of experts in air and water quality, as well as
representatives of the oil, ethanol and MTBE industry, and the
environmental community, and presented our report in 1999.
I am here today to speak of both the good news from the
last decade about fuel specifications and clear air and about
the opportunities and challenges that lie ahead. First the good
news.
The Clean Air Act Amendments of 1990 passed by Congress and
signed into law by President Bush required the introduction of
new, cleaner burning fuels, reformulated gasoline, in all areas
of the country facing serious ozone problems. That fuel
containing by law at least two percent by weight of oxygenates
was introduced in 1995 and resulted in a clear and measurable
air quality benefit.
Among other pollutants that were reduced, levels of benzene
in ambient air, a known human carcinogen, were reduced almost
immediately by 39 percent. At the same time, because in that
case of adequate lead time for refineries to plan for and
implement these fuels, they were introduced in some of the
largest markets in the United States with relatively little or
no impact on cost or supply of fuel.
Looking ahead, we have the opportunity to continue this
good news. Tier two RFG, also envisioned in the Clear Air Act
and being implemented in this decade, has the potential, when
coupled with continued improvement in motor vehicle emissions
technology, to provide air quality and public health benefits
well into this century.
Also, although these fuels needed oxygenates to replace
octane when RFG was first introduced in the 1990's, the Blue
Ribbon Panel found that today's refinery technology has been
improved to enable the production of these clean fuels in a
variety of ways, with oxygenates, such as ethers and ethanol,
but also without oxygenates altogether. This offers the
opportunity to take a much more market-based approach to
providing clean fuels, continuing the strong clean air
performance standards, but giving the market much more
flexibility to choose, based on efficiency and cost, the best
way to ensure a low-cost abundant fuel supply.
This good news, however, does not come without its
challenges. First and foremost, there is the challenge of MTBE.
Although MTBE has shown itself to be a cost-effective and clean
fuel burning component with relatively low potential for health
effects, its relatively rapid transport through groundwater and
its distinctive odor and taste have caused a number of drinking
water wells to be shut down.
As a result, the Blue Ribbon Panel recommended strongly a
substantial reduction in its use. A number of States, including
California, Connecticut and New York, have gone further and
legislated bans on its use to take effect in 2003 and 2004.
Second, this pressure to reduce use of MTBE, which makes up
11 percent by volume of RFG, comes at a time when consumer
demand for fuels has grown, when supplies are tight, when
refiners, as we have already heard, are beginning to gear up to
produce even cleaner burning fuel for tier two. The Blue Ribbon
Panel clearly saw the opportunity for a portion of MTBE demand
to be met by increased use of ethanol.
But it was concerned that at this stage in clean fuel
development, when refiners need maximum flexibility and a range
of alternative ways to make clean fuels, it was neither
appropriate nor necessary to maintain the strict oxygenate
content rules of the 1990 Clean Air Act Amendments. Thus, the
panel recommended that the clean air performance requirements
of RFG be maintained and continued, but that the oxygenate
mandate be removed.
In conclusion, where do these opportunities and challenges
leave us today? We have two paths we can follow for clean
fuels, to continue clean-burning fuels with legislatively
mandated fuel additive requirements and risk potential market
dislocations and increases in price or to keep the strong clean
air performance requirements for these fuels but to free the
market to make them in the most cost-effective way possible
with a minimum of specific fuel additive requirements.
In the view of the Blue Ribbon Panel, this market-driven
path is clearly preferable. It will result in continued clean
air benefits, but also in a substantial increase in the use of
ethanol but without risking the higher prices and market
shortages that could result from continued fuel additive
mandates. With this path, we have the chance to see clean air
improvements and stable fuel markets well into the 21st
century.
Thank you for the opportunity.
The Chairman. Thank you very much, Mr. Greenbaum.
Mr. Daigle.
STATEMENT OF D.H. DAIGLE, DIRECTOR OF AMERICAS REFINING,
EXXONMOBIL REFINING AND SUPPLY COMPANY
Mr. Daigle. Chairman Murkowski, members of the committee, I
am Don Daigle, director of Americas Refining in the ExxonMobil
Refining and Supply Company. In the interest of your time, I
will summarize my remarks and ask that my written testimony be
submitted for the record.
My expertise is in the refining and supply of petroleum
products. I also chaired the group that prepared the National
Petroleum Council's June 2000 report on U.S. refining. Much of
my testimony today is underpinned by the council's conclusions.
Due to antitrust and competitive concerns, please
understand that I cannot discuss company-specifics regarding
inventory, supplies, pricing, and plans for operations and
investments.
ExxonMobile believes that it is critically important to
develop a national energy policy which will allow us to
continue to supply quality products to consumers. The
committee's interest in this aspect of energy policy, along
with that of the new administration, is most welcomed and
encouraging. There are important decisions to be made in the
relatively near term, which will significantly affect
industry's ability to meet future consumer demands.
To set the stage briefly, refining is economically risky
and volatile and not one of the more profitable segments of the
petroleum business. Industry downstream financial returns have
historically run about 5 percent, just a little more than a 3-
month T-bill. Even so, industry has expanded domestic capacity
to meet growing demand.
The key energy policy question is: How to ensure that the
refining industry is allowed to continue expanding capacity.
The National Petroleum Council identified a number of obstacles
that the industry skill and technology may not be able to
overcome without changes in policy. While I want to focus on
these policy solutions in this summary, it is vitally important
to understand just how serious the current situation is.
To summarize the key National Petroleum Council findings,
the changes mandated in gasoline and diesel quality, coupled
with the potential for removing MTBE from gasoline, will be
very expensive, perhaps beyond the bounds of affordability for
some refiners. These requirements will make the U.S. supply and
logistics system much more rigid.
The new source review enforcement initiative launched
several years ago by the Environmental Protection Agency poses
very significant further challenges. The industry will have a
very hard time implementing all these changes in a compressed
time frame. The refining system is tight, creating a very real
risk of increased supply disruptions and price volatility.
I would like to discuss how we see resolving these
challenges beginning with new source review, or NSR for short.
My written testimony covers in some detail the very serious
problems we face under this program. To address these concerns,
we urge this committee and the new administration to take a
fresh look at the EPA's entire NSR enforcement program.
Specifically, we recommend that new source review enforcement
activities be suspended until there has been a thorough review
of the program and its implications.
We encourage this committee and the administration to
examine the implications for consistency with a balanced energy
policy. Guidelines should be established to assure that EPA's
application and enforcement of its new source review
requirements are compatible with that policy.
Finally, clear new source review regulations, consistent
with responsible implementation of the statutory framework,
should be developed through an open administrative process.
The second difficult legacy policy is the Federal oxygen
mandate. New scientific data and technological advancements
obviate the earlier environmental basis for mandating
oxygenates in gasoline. While the environmental objective is
laudable, this out-dated mandate is vulcanizing fuel supplies
and hamstringing our ability to provide gasoline to the
motoring public.
Congress can be a part of the solution. We support repeal
of the oxygen mandate or, at a minimum, an amendment that
grants governors authority to waive this mandate on a regional
basis. In the meantime, Congress should encourage the EPA to
grant State requests for waivers. Granting California's request
is a good place to start.
A third area that warrants a fresh look is the EPA's recent
ultra low sulfur diesel rule promulgated late last year. We
accept the need to provide lower sulfur fuel to enable new
cleaner vehicle technology. However, only brand new diesel
vehicles will need this ultra low sulfur fuel. There is
virtually no environmental benefit in requiring it for the
existing fleet, as the rule now does.
Coupled with other fuel changes, such as low sulfur
gasoline in 2004, the refining industry's resources will be
stretched to the limit. A mandate to manufacture large volumes,
especially diesel, ahead of the time that it is needed is
likely to cause significant diesel supply disruptions.
We recommend that the low sulfur diesel rule be adjusted to
phase in volumes on a time frame that is much more consistent
with the actual vehicle needs. This will provide the same
environmental benefits as the current rule while decreasing the
risk of diesel fuel shortages.
In conclusion, we look forward to working with this
committee and with the administration to develop a cohesive
energy policy based on free markets and open competition.
Improving the environment is an important goal, but basic
reliability and availability of fuel supplies and consumer
costs are equally so.
Energy and environmental objectives can be addressed, but
they must be considered together. A good scientific base,
clear-headed cost benefit analysis, and consistent and
responsible application of rules are also key. Change should
proceed at a pace that allows investments to be made in an
orderly manner, so as not to threaten the supply of fuels to
U.S. consumers. We look forward to working with the committee
towards these ends.
I will be happy to take questions from the committee.
The Chairman. Thank you, Mr. Daigle.
[The prepared statement of Mr. Daigle follows:]
Prepared Statement of D.H. Daigle, Director of Americas Refining,
ExxonMobil Refining and Supply Company
INTRODUCTION
Chairman Murkowski and members of the committee, I am Don Daigle,
Director of Americas Refining in ExxonMobil Refining & Supply Company.
The divisions and affiliated companies of ExxonMobil operate or market
products in the United States and nearly 200 other countries. Our
principal business is energy, involving exploration, production,
refining, transportation and sale of petroleum products.
My area of expertise is in the refining and supply of petroleum
products. I also was Chair of the Coordinating Subcommittee for
preparing the National Petroleum Council's (NPC) June 2000 report on
U.S. Refining. Much of my testimony today is underpinned by the
conclusions reached by the NPC. I welcome the opportunity to outline
some of the important proactive steps which can and should be taken to
ensure a reliable supply of petroleum products for American consumers.
Due to antitrust and competitive concerns, I hope you will
understand that I'll not be able to discuss company specifics regarding
inventory, supplies, pricing, and plans for operations and investment.
Within the bounds of that caveat, however, I'll be as responsive as
possible to the committee's questions.
We believe that it is critically important to develop a national
energy policy which will allow the industry to continue to refine
quality products and distribute them efficiently to consumers. The
committee's interest in this aspect of energy policy, along with that
of the new Administration, is most welcome and encouraging. There are
important decisions to be made in the relatively near term which will
significantly affect industry's ability to meet future consumer demand.
For at least the next several decades, and likely beyond, fossil
fuels, particularly oil and gas, will be required to meet the vast
majority of our U.S. energy needs. The refining business has a critical
role to play in meeting that demand, both now and in the future.
To set the background, it should be recognized that refining is an
economically risky and volatile venture. Historically, it has not been
one of the more profitable areas of our business. In fact, industry
downstream financial returns have averaged about 5% over the last 2
decades--just a little more than a 3-month T-bill. This reality is
reflected in the fact that during the 1990s, the number of operating
U.S. refineries decreased from 194 to 155. Many of those which shut
down were too small to be economically viable. Notwithstanding this
trend, however, total U.S. refining capacity increased through
expansions and efficiencies at existing refineries. Industry has been
able to meet growing consumer demand with essentially no change in
refined product imports.
A key question for this committee is how to ensure that the
refining industry can continue this trend. As we see it now, there are
a number of obstacles which the industry's skill and technology may not
be able to overcome without changes in policy. Refineries are currently
running at essentially maximum capacity to meet the increased demand.
Building new domestic refineries is unlikely to be a practical option
given siting and permitting issues and fundamental economics of the
business. As a result, we will need to took to capacity expansions at
existing refining locations to meet the bulk of our future demand
growth. At the same time as the industry is challenged to add capacity,
there are a number of competing environmental regulations that push us
in a different direction--adding cost and complexity to our plants
without capacity benefits, and sometimes, with a capacity debit. As
capable as our industry is from a technical perspective, we cannot
always serve both of these masters simultaneously.
At the request of former Energy Secretary Richardson, the NPC
assessed the impact of proposed and potential government policies and
actions on refinery operations and petroleum product supply over the
1999 to 2005 time frame. The NPC assessment, entitled ``U.S. Petroleum
Refining--Assuring the Adequacy and Affordabiliiy of Cleaner Fuel,'' is
a blunt call to action. Let me paraphrase its key findings. The changes
we face in gasoline and diesel quality coupled with the potential for
MTBE removal from gasoline will be very expensive, and significantly
stretch capital resources, potentially beyond the bounds of
affordability for some refiners. They will also make our supply and
logistics system more rigid. The New Source Review (NSR) enforcement
initiative launched several years ago by the Environmental Protection
Agency poses further permitting and investment obstacles to necessary
capacity expansion. The industry faces very significant challenges in
implementing all these changes in the time frame which current
regulations require. The tightness of the system creates a very real
risk of increased supply disruptions and price volatility.
The main refining and supply areas which we believe need attention
from this committee and the administration are: the reinterpretation of
the NSR regulations; elimination of the oxygenate mandate contained in
the 1990 Clean Air Act Amendments as part of an overall MTBE removal
strategy; and phasing in the volume requirements for the new ultra low
sulfur diesel regulations. I will comment on each of these in order.
NEW SOURCE REVIEW
The New Source Review program was originally intended to improve
air quality through a permit review of new sources and major
modifications to existing facilities. Over time, however, the NSR
program has evolved from a 20-page rule into 4,000 pages of confusing,
often contradictory and continually changing ``interpretative
guidance.''
Several years ago, EPA began an aggressive initiative attempting to
enforce retroactively new and more stringent interpretations of NSR
requirements. In a stroke, it has attempted to undo years of Federal
and state agency and industry interpretation and understanding and
created conflicts with existing regulations, past actions, and state
permitting decisions. This enforcement initiative occurred after EPA
largely abandoned efforts to change NSR regulations through the normal
rulemaking process.
Under EPA's reinterpretation, the number of projects that would
require intrusive, costly and time consuming NSR review and permitting
would increase substantially. Left to stand this will significantly
increase the cost and difficulty of implementing improvements at
refineries, and result in a significant permitting backlog for both
state and federal officials. A company's ability to make even the most
minor changes to improve refining capacity, energy efficiency and
environmental performance can be compromised.
These legacy NSR enforcement actions were premised heavily on what
we believe are erroneous reinterpretations of two elements of its
permitting requirements. First, EPA asserted that numerous previously
permitted projects resulted in ``potential'' emission increases when in
reality they had no effect on actual emissions or were followed by
emission decreases. In fact, overall, refinery emissions have actually
decreased while production of fuel products increased. Second, that
routine maintenance, repair and replacement at refineries--activities
that were previously exempt from NSR--are now required to obtain
permits. Such a strategy of ``regulation by enforcement'' puts industry
in a difficult position. If unchecked, it will require refineries to
seek permits for many more activities including many with little or no
environmental benefit. This activity would divert resources that could
have been used to expand and improve existing refinery capacity.
We believe this committee and the new administration should take a
fresh look at the entire NSR enforcement program. Without revision to
this program, the refining industry (and others) faces the threat of
penalties and additional unnecessary investments for emission
reductions above and beyond those currently required by regulation. A
similar enforcement initiative imposed on the power generation sector
has the potential to affect the ability of the electric utility
industry to meet electricity requirements.
We offer the following recommendations as a means to prevent NSR
enforcement policies from interfering without tangible benefit to
industry's ability to meet our energy and fuel supply needs:
First, we recommend that NSR enforcement activities be suspended
until such time as there has been a thorough review of both the program
itself and its implications.
Second, we encourage this committee, and others involved in
establishing new directions for national energy policy, to factor the
implications of NSR interpretations into the policy making equation.
Guidelines should be established to assure that EPA's application and
enforcement of its NSR requirements are compatible with the nation's
energy and fuel supply policy. Attention from the White House Office of
Energy Policy, and from the Secretary of Energy will also be helpful.
Finally, clear NSR regulations should be developed through an open
administrative process, which are consistent with responsible
implementation of the statutory NSR framework.
FEDERAL OXYGENATE MANDATE
Another legacy of past policy making that poses hurdles for the
refining industry is the federal oxygenate mandate. The Clean Air Act
Amendments of 1990 required the use of oxygenates in reformulated
gasoline for nine areas of the nation with the most severe air quality
problems. While the intention is laudable, this requirement is
outmoded, fails to deliver promised benefits, and exacerbates the risk
that supply issues will affect consumers.
EPA's own MTBE ``Blue Ribbon'' Panel concluded that the current
Clean Air Act's mandate ``to require oxygenates in RFG must be removed
in order to provide flexibility to blend adequate fuel supplies in a
cost-effective manner while quickly reducing usage of MTBE and
maintaining air quality benefits.'' Additionally, new scientific data
that became available after the 1990 Clean Air Act amendments
demonstrate that oxygenates are not needed to provide the requisite
environmental benefits of reformulated gasoline. Further, technological
advancements in newer vehicles obviate any earlier justification for
mandating oxygenates in RFG in order to address environmental concerns.
The oxygenate mandate is causing further balkanization of fuel
supplies and is hindering the supply system and refineries' ability to
get product to markets where and when needed. For example, Alabama and
Georgia have chosen to require a unique fuel within their borders
rather than adopt reformulated gasoline (RFG) and the costs and issues
associated with oxygenates such as MTBE. As another example, Maine has
opted out of the RFG program, choosing instead to require a lower
volatility fuel. New Hampshire is requesting the same. Chicago and
Milwaukee have their own brand of unique fuels because ethanol is the
oxygenate used in those areas.
The solution? First, Congress should repeal the oxygenate mandate
or, at a minimum, amend the law to grant authority to governors to
waive the oxygenate mandate on a regional basis. In the meantime,
Congress should encourage the EPA to grant state waivers from the
oxygenate mandate. Granting California's request is a good place to
start.
We are aware that some of the committee members are concerned about
the continued market for ethanol. We expect that even without mandates
there will likely continue to be additional opportunities for ethanol
use as long as it is economically viable.
ULTRA LOW SULFUR DIESEL RULE
Another area which we believe deserves a fresh look is the ultra
low sulfur diesel (ULSD) rule promulgated late last year. We accept the
need to provide new lower sulfur fuel to enable new cleaner vehicle
technology, but believe the regulations should recognize that only new
diesel vehicles will need this ultra low sulfur fuel. There is little
environmental benefit in requiring it for the existing fleet as the
regulation now does. Coupled with the requirement to produce lower
sulfur gasoline in 2004 and the need to address the oxygenate issue,
the refining industry's resources will be stretched to the limit in
order to manufacture large volumes of a fuel that will benefit only a
few vehicles initially. In fact, there is reason for concern that there
will not be sufficient on-road diesel to meet demand.
We are concerned that a supply disruption could result that would
be more serious than the one that occurred in 1993 during the
introduction of new California diesel fuel. We recommend that the ULSD
rule be phased in with volumes more consistent with actual new vehicle
needs, specifically, refiners would produce ULSD beginning June 1,
2006, in volumes needed to meet new on-road vehicle and retail
availability requirements. Production volumes would increase as vehicle
turnover occurs and market demands increase. Additionally, refiners
would produce current low sulfur diesel (LSD; current 500 ppm sulfur
cap highway diesel) to meet older on-road vehicle diesel demands. As
ULSD demands grow, production would increase and LSD production would
decline.
The advantages of implementing these recommendations are numerous.
(1) Essentially the same vehicle emission benefits and timing as
the final EPA highway diesel rule would be maintained; (2) the
potential for diesel fuel supply disruptions is reduced; (3) greater
refinery energy efficiency and lower refinery CO2 emissions
are achieved by avoiding overproduction of ULSD in the early demand
years; (4) by avoiding overproduction, ULSD is cost effectively
provided to consumers who own new vehicles that benefit from the new
fuel; (5) this approach stages investment and spreads out permitting,
financing, investment, engineering and construction activity for
refinery modifications, freeing critical resources to help implement
other key fuel requirements; and (6) it provides an opportunity for
further technological development to reduce the ultimate cost of sulfur
removal.
CONCLUSION
ExxonMobil encourages members of this committee to help clarify
where we, as a nation, are going in the energy policy area and what is
needed to get there. We look for ways to work with you and other
branches of government to develop a cohesive energy policy. In our
view, that policy needs to be based on free markets and open
competition if it is to be effective. It should also take an integrated
approach to energy and environmental regulation. We urge you to ensure
that industry is given the flexibility to provide new fuels that will
support new engine emission control technology in the most cost-
effective and environmentally sound manner. New pipelines and refinery
upgrades needed to meet growing product demands and more stringent
specifications, as well as new electricity generating capacity, will
all be benefited by improvements in the regulatory review process.
In conclusion, I'd like to reiterate a core belief at ExxonMobil:
in all the energy sectors, the market must be allowed to work.
Improving the environment is a fundamentally important goal, but so are
basic reliability and availability of fuel supplies, at reasonable
costs to the consumers. All these objectives can be addressed, but they
must be considered together. We believe that policy making must be
based on sound science coupled with rigorous cost-benefit analysis and
we urge that it proceed at a pace that allows investments to be made in
an orderly manner. We look forward to working with you toward those
ends.
I will be happy to answer any questions the committee may have.
The Chairman. Mr. Moyer, please proceed.
STATEMENT OF CRAIG MOYER, EXECUTIVE DIRECTOR, WESTERN
INDEPENDENT REFINERS ASSOCIATION
Mr. Moyer. Thank you. Yes, I am Craig Moyer. I am the
executive director of the Western Independent Refiners
Association, WIRA. I want to thank this committee for the
opportunity to speak this morning, but more importantly for
your leadership in developing a national energy policy.
WIRA represents small business refiners, which are defined
as small businesses pursuant to the Small Business
Administration, fewer than 1,500 employees, and less than
155,000 barrels per day total capacity. WIRA members produce a
full slate of petroleum products, including everything from
gasoline, diesel, jet fuel to asphalt, lube oil and specialty
petroleum products.
From the ground to the pump, there are three phases of the
process: Exploration and production, refining, and marketing.
members of WIRA are involved only in refining crude oil into
products. No members of WIRA drills for oil or operates service
stations.
WIRA is also part of a larger group of small business
refiners that produce diesel fuel throughout the United States.
Among the constituents of Senators on this panel include
PetroStar in Alaska represented by Senator Murkowski; Calcasieu
Refining, Placid Refining in Louisiana represented by Senator
Landrieu; Countrymark, a farm cooperative in Indiana
represented by Senator Bayh; Frontier in Wyoming, a refinery
both in the State of Wyoming represented by Senator Thomas;
Golden Bear, Kern Oil, Paramount, San Joaquin Refining
represented by Senator Feinstein of California; and U.S. Oil
and Refining in Washington represented by Senator Cantwell;
Montana Refining represented by Senator Burns; and of course,
Navajo Refining in New Mexico represented by Senator Domenici
and Senator Bingaman.
I would like to make three brief points today. First, small
refiners are important, both regionally and nationally. Two,
EPA's low sulfur diesel regulations poses a challenge to the
continuing viability of small business refiners. And three,
Congress should act to mitigate the potentially harmful effect
that this regulation is going to have on small business
refiners and, as a result, the effects on the Nation's refining
capacity.
Individually, small business refiners may be a small part
of the market, but cumulatively their impact is substantial and
historically and decidedly pro-competitive. Small business
refiners are also very important to the regions they are in.
For example, just in California, small business refiners
represent 100 percent of California's grade 80-aviation fuel,
aliphatic solvents, and JP-4 jet fuel. Small refiners also
manufacture 100 percent of the asphalt that is produced in
southern California and most of the off-road diesel fuel. Half
of the diesel fuel produced in the San Joaquin Valley,
California's farm belt, is refined by small business refiners.
I am from California. But if we are reviewing the
statistics from other States, such as Wyoming or Louisiana, I
believe other similar references could be made to the regional
and product manufacturing importance of these small business
refiners.
Your former colleague, the Secretary of Energy Spencer
Abraham, recently commented that the number of American
refineries has been cut in half since 1980. Many of these were
small businesses unable to meet the challenges of poor refining
margins and expensive regulations. Meanwhile, as noted in your
opening comments, Mr. Chairman, not one refinery has been built
in the United States in over 25 years except for your plant in
Alaska.
Small business refiners cumulatively account for a
substantial part of the Nation's refining capacity; for
example, 5 to 6 percent of the U.S. supply of on-road diesel
fuel and 20 percent of the military jet fuel supplied to our
bases. Experience confirms that when small business refiners
leave the market, prices go up and consumers suffer.
I would like to turn, then, to the ultra low sulfur diesel
fuel regulation quickly. You are familiar with the rule. It
requires 15 parts per million sulfur limit for most on-road
diesel beginning in June 2006. Some of the associations of
large refiners are appealing this regulation in court. WIRA has
not joined that effort. Instead our members are making good
faith efforts to comply with the regulation.
In the final rule, EPA stated that, and I quote, ``small
business refiners would likely experience a significant and
disproportionate financial hardship in reaching the objectives
of our diesel fuel sulfur program.''
However, EPA made no provision to assist small business
refiners in financing the mandated capital expenditures. The
Energy Information Agency forecasts a 6.5-percent increase in
diesel demand, while other studies almost universally
anticipate that that rule will result in a decline in diesel
production nationally.
Meanwhile, ongoing challenges face the industry, as
discussed by others on this panel and by the members of this
committee. Existing refineries are operating at capacity
resulting in more frequent unplanned shutdowns. And every small
refiner forced from the marketplace increases our
vulnerability.
Given the foregoing, we must agree with now-Secretary
Abraham that we have a refining industry strained to capacity,
leaving us dangerously vulnerable to regional supply
disruptions and price spikes. The new EPA regulation adds one
more financial and regulatory burden on an already at-capacity
industry.
Small business refiners want to be a part of the solution.
Without assistance to make the capital investment, however,
small refiners may be forced to shut down. EPA has estimated
that small business refiners will incur on average capital
costs of $14 million per facility to meet the new diesel
regulations.
For some facilities, that cost will be substantially more.
And some small business refiners are considering going out of
business rather than expend the capital necessary to comply
this and other regulations.
Unmitigated, the new regulations will make it even less
likely that new refineries will ever be built. Therefore, it is
important to seek methods to reimburse small business refiners
for their costs in meeting these new government-imposed
mandates, which endanger their long-term economic viability.
On behalf of the Western Independent Refiners Association
and the rest of the small business refiners in the United
States, I ask that this committee, while considering
legislation to implement a national energy policy, work with
small business refiners to find some way to mitigate the
disproportionate impact this regulation will have on them.
Senator Murkowski's bill, S. 389, includes provisions providing
tax relief for petroleum refiners. A similar incentive for
compliance with this regulation would be an appropriate method
to help offset the hardship this regulation will place on small
business refiners.
I thank you for your attention this morning. I look forward
to discussing this matter with you all further.
[The prepared statement of Mr. Moyer follows:]
Prepared Statement of Craig Moyer, Executive Director,
Western Independent Refiners Association
On behalf of the Western Independent Refiners Association (WIRA),
in my capacity as Executive Director for WIRA, I am pleased to have the
opportunity to testify before this committee and to provide this
statement for the record addressing national energy policy with respect
to fuel specifications and their infrastructure constraints.
BACKGROUND ON WIRA
WIRA is a trade association of small and independent refineries on
the West Coast. At this time, ten small independent refineries continue
to operate on the West Coast, nine in California and one in Tacoma,
Washington. In California, these refineries are located in each of the
three refining areas within California. One is located in the San
Francisco Bay area. One is located in the Bakersfield area of the
Southern San Joaquin Valley and the remaining facilities operate in the
Los Angeles Basin. Small independent refineries employ thousands of
people and each company pays millions of dollars in taxes, even after
excluding income taxes. WIRA members produce a full slate of petroleum
products including gasoline, diesel fuel, jet fuel, asphalt, lube oil
and specialty petroleum products.
While I am here on behalf of WIRA, we are also part of a larger ad
hoc committee representing small refiners throughout United States.
There are small refiners located from as far North as PetroStar Inc. in
Alaska and Holly Corporation in Great Falls, Montana to Placid Refining
Co. in Port Allen, Louisiana. Other small refiners included are
American Refining Inc. in Pennsylvania, Gary-Williams Energy Corp. in
Oklahoma, and Navajo Refining in New Mexico. (See attachment A for a
complete list of small refiners in the United States.)
SUMMARY OF ISSUE
Small and independent refiners (refiners with fewer than 1,500
employees and less than 155,000 barrels per day total capacity) have
long been recognized as an important competitive force in the refining
sector. Individually, each small refiner represents a relatively small
share of the petroleum product marketplace. Cumulatively, however,
their impact is substantial. In some regions, small refiners represent
50 percent or more of the market for certain products. Their pricing
competition pressures the larger integrated companies to lower prices
to the consuming public. Without that competitive pressure, consumers
will pay more. Small refiners also are key suppliers to the Department
of Defense and other niche markets such as diesel fuel, asphalt and jet
fuel. Loss of supply in these products will not easily be filled by the
major refineries.
Under new Environmental Protection Agency (EPA) regulations, coming
into effect in 2006, refiners must meet a stringent new standard of 15
parts per million sulfur limit for most on-road diesel volume. EPA
estimates that small business refiners will incur average capital costs
of $14 million per facility to meet the new diesel regulations. Our
projections indicate that the initial cost to meet these new standards
will be approximately $300 million for the whole industry. Regarding
these standards, EPA stated that: ``small business refiners would
likely experience a significant and disproportionate financial hardship
in reaching the objectives of our diesel fuel sulfur program.''
U.S. consumer demand for diesel fuel, as forecast by the Energy
Information Administration, is expected to grow by 6.5 percent between
now and 2007. It is important to seek methods to ensure small business
refiners are able to meet these new government imposed mandates, which
endanger their long-term economic viability. Some 25 U.S. refineries
have shut down over the last decade and virtually no new refinery has
been built in the United States for over 20 years.
NEW FUEL SPECIFICATION REGULATIONS
On January 18, 2001, the EPA published new regulations, which
create new standards for levels of sulfur in highway diesel fuel
beginning in June, 2006. Under the new regulations, refiners must meet
a stringent new standard of 15 parts per million sulfur limit for most
on-road diesel volume (``Ultra Low Sulfur Diesel Fuel''). Small
refiners produce about four percent of the Nation's diesel fuel and in
some regions produce over half of the diesel fuel. In the final rule,
EPA stated regarding the diesel sulfur standards ``that small business
refiners would likely experience a significant and disproportionate
financial hardship in reaching the objectives of our diesel fuel sulfur
program.'' In the final rule, EPA agreed with the final Small Business
Administration report regarding the diesel sulfur standards ``that
small business refiners would likely experience a significant and
disproportionate financial hardship in reaching the objectives of our
diesel fuel sulfur program.'' However, EPA has made no provision to
assist small business refiners in financing the mandated capital
expenditures.
The new regulations also will make it even less likely that new
refineries will ever be built. With the exception of one small topping
facility in Alaska, no new refinery has been built in the United States
for almost 20 years. Existing facilities are operating at full
sustainable capacity. Operational demands imposed by the new
regulations will result in a reduction of on-road diesel production. At
the same time, U.S. consumer demand for diesel fuel, as forecast by the
Energy Information Administration, is expected to grow by 6.5 percent
between now and 2007. If small business refiners are eliminated from
diesel production, supply shortages will become even more likely.
Therefore, it is important to seek methods to reimburse small business
refiners for their costs in meeting these new government imposed
mandates, which endanger their long-term economic viability.
EPA estimates that small business refiners will incur average
capital costs of $14 million per facility to meet the new diesel
regulations. For some facilities, the cost will be substantially more.
In addition, costs to produce low-sulfur diesel fuel and to comply
with other regulations will add significantly to capital requirements
in approximately the same time frame. Such capital investments are
significantly beyond the financial capability of facilities operated by
small business refiners, whose total investment is dwarfed by these
requirements. On top of the initial required capital expenditures, the
related increases in operating costs could equal or exceed the
refineries' historical annual profits, and thus, imperil the viability
of these important U.S. businesses.
While WIRA does not oppose the regulation, and is fully committed
to compliance, we believe that national energy policy should take into
account the importance of the small refiners and should include
proposals for mitigating the impact of this regulation. Without such
provisions, some small business refiners will shut down and all will
struggle to meet the mandated expenditures. Such a policy ignores the
important role of the small business refiner in the U.S. energy market.
The result of such a policy will have serious consequences for our
country.
national energy policy: the pro-competitive role of the small refiners
Small and independent refiners have long been recognized as an
important competitive force in the refining sector. Individually, each
small refiner represents a relatively small share of the petroleum
product marketplace. Cumulatively, however, their impact is
substantial. Their pricing competition pressures the larger integrated
companies to lower prices to the consuming public. Without that
competition pressure, consumers will pay more. For example, in early
1991, Amoco shut down a 40,000 barrels per day refinery in Casper,
Wyoming, and gasoline prices jumped almost 10 cents per gallon. In
California, the Attorney General concluded that after five small
refiners shut down because they could not manufacture California's
cleaner burning gasoline, the loss of competition cost consumers
hundreds of millions of dollars. Through experience, we know that when
small refiners leave the marketplace, prices go up and consumers
suffer.
Congress and many agencies, including the Environmental Protection
Agency (``EPA'') and the California Air Resources Board (``CARB''),
have long recognized the importance of the independent refining sector
to maintaining a competitive market for petroleum products. For
example, after EPA promulgated rules limiting the sulfur content of
diesel fuel to 500 parts per million effective October 1, 1993,
Congress recognized the implications of this rule on small diesel
refiners and authorized the issuance of acid rain credits to small
diesel refiners pursuant to Section 410 (h) of the 1990 Clear Air Act
amendments. Because of the important pro-competitive impact of small
refiners, CARB, an agency that has promulgated perhaps the most
stringent fuels regulations in the country, has provided separate
treatment for small refiners in virtually every fuels regulation it has
passed since 1988. In its two most recent fuels rule makings, EPA has
authorized separate treatment for small business refiners, as well.
Even the South Coast Air Quality Management District, an agency leading
the nation and perhaps the world, in stringent air quality regulations,
authorized separate treatment for small refiners in its recently
promulgated Rule 431.1 regulating diesel fuel.
In addition to maintaining competition, small and independent
refiners often supply other petroleum products not otherwise available
in certain areas. For example, small refiners manufacture 100 percent
of California's grade 80-aviation fuel, aliphatic solvents, and JP-4
jet fuel. Small refiners also manufacture 100 percent of the asphalt
produced in southern California and much of the off-road diesel fuel.
Half of the diesel fuel produced in the San Joaquin Valley,
California's farm belt, is refined by small refiners.
Small business refiners also fill a critical national security
function. For example, in 1998 and 1999, small business refiners
provided almost 20 percent of the jet fuel used by U.S. military bases.
This adds up to almost 500 million gallons of jet fuel supplied each
year under defense contracts between the government and small business
refiners.
CHALLENGES FACING THE INDUSTRY
Today, approximately 124 refineries are operating in this country.
About 25 percent are small, independent refiners. Small business
refiners are primarily owned by U.S. citizens including privately held
businesses and one farmer cooperative.
As Secretary of Energy Spencer Abraham noted in recent comments to
the United States Chamber of Commerce, the number of American
refineries has been cut in half since 1980. Many of these were small
business refiners unable to meet the challenges of poor refining
margins and expensive regulations. Meanwhile, no new refinery has been
built in the United States in over 25 years and regulatory requirements
limit the ability of existing refineries to expand capacity. Government
regulations require the production of more than 15 types of gasoline.
Existing refineries are operating at capacity resulting in more
frequent unplanned shutdowns. Every small refiner forced from the
marketplace increases our vulnerability. Given the foregoing, one must
agree with Secretary Abraham that we ``have a refining industry
strained to capacity, leaving us dangerously vulnerable to regional
supply disruptions and price spikes.''
Additional challenges facing small refiners include the following:
Small refiners are large users of electricity and natural
gas. The remarkably high prices of these inputs are affecting
the small refiners.
The phase out of MTBE as an oxygenate has led to increased
costs as replacements are found.
Access to crude oil is not reliable, as the larger companies
are not consistently willing to supply small refiners.
Wastewater treatment controls and stationary source controls
have become increasingly stringent, thus raising costs for
small refiners.
conclusion: u.s. government energy policy should recognize and take
steps to mitigate the impact of new fuel specifications
New fuel specifications will adversely impact the financial
viability of small refiners producing diesel fuel. Because of the
importance of these refiners to the competitive structure of the fuel
market, Congress should consider mitigation, including tax measures,
for this important segment of the energy market.
ATTACHMENT A
----------------------------------------------------------------------------------------------------------------
Refinery Parent Co.
Co. No. Parent company Ref. No. Refinery Refinery capacity capacity
location crude bpd crude bpd
----------------------------------------------------------------------------------------------------------------
1 Age Refining Inc....... 1 Age Refining Inc....... San Antonio, TX.. 5,000 5,000
2 American Refining Inc.. 2 American Refining Inc.. Bradford, PA..... 10,000 10,000
3 Countrymark 3 Countrymark Mt. Vernon, IN... 22,000 22,000
Co.operative, Inc.. Co.operative, Inc..
4 Cross Oil & Refining... 4 Cross Oil & Refining... Smackover, AR.... 6,000 6,000
5 Foreland Inc........... 5 Foreland Corp.......... Eagle Springs, NV 5,000 5,000
6 Frontier Oil Corp...... 6 Frontier Refining & Cheyenne, WY..... 41,000 151,000
Marketing Co..
6 Frontier Oil Corp...... 7 Frontier Refining & El Dorado, KS.... 110,000
Marketing Co..
7 Gary-Williams Energy 8 Wynnewood Refining Co.. Wynnewood, OK.... 50,000 50,000
Corp..
8 Golden Bear Oil 9 Golden Bear Oil Bakersfield, CA.. 12,500 12,500
Specialties. Specialties.
9 Holly Corp............. 10 Montana Refining Co.... Great Falls, MT.. 7,000 69,000
9 Holly Corp............. 11 Navajo Refining Co..... Artesia, NM...... 62,000
10 Kern Oil & Refining Co. 12 Kern Oil & Refining Co. Bakersfield, CA.. 25,000 25,000
11 Paramount Petroleum.... 13 Paramount Petroleum Paramount, CA.... 43,000 43,000
Corp..
12 PetroStar Inc.......... 14 PetroStar Inc. (Topping North Pole, AK... 15,000 57,000
only).
12 PetroStar Inc.......... 15 PetroStar Inc. (Topping Valdez, AK....... 42,000
only).
13 Placid Refining Co..... 16 Placid Refining Co..... Port Allen, LA... 48,000 48,000
14 San Joaquin Refining 16 San Joaquin Refining Bakersfield, CA.. 24,300 24,300
Co.. Co..
15 Somerset Refining, Inc. 18 Somerset Refining Co... Somerset, KY..... 5,500 5,500
16 U.S. Oil & Refining Co. 19 U.S. Oil & Refining Co. Tacoma, WA....... 46,000 46,000
17 Transworld Oil USA..... 20 Calcasieu Refining Co.. Lake Charles, LA. 22,000 22,000
18 Wyoming Refining Co.... 21 Wyoming Refining Co.... Newcastle, WY.... 12,500 12,500
------------
613,800
----------------------------------------------------------------------------------------------------------------
The Chairman. Thank you very much. I appreciate the
testimony collectively.
Let me focus on Dr. Daniel Greenbaum. And it is my
understanding that your blue ribbon panel on oxygenates on
gasoline recommended doing away with the additive requirement
to comply with EPA. Is that basically correct?
Mr. Greenbaum. That is correct, that you could----
The Chairman. That is a pretty profound statement. Okay.
And I hope we take note of it, a recommendation to do away with
the additive requirement. Now many of our current gasoline
balkanization, so to speak, problems appear to be directly
related to that requirement. Is that not correct?
Mr. Greenbaum. I am not an expert in the refining industry,
but that is a significant component of that.
The Chairman. All right. Now is this a case, in your
opinion, of Congress writing fuel standards?
Mr. Greenbaum. Well, it certainly----
The Chairman. The EPA has to adhere to the law? What in the
hell does Congress know about writing fuel standards? I do not
know anything about it. I can tell you a little bit about
banking.
Mr. Greenbaum. I am assuming that was not a question.
The Chairman. I do not know. Maybe Senator Nickles can tell
us something about our qualifications to write fuel standards.
Senator Bingaman. Mr. Chairman, I thought we all voted for
that Clean Air Act.
The Chairman. Well, did we know what we were voting for?
Senator Bingaman. I am not sure.
The Chairman. I am not either. Now there may be some folks
out there that will take issue with your rather profound
statement, but I certainly admire your willingness to evaluate
this based on your background and expertise and your blue
ribbon panel on oxygenates that suggests that this is not
necessary. And we look at EPA with forked tongue and say, how
could they do this, when they are enforcing a law that we
passed.
And I would suggest, if you feel strongly enough, you blame
the Congress.
Mr. Greenbaum. We recommend to Congress that Congress take
action, because only Congress can address the issue. I think it
is fair to say that in the very early stages of the RFG
program, the oxygenates were a relatively quickly available way
to move to get the clean fuels. What we found, though, is that
the refining industry responded and was able, and is definitely
able today, to make clean fuels with far less reliance on the
oxygenates. And we argue strongly that, therefore, the mandate
was counterproductive at this point, particularly in light of
the problems with MTBE.
The Chairman. If the science supports removing the
oxygenate standard, then why has it not been done? America, in
your opinion, could enjoy cleaner fuels at less price. So are
you waiting for Congress in its wisdom to do it for you?
Mr. Greenbaum. I think Congress has to do it because of
the--because this is a mandate that was put into the law very
specifically. And I think it is an interesting lesson in
actually when the mandates get that specific, how had it is to
then be flexible in the face of changing technology, changing
market conditions. And that is why the panel really thought
that performance standards--and several of us have spoken to
this--were the way to go.
The Chairman. Well, we have committees, committee
jurisdiction. This case, I assume, was the Environment and
Public Works Committee on the Senate side and the Commerce
Committee on the House side. And the professional staff or
experts or whomever put this together, and now we are hearing
it is unnecessary and adds additional price to the consumer,
and that the industry can meet requirements, ultimately
``cleaner fuel'' at less price, if we do away with this.
Is that--do the witnesses generally agree with that
statement?
Mr. Daigle. Senator, may I comment on that?
The Chairman. Please.
Mr. Daigle. We firmly support removal of the oxygen
mandate. New scientific data, technological advancements
clearly indicate that clean fuels can be made, maintaining all
the benefits of the Clean Air Act, without the use of oxygen
mandates. Imposing a mandate reducing flexibility on the part
of the refiners and, as a result of that, ultimately decreases
flexibility in the system and increases cost.
The oxygen mandate is clearly one of the major causes of
the balkanization in the various regional fuel supplies, fuel
requirements, that was shown on one of the charts earlier.
I think if the oxygen mandate were removed, a lot of the
areas that have selected these regional specifications, because
they do not want to deal with the potential problems associated
with the oxygen mandates, then could very much move back to the
RFG standard and get rid of a number of these specific
standards that are causing a lot of the rigidity in the system
and reducing the flexibility in the system, to move supplies
around to where there are regional shortages for every reason.
The Chairman. And do you generally agree with that
statement?
Mr. Moyer. Senator Murkowski, could I add to this?
Expanding--I not only agree with that, I would expand upon it,
that as one of these oxygenates, MTBE, is looked at as a bad
actor now in California, as you all know.
The Chairman. It supposedly gets in the water table. I do
not know.
Mr. Moyer. It moves very quickly and gets into the water
and moves much faster than gasoline.
The Chairman. Right.
Mr. Moyer. The elimination of MTBE exacerbates the problems
associated with the oxygenate mandate.
Mr. Daigle. I would add to that that clearly Congress has a
role in setting the specifications that are required to balance
between environmental demands and supply demands. But Congress
should----
The Chairman. Yes, but when Congress begins to write
specifics relative to fuel standards, you know, I question
Congress's collective wisdom. It is torn between environmental
concerns that may have some validity or not. And what I am
getting at here is, is there general agreement with this
statement that has been made relative to the recommendations
that doing away with the additive requirements, because it
really--there is a simpler and better way to achieve the
objective of enjoying cleaner fuels.
Mr. Robinson. Absolutely.
The Chairman. All right. Now, would you gentlemen be
willing to draft collectively some legislation in a draft form
to submit to this committee that would propose how you bring
about this change and still have the reasonable safeguards? And
I do not want to go down a million rabbit trails here.
But you know your business, and we do not. But we would be
willing to take this, review it, and see if we can address in
reality what you have suggested here, which is clearly a relief
from duplicity, clearly offers more simplicity to achieve a
better standard, which is what you are telling me you can do.
Would you be willing to do that?
Mr. Daigle. I think we clearly would be willing to do it.
And I think there are activities underway along those regards
with organizations, such as API and NPRA.
The Chairman. Okay.
Senator Nickles. Would the Senator yield to this----
The Chairman. Yes. Just one more question, though.
We are going to get some of this from the administration's
task force. But how long is it going to take you to submit
something to the committee?
Mr. Daigle. I would think something could be submitted in a
very short period of time.
Mr. Robinson. Mr. Chairman, I think it is much, much
easier. Basically you maintain all your performance standards.
No one is complaining about a performance standard whatsoever.
You just delete the oxygenate mandate. That is your
legislation. That is all it is.
The Chairman. All right. What I want you to do is submit
this and give us the counter argument that is going to come up
as a consequence of deleting the oxygenate mandate.
Senator Nickles. I was going to say, I think that is the--
that was my suggestion. We just go back and eliminate the
additive mandate language, the challenge being that I see--and
maybe I am incorrect--is that the ethanol crowd will come
unglued.
[Laughter.]
Senator Nickles. That would be more political than--that
argument will not be based purely on economics. It would be--
that would be our challenge. But clearly, MTBE has not proven
to be effective. The mandate was a mistake. It was in the bill.
Some of us opposed us back in 1990, thinking we should not be
doing that. You might remember the terminology, government gas,
when we were involved in writing this legislation. And a lot of
us were opposed to the mandate.
Anyway, it was put in. And it was put in--correct me, if I
am wrong. And this is stretching my memory--but it was put in
coupled with ethanol as one solution. And the ethanol lobby is
very strong, and it has a lot of votes in the Congress. And
that is our real challenge. I do not think the challenge is
going to be on removing the mandate, except for the fact that
it pulls ethanol.
The Chairman. Well, misery loves company, Senator Nickles.
And I would like to have something from this collective group,
because I think it represents a balance, if you will, and a
point of view that should be considered. And clearly, there is
potential relief for consumers, achieving the same objective.
My time is----
Senator Nickles. Tell Grassley you are thinking about this.
The Chairman. No, I am not going to tell him, either.
[Laughter.]
Mr. Greenbaum. Mr. Chairman, if I might just add something
to Senator Nickles's comments. One of the things we found in
the blue ribbon panel was that removing the oxygenate mandate
does not mean less use of ethanol. It undoubtedly, if you keep
the performance standards, it undoubtedly means you will see
increased use of ethanol.
The Chairman. That would be good news for Senator Grassley.
Mr. Greenbaum. Right. And I think the question, because in
fact the mandate has largely been met by MTBE, ethanol is a
relatively clean additive. It has some limitations, as we have
heard today. But you would see increased use of it. And I think
everybody would agree on that. I think the question is how much
and do you need a guarantee. I think the panel felt you did
not. In fact, it was better to have a mix of solutions, not
just rely on ethanol.
But the data was there to suggest that you would see an
increase in ethanol under any circumstance.
Senator Nickles. Help me a little bit, because I thought we
were saying we wanted to eliminate the additive mandate, which
would also eliminate the mandate--well, it is either going to
be supplied by MTBE or ethanol, by and large.
Mr. Greenbaum. Right. What we said, and what I think
everybody here has said, is that there are RFG specifications,
which are performance based. You need to have a certain level
of clean emissions from the fuel. They do not tell you how to
mix it or what has to be in it. Those should stay in place.
What should be moved was the mandate, which only said you
had to use oxygenates to get to that. If you do that and you
keep those standards, you will still need to have something to
make sure the fuel is clean. You will have to have lower
benzene, so you will need a source of octane to replace it. You
need some other things, and ethanol is one of the sources for
that.
So you will still have use of that, and you will see at
least the same level and undoubtedly an increase in the use of
ethanol.
Senator Nickles. Your statement is very helpful in the
success of this endeavor.
The Chairman. Mr. Heminger, you are a large blender of
ethanol. Would you care to comment relative to the concern that
has been expressed on the politics associated with ethanol?
Mr. Heminger. Yes, Mr. Chairman. We are the Nation's
largest blender of ethanol. I would provide caution, though, to
this discussion. In order to take MTBE out and bring ethanol in
as a replacement, we are talking about 1.6 billion gallons in
volume to replace. We believe just ethanol alone, that is about
a 4-year minimum project. So I provide caution. We cannot snap
our fingers and correct that today. It is going to take at
least four years to be able to have the ethanol plants to
supply that.
But beyond that, the problems, as I had in my testimony, of
transporting ethanol, you cannot ethanol refined products with
ethanol through the pipeline system. It just does not work
because of the affinity ethanol has for water. So we have to
look beyond just ethanol corrects the problem. We have to look
at how we transport, how we get the product eventually to
market. It is a partial solution, but there are many other
things we have to consider as well.
Mr. Daigle. Mr. Chairman, may I clarify something?
What we are suggesting is not the replacement of one
mandate with another mandate. We are not asking to remove MTBE
and then mandate to meet an oxygenate level of ethanol. We are
asking to remove the mandate, put the performance specs out
there, leave them in place as they are now, and then allow the
industry to use its skill and its know-how to come up with the
optimum blend and the optimum set of components to meet the
gasoline supply.
And I think what is being suggested is that if that is
done, there will be a continued use for ethanol, particularly
where it is economically attractive to use ethanol. And it may
well grow above and beyond the current level. But we are not
asking, clearly, to remove MTBE and replace with ethanol. I
think----
The Chairman. I appreciate your clarification of that. And
my time is up. But before I quit, I want to know which one of
you is going to volunteer to coordinate the effort of the five
panelists to get something to us.
[Laughter.]
Mr. Daigle. Why do I not take that on, Senator, working
with appropriate industry groups to get that done?
The Chairman. All right. And what I also want you to
address here is the concern that Mr. Moyer raised, where he
indicated that the smaller refiners are working to try and
comply with the mandate to reduce from, what, 500 to 15.
Mr. Moyer. Exactly.
The Chairman. But I am concerned about the ability of the
small refiners to be able to bite financially that bullet,
because we have seen the small refiners close down because the
economics just would not address significant changes to meet
various new requirements. Now it is one thing to be committed
to try and achieve it. I do not want to see you folks going out
of business.
Now Exxon and the rest of them with their larger refineries
can afford the retrofit. So I would like you to--you know, it
is fine to pursue something, but if you do not achieve it, you
go out of business.
Mr. Moyer. That is exactly right, Senator. And indeed, in
California one of the reasons that, according to the attorney
general's task force, we have such volatility is the loss of
five small and independent refiners that were not able to
achieve the California RFG specification.
The Chairman. Well, you tell me what you are going to have
to have to stay alive.
Senator Bingaman.
Mr. Daigle. Mr. Chairman, with all due respect, there are
two different issues. One is the oxygen mandate, and we will
get you what you have asked for on the oxygen mandate.
A completely different issue is the low sulfur diesel rule
and what is the appropriate response on the part of the EPA, on
the part of the industry to that.
Mr. Moyer. I will be happy to take the lead on----
The Chairman. That is fair enough. Okay. And remember, what
we are looking at is, we recognize that the bigger oil
companies, the bigger refineries, can do it. But we do not want
to drive you folks out of business. And if the technology is
there and achievable, that is one thing. If it is not or it is
simply unavailable to the standpoint of your financial
capacity, then what do you suggest?
Senator Bingaman.
Senator Bingaman. Well, thank you very much. I want to just
underscore the point that Senator Nickles made. As I recall,
this oxygenate mandate is in the law because the ethanol
industry wanted it in the law. And as you pointed out, several
of us opposed adding it as a mandate.
I believe the Environment and Public Works Committee this
last year proposed an additional mandate for the use of
ethanol. I think that came out of that committee. So I think
there is a strong level of support here in the Senate for
maintaining some mandate. I think clearly I agree with the
policy of eliminating the mandate and keeping the standards,
and I hope we can do that.
We have a provision in the bill that we introduced, S. 597.
It is section 306 of that bill, which is entitled streamlining
fuel specifications not later than 9 months after the date of
enactment. The administrator of EPA and the Secretary of Energy
shall join the report to Congress on the technical and economic
feasibility of developing national or regional vehicle fuel
specifications for the contiguous United States that would
enhance flexibility in the distribution of fuels, reduce price
volatility and costs to consumers, and meet local, regional and
national air quality standards.
Have any of you had a chance to look at that? Would you
have a comment as to whether this kind of a provision is
adequate or something different should be done on this problem
of fuel specifications? We are anxious to get input from any of
you as to how to address this problem in a constructive way.
Mr. Daigle. Senator, if I may comment?
Senator Bingaman. Yes, please.
Mr. Daigle. In our view, it is really not practical to have
one single national fuel. Different areas of the country have
different needs, particularly from a volatility requirement
standard, to assure proper operation of vehicles. What refiners
really need is the flexibility of producing the needed fuels.
So any fuels requirements that get put in place need to
recognize the physical realities of the fuel supply system, the
distribution system, and the current refining capacity.
So mandates, quotes, rigid specifications, I think, are
really not the way to go. The industry needs to know what
specifications are required and then have the latitude and the
flexibility to go out and use its know-how and its capability
and its technology to provide that fuel in the most economic
fashion.
There are areas of the countries that need cleaner burning
fuels because of particular problems with overall levels of
contaminants in the air in those areas. There are other areas
of the country that really do not need those. To the extent we
pick one single fuel supply and impose that nationwide, there
will be a number of areas in the Nation that will be incurring
a lot higher fuel costs with really no net economic benefit.
Senator Bingaman. Well, I can certainly understand that,
and I agree with it. What about the idea, though, of having
regional vehicle fuel specifications? Does that make sense to
you or not?
Mr. Heminger. Senator, if I can answer that? I agree with
what Mr. Daigle said. And if you go to a regional mandate, the
regional, looking at the west coast, you would have carb
gasoline. Looking at the Midwest, RFG in Chicago is the most
stringent. So if we were to use that fuel for the balance of
the Midwest, that is the most difficult, however, the most
stringent gasoline to make.
In doing so, you are going to take volume out of the
system, when volume is required. And also doing that, you are
going to put further difficult reasons on the infrastructure or
requiring additional infrastructure to be able to design and
make this fuel. And again, it is just for a region.
We do not believe that it is right today to change to where
we have possibly three, four, six, who knows how many different
regional fuel components. The system has been designed today to
make these individual fuels. The system is getting much better
at being efficient in transporting those fuels. But we do not
believe it is right to mandate, to go to the strictest sense
for a given region.
Senator Bingaman. So my understanding is that both of you
then take the view that we should do nothing at the Federal
level to deal with the problem that is reflected in this map
over here.
Mr. Heminger. That is not what----
Mr. Daigle. That is really not what I am saying, Senator.
Senator Bingaman. What are you saying that we should do? I
guess that is my question.
Mr. Daigle. What I am saying is a lot of the balkanization
and a lot of the regional specs now are the result of the
oxygen mandate.
Senator Bingaman. So if we eliminate that----
Mr. Daigle. If the oxygen mandate is removed, I think you
will see the removal of a lot of the impediments that caused
areas to go to regional and specific fuel supplies and move
back toward RFG in the areas where the cleaner burning fuel is
needed and the----
Senator Bingaman. So you say if we eliminate that oxygenate
mandate, that will solve the problem to the extent that we
ought to solve the problem.
Mr. Daigle. That is my view, Senator. It will----
Senator Bingaman. And is that your view, too, Mr. Heminger?
Mr. Heminger. Yes, sir. It will start to solve part of the
problem.
Senator Bingaman. Mr. Robinson, did you agree with that?
Mr. Robinson. Not entirely. I would probably take a little
bit more aggressive position on that, in the sense that I think
what this is saying is, look at the technical and economic
feasibility of developing national or regional fuel
specifications. I do not know at this point whether it really
makes sense to go to a national specification.
I certainly think that we need to move away from making
more and more different specifications. I think moving in the
direction of less specifications is going to make a
significant--will significantly assist the distribution system.
You know, whether we move all the way to a single or not,
that is a pretty large step. But we have continued to make it
more difficult. We need to start shrinking it back the other
direction, at least.
Senator Bingaman. So you think just eliminating the
oxygenate requirement or mandate does not necessarily get us
where we need to go.
Mr. Robinson. Probably not, although that would be a huge,
very, very important first step.
Senator Bingaman. Okay.
Mr. Daigle. I think, Senator, one thing to keep in mind is
moving to one size fits all around the Nation on fuel specs, or
regional even, again, that is putting in arbitrary regulations,
arbitrary requirements, not necessarily required by a given
region, and has the potential to create supply problems, supply
reduction, and more cost to the consumer.
Senator Bingaman. Well, what I was trying to deal with is,
some of your testimony talks about the problems and the
increased cost that has resulted from balkanization. And it
seemed to me that one way--maybe I am not defining that word
the way you folks are. But I thought that the way to deal with
that is to go to more uniformity and less balkanization.
Yes.
Mr. Moyer. Senator Bingaman, could I address this? First of
all, I think we all agree that the elimination of the oxygenate
mandate would be a good thing. But the question is, do we go
further than that? Let me--there is a bit of a tension here.
On the one hand--and we can take California as an example.
On the one hand, all of California has California reformulated
gasoline, even though clearly in the high Sierras, which has
some of the pristine air in the country, do not really need
that fuel. Yet the State of California chose to have one fuel
to make it easier to distribute that fuel throughout the State.
However, that also has eliminated, because we went to that
lowest common denominator fuel, eliminated the ability of some
folks to be able to actually supply that. That is the small
refiners, for example, that went out of business, that cold not
make that change to get to that lowest common denominator.
And I believe that is the point being emphasized by Mr.
Daigle, that if you go to that lowest common denominator, that
will reduce the supply. It will certainly improve distribution,
but it will reduce the amount of supply. And that is the
tension that I was mentioning.
Mr. Heminger. Senator, along the same lines, if you look at
Chicago being the strictest, the additional cost to make the
RFG for Chicago, if that was a regional fuel, we do not believe
the consumer needs to pay in southern Illinois, in southern
Indiana, midwest Ohio, that they need that strict fuel blend.
So to have----
Senator Bingaman. But you are assuming that if we went to a
regional specification, it would be the most stringent. It
would be Chicago's.
Mr. Heminger. That is what we are assuming, if the same
regulations are going to apply for emissions today. Now if we
are going to change those, then you could come off of the
strict compliance of Chicago. So you are right, that is the
assumption we are making.
Senator Bingaman. All right. I think it is you and me here,
Chuck. Why do you not go ahead with any questions you have?
Senator Schumer. Thank you, Mr. Chairman. And I appreciated
the testimony of all the witnesses. As I have mentioned, I
think we are on the precipice of a very large energy crisis,
gasoline, home heating oil, gas for heating your home,
electricity. And I have also said that Democrats talk about
conservation, decreased demand; Republicans talk about new
exploration, increased supply. The twain never meet, and
nothing gets done.
So your testimony is good, is one aspect of that, the
gasoline market. We are going to have all sorts of problems
down the road, if we do nothing. But I am delighted that we
talked about this subject.
Now, I would like--my first question is for Mr. Greenbaum,
because we in New York are very concerned about the oxygenate
issue. And you made reference to the problems brought about by
the use of MTBE. In fact, my State, New York, is seeking to
phase out MTBE by 2004. But the $64,000 question is: What can
the Northeast put in gasoline to replace MTBE? Ethanol is not
economically feasible. What is?
And if you are faced with the choice of knocking out MTBE
and putting nothing in its place or keeping it, what do you do?
Not easy questions that we are all grappling with.
Mr. Greenbaum. I entirely understand that. And the blue
ribbon panel saw that in New York, in a number of States. And
California is also wrestling with that, as well. I think that
there are--we spent a fair amount of time a few minutes ago
talking about one solution to that.
And that is, if one could remove the oxygenate mandate,
keep the standards, the specifications, for the clean fuels,
the performance standards, that would not only allow places
like New York to continue to have the clean fuels and avoid the
MTBE, but it would, on that map, for example, allow Maine to
come back into the RFG program and not require a separate
little fuel in Maine and another one in some of these other
areas. So it would have that dual advantage.
I think short of that, the other route that is available--
--
Senator Schumer. What is the major problem with doing that?
Mr. Greenbaum. Well, I think--it would appear to all of us
that the major problem with doing that is that, thus far,
Congress, which would need to remove the oxygenate mandate, has
not done it, largely because the ethanol industry would be
concerned that it would somehow lose market or would--it would
prefer to have more sale.
Senator Schumer. Even if we did it--now, I do not know.
Maybe this is not possible. But what if we did it just in areas
where ethanol, you know, in the Northeast, where ethanol is not
around. So they would not have a disadvantage, they would just
forego a potential advantage, which is not going to happen.
Mr. Greenbaum. Well, the second alternative, which I think
Mr. Daigle also mentioned, is the one that California is
pursuing, which is to seek a waiver from the EPA of the
oxygenate mandate in its area, because of the need to deal with
this problem.
And that is--as long as that is done consistently in
whatever area does it--I mean, I would guess that my colleagues
on the panel would be concerned if only New York got a waiver,
and Connecticut and New Jersey did not get a waiver, because
then they would have yet another sort of funny color on that
map.
Senator Schumer. Right.
Mr. Greenbaum. But that is the other mechanism. I know the
regional--for example, in your region, that the Northeast
States for coordinated air use management is attempting to come
up with that kind of proposal as a fallback, because I think
everybody understands that if we are going to get MTBE out of
the fuel supply, there has to be a way to come up with a
reasonable, consistent, uniform fuel supply to replace it.
Senator Schumer. If we did your preferred choice, would it
make either the supply less or the cost greater?
Mr. Greenbaum. Well, the others on the panel could speak to
it, but I think our experience was that as long as you give
time for people to make the adjustments, and particularly in
that case, it would certainly not increase cost. And it might
have the potential, because it would not require the additive,
to decrease it.
Senator Schumer. Does everyone agree with that? Mr. Daigle?
Mr. Daigle. Yes, if I may comment. I think if the oxygen
mandate is removed, quality specs stay the same as they are
now, there will be incentives in certain areas of the country
to continue to use ethanol and possibly increase ethanol use.
The key is going to be the distance from the supply to the
needed source.
So I think removing the oxygen mandate will not necessarily
reduce ethanol use, could potentially increase ethanol use. And
it will unshackle the rest of the industry to use its
capability and its know-how to blend fuels in an optimum
manner. To the extent you remove those arbitrary restrictions,
directly that reduces the cost, directly it increases the
supply.
So if you do not tell the industry what spec to make, but
do not tell the industry the recipe, allow the industry to use
its know-how to come up with the optimum recipe and keep the
cost down----
Senator Schumer. Would the ethanol industry agree with your
analysis?
[Laughter.]
Mr. Daigle. I do not know what the ethanol industry would
agree to. Up to now, they seem to have seen it a different way,
Senator.
Senator Schumer. All right. Does anyone else have anything
to say about that question that I asked, in terms of whether
this would increase cost, decrease supply?
Mr. Moyer. Nothing really. But----
Senator Schumer. Go ahead.
Mr. Moyer. I guess I would--no one here on this panel, I do
not think, would have the right to speak for the ethanol
industry. But I can speak for our members in California that
will continue to--that would use some ethanol, even if there
were no such mandate. And in fact, I believe that that
flexibility--performance-based specs is clearly the way to go.
Why should government demonstrate how to do the fuel?
Senator Schumer. Yes, sir.
Mr. Robinson. Senator, in California we will have MTBE--the
ban will go into effect in less than 2 years. At that point, we
will effectively have a mandate for ethanol, effectively a
monopoly. It will not be a $64,000 question.
Mr. Moyer. Agree.
Senator Schumer. You agree with that. Okay.
My next--just another question. We talked a little bit
about the--well, we talked about gasoline inventories being
lower than they were a year ago. And it was reported in
yesterday's New York Times that some refiners have been slow to
convert from a focus on heating oil production to gasoline
production in order to maximum profits created by rising
prices.
Do you agree with this analysis? And what is the best way
to make refineries more sensitive to decreasing supply
conditions that might get dangerous? Mr. Heminger?
Mr. Heminger. Yes. If you look back at the year 2000, as we
were coming off of the summer problems of lower gasoline
inventories, the industry was called upon for excess heating
oil going into the winter because of the serious concern of the
Northeast, the lack of heating oil availability in the Upper
Midwest.
The industry responded and made large amounts of heating
oil throughout the winter and, in fact, early into February and
March. When you are running at a full slate, or as much as you
can, of heating oil and then you turn to a full slate of
gasoline, you are going to have an imbalance in the system.
What we have seen, then, is that due to last summer's and
winter's requirements of the industry to make the given
products, is that maintenance and large repair orders--we call
them turnarounds--within the refineries were delayed in order
to be able to make the fuels that were required.
Here in the January/February time frame, it appears that
about three times more plants were down for heavy maintenance
and turnaround because they delayed from last year. We are
seeing those plants come on--and in fact, the run time capacity
that the industry forecasts has come back to where we are
running again today at full capacity. But we did have in the
first part of the year, plants just had to take the turnarounds
to be prepared to make gasoline for the coming----
Senator Schumer. You think they all did it as quickly as
they possibly could.
Mr. Heminger. Yes, Senator.
Senator Schumer. There was not a view of, well, let us wait
a little bit and the price will get higher and all of that.
Mr. Heminger. No. In fact, if you go back and look at the
January/February time frame, generally when you are starting to
turn to gasolines, we call those the collar months in the
business, collar meaning outside of the main transportation
months. The refiners had every incentive to make every gallon
of gasoline they could at that time.
Senator Schumer. Everyone agree with that?
Mr. Daigle. Very much so, Senator. I guess the other point
I would make is, number one, our customers are every bit as
important to us as your constituents are to you. Refining is a
very capital-intensive industry. About the worst thing a
refiner can do from a profitability standpoint is hold his
equipment off the line or run his equipment spare.
So I think you will see refineries typically motivated to
run all out and make the product that is in demand at the time.
That is the way you get the maximum utilization of your
capital, and that is the way the industry always operates.
Senator Schumer. All right. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Schumer. I know
that we all share in the responsibility to address this with
action, as opposed to extended words. They are awfully cheap
around here. And we have heard some witnesses say that we are
on the verge of a crisis. I would differ with that. I think the
crisis is here.
And, you know, we can talk a lot about what we can do
before the crisis occurs. But if you believe the crisis is
here, you are already too late. And with what Senator Boxer
showed us yesterday relative to gasoline prices in San
Francisco at $2.35 a gallon--this was a poster that she had, so
it was obviously accurate--suggests that reality is here.
I am going to look forward to receiving collectively from
your group your specific recommendations relative to our
ability to achieve the objective, which is obviously cleaner
air as a consequence of your specific recommendations on
oxygenates and additives and what the industry can do. But I
think it points out a terrible inconsistency when government
committees set fuel standards and do not really understand the
implications.
And here we have clear evidence of what has been the
result. And while we can blame EPA, EPA is only enforcing the
law. So I think that if anything has come out of this hearing,
it has been that specific realization.
And I want to thank you particularly, Mr. Greenbaum, for
your willingness to come before this committee with a specific
recommendation, based on your blue ribbon committee that has
evaluated this for an extended period of time.
One last question, gentlemen. I am a businessman, and I
want to make some money. And I look at the refining industry
and say, gee, there has not been a new refinery built in 25
years. Now you are small--Mr. Craig Moyer, you are familiar
with the difficulties of the small refiner. Mr. Daigle,
representing Exxon, you are--obviously, capital is not
necessarily a problem for Exxon, if Exxon wants to build a new
refinery. Why do you not build a new refinery?
Mr. Daigle. Several reasons, Senator. As I mentioned
earlier----
The Chairman. Well, just give me a couple of good ones.
[Laughter.]
Mr. Daigle. Okay. Two real good ones is permitting and
siting.
The Chairman. Okay. Permitting. The Nation obviously needs
more refining capacity, as evidenced by previous
administration's SPR, when they went out and took 30 million
barrels and said, let us refine it so we can increase supply of
heating oil. And then we found out that the refiners did not
have the capacity. And we simply replaced what we were
importing.
Mr. Daigle. Senator, if I could get back, permitting and
siting is one problem. Another problem----
The Chairman. Okay. But tell us permitting. Okay. Why can
you not get a permit? The need is there.
Mr. Daigle. The ability to be able to get the permit from
the Environmental Protection Agency----
The Chairman. What do they require you to do that is
unreasonable or uneconomic?
Mr. Daigle. You need to link permitting and siting along
with the overall basic economics of the refining industry. In
the United States over the last 10 years, the U.S. industry has
earned around 5 percent return on capital employed.
The Chairman. Five percent?
Mr. Daigle. About 5 percent return on capital employed. So
I think the way to go in expanding refining capacity is not
necessarily grassroots refining. The industry over the last 10
years has basically increased capacity by expanding at existing
sites. Efficiency improvements, incremental capacity
improvements, there is still the potential to do a lot of that.
Getting back to my testimony, though, a very real
impediment to that is the current initiative by the EPA on new
source review enforcement, where they are going in and
retroactively reinterpreting a bunch of regulations, putting a
new spin on it, looking at what the industry has done over the
past 20 years, and now, with the new interpretations,
concluding that those refineries or those expansions were not
permitted correctly and threatening large penalties and fines
and very much undermining the industry's capability to continue
to have this ongoing capacity expansion at existing locations.
So I think that is a very significant problem that needs to
be addressed.
The Chairman. So, sir, what you are telling me is there is
simply no economic incentive for investment to go into a
refinery with the requirements currently for siting, as well as
EPA requirements.
Mr. Daigle. Grassroots refineries definitely are not
attractive in the United States at this time frame. However,
there is the potential to continue to expand, as the industry
has been expanding. The impediment now is the new initiative by
the EPA. And unless that is addressed, as I recommended in my
testimony, I think that will seriously undermine the industry's
ability to continue to bring on stream that incremental
capacity to allow the capacity to meet the demand.
The Chairman. So we are right back with supply and demand.
And as a consequence, the demand is going to be there, but the
supply is going to be tight, simply because you can do better
with a passbook savings account than invest in a refinery. You
can get 5 percent almost on a CD, at least.
Anyway, Mr. Heminger?
Mr. Heminger. We recognize the same permit problems that
Mr. Daigle is talking about. And it even goes into a number of
the pipeline of industries, in being able to get permits to lay
new pipelines, to convert pipelines. It is very time consuming,
very long lead times. And many times, you just walk away from
the project because there are roadblocks that stop you from
getting it accomplished.
Now, you know, Congress has a way about kicking big oil.
And I guess there is some difference of opinion on where they
kick them. But in any event, the reality suggests that you are
not making any money in the refining business, you are making a
little better than a return on investment.
On the other hand, when oil was selling for $10 a barrel, a
lot of production was below your basic costs. But you had to
produce. So theoretically, your profits were less.
Recent reports from several of the major oil companies
indicate near record profits as the price of oil has risen
dramatically. Some of that is supply. Obviously, we are
dependent 56 percent on imports. So we have seen OPEC explain
an extraordinary discipline on supply. And when the supply is
tight, the price goes up.
But in this current market with a tight supply, where, Mr.
Daigle, are the major profits coming from? They are not coming
from the refining. Yet, you know, the American public is
confronted with refined product, and they pay an increasing
price for refined product. So if you are not making it in the
refineries, where are you making it?
Mr. Daigle. Well, Senator, from an Exxon Corporation
standpoint, a very large portion of Exxon Corporation's
profits, as reported in our earnings statements, comes from
overseas operations. A very large portion of that----
The Chairman. So that is the efficiencies you get from
having oil overseas and producing it and transferring it over
to the United States and refining it. So it is really on the
fields that you have found, the development that you have made.
Mr. Daigle. Yes. Earnings and returns typically are very
much higher in the up-frame portion of the business. That is
not to say that we are not in the down-frame portion of the
business long range. As I mentioned in my testimony, returns
for the industry have been in the 5-percent league. But if you
look at the last decades, you will see that the refining
industry has incrementally brought on capacity needed to meet
demand.
Demand has increased over the last 20 years. Imports have
not increased. So demand has been met by refinery capacity. The
industry has been doing that, even at the low returns. The
industry will continue to meet its customers' needs, if
impediments that are being put in place are removed and the
industry is allowed to continue to operate.
I keep getting back to this new source review. That is very
significant. And again in my written testimony, I have specific
recommendations for the committee to consider there. They are
retroactively reinterpreting regulations, applying those to the
industry, causing very long delays in permits.
And they have the potential to do that even more in the
future, and also causing significant increases in investments
to bring on capacity and trying to require the industry to
reduce emissions by having to install equipment that is not
required by the regulations. And that is going to be a big
impediment on the industry's ability to continue to bring on
the----
The Chairman. Many of my colleagues are not here, but
several of them, I think, have some misconception on
justifiable return on investment that efficient companies that
apply Americans deploy in their operations. I think your
explanation that if you are lucky enough to own an oil field
over in Saudi Arabia and you are producing and selling at $10 a
barrel and then the price goes up to $28 a barrel, you are
going to start making some money.
Are you not entitled to that? Certainly you are.
Mr. Daigle. Certainly.
The Chairman. Who sets the price of oil? It is not set by
an Exxon or a BP. It is set by world market. And that world
market is not controlled by the United States. It is controlled
by Saudi Arabia and several of the OPEC nations that have put
together something that we could not do in the United States,
because antitrust laws prohibit it.
They put together a cartel. So the producing nations have
got us. As long as they hold their discipline and hold the
supply, they are going to dictate the price. Is that not
generally correct?
Mr. Daigle. I think that is generally correct, Senator.
The Chairman. And we are exposed to that. So, you know,
this business of kicking big oil for making a return or having
higher profits for a period of time is directly related to the
reality that they made investments on oil production.
And somebody else controls the supply. And the price is
relative, obviously, to the demand and the discipline of who--I
mean, it is like the old golden rule. What was it? He who has
the gold rules, as far as oil is concerned, it is OPEC.
So I hope some of my colleagues can understand that. And
some of the press people have a little problem with that as
well.
But in any event, I am going to give you one more
opportunity to conclude. If you do not have anything to say,
that is fine. I do not either. But I want to thank you for your
contribution today. And I do look forward to the coordinated
effort collectively through Mr. Daigle. And Mr. Moyer, you are
going to cover what the small refiners are going to have to do
to stay alive.
Mr. Daigle. Senator, the only comment I would add to the
comment that you just made is the situation you described is
real. And again, it clearly spells out the need for more access
on the part of the industry to areas that have the potential to
allow more production in the United States.
If there were more access, I think there are funds that the
industry would put into exploring and developing. And I think
the industry has clearly demonstrated that it has the know-how
and the technology to do this in an environmentally sound
manner and balance energy needs for the Nation versus
environmental considerations.
So access is a very clear need, if we are going to really
reduce or reduce the increase in dependence on foreign oil for
this nation.
The Chairman. Yes. I cannot help but refer to the Wall
Street Journal today, April 26. I would encourage all
participants to--if you are too tight to buy it, I will give
you a copy. But in any event, they make a suggestion that the
energy task force is reflecting on what the priorities and
objectives are. And they indicate in the article that the media
debate has focused on whether the task force will suggest
opening up that sliver of ANWR and reviving the nuclear power
industry.
The Wall Street Journal happens to suggest both. And then
they go on to hope that the green lobby will blow a gasket. And
then we hope the liberal Congress and the liberal Democrats go
berserk. But they say they are getting ahead of themselves. So
if you want the rest of the story, go buy a paper.
Mr. Heminger. Yes, Mr. Chairman, just one last comment. We
spoke today about oxygenates and the delicate balance of supply
and demand on the downstream. And as we see refineries running
at full capacity, that is today. In 4 years, I guess it is 5
years, we are required to meet low sulfur diesel and low sulfur
gasoline specs. We did not discuss those issues today.
I just want to provide additional caution that what we are
talking about today will help us in the near term. We need to
look way beyond at those requirements coming down at us in 5 or
6 years, the hundreds of millions of dollars of investment that
we are going to have to put in to meet these low sulfur specs
and, again, the delicate balance.
If small refineries cannot make that investment, they are
going to close. And it is going to continue to multiply and
accelerate the problems that we have in this industry.
And lastly, the waterway systems are very important
infrastructure transportation needs to us as well. And again,
the budget this year, we have noticed that 8 out of 20 locks
within the Midwest require repair. That has been stricken from
the budget. $3 billion per year of energy moves across the Ohio
region and the upper Mississippi waterways. Again, here we have
taken funding away to be able to support an infrastructure
system that is very, very important to the livelihood of the
entire Midwest.
Thank you.
Mr. Robinson. Mr. Chairman, I am a Californian. What is
going on in California is replicating itself across the Nation.
Crude oil is not the problem in California. Crude oil is
important. I am not trying to minimize that. But what is going
on in California and across the Nation is we have a very
severely stressed refining and distribution system. And as long
as you have a stressed system, you are going to have
volatility.
It is incredibly important that we make it possible for
refineries to make the upgrades necessary to reduce that
stress. And certainly two really key areas to help that
distribution system is moving away from mandates, moving
strictly to performance standards, and also a more fungible
type of a standard.
The Chairman. Thank you.
Mr. Greenbaum.
Mr. Greenbaum. Well, Mr. Chairman, thank you very much for
having this hearing and giving me the opportunity to bring
forward the blue ribbon panel comments. I might say that when
that panel issued its report, we had a rare occurrence in
Washington.
We actually agree from a very wide range of interests,
including both the oil industry and the environmental
community, as well as State regulators and a number of experts
on the kinds of things we have talked about today.
And I look forward to working with you and the committee
staff as you move forward to see if we can get some of the
recommendations of that broad group implemented.
The Chairman. We look forward to that.
Mr. Daigle.
Mr. Daigle. Thank you, Mr. Chairman. I would only conclude
by saying that we certainly look forward to working with this
committee and with the administration to develop a cohesive
energy policy based on free markets and open competition.
The Chairman. Thank you. Well, clearly, Senator Bingaman
and I feel an obligation to address the crisis with what
appropriate action should be taken by the Congress.
Mr. Moyer.
Mr. Moyer. Thank you. I really just want to thank you and
this committee for your leadership in addressing the national
energy policy. It is clear it is time, and I do appreciate that
you and Senator Bingaman are working very closely together. And
I cannot tell you, both as a citizen and as a member of the
small refinery industry, I really want to thank you for your
leadership in that regard.
The Chairman. Thank you, gentlemen. We conclude the hearing
and wish you all a good day. And when might I get this
material?
Mr. Moyer. Soon, within 30 days.
The Chairman. No, no. I have to have it within 10 days.
Mr. Moyer. You will have it.
The Chairman. Thank you.
[Whereupon, at 11:36 a.m., the hearing was recessed, to be
reconvened on May 15, 2001.]
[The following additional comments of Mr. Daigle follow:]
ExxonMobil Refining & Supply Co.,
Fairfax, VA, May 8, 2001.
Hon. Frank Murkowski,
Chairman, Energy and Natural Resources Committee, U.S. Senate, Hart
Senate Office Building, Washington, DC.
Dear Mr. Chairman: Thank you very much for the opportunity to
testify before the Senate Energy and Natural Resources Committee on
April 26, 2001.
Per my commitment to respond to your request for legislative
language to repeal the federal oxygenate mandate, attached is an
industry letter which provides such language.
I'd be happy to answer any questions you may have regarding the
attached. Amy Hammer in our Washington, D.C., office also is available
to answer questions. She can be reached at 202-862-0216. Again, thank
you for the opportunity to address your committee.
Sincerely,
D.H. Daigle,
Director, Americas Region.
[Attachment]
May 7, 2001.
Hon. Frank Murkowski,
Hart Senate Office Building, Washington, DC.
Dear Mr. Chairman: At the April 26, 2001 hearing on national energy
policy, fuel specifications and infrastructure constraints, you asked
that all the witnesses provide additional information on the oxygen
requirement for reformulated gasoline (RFG). In particular, you asked
whether we agree that removal of the oxygen requirement would enhance
refiners' supply flexibility and, if so, whether we could provide
legislative language to accomplish that goal.
As you noted during the hearing, refiners' flexibility is enhanced
when they are allowed to meet emission reduction goals in the form of
performance standards rather than product specifications. When the
Clean Air Act Amendments of 1990 were enacted, none of us recommended
that Congress attempt to prescribe a ``recipe'' for gasoline in the
statute.
Perhaps Daniel Greenbaum's testimony summarized todays situation
best by indicating:
``We have two paths we can follow for clean fuels: to continue
clean-burning fuels with legislatively-mandated fuel additive
requirements, and risk potential market dislocations and
increases in price; or to keep the strong clean air performance
requirements for these fuels, but to free the market to make
them in the most cost-effective way possible, with a minimum of
specific fuel additive requirements.''
The most straightforward approach to removing any constraints
associated with the oxygen requirement in RFG is to simply delete those
sections of the Act that impose the requirement. The language in option
1 in the attachment to this letter does just that.
Should you want an alternative approach that could enhance state
flexibility in choosing whether to require oxygenates in RFG, you might
consider the approach outlined in option 2 of the attachment. It
provides states with the right to waive the oxygen requirement. Of
course, this approach would need approval and coordination at the
federal level to ensure that such waivers do not impose additional
constraints on the fuel distribution system.
We would be happy to answer any questions you may have or provide
further information. Please do not hesitate to contact us.
Sincerely,
American Petroleum Institute
National Association of Convenience
Stores
Society of Independent Gasoline
Marketers of America
Western Independent Refiners
Association
Option 1. Elimination of Reformulated Gasoline Oxygen Mandate
Section 211(k) of the Clean Air Act (42 U.S.C. 7545(k)) is
amended--
(1) by striking 211(k)(2)(B) and 211(k)(3)(A)(v);
(2) by renumbering 211(k)(2)(C) and (D);
(3) by striking 211(k)(7)(A)(i) and 211(k)(7)(C)(ii);
(4) by renumbering 211(k)(7)(A)(ii) and (iii); and
(5) by renumbering 211(k)(7)(C)(iii).
Option 2. Waiver of Reformulated Gasoline Oxygen Mandate
Section 211(k) of the Clean Air Act (42 U.S.C. 7545(k)) is amended
by adding the following new paragraph at the end:
(11) WAIVER OF OXYGEN CONTENT REQUIREMENT--
(A) IN GENERAL--Upon petition to the Administrator by
the Governor of a State, the Administrator shall waive
any oxygen content requirement in effect under this
subsection for that State.
(B) ACTION BY ENVIRONMENTAL PROTECTION AGENCY--Not
later than 270 days after the date of receipt of a
petition submitted under subparagraph (A), the
Administrator shall grant the waiver of the oxygen
content requirement requested in the petition. If, by
the date that is 270 days after the date of receipt of
such a petition, the Administrator has not granted the
petition, the petition shall be deemed to be granted.
The waiver under this subparagraph shall take effect on
the date 90 days after the petition is granted or
deemed granted unless the Administrator establishes an
earlier effective date.
(C) SPECIAL RULE--The oxygen content requirement in
effect under this subsection shall not apply to a State
referred to in subsection (c)(4)(B).