[Senate Hearing 109-307]
[From the U.S. Government Publishing Office]
S. Hrg. 109-307
ENERGY PRICES AND PROFITS
=======================================================================
JOINT HEARING
before the
COMMITTEE ON
COMMERCE, SCIENCE, AND TRANSPORTATION
and the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
----------
NOVEMBER 9, 2005
----------
Printed for the use of the Committee on Commerce, Science, and
Transportation
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S. Hrg. 109-307
ENERGY PRICES AND PROFITS
=======================================================================
JOINT HEARING
before the
COMMITTEE ON
COMMERCE, SCIENCE, AND TRANSPORTATION
and the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
NOVEMBER 9, 2005
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
ENERGY PRICES AND PROFITS
ENERGY PRICES AND PROFITS
COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii
CONRAD BURNS, Montana JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine BYRON L. DORGAN, North Dakota
GORDON H. SMITH, Oregon BARBARA BOXER, California
JOHN ENSIGN, Nevada BILL NELSON, Florida
GEORGE ALLEN, Virginia MARIA CANTWELL, Washington
JOHN E. SUNUNU, New Hampshire FRANK R. LAUTENBERG, New Jersey
JIM DeMINT, South Carolina E. BENJAMIN NELSON, Nebraska
DAVID VITTER, Louisiana MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
David Russell, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director
COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD BURR, North Carolina TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia JON S. CORZINE, New Jersey
GORDON SMITH, Oregon KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
Alex Flint, Staff Director
Judith K. Pensabene, Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Lisa Epifani, Counsel
Deborah Estes, Democratic Counsel
Jennifer Michael, Democratic Professional Staff Member
C O N T E N T S
----------
STATEMENTS
Page
Statement of Senator Alexander................................... 51
Statement of Senator Allen....................................... 86
Statement of Senator Bingaman.................................... 5
Statement of Senator Boxer....................................... 57
Statement of Senator Burns....................................... 55
Statement of Senator Burr........................................ 88
Statement of Senator Cantwell.................................... 68
Statement of Senator Craig....................................... 90
Statement of Senator Domenici.................................... 3
Statement of Senator Dorgan...................................... 53
Statement of Senator Feinstein................................... 72
Statement of Senator Hutchison................................... 74
Statement of Senator Inouye...................................... 4
Prepared statement........................................... 5
Statement of Senator Landrieu.................................... 79
Prepared statement........................................... 81
Statement of Senator Lautenberg.................................. 94
Statement of Senator Martinez.................................... 70
Statement of Senator Murkowski................................... 61
Statement of Senator Bill Nelson................................. 84
Statement of Senator Pryor....................................... 75
Statement of Senator Salazar..................................... 131
Prepared statement........................................... 133
Statement of Senator Smith....................................... 65
Prepared statement........................................... 67
Statement of Senator Snowe....................................... 89
Statement of Senator Stevens..................................... 1
Statement of Senator Sununu...................................... 83
Statement of Senator Talent...................................... 92
Prepared statement........................................... 94
Statement of Senator Thomas...................................... 77
Statement of Senator Wyden....................................... 62
Witnesses
Goddard, Terry, Attorney General, State of Arizona............... 108
Prepared statement........................................... 111
Harvey, Peter C., Attorney General, State of New Jersey.......... 98
Prepared statement........................................... 101
Hofmeister, John, President, Shell Oil Company................... 36
Prepared statement........................................... 38
Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission.. 115
Prepared statement........................................... 118
McMaster, Henry, Attorney General, State of South Carolina....... 103
Prepared statement........................................... 106
Mulva, James J., Chairman and Chief Executive Officer,
ConocoPhillips................................................. 20
Prepared statement........................................... 23
O'Reilly, David J., Chairman and Chief Executive Officer, Chevron
Corporation.................................................... 12
Prepared statement........................................... 14
Pillari, Ross J., President and Chief Executive Officer, BP
America, Inc................................................... 31
Prepared statement........................................... 33
Raymond, Lee R., Chairman and Chief Executive Officer, Exxon
Mobil Corporation.............................................. 6
Prepared statement........................................... 9
Appendix
Akaka, Hon. Daniel K., U.S. Senator From Hawaii, prepared
statement...................................................... 145
Cavaney, Red, President and CEO, American Petroleum Institute,
prepared statement............................................. 341
Response to written questions submitted to Terry Goddard by:
Hon. Olympia J. Snowe........................................ 336
Response to written questions submitted to Peter C. Harvey by:
Hon. Olympia J. Snowe........................................ 190
Response to written questions submitted to John Hofmeister by:
Hon. Jeff Bingaman........................................... 229
Hon. Jim Bunning............................................. 225
Hon. Maria Cantwell.......................................... 236
Hon. Pete V. Domenici........................................ 224
Hon. Frank R. Lautenberg..................................... 246
Hon. Ken Salazar............................................. 241
Hon. Gordon H. Smith......................................... 229
Hon. Olympia J. Snowe........................................ 243
Hon. James M. Talent......................................... 228
Hon. Ron Wyden............................................... 236
Response to written questions submitted to Hon. Deborah Platt
Majoras by:
Hon. Frank R. Lautenberg..................................... 151
Hon. Ted Stevens............................................. 146
Hon. Ron Wyden............................................... 153
Response to written questions submitted to Henry McMaster by:
Hon. Ted Stevens............................................. 338
Response to written questions submitted to James J. Mulva by:
Hon. Jeff Bingaman........................................... 252
Hon. Jim Bunning............................................. 274
Hon. Maria Cantwell.......................................... 287
Hon. Pete V. Domenici........................................ 281
Hon. Frank R. Lautenberg..................................... 301
Hon. Lisa Murkowski.......................................... 285
Hon. Ken Salazar............................................. 298
Hon. Gordon H. Smith......................................... 273
Hon. Olympia J. Snowe........................................ 246
Hon. James M. Talent......................................... 271
Hon. Ron Wyden............................................... 286
Response to written questions submitted to David J. O'Reilly by:
Hon. George Allen............................................ 189
Hon. Daniel K. Akaka......................................... 179
Hon. Jeff Bingaman........................................... 169
Hon. Jim Bunning............................................. 167
Hon. Maria Cantwell.......................................... 181
Hon. Pete V. Domenici........................................ 162
Hon. Frank R. Lautenberg..................................... 189
Hon. Mel Martinez............................................ 188
Hon. Lisa Murkowski.......................................... 164
Hon. Ken Salazar............................................. 187
Hon. Gordon H. Smith......................................... 166
Hon. Ted Stevens............................................. 159
Hon. James M. Talent......................................... 164
Hon. Ron Wyden............................................... 180
Response to written questions submitted to Ross J. Pillari by:
Hon. Jeff Bingaman........................................... 199
Hon. Jim Bunning............................................. 196
Hon. Maria Cantwell.......................................... 210
Hon. Pete V. Domenici........................................ 192
Hon. Frank R. Lautenberg..................................... 224
Hon. Lisa Murkowski.......................................... 193
Hon. Ken Salazar............................................. 219
Hon. Gordon H. Smith......................................... 196
Hon. Olympia J. Snowe........................................ 221
Hon. James M. Talent......................................... 195
Hon. Ron Wyden............................................... 209
Response to written questions submitted to Lee R. Raymond by:
Hon. Jeff Bingaman........................................... 313
Hon. Jim Bunning............................................. 310
Hon. Maria Cantwell.......................................... 325
Hon. Pete V. Domenici........................................ 305
Hon. Frank R. Lautenberg..................................... 332
Hon. Lisa Murkowski.......................................... 307
Hon. Ken Salazar............................................. 331
Hon. Gordon H. Smith......................................... 310
Hon. Olympia J. Snowe........................................ 302
Hon. James M. Talent......................................... 308
Hon. Ron Wyden............................................... 325
Richardson, Hon. Bill, Governor, State of New Mexico, prepared
statement...................................................... 339
Rockefeller IV, Hon. John D., U.S. Senator From West Virginia,
prepared statement............................................. 145
ENERGY PRICES AND PROFITS
----------
WEDNESDAY, NOVEMBER 9, 2005
U.S. Senate,
Committee on Commerce, Science,
and Transportation, and the
Committee on Energy and Natural Resources,
Washington, DC.
The Committees met jointly, pursuant to notice, at 9:27
a.m. in room SD-106, Dirksen Senate Office Building, Hon. Ted
Stevens, Chairman, Committee on Commerce, Science, and
Transportation and Hon. Pete V. Domenici, Chairman, Committee
on Energy and Natural Resources, presiding.
OPENING STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Chairman Stevens. If I may, there is a question that has
been raised before we start the hearing. The question whether
Senator Domenici and I should administer oaths to these
witnesses at today's hearing was raised by a letter that I
received this morning at 8:10 a.m., after it was delivered to
the press. As a matter of fact, there is a story in the Seattle
paper about the request having been denied already.
I remind the witnesses as well as the members of these
committees, Federal law makes it a crime to provide false
testimony. Specifically, section 1001 of title 18 provides in
pertinent part: ``Whoever in any matter within the jurisdiction
of the legislative branch of the Government of the United
States knowingly or willfully makes any material false,
fictitious, or fraudulent statement or representation shall be
fined under this title or be imprisoned not more than 5 years
or both.''
I have reviewed the rules of the Senate and the rules of
the Commerce and Energy Committees in effect in this Congress
and the relevant provisions of title 2 of the U.S. Code. There
is--could we have quiet, please. There is nothing in the
standing rules of our committee rules or the Senate which
requires witnesses to be sworn. The statute has the position
that everyone before, appearing before the Congress, is in fact
under oath.
These witnesses accepted the invitation to appear before
our committees voluntarily. They are aware that making false
statements and testimony is a violation of Federal law whether
or not an oath has been administered.
I shall not administer an oath today.
Senator Boxer. Mr. Chairman.
Chairman Stevens. And we look forward to questions.
Senator Cantwell.
Senator Cantwell. Mr. Chairman, I did send you a letter co-
signed by eight of my colleagues asking that the witnesses be
sworn in. This rare joint hearing----
Chairman Stevens. I did not yield to make a statement. We
are ready to go. We have a statement process. Do you have any--
--
Senator Boxer. Mr. Chairman, I would like the committee to
vote on whether we swear----
Chairman Stevens. There will be no vote. It is not in order
at all. It is not part of the rules that any vote can be taken
to administer an oath. It is the decision of the chairman and I
have made that decision.
Senator Boxer. Mr. Chairman, I move that we swear in the
witnesses.
Chairman Stevens. And I rule that out of order.
Senator Cantwell. I second the motion.
Chairman Stevens. Thank you very much. That is the last we
are going to hear about that because it is out of order.
Senator Boxer. Mr. Chairman, Mr. Chairman. Could I just ask
for a little clarification here? If the Senator makes this
request and there is a second, why would we not have a vote on
that?
Chairman Stevens. Because you cannot vote to put in the
rules something that is not there.
Senator Cantwell. Mr. Chairman.
Chairman Stevens. This is not a business meeting. There is
no way to put this into the rules. This is a matter for the
chairman to decide and I have made the decision.
Chairman Domenici. Mr. Chairman, I want to say----
Chairman Stevens. Pardon me. It specifically says in the
rules the President of the Senate, Speaker of the House, or a
chairman of any committee can make the decision.
Chairman Domenici. And Mr. Chairman, I concur.
Chairman Stevens. Now, if we could come to order, and I
would hope that we would have--I do believe that we do not wish
to have standing room only in this. There are plenty of seats.
Please take your seats.
This is a joint committee meeting, gentlemen, and we have
together determined that myself and Senator Domenici and
Senator Inouye and Senator Bingaman will make opening
statements, and after that time we will listen to the
witnesses, and following that time Senators will be recognized
by the early bird on each committee.
We encourage the witnesses to limit their statements to 10
minutes each if that is agreeable. I think it has been. We
shall have a limit according to an agreement between the
chairmen and ranking members of each committee to 5 minutes
each on opening statements.
Over the last 2 years, energy prices have tripled, the cost
of oil has risen at least once to $70 a barrel. All Americans
know now that the cost of energy is going up. But in the wake
of the Hurricanes Katrina, Rita, and Wilma there is fear about
how sharply these prices have risen. Americans are now
concerned whether they should be paying so much more for energy
when our energy companies are recording record profits.
Today we are going to hear testimony from: Lee Raymond,
chairman and CEO of the Exxon Mobil Corporation; David
O'Reilly, chairman and CEO of the Chevron Corporation; James
Mulva, chairman and CEO of ConocoPhillips; Ross Pillari,
chairman and CEO of British Petroleum of America; and John
Hofmeister, president and U.S. Country Chair of Shell Oil
Company.
We thank you gentlemen for coming to appear before us today
voluntarily. This hearing is an opportunity for your companies,
the major energy companies of our country, to address these
concerns. We do sincerely want to listen to your thoughts.
This is a joint hearing. The members of each committee are
here today and, as I indicated, each Senator will be entitled
to ask questions for 5 minutes. I urge that the witnesses be
succinct in their answers as possible and that witnesses
observe the timer clocks which should be visible to all
concerned.
In my judgment these hearings should be a respectful
discussion about our Nation's energy prices. I intend to be
respectful of the positions these gentlemen hold. In turn, I
know that each of you as witnesses understand that those of us
at this table have a duty to our constituents and to all
Americans to seek the information we will seek today.
Specifically, we want you to discuss the steps your
industry plans to take to alleviate price concerns and we need
to gain your perspective on some of the initiatives Members of
Congress have proposed that aim to assist communities in
meeting these increased costs.
I now yield to Chairman Domenici.
STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
Chairman Domenici. Thank you very much, Mr. Chairman.
Fellow Senators and witnesses: Let me first say that I want
to thank Majority Leader Frist for requesting this joint
hearing and thank all the Senators who are here to participate.
I think all of you know that we represent constituents--added
all up, we represent the American people. Every day that we are
in office and every day that we go home, we hear what our
people and what the American people are worried about and what
concerns them.
Americans have been experiencing painfully high prices at
the pump. Whether you think so or not, they think so. Americans
are facing dramatically increased winter heating fuel prices,
especially of natural gas. You see a story on the front page of
the Post today about an aluminum company, because of natural
gas prices being so high, may indeed close up.
Most Americans in most of the polls show that our people
have a growing suspicion that the oil companies are taking
unfair advantage of the current market conditions to line their
coffers with excess profits. Now, I am telling you what we are
hearing and what Americans are saying. Some Senators are
proposing a windfall profits tax. From all I know, it did not
work before; it probably will not work again.
Still, I expect the oil companies' witnesses to provide
some assurances about how you plan to use your recent profits
to provide a stable source of energy to the United States and
to pursue to the maximum extent possible lower oil prices and
lower gas prices. The oil companies' witnesses owe the company
an explanation and they owe it to us as those who represent the
people.
I expect the witnesses to answer whether you think your
current profits are excessive and to talk about what they
intend to do with the reserves and the profit accumulations
that they have. This may not in past times be relevant as you
think of it, but it is relevant to the American people at this
point, and I believe you have to tell us about it.
Now, there are a variety of factors that have pointed to
the reasons for the high prices. Some weigh exports to China,
India; increased geopolitical risks; and of course the
hurricanes in the Gulf. Some of these factors are out of your
control, but we hope you will explain nonetheless why the
prices are so high.
There are other factors, however, such as the lack of
refining capacity, which the American people believe is urgent.
I say to all of you that time is urgent, that we address these
issues, like expanding refining capacity, increasing production
here at home, and providing some balance in the supply-demand
internationally so we might expect a stabilization of prices of
crude oil and thus gasoline and derivatives at least, if not
causing them to go down substantially.
Things look a little better this week than they did 3 or 4
weeks ago. We would like to know what you think about that
trend. Is it going to continue or is it just a spurt? We know
gasoline has come down dramatically. What do you think about
the future?
With that, I thank you for coming here and I thank all the
Senators for attending. Mr. Chairman, it is a privilege to co-
chair this with you. I think before the day is out we might get
the American people some answers. Thank you.
Chairman Stevens. I will next call on Senator Inouye, co-
chair of the Commerce Committee.
STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII
Senator Inouye. Thank you, Mr. Chairman.
The past several weeks have been very painful for the
people of the United States. It has been the time of Katrina,
it has been a time of suffering, of death. It has been a time
when hospitals were destroyed. Americans were called upon to
make record-breaking contributions. Sacrifices were made in
every quarter.
Yet at the same time, we saw Americans lined up at gas
pumps waiting to pay $3 and much more for their gasoline. I
think Americans are concerned. Then suddenly they have thrust
upon them headlines saying ``Record-Breaking Profits.'' In the
midst of suffering, in the midst of sacrifice, record-breaking
profits.
I have nothing against making profits. After all, it makes
capitalism live.
Mr. Chairman, I think, although the rules are very clear
that the chair has the responsibility to decide whether to have
witnesses sworn before they testify. If I were a witness I
would prefer to be sworn in so that the American people can be
assured that the testimony that we are about to give would be
the honest truth and nothing but the truth. If I were a
witness, I would demand that I be put under oath.
[The prepared statement of Senator Inouye follows:]
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator From Hawaii
The recent record-setting gas prices created two story lines that
many of us find difficult to reconcile. While many Americans described
their struggle to make ends meet, your companies were reporting
windfall profits. I have little doubt that you will present a spirited
defense of your record earnings, but you can understand why our
Committees are concerned.
While our colleagues on the Energy Committee oversee oil production
and supply, we on Commerce oversee factors that effect pricing and
demand. We have three principal areas of jurisdiction in this
discussion: price gouging and the role of the Federal Trade Commission,
vehicle standards, and the science of energy and fuel efficiency.
In the short term effort to understand the high gas prices, I
believe the FTC should play a more active role and it has the authority
to do so. If it continues to pursue its role more narrowly, then
Congress needs to provide further guidance and legislation defining
specific authorities. As such, I am an enthusiastic, original co-
sponsor of Sen. Cantwell's legislation on price gouging, and I am
hopeful that our Committee will examine it soon.
Over the long term, we must address our national oil demand, which
is a well-known and urgent economic vulnerability. One of the most
immediate and effective steps we can take to remedy our dependence on
oil is to increase the fuel efficiency standards of our cars, SUVs, and
light trucks in a meaningful way. By affecting the demand side of the
equation, we can help bring down the prices.
Our Committee oversees the nation's science priorities, and we can
help target them towards a solution to this problem. As many experts
have recommended, we can help our automakers transition, in part,
through our national scientific investments. Through the research and
development of advanced, lightweight, strong, composite materials as
well as alternative energy sources, we can work together to create the
vehicles of the future that meet--if not exceed--the new efficiency
standards without sacrificing safety.
We know that oil is a finite resource, and we know that India and
China's oil consumption is growing exponentially and will, at some
point, exceed our own. We are all rapidly headed to the bottom of the
barrel, and it is my hope that, together, we wisely prepare for this
reality.
I recognize that energy independence cannot be achieved overnight,
but I find it troubling that the energy companies exhibit an
unmistakable reluctance to lead the nation toward an energy independent
future. We do not expect you to put yourselves out of business, but we
do expect you to be innovators and leaders in the effort to help create
a sustainable energy future for our country.
Chairman Stevens. The next statement will be by Senator
Bingaman.
Senator Bingaman is recognized.
STATEMENT OF HON. JEFF BINGAMAN,
U.S. SENATOR FROM NEW MEXICO
Senator Bingaman. Thank you very much. I welcome the
witnesses, thank them for being here, and I look forward to
learning all I can at this hearing.
It strikes me that the focus of the hearing is on the high
price of gas that people are paying at the pump, on the high
price of natural gas and home heating oil for our homes this
winter as the temperatures drop. I am sorry, frankly, that we
were not able to accommodate the request I made to have a
consumer representative, a representative of one of the
consumer groups, on one of the panels today. I think that would
have added to our discussion.
I do believe that there are some concrete steps that we
need to discuss and I hope the witnesses will be able to
address these. Let me mention a few. No. 1, there are eight
different bills pending here in the Senate that relate to this
issue of price-gouging and whether we should have a Federal
statute similar to what the State statutes that exist. It is my
view that that would be an appropriate thing for us to do. I
would like to see us pass such a statute before we adjourn here
in the next few weeks, this session of Congress.
A second concrete idea is the Low Income Home Energy
Assistance Program. We need to fund that at the fully
authorized level. We have tried to do that now several times.
We had a floor vote on October 5, another on October 20, and
another on October 26. Each time that has been turned down. I
think again we need to fully fund that program before Congress
adjourns this session.
The third proposal that I would have is that we need a
high-profile national public education campaign to encourage
conservation. This is something that everyone seems to think is
a good idea, but no one is willing to pay for. The Federal
Government has not committed the funds to pay for this. As far
as I know, the industry has not either. I will refer to that
again in just a moment.
A fourth item I believe we need to go ahead with is the
Lease Sale 181. That clearly is something that should have been
done some time ago. It was on track to be done when this
Administration came into office. For political reasons, for
reasons related to the politics of Florida, frankly, it was put
off. There is no legislative action required in order for this
to be accomplished. It is strictly an administration decision
and I wish they would make the decision to go ahead with that
lease sale.
A fifth item, I believe we should once again get back to
increased fuel efficiency in cars, trucks, and SUVs in this
country. That is a subject we tried to deal with in the energy
bill. We were unsuccessful. I hope we can take some action on
that. Over the long term that would do a great deal of good, I
believe, for our country.
Two specific things that I would just ask the witnesses to
respond to: What can your companies, what can the oil and gas
industry itself, do to help with this public education campaign
for conservation? I think that clearly much more is needed
there. Second, what help can be provided to these LIHEAP
programs around the country?
Thank you very much.
Chairman Stevens. Thank you very much.
Senator, we did have in our committee, two separate
hearings on price-gouging. We have had such hearings already.
Now we are going to turn to the witnesses. The first
witness will be Mr. Lee Raymond of ExxonMobil. Mr. Raymond--
pardon me.
I hope all members will look at the clocks in front of them
and keep track of their own time, please.
STATEMENT OF LEE R. RAYMOND, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, EXXON MOBIL CORPORATION
Mr. Raymond. Thank you, Mr. Chairman. Chairmen Domenici and
Stevens, Co-Chairman Inouye, and ranking member Bingaman, and
committee members: Thank you for the opportunity to discuss the
important issues being raised about ExxonMobil and the
industry.
The increases in energy prices following Hurricanes Katrina
and Rita have put a strain on Americans' household budgets. We
recognize that. After all, our customers are your constituents.
And we recognize our responsibility to make energy available to
them at competitive costs. It is also our responsibility to
engage in an open, honest, informed debate on our energy
future, grounded in reality, focused on the long term, and
intent on finding viable solutions.
I would like to make three points in my allotted time.
First, given the scale and long-term nature of the energy
industry, there are no quick fixes and there are no short-term
solutions. Second, petroleum company earnings go up and down
since prices for the openly and globally traded commodities in
which we deal are volatile, but our ongoing investment programs
do not and they cannot if we are to meet growing energy demand.
Third, as the response to Hurricanes Katrina and Rita have
proved, markets work even under the most extraordinary
circumstances. Permitting them to function properly is the kind
of leadership required to meet the future energy challenges
that we all face.
Let me elaborate on each point in turn. Currently, the
world's consumers use the equivalent of 230 million barrels of
oil equivalent every day from all energy sources. That is 400
million gallons an hour or 67 billion gallons a week. Because
of the size and strength of the U.S. economy, Americans consume
a fifth of this total, more than any other country. At current
market prices, the bill for the world's petroleum consumption
is more than $2.5 trillion a year. That is greater than the
U.S. Government's entire annual budget.
The petroleum companies represented here today help meet
that enormous demand, but we are a relatively small part.
Consider this. ExxonMobil is the world's largest nongovernment
petroleum company, with a market capitalization of about $350
billion and operations in 200 countries and territories. Almost
three-quarters of our business is outside of the United States.
On an average day we produce over 4 million oil equivalent
barrels. That is about 3 percent of the world's daily oil and
gas appetite.
It is also important to keep in mind the long-term time
lines in which we operate. In politics time is measured in 2,
4, or 6 years based on the election cycle. In the energy
industry time is measured in decades based on the life cycles
of our projects. For example, ExxonMobil just announced first
oil and gas production from our Sakhalin-1 project in Russia's
Far East. We began work on the project over 10 years ago when
prices were very low, and we expect it to produce for over 40
years. All told, that is more than 50 years for one project. 50
years is 25 Congresses and 12 presidential terms. 50 years ago
Dwight Eisenhower was President of the United States.
So what does that mean for policymaking? It means, given
the scale and long-term nature of our business, effective
policies must be stable, predictable, and long-term in their
focus. History teaches us that punitive measures hastily
crafted in reaction to short-term market fluctuations will
likely have unintended negative consequences, including
creating disincentives for investment in domestic projects.
Think back to the 1970s, when we were all in an energy
crisis here in this country. First price controls, then
punitive taxes were tried to manage petroleum markets. They
contributed to record prices, shortages, and gasoline lines. As
the Government withdrew from attempting to manage the markets,
prices began to come down. In fact, net of taxes, prices in
real terms for petroleum products like gasoline, diesel fuel,
heating oil, and jet fuel have actually declined over the last
25 years.
Which brings me to my second point: The petroleum
industry's earnings are at historic highs today, but when you
look at our earnings per dollar of revenue, a true apples to
apples comparison, we are in line with the average of all U.S.
industry. Our numbers are huge because the scale of our
industry is huge.
How are these earnings used? We invest to run our global
operations, to develop future supply, to advance energy-
producing and saving technologies, and to meet our obligations
to millions of our shareholders. Last year, with $40 a barrel
oil and high earnings, Exxon invested almost $15 billion in new
capital expenditures and more than $600 million in research and
development. In 1998, when crude prices were as low as $10 a
barrel, our earnings were lower, at about $8 billion, but we
invested $15 billion in capital expenditures that year as well.
In fact, over the last 10 years ExxonMobil's cumulative
capital and exploration expenditures exceeded our cumulative
annual earnings. So when we keep investing in the future when
earnings are high as well as when they are low.
The current discussion on building new grassroots
refineries is interesting. Building a new refinery from scratch
takes years, even if regulatory requirements are streamlined.
Current refining economics are almost irrelevant to that
decision. For us, a faster and more practical way to add
capacity has been to expand our existing refineries. It is much
more efficient because the basic infrastructure is already in
place. Over the last 10 years, ExxonMobil alone has built the
equivalent of three average-sized refineries through expansions
in efficiency gains at existing U.S. refineries.
I should add that we would also like to invest even more in
this country, especially in exploring for and producing new
supplies of oil and natural gas, if there were attractive
economic opportunities to do so. But the fact is that the
United States is a mature oil province, domestic production is
declining, and limited opportunities for new investments that
have been made available to us.
Finally, my third point: Markets work if we let them.
Hurricanes Katrina and Rita were a one-two punch to the
petroleum industry as well as to many of your constituents. At
one point some 29 percent of U.S. refining capacity was shut
down. The Congressional Budget Office estimates the hurricanes
caused between $18 and $30 billion in energy sector
infrastructure losses.
But we are recovering. Our diligent and dedicated employees
went above and beyond to repair the damage and get back to
work. Credit also goes to the Federal Government. Release of
the crude from the SPR, temporary easing of regulations such as
gasoline specification and the Jones Act enabled us to
reallocate resources effectively and efficiently.
But most importantly, credit goes to our free market
system. The hurricanes showed that markets work even under the
most extraordinary conditions. Prices for products did
increase, of course, but there was no panic and no widespread
shortages. Retailers responded to the short-term supply
disruption, consumption decreased, and imports increased to
make up the shortfall. In a word, markets worked. And letting
markets work will enable us to meet our future energy
challenges.
In just 25 years, global energy demand is expected to
increase nearly 50 percent, with oil and natural gas needed to
meet the majority of that demand. The energy industry is
meeting this challenge. Government can best help by promoting a
stable and predictable investment environment, reinforcing
market principles, promoting global trade and efficient use of
energy, and implementing and enforcing rational regulatory
regimes based on sound science and cost-benefit analysis.
It is this kind of leadership that is required of all of us
to meet the future energy challenges we all face.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Raymond follows:]
Prepared Statement of Lee R. Raymond, Chairman and Chief Executive
Officer, Exxon Mobil Corporation
Chairmen Domenici and Stevens, Co-Chairman Inouye, Ranking Member
Bingaman, and Committee Members. Thank you for the opportunity to
discuss the important issues being raised about ExxonMobil and the
industry.
The increases in energy prices following Hurricanes Katrina and
Rita have put a strain on Americans' household budgets. We recognize
that. After all, our customers are your constituents. And we recognize
our responsibility to make energy available to them at competitive
costs.
It is our responsibility to engage in an open, honest, informed
debate about our energy future . . . grounded in reality . . . focused
on the long-term . . . and intent on finding viable solutions.
In that spirit, I would like to make three points during my
allotted time.
First, given the scale and long-term nature of the energy industry,
there are no quick fixes or short-term solutions.
Second, petroleum company earnings go up and down with the
volatility in the openly and globally traded commodities in which we
deal, but our ongoing investment programs do not--and they cannot, if
we are to meet growing energy demand.
And third, as the response to Hurricanes Katrina and Rita proved,
markets work, even under the most extraordinary circumstances.
Permitting them to function properly is the kind of leadership required
to meet the future energy challenges we all face.
Let me elaborate on each point in turn.
ENERGY INDUSTRY SCALE AND TIMELINES
As you consider energy policy--just as when we consider corporate
strategy--it is essential to understand the sheer size of the petroleum
industry and the extended timelines in which we operate.
Currently, the world's consumers use the equivalent of 230 million
barrels of oil every day from all energy sources.\1\ That's 400 million
gallons an hour, or 67 billion gallons a week. Because of the size and
strength of the U.S. economy, Americans consume a fifth of this total,
more than any other country.
---------------------------------------------------------------------------
\1\ ExxonMobil Energy Outlook.
---------------------------------------------------------------------------
You are accustomed to dealing in large budget figures, so let me
try putting it in those terms. At current market prices, the bill for
the world's petroleum consumption is more than $2.5 trillion a year.
That's greater than the U.S. government's entire annual budget.
The petroleum companies represented here today help meet that
enormous demand--but we are a relatively small part.
Consider this. ExxonMobil is the world's largest, non-government
petroleum company, with over 86,000 employees, a market capitalization
of about $350 billion, and operations in 200 countries and territories.
In fact, almost three-quarters of our business is outside the United
States.
On an average day, we produce over 4 million oil equivalent
barrels. That is about 3 percent of the world's daily oil and gas
appetite.
Now, in addition to the energy industry's enormous scale, it is
also important to keep in mind the long-term timelines in which we
operate.
In politics, time is measured in 2, 4 or 6 years, based on the
election cycle.
In the energy industry, time is measured in decades, based on the
lifecycles of our projects.
For example, ExxonMobil just announced first oil and gas production
from our Sakhalin-1 project in Russia's Far East. We began work on the
project over 10 years ago when prices were very low, and we expect it
to produce for over 40 years. All told, that's more than 50 years for
one project.
Fifty years is 25 Congresses and 12 Presidential terms. It is
longer than any Senator has served in the history of this body. Or
think of it this way--50 years ago, Dwight Eisenhower was President.
So what does this mean for policymaking? It means, given the scale
and long-term nature of our business, effective policies must be
stable, predictable and long-term in their focus.
History teaches us that punitive measures, hastily crafted in
reaction to short term market fluctuations, will likely have unintended
negative consequences--including creating disincentives for investment
in domestic projects.
Think back to the 1970s--when we were in an energy crisis in the
U.S.
First price controls and then punitive taxes were tried to manage
petroleum markets. In addition to contributing to the record gasoline
prices consumers were paying by March 1981, they contributed to
shortages and gasoline lines. As the government gradually withdrew from
trying to actively manage petroleum markets, prices began to come down.
In fact, if you exclude the effect of state and federal taxes, prices
in real terms for petroleum products like gasoline, diesel fuel,
heating oil and jet fuel have actually declined over the last 25
years.\2\ Today's higher prices are still less than the prices that
resulted from government controls in the early 1980s.
---------------------------------------------------------------------------
\2\ See also: Appendixes A and B,* Price Increase of Consumer
Goods, and Commodity Price Increases, respectively.
* Appendixes A-F have been retained in committee files.
---------------------------------------------------------------------------
Which brings me to my second point.
EARNINGS AND INVESTMENTS
The petroleum industry's earnings are at historic highs today. But
when you look at our earnings per dollar of revenue--a true apples-to-
apples comparison--we are in line with the average of all U.S.
industries.\3\ Our numbers are huge because the scale of our industry
is huge.
---------------------------------------------------------------------------
\3\ See, Appendix C, How Do Oil Industry Earnings Compare to Other
Industries?
---------------------------------------------------------------------------
How are these earnings used?
We invest to run our global operations, to develop future supply,
to advance energy-producing and energy-saving technologies, and to meet
our obligations to our millions of shareholders.
Last year, when oil prices averaged a little under $40 a barrel and
earnings were high, ExxonMobil invested almost $15 billion in new
capital expenditures and more than $600 million in research and
development.
And in 1998, when crude oil prices were much lower--as low as $10 a
barrel for a time--so were our earnings, about $8 billion. But we
invested $15 billion in capital expenditures that year as well.
In fact, over the last 10 years, ExxonMobil's cumulative capital
and exploration expenditures have exceeded our cumulative annual
earnings.\4\
---------------------------------------------------------------------------
\4\ See, Appendix D, ExxonMobil Long-Term Earnings and Investment
History.
---------------------------------------------------------------------------
So, we keep investing in the future when earnings are high as well
as when they are low.
If we are to continue to serve our consumers and your constituents,
corporate and government leaders alike cannot afford to simply follow
the ups and downs of energy prices.
We must take a longer-term view.
The current debate on building new grassroots refineries is a good
example. Building a new refinery from scratch takes years--even if
regulatory requirements are streamlined.
Current refining economics are almost irrelevant. And once a
refinery begins operations, it takes years more for that refinery to
pay back its investment.
For us, a faster, more practical and economical way to add capacity
has been to expand our existing refineries. It is much more efficient
because the basic infrastructure is already in place. We have invested
$3.3 billion over the last five years in our U.S. refining and supply
system.
Over the last ten years, ExxonMobil alone has built the equivalent
of three average-sized refineries through expansions and efficiency
gains at existing U.S. refineries.
And industry-wide, while the number of refineries in the United
States has been cut in half since 1981, total output from U.S.
refineries is up by 27 percent over this same period, a percentage
which almost exactly matches the rise in overall product demand.\5\
---------------------------------------------------------------------------
\5\ See, Appendix E, How Do Fewer U.S. Refineries Affect Supply?
---------------------------------------------------------------------------
I should add that we would like to invest even more in this
country, especially in exploring for and producing new supplies of oil
and natural gas--if there were attractive, economic opportunities to do
so. But the fact is the United States is a mature oil province,
domestic production is declining from those areas that are accessible
to the industry, and limited opportunities for new investment have been
made available to us.
MARKET LEADERSHIP
Finally, my third point. Markets work--if we let them.
The response to Hurricanes Katrina and Rita proved the point. These
storms were a one-two punch, to the petroleum industry as well as to
many of your constituents. At one point, almost 29 percent of our
domestic refining capacity was shut down, and all told, the
Congressional Budget Office estimates the hurricanes caused somewhere
between $18 billion and $30 billion in energy sector infrastructure
losses.\6\
---------------------------------------------------------------------------
\6\ Statement of Douglas Holtz-Eakin, Congressional Budget Office,
``Macroeconomic and Budgetary Effects of Hurricanes Katrina and Rita,''
before the House Committee on the Budget (October 6, 2005).
---------------------------------------------------------------------------
But we are recovering. Crude oil supply was quickly rerouted,
refineries rapidly came back on-line, investors kept cool-headed, and
production in the Gulf has been gradually restored.
Credit for this goes, in part, to the energy industry, especially
our diligent and dedicated employees who went above and beyond to
repair the damage and to get back to work.
Credit also goes to the Federal Government. Release of crude from
the Strategic Petroleum Reserve and the temporary easing of regulations
such as gasoline specifications and the Jones Act enabled us to
reallocate resources effectively and efficiently. That helped.
But most importantly, credit goes to our free market system. The
hurricanes showed that markets work, even under the most extraordinary
conditions.
Even before the hurricanes made landfall, shippers rerouted
tankers, refiners recalibrated output, traders reallocated resources,
investors moved capital, and consumers began to change their
consumption patterns.
Prices for products did increase, of course, but there was no panic
and no widespread shortage. Retailers responded to the short-term
supply disruption, consumption decreased, and imports increased to make
up for the shortfall.
The remarkable recovery would not have been possible had the
millions of Americans impacted by the storms--energy producers,
refiners, suppliers, retailers and consumers--not had a free hand to
respond. Markets enabled them to do so.
And letting markets work will enable us to meet our future energy
challenges.
In just twenty-five years, global energy demand is expected to
increase nearly 50 percent, with oil and natural gas needed to continue
to meet a majority of that demand.\7\
---------------------------------------------------------------------------
\7\ See, Appendix F, Will Energy Demand Continue to Increase?
---------------------------------------------------------------------------
An estimated 100 million barrels of oil equivalent in new
production is required during this time frame, as well as an estimated
$17 trillion in new investment.\8\
---------------------------------------------------------------------------
\8\ International Energy Agency, World Energy Outlook (2005).
---------------------------------------------------------------------------
To be sure, much of future demand growth will be in developing
countries like China and India. But because oil is a global commodity--
like corn or copper--failing to meet demand abroad means higher prices
for Americans at home.
The energy industry is meeting this challenge, and will continue to
do so. Government can best help by promoting a stable and predictable
investment environment, reinforcing market principles, promoting global
trade, promoting the efficient use of energy, and implementing and
enforcing rational regulatory regimes based on sound science and cost/
benefit analyses.
It is this kind of leadership that is required of all of us to meet
the future energy challenges we all face.
Thank you.
Chairman Stevens. Thank you very much.
Our next witness is Mr. O'Reilly. I am looking for your
title. We are happy to have your testimony, Mr. O'Reilly. You
are chairman of Chevron.
STATEMENT OF DAVID J. O'REILLY, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, CHEVRON CORPORATION
Mr. O'Reilly. Thank you, Senator. Thank you, Chairmen
Domenici and Stevens, ranking member Bingaman, and Co-Chair
Inouye, and committee members.
I am here today representing 53,000 Chevron employees as
well as millions of shareholders who have put their trust and
confidence in our company, and I welcome the opportunity to
talk together about working to deliver reliable energy supplies
at reasonable costs to all Americans.
I would like to make several points today. First, we have
seen a situation of tight supplies and growing demand for
energy for several years. The recent hurricanes in the Gulf
Coast magnified that situation. Secondly, Chevron is investing
aggressively to increase energy supplies. Since 2002 we have
invested what we have earned. Thirdly, conflicting government
policies and restricted access to opportunities make it
difficult to invest here in the United States. Finally, I will
make a few brief suggestions as to how I believe we can work
together to create a more robust climate for U.S. energy
investment.
Let me provide some context which will illustrate my first
point. We are here today to talk about energy prices, which
came to the forefront following the hurricanes that devastated
the Gulf Coast region, including the oil and gas industry. They
disrupted oil and gas production, our pipeline network, and our
refining and distribution operations. I personally visited our
operations in the aftermath of the storm and it is difficult to
appreciate the devastation in the Gulf Coast unless you have
visited it firsthand.
We were fortunate that no Chevron employees lost their
lives, but many hundreds lost their homes and their
possessions. Nonetheless, these same employees continue to work
around the clock to resume normal operations, to get supplies
to market. I could not be prouder of their heroic performance
in the face of unimaginable adversity.
Clearly, we experienced price volatility in the wake of the
hurricanes. These price fluctuations reflected the fact that
the storms shut in one-third of U.S. oil and gas production and
one-fourth of U.S. refining capacity. Price volatility was also
driven by localized panic buying, which led to temporary
shortages of gasoline. As we began to normalize distribution
and production in the days and weeks that followed, prices
began to moderate.
But the more important issue is that we have been operating
in a tighter supply situation for some time now. I have been
talking about this for the last year and a half, but I am happy
to discuss it with the committees today. Today's energy markets
are being shaped by several forces. Growing demand for energy,
particularly in Asia, for example China and India, but also
here in the United States, has resulted in decreased spare
capacity in global crude oil supplies and the global refining
system.
Oil production in mature basins, particularly in Europe and
North America, has been declining. New developments are
occurring, but in challenging and capital-intensive locations
outside of OPEC countries, such as the deep water, the Arctic,
and oil sands. Meanwhile, OPEC production has increased, but is
now approaching its current capacity to deliver.
That brings me to my second point: Chevron is doing
everything we can to expand and diversify the world's energy
resources. We are doing it at huge cost and significant risk in
some of the most challenging areas. We are doing it to assure
supplies to our customers while providing a reasonable return
to our investors. Since 2002 our company has invested $32
billion in our business. During the same time period our
earnings were $32 billion. In other words, we invested what we
earned.
Our investments flow to the areas of greatest opportunity
and long-term return. In the United States, for example, 90
percent--that is 90 percent--of our capital program for oil and
gas production is focused in the Gulf of Mexico because it is
open for investment. While our investment in the United States
is significant, it is important to note that about two-thirds
of our capital program--that is 65 percent--is outside the
United States because of the relatively limited opportunities
here at home.
Investments in energy projects outside the United States
also benefit U.S. consumers because they increase global
supplies. However, let me give you an example of the type of
inefficiencies that can occur when U.S. investment is
discouraged. In our search for natural gas in the United States
we have found many promising areas off-limits to development.
For example, in the late 1980s we made a significant discovery
of natural gas in an area of the eastern Gulf of Mexico called
Destin Dome, approximately 25 miles off the coast of Florida.
At the time it was estimated that Destin Dome held enough
natural gas to supply one million--that is one million--
American households for 30 years.
Chevron and its partners could not get the permits to
develop the field because of opposition at the local level in
Florida as well as a maze of regulatory and administrative
barriers at the Federal level. We reluctantly relinquished the
leases as part of a settlement reached with the Government in
2002.
So what actions are we taking now to supply natural gas to
this market? We are co-leading a project to produce and liquefy
natural gas in Angola, shipping it to an import facility in the
U.S. Gulf Coast, and then piping it to the market. The
customers will be the same customers who could have been
supplied by natural gas just miles off the coast of Florida.
This brings me to my final point. How can we create a
policy environment that stimulates more investment in energy
production and allows those investments to be made more
efficiently? As I have stated, the industry cannot pursue its
potential in the United States without the right government
policies in place. The energy bill passed earlier this year was
a start, but there is more we can do. I have offered a detailed
list of policy recommendations in my written testimony, so I
want to just quickly summarize four of them here.
First, the U.S. Government should open areas currently off-
limits for the environmentally responsible exploration and
development of oil and gas.
Second, there is a critical need to rationalize regulations
that create barriers to the efficient development and operation
of energy infrastructure, for example siting of LNG terminals
and expansion of refineries. There is also a need to reduce the
number of boutique fuels.
Third, we need to continue effective public-private
partnerships that stimulate energy efficiency and research and
development of potential new energy sources.
Finally, the Government should look at all of its
policies--environmental, trade, and foreign policy--and ensure
that they are aligned towards achieving strategic energy
objectives.
Senators, I believe that if the U.S. Government can work
with our industry as partners to eliminate barriers to
investment, investment will follow. It is clear that the policy
choices we have made in the past have had consequences. So too
will the policy decisions made from this point forward. It is
important that Congress and the American people recognize the
choices that face us, understand their implications, and plot a
constructive path forward.
Thank you for the opportunity to comment. I appreciate it.
[The prepared statement of Mr. O'Reilly follows:]
Prepared Statement of David J. O'Reilly, Chairman and Chief Executive
Officer, Chevron Corporation
INTRODUCTION
Thank you, Chairmen Domenici and Stevens, Senators Bingaman and
Inouye, and Committee Members. My name is Dave O'Reilly, and I am
Chairman and CEO of Chevron Corporation. I am here today representing
Chevron employees as well as the shareholders who have put their trust
and confidence in our company.
I welcome this opportunity to talk about working together more
effectively to enhance our country's energy security and deliver
reliable supplies of energy at a reasonable cost to all Americans.
There are few industries more central to the vitality of the United
States, or that touch more American households, than the oil and gas
industry. Chevron takes this responsibility very seriously and I hope
the information that I will share with you today will help you better
understand the challenges we face--and the value that our industry
provides to American consumers and the American economy.
Chevron is a global energy company whose roots go back 126 years to
the Pacific Refining Co. in California. We are the second-largest oil
and gas company based in the United States, with approximately 53,000
employees worldwide and a presence in more than 180 countries around
the world. We are involved in virtually every aspect of the energy
industry--from crude oil and natural gas exploration and production to
the refining, marketing and transportation of petroleum products. We
also have interests in petrochemicals and power generation assets and
are working to develop and commercialize future energy technologies.
Let me start by providing some context. We are here today to talk
about energy prices, which came to the forefront following Hurricanes
Katrina, Rita and Wilma. These hurricanes were devastating to the
entire Gulf Coast region, including the oil and gas industry. They
disrupted oil and gas production in the Gulf of Mexico, the network of
pipelines in the region and many refining operations. I personally
visited our operations in the aftermath of the storms. It is difficult
to appreciate the devastation created by the hurricanes until you stand
on the ground in south Louisiana and Mississippi. We were fortunate
that no employees of Chevron lost their lives during the hurricanes,
but many hundreds of our employees lost their homes and prized
possessions. Despite this huge personal loss and tremendous family
disruptions, those very same employees have been working around the
clock to resume normal operations as quickly as possible to get
supplies to market (Attachment A;* Chevron's response). I could not be
prouder of their heroic performance in the face of almost unimaginable
adversity.
---------------------------------------------------------------------------
* Attachments A-D have been retained in committee files.
---------------------------------------------------------------------------
The hurricanes had a clearly recognized dramatic impact on the
domestic energy supply infrastructure. The storms temporarily shut in
almost one-third of U.S. oil and gas production and one-fourth of U.S.
refining capacity. This resulted in higher prices and volatility. Price
volatility at the retail pump was also driven by localized panic buying
of gasoline supplies, which led to temporary shortages. Every oil and
gas company in the region had difficulty resupplying the market in
those first days following the storms because power outages had shut
down pipeline infrastructure, crippling the ability to move supplies
into impacted areas. The temporary supply shortages had ripple effects
elsewhere in the United States, and in the European and Asian markets,
reflecting the interdependence of global energy markets. As
distribution and production began to normalize in the weeks that
followed, the market began to reflect that in moderating prices
(Attachment B, regular gasoline prices). However, although most of the
refining capacity has been restored, as of last week approximately one
million barrels per day of crude oil and five billion cubic feet per
day of natural gas remained shut in while repairs to facilities
severely damaged by the storms are being made. I can assure you that my
company continues to do everything we can to resume normal operations
on the Gulf Coast as rapidly as possible.
However, the larger and more important issue we need to address is
that we have been operating in a tighter supply situation for some time
now, brought about by fundamental changes in the energy equation.
Growing global demand for energy, particularly from China and India but
also in the United States, has resulted in decreased spare capacity in
global crude oil supplies and the global refining system. Oil
production in mature areas, particularly in Europe and North America,
has been declining. New developments are occurring, but in challenging
and capital-intensive locations, such as the deepwater, the Arctic, and
oil sands in Canada and extra heavy oil in Venezuela. Meanwhile, OPEC
production has been increased, but is now approaching its current
capacity to deliver.
Fundamentally, today's energy prices are a reflection of the
current interplay between supply and demand, as well as complex
regulatory and geopolitical forces. The hurricanes magnified this
underlying trend and showed how vulnerable supplies are to disruptions.
These impacts were felt not only in the United States, where the
hurricanes occurred, but in energy markets around the world. The
tightness of supply, and global energy interdependence, are issues that
I have been discussing for the past year-and-a-half with a variety of
our stakeholders. I have been urging fresh new policy prescriptions in
response (Attachment C, select speeches).
The aftermath of the hurricanes also highlighted challenges that
are specific to the U.S. energy market--the concentration of oil and
gas production in the Gulf of Mexico, the lack of spare refining
capacity in the U.S. refining network (Attachment D, spare refining
capacity) and the complexity of transporting numerous blends of
gasoline from one part of the country to another under the current
system of fuel specifications. The temporary waivers of those
specifications by the Environmental Protection Agency (EPA), and
numerous states, were some of the most effective actions government
took following the hurricanes. This played a constructive role in
alleviating regional gasoline shortages, and provided a glimpse of how
regulatory reform can make markets work more efficiently.
Chevron is investing aggressively in the development of new energy
supplies for American businesses and consumers and will continue to do
so. We believe that the increased awareness of energy issues facing the
United States provides a good framework for a discussion of steps that
the industry and government can take together to create a climate for
enhanced investment that promotes economic and environmentally sound
production of energy supplies.
HOW DID WE GET HERE?
The energy situation in the United States today reflects a number
of factors, most notably the increasing demand for transportation fuels
and natural gas. But it also reflects the increasing complexity of the
regulatory and permitting processes governing the industry. Numerous
laws and regulations passed during the last 35 years have affected the
petroleum industry. The early 1970s witnessed the passage of
significant environmental legislation, the creation of the EPA, and a
growing public resistance to development, i.e. ``not in my backyard''
(NIMBY). These were well-intentioned initiatives that created
significant benefits for the environment. But over time, even as the
oil and gas industry made great advances in its environmental
stewardship capabilities, these pieces of legislation promulgated
hundreds of federal, state and local collateral regulations--many of
which have had the consequence of limiting energy production.
The balance between regulatory benefits and economic benefits in
our industry has been lost and it is time to look at ways we can
restore that equilibrium.
Moratoria, for instance, have closed off access to vast areas of
our offshore exploration. In the 1980s, increasing public opposition to
leasing led to Congressional pressure for annual moratoria in specific
areas. By 1990, individual moratoria were so numerous that President
H.W. Bush declared a blanket moratorium that applied to virtually the
entire United States' coastline, except for a few locations. In 1998,
President Clinton extended the ban for an additional 10 years to 2012.
Federal offshore drilling is currently only allowed in Mississippi,
Alabama, Louisiana, Texas and parts of Alaska.
At the same time, regulatory hurdles have hindered onshore oil and
gas development. The Bureau of Land Management (BLM) manages about one-
eighth of U.S. land. Projects on federally-managed lands supply about
34 percent of total U.S. natural gas and 35 percent of total U.S. oil
production. The majority of this land is in the western states,
including Alaska. The Federal Land Policy and Management Act of 1976
(FLPMA) is the guiding legislation for BLM's management of public lands
and mineral estates--the purpose being to balance a variety of
competing land uses including cattle grazing, recreational use,
resource development and environmental protection. Existing
environmental regulations and BLM processes for oil and gas regulations
make obtaining leases and permits to produce difficult. The Arctic
National Wildlife Refuge (ANWR) is another area currently ``off-
limits'' and the debate on whether to open it up for drilling has been
going on for many years. As a result of government policies,
responsible oil and gas development has been channeled away from
Alaska, the Rocky Mountains, and offshore regions toward the more
accessible areas along the Alabama, Mississippi, Louisiana and Texas
coasts. For these same reasons, investment has been channeled outside
the United States as well.
The refining sector too has undergone many changes as it has
responded to a need to become more efficient and to comply with
environmental laws. No refineries have been built since 1976 and their
number has dwindled substantially, from 325 in 1981 to 148 today.
Despite that drop, the overall capacity of the U.S. refining system has
been steadily increasing since 1994. Current capacity stands at around
17 million barrels per day, up from 14.5 million in 1994. Refineries
today are extremely efficient, operating at almost maximum capacity--
nearly 95 percent. But a variety of factors make it challenging to
expand current refining infrastructure:
Historically low economic returns in the refining business.
Timing and cumulative impact of environmental rules
resulting in high costs for building new equipment.
Delays in obtaining permits and NIMBY challenges.
Multiple regulatory requirements to make a variety of
cleaner burning gasolines, which has resulted in a
proliferation of boutique fuels.
Regulatory uncertainty regarding alternative fuels.
Together, limited access to domestic supplies and constrained
refining capacity in the United States have created a situation in
which the United States has become increasingly dependent on imports of
all forms of petroleum. Today, the United States imports 58 percent of
its crude oil requirements and 15 percent of its natural gas--compared
to 42 percent of its crude oil, and eight percent of its natural gas in
1990. Imports of gasoline, jet fuel and diesel have risen from 12
percent of consumption in 1990 to 22 percent today.
At the same time, the American Petroleum Institute estimates that
there are more than 131 billion barrels of oil (enough to produce
gasoline for 73 million cars and fuel oil for 30 million homes for 60
years) and more than 1,027 trillion cubic feet of natural gas (enough
to heat 125 million homes for 120 years) remaining to be discovered in
the United States. Much of the area where this exploration and
subsequent production could occur is currently off-limits.
WHAT CHEVRON IS DOING TO MEET AMERICA'S ENERGY NEEDS
Now, let me turn to what Chevron is doing to increase energy
production. Where we can, we are investing aggressively all across the
energy value chain. Since 2002, Chevron has invested $32 billion in
capital expenditures worldwide--compared with $31.6 billion in earnings
for the same period. In other words, we invested more than we earned.
This year alone, Chevron's capital investment program is estimated
to exceed $10 billion worldwide. This is a 20 percent increase over our
spending last year.
Highlights of our current and planned investments in the United
States include:
The $3.5 billion Tahiti project, one of the Gulf of Mexico's
largest deepwater discoveries. We have begun construction of
the floating production facility to be installed there. When
complete, the facility will have a capacity of 125,000 barrels
per day of oil and 70 million cubic feet per day of natural
gas. It is scheduled to begin production in 2008.
A $900 million project to develop the Blind Faith Field in
the deepwater Gulf of Mexico. This field is expected to provide
30,000 barrels of oil per day and 30 million cubic feet of
natural gas per day. It is scheduled to begin production in
2008.
Continuing evaluation work on several deepwater Gulf of
Mexico discoveries (e.g., Great White, Tonga, Sturgis, Tubular
Bells), which have the potential to become significant
investment opportunities in the future, with direct benefits
for U.S. consumers.
Stepping up to the technical challenges presented by
deepwater operations in the Gulf of Mexico. In November of
2003, Transocean and Chevron announced what was at the time a
new world water-depth drilling record for a well in 10,011 feet
of water in the Gulf of Mexico. Also, our successful Tahiti
well test completed in September 2004 in 4100 feet of water and
at 25,812 feet subsea was the deepest successful well test in
the history of the Gulf of Mexico.
Proceeding with significant investments in our U.S.
refineries. Since 2001, including 2005 estimates, we will have
invested over $1.5 billion in our U.S. refineries to meet
various clean fuels requirements, comply with environmental
regulations, maintain safe and reliable operations and increase
capacity. Of that, about $900 million was invested in our two
California refineries (El Segundo and Richmond) and almost $500
million in our Mississippi refinery (Pascagoula).
Recent investments in our El Segundo refinery will enable us
to increase gasoline production by about 10 percent. We also
have begun the permitting process at our Richmond refinery to
improve utilization. We expect these projects to increase our
gasoline production by about seven percent at this refinery.
Likewise, we have announced a significant investment for
expansion at our Pascagoula refinery that will also enable
increased gasoline production.
Building Liquefied Natural Gas (LNG) projects in countries
in the Atlantic and Pacific ``basins'', which will result in
needed additional natural gas supplies for the U.S. market. To
accommodate these new supplies, Chevron is pursuing a portfolio
of options for LNG import terminals in North America. For
example, in Mississippi we have an application with Federal
Energy Regulatory Commission (FERC) to own, construct and
operate an LNG import terminal near our Pascagoula refinery.
In addition, we have committed for terminal capacity of 700
million cubic feet per day at the Sabine Pass LNG import
facility currently being built in Cameron Parish, Louisiana.
This is a terminal use agreement for the next 20 years.
While U.S. spending is significant, nearly 65 percent of our
capital and exploratory expenditures have been directed towards
investment opportunities outside the United States. As with any well-
run company in any industry, our investments have gone to areas where
there is opportunity to invest and earn reasonable, long-term returns
for the risks taken.
But, it is inaccurate to think that investments in energy projects
outside the United States do not benefit U.S. consumers. They do. Since
oil is a globally-traded commodity, any investment anywhere in the
world that adds to supplies tends to benefit all consumers, including
those in the United States. And, while natural gas is not yet a
globally-traded commodity, industry investments are rapidly moving us
in that direction. Likewise, investments in global refinery capacity
are generating additional supplies of petroleum products which benefit
U.S. markets.
Outside the United States Chevron is investing significantly in
exploration and development projects in, for example: Nigeria (oil and
natural gas); Kazakhstan (oil); Angola (oil and natural gas); Australia
(natural gas); Indonesia (oil and natural gas); Thailand (natural gas);
Venezuela (oil and natural gas); the United Kingdom (oil and natural
gas); Canada (oil); and gas-to-liquids (GTL) facilities in Nigeria,
which will use natural gas to develop ultra-clean diesel fuels that
will be available for world markets.
Chevron is expanding its natural gas business, which is very
capital-intensive. Unless natural gas is consumed near where it is
produced (and then pipelined to market), the gas must be liquefied,
shipped, re-gasified, and then transported via pipeline to consumers.
We have three very large projects in this category--in Angola, Nigeria
and Australia--that we are working on to bring natural gas resources
found outside the United States to American markets.
In our search for natural gas in the United States, we have
identified many promising areas currently off-limits to development.
For example, in the late 1980s, we made a significant discovery of
natural gas in the Eastern Gulf of Mexico called Destin Dome,
approximately 25 miles off the coast of Florida. At the time, it was
estimated that Destin Dome held enough natural gas to supply one
million American households for 30 years.
Chevron and its partners could not get permits to develop the field
because of opposition in Florida and a maze of regulatory and
administrative barriers at the federal level. After a long, expensive
and frustrating effort to move forward, we relinquished the leases as
part of a settlement reached with the government in 2002.
So, what actions are we taking now to supply natural gas to this
market? We are co-leading a project to produce and liquefy natural gas
in Angola, ship it across the Atlantic Ocean to a regasification
facility in the U.S. Gulf Coast, and transport it via pipeline to the
market. The customers will be those same customers in Florida and the
Southeast who could have been supplied by natural gas just miles off
the shore of Florida.
This is clearly not an efficient and economic use of resources for
the United States, or the rest of the world for that matter. Yet it is
the direct result of our historical energy policies.
Similarly, U.S. energy policies have required significant
investments in refining and marketing operations in order to meet
environmental and new fuel specifications. From a U.S. energy policy
perspective, the focus has been on environmental and fuels investments,
not on investments that add to production capacity.
Over the past decade, we have made substantial investments in
projects to meet fuel specification and environmental objectives. We
have invested in reformulated fuels for the California market and to
prepare for additional blending of ethanol. We have invested to meet
changing gasoline sulfur specifications, and new ultra-low sulfur
diesel specifications to meet the requirements of new diesel engines.
Even then, meeting these requirements has not always been easy or
without risk. For example, the state of Georgia and the EPA delayed
implementing new fuel specifications for the city of Atlanta after our
Pascagoula refinery had already invested in facilities to meet the new
requirements. As another example, it took us nearly 12 months just to
get the local permit to build an ethanol blending tank at our Richmond
refinery in California to meet a combination of federal and state fuel
requirements.
Chevron has also invested to increase the efficiency, reliability
and capacity of our refining operations in the United States. In some
instances, when we have debottlenecked and have added to capacity, we
have had to pay severe penalties to do so. Because of the lack of
clarity surrounding permitting rules, our company, along with most
other majors in the industry, has had to reach settlements with the EPA
over whether such routine maintenance, repair and replacement
activities trigger the New Source Review permitting requirements.
In addition to the investments I have just outlined, Chevron has
spent more than $1 billion since 2000 on the next generation of energy
by focusing on the pragmatic development of renewable and alternative
energy sources, and the creation of more efficient ways of using the
energy we already have.
Since 1992, Chevron has taken steps that have reduced companywide
energy use per unit of output by 24 percent. This is the result of
having strong energy efficiency strategies, and business units that
develop, share and adopt energy best practices across the corporation.
Chevron has also made a successful business of developing energy
efficiency solutions for the external market. Our subsidiary, Chevron
Energy Solutions, is a $200 million business that has developed energy
efficiency and renewable projects for large-scale facilities operated
by the U.S. Postal Service, the Department of Defense, hospitals and
public schools.
Chevron is the world's largest producer of geothermal energy and we
are investing sensibly but aggressively in the development of
alternative fuel sources. In 2004, the U.S. Department of Energy
selected Chevron to lead a consortium that will demonstrate hydrogen
infrastructure and fuel-cell vehicles. Over a five-year period, the
consortium will build up to six hydrogen energy service stations with
fueling facilities for small fleets of fuel-cell vehicles and capacity
to generate high-quality electrical power from stationary fuel cells.
Chevron is 50 percent owner of Cobasys, a manufacturer of
environmentally friendly advanced batteries for applications such as
hybrid electric vehicles and stationery power applications. We have
made significant investments in this venture, including the
construction of a factory, to help meet the growing demand for
batteries in these applications. Cobasys has received battery pack
purchase orders from customers for upcoming hybrid electric vehicle
production programs.
Chevron has one of the largest solar photovoltaic installations in
the United States, a 500 kw solar array, at our Bakersfield, California
production location.
THE ROLE OF THE U.S. GOVERNMENT
Even with the investments we are making now, more is required to
meet future demand for energy.
We acknowledge the work of the Congress in passing the Energy
Policy Act of 2005, a start toward securing America's energy future. We
believe, however, that there are additional steps that must be taken by
Congress and the Administration:
First, impediments to access for exploration should be
removed. This would include ANWR, areas in the Rocky Mountain
region, and Continental shelves.
Second, the permitting process for LNG facilities,
refineries, and other energy infrastructure should continue to
be streamlined. There should be a coordinated, integrated and
expeditious review. There should be a clearly defined and
simple process with specific deadlines. One agency should be
designated as accountable for meeting overall guidelines.
Overlapping authority and conflicting or redundant processes
should be eliminated. Also, the Federal Government should help
educate state and local government, as well as the public,
about the need for these facilities.
Third, there is a need to rationalize the proliferation of
boutique gasolines. The recently passed legislation by the
House of Representatives contains provisions that would limit
the number of boutique fuels. Rationalizing the current slate
of boutique fuels is critical to improving the current supply
situation by bringing fuel specifications into alignment with
the regional manufacturing, supply and distribution systems.
Additionally, granting EPA authority to temporarily waive and
pre-empt state fuel requirements in situations like we just
experienced will result in quicker response to such
emergencies.
Fourth, as with the U.S. Department of Energy's leadership
and support of hydrogen projects, the Federal Government should
continue to support joint ventures with private enterprise to
advance technology and develop alternative energy supplies.
Fifth, Congress and the Administration should continue to
support development of clean coal and nuclear power as
important sources of additional energy supplies.
Sixth, the government should recognize the growing
interdependence of energy markets and work actively with other
countries to provide additional secure sources of energy and to
ensure a level investment playing field across national
boundaries.
THE ROAD AHEAD
Clearly, we face a significant challenge. But I would suggest that
when it comes to energy policy, we should acknowledge the new equation
we face and work together to develop new solutions.
Today, energy markets are globally interdependent. As a nation, we
import an increasing percentage of our energy from abroad. Clearly, in
the wake of this year's hurricanes, the importance of our ability to
get energy supplies from abroad was critical to our recovery. In moving
forward, we should recognize this interdependence as we pursue energy
policies.
Historical divisions are irrelevant in the energy equation we now
face. When a single hurricane can knock out nearly 10 percent of our
nation's gasoline supplies, it is clear that a new approach to dealing
with energy issues is needed. This is no time for a divisive, business-
as-usual energy debate. The time for pragmatic and unified action is
here.
The good news is that energy goals advanced by well-meaning
advocates on both the supply and production side, as well as the
conservation and alternative-energy side, do not have to be at odds. We
saw some evidence of this when the long-awaited 2005 energy bill was
signed into law by the President earlier this summer. It was a start.
But the hurricanes have shown that in many respects it did not go far
enough.
We need to shift the framework of the national energy dialogue to
acknowledge that improving America's access to oil and natural gas,
investing in new energy sources such as hydrogen fuel cells and
renewables, and developing clean coal and nuclear power sources are, in
fact, complementary goals that can help create affordable, reliable
energy supplies. The American public has shown in the past that when
they know the facts, they will cast aside partisanship in favor of
pragmatic solutions. Given the state of the country's current energy
situation--constrained supplies and volatile prices--Americans deserve
that kind of discussion.
So let's begin now to reframe the debate. Here are three ideas that
can help guide a new national dialogue:
First, we need to begin viewing energy as an asset to be optimized,
not a liability to be managed. We need to let go of the old paradigm
that energy development and environmental stewardship cannot co-exist.
If we use the assets we have more effectively, while also seeking to
diversify our energy supply, our nation will be well on its way toward
greater energy security.
Second, we need to rationalize the complex thicket of regulations
and permitting requirements that is acting as a bottleneck to the
efficient development and operation of energy infrastructure,
particularly in the refining sector.
Third, we need to broaden the goal of energy efficiency beyond
individual actions such as turning down the thermostat, as effective as
they can be. The next generation of energy efficiency, which will be
driven by human ingenuity and technology, must target enterprise
solutions such as ``smart'' buildings, hybrid vehicles and the
development of ultra-clean diesel fuels from natural gas. The Federal
Government can play a constructive role in enabling increased
investment in energy efficiency, as it did earlier this year by
renewing the Energy Savings Performance Contracting Program, which
enables businesses to make their facilities more efficient and then
recoup the capital investment with the money saved from lower energy
use.
We can do all these things. Having seen our employees respond to
the hurricanes, I know Chevron is up to the challenge of helping to
meet our future energy needs. America is equally up to that challenge.
But it will require crossing hardened political and ideological lines
toward a new national consensus on energy policy.
The interrelationship of such a policy with our national security,
trade, economic, and environmental policies will have to be clearly
recognized, and the necessary balances examined, debated and resolved
with the understanding and support of the American public. This will
require significant skill and leadership from our government.
For too long, Americans have been led to believe they can enjoy low
oil and gasoline prices with less exploration and refining. The
hurricanes have shown that this equation is not sustainable. As we move
forward, let's not default to quick fixes, partisan solutions, or
unrealistic goals. Let's be clear-headed and pragmatic. A bi-partisan,
public-private commitment to these goals will help protect America from
the next energy crisis, and safeguard America's quality of life.
Thank you.
Chairman Stevens. Thank you very much, Mr. O'Reilly.
Our next witness is the chairman and CEO of ConocoPhillips,
James Mulva.
STATEMENT OF JAMES J. MULVA, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, ConocoPhillips
Mr. Mulva. Good morning. I welcome this opportunity to
demonstrate what our company, ConocoPhillips, is doing now and
what we are committed to doing in the future to help the United
States achieve greater energy system at an affordable cost.
Today's higher prices are a function of longer term supply
and demand trends and lost energy production during the recent
hurricanes. While ConocoPhillips does not expect the prices we
see today to continue, we do want to give you an appreciation
of the challenges that lie ahead in supplying the United States
and the world's energy needs.
For example, exploration and development projects typically
cost several billion dollars, but have no revenues for 7, 8,
sometimes 10 years, and they have substantial technical,
capital, political, and price risk. Our industry is
experiencing rapid cost increases due to high steel prices and
service industry costs, and also because host governments,
including the United States, limit access to reserves or make
the terms too unattractive. Thus the opportunities that are
available for us tend to be the more remote, complex, and
higher cost type projects.
The fragile balance of world energy supply and demand was
brought into sharp focus when Hurricanes Katrina and Rita
disabled a major portion of America's productive capacity.
Given the amounts of devastation, we believe that the energy
industry did a commendable job of resuming operations as fast
as humanly possible and redistributing supplies from other
regions and countries, thereby avoiding a much larger supply
disruption. As a testament to the industry's success, AAA
reported on November 2 that gasoline prices have declined for
the 26th consecutive day, to a level below where they were
prior to the hurricanes.
ConocoPhillips lost one-third of its domestic refining
capacity as a result of the shutdown of three of our
refineries. One of our refineries is down for a week, another
for 45 days, and the last is expected to resume partial
operations by year's end. To increase gasoline supplies to
affected areas, our company redirected supply from some of our
other refineries in the United States, we deferred turn-around
work at three of our other countries refineries, and imported
gasoline from Europe, and we worked around the clock to resume
and restore our operations.
Immediately after Katrina's and Rita's arrival, our company
froze gasoline prices in the impacted States at all of our
company-owned stations and convenience stores for several days
and then lagged price increases in the spot market by nearly 50
percent. Essentially all of our company's gasoline marketing is
done through independent marketers and, although antitrust laws
prevent us from giving them specific guidance on pricing, we
urged all of them to use restraint in setting their prices.
ConocoPhillips is and has always been against any form of
price-gouging. If we become aware that any of our independent
marketers were doing this, that would be grounds for revoking
our branded name from that dealer. We know that many State
attorneys general are requesting reviews and we are ready to
open our records to them to show that we do not conduct,
condone, or tolerate price-gouging.
ConocoPhillips reported third quarter 2005 net income of
$3.8 billion, which is up 89 percent from the same quarter last
year. With respect to U.S. refining and marketing income, this
segment accounts for about 33 percent of the 89 percent
increase. Now, translating this increase in U.S. refining and
marketing earnings to earnings per gallon sold, earnings were
up 4 cents per gallon from last year, that is from 5 cents per
gallon in the third quarter of 2004 to 9 cents per gallon in
the third quarter of 2005.
So how is this possible when the industry average retail
price for gasoline went up 67 cents per gallon from the third
quarter of 2004 to the third quarter of 2005? So let me explain
what happened with the 67-cent increase from one year to the
next. 54 cents per gallon went for higher crude oil and
feedstock costs that we must pay to run through our refineries.
The oil that we purchase usually represents 85 to 90 percent of
the total cost of running our refineries.
Operating and marketing costs remained flat on a per-gallon
basis, while taxes increased 3 cents per gallon due to the
higher earnings. In addition, 6 cents per gallon represents
retail industry taxes and margins that our company is not
exposed to because our U.S. marketing operations are
predominantly wholesale activities. That leaves us with 4 cents
per gallon additional profit, which is 6 percent of the total
increase in gasoline prices from 1 year to the next.
Based on ConocoPhillips's third quarter revenues of about
$50 billion, the $3.8 billion of income represents a profit
margin of 7.7 cents per dollar of sales, near or below the
average of all U.S. industry. With this level of profit in the
highest price environment our industry has experienced in 22
years after adjusting for inflation, we do not see this as a
windfall.
At ConocoPhillips we have ramped up our investment
significantly in recent years, from $6 billion of investment in
2003 to $9.5 billion in 2004 to more than $11 billion expected
this year. For 2006 we are forecasting $12 billion in capital
investment. Over the last 3 years our company delivered about
$26 billion of earnings, but has reinvested over $26 billion
right back into the business to expand capacity in terms of
production and refining capacity. In 2005 our company has
earnings of about $10 billion year to date, or about a billion
dollars a month, but our capital investments are also close to
one billion dollars a month.
ConocoPhillips has been at the forefront in recent years in
growing its refining capacity. Over the past 5 years we spent
$4 billion in worldwide refining, of which $3.2 billion was
primarily spent to expand and modernize our refineries in the
United States. Before the two hurricanes, we announced an
incremental investment program. This is now $4 to $5 billion on
top of our maintenance and other refinery investments of $1 to
$2 billion per year aimed at growing our U.S. refining
capacity. With these expansions and improvements, we expect to
be producing 15 percent more clean fuels, such as gasoline,
diesel, and heating oil, by the end of this decade. That is the
equivalent of adding at least one world-scale refinery to our
domestic refining system.
As the largest energy producer in Alaska, we are working
closely with the State of Alaska and others to bring North
Slope natural gas to the lower 48 market through a new pipeline
expected to cost $20 billion. The line will add as much as 4.5
billion cubic feet per day to the Nation's gas supply. This
represents about 8 percent of current U.S. production.
ConocoPhillips recently agreed in principle to the basic fiscal
terms with the governor of Alaska, which is a significant step
in moving this important project forward.
We are also investing aggressively in bringing liquefied
natural gas, LNG, to the U.S. market. We are progressing LNG
projects in Qatar, Nigeria, and aggressively pursuing projects
in Russia, Venezuela, and Australia. These are all multi-
billion dollar projects.
Our country sorely needs additional refining capacity,
pipelines, and other critical energy infrastructure, including
LNG receiving terminals. The private sector will make these
investments without need of any new government incentives.
However, the industry needs governments at all levels to
streamline permitting and environmental review processes so we
can make these investments and add to our energy supplies.
We also encourage you to give more serious consideration to
the issue of resources access. With the entire east and west
coast and the eastern Gulf of Mexico and key areas in Alaska
all closed to entry, it is understandable why the supply-demand
balance is tight.
We also want to express support for the development of all
energy sources--coal, nuclear, alternative energy--as well as
conservation and efficiency standards. We will need to include
all of these to diversify our supply sources and put some extra
capacity back into our energy system.
We caution against advancing short-term proposals that will
restrict the industry's ability to re-invest its funds on
finding and producing more energy. While these make powerful
headlines, the fact remains that such proposals invariably
reduce investment and supplies. In addition, these proposals
would hurt the competitiveness of the U.S. energy companies as
we seek to compete for resources around the world.
That completes my prepared remarks. Thank you, Mr.
Chairman.
[The prepared statement of Mr. Mulva follows:]
Prepared Statement of James J. Mulva, Chairman and Chief Executive
Officer, ConocoPhillips
INTRODUCTION
Good morning, members of the energy and commerce committees. My
name is James Mulva, and I serve as chairman and chief executive
officer of ConocoPhillips. ConocoPhillips currently serves as chair of
the American Petroleum Institute but my comments today reflect only the
views of ConocoPhillips.
ConocoPhillips appreciates the invitation to testify and respond to
your questions regarding the energy situation facing the United States
today. ConocoPhillips fully appreciates your and the American public's
concerns regarding supply availability and cost. In fact, we welcome
the opportunity to demonstrate what ConocoPhillips has accomplished,
and what we will continue to achieve to supply the energy required in
the market place.
In this statement and when answering your questions to the best of
my ability, I will from time to time express my opinions, beliefs and
predictions about future events. As I'm sure you appreciate these
future events are subject to risks and uncertainties, many of which are
described in our public filings, which I refer you to.
Let me begin by giving you a brief description of our company.
ConocoPhillips is an international, integrated energy company,
headquartered in Houston, Texas and operating in 40 different countries
with year-to-date September 2005 annualized revenues of $175 billion
and assets of $104 billion. We are the third largest integrated energy
company in the United States, based on market capitalization, oil and
gas proved reserves and production, and the second largest refiner in
the United States. But a company is more than its revenues and assets--
it is its employees, shareholders and the communities it touches. We
are comprised of approximately 35,800 employees, who own about 5
percent of our shares through company-sponsored benefit plans.
Approximately 83 percent of ConocoPhillips' stock is owned by more than
2,000 different mutual funds, representing investments by a wide array
of individuals and businesses, as well as numerous private and public
pension plans.
Our investors expect a combination of growth and returns from our
company. Our job is to meet these expectations by operating our
facilities well and holding costs down when markets are strong or soft,
and by expanding our investments when markets signal that new supplies
are needed. For the last 20 years, the petroleum industry has had sub-
par returns, which limited the capital available for investment. Within
the past two years, the price signals have encouraged the industry to
recalibrate the investment dial to higher, more aggressive levels of
spending. Until recently, accelerated levels of investment were not
encouraged because growing global demand could be met largely from
spare oil production capacity in Russia and in OPEC countries, and by
taking advantage of spare global refining capacity and spare capacity
in oilfield services and supplies. That situation has changed, and
today the industry can offer the prospects of profitable growth as it
steps up its investment in huge, complex energy projects around the
world. We feel confident that this response will lead to a moderation
of prices and increased energy security.
GLOBAL ENERGY CHALLENGES--SUPPLY/DEMAND
You have asked us here today to explain the record high prices
recently observed at the gasoline pump as well as prices of other fuels
such as natural gas and home heating oil. The higher prices we see
today were many years in the making.
Crude oil prices are the main driver of gasoline and other product
prices, as noted in a recent Federal Trade Commission report. The
report indicated that over the last 20 years, changes in crude oil
prices have explained 85 percent of the changes in the price of
gasoline in the United States. Crude oil prices are determined in the
international market by thousands of entities based on the market
conditions that day.
Global crude prices have been rising since 2002 as a result of the
U.S.-led global economic recovery, leading to exceptional oil demand
growth and rapid industrial growth in the developing economies of Asia.
Over the last decade, oil demand in China and India doubled, and is
expected to double again by 2020. Strong U.S. and global economic
growth are certainly desirable but the consequence of strong growth is
a rise in the demand for commodities, including oil. If incremental
supplies are not immediately forthcoming, then prices rise to encourage
new investments, and prices have indeed risen for most commodities,
including oil, in recent years.
This exceptional demand growth over the last few years has left
little surplus crude oil production capacity available in the world
today. Concern about geopolitical risk in various oil-producing
countries in the face of limited spare production capacity has helped
drive oil prices higher. While ConocoPhillips doesn't expect the prices
we see today to be sustained, we do want to give you an appreciation of
the challenges that lie ahead in supplying the U.S. and the world's
energy needs.
Our typical exploration and development project costs several
billion dollars up front and does not generate production or revenues
for 7-8 years. Our projects also have high technical, capital,
political and price risks. Commodity prices have always been cyclical
in nature and we can't invest based on the assumption that the present
price situation will persist when our projects often last for 30 years.
So the first challenge is investing these large sums in an atmosphere
of great price uncertainty.
Another challenge is that it takes an ever increasing amount of
capital to keep production in the mature oil and gas fields in the
United States and the north sea from declining. We will eventually lose
this battle.
After two decades of declining costs, our industry has experienced
rapid cost increases over the last five years. Some of this increase is
a reflection of high steel prices and the high level of industry
spending, with the oil services industry struggling to keep pace.
However, costs also are rising because international oil companies
don't have access to low-cost reserves, primarily because host
governments, including the United States, don't allow access to
reserves or make the terms too unattractive. The opportunities
available to us tend to be more remote, complex, or involve lower
quality crude oil that requires higher prices to be economically
produced.
Resource access is a particular problem for natural gas in the
United States, since the most highly prospective areas are off limits
for drilling or the permitting requirements are so onerous that the
prospect becomes uneconomic. Given industry decline rates of 30 percent
per year in existing lower 48 natural gas wells, and the long lead
times in liquefied natural gas (LNG) and arctic gas pipelines, the
United States will be short of gas in the near-term. The only way to
solve this problem is by making more acreage available, especially in
the eastern Gulf of Mexico.
Another challenge is that much of the investment required in energy
today is for energy infrastructure in consuming countries, such as
refineries, liquefied natural gas receiving terminals, and pipelines.
In the United States, nimby (not-in-my-back-yard) sentiments have
caused costly delays and even the abandonment of these important
infrastructure projects.
The final challenge I would like to raise is that the petroleum
industry for the last 20 years has had sub-par returns, which limited
the capital available for investment. Between the difficult years of
1990 and 2002, the average return on equity for the petroleum industry
was 11.3 percent, lower on average than the 12.6 percent return for the
S&P 500. The refining & marketing sector has an even lower historical
return on capital than the total petroleum sector. Between 1990 and
2002, the refining and marketing sector had a return on capital
employed of 5.0 percent versus 7.1 percent for the total petroleum
industry.
The refining sector has been particularly challenged because so
much of the capital spending has been directed toward on site
environmental needs and the production of clean fuels. In addition to
investing heavily to meet federally mandated fuel specifications,
refineries have put substantial capital into addressing state and local
boutique fuel requirements, which have added to the cost of producing
gasoline and reduced the fungibility of product.
We also cannot ignore the negative impact that federal and state
regulatory processes have had on discouraging new grass roots
refineries. The process for siting and securing the many permits
necessary for a refinery are lengthy and difficult. We have found this
to be the case in our on-going efforts to expand refinery capacity at
existing locations. Historically, there has been substantial excess
refining capacity outside of the United States, allowing for relatively
low-priced product imports. Given strong demand growth of recent years,
the amount of excess capacity has been reduced, which is sending price
signals globally to expand capacity. Governments also need to recognize
the importance of international trade in our industry, and should avoid
doing anything that might impede the free flow of crude oil, refined
products, capital and people.
Given the enormous size and risk of the investments our industry is
contemplating, we need an adequate return to bring these investments to
fruition. Unfortunately, returns in our industry are highly cyclical.
Today, we are in an up-cycle but we saw our last down-cycle as recently
as 1998 when crude oil prices fell to $11 per barrel. There will
undoubtedly be another down cycle in the future, and we have to build
the financial strength to withstand these even as we increase
substantially our capital employed in this sector.
We want you to know that despite these enormous challenges our
industry has collectively invested nearly $380 billion in energy
supplies and infrastructure over the last five years.
IMPACT OF HURRICANES
Much has been written about the devastation of Hurricanes Katrina
and Rita and how they disrupted peoples' lives. The storms also
provided a wake up call on the fragile balance in global energy supply
and demand and the vulnerability of this country's energy
infrastructure in the Gulf Coast area. The Office of Management and
Budget recently estimated that the energy industry will spend somewhere
between $18 billion and $31 billion to bring operations back on line.
Heavy damage from the two hurricanes all but closed down the
refinery infrastructure in the region. Immediately after the storms,
about a third of total U.S. refining capacity was not in production.
Today, about 800 thousand barrels per day, or about 5 percent of total
U.S. refining capacity, is still not operating. That includes some
247,000 barrels per day from ConocoPhillips' Alliance refinery, south
of New Orleans, which suffered severe flooding. We expect to see
Alliance back up in partial operation by year's end.
Some 100 offshore production platforms were destroyed by the
storms. After hurricane Rita, nearly all of the crude oil production in
the Gulf of Mexico was shut in, as was 75 percent of the industry's
natural gas production. Today about 800 thousand barrels per day or
about half of federal Gulf of Mexico crude oil production, and 4.7
billion cubic feet per day, or nearly half of the natural gas
production remain shut in. Additionally, many other sectors of energy,
including utilities and pipelines suffered significant damage from
these storms. We are pleased to report that ConocoPhillips was able to
restore 100 percent of its operated production within five days after
Hurricane Katrina made landfall, and 97 percent of its operated
production within 10 days after Hurricane Rita made landfall.
Right now, the focus of attention is supply security and price but
when we look back, it will be recognized that the energy industry did a
commendable job in getting the infrastructure back on its feet in a
hurry, and that we avoided what could have been a much larger supply
disruption. Despite the fact that the 1,100 ConocoPhillips employees
were personally impacted by the hurricanes, many were immediately back
working on returning our facilities to production as rapidly as
possible. As a testament to industry's success in bringing in new
supplies after the hurricanes, AAA reported on November 2 that gasoline
prices have declined for the 26 consecutive day, and the U.S. average
price, and prices in most states, are lower than they were prior to the
hurricanes. The data also shows that retail prices in the Gulf Coast
rose by a much smaller percentage than spot gasoline prices after both
storms, demonstrating pricing restraint by the industry.
While gasoline prices were on the front page prior to the
hurricanes, there is little doubt that the back-to-back storms greatly
exacerbated price increases, especially in the impacted states. As a
result of massive refinery shutdowns, there was an immediate increase
in the spot price of gasoline. This price rise encouraged gasoline
supplies from around the world to be diverted to the United States.
Gasoline imports from the beginning of September through the end of
October were 35 percent higher than they were during the same period
last year. With increased supply, prices then readjusted downwards
rapidly. This demonstrates that the market works.
Diesel supplies have proved to be more difficult to import than
gasoline supplies because of the tight global diesel supply/demand
balance, and particularly strong demand for diesel fuel in Europe,
which prevented some product from being diverted to the United States.
This also demonstrates the risks of biasing consumers towards one fuel
over another. Diesel has benefited from advantageous tax treatment for
decades in several European countries. As a result, diesel demand now
exceeds gasoline demand, prices are rising and U.S. customers who use
the same product as heating oil are paying more. Diesel market
tightness in the U.S. has also been exacerbated by refineries
maximizing gasoline versus diesel production to meet immediate consumer
gasoline needs. As the refining industry prepares to meet the
congressionally-mandated deadline for producing low-sulfur diesel by
June 1, 2006, you may continue to observe erratic pricing in diesel
markets next year.
There continue to be concerns about home heating oil and natural
gas as we enter the winter months. Weather, and its impact on demand,
will determine how prices react. The problem with natural gas is that
there is still 9 percent of U.S. supply shut in and there is little
additional liquefied natural gas supply available for import this
winter. In fact, there have been reports of several European and Asian
buyers paying U.S. price levels of $12 per million British thermal
units for spot LNG cargoes so that the cargoes wouldn't be redirected
to the United States. Thus, it is important that governments at all
levels encourage consumers to conserve natural gas this winter.
There will be substantial new supplies of LNG starting in 2008-
2009, when the first slate of LNG projects dedicated to U.S. markets
comes on line. However, it should be noted that virtually all of the
LNG receiving terminals currently being constructed are in the western
Gulf of Mexico. Given our recent experiences with hurricanes, it would
seem prudent to also build some of the LNG terminals on the east and
west coasts.
OUR RESPONSE--HURRICANE IMPACTED SUPPLIES AND PRICES
ConocoPhillips, one of the largest refiners in the United States,
temporarily lost one-third of its domestic capacity as the result of
the shutdown of three refineries. Of the three refineries, one was down
for about one week, another for 45 days and the alliance refinery
mentioned previously is expected to be back up in partial operation by
year end.
I am proud of the performance of our employees as they handled this
supply short fall. We carefully managed our limited, available gasoline
and diesel inventories to ensure that local and federal emergency
responders were given top supply priority within the areas impacted by
the hurricanes.
To increase gasoline supplies to affected areas, ConocoPhillips
redirected supply from some of its other refineries, deferred
turnaround work at three other company refineries, imported gasoline
from Europe, and worked around the clock to safely restore operations.
Affected ConocoPhillips plants worked diligently to restore temporary
power and operations that allowed rapid blending and shipping of all
available products stranded in storage just prior to the hurricanes.
With respect to diesel, when all three of our refineries were down,
we lost 200,000 barrels per day of diesel production. This created a
shortage and severely limited our ability to supply our normal spot and
term diesel customers in Texas, the Southeast and Oklahoma. We couldn't
import a significant volume of diesel fuel because of the strong demand
in Europe, and because of the limited import capability on the Gulf
Coast. To help balance available supply with demand, ConocoPhillips had
to discontinue all discretionary spot sales and purchase additional
supplies on the spot market to fulfill all of our term contracts.
Getting two 100-year hurricanes in four weeks that temporarily shut
down 30 percent of the nation's refining capacity led to product price
increases in the physical and financial markets. But immediately after
Katrina's and Rita's arrival, ConocoPhillips froze gasoline prices in
the impacted states at all company-owned stations and convenience
stores for a few days, and then lagged price increases in the spot
market by nearly 50 percent. We also requested our independent
marketers to use restraint in setting prices and not to do anything to
tarnish our branded name. Essentially all of ConocoPhillips' branded
sales are done through independent marketers. Anti-trust laws prevent
us from giving our independent marketers any specific guidance on
pricing. We only own 350 outlets in the United States, which represents
three percent of ConocoPhillips' refining capacity. At no time did we
lead price increases; we showed restraint and intentionally lagged
behind prices in the financial and physical markets.
The petroleum industry has routinely been accused of price gouging
whenever there are sudden changes in oil and natural gas prices. In a
report published earlier this year, the Federal Trade Commission stated
that the vast majority of its investigations have revealed market
factors to be the primary drivers of both price increases and price
spikes. ConocoPhillips is and has always been against any form of price
gouging. If we became aware that any of our independent marketers were
doing this, that would be grounds for revoking our branded name from
that dealer. We know that many state attorney generals are requesting
reviews, and we are ready to open our records to them to show that we
do not conduct, condone or tolerate price gouging.
EARNINGS AND INVESTMENTS
Since there has been a lot of focus on energy company earnings in
the third quarter, we want to explain our earnings and how much of them
we have reinvested.
COP reported third-quarter 2005 net income of $3.8 billion, up 89
percent from this quarter last year. 48 percent of this increase comes
from our worldwide oil and gas exploration and production operations,
38 percent of this increase comes from our worldwide refining and
marketing operations and 15 percent comes from our strategic alliance
with LUKOIL, which we entered into during the fourth quarter of 2004.
With respect to U.S. refining & marketing income, this income
represents 33 percent of the 89 percent increase. Earnings from our
U.S. refining and marketing operations were about $1.1 billion in the
third quarter of 2005, compared with $505 million a year ago. Earnings
per gallon sold were only up 4 cents per gallon from last year, from 5
cents per gallon in third-quarter 2004 to 9 cents per gallon in third-
quarter 2005.
The industry average retail price for gasoline went up 67 cents per
gallon from third quarter 2004 to third quarter 2005 ($1.93 per gallon
to $2.60 per gallon). Contrasting the retail price increase with
ConocoPhillips' 4 cent per gallon increase, begs the question:
Where did all of this difference go?
54 cents per gallon went for higher crude oil and feedstock
costs that we must pay to run through our refineries. Normally,
the oil that we purchase represents 85 to 90 percent of the
total cost of running our refineries.
operating and marketing costs remained flat on a per gallon
basis, while taxes increased 3 cents per gallon due to higher
earnings.
in addition, 6 cents per gallon represents retail industry
taxes and margins that ConocoPhillips is not exposed to because
our U.S. marketing operations are predominately wholesale
activities.
that leaves 4 cents per gallon profit or 6 percent total
increase in the gasoline price.
ConocoPhillips' third-quarter revenues of about $50 billion
generated about $3.8 billion of income. This represents a profit margin
of 7.7 cents per dollar of sales, near or below the average of all
industries. With this level of profit in the highest price environment
our industry has experienced in 22 years, adjusted for inflation, we
don't see a windfall.
We also fear that people are mistaking the size of our earnings for
a windfall, not realizing the enormous levels of investment required to
achieve those earnings and bring new energy supplies to the market.
Let me tell you how much ConocoPhillips is investing, and the rate
which spending has ramped up in recent years. ConocoPhillips invested
about $6 billion in 2003, growing to $9.5 billion in 2004, an estimated
$11.4 billion in 2005 (annualized year-to-date third-quarter actuals)
and $12 billion forecasted in 2006, which is double the 2003 level.
ConocoPhillips has been investing its earnings back into
maintaining and expanding supplies. We have had 2005 earnings of about
$10 billion year-to-date--about $1 billion a month, but our capital
investments are also close to $1 billion a month. In fact, over a
three-year timeframe, using 2003-2004 reported results and 2005
annualized year-to-date third-quarter actuals, ConocoPhillips earnings
are about $26 billion but investments are just over $26 billion. In
2006, we intend to increase our capital spending despite the fact that
we expect to have a lower price environment, increased cost pressure
and lower earnings.
OUR INVESTMENT STORY
ConocoPhillips has been aggressively investing in refining, and in
developing new natural gas supplies for the United States. The projects
described below are all very large and will require significant capital
expenditures in the future.
Industry analysts, some of whom questioned the economics of our
decisions, will tell you that we have been at the forefront in recent
years in growing the company's refining business when most of our
competitors were focusing on exploration and production. Over the past
five years, ConocoPhillips has spent $4.0 billion worldwide, of which
$3.2 billion was spent domestically, to expand and modernize our
refineries and upgrade marketing operations.
Going forward, we are planning an expanded incremental investment
program, whereby we expect to invest $4-5 billion, on top of our
maintenance and other refinery investments of $1-2 billion per year.
This investment program is aimed at growing our U.S. refining capacity
by about 11 percent and improving our capability of handling lower
quality oils in order to make 15 percent more clean fuels such as
gasoline, diesel and heating oil by 2011. These expansions will add
enough clean fuels product to be the equivalent of adding one world
scale refinery to our domestic refining system.
ConocoPhillips will continue to be proactive and we applaud
industry efforts to expand capacity and add new refineries. We do not
need any new government incentives to make these investments. However,
we do need thorough--but expedited--permitting and regulatory
environmental reviews so we can quickly make the investments, thereby
adding capacity and refined product supply.
ConocoPhillips is making major investments in North American arctic
natural gas through the Mackenzie Delta pipeline and Alaskan North
Slope pipelines. The initial development of the Mackenzie Delta will
access 6 trillion cubic feet of gas, which is expected to come on
stream in 2011 at approximately 1 billion cubic feet per day. As other
fields are added, the pipeline will have the capacity to be expanded to
1.8 billion cubic feet per day. The total cost of this pipeline is
estimated to be at least $6 billion.
The Alaskan North Slope presently has an estimated 35 trillion
cubic feet of natural gas, which would increase total U.S. gas reserves
by approximately 20 percent. When the pipeline connecting this gas with
the lower 48 market is completed, about 4.0-4.5 billion cubic feet per
day will be added to natural gas supplies. This equates to about 8
percent of present U.S. natural gas production. This project
exemplifies what we have been saying about capital intensive projects
that require many years before we see a return on the investment. The
Alaska pipeline alone is expected to cost about $20 billion and take
ten years before the first cubic foot of gas is sold on the market. Two
weeks ago, ConocoPhillips joined Governor Murkowski of Alaska in
announcing that we have reached an agreement in principle on terms and
conditions that would move the Alaskan natural gas pipeline closer to
reality. Once agreement is completed by all gas owners, the Alaska
legislature will, hopefully, act on that agreement, passing it quickly.
While it is not a short term solution, gas from Alaska will,
eventually, make a sizable contribution in addressing the market
problems we are anticipating for natural gas.
ConocoPhillips is also investing aggressively in bringing liquefied
natural gas (LNG) to the U.S. market. We are progressing LNG projects
in Qatar and Nigeria and aggressively pursuing projects in Russia,
Venezuela and Australia. These are all multi-billion dollar projects.
We will bring our first cargo of Qatari gas to the United States in
2009. We are also developing an LNG supertanker to bring gas to the
United States. We are participating in the construction of an LNG
regasification facility at Freeport, Texas. We are pursuing a second
LNG regasification terminal in Compass Port, offshore Alabama, although
it is currently bogged down in the permitting process. We are committed
to making the investments in these two facilities, which total over
$1.5 billion. We are also pursuing permitting of regasification
facilities on the east and west coasts as well as an additional Gulf
Coast terminal.
To bolster U.S. and global oil supplies, ConocoPhillips is
expanding conventional crude production in Venezuela, Russia and the
Far East. There is likely to be a bridge of unconventional heavy oil
and natural gas before the world transitions to alternative fuels in a
large way. ConocoPhillips has invested and continues to invest heavily
in unconventional heavy oil production in Venezuela and Canada. Our
company announced just last week that we will be partnering with a
Canadian company to develop the $2.1 billion Keystone pipeline, which
will bring over 400 thousand barrels per day of much needed Canadian
heavy oil production to our U.S. mid-continent refineries.
There is an estimated 7 trillion barrels of unconventional heavy
oil in place versus conventional estimates of 3 trillion barrels.
Technology improvement will be important in raising the present low
recovery rates of unconventional heavy oil. We are also building
additional upgrading capacity in our refineries to process
unconventional heavy crude. We have also developed technology for
turning natural gas into a slate of clean refined oil products, which
will enhance clean diesel supplies.
As for alternative energy sources, ConocoPhillips is presently
focused more on research and development and monitoring versus making
large capital investments, given the tremendous uncertainty about which
technologies will be accepted in the market place and how much their
cost can be reduced so they can compete with conventional forms of
energy. However, we recently had a successful experiment with renewable
diesel, and we are conducting other tests to evaluate technologies to
produce gasoline and other liquid fuels from non-petroleum feedstock.
We are cognizant of U.S. Department of Energy and International Energy
Agency projections that the market share of renewable fuels, including
hydropower, will likely be less than 14 percent by 2025-2030 due to the
technological, economic and environmental challenges of most of these
alternatives.
AVOIDING FUTURE SUPPLY DISRUPTIONS & PRICE RUN UPS
Before we get to solutions for supply and price issues, we would
like to point out that you can not completely avoid supply disruptions
and price run ups when you have incidents such as two 100-year back-to-
back hurricanes and massive shutdowns of energy infrastructure.
However, the industry and markets do respond rapidly, although never as
quickly as the consumer would like. And even after these devastating
hurricanes, prices are now below where they were before the storms.
Market forces work and interfering with the market would exacerbate
supply short falls and stifle investment. And representing a company
who participates in the market every day, I can't say it more
emphatically--ConocoPhillips will not condone or tolerate price
gouging.
What this country sorely needs is additional refining capacity,
pipelines, and other critical energy infrastructure. The private sector
will likely make these investments without need of any new government
incentives. However, the industry does need governments at all levels
to be thorough--but at the same time--to streamline permitting and
environmental review processes so we can make these investments and add
energy supplies.
Our company would also support moving away from ``boutique'' fuels
to more standardization of refined products. This will make it easier
to redistribute products during times of shortage and should reduce
price volatility in normal market conditions.
Our company is particularly concerned about permitting and the
NIMBY issues associated with building new LNG receiving terminals. LNG
offers the most promising option for meeting the growing natural gas
needs of American consumers in the near term. ConocoPhillips and other
companies here today have searched the four corners of the globe to
find and contract for new sources of LNG to bring to the U.S. market.
We have made these arrangements on the premise that there will be
regasification terminals built and ready when the gas arrives. But, the
permitting and approval of new regasification terminals is occurring
significantly slower than we expected and many are being delayed or may
be cancelled, altogether, due to the ``NIMBY'' or ``not in my back
yard'' attitude that exists in many communities where they are planned.
The siting of LNG terminals was addressed in earlier energy policy
legislation. However, Washington, the states and the individual
localities where these facilities are planned need to have continued
dialogue and cooperation on siting issues. There also needs to be
better cooperation among the various federal agencies charged with
evaluating and permitting these facilities. If America does not secure
these badly-needed supplies, you can be sure that companies
representing other nations that are hungry for new energy supplies will
step in and secure available LNG supplies in the not-too-distant
future.
If you asked us what you could do that would have the greatest
positive impact on supplies, it would be to give more serious
consideration to the issue of access to resources. Let me emphasize
that ConocoPhillips is not pursuing the opening of national parks, the
Everglades and other such sensitive areas to energy development. But
with the entire east and west coasts, the eastern Gulf of Mexico and
key areas in Alaska all closed to entry, it is understandable why
supply/demand is tight. The industry's only access to new offshore
development remains the central and western Gulf of Mexico. Immediately
after the hurricanes, industry was criticized by some members of
Congress for concentrating too much of its resources in the Gulf
region. We are concentrated there because that is where the available
resources are and that is where policies from Congress have kept us.
The eastern Gulf of Mexico probably has more natural gas potential
for consumers than about any place in the lower 48 states. When Outer
Continental Shelf Lease Sale 181 was withdrawn from development,
another key prospect for finding badly-needed natural gas reserves was
removed from consideration. We would encourage the Senate to consider
reinstating that sale and revisiting access in other areas. Our
industry has the technological know-how and the track record necessary
to protect Florida's treasures and, at the same time, explore and
produce in the eastern gulf in a safe and environmentally-responsible
manner.
The Rocky Mountain region of the country is another area where new
natural gas production can make a difference. But the leasing and
permitting process has hampered development in areas such as the San
Juan basin of New Mexico and the Powder River basin to the north.
Funding and staffing appears to be improving but continues to be a key
problem in these areas. Local BLM personnel are doing a commendable job
with what they have but more funding for permitting and related
staffing must be directed to those areas.
The last area that we wanted to express support for was the
development of all energy sources--coal, nuclear, alternative energy
with appropriate environmental safeguards--as well as conservation and
efficiency standards. We will need to include all of these to diversify
supply sources and put some needed slack back in our system.
These are the areas where we need your help to better enable us to
meet the energy demands of America and help our country continue to
grow. What we do not need are ideas that sound good to some but have
never worked and invariably reduce investment and supplies. We are
against windfall profit taxes, price controls and mandatory
allocations.
According to a 1990 report of the Congressional Research Service,
the windfall profits tax that was signed into law in 1980 and repealed
in 1988 drained $79 billion in industry revenues during the 1980s that
could have been used to invest in new oil production--leading to 1.6
billion fewer barrels of oil being produced in the U.S. from 1980-1988.
The tax reduced domestic oil production as much as 6 percent, and
increased oil imports as much as 16 percent. In addition, this tax
would not take into account the significantly higher costs the industry
is facing today.
Finally, any tax that drains investment dollars from U.S. oil
companies reduces their ability to compete with foreign companies. Of
the world's currently known conventional oil and gas reserves, only 7
percent is held by the international oil companies. This means
America's energy companies face a tremendous challenge in gaining
access to large, reliable sources of oil and gas around the world.
Federal tax policies that jeopardize the competitive strength of
America's energy representatives could weaken our ability to meet the
nation's needs now, and for years to come.
We are not in favor of any special taxes levied on our industry to
support the Low Income Home Energy Assistance Program (LIHEAP). While
we believe this is a very worthy program, we think it is a bad
precedent to have private industry support a federally-funded program.
In addition, this will reduce the level of investment we will be able
to make, thereby reducing the development of new supplies.
We agree there is a need for added supply and we want to
participate in providing it. Levying additional taxes will obstruct our
ability to do that. There is a direct correlation between energy
investment and energy supply.
Our company and the industry are fully aware of the public distrust
and concern about the rapid rise in energy prices. However, the higher
prices were caused in part by sub-par returns that led to under-
investment in the energy sector for several decades. Only now are
returns approaching levels that economically justify a major step up in
energy investments, and there is no guarantee that current return
levels will persist over the life of the investment. We are making the
necessary investments in added production and refining capacity but are
concerned that proposed legislation will hinder our ability to make
future investments.
CONCLUSION
Meeting U.S. and global energy needs over the next 30 years will
require a tremendous amount of investment. The International Energy
Agency calculated that $16 trillion would be required to meet global
energy needs and $3.5 trillion would be needed to meet U.S. energy
needs. We need to work together to meet such an enormous challenge. Our
industry should do what we do best--finding new energy supplies and
bringing them to the market. We ask that you do what you do best . . .
help American companies stay strong competitors in the global energy
market . . . and streamline the regulatory processes and remove other
barriers that discourage energy investment at home.
I would like to commend Chairmen Domenici and Stevens for your
committees' tireless efforts over the past few years to address energy
policy. The legislation that has been enacted, thus far, is a notable
start in addressing the energy needs of this country. But there is more
work to be done in removing barriers to investment.
We need to have better communication and work more closely in a
transparent way with key stakeholders--governments and consumers--to
develop a sound long-term energy program, which we have not had for
many decades. This program needs to stress investment, supply
expansion, conservation and alternative energy sources. Our company
plans to play a proactive role in meeting U.S. and global energy
challenges and looks forward to working with you to achieve this mutual
goal.
Chairman Stevens. Thank you very much.
Our next witness is Mr. Ross Pillari, chairman and chief
executive officer of British Petroleum America.
Mr. Pillari.
STATEMENT OF ROSS J. PILLARI, PRESIDENT AND CEO, BP AMERICA,
INC.
Mr. Pillari. Thank you. Good morning, Chairmen Stevens and
Domenici and members of both committees. As I have submitted my
written comments for the record, I will just summarize the key
points in my oral comments this morning.
BP America employs 40,000 people in the United States and
we are a major producer of crude oil and natural gas. We
operate five refineries and supply gasoline and distillate
fuels in 35 States.
As you have already heard, 2005 has been an unusual and
challenging year for our industry and company, both in the
United States and around the world. We have experienced very
tight supply-demand in global crude oil markets, resulting in
high crude oil prices. This tightness reflects strong economic
growth and increased demand throughout the world, particularly
in the Far East.
Combined with reduced production from Iraq and Venezuela at
times this year, the overall impact on crude supply was a
reduction in the historical excess crude oil capacity by nearly
two-thirds, to less than one million barrels per day,
significantly impacting the price of crude oil.
In the second half of the year, the refined product supply-
demand picture was also affected by a series of natural
disasters in the world, including Hurricanes Katrina and Rita
here in the United States. These disruptions to refinery
production and logistics infrastructure resulted in a sharp
increase in finished product prices. Markets with disrupted
supply sources sought to attract supply from unaffected areas
of the United States and the world product markets.
There has been extensive media coverage and analysis of the
impact the hurricanes have had on the communities in the Gulf
Coast region. The difficulties faced by these areas in the
recovery continues to be a concern for all of us. BP operations
in the affected areas, particularly in Texas and Louisiana,
were also severely impacted. Producing platforms, pipelines,
and terminals in the Gulf of Mexico were shut down during the
most severe periods of the storms, suffering damage and lost
production. Onshore distribution facilities were damaged by
both storms, resulting in an interruption to logistics,
infrastructure, and refinery supply.
Refineries had to be shut down or curtailed and thousands
of employees were displaced from their homes. We estimate that
our lost production was nearly 135,000 barrels per day in the
third quarter and nearly 160,000 barrels a day of oil
equivalent in the fourth quarter, and that damage to our
facilities will clearly be in the tens of millions of dollars.
We do expect most of the BP-operated production facilities
to be back onstream by year end. Importantly, the severe impact
of these storms made it impossible to respond as quickly as we
would have liked to the immediate needs of many of our
customers and communities. Displaced staff, utility outages,
damaged equipment, and the inability to operate terminals and
refineries in many of the affected areas hampered initial
recovery efforts.
In the face of these unusual external conditions, the
market response was what you would expect in a global commodity
market. Available product supplies were bid up as demand
exceeded supply. Geographic areas not affected by the
hurricanes experienced increased demand from buyers looking to
move supply to the storm-damaged areas, causing upward price
movement in both the storm-damaged and the unaffected areas.
Product prices in Europe also increased as domestic marketers
began importing product immediately to meet demand in the
United States.
Consequently, while consumers experienced difficult and
rapid increases in prices throughout the country, these same
increases resulted in a market that was able to attract supply.
We recognized these effects are not desirable for our
customers and we made every effort to increase supplies and
minimize the extent of these disruptions. We regret any
continuing problems and are working diligently to solve them.
In recent weeks, fuel prices have dropped dramatically,
down to levels similar to last spring, reflecting the increased
supplies arriving from unaffected areas, including the global
markets. Additional supplies will reach the market as Gulf
Coast refinery operations return to normal and we would expect
the market to react again.
Specific actions taken by BP in response to the storms
included: providing housing, transportation, and temporary
relocation for employees and their families displaced by the
storms; we prioritized fuel deliveries to emergency service and
health organizations; contributed to date over $12 million to
relief agencies in all of the affected areas; we have imported
over 30 million barrels of gasoline, diesel, and jet fuel for
delivery into markets in the Northeast, Florida, and the Gulf
Coast. We have reversed the pipeline at our Texas City refinery
dock to accept marine shipments and deliver imported product
into the Colonial pipeline. We have arranged offshore loading
from platforms to permit delivery of crude oil while awaiting
the startup of pipeline operations.
I would like to note that recovery of offshore operations
was greatly aided by government response to requests for
expedited permits and waivers. At retail, the Government
support of temporary fuel spec waivers allowed us to
redistribute available fuels to the most distressed areas. We
are very grateful for this support.
In recent months, our efforts have been focused on
repairing our facilities and returning to normal operations. In
the future we look forward to continuing to invest and build on
our extensive U.S. asset base. In the last 5 years, the BP
group has averaged $13 to $15 billion each year in new capital
investment. The largest single placement of that investment,
approximately $31 billion or roughly half of our global total
investment, has been here in the United States.
Our non-U.S. investment is also important to the United
States as it provides secure options for incremental supply.
This is particularly important in times of market disruptions,
as seen recently with the hurricanes. For example, BP was able
to quickly bring fuel from our Rotterdam refinery to the East
and Gulf Coast markets immediately following the storms.
Our U.S. investments have included continued expenditures
in mature operations, such as $700 million per year in Alaskan
North Slope field, a 30 percent increase in lower 48 natural
gas investment over the last 2 years to nearly $1.5 billion
already this year, and over $650 million per year in refinery
investment.
For the future, we see continued opportunities to invest in
the United States. Projects currently announced include: $2
billion for new development and infill drilling in the
Wamsutter natural gas field in Wyoming, increases U.S. natural
gas supplies; two proposed LNG projects, one on the east coast
and one on the Gulf Coast, at a cost of nearly $1.2 billion.
These projects will allow us to further access our natural gas
position in Trinidad and elsewhere in the world and bring this
product to the United States. Nearly $2 billion planned spend
to increase the use of Canadian heavy oil and improve our
upgrading capability in BP's refineries here in the United
States, which also provides a secure North American source of
crude oil supply.
We plan to invest over $2 billion per year over the rest of
the decade as part of our continuing program to invest a total
of over $15 billion in exploration and production in the Gulf
of Mexico. We also plan to invest in our share of the nearly
$20 billion Alaska natural gas pipeline to bring Alaskan gas to
the lower 48.
Also, outside of the normal oil and gas area, over the past
5 years we have invested more than $500 million in our solar
and alternative energy business and continue to see this as a
growing area of importance for our company and the country.
In closing, we believe the events of 2005 reflect unusual
challenges to the global markets for oil and gas. We know we
have a responsibility to help meet these challenges and we have
been working hard to fulfil that role. BP has a long history of
business activity and significant investments in the United
States. We will continue to offer quality products, enhanced
energy options, and continue to invest in support of our
customers and the energy needs of the Nation.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Pillari follows:]
Prepared Statement of Ross J. Pillari, President and CEO, BP America,
Inc.
My name is Ross Pillari and I am President and CEO of BP America.
BP America is the U.S. holding company for the BP Group. BP America
employs 40,000 people and produces 666,000 barrels of crude oil and 2.7
billion cubic feet of natural gas per day. We operate five refineries
that process nearly 1.5 million barrels a day of crude oil, and a
system of pipelines and terminals throughout the United States that
supply over 70 million gallons per day of gasoline and distillate fuels
to customers in 35 states.
2005 has been an unusual and challenging year for our industry,
both in the United States and around the world. We have experienced
very tight supply/demand in global crude oil markets resulting in high
crude oil prices. The tightness reflects the continued growth in demand
in the Far East combined with strong global economic growth. Together
with reduced supply from Iraq and Venezuela, the overall impact on
crude supply in 2005 was a reduction in the historical excess crude oil
capacity by nearly two thirds to less than one million barrels per day.
During the year, crude oil prices ranged from $45 per barrel WTI early
in the year to nearly $70 per barrel WTI in the third quarter and are
now again near $60 per barrel WTI as supplies are more in balance with
demand.
In the second half of the year, the refined product supply/demand
picture was also affected by a series of natural disasters in the world
including Hurricanes Katrina and Rita here in the United States. These
disruptions to refinery production and logistics infrastructure
resulted in a sharp increase in finished product prices as markets with
disrupted supply sources sought to attract supply from unaffected areas
of the United States and the world product markets.
There has been extensive media coverage and analysis of the impacts
the hurricanes have had on the communities in the Gulf Coast Region.
The difficulties faced by these areas, and their recovery continues to
be a concern for all of us.
Many BP employees were directly affected by the storms including
the need to evacuate, and in many cases the loss of their homes and
property. BP operations in the affected areas, particularly Texas and
Louisiana were severely impacted. Producing platforms for both oil and
gas in the Gulf of Mexico were shut down during the most severe periods
of the storms, suffering damage and lost production. Underwater
pipelines and onshore distribution facilities were damaged by both
storms resulting in a logistical interruption to refinery supply.
Refineries had to be shut down or curtailed and thousands of employees
were temporarily displaced from their homes.
The impact of these extraordinary storms on our operations has not
yet been fully determined but we estimate that lost production was
nearly 135 thousand barrels of oil equivalent a day during the third
quarter and nearly 160 thousand barrels a day of oil equivalent in the
fourth quarter, and that damage to our facilities will be in the
millions of dollars. We expect most of the BP operated production
facilities to be back on stream by year end.
More importantly, the severe impact of these storms made it
impossible to respond as quickly as we would have liked to the
immediate needs of many of our customers and communities. Displaced
staff, utility outages, damaged equipment and the inability to operate
terminals and refineries in many of the affected areas hampered initial
recovery efforts.
In the face of these unusual external conditions, the market
response was what you would expect in a global commodity market.
Available product supplies were bid up as demand exceeded supply.
Geographic areas not affected by the hurricanes experienced increased
demand from buyers looking to move supply to the affected areas causing
upward price movement in both the storm damaged and the unaffected
areas. The rest of the world was also impacted. Product prices in
Europe increased as domestic marketers began importing product to meet
demand in the United States.
Consequently, while consumers experienced difficult and rapid
increases in prices throughout the country, these same increases
resulted in a market that was able to attract supply and minimize large
scale supply disruption. We recognize these affects are not desirable
for us or our customers, and we made every effort to increase supplies
and minimize the extent of the disruptions. We regret any continuing
problems and are working diligently to solve them.
In recent weeks, fuel prices have dropped down to levels similar to
last spring, as the market has shown the balancing effect expected when
supply moves to meet demand. The market has attracted increased
supplies from unaffected areas including the global markets and the
price has fallen to reflect the market driven supply/demand
equilibrium. Additional supplies will reach the market as Gulf Coast
refinery operations return to normal.
In addition to the expected workings of the market, the industry
responded to the crisis by adjusting its operations to meet the
circumstances and restrictions created by the storms.
Specific actions taken by BP in response to these conditions
include:
Provided housing, transportation and temporary relocation
for employees and their families displaced by the storms.
Identified emergency service and health organizations and
prioritized fuel deliveries to meet their needs.
Contributed, to date, over $12 million to relief agencies in
all of the affected areas (from BP, employees and branded
partners).
Imported over 30 million barrels of gasoline, diesel and jet
fuel for delivery into markets in the Northeast, Florida and
the Gulf Coast.
Reversed a pipeline at our Texas City refinery dock to
accept marine shipments and deliver product into the Colonial
Pipeline while the refinery recovers from the storm damage.
Optimized the use of available supplies of boutique fuels
through waivers of fuel content requirements to help meet the
needs of highly impacted areas.
Arranged offshore loading from platforms to permit delivery
of crude oil in the face of pipeline interruption.
Recovery of offshore operations was greatly aided by government
response to requests for expedited permits and waivers. On the
downstream side, the government's support of temporary waivers of fuel
specifications allowed us to redistribute available fuels to the most
distressed areas.
While some areas continue to have tight supplies, including
unfortunately, occasional runouts, the supply situation is returning to
normal and as noted above, prices at the wholesale and retail level are
returning to levels similar to earlier this year.
In recent months, our efforts have been focused on repairing our
facilities and returning to normal operations. But, it is important to
recognize that BP has continued to maintain and grow a significant base
of United States production and refining assets.
In the last five years, the BP Group has averaged $13 to $15
billion each year (excluding acquisitions) in new capital investment.
The largest single placement of that investment, approximately $31
billion or roughly half of our global total investment, has been here
in the United States.
It is important to recognize the global nature of oil markets,
means that investment outside of the United States significantly
affects our nations crude and product availability by creating secure
options for supply. This is particularly important in times of market
disruptions as seen recently with the hurricanes. For example, BP was
able to quickly bring fuels from our Rotterdam Refinery in the
Netherlands to the East and Gulf Coast markets.
Our investments in the United States, of $6 billion per year, have
included continued expenditures in mature operations such as $700
million per year in Alaskan North Slope fields, a 30 percent increase
in lower-48 natural gas fields over the last two years to $1.5 billion
this year, and over $650 million per year in refinery investments.
Additional investments have also been made to maintain terminal and
pipeline capability and to meet new regulations affecting distribution
and marketing.
For the future, we see continued opportunities to invest in the
United States. Projects currently announced include:
$2 billion for new development and infill drilling in the
Wamsutter natural gas field in Wyoming. This investment is
expected to double BP's net production to 250 million standard
cubic feet by the end of the decade.
Two proposed LNG projects, one on the East Coast and one on
the Gulf Coast at a cost of $1.2 billion. These projects will
allow us to access our natural gas position in Trinidad and
elsewhere in the world; and if approved, potentially add 2.4
billion cubic feet send out capacity to supply markets in the
United States.
$2 billion planned spend, to increase the use of Canadian
heavy oil and improve our upgrading capability in BP's
refineries, also securing a North American source of crude oil
supply.
$2 billion per year sanctioned investment through the rest
of the decade as a part of our continuing program to invest
over $15 billion in exploration and production in the Gulf of
Mexico.
BP has publicly announced its intention to participate in
the nearly $20 billion Alaskan Natural Gas Pipeline to bring
Alaskan gas to the lower 48. We, together with other interested
parties, are nearing completion of a commercial agreement with
the State of Alaska.
Over the past five years, we have invested more than $500
million in our solar and alternative energy business and
continue to see this as a growing area of importance.
In closing, we believe the events of 2005 reflect unusual
challenges to the global markets for oil and gas. We know we have a
responsibility to help meet these challenges and we are working hard to
fulfill the role we play in helping the nation recover from these
extraordinary events.
BP has a long history of business activity and significant
investments in the United States. We will continue to offer quality
products, enhanced energy options and invest in support of our
customers and the energy needs of the nation.
Chairman Stevens. Thank you very much, Mr. Pillari.
Our next witness is John Hofmeister, president and chair of
the Shell Oil Company of America.
STATEMENT OF JOHN HOFMEISTER, PRESIDENT, SHELL OIL COMPANY
Mr. Hofmeister. Mr. Chairman, members of the committee:
Thank you for the opportunity to be here. I would like to
discuss the energy issues of concern to you, to Shell, and to
the American people.
We face serious energy challenges here and also around the
world, for which there are no perfect solutions or easy
alternatives. Every avenue--increasing crude supplies, building
refinery capacity, repairing hurricane damage, developing new
technologies--presents a challenge and requires a significant
and sustained investment. Basically, demand for energy around
the world is growing, thanks to strong economies. In fact, I
fear the alternative.
Consequently, there is a fragile supply-demand balance,
leading to current energy prices. And yes, industry profits are
large in total dollars, but they represent an average return on
sales in cross-industry comparisons. Shell earned $9 billion in
the third quarter of this year, a 50 percent improvement, for
three quarters of the year. But three points I would make about
those profits.
First, they are determined largely by the price of crude
and the price of crude is set on world markets. We do not set
or control the price of crude.
Second, as profits rise so do our tax payments. Shell's
global tax payments are up 55 percent this year, totaling more
than $14 billion.
Third, where do these profits go? They go back into the
business. Over the past 5 years Shell has reinvested the
equivalent of 100 percent of our U.S. profits in U.S. energy
projects. And future investments of billions of dollars will be
required to meet future energy demand.
Energy projects are becoming more complex, more costly,
more technologically demanding, and many take a decade or
longer to reach fruition. The EIA estimates $20 trillion--that
is $20 trillion--will be needed by 2030 to develop the
necessary supplies and infrastructure to meet global demand in
the future.
The surge in demand has had a dramatic impact on the costs
of doing business. The cost of an onshore rig in this country
this year has more than doubled. The cost of a deep water rig
is now up to or over $300,000 or more per day. The cost to
develop a deep water field, reaching $2 billion. The cost to
build or expand a refinery, for example a 200,000 to 300,000
barrel per day refinery, costs in the range of $3 to $3.5
billion. The cost to build a major greenfield LNG facility can
be in the range of $5 to $6 billion.
But these investments are critical if the energy needs of
today and tomorrow are to be met. At Shell we are making those
investments and we are making them here in the United States.
In the offshore, Shell will continue to be an industry leader
in the deep water Gulf of Mexico, a frontier we pioneered more
than a decade ago. In the past 5 years we have produced nearly
one billion barrels of oil and invested more than $7 billion
just in the Gulf.
Onshore, Shell has new natural gas prospects, both
conventional and unconventional, under way in Washington, North
Dakota, Texas, and across other regions of the United States.
In Alaska we just invested $45 million to acquire 84 licenses
this year to develop Alaska's vast resources and we are working
on additional opportunities.
In the oil sands, Shell Canada's major Athabasca oil sand
project is unlocking significant resources and plans to expand
this project will require many billions of dollars.
Oil shale. We have an exciting project in Colorado where we
are testing a unique process designed to release huge oil shale
resources. Shell's technology has the potential to recover more
than ten times per acre as much as traditional retort
technologies and in a more environmentally sensitive way.
Coal. I am in discussions with ten or more States about how
to tap the Nation's abundant coal resources using our coal
gasification process to efficiently and cleanly convert coal to
power, gas, chemical feedstocks, liquid fuel, and hydrogen.
LNG. Shell is investing to bring more LNG to the United
States. We currently have LNG import capacity at two existing
LNG terminals and have proposed to build two additional LNG
projects, one in the Gulf and one in the Northeast, to serve
U.S. markets.
In refining, our joint venture company, Motiva Enterprises,
is considering a major investment to increase capacity at one
or more of its Gulf region refineries. Expansion projects are
being considered in the range of 100,000 to 325,000 barrels per
day.
In pipelines, in Louisiana, Shell is investing $100 million
in an interstate pipeline to help transport refined product to
markets in southeastern, mid-Atlantic, and Northeastern States.
In renewables, Shell Hydrogen is a leader in pursuing
realization of a hydrogen future. Shell Wind has nearly 700
megawatts of power in the United States, a figure we expect to
grow. We are investing hundreds of millions in alternative
energy and alternative fuels each year and we are committed to
continuing these investments in the future.
But I cannot talk about Shell's investments in the United
States without mention of the tremendous costs involved in
recovering from recent hurricanes. Hurricanes Dennis, Katrina,
Rita, and Wilma and others brought into sharp focus the fact
that the Nation's energy supply-demand balance is fragile.
Katrina and Rita tore through the Gulf of Mexico production
sites, blasted the refinery belt in the Southeast, and roughed
up the terminal and pipeline networks that feed products to
half the country. Key parts of the Nation's energy
infrastructure were brought to a standstill. Recovery costs are
estimated between $18 and $31 billion to the industry, and
Shell bears its share of that cost.
But it is Shell people and their response that I would like
to tell you about in this instance. Nearly one-fourth of
Shell's U.S. staff was directly affected by the storms, about
5,000 people and their families. Despite their own losses,
losses in some instances horrific, these dedicated
professionals returned to work only hours after the storms
passed. We had employees lifted from their roofs in New Orleans
and we had employees in the convention center. But these
employees returned to work and have been there 24 hours a day 7
days a week, fixing damaged platforms, refineries, pipelines,
terminals, and service stations. They did so efficiently and
safely. I commend them and I thank them.
We continue the task of bringing our facilities back on
line. Just this week, I am pleased to say that we announced our
commitment to return full well to New Orleans, a city that we
admire, in early 2006, to bring 1,400 staff back to their
offices in central New Orleans.
Let me close with a comment about how we see ways
policymakers can help the industry and help secure an energy
future. Congress might consider policies that will in the first
instance allow responsible access to more domestic resources;
secondly, to encourage conservation; third, to streamline
regulatory requirements to speed the delivery of projects; and
fourth, to educate the work force of the future, to train the
next generation of energy professionals, men and women who will
develop future energy resources, future energy innovations, and
future energy solutions.
The facts are we have in this country the natural
resources, the financial capacity, and the human capability to
secure our energy future. The long-term success of American
energy development can and should be predicated on government
enabling a responsible industry to work on behalf of American
energy requirements.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Hofmeister follows:]
Prepared Statement of John Hofmeister, President, Shell Oil Company
I am John Hofmeister, President of Shell Oil Company. I appreciate
the opportunity to appear before you today to discuss the energy issues
important to the Congress, to America's energy providers and to
consumers.
Shell Oil Company is an affiliate of the Shell Group, which
operates in more than 140 counties and employs more than 112,000 people
worldwide. About 22,000 people work for Shell in the United States in a
diverse range of energy activities:
Shell produces approximately 700,000 gross boe/d (Shell
gross) of oil and natural gas in the U.S.
Shell operates or has an interest in seven U.S. refineries
with a capacity of more than 1.6 million barrels per day.
Seventy-five percent of Americans live within five miles of
one of our approximately 17,500 retail sites (Shell-branded
gasoline stations and Jiffy Lube facilities) in the U.S., where
an average of more than six million customers are served per
day.
We operate five chemical plants in the U.S., which focus on
the production of bulk petrochemicals and their delivery to
large industrial customers who, in turn, use them to make many
of the essential materials of our modern world.
We are a key capacity holder at two of the nation's existing
Liquefied Natural Gas (LNG) facilities, Cove Point and Elba
Island, and have announced proposals to build two additional,
large LNG receiving terminals in the U.S., which will be
critical in meeting the nation's growing need for natural gas
with potentially lower-cost global supply sources.
Shell Trading Gas & Power, through Coral Energy, has more
than 5,000 megawatts of electricity capacity in the U.S.
Shell WindEnergy has interests in more than 630 megawatts of
clean, renewable wind power capacity in the U.S., and we have
just announced a major wind project in West Virginia.
Shell Solar Industries, based in California, manufactures
solar photovoltaics in the U.S.
Shell Hydrogen opened the nation's first hydrogen fuel
dispenser at a Shell retail station. It's about 10 minutes from
the Capitol and I invite you to visit to experience what we
hope will be a common retail experience in the future. More
hydrogen dispensing sites are under development.
Shell is leading the way on other fuels of the future with
its investments in biofuels, cellulosic ethanol and gas-to-
liquids fuels.
I would like to use my time this morning to discuss four areas of
interest:
1. The economics of the energy business and the growing
demand/supply challenges;
2. The impact of hurricanes Katrina, Rita and Wilma on our
business and on the price of energy;
3. What Shell is doing to increase energy production in this
country and abroad; and
4. Initiatives Congress might take to help address the energy
concerns that are becoming increasingly apparent and urgent.
My primary message is that we face fundamental and pressing energy
challenges. There is no soft option or soft landing. Every route
forward has significant economic, environmental and technological
challenges. Every solution will require significant investment.
ECONOMICS OF THE ENERGY BUSINESS
Mr. Chairman, high energy prices and industry profits are matters
of concern to Congress, to your constituents and to our customers. Our
industry is extremely cyclical, and what goes up, almost always comes
down. That dynamic has proven to be true time and time again. For
example, the U.S. Energy Information Administration (EIA) reported that
only three years ago (in 2002), returns on investment for U.S.
petroleum companies were only 6.5 percent, and refining and marketing
returns were negative. The challenge is to manage our business in the
face of these severe price fluctuations.
As to profits, oil and gas industry earnings per dollar of sales
are in line with all U.S. industry during the second quarter of 2005.
The energy industry overall earned 7.6 cents for every dollar of sales,
compared to an average of 7.9 cents for all U.S. industry. True, the
total dollar numbers are large, but so are the billions of dollars that
petroleum companies have invested to supply energy to U.S. consumers--
and will need in order to re-invest to meet future demand in a safe and
environmentally sustainable way. It is this re-investment potential
that is critical.
Shell companies are in business to create economic value through
the reinvestment of earnings in new technology, new production,
refining and product distribution infrastructure and environmental and
product quality improvements. As such, we continue to build our
portfolio of integrated gas, unconventional resources and material oil
projects. Recognizing that the energy consumed today is made possible
by investments made years or even decades ago, we continue to reinvest
earnings to help ensure a secure energy future. For example, over the
past five years, Shell companies have invested approximately 100
percent of U.S. after-tax earnings in U.S. projects to meet the future
needs of consumers. Investments of this magnitude require long-term
fiscal stability.
The prices of oil and natural gas--which are set on the world
market--fluctuate substantially and dramatically. Today we have $60
per-barrel oil; just six years ago oil was under $20. Similarly, we
have recently experienced $12 per mmbtu natural gas; just six years
ago, natural gas was under $3, while unleaded gasoline was averaging
less than $1.20 per gallon, including taxes. In fact, with warm weather
and the return of supply lost to the hurricanes, the price of natural
gas dropped $3 per mmbtu last week (week of 10/31/05).
Even further, the first hearing of the Senate Energy and Natural
Resources Committee held during the 106th Congress just six years ago
related to the low-price environment and the state of the petroleum
industry. The Committee recognized the potential impact of the low-
price environment--noting, for example, the number of wells being shut
in and the drop in rig counts across the country.
These low prices were largely attributed to two factors. First, the
return of Iraqi crude oil to global markets caused an increase in
supply, driving prices down by $5-6 dollars per barrel, according to
the EIA. Second, the Asian financial crisis caused a drop in demand,
again affecting price.
Today, the market forces of supply and demand are driving prices
up. Oil prices reached an all-time high last year, an average of more
than $41 a barrel for West Texas Intermediate (WTI). So far this year
the average is over $50, with prices rising to around $70.
The U.S. is not self-sufficient in energy, importing more than 60
percent of its raw energy materials from other countries. The U.S. has
to compete for oil in world markets. For crude oil, it competes with
large refining centers such as Rotterdam and Singapore. For petroleum
fuels such as gasoline, diesel and heating oil it competes with
Germany, Japan, China, India and others.
The prices for many fuels are determined in the global marketplace.
Buyers and sellers of fuels--energy companies, marketers, futures
traders--continually compete via auctions or other transparent
mechanisms to balance their needs. Auctions and fuel trading take place
around the globe, but there are major centers in London, Singapore and
New York. Fuel prices move up and down based on world demand and supply
pressures.
For example, brownouts in China last summer raised the demand for
diesel fuel to run generators, which in turn bid up the price of
diesel. Asian buyers were successful bidders for cargoes, but diesel
prices were higher around the globe. A drought in Spain this summer
increased LNG requirements to run generators. To obtain additional LNG,
Spain bid for excess cargoes and the result was higher LNG prices
around the globe.
The September hurricanes created shortages of gasoline and other
fuels, resulting in higher prices in all global trading markets. In the
aftermath, Shell imported gasoline and other fuels--purchased at prices
that were set in the global marketplace--to compensate for lost
production from our damaged Gulf Coast refineries.
Similarly, natural gas prices in most markets in the United States
are determined by the interaction of many buyers and sellers. The shut-
in gas production during the past two months has averaged over 10
percent of total U.S. output. This production loss raised the fear of
not meeting appropriate start-of-winter storage levels. As a result,
the market bid up gas prices to levels that encouraged switching and
averted a storage shortfall.
As in the late 1970s and early 1980s, we expect that high prices
will stimulate supply and reduce demand. But these responses take time.
There are indications that Americans have reduced demand for vehicle
fuels. Yet on a global basis, high economic growth is stimulating
global energy-demand growth in spite of high prices, particularly in
major emerging economies like China.
On the supply side, large projects can take a decade or longer to
reach fruition and the projects are riskier and require higher capital
investment. Industry investments in oil and gas production, refining
and LNG facilities are accelerating.
As we look to the future, there are major challenges. Global demand
for primary energy is likely to continue to grow, and for the
foreseeable future, must largely be met by oil, gas and coal. Keeping
pace with this growth will be challenging. IEA estimates that some $16
trillion will be needed by 2030 to develop supplies and build energy
infrastructure. It will require very large investments in complex,
costly and technologically demanding projects.
This demand is already placing upward pressure on costs:
An onshore rig that cost $9,000 per day one year ago costs
$15,000 per day today. In the deepwater, the cost of floating
rigs has doubled to $300,000 per day. The cost to develop a
major deepwater field is between $1.5 and $2 billion.
On the refining side of our business, building a new
refinery or greatly expanding capacity at existing refineries
is a multi-billion-dollar proposition. The American Petroleum
Institute (API) has estimated that a 200,000 to 300,000 barrel-
per-day greenfield refinery could cost up to $3 billion to
build in the U.S.
To develop one Bcf/d of LNG requires an investment of $5-6
billion, which would mean, according to the U.S. ETA, that the
industry would have to invest $50-60 billion if U.S. LNG
imports grow by approximately 10 Bcf/d in the next 10 years.
So, while energy prices are high, the cost of energy projects is
also rising in tight markets for equipment and skills. We must foster
and fund technological innovation in an atmosphere of uncertainty. We
must work to maximize recovery from existing fields, access more
difficult and unconventional resources, develop more efficient ways of
producing energy and cleaner fuels, and curb emissions from energy
processes.
HURRICANE IMPACT AND RECOVERY
Shell and Motiva People. The landfall of Hurricane Katrina and the
subsequent devastation of New Orleans and surrounding Gulf Coast
communities affected some of our key facilities and nearly 4,600 of our
staff and their families. Our first priority immediately following the
storms was ensuring our staff and their families were safe and
providing assistance to them so they could return to work as soon as
possible to assess damage, begin repairs and restart facilities.
We invested heavily in locating and ensuring the safety of our
staff and their families--including going door-to-door, when necessary,
to make sure everyone was okay. Following Hurricane Rita, we moved
quickly to locate our nearly 1,000 employees who work and live near our
Motiva Port Arthur refinery. All told, during the course of the
hurricanes, we had nearly a quarter of our U.S. staff directly affected
by the storms.
After Hurricane Katrina, we began a large-scale temporary movement
of staff from New Orleans to Houston and surrounding facilities. We
moved rapidly to gain adequate accommodations in and around the
impacted facilities or the new temporary work sites. I am very pleased
to share that on Monday of this week (11/7/05), Shell Exploration and
Production announced its commitment to return to its New Orleans
office. We expect to have a substantial number of currently displaced
New Orleans Shell employees back home and back at work in the city we
cherish early next year and expect almost all to return within the
first half of 2006. We also have offered to the Governor and the Mayor
some of the best minds in the world to assist with a successful,
transparent and integrated rebuilding program that will help New
Orleans.
More than 4,400 pay, loan, employee assistance and payroll re-
direct requests have been implemented to date in association with these
disasters, totaling nearly $23 million. These requests consist of 2,360
employee interest-free loans for $20.7 million, and 1,642 assistance
payments of $250 each--totaling $407,000--for employees who have been
housing displaced friends and family, and 190 relocation supplements
totaling $1.4 million.
Shell and Motiva Operations. A fragile supply/demand balance and
vulnerable energy infrastructure were facts prior to the hurricanes.
But the devastating impact of the storms on the energy industry gave
these facts visibility and sharper focus. Like all of the companies
represented here this morning, Shell plans and invests for the long
term, but we live in the present, and we must deal with major
dislocations such as those caused by hurricanes Katrina, Rita and
Wilma.
Hurricanes Katrina and Rita tore through the heart of the Gulf's
oil and gas producing areas, through the Gulf Coast refinery belt, and
through the heart of the industry's terminal and pipeline networks that
feed products to half the country. Our Mars platform withstood winds of
175 miles per hour for four hours; it was damaged, but the damage is
repairable and it will be back in service again.
As of today (11/09/05) Shell has restored Gulf of Mexico production
to more than 200,000 boe per day (Shell share) of the approximately
450,000 boe per day (Shell share) prior to Hurricane Katrina (operated
and non-operated). Good progress continues to be made on key assets,
including Ursa, Mensa and the Auger pipeline and an additional 150,000
boe per day (Shell share) is expected to return to production during
fourth quarter 2005. Approximately 15 million barrels (Shell share)
were deferred in third quarter 2005 and approximately 18 million
barrels are expected to be deferred in fourth quarter 2005. Production
from the Mars platform is expected to resume in the second half of
2006.
To give you an idea of the enormity of the challenge ahead of us, I
can tell you that one of our tasks is to examine every foot of pipeline
3,000 feet below the surface of the Gulf of Mexico--something that has
never been done before. The Congressional Budget Office has estimated
that Hurricanes Katrina and Rita inflicted losses on the energy sector
estimated at $18 to $31 billion--and Shell certainly bore its share of
that damage.
Critical operations continued while our employees, retailers and
wholesalers suffered from the same devastation as their neighbors. I am
extremely proud to represent these dedicated professionals who began to
return to our manufacturing sites, pipelines, distribution terminals
and service stations only hours after the storms passed. Despite their
own losses, they continued to work to bring our critical facilities
back on line for the American people--and that they did so without
incurring any health, safety or environmental incidents.
MEETING FUTURE ENERGY CHALLENGES
Today's profits will finance re-investments and new projects that
will lay the foundation for greater energy supplies. As in the past,
both energy prices and costs are expected to be cyclical, but Shell is
committed to providing growing energy supplies. As stated, developing
these energy resources will require a tremendous capital investment by
our company, year in and year out, in periods of prices high and low.
Let me highlight some of our plans and projects.
North America Exploration and Production. Shell's Exploration &
Production (E&P) North American businesses are dedicated to growing the
North American energy supply. Our commitment is underpinned by a
history of investing billions of dollars every year in the development
of future domestic energy sources and defining new frontiers. Years of
investment in technology and people enabled Shell to lead the industry
into the Deepwater Gulf of Mexico, beginning with the development of
our Auger field more than a decade ago. Over the past five years in the
Gulf of Mexico alone, Shell gross production has been nearly one
billion barrels of oil equivalent, and over the same period Shell has
reinvested almost $7 billion in new offshore supply capacity. That same
level of determination and commitment continues today.
Shell is aggressively pursuing natural gas prospects in a number of
onshore North American basins. It is our goal to build new supply
positions by developing both conventional and unconventional gas
resources. Today Shell is drilling for new natural gas supplies in the
Gulf of Mexico, Washington state, North Dakota, Texas, and the US. and
Canadian Rockies.
Alaska Gas Pipeline. Alaska holds vast resources of natural gas
that can be brought to market in the Lower 48. Shell is making
significant investments in Alaska in the search for more supply. This
year alone we have spent $45 million purchasing leases in the Federal
waters of the Beaufort Sea and the recent State's sale in the Bristol
Bay area. Shell is excited about the opportunities that exist in
Alaska.
Unconventional Resources. Shell is making significant investments
in unconventional resources--oil sands, oil shale and coal. By 2010,
EIA estimates that unconventional gas reserves will account for more
than 50 percent of total U.S. reserves, up from 46 percent in 2002.
We have a major oil sands resource project in Athabasca, Canada,
with bitumen from the Muskeg River mine piped 500 kilometers south to
be turned into synthetic crude in the world's largest hydro-upgrader
adjacent to Shell's Scotford refinery. Most bitumen is upgraded by
coking. The Scotford upgrader is the only one based exclusively on
adding hydrogen--enabling it to provide a 103 percent yield rather than
the normal 85 percent. The plan now is to expand capacity from the
present 155,000 barrels a day to more than 500,000 by 2015. This will
require many billions of dollars of further investment in mining and
upgrading facilities.
Shell is investing in oil shale in Colorado, where we are testing a
process to unlock very large oil shale resources by conversion in the
ground--using electric heaters to gradually heat the rock formation to
release light oil and gas. This technology has the potential to recover
more than 10 times per acre as much as traditional retort technologies,
in a more environmentally sensitive way.
In order to meet growing U.S. energy needs, the entire portfolio of
domestic fuels will be required. Given the abundant coal resources in
the U.S., Shell also is looking at technologically sophisticated ways
to use coal more efficiently and cleanly. Given the very large
remaining coal resources--particularly here in the United States--it is
important to make these technologies viable. Currently, Shell is
working with 12 states--including New York, Pennsylvania, West
Virginia, Ohio, Indiana, Montana, Colorado, Wyoming, Utah, California,
Arizona and Texas--on the opportunities that exist with coal.
Coal gasification offers an efficient way of using coal for power,
town gas, chemical feedstock, liquid fuel and hydrogen. New technology
has made coal gasification cleaner and more efficient. The Shell
process provides more than 99 percent carbon conversion efficiency.
Integrated coal gasification combined cycle power--IGCC--produces 10 to
15 percent less carbon dioxide emissions than the best conventional
coal generation. It should be as cost-effective as traditional coal-
fired generation with full modern environmental clean-up equipment.
In the U.S., for example, new IGCC offers an attractive way to use
coal with the added advantage of the potential to capture the carbon
dioxide--produced as a high-pressure concentrated stream in the
gasification process--for sequestering underground. We are working with
the Queensland government in Australia on the feasibility of building
an IGCC power plant with 85 percent of the carbon dioxide sequestered
in this way. The aim is to have it in operation by 2010. Coal
gasification for power generation is likely to expand significantly in
the coming years.
Liquefied Natural Gas (LNG). It is clear to Federal and state
government that clean-burning natural gas is critical as an energy
bridge to future renewable and other energy resources, and LNG is a key
component of this fuel portfolio, even with northern frontier gas. LNG
is safe with a proven track record, easy to handle, clean burning with
low carbon emissions and utilizes environmentally friendly operations
in which to provide energy.
According to the EIA, today the U.S. consumes one-quarter of the
world's natural gas and is forecasted to outpace other major markets in
year-over-year LNG import growth. World demand is estimated to increase
from 6.4 tcf in 2004 to 22.4 tcf by 2020, with the U.S. making up 15 to
20 percent of the total forecasted LNG demand.
As a global industry leader, at Shell we are committed to
leveraging our strong global supply position and industry experience to
rise to the challenge of providing imported LNG as a critical
supplement to domestic gas and other fuel sources in order to meet the
country's growing energy needs--because we believe it is right for
America. We are proceeding with the Broadwater project in Long Island
Sound and the Gulf Landing project for offshore Louisiana.
Given the opportunity through approval of proposed facilities in
the U.S., LNG can be a significant source of the North American gas
supply, as it represents the potential to provide approximately 10
percent of the North American natural gas supply by 2010. In fact, by
2010, we estimate that Shell's projects alone could result in 2 to 3
Bcf/d of LNG import capacity to serve U.S. markets, growing to 4 or 5
later in the next decade. However, this fuel source opportunity for the
American public represents a significant, long-term capital investment
for many energy companies, including Shell.
Downstream/Refining. Our joint venture refining company, Motiva
Enterprises LLC, is considering a capital investment strategy to
increase refining capacity at one or more of its Gulf region
facilities. Expansion projects being considered range from 100,000-
325,000 barrels per day. In Louisiana, we are investing in a $100
million intrastate pipeline project to facilitate the transportation of
refined product into existing interstate pipelines that serve markets
in Southeastern, mid-Atlantic and Northeastern states.
WHAT SHOULD POLICYMAKERS DO?
Let me address the role that policy initiatives might play in
increasing domestic production and refining capacity to enable us to
meet the increasing demand for natural gas.
Outer Continental Shelf (OCS) Access. Given the sustained high
energy demand in the U.S. and globally, the key driver impacting oil
and gas prices is supply. Although our company is actively exploring
for oil and gas in all the areas in North America currently available,
we are doing this with one hand tied behind our back, as most of the
Outer Continental Shelf (OCS) is off the table for exploration and
development.
The U.S. Government estimates that there are about 300 trillion
cubic feet of natural gas and more than 50 billion barrels of oil yet
to be discovered on the OCS surrounding the Lower 48. When you then add
the Alaska OCS, you contribute the potential for another 122 trillion
cubic feet of natural gas and 25 billion barrels of oil. If Congress
wants to address high oil prices, they must address domestic supply
issues, such as the limited access to oil and gas exploration off our
coastlines.
U.S. dependence on the Gulf Coast for domestic oil and gas supply
and refining capacity became obvious to every American in the aftermath
of Hurricanes Katrina and Rita. The strategic importance of the Gulf of
Mexico production and refinery capacity was highlighted after Katrina
shut in 92 percent of the Gulfs oil output and 83 percent of its
natural gas production. For years, the Gulf of Mexico has shouldered
the burden of the U.S. offshore energy production. Urgent action is
needed to broaden the U.S. oil and gas production base to other parts
of the country if we are to ensure reliable and adequate energy
supplies for all Americans in the future.
A step in the right direction for Congress would be to pass OCS
revenue-sharing legislation to provide funds, needed by states and
communities with production off their coasts, to mitigate the impacts
of offshore development.
Earlier I mentioned Shell's interest in Alaska. In order for us to
continue to grow in this area, two things need to occur:
1. Ensure fair and equitable access to the proposed natural
gas pipeline; and
2. Continue to provide new opportunities for exploration
leasing.
Streamline Government Processes. Governments at all levels--
federal, state, local--should take the initiative to remove unnecessary
bureaucratic barriers that inhibit investment. If the bureaucracy is
too slow or too uncertain, investments will go elsewhere. Permit
streamlining is an admirable goal, one that should be pursued to
attract needed investment, not as a tactic to avoid responsible
environmental behavior.
Conservation. Energy efficiency and conservation dearly affect
demand and that, in turn, affects the market. The political viability
of conservation policies is unclear. I will just note that at Shell, we
have found significant cost savings in our own facilities from energy
conservation. I would encourage all industries, governments and
individuals to stress the need for conservation and efficiency in daily
operations and activities.
Workforce. We welcome Congressional initiatives that will help
secure a future energy workforce. Today, nearly 50 percent of all oil
and gas industry workers are over the age of 50. Only 15 percent are in
the age range of 20s to mid-30s. The available skilled workforce is
aging, and interest in energy-related educational opportunities is
shrinking. University enrollment in petroleum engineering is down from
11,000 students in 1993 to 1,700 today. And the number of universities
with petroleum engineering degrees has fallen from 34 to 17.
It is the engineers, scientists, inventors, drillers, geologists
and skilled trades people who will actually do the work needed to meet
our energy needs. To this end, Shell has funded a number of
initiatives, including two training facilities--one in Wyoming and one
in Louisiana--that will train returning veterans and others.
Finally, we respectfully request that Congress ``do no harm'' by
distorting markets or seeking punitive taxes on an industry working
hard to respond to high prices and supply shortfalls.
CONCLUSION
In conclusion, the world faces fundamental and pressing energy
challenges. Demand is likely to be robust despite high prices. The
investment necessary to meet this demand will be significant. Prices
are high, but input costs are rising everywhere, driven by tight
capacity along the supply chain. As I said in my opening remarks, every
route forward has major challenges--economic, environmental and
technological. I trust that my remarks have given you a sense of how we
can meet these challenges.
Thank you.
Chairman Stevens. Now we will enter a period for questions.
In the beginning I am going to yield to Senator Domenici and
Senator Bingaman to start the questions.
Chairman Domenici. Thank you very much, Mr. Chairman.
For the Senators, let me suggest that we both decided on
the rules for how we are going to do this. We are going to
follow a kind of modified early bird rule, meaning we are going
to go back and forth between Republican and Democrat. As I have
it on my side, so you will know, I am first, followed by
Senators Bingaman, Alexander, Dorgan, Murkowski, Wyden, Craig,
Feinstein, Martinez and Salazar, and we will go on from there.
But I think we both have agreed on a second proposition. If
your turn comes up under the early bird and you are not here,
then you will go to the bottom of the list and start over
again. Now, we have to do it that way or else we are not going
to know where we are and Senators are not going to know when
they have to be here.
Now, that is not counted against my time, I assume, because
I do not have very much time.
First of all, I did want to say something--I did want to
say something that would maybe make you smile, and I hope
witnesses will. We are glad to hear the constructive
suggestions you have made. I am very hopeful. You must know we
know most of them. You are repeating what we have heard. Most
of them ought to be done. We will try in the future to see what
we can do together to implement them.
But obviously we have some very serious questions to ask
you because our people are asking us. I will tell all of you, I
come from an energy State, but in almost every occasion upon my
return to New Mexico the first person that puts out their hand
and says, hello, Pete, or hello, Senator, follows up with a
question: Why don't you bring the price of crude oil down,
Pete? What is happening? Who is setting the price of that oil?
So my first question is, since most of my people and I
believe most Americans that we hear from want to know, how is
the price of oil set? Who sets it? Why does it go up? How does
it come down?
Actually, my constituents and I believe most Americans
think that somebody rigs these prices, that in the process
somebody is getting ripped off, and they think it is them, the
constituents who have asked me and the constituents of America
who ask this question.
So I want to ask you, and please, in the few minutes you
have, somebody describe in detail how the price of oil is set,
because I close by saying if that is not rational, then are you
rigging the price of oil or is somebody rigging the price? Who
chooses to answer the question first?
[No response.]
Chairman Domenici. No volunteers? We will go the way we
started. Mr. Raymond?
Mr. Raymond. I will volunteer.
Chairman Domenici. Thank you. That is called an involuntary
volunteer.
Mr. Raymond. Senator, that is an extraordinarily complex
question that you have just asked. I think, as I made in my
comment, in the comments I made, the U.S. companies that are
represented here in terms of the total amount of production
that they have, that they contribute to the world supply, is
relatively modest. Our own company is less than 3 percent and
we are the largest producer.
The facts are that the world supply pool, many, many
countries contribute to that and many companies operate in
those countries. But obviously the big actors in the equation
are Russia and the Middle East countries and OPEC.
Chairman Domenici. Now, Mr. Raymond, let me interrupt. I
want to know something as simple as this. Oil comes out of the
ground. It is either put in a boat or put in a pipeline. It
then moves. At some point somebody buys it. At some point it
assumes a price. That price may be only fixed one time or it
may be fixed a number of times. Then it goes to another place
and gets refined.
I need to know from you, tell me from the time it comes out
of the ground, how is the price set?
Mr. Raymond. Well, let us talk for a moment about the
easiest place to talk about is Saudi Arabia.
Chairman Domenici. Okay.
Mr. Raymond. A month before the month in which we are going
to lift the crude, the Saudis tell us what the crude price will
be for that month, and we have the alternative of either saying
we will nominate and they will tell us we can lift, we can lift
that crude. If we lift that crude, we are going to pay the
price that they have said what you have to pay in order to buy
that crude oil.
Chairman Domenici. What does ``lift'' mean?
Mr. Raymond. To have a ship show up and take it away.
Chairman Domenici. Be ready to take it.
Mr. Raymond. That is exactly right. At this point there are
no pipelines out of Saudi Arabia, so it all goes out by ship.
They say, here is the price, and the alternative we have is
to buy it or not buy it.
Chairman Domenici. Okay.
Mr. Raymond. Now, how they determine what that price, what
the price is that they are going to set would only be
speculation on my part, but I would have to say when you look
at that data that the prices they set for the forthcoming month
generally are very reflective of world market conditions
apparently as they see them.
Chairman Domenici. What does that mean, world market
conditions?
Mr. Raymond. Well, they look around the world and see what
people are willing to pay per barrel of crude oil. It is traded
in the North Sea, it is traded in Singapore, it is traded all
over the world.
Chairman Domenici. So if the price is short they can ask
high prices and they will get it; is that right?
Mr. Raymond. That is exactly right.
Chairman Domenici. Okay. Now, when we hear the word
``speculators'' purchase it or it is bought in bidding, where
does that occur?
Mr. Raymond. Well, that happens basically on the mercantile
exchanges. That could happen in New York, it could happen in
Singapore, it can happen in London. Those exchanges, those
markets, Senator, are open 24 hours a day all around the world.
Chairman Domenici. But Mr. Raymond, what we would like to
know is what does that mean? Do they also respond to Saudi
Arabia or do they bid up the price afterwards?
Mr. Raymond. They bid up the price afterwards. The Saudis--
to be specific about the Saudis, the Saudis will only sell to
end users. That is to say, the Saudis will only sell to
refiners. The Saudis have never had any interest in being
involved in, I will call it, the speculative market. As a
matter of fact, if we were to contract--we have a long-term
contract with the Saudis. If we buy crude oil from them, if for
some reason, say for example we had a hurricane, had to shut
down the Baytown refinery, we have some crude oil, we do not
know what to do with it, before we could sell it to somebody
else we would have to go back to the Saudis and tell them that
we intend to sell it to someone else and who that other party
is, because they want to make sure they sell only to end users.
Chairman Domenici. Mr. Raymond, let me interrupt now. Why
don't you do this for me. Put yourself in my shoes. I am there
talking to that person and they say: How is the price of oil
set? How do I answer that person?
Mr. Raymond. The price is set on the world market by
willing buyers and sellers as to what willing sellers are
willing to sell it for and willing buyers are willing to pay
for it.
Chairman Domenici. All right. Now, who makes the profit in
that, in that--I do not think my constituent would understand
that, nevertheless.
Mr. Raymond. Well, okay. Well, let's stay on the example
that we are on. The Saudis set the price. At that point that
establishes the price for Saudi Aramco or the Saudi government.
We then, in the case say we bought the cargo of crude oil, we
will take it to a refinery. We run it through the refinery and
the product markets then determine what the margin was in the
refinery. But we bought the crude oil at world market price.
Chairman Domenici. All right. Thank you very much. My time
has expired. I am not sure my constituent is pleased with the
answer, but nonetheless. Not unpleased; they do not understand
it.
Senator Bingaman.
Senator Bingaman. Thank you again for being here. I wanted
to ask about what can be done over the next 6 months,
particularly as we go through this winter, to deal with the
high prices that consumers are going to be faced with, both at
the pump and in heating their homes. It strikes me that not a
whole lot more can be done other than what is being done to
affect supply over that period, being the next 6 months, but a
significant amount could be done on the demand side to
encourage conservation. I think each of you have indicated that
you believe that the Government has a legitimate role in
conservation.
I have been urging the Secretary of Energy to have a high
profile public education campaign to encourage conservation
over these next several months, and it occurs to me that each
of you and your corporations have substantial advertising
budgets. Would it make sense and would you be willing to
participate in a public-private partnership that would try to
put on this kind of a public information campaign for the
American people to assist to the extent possible in reducing
demand over this period?
Let me ask you, Mr. Raymond, and just down the line if
people have responses?
Mr. Raymond. Well, Senator, I think it is fair to say as
best I can recollect every person that is a member of this
panel in one form or another over the last couple of years have
made a lot of public statements about the need for America and
the world, not only America, to become more efficient in its
use of energy. I think all of us feel very strongly about that,
and through the API of course we continue to support programs
to do that. I think that is the appropriate vehicle for the
industry to deal with the question that you have just raised.
In terms of whether there can be a viable corporate and/or
API, industry relationship with the Government through the
Secretary of Energy, I would think that that is something that
we ought to look at very, very carefully and see if there can
be a constructive role.
Senator Bingaman. Thank you very much.
Any of the rest of you have thoughts on that?
Mr. O'Reilly. Senator, I agree, energy conservation is
probably one of the cheapest sources of additional supply that
we can generate in the near term. Our company is running
advertising currently and we are also participating with API
and would be interested in working with the DOE to the extent
that something constructive can be done.
I think it is important that we look at both the demand
side and the supply side, however, and I would not want to
lose--each side is important here. We need to be conservation-
minded, but we also need to recognize that supply is an
important factor.
Thank you.
Senator Bingaman. Mr. Mulva.
Mr. Mulva. Senator, with respect to supply, first on the
refineries, we have to get them up and running, the ones that
are down as a result of the hurricane. So we need to make sure
we do everything we can, and we are, to restore that capacity
because that adds supply. I know all the companies, including
our own, will be looking at how can we import additional
supplies because it may be in one part of the world, in Europe,
it may be it is a warmer winter or whatever, that we can take
some supply from one part of the world and bring it in and add
supply.
With respect to conservation and more efficient use of
energy, we certainly have supported your ideas as a company and
I am sure as an industry we are very willing to explore just
those concepts of working together with the government to see
what we can do to really work on conservation and more
efficient use of energy.
Senator Bingaman. Mr. Pillari.
Mr. Pillari. Senator, I will not repeat the comments on
supply. We are working very hard to get it there. On the
conservation message, I think, yes, we would be willing to
explore what we might be able to do. I do not think it is
enough. I think each one of us--certainly in our company we
believe that there are things that we should do, particularly
in those markets where we are very active. So in California,
for example, this year we will have several million dollars in
a program called A-Plus For Energy, which is about teaching
conservation in secondary high schools. I believe those kinds
of programs need to continue.
Mr. Hofmeister. Senator, as soon as we saw the production
shutdowns in the Gulf of Mexico we launched a conservation
communication program with our 17,000 stations around the
Nation. We believe in that quite firmly. Very specific steps
that Americans can take.
Then I would support Mr. Mulva's comments on improving
imports in order to meet supply requirements.
Senator Bingaman. Let me ask one other question before my
time expires. Most of the growth in demand for oil in this
country is in the transportation sector. Would you agree with
me that it is time that we go ahead and raise fuel economy
standards on vehicles in this country?
Mr. Raymond.
Mr. Raymond. Well, I do not want to get into the political
aspects of that. I think that is more appropriately in your
bailiwick. But I think the general proposition that we have to
find ways to make the transportation system in this country
more efficient in the use of energy is one that I would
strongly support.
Senator Bingaman. Thank you very much.
Anybody else want to comment on that? If not, I have gone
through my 5 minutes.
[No response.]
Senator Bingaman. Thank you, Mr. Chairman.
Chairman Domenici. Senator Stevens.
Chairman Stevens. Thank you very much.
I have a letter,* gentlemen, from the American Petroleum
Institute referring to the request from the chairman of the
Senate Finance Committee to determine whether the industry
would contribute to the program we call LIHEAP. In it--I do not
know if you have seen the response, but in it Red Kavenny
points out that the estimated cost to restore all of the
industry assets that were affected by the storms in the Gulf,
as you mentioned, some $18 to $31 billion, will all be
shouldered without government assistance.
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* The letter can be found in the appendix.
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But I do not find that it has really taken a position with
regard to whether at this time the industry has in mind being
willing to take any action that might assist in terms of this
Low Income Housing Home Energy Assistance Program that is
really growing considerably.
Is it possible that your industry would join, at least to
the extent of helping to find ways to make it more efficient?
It just seems we have this program every year and the impact of
the LIHEAP expenditures do not reduce the costs. They do not
bring about more efficiency. Could you go together and help
design ways that that program could in effect use less energy
in order to help people meet the costs? Anyone been involved in
this?
[No response.]
Chairman Stevens. I hate to do it, Jim, but you are the
chairman of the board.
Mr. Mulva. Mr. Senator, first of all, as an American I can
say that we all feel very much for those who are less fortunate
with respect to heating bills and whatever. We want to make
sure that they get the energy and what they need. But as an
industry we feel that it is not a very good precedent to be
looking at one industry to help fund necessarily those,
government programs as such. We think that is more in the realm
of the Government should be doing that.
What we need to be doing as an industry, though, is what we
have been talking about, and that is spending all of our money
to add capacity and be pushing very, very hard on energy
efficiency. One of the things that I would see is certainly we
support the Government programs, the LIHEAP program, but not as
an industry--it is not necessarily a good precedent.
For our company, we would like to see what we can be doing
to help more than what we have already done over the short
period of time, but the medium and the long period of time, is
helping the Gulf Coast areas where we have our facilities, our
employees and constituencies and residents and stakeholders, so
we can help them recover from the hurricanes.
So we want to do all these things, but we also want to do
what we can with respect to energy efficiency over time so we
can reduce the cost or have more affordable energy for all
consumers.
Chairman Stevens. Hopefully I will be back with other
questions, but, addressing BP, I was amazed to find recently
that there is a provision in the Marine Mammal Act that
provides that the refinery in the State of Washington is
prohibited--all government agencies are prohibited from doing
anything to assist the refinery there to refine oil other than
for consumption in the State of Washington.
Now, Idaho has no refinery. Oregon has no refinery, and the
oil from our State goes right by there. If we repeal that,
would that assist the area by having increased refinery
capacity for the Northwest States?
Mr. Pillari. Yes, it would, Senator. As you know, we are
supportive of doing that. Currently the way the Magnuson Act
works, if there are not changes made there we will have to
reduce our gasoline production by about 10 percent at our
Cherry Point refinery, which would reduce the amount of
gasoline that would go to Oregon, Washington, and California.
I think the second point would be, with that kind of a
restriction, a refinery like Cherry Point, which has good
options for expansion, those options would just not be able to
be taken up.
Chairman Stevens. If we repeal that section there would be
a possibility that that Billingham refinery could be enlarged,
particularly if we can get more oil back in the pipeline from
production in ANWR, is that right?
Mr. Pillari. We would like to take a look at expanding that
refinery if this is removed, yes.
Chairman Stevens. Very well.
I will have later questions.
Senator Inouye.
Senator Inouye. Thank you very much.
Two months ago on September 9, AAA Mid-Atlantic issued the
following press statement: ``A growing chorus of Exxon dealers
in the Washington metro area are raising their voices and
accusing the world's largest oil company, ExxonMobil, of
profiting from the exorbitant prices at the pump in the wake of
Hurricane Katrina, a spokesman for AAA Mid-Atlantic confirmed
today. In candid conversations with AAA Mid-Atlantic, a handful
of local dealers accused the oil giant of raising the wholesale
price to service stations by 24 cents in a 24-hour period.''
Since then, two members of this panel have introduced
measures to prevent price-gouging. They define price-gouging as
``unconscionably excessive.'' Mr. Raymond, would you consider
24 cents in a 24-hour period as being unconscionably excessive?
Mr. Raymond. Well, I think, Senator, first you need to
realize that I am sure all of those stations or nearly all of
them, we have nothing to say about the price that is at the
pump. That is the individual dealer who makes that decision. It
is only in our company-operated retail stores, which in the
United States is only about 7 percent of the stores that bear
the Exxon logo, do we actually control the price. In all the
rest of the stores, the dealer individually decides what to do
with that price.
Now, in terms of what happened to the wholesale price of
gasoline at the end of--or at the beginning really of Katrina,
I can only comment to you the directive that our people had,
which was that in the directly affected hurricane areas, which
we really had difficulty with operations simply because we had
no electricity, so stations cannot operate, the roads were not
passable so you could not get trucks on the roads to deliver
gasoline anyway--but outside of that area, the directive was to
minimize the increase in price while at the same time
recognizing if we kept the price too low we would quickly run
out at the service stations and have shortages.
So it is a tough balancing act, because we were not
interested in ever having our stations be in the position where
it appeared that there would be a shortage, because we all
remembered very clearly what happened in the 1970s when that
happened.
So whether the number you have in fact is accurate I do not
know. But I can tell you the philosophy we had was related not
at all to the concept of gouging. The concept we had was to try
and maintain orderly supply wherever we could around the
country.
Senator Inouye. Would you suggest that the local dealers
who accused you of raising their wholesale prices to service
stations by 24 cents in a 24-hour period, they were not being
quite honest?
Mr. Raymond. I do not know if they are being honest. I just
do not know if that data is accurate, frankly. But I can tell
you what the philosophy that the company had in terms of trying
to deal with the issue we had after the hurricanes.
Senator Inouye. When your company heard about this press
release by the AAA, did you respond?
Mr. Raymond. As a matter of fact, I think as I recall--this
is a long way from Dallas, Texas. But as I recall, the comment
was made that a couple of our people in the company did have
conversations with the AAA and did talk with the dealers.
Senator Inouye. I gather that all of you are in favor of
alternative sources of fuel, such as hydrogen, and you would be
in favor of improving CAFE standards?
Mr. Raymond. I think for me my comment has been again, I do
not want to get into the politics of that. That is in your
bailiwick, but I am and I have been supportive for a long time
of having the transportation sector become more efficient.
Whether that is CAFE standards or some other way to do that,
that is a decision, I think a political decision you have to
deal with.
Senator Inouye. Thank you all very much.
Chairman Stevens. Thank you.
We will now come to a period of individual members being
recognized under the early bird rule, and the Energy Committee
will go first.
Chairman Domenici. Senator Alexander, you are next, then
Senator Dorgan.
Chairman Stevens. For 5 minutes each, gentlemen.
Chairman Domenici. Right, 5 minutes each.
STATEMENT OF HON. LAMAR ALEXANDER,
U.S. SENATOR FROM TENNESSEE
Senator Alexander. Mr. Hofmeister, the focus of these
hearings like this always seems to be on gasoline, which is a
big problem. But to my way of thinking natural gas prices are a
bigger problem for our country. If gasoline prices had gone up
recently as fast as natural gas prices have, gasoline would be
at $6 or $7 a gallon. We hear many statistics about tens of
thousands of good blue-collar jobs moving overseas. At the
moment there are 50 new chemical plants being built in China,
where natural gas as a raw material is much cheaper than it is
here; one new chemical plant being built in the United States.
Now, all of you have something to do with natural gas. Mr.
Hofmeister, I believe Shell even helps make electricity from
natural gas, which is increasingly a way we have been using
natural gas in this country. My question is, as a way of
reducing the price of natural gas for homeowners, farmers, and
manufacturers so we can keep more jobs in this country, would
it not make sense to require that the newer natural gas plants,
which use about half as much--which are twice as efficient as
the old natural gas plants--would it not make common sense to
require in this emergency that we use the newer natural gas
plants to make electricity rather than the old ones or instead
of the old ones or before the old ones? We call that the more
efficient dispatch of natural gas.
I understand there are some issues on the other side. But
help us come up with a common sense way to use these natural
gas plants that are twice as efficient as the old ones as a way
of bringing down prices. The estimates we have are that if we
were to do that it would save enough--it would lower retail
natural gas prices by 5 percent within a few years and it would
save enough natural gas to equal 600,000 homes, which is the
size of the city of Memphis or the size of the city of Fort
Worth.
Mr. Hofmeister. Senator, I think the expertise that we have
on this subject is on the supply side. I do agree with you that
natural gas is perhaps the single most critical energy issue
that the Nation is facing. In part it is directly related to
the hurricanes. In the case of our own platforms producing
natural gas offshore Gulf of Mexico, we have a serious pipeline
damage problem which came about from the drifting of oil rigs
due to the force of the storms, in which some of these oil
rigs, which are temporary structures and move around the Gulf,
actually were forced by the storm to drag their anchors and
their anchors attached to our pipelines, seriously damaging our
pipelines.
Senator Alexander. We had big problems in natural gas long
before the hurricanes, and we had new natural gas plants that
we could have been using instead of old ones. Don't you have
some of these new ones?
Mr. Hofmeister. We are actually not in the gas--we are in
the gas distribution business, not in the gas usage business.
So the utilities would probably be more expert in this, to your
specific question.
But the real supply side issues I think are access to more
gas fields, in which we have been working with members of
Congress to try to achieve more access, but also LNG. LNG is--
--
Senator Alexander. Sir, I understand all that and I have a
limited amount of time. But you do not believe that using new,
more efficient natural gas plants would make common sense
rather than older, less efficient natural gas plants as a way
of lowering the price?
Mr. Hofmeister. I think my point is that is a question for
the utilities which are using our gas, not for the suppliers.
Senator Alexander. So you do not know the answer to that?
Mr. Hofmeister. Correct.
Senator Alexander. Mr. O'Reilly, when I talked to auto
company executives--Toyota, General Motors, Nissan--they are
investing hundreds of millions of dollars in fuel cell vehicles
and hydrogen. Some of them give surprisingly optimistic views
about how soon they will be able to produce a commercial
vehicle at a price people can afford and drive, which will go a
long way toward reducing demand for oil and therefore hopefully
stabilizing or reducing the price of gasoline.
I am interested in what any of you can tell us, starting
with Mr. O'Reilly, about whether your companies in effect are
turning from oil companies into energy companies? I start with
Mr. O'Reilly because I know you have been interested in
hydrogen. How soon--assuming one of the automobile companies
does produce such a fuel cell vehicle at a competitive price,
how soon will one of our large companies or some other company
be able to do with hydrogen what we do now with gasoline, take
it from the place it is produced to the automobile itself?
Mr. O'Reilly. Senator, we are working on hydrogen
distribution and hydrogen manufacture as part of a DOE-auto
company combination experiment in California. We see the
challenges of hydrogen as how do you distribute it efficiently
to the automobiles. So we are looking at distributed hydrogen
production at service stations and loading facilities at the
service station as well as commercial refueling centers in
California, as I say, with the cooperation of DOE and in this
case Hyundai.
The issue I think is distribution, and then one has to
remember that at the source we still have to make hydrogen. We
are making hydrogen today in California from natural gas. So it
kind of comes back in a full circle to natural gas supply and
then learning how to distribute hydrogen. If we can overcome
those two, with time there will be hydrogen vehicles on the
road.
But I think it is a little way off. The near term, I think
the hybrid vehicle is a more pragmatic solution, and they are
already in the markets, much more efficient than conventional
automobiles. Of course, we are working in that area,
particularly with the long-lived batteries that will support
those automobiles. So we are working on these areas. There are
some challenges to be overcome.
Chairman Domenici. Senator, your time is up.
Mr. O'Reilly. But I think we are on track.
Chairman Domenici. Thank you very much.
Senator Alexander. Thank you, Mr. O'Reilly.
Chairman Domenici. Thank you, Senator.
Senator Dorgan.
Senator Dorgan. Mr. Chairman, thank you.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
I thank the witnesses for being here today. Mr. Raymond,
you and others said, and I quote you, ``Increases in oil prices
following the hurricanes have put a strain.'' The fact is that
oil prices were well above $60 before the hurricanes formed up;
is that not the case?
Mr. Raymond. Yes, Senator. The facts are--and I have said
this publicly for a long time--the oil prices have been moving
steadily up for the last 2 years, and I think I have been very
clear in saying that I do not think that the fundamentals of
supply/demand, at least as we have traditionally looked at it,
have supported the price structure that is there.
Senator Dorgan. I understand that, but my point was you all
seemed to make the case, and you started with it, that somehow
this oil price problem is a result of hurricanes. I understand
the dislocations of the hurricanes----
Mr. Raymond. No, I think the point I would make is that the
hurricanes aggravated whatever problem was there to begin with.
Senator Dorgan. That is certainly true, and the price of
oil was over $60 a barrel before we heard the news of
hurricanes. That is true as well, and I think an important
point because it relates to the question of price and supply
and demand.
Second, I would ask the question Senator Inouye asked of
you. Your answer to him about this issue of the AAA and a 24-
cent increase in 24 hours of Exxon's wholesale price, which
angered your local dealers, you obviously did not investigate
that because you do not know about it. I wonder why you would
not investigate something like that. That is the sort of thing
that would make notice here of people trying to evaluate what
is going on. Your own branded dealers are complaining. Why
would you not investigate that?
Mr. Raymond. As a matter of fact, my point I think to the
Senator was that the people who are in charge of that, which
are over here in Fairfax, did look into that. I think the
comment that they have made back to us was that what was done--
and I am not sure that 24 is the right number; that is the
point I am making--was consistent with the directive that we
had made in terms of trying to moderate the pricing, but at the
same time maintain continuity of supply.
Senator Dorgan. Well, I understand your answer. My point is
when you see these kinds of things I would expect they would be
investigated with some great concern. But there are people
here--I think Senator Inouye talked about oil and gas with
respect to gouging. None of us know much about what is
happening with respect to pricing. We see the pain of the
consumers, we see the gain of the companies.
Let me ask, if I can, something that Senator Domenici tried
to elicit from you. How do you respond to a consumer--you know,
the notion with most challenges in this country is that we are
all in this together. But with respect to this challenge, for
consumers at least, it seems to be we are all in this alone,
because on the one side you have those that have the energy
exhibiting substantial pricing capability and the consumers
having to pay substantial prices.
I think Senator Domenici was asking--I do not mean to
paraphrase him, but--a consumer says to us, you know, Mr. and
Mrs. Politician, what I see are big economic interests getting
rich here. Your profits are very handsome. In fact, your
individual compensation is very substantial. You are doing
really well. On the other hand, there is dramatic pain for
consumers.
In my part of the country, people going into the winter
understand heating your home is not a luxury, it is a
necessity, and they are going to pay a substantial amount more
to heat their homes this winter, while they open the paper and
they say: Boy, it is nirvana for you all, personally and for
the companies.
How do you respond to those consumers in a way that says to
them, well, this is the right thing and this is a fair thing?
Anyone? Mr. Raymond, you want to answer that?
Mr. Raymond. I think, Senator, the point is when you say we
are all in this together, I would broaden that to a world view:
We are all in this together everywhere in the world. And the
United States, as has been demonstrated by the hurricanes, is
just one of many players on the world stage that affect
petroleum prices.
If tomorrow a number of refineries were to go down in
Europe, the price of heating oil in your State would go up.
That is the reality that we are in. And our job I think is
first of all to make sure that the customers in fact do have
supply. As all of us who have been around a long time remember,
shortage is a disaster, and we do not want to go there.
That means we are going to have to pay the world market
price for these products, no matter where they come from. In
doing that, we recognize the consumers in the United States
sometimes are going to have difficulty realizing that they are
part of that world. But in fact they are, and our job is to get
it to them at the most competitive price we can.
Senator Dorgan. Mr. Raymond, you have used the term ``world
market'' many times. I notice you did not use ``free market,''
because when I heard you describe the price you pay to the
Saudis, you pull up to the Saudi pump, they say here is what it
is going to be. That is not a free market. It is a longer
discussion we ought to have at some point, but I think the
consumers bear the brunt of a market that is not free, and your
companies at this point are experiencing very substantial
profits as a result of it. I think most consumers find it
terribly unfair. Talk is cheap. They are saying to Congress: We
want some action.
Chairman Domenici. Senator, your time has expired.
Senator Dorgan. Thank you very much.
Chairman Domenici. We will go to Senator Stevens for his
side now.
Chairman Stevens. We will now recognize Senator Burns,
followed by Senator Boxer, for 5 minutes each.
STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. Thank you very much for coming today, and I
will tell you that my number one concern right now is the
business of agriculture. We cannot increase the price of our
product off of the farm. We cannot pass along our costs. I want
you to write this down: It costs a bushel of wheat to buy one
gallon of diesel. Gasoline has come down, diesel has not.
Then we get our product to the market and we are charged a
surcharge from the rails and the trucks, which further
depresses our price on the farm and it takes us out of our
ability to compete with our product on the world market.
I understand what you are saying, Mr. Raymond, because I
come out of the auction business and I know when you go to an
auction that is the truest form of supply and demand. Who wants
it and how bad do they want it?
So my concern now is the diversity of supply. We have heard
of no new refineries being built in the past 30 years. Reason,
we are not going to go into that. Are oil companies willing to
invest in the use and/or expanding the refinement of biofuels
or coal to fuels, that is gasification technologies? And if
not, why not? Anybody can take a swing at that that can pick up
a bat.
Mr. Raymond. Well, I will take a quick swing at it,
Senator. First of all, I think, as the comments I made earlier,
in fact while there has not been the construction of what we
would call a new grassroots refinery, there has been continual
expansion of the refining industry. As I commented, effectively
in this country in the last 10 years we have built in essence
three new refineries. They are inside the fence where
refineries already were, and as a result they are much more
efficient than if we had gone off in some greenfield site and
tried to do it.
In terms of are we willing to look at biofuels, we are
willing to look at any feedstock that would enable us to be
able to provide competitive supplies. In terms of coal
gasification, we had projects on that 20, 30 years ago. The
problem with them is that they are not economically competitive
with traditional oil and gas supplies.
Senator Burns. Now, I have a follow-up question on that and
then I will let somebody else.
Mr. Raymond. Please.
Senator Burns. Are refineries and biofuels or gasification
plants treated the same as far as policy, taxation? Do they
work under the same definitions as far as policy is concerned?
Mr. O'Reilly.
Mr. O'Reilly. Senator, biofuels, and if you include ethanol
in that, obviously have additional tax incentives for
manufacture. So they are not quite under the same policy. As
far as I know, the underlying structure other than the tax
incentives themselves are similar.
Senator Burns. I just think that somewhere along the line
our policy up here does not put them both on the same level so
that the investments not only could flow to refinery capacity,
but also into the use of more diverse areas of our supply. Am I
going down the wrong road here, Mr. Mulva?
Mr. Mulva. No, Senator, I do not think you are going down
the road. Anything that can support diversity and expansion of
refining capacity is really something that we need to do and
should do.
I will come back to your initial question, though, with
respect to diesel. In our own company we lost three refineries
as a result of the hurricane. They are coming back on stream.
But we lost 200,000 barrels a day of diesel capacity. To put it
in perspective, I think the State of Mississippi uses about
40,000 barrels a day of diesel.
We cannot really import it from Europe like we can gasoline
because Europe has moved into, you might say, dieselization. So
we cannot bring it in in the form of export from Europe
imported into the United States. So what is really absolutely
important for us is to get our capacity and our refineries back
on stream. The best thing we can do is adding supply by
efficiently running our refineries and getting them back on
stream. It is going to be the best thing we can do to get
diesel prices down.
Senator Burns. Let the American people understand:
Agriculture is going to get shut down. We are not going to turn
on one tractor to produce food and fiber for this country under
these kind of conditions. We have to do something different.
I thank the chairman.
Chairman Stevens. Senator Boxer is recognized for 5
minutes.
Senator Boxer. Thank you, Mr. Chairman.
STATEMENT OF HON. BARBARA BOXER,
U.S. SENATOR FROM CALIFORNIA
I would like to put into the record a copy of a front page
story in the Washington Post Tuesday, January 22, 1974, given
to me by Senator Cantwell, showing Senator Scoop Jackson
swearing in oil company executives. The headline: ``Firms Say
Oil Crisis Is Real, Deny Holding Supplies Back From the
Market.'' I would like to put this in the record as a reminder
of the way things used to be done around here, if I might.*
---------------------------------------------------------------------------
* The article has been retained in committee files.
---------------------------------------------------------------------------
Chairman Stevens. The chair has no objection, but we do not
print photographs in the record.
Senator Boxer. Well, we can describe it then. That is fine.
Mr. Chairman, today's hearing in the mind of most of my
constituents is about shared sacrifices in tough times versus
big oil company greed.
Gentlemen, to all of you, I hope I can give you a bit of a
reality check. Working people struggle with high gas prices and
your sacrifice, gentlemen, appears to be nothing. I want to get
to a very simple thing that everyday people can understand, and
that is oil executive bonuses versus average U.S. salaries. I
have a chart, and I do not go into all of you because some of
you work for companies that do not have to file this
information.
[Chart.]
In 2004, Mr. Raymond, your bonus was over $3.6 million.
This was on top of your salary of $3.2 million and stock gains
and other compensation of $19 million.
Mr. O'Reilly, your bonus was almost $4 million, in addition
to a salary of $1.5 million and stock gains and other
compensation of $11.2 million.
Mr. Mulva, your bonus was a little over $4 million, on top
of your $1.5 million salary and $2.7 million in stock gains and
other compensation.
Gentlemen, this compares to an average American who makes
$23,276 per year. Each of your bonuses was more than 155 times
greater than the typical American's yearly salary. And compare
your bonuses to a worker on minimum wage, which Congress has
not raised in 9 long years. That minimum wage worker makes
$10,713 per year. Each of your bonuses--forget the rest of it--
each of your bonuses was more than 300 times greater than a
minimum wage worker's annual pay.
So let me just ask you a question here. Will you consider
making a major personal contribution and major corporate
contributions from record profits to a charitable fund set up,
hopefully with your efforts and community efforts, to help
America's working families get relief from higher home heating
oil prices or higher gas prices? Just a yes or no, if you would
consider this.
Chairman Stevens. We will stop the clock right here for
you, Senator. We are permitted to have charts to show
information that pertains to our issue. This chart is really
publicity. I want you to know we are going to have a question
about that later in our business discussion. But I would urge
Senators to bring charts that demonstrate some information that
is necessary for the consideration of the subjects before us.
This does not seem to be that case.
Senator Boxer. Well, Mr. Chairman, if I could have 30
seconds without it being taken away since you interrupted my
train of thought, let me just tell you something. I think that
this is very much on point. People in our country are concerned
about fairness and justice at a time of sacrifice.
But that is a difference between us, we should not try to
stop each other from saying what we want to say. But we will
discuss that, because I know at the end of the day you are a
fair person.
Now, if I could have a second question and, Mr. Hofmeister,
it is to you. Two years ago this month, your company Shell
announced it was closing its oil refinery in Bakersfield,
California, an oil refinery that supplied 2 percent of our
State's gasoline. We already had some of the highest gasoline
prices in the country and the community was up in arms.
In the end the refinery was sold, not closed, but only
because of elected officials, in particular the attorney
general of California. Now, today is your chance to please let
us know why you told the people a number of falsities. And I
want to say your company, not you personally, your company. You
said that the refinery was not making money. You said it was
not economically viable.
It was not true. Internal documents showed Bakersfield
refinery was making about 55 cents profit per gallon, the
biggest marginal profit of any Shell refinery in the country.
The truth is it also was the most reliable Shell refinery in
the country for 2003.
I ask consent to put those documents in the record that
prove what I am saying is accurate. I ask consent to put those
documents in the record, Mr. Chairman.
Chairman Stevens. What documents?
Senator Boxer. If I could have a moment to explain the
documents without it coming off my time, please.
Chairman Stevens. If they are official documents----
Senator Boxer. They are official documents.
Chairman Stevens. Without objection.
[The material referred to follows:]
Shell Oil Products US,
Houston, TX, April 13, 2004.
Hon. Barbara Boxer,
U.S. Senator, Hart Senate Office Building, Suite 112, Washington, DC.
Dear Senator Boxer: Thank you for your letter of April 9 regarding
Shell's decision to close the Bakersfield refinery by October of this
year. We appreciate your seeking information from Shell on this matter.
Shell has always been and remains willing to entertain any credible
offers for the Bakersfield refinery. Shell has received nine inquiries
from prospective buyers, but none of them has resulted in a credible
offer to date. One inquiry came from an oil company, but they have
indicated that they will not pursue further. Seven inquiries came from
energy-related companies or other concerns, and another inquiry came
from a company that was not interested in running the refinery as an
ongoing concern. Out of all the inquiries, we have received only one
written expression of interest thus far. In our view, a credible offer
would begin with a written expression of interest and information
showing adequate financial capability. While we are sharing information
with this one party, it has not resulted in a credible offer to date.
As Shell representatives informed your staff during a briefing in
Washington, D.C. last month, the decision to close the refinery is
based on the fact that the refinery is not economically viable due to
the continual decline of the crude which supplies this land-locked
facility. And we believe potential buyers would reach the same
conclusion that we have about its economic viability. For this reason,
we have not expended time or resources in an attempt to find a buyer
and do not intend to do so. We will, however, continue to respond
diligently to all inquiries and are prepared to negotiate with any
credible potential buyers.
To give you a better understanding of how we reached our decision,
let me share with you some facts. The Bakersfield refinery is
configured to process San Joaquin Valley heavy crude, which it only
gets from the Kern River Field, upon which the refinery has sat since
1932. Production from the Kern River Field declined by 6.4 percent in
2002 alone, according to production reports published by the California
Department of Conservation. Transmission pipelines take San Joaquin
Valley heavy crude away from the Kern River Field to several other
refineries, including Shell's larger Martinez refinery near San
Francisco, but there are no transmission pipelines or other economical
means to bring crude to the Bakersfield refinery from other San Joaquin
Valley fields.
Declining access to economic crude for this facility is a financial
drain. The Bakersfield refinery lost $24 million in 2001 and lost $33
million in 2002. It made only $4.7 million in 2003, which is an
inadequate return on investment given Shell's investment of over $200
million in the refinery. The refinery was projected to lose $5.7
million in 2004. Even if the refinery is slightly profitable in 2004,
we will not achieve an acceptable rate of return to justify continued
investment in the facility. Furthermore, in February of this year, even
with rising margins, we could utilize only 64 percent of the refinery's
capacity largely due to our limited access to crude. Thus, with the low
utilization rates projected to continue due to lack of access to enough
crude, Shell cannot justify continuing to make investments in this
facility.
Shell announced this closure decision eleven months in advance in
order to give its employees, customers, the city of Bakersfield, the
market, and other concerned parties as much time as possible to plan
for the closure. As noted above, we remain receptive to any credible
offers that we may receive over the next several months. But given what
we believe to be the inevitable--the closing of the refinery based on
economic reality--it would be a disservice to now introduce uncertainty
into this process by delaying or indefinitely postponing the closing of
the facility. Therefore, we do not intend to postpone closing the
refinery.
I thank you again for your correspondence. Please feel free to
contact me if you have any additional questions.
Sincerely,
Lynn L. Elsenhans,
President and CEO.
______
Base Oils Manufacturing
Port Arthur--Operations are running well.
Refining Margins
Wow.
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Difference from plan
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Location As of Margin Last Last
Latest 7 day MTD month qtr
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Norco................................ 2-Apr.................. 9.18 4.75 5.88 4.90 3.97 4.90
Port Arthur.......................... 2-Apr.................. 7.85 3.81 4.46 3.92 3.15 3.92
Convent.............................. 2-Apr.................. 10.19 5.41 6.08 5.49 4.56 5.49
Delaware City........................ 2-Apr.................. 7.19 2.82 3.56 2.98 2.77 2.98
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Bakersfield.......................... 2-Apr.................. 23.01 16.78 10.79 16.45 3.54 16.45
Los Angeles.......................... 2-Apr.................. 22.93 17.54 11.06 16.91 3.81 16.91
Martinez............................. 2-Apr.................. 21.82 15.95 10.04 15.75 2.11 15.75
Puget Sound.......................... 2-Apr.................. 14.96 10.94 5.73 10.47 0.92 10.47
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______
Fellow Bakersfield Refinery Employee,
My best wishes to you and your loved ones this holiday season. May
you experience the joy and promise this time of year represents.
As we have discussed before, we turned in excellent operational
performance this year. We are the most reliable Shell U.S. refinery in
2003, and achieved world-class performance two years in row now. We
have made quantum step improvements in our environmental compliance,
finishing well under our target again for the second straight year. We
have reduced the expenses we control 15+ percent year over year, and
have been one of the few Shell U.S. refineries to turn a profit. And,
while we struggled with our attention to safety in a difficult first
quarter, we've stepped forward and created a new culture and attitude
for protecting ourselves and our coworkers; reducing injuries over
threefold in the last half of the year.
We've done all this with the lowest personnel index in Shell
refining in the country, making us comparatively the most productive
and effective workforce in the system. All in all, an outstanding year
by an exceptional group of people. Great, great job and I thank you for
your contributions to this success.
As you well know, 2004 will bring its fair share of challenge and
life change for us. Yet despite the level of difficulty, I am convinced
there is no better group of people to face it with. I look forward to
positive outcomes for all of us as we navigate the new year.
Sincerely,
Jeff Krafue.
Senator Boxer. Thank you.
At the end of the day there was a credible buyer. The
refinery is up and running. So could you please explain why
your company put out that word? That there were no buyers, that
was not true. That the refinery was not reliable, that was not
true. That the refinery was not making money, that was not
true.
Was it because you wanted to control the supply of gasoline
and make gasoline even more expensive to my people in
California?
Mr. Hofmeister. Senator, I would like to thank you and the
attorney general for the help that you gave us ultimately in
the sale of that refinery.
Senator Boxer. Well, you were not happy when we intervened
initially, but I am happy you are happy now.
Mr. Hofmeister. And the refinery is up and operating and
Shell continues to support the new owners of that refinery in
its technical requirements and in a smooth handover from one
owner to the next.
Fundamentally, we had shopped the refinery around
unofficially, but did not find buyers. We then decided to close
it. The reason for closing it is that this is a refinery that
is one of the oldest in the country, it is one of the smallest
in the Shell system, and it is on multiple sites. So in other
words, the refinery is not contiguous. It operates in different
plots of land in the city of Bakersfield. So in terms of future
investments as we look at the need for world-scale large
manufacturing operations, what we really require are world-
scale factories, and this was not going to get to world scale.
It was impossible to expand it. It was impossible to link it up
in the way in which refineries are to be linked up to meet our
investment criteria.
So in the end it was sold. It is operating. We are
delighted that the employees are still employed.
Senator Boxer. Well, Mr. Chairman, if I just might say this
to you. This was a struggle to get Shell to cooperate with us.
The attorney general had to force them, in essence, to open up
their books. I just would say to you, I am very happy that you
now think it was a good thing. At the time the people in charge
there were not happy with us. It seemed to us and in retrospect
still does that there was a desire to short the market even
more.
Mr. Chairman, thank you.
Chairman Stevens. Thank you very much.
Senator Domenici will yield now to his committee.
Chairman Domenici. On our side, Senator Murkowski and
Senator Wyden.
STATEMENT OF HON. LISA MURKOWSKI,
U.S. SENATOR FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman, and welcome to
the members of the panel here this afternoon or this morning.
I would like to talk a little bit about the natural gas
situation, following up on Senator Alexander's comments. People
were shocked with the hit in the price of gas at the pump, but
I think it is fair to say that this winter people across the
country are going to be shocked when they look at their natural
gas bills that we anticipate all across the country.
As we all know, Alaska has 35 trillion cubic feet of known
natural gas reserves just waiting for a means and a mechanism
to get to the market. Now, for about the past year or so the
gas owners, Exxon, BP, ConocoPhillips, have been in
negotiations with the other owner of the gas, the State of
Alaska, to work a deal so that we can get the gas moving. Mr.
Mulva, I appreciate your comments here this morning insofar as
the tentative agreement that ConocoPhillips has reached with
the State and we appreciate that.
Now, given that the third quarter profits that we have seen
from the three companies that I just mentioned exceed the
estimated $20 billion cost of the entire pipeline project, I
would like to direct a question to you, Mr. Raymond, and you,
Mr. Pillari. What is holding Exxon up, what is holding BP up,
from reaching a firm agreement with Alaska and actually
committing to build this very vitally needed pipeline?
Gentlemen?
Mr. Raymond. Well, Senator, I think we have been involved
with the State of Alaska in discussing the building of a gas
pipeline now for some 30 years. Fortunately, we did not do it
earlier because it would have been an economic disaster for
both the companies and the State.
The comment about the structure of the natural gas market I
think is one that we are all concerned about, and the National
Petroleum Council 3 years ago had an exhaustive report on that
and it was updated a year ago. Frankly, the position that the
country is in in natural gas is exactly what the NPC said was
going to be the case.
In terms of our current discussions with the State and with
the Governor, I am told by our people that we continue to make
progress. The specific issues that are out there I think are
more appropriately handled between the Governor and the people
up there who are trying to negotiate it. I think the intent is,
as we have had for a long time, is to come to a successful
conclusion. But I think we have to recognize that it would
probably be the largest single private project anywhere in the
world, and therefore it is absolutely critical from our point
of view that all the elements of the agreement be clear and the
interaction between the gas operation and the oil operation at
Prudhoe Bay also be clear.
Senator Murkowski. Mr. Pillari.
Mr. Pillari. The only thing I would add to that is I think
progress has been made. We would like to see this pipeline
built. My understanding is people are working 7 days a week to
get the details done. I think every company approaches a
negotiation a different way. We would like to see all the
details resolved before we agree to go forward, but we believe
this project is a good project and we believe it will get done
shortly.
Senator Murkowski. I appreciate that air of optimism from
you, Mr. Pillari. We do not want to be sitting here 30 years
from now--as you point out, Mr. Raymond, it has been 30 years
in the making already. And I appreciate the confidentiality of
the terms of the agreement and the effort that has been made.
But I think we need to be aware that there will come a point
when the American consumer is going to say: Well, wait a
minute; you have got all the gas up there, you have been trying
to get this line going; is it these companies that are trying
now to manipulate the price of natural gas and holding off and
not moving forward with the project?
It may cause us here in Congress to question or revisit
some of the incentives that we moved forward just last year to
help facilitate this project. So I want to just put that on the
record, that we do not want to be sitting here in another
hearing a year or two from now saying, what happened, why have
you not participated.
I just have a couple seconds remaining here. I want to put
out also the issue of access to a natural gas pipeline and what
it would mean under the FERC order that covered the gas line.
There are some parameters to ensure access to others so that we
guarantee line expansion in an equitable and an economic way,
and I would just like to know that you would be willing to work
with the State, essentially guarantee that access to expansion
to the line. If I can have either Mr. Raymond or Mr. Pillari
speak to that.
Mr. Raymond. If I may, Senator, I think the issue of access
to the expansion of the line, while it is an interesting
question, is not really the key question right now. The key
question is to build the line to begin with. The question is
not access to expansion.
The facts are--and I think people need to realize it--that
even if we come to an agreement with the State on the
construction of the line, it will be probably 10 years from now
before that gas flows. The issue of natural gas in this
country, while that can make a significant contribution years
down the road, the more important question is in the near to
medium term when we have to start dealing with imports of gas
through LNG terminals. The facts are, Senator, we need to do it
all.
Senator Murkowski. We need to do it all and I understand
from your full-page advertisement a couple days ago that you
have got a $14 billion commitment over in Qatar to assist with
that LNG facility. We would just like to do what we can
domestically. We recognize that it takes a while to get the
Alaska gas on line, but we have got to get moving sooner than
later.
Thank you, Mr. Chairman.
Mr. Raymond. I do not disagree with that.
Chairman Stevens. Senator Wyden is recognized for 5
minutes.
Senator Wyden. Thank you, Mr. Chairman.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Gentlemen, the President said, and I quote: ``With $55 oil,
we do not need incentives to oil and gas companies to explore.
There are plenty of incentives.'' Now, today the price of oil
is above $55 per barrel. Is the President wrong when he says we
do not need incentives for oil and gas exploration?
If I could just have a yes or no answer, going right down
the row beginning with you, Mr. Raymond.
Mr. Raymond. No, I do not think our company has asked for
any incentives for exploration.
Senator Wyden. Sir?
Mr. O'Reilly. Agreed.
Mr. Mulva. In my oral comments I said we do not need. What
we do need, though, is access----
Senator Wyden. Just a yes or no.
Mr. Mulva. Yes.
Senator Wyden. Sir? The President is correct?
Mr. Pillari. He is correct.
Senator Wyden. Sir?
Mr. Hofmeister. Yes, he is.
Senator Wyden. All right. Now, your companies have been
charging record prices and getting record profits, but also
getting record tax breaks. Now, the President says they are not
needed. You have just told me they are not needed. But Congress
just a couple of months ago gave you several billion dollars in
new tax breaks on top of the tax breaks you already get.
My question to you is, why shouldn't Congress take back the
billions of dollars in brand-new tax breaks, breaks that you
have just told me are not needed, and use that money to help
people who are hurting in our country? Mr. Raymond, your
response?
Mr. Raymond. I have heard that comment made many times
since the passage of that legislation and I have asked my
people many times if they could identify what so-called tax
breaks are in that legislation that would apply to ExxonMobil.
The answer they come back with is, when you add it all up, that
energy legislation is zero in terms of how it affects
ExxonMobil.
Now, how it affects the industry, some other people can
respond to.
Senator Wyden. So you would have no problem, because I am
on the Finance Committee and I am going to offer an amendment
to take back the $2.6 billion of brand-new tax breaks and use
that money to help people who are hurting. You said you are not
getting any?
Mr. Raymond. As far as my company is concerned, it does not
make any difference whether it is there or not.
Senator Wyden. Good, I am glad you will support me on
Thursday.
Mr. Raymond. That is a different question.
Senator Wyden. Sir?
Mr. Raymond. That is a different question.
Senator Wyden. I think you have summed it up.
Just a yes or no answer. Sir?
Mr. O'Reilly. Senator, it is impossible to----
Chairman Stevens. The Senator will suspend.
Our rules provide that the chairman has the duty to
maintain good order, and any public demonstration of approval
or disapproval indicated by people in the audience, it is the
duty of the chair to enforce on his own initiative and without
any order by any Senator the decorum of this hearing. When the
chair feels it is necessary to maintain order, he shall have
the power to clear the room and the committee will continue in
closed session so long as there is any doubt about the
continued disruption of the hearing.
The Senator will proceed.
Senator Wyden. Sir, right down the row?
Mr. Pillari. Senator, it is impossible to give a yes or no
answer, but if you permit me a sentence or two I will answer.
Senator Wyden. I think what I need to know--you have told
me the tax breaks are not needed. I want to take them away.
Mr. O'Reilly. I did not say that.
Senator Wyden. You said the President was right that we do
not need tax breaks. The price is over $55 a barrel.
Mr. O'Reilly. If you forgive me, Senator, I would like to
answer the question. That is, from our perspective it will have
a minimal impact on our company, minimal. However, I think my
understanding of those breaks, because they must affect others,
is that whatever steps are taken by the Government, they should
be done on a prospective basis so they do not penalize people
that have made decisions based on the act that has already been
adopted.
Thank you.
Mr. Mulva. Senator, with respect to oil and gas exploration
and production we do not need incentives. What we need is
access so that we can explore. Second, the recent energy----
Senator Wyden. You will support my effort Thursday to take
them back?
Mr. Mulva. The recent energy legislation that was passed,
while it is a good step, did not do very much with respect to
supporting and enhancing additional supply, which is what we
really need, additional supply. And that goes back to access.
Senator Wyden. The next witness?
Mr. Pillari. I would agree with what has just been said and
say it is a minimal impact on us. I would add that included in
that bill is something about LNG siting, which I believe is
very important.
Mr. Hofmeister. The bill for us is not material in any way,
but I do think we are a large, diverse, and complex industry,
in which many of the industry players see it differently than
we do. I would say that there are some areas of the bill, such
as coal gasification, which offers benefits to States, not only
to industry.
Senator Wyden. I just want the public to know you got $2.6
billion of tax breaks, you have told me they are not needed. I
hope you will support my effort to take them back and give that
money to people who are hurting.
One last question for you, Mr. Raymond, if I might. You
have been quoted as saying that speculation accounts for about
$20 of the current per barrel price of oil. Yet you have given
us now several times multiple discussions about how the markets
are working. Should we not rein in those speculators who by
your own admission are accounting for $20 of the current per
barrel price of oil, in order to make markets work? Will you
support legislation to rein in those speculators?
Mr. Raymond. Well, I think the point, Senator, is that that
is part of the market. That is part of the market system. Now,
in terms of----
Senator Wyden. So speculation is good?
Mr. Raymond. I think you will find that many times
speculation is a requirement for an orderly market. Now, I am
not going to be here to defend the speculators on Wall Street.
That is not my role in life. But I think the point I am trying
to make to you is that that is an extraordinarily complex
interaction to try and deal with that. The facts are that in
the petroleum markets and the scene that has been set for the
petroleum markets the uncertainty, political, all around the
world, leads to speculation and that speculation does impact on
the price of petroleum.
Beyond that, what you want to try and do with it, that is
up to you.
Senator Wyden. My time is up, Mr. Chairman. I am only
saying that when you yourself say that speculation is such a
big factor in this clobbering people are taking at the pump, it
seems to me you owe it to the public to be aggressive in terms
of trying to root out some of these abuses, and I hope you will
try to do that when a group of us try to make those changes as
well.
Thank you, Mr. Chairman.
Chairman Stevens. Senator, I look forward to that debate on
the floor. Since primarily that tax relief was for small
refineries, we will be happy to have another panel of them come
and answer your question and tell you why it is necessary.
The next Senators to question are Senator Smith and Senator
Cantwell.
STATEMENT OF HON. GORDON H. SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Thank you, gentlemen, for being here.
Obviously this is a most important hearing to the pocketbooks
of the American people.
It is my understanding that, while the price of crude has
gone up about 40 percent this year, the price of gasoline has
gone up 60 percent. Given that refining costs are essentially
constant, can you explain to me or, more importantly, to the
American people this growing disparity between crude oil and
gasoline prices?
Mr. Raymond. Was this to me?
Senator Smith. Any of you.
Mr. O'Reilly. I will take a turn.
There really are two markets at work, Senator. First of
all, the crude oil market has a bearing on all of refined
products, whether they are gasoline, jet fuel, or diesel,
because underlying gasoline, jet fuel, and diesel you have
inherently the raw material cost is crude. That is by far the
biggest factor in the cost.
Crude is a global market and it functions, it moves up and
down. Gasoline is not quite as global in a sense. It has
regional characteristics that are both geographic and quality
in nature. Some gasolines are different than others. For
example, Oregon has a different gasoline than California. So
you will see differences in gasoline markets that are related
to supply.
Senator Smith. Is 20 percent what it takes to account for
those differences?
Mr. O'Reilly. Well, clearly if 15 percent of refining
capacity comes out of the market, as it did during the period
of the hurricane, you will have dramatic impacts on the product
markets that are independent of crude, and I think that is what
you are seeing. There has been more volatility in product
markets, particularly this year, than in typical years.
Senator Smith. I suppose I understand those kind of things.
I have run a commodity business myself. But the concern that I
have is that, while the Gulf can probably be explained by these
incredible hurricane and natural events, however, the States
these three Senators represent were not affected by that. We
get no crude from the Gulf, yet the prices on the west coast
spiked as well. I think that increase is really hard for me to
explain in a town hall in Pendleton, Oregon.
Mr. O'Reilly. Well, as a west coast-based company I think I
owe you help with the answer to that question. A lot of people
do not fully appreciate that the west coast is deficit products
and we typically bring product to the west coast from the Gulf
Coast, from Asia, and at times from Europe, because the supply
lines are so long.
When the Gulf Coast refineries went down because of the
hurricanes, there was literally a bidding for the gasoline that
is coming from these areas, and obviously prices in the Gulf
Coast were so high that that is where the products moved. Then
it caused an abnormal supply situation to occur on the west
coast. It was not as dramatic as what happened in the Gulf or
as volatile, but nevertheless it did impact the markets in
California, it impacted the markets in Asia, as well as in
Europe.
Senator Smith. Well, look, I want----
Mr. Mulva. If I could answer one point.
Senator Smith. Yes, please.
Mr. Mulva. All these points, the oil market certainly is a
worldwide market and we have regional situations as a result of
the hurricane or whatever. But there is something else that as
an industry, when asked earlier when we started the hearing
today what could be done, we have so many different fuel
requirements and specifications from one season to the next
across the United States that one of the things that we feel
quite strongly that we need to do and certainly, as I think you
working here in Congress and in the Senate could help us, is to
go to more standardized fuels and get away from the boutique
fuels.
That can help somewhat with respect to the changes and
dramatic changes from products from one season to the next and
within regions of the United States.
Senator Smith. Let me also say, I do not know petrol, but I
know the pea business. That was my business. If I owned the
farm, if I owned the food processing plant, if I owned the
distributorship and I owned the grocery store, then I am
totally integrated. If I then posted enormous profits the likes
of which the petroleum industry has posted, I would get a lot
of attention.
My concern is your vertical integration on the west coast.
When I see profits posted at $9.9 billion, $3.6 billion, after
you have already accounted, as I understand it, for your
capital investments, your taxes and more, I am hard-pressed to
feel good about defending these kinds of increases when all of
this vertical integration has taken place from the ground to
the gasoline station.
This is a public relations problem that you have and it is
a public policy problem we have. We need your help to solve it.
Thank you, Mr. Chairman.
[The prepared statement of Senator Smith follows:]
Prepared Statement of Hon. Gordon H. Smith, U.S. Senator from Oregon
We are here today to discuss the oil industry, recent profits, and
the effect of continued high gasoline prices on U.S. consumers. In this
era when major oil companies control oil production from the ground to
the gas pump, we need to ensure the American people that their isn't
profiteering along the way.
Long after the winds and the water have subsided, Hurricanes
Katrina and Rita are affecting our entire nation. The loss of life and
the scope of the destruction in the Gulf region is almost beyond
comprehension. We must continue to offer federal assistance as
individuals and communities seek to rebuild.
The impact of higher gasoline prices on the rest of the nation,
while less dramatic, is hampering our entire economy. Drivers felt the
immediate impact on their wallets at the gas pump. Soon these higher
costs will be reflected in higher prices for all the goods we buy.
The huge jump in gas prices nationwide in the days immediately
following Hurricane Katrina spurred allegations of profiteering and
price gouging. Even in Oregon, which is less reliant on Gulf of Mexico
production, we had price spikes in the week following Katrina. That is
why, as Chairman of the Subcommittee on Trade, Tourism and Economic
Development, I requested early on that the Federal Trade Commission
launch an investigation into these allegations.
This disaster also revealed a gap in federal laws pertaining to
consumer protections and interstate commerce. Even though almost 30
states have enacted price gouging laws, there is no federal statute to
protect consumers from price gouging in the wake of a major disaster.
That is why I introduced legislation aimed at ensuring consumers
are protected in the future. My bill, S. 1743, the ``Post-Disaster
Consumer Protection Act of 2005,'' will provide additional authorities
to the Federal Trade Commission to prevent oil and gas price gouging in
the immediate aftermath of a declared disaster.
Under my bill, the President must declare a major disaster under
the Stafford Act. For 30 days following the disaster declaration, it
will be unlawful to engage in price gouging of oil or gas products.
The bill defines price gouging as a gross disparity in the price
for the product charged after the disaster declaration as compared to
prices charged by the same supplier during the 30 days immediately
preceding the disaster. Price gouging will not include price increases
attributable to increased wholesale or operational costs, international
market trends, loss of production capability or loss of pipeline
transmission capability.
The bill authorizes the Federal Trade Commission to determine what
represents a gross disparity in pricing. The FTC will to punish
violations under this act using its existing authorities under the
Federal Trade Commission Act. Those authorities include seeking civil
penalties of $11,000 per violation; assessing fines or repayment of
illegal gains; freezing assets; and seeking preliminary injunctions,
cease and desist orders or temporary restraining orders.
I believe my bill provides needed authority to the Federal Trade
Commission to protect consumers from being victimized in the wake of a
disaster without hampering the normal functioning of the free market.
We are heading into the winter heating season, and the high cost of
energy--particularly for home heating--is only going to put additional
strains on family budgets. Individuals on fixed incomes, many of whom
are elderly, are going to be among the hardest hit.
As Chairman of the Special Committee on Aging, I chaired a hearing
earlier this year on the impact of high energy prices on seniors.
Statistics revealed that energy prices were highly burdensome for this
population. In the Coos-Curry County area of Oregon, 60 percent of
seniors receiving assistance struggle to pay their utility bills or
medications. Households in this part of my home state experienced an
increase in utility bills by as much as 40 percent. Similar increases
are being felt by retirees on fixed incomes across the state of Oregon
and throughout the country.
On average, many low-income elderly citizens pay 10-20 percent of
their annual income toward energy bills. With the high cost of gasoline
and home heating expected to reach historic record highs this winter,
the amount that older Americans on fixed incomes pay for energy can be
expected to represent an even larger proportion of their income. No one
should be forced to choose between heating their home and affording
medicine and putting food on the table, but that is a decision many
elderly households may be facing this winter.
I look forward to hearing from the witnesses here today and working
with the Members of both committees to address these issues in the
months to come.
Chairman Stevens. Senator Cantwell.
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman.
Gentlemen, this committee was billed as an investigative
hearing and I think you can imagine as the public looks at what
some are saying will be $100 billion in profits this year for
the oil industry, while my constituents are losing their jobs
or losing their pensions, that Americans want answers. So I am
going to try in my 5 minutes to ask you some questions, and if
you could give me yes or no answers that would be helpful.
First, I would like to know whether your companies in 2005
exported fuel, gasoline, diesel, outside of U.S. markets prior
to Katrina? Just a yes or no answer.
Mr. Raymond. Well, Senator, there are no easy yes or no
answers in this business.
Senator Cantwell. Did you export fuel outside of the United
States prior to Katrina in 2005? It is just a simple question.
Mr. Raymond. No, it is much more complex than that.
Historically this country has exported some products. It is
basically the way that the Caribbean and Central America live.
So to the extent you say you cannot export to places that have
been traditional export areas we go to, they will continue. If
you are asking the question have we had discretionary exports
that would be not in the historical pattern, for our company
the answer to that is no.
Senator Cantwell. I am asking a simple question: Did you
export any fuel, gas or diesel, out of the United States during
2005? It is a simple question. Prior to Katrina.
Mr. O'Reilly, yes or no?
Mr. O'Reilly. Senator, we import a lot more than we export,
but we always export because the Caribbean is dependent on our
refineries in the Gulf Coast.
Senator Cantwell. Mr. Mulva? Yes or no will do.
Mr. Mulva. Senator, we as a result of the hurricane, we did
not export product----
Senator Cantwell. Prior to Katrina. I am asking prior to
Katrina.
Mr. Mulva. We did export product prior to Katrina.
Senator Cantwell. Thank you.
Mr. Pillari. I do not have the details, but I would think
we did, to places like Mexico and Canada and the Caribbean.
Senator Cantwell. Thank you.
Mr. Hofmeister. We both import and export.
Senator Cantwell. Thank you.
Did any of you sell product outside of the United States in
this same time period for a smaller profit than you would have
made if you would have sold the product in the United States?
Mr. Raymond. I do not know the answer to that question.
Senator Cantwell. Mr. O'Reilly, do you know?
Mr. O'Reilly. Impossible to answer without checking.
Mr. Mulva. I do not know the answer.
Mr. Pillari. I do not know.
Mr. Hofmeister. Do not know.
Senator Cantwell. Thank you.
Will you gentlemen provide information about how much gas
and diesel your companies exported in 2005 and whether you sold
any of that product for a lower profit than you would have made
in the United States? Will you provide the committee with that
information?
Mr. Raymond. Sure.
Senator Cantwell. Could you answer for the record?
Mr. O'Reilly. We will get it for you.
Mr. Mulva. Yes, we will.
Mr. Pillari. Sure.
Mr. Hofmeister. Yes.
Senator Cantwell. Do you know of any instance in which your
companies might have diverted supply, that is any instance
where you had a ship heading towards the United States destined
for the U.S. market with supply and the petroleum products en
route to the United States were diverted?
Mr. Raymond. No.
Mr. O'Reilly. Senator, the other way around. Without
bringing in products from places like Europe and Asia to the
west coast, we would----
Senator Cantwell. I am just asking----
Mr. O'Reilly. I would just like to clarify. We would have
been shorter of product on the west coast.
Mr. Mulva. Senator, no, not that I am aware of.
Mr. Pillari. No, I do not believe so.
Mr. Hofmeister. Senator, there were cases where ships were
on their way to this country but there was no more capacity, no
room to bring the imports into this country, particularly in
the New York harbor, where the capacity was simply unable to
take more imports.
Senator Cantwell. Would you provide this information to the
committee as well?
Mr. Hofmeister. Yes.
Senator Cantwell. Thank you.
Now, I only have a few minutes left and I would hope that
the members before us today would speak to the issue of the
spot market, because, having dealt with this situation with
Enron, where all my colleagues here heard that this was about
the fact that we just did not have enough supply and it was
environmentalists that were holding things up or it was the
process, only to find out it was not so much about production
but about manipulation of supply.
I want to know whether you gentlemen will help us reform
the spot market sales and lack of transparency that occurs in
the off-market exchanges, the fact that we do not know what
these records and trades were, there is no ability to track
that. So would you disclose your sales in this off-exchange, in
the spot markets, for this same time period in 2005?
Mr. Raymond. I have no problem with that. We are basically
not in those markets.
Mr. O'Reilly. With clarification, I would be happy to
provide that.
Mr. Mulva. Yes, I think with further clarification we would
provide it. We are essentially in the physical markets, not
necessarily the financial markets. So we would share that
information.
Mr. Pillari. We would be happy to work with you on what it
is you are looking for and then provide it.
Mr. Hofmeister. The same.
Senator Cantwell. Thank you.
Thank you, Mr. Chairman. I think this is a very critical,
important issue, the fact that we have lack of transparency and
product inventories have changed drastically. This industry has
moved to just in time inventories and so, instead of having 26
days of reserves, we now have 5 days of reserves or something
of that nature. Let us find out.
But I think that that leads to a manipulation of supply
that increases price prior to Katrina. The spot market
fluctuation has to have transparency.
Thank you, Mr. Chairman.
Chairman Stevens. We now recognize Senator Martinez and
Senator Landrieu for 5 minutes each.
STATEMENT OF HON. MEL MARTINEZ,
U.S. SENATOR FROM FLORIDA
Senator Martinez. Thank you very much, Mr. Chairman.
Mr. O'Reilly, the first question is to you. I heard your
testimony about the area of the Destin Dome, which happens to
be in my State of Florida, and one of the questions--well,
frankly, one of the things I hear when I go home is folks not
only asking what is going on with the prices, but they also do
say: Thank you for protecting our beaches, thank you for
protecting Florida.
So in that vein, in addition to economic considerations,
environmental considerations, I wonder if you are aware of the
fact that very close to the Destin Dome is one of the largest
Air Force bases in the United States, in fact the largest land
area in the United States, the Eglin Air Force Base, which
utilizes extensively the Gulf of Mexico for military training
missions? Are you aware of that presence there?
Mr. O'Reilly. Yes, I am, Senator.
Senator Martinez. Would it be also part of the
consideration of not drilling immediately 25 miles off the
coast of Florida immediately south of Eglin Air Force Base, the
fact that military missions and training and testing would be
impeded if there were platforms in that immediate area just
south of Eglin Air Force Base?
Mr. O'Reilly. Senator, I do not--I think it is a policy
decision that the Government should make. This was done on what
I would call a bipartisan basis. I am just pointing out it is a
policy decision. We can either develop the gas or we can leave
it there. It is a government choice.
Senator Martinez. But there are policy considerations in
why we make certain decisions.
Mr. O'Reilly. That is correct.
Senator Martinez. Which then have ramifications I do
understand.
Mr. O'Reilly. That is correct. That was the point in one of
my recommendations. Policy alignment is I think a very critical
issue, and I am just pointing out that it is difficult for us
to develop resources unless the policies are there to support
them.
Senator Martinez. Your example then went on to talk about
liquefied natural gas from Angola. The fact is that there are
other means by which gas product can get to Florida, through
pipelines over land, and those are really the more normal
routes by which gas comes to Florida, since there are no
liquefied plants that I am aware of in the State of Florida
anyway?
Mr. O'Reilly. No, there are not, that is correct, Senator.
Senator Martinez. So that is not really how Florida
receives its gas product, Angola?
Mr. O'Reilly. It will be, because it will get into the
pipelines and ultimately arrive in Florida.
Senator Martinez. Not today.
Mr. O'Reilly. In a few years, Senator.
Senator Martinez. This is for all of you now. I recently
had an opportunity to become aware of some of the things that
are being done in Brazil and have been done over the years in
Brazil with the use of ethanol in their mix of fuels. As the
leading energy companies in our country as it relates to
gasoline and servicing of our folks that attempt to move about
in our transportation network with the fuels that we currently
have, I want to know what each of your companies is doing about
the future. I want to talk about the thinking that we have as
to what we will do for tomorrow that will be different than
what we have been doing in the past.
In Brazil they are utilizing ethanol extensively as a mix
into their gasoline. In addition to that, I understand from
what I was told while there that every single gas station
outlet in the country has a pump that will pump ethanol. I know
that the automobile companies there, Ford and GM for two, are
developing vehicles that will soon be on the market that will
allow them to run on either ethanol or on more traditional
gasoline.
I do believe in the ingenuity of our industry. I do believe
in the ability of the American know-how to be re-energized and
for us to become not so wedded to what someone decides on a
given day in Saudi Arabia that they will sell us crude oil for,
but that we will be independent of that and that we will be
independent of irrational and unstable dictators south of the
border that control a substantial percentage of our fuel.
What are each of your companies doing for us to develop
that ingenuity and that know-how into independence of fossil
fuels as we have known them in the past, utilizing renewables,
utilizing ethanol and maybe other technologies as well? We will
begin with you, Mr. Hofmeister. I noticed we have started at
the other end of the table. I want to give you an equal
opportunity.
Mr. Hofmeister. Thank you, Senator. We are heavily involved
in the ethanol business in Brazil and that is a good business.
Senator Martinez. Why are we not doing it here?
Mr. Hofmeister. Well, in fact we are the world's largest
marketer of ethanol and we are doing it here. We are shipping
daily tens of thousands of gallons--barrels, I should say--of
ethanol to different parts of this country. We are also
investing in cellulose ethanol, which is a more derivative form
of ethanol. We are both passive investors in companies that are
doing it and in which we are funding their research, but also
in our own laboratories.
We are investing in biofuels, in a wide range of biofuels,
not just ethanols, to test their viability. And we are working
closely with the auto manufacturers on their engine designs to
see to it that the long-lived nature of engines is protected
with the introduction of these biofuels in such a way that we
can also handle the climate change issues. What I mean by that
is the existing climates of North and South and East and West
of this country.
We are also--4 miles from here, we are selling hydrogen in
a retail station and we believe that the hydrogen business,
working in a partnership with General Motors, is a very good
future business for us. But it is many years into the future
before it really does touch many of the consumers in the United
States.
Senator Martinez. Gentlemen, I realize my time has expired.
If anyone can give a similar answer, that's fine. If not, I
would take it in writing from each of you.
Mr. Pillari. Senator, I would just add that we are an
extremely large user of ethanol. We will continue to grow our
ethanol use. We have hydrogen sites, pilot sites, now in
Florida, Michigan and California. We are working with auto
manufacturers on what they are going to do with engines. So it
is a very similar story.
Chairman Stevens. The Senator's time has expired. I am
sorry.
Senator Landrieu.
Senator Martinez. Thank you, Mr. Chairman.
Chairman Domenici. Now Senator Feinstein.
Chairman Stevens. I had made a mistake.
STATEMENT OF HON. DIANNE FEINSTEIN,
U.S. SENATOR FROM CALIFORNIA
Senator Feinstein. Thank you very much, Mr. Chairman.
Welcome. It is my impression that refineries in the United
States are virtually at capacity and yet no new refineries are
planned. I wrote to each CEO earlier asking what you were going
to do to try to see that prices are lowered or whether you
would cooperate to see that prices are lower, and I received no
affirmative answer. I did, however, receive a letter from Mr.
Bindra, Mr. O'Reilly, of Chevron, which with respect to
refinery production indicates that Chevron is increasing the
total California refinery production capacity by roughly 20,000
barrels per day. That is 800,000 gallons a day. It is a 10
percent increase as I understand it in production. And that the
Richmond refinery has already submitted permit applications for
the city of Richmond and the Bay Area Quality Management
District, and that modernization is under way at El Segundo. So
I think that is good news.
But Deutschebank reported that refining margins on the west
coast have doubled in 2 years, going from $11.99 in 2003 to
approximately $24.60 in the third quarter of 2005. So it
appears that oil companies are holding back adding refining
capacity because it helps increase margins.
Now, I know you have spoken about expansion, but I would
like to know how much of your profit margin is due to refining
and what justification you have for such huge refining margins?
Mr. Raymond. Well, Senator, if I may, I recall the letter
you sent, but I think in our case as I recall it was directed
primarily toward California. You probably do not recall, no
need that you would, that at the time that Exxon and Mobil
merged each one of the companies owned a refinery in
California. The Federal Trade Commission and the State of
California made it very clear that we could only own one
refinery and they were not interested in our making any
additional investments in any refining in California. So, given
that that was the circumstance a few years ago and we now only
own one refinery, we probably are not the right people to talk
to.
Senator Feinstein. Mr. O'Reilly?
Mr. O'Reilly. Senator, with two refineries--and of course
we are in the process, as you point out, of expanding both;
they are in the permitting phase. The one at El Segundo is
under way. The one in Richmond is in the permitting phase and
we hope to be able to expand there in the coming year if the
permits are all approved.
The issue in California is really twofold. It is also an
issue of the investments that have been required there to meet
the unique California gasoline and the very strict
environmental regulations. And I am not squabbling at all about
the fact that we need strict environmental regulations, but the
capital that has been invested in California is enormous over
the last decade to meet those.
So I think the issue for us is to continue to work on
expansion and to try to assure that we can meet the market
needs. Today we bring gasoline into California from places as
far as Europe to supply the needs because of its unique
formulation and the fact that the expansion prospects at our
refineries are difficult to accomplish.
So I think we are on the right track, but it is a constant
battle.
Senator Feinstein. I think perhaps I was a little too
subtle. What I am trying to get at is it would appear if you
look at the profit margins that the industry is purposely
keeping refining capacity low. I tried to say, to recognize
your expansion at Chevron, but it would appear that overall
there is a purposeful effort to keep refining capacity tight
because it increases profit margin. That is what I am trying to
get at, because the profits have been enormous due to this.
It seems to me--and I have always been told, we do not have
refining capacity in California, you cannot add any more
regardless. Therefore it seems to me that what we need to do is
increase refining capacity all over this Nation.
Mr. Mulva?
Mr. Mulva. Senator, we are one of the largest refiners in
the United States and we operate in all regions of the United
States. Several years ago we started embarking on a program to
expand capacity as well as to modernize our refineries to
handle the lower quality crude oils that will be made available
over time that are imported from Canada, from Central America,
as well as from the Far East and from the Mideast.
So what that does is not only are we adding capacity--and
we, our company, announced a $4 billion program over and above
what we normally do to add capacity and modernize our
refineries, so we can make more jet fuel, more heating oil,
more gasoline, more diesel. So we have looked upon--
historically this business has not had the returns that we have
experienced in the last several years. But the utilization of
capacity, refining capacity, has moved up from less than 80
percent years ago to essentially full utilization.
So we are, our company and as you heard from the other
people on this panel today, we are significantly putting money
to add capacity and increasing our capability to handle the
lower quality crude, so we make the transportation fuels and
the clean fuels that the consumer and the public needs.
Chairman Stevens. The Senator's time has expired. I am
sorry.
Senator Feinstein. Thank you.
Chairman Stevens. We yield 5 minutes to Senators Hutchison
and Pryor.
STATEMENT OF HON. KAY BAILEY HUTCHISON,
U.S. SENATOR FROM TEXAS
Senator Hutchison. Thank you, Mr. Chairman. Mr. Chairman, I
was looking up some of the tax breaks that were mentioned
earlier and trying to determine where those might be applied to
oil companies. One is allowing natural gas distribution lines
to be depreciated over 15 years instead of 20 to encourage more
gas distribution lines. Another is an incentive for deep
drilling in the Gulf, which we have had for a long period of
time because of the risk and the cost that is added, and the
Gulf being one of the few places that we can really drill on
our shores.
So my question is this. You say, well, we can do without
the tax breaks, but when you are making the decisions about
where you can put your money most productively do 15-year
depreciation rules instead of 20-year depreciation rules, or
incentives for something as expensive and risky as deep
drilling in the Gulf, does it make a difference in where you
start making allocation decisions as opposed to not needing it?
Mr. Raymond. Senator, I think the problem you get into here
is that each company views that somewhat differently. I think
in our own case when we look at the specific issues you talk
about the conclusion we came to is that they will not
significantly alter the programs that we have in any of those
areas. That does not--but in saying that, that does not mean
that is the case for every company.
Senator Hutchison. Let me just ask anyone else, because we
are trying to do things that will spur building of refineries,
building of pipelines, and more production in our country, and
we are trying to determine the best way to do that. So I am
trying to see if there are certain incentives for doing things
that you might not do making a business decision in those areas
that have been put in our tax bills.
Mr. O'Reilly. Senator, I think that from our perspective
the more important thing for refining is the permitting side of
the business. It is one thing to have a 15 or a 20-year
depreciation schedule, but it is another thing to get it
started. One of the problems that we face are things like new
source review, which is in litigation, and the rules around new
source review.
If you take it--if you fix the furnace in your home, you
should not have to go back and re-permit all of the other
energy-consuming efficiencies in your home. Yet that is what we
have to do in refineries. So it is a complex issue.
Frankly, I would much prefer from our company's perspective
to see streamlined permitting than to see--to me, that is a
much more important barrier to overcome than tax incentives.
Mr. Raymond. I would share that view, Senator. I do not
think, at least in the last 20 years that I can speak for, that
we have ever come here and asked for a financial incentive to
do anything. If there are things to be done, it is more in the
regulatory process and the access issues that are more
fundamental to our investment outlook in this country.
Senator Hutchison. Could I just pursue that, because if you
are saying that the regulatory environment--and I will tell you
that I have heard this many times from other companies' CEO's,
not just oil and gas--that the reason refineries or other
investments in manufacturing are not made in the United States
but are instead made overseas is because the regulatory
environment is more stable and more predictable in other
places--are you saying that that is the issue that we need to
address more than any other for incentives for building
refineries?
Mr. Mulva?
Mr. Mulva. Senator, I think the prior comments are
certainly applicable, but what we definitely need is really the
streamlining of regulations and permits to allow us to expand.
One of the things we do on refineries is our ability to expand
capacity generally speaking is about half the cost of building
a new refinery. So if we can have accelerated permitting and
whatever to expand, we can bring on capacity far more quickly.
With respect to the upstream part of the business,
exploration and production, we really need access. Now, the
panel that is here today are representing the larger integrated
companies. But as you know, we have numerous, many, many
independent producers in the United States who develop a great
deal of oil and gas. From all of us, integrated companies and
the independent producers, what we really need is access to
explore, to drill and add capacity of oil and gas versus
incentives on the upstream part of the business.
Senator Hutchison. Thank you, Mr. Chairman.
Chairman Stevens. You must stop there, Senator.
Senator Pryor is recognized for 5 minutes.
STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. Thank you, Mr. Chairman.
Senator Sununu and I were talking a minute ago about how we
feel like we are at Thanksgiving dinner and you have put us at
the children's table. Is there a reason for that?
Chairman Stevens. I remember a Senator told me once how
much time you have to log to get from your seat to mine.
[Laughter.]
Senator Pryor. Fair enough, fair enough.
Let me just say that I have a concern and maybe even a
suspicion, and it is basic Adam Smith economics, and that is in
a market economy you have supply and demand and that works
pretty well unless there is market manipulation. I think what
you are hearing voiced from us and our constituents is that we
have concerns about market manipulation. I do not have any
evidence of that. I cannot point out four or five things that I
am basing that on. But I will tell you right now, that is
something I am very concerned about and I am looking at.
Mr. Raymond, if I can start with you. One of the
disconnects in this price of gasoline issue and the oil
industry right now, one of the real disconnects in my mind, is
your profits--and not to single you out, but your profits have
risen dramatically in what you posted in the third quarter.
That is obvious to everyone. Many times today the panel has
talked about the hurricanes and how disruptive the hurricanes
have been and what the adverse effects of the hurricanes have
been.
Are you telling the committee today that had we not had the
hurricanes that your profits would be even higher?
Mr. Raymond. That is a hard question to answer. I do not
believe I would say that that is the case. I think the focus on
the hurricanes is related to the question about what happened
to gasoline prices in this country as a result of when 30
percent of the refining capacity had to go off line because of
the hurricanes.
The broader issue of the general level of profitability I
think is somewhat different. As I commented, 75 percent of our
profits come from outside of this country. They have nothing to
do with our U.S. operations. When you then start to focus on
the U.S. operations, I will be the first to comment to you that
we are at the high point of a cycle. We go through many cycles.
I can recall with pain when the crude oil price was $10 a
barrel. Consumers of course were very happy because gasoline
was less than a dollar a gallon. We are now on the other end of
the cycle.
But in our business we have to manage through the cycles,
and the question is what is the profitability through the
cycle, not at any point in time.
Senator Pryor. You understand the concern I have on that,
though?
Mr. Raymond. I understand that, and I think I made that
comment earlier today. I certainly do understand it. But the
other side of it is people need to realize we are in a
commodity business, there are ups and downs in a commodity
business, and our job is to manage through the ups and downs
with a view towards the long-term, which is what we try and do.
Senator Pryor. Mr. Hofmeister, let me ask you, and I hate
to ask you to keep your answers very brief because we just have
5 minutes today. In your opening statement you talked about
crude prices going up, and we all have seen that on the world
market. What is the connection between the price of crude and
profits?
The reason I ask that is it is intuitive to me that when
your crude price goes up, in other words your feedstock price
goes up, you are probably--and actually you are, going to have
to pass that cost on to the consumer and your profits would go
down. But it appears that we are in a market right now where
your crude oil prices have been at an all-time high and your
profits have been at an all-time high. So what is the
relationship between crude prices and profits?
Mr. Hofmeister. Well, I think it is largely driven by
demand. The demand is what is driving up the end price that
consumers pay. It is also driving up crude. In other words, the
availability of crude is simply not sufficient at this point in
time to meet all of the demands put upon that crude and as a
result the pull on the available crude is keeping crude prices
high, the demand for products is keeping product prices high.
That is yielding the profits that we see.
Senator Pryor. Okay. We know that from the ground up it is
very expensive to build a new refinery. Is that correct? What
is the estimated cost on a new refinery?
Mr. Hofmeister. It really depends on the size of the new
refinery.
Senator Pryor. Okay. Well, here is my question for you,
because I notice that Shell had posted about a $9 billion
profit in the third quarter. Is it your intention ----
Chairman Stevens. Senator, this is your last question,
please.
Senator Pryor. Yes, sir.
Is it your intention to take those profits and build a new
refinery?
Mr. Hofmeister. Senator, in September we commissioned an
engineering study to look at alternatives between several
hundred thousand barrel per day expansions up to a 325,000
barrel per day expansion in a single site. We will see the
results of those studies probably in the first quarter and then
be in a position to make a decision whether to go forward or
not.
Chairman Domenici. Back on our side, if I have got it right
it is Senator Thomas and then Senator Landrieu.
STATEMENT OF HON. CRAIG THOMAS,
U.S. SENATOR FROM WYOMING
Senator Thomas. Thank you, Mr. Chairman.
Thank you, gentlemen, for being here. I have got several
questions. I will do it quickly and hope you can do it quickly.
In terms of the industry, it seems like in business usually
as your volume goes up you make more profits, but the
percentage of profit on the sales remains about the same. Is
that true over the last 5 years, 10 years, in the industry? Has
the profit as a percentage of total sales remained somewhat the
same or has it increased? Anybody?
Mr. Raymond. I think the answer to that over the last 10
years is it has gone up somewhat, because in the early part of
that period they were extraordinarily low.
Senator Thomas. Okay. But the profit----
Mr. Raymond. They have gotten now up to about the average
of all U.S. business. In the early part of that period they
were well below that.
Senator Thomas. So these higher profits are at least a
fundamental part of having higher sales?
Mr. Raymond. That is right.
Senator Thomas. Okay. Coal remains our largest fossil fuel
resource. Generally, are you guys interested in looking at the
diesel fuel from a coal kind of alternative? Is that something
that you look at and are willing to be interested in?
Mr. Raymond. We have over a long period of time, Senator.
We have had a number of research projects going back to the
mid-1960s that looked at converting coal into liquid fuels, and
continue to be interested.
Senator Thomas. So you do not see that as a conflict with
your interest in oil?
Mr. Raymond. No, no.
Senator Thomas. Okay, good.
Mr. Raymond, I guess you specifically. You indicated that
in 1998 crude oil was $10 a barrel, your company made $15
billion in capital expenditures. Last year your prices were
over $40 and you still made $15 a barrel. Do you invest more
money when you make more profit?
Mr. Raymond. What we generally try and do, Senator-- the
numbers were back in 1988 we made $8 billion and we invested
15; last year we made 24 and we invested 15; this year we are
going to invest 18 or 19. Our objective over time is to clip
off the peaks and the valleys and try and have it generally up-
trend with regard to the investments. Year to year you have to
be careful because there can be big projects in one year versus
another. So you have to be careful.
Senator Thomas. So you try to even it out over a period of
time.
Mr. Raymond. Yes, that is the intent.
Senator Thomas. Specifically, I guess in Wyoming, for
example, one of the alternatives is to have CO2
secondary recovery, and we are doing quite a bit. Anadarko, for
example, has a program. You produce a good deal of it at the
Chute thing.
Mr. Raymond. Yes, we do.
Senator Thomas. But you do not put it on the market. Why
not?
Mr. Raymond. The CO2?
Senator Thomas. Yes.
Mr. Raymond. Well, I think all the studies have indicated,
given what the location is of the Chute Creek plant versus
where the location is for the CO2 to be injected
into the reservoirs, generally up until the prices that have
gone up in the last year the transportation was uneconomic.
Senator Thomas. But now that the price--for instance, you
have a pipeline going up to Salt Creek. That is a long ways.
Mr. Raymond. But the point is that if people felt that the
crude price were sustainable even close to the current levels
then it would likely be that the CO2 would become
economic.
Senator Thomas. I got you.
We talked some earlier or you talked some earlier about,
importantly I think, educating the public as to what some of
the issues are in your industry. You have been talking about
for some time an educational program. Exxon has not joined in
that. What is your position on that?
Mr. Raymond. Actually, we have had an educational program
that the company has funded for 15 or 20 years.
Senator Thomas. I know, but the industry has talked about
one.
Mr. Raymond. Well, that is the API. I hate to just pass it
off to the API, but Exxon has supported programs like that for
years.
Senator Thomas. This is the one that has to do with like
the livestock deduction for contribution and so on.
Mr. Raymond. I understand.
Chairman Domenici. Senator, I hate to interrupt, and do not
charge this to him, but I just wonder, do you mind when you ask
the questions if other than Mr. Raymond might answer some of
them?
Mr. Raymond. Please.
Chairman Domenici. Just because he was first does not mean
he should handle all of them.
Senator Thomas. Well, a couple of those were specifically
for Exxon.
Chairman Domenici. Oh, I am sorry.
Senator Thomas. I might ask Shell if you are interested in
shale oil in Wyoming as well as Colorado?
Mr. Hofmeister. Absolutely, Senator.
Senator Thomas. I know that.
No, I understand. I just want to say specifically, to say
that I know your companies, and Shell specifically to mention,
and the others have, too, have made considerable contributions
to environmental kinds of things and are interested in making
sure that as we move toward access-- and I agree with you
entirely on access; there is a great deal more access
available, but we have to do it in a way that is
environmentally sound, and I think we can do that and I
appreciate it.
So I will yield my time.
Chairman Domenici. Thank you very much, Senator.
I think on our side Senator Mary Landrieu from Louisiana.
STATEMENT OF HON. MARY L. LANDRIEU,
U.S. SENATOR FROM LOUISIANA
Senator Landrieu. Thank you, Mr. Chairman.
I thank the panel. It has been a long morning and we are
going to continue on for a while. But first let me begin by
thanking each of you and the companies for what you did to save
lives, to save property, to restore the communities along the
Gulf Coast.
Sometimes the Members of Congress do not quite understand
the tremendous investments and number of people that it takes
to supply gas and oil for this country. But those of us from
Louisiana and Texas, Mississippi, Alabama, have a little better
idea. I know the heroic work that all of your companies did to
save lives, to get people out of the Gulf, out of harm's way. I
know that your employees, having lost their own homes, and some
of your suppliers lost their own businesses, stayed up 24/7 so
that we could keep the lights on in New York and California and
New Jersey and Florida. So I just want to thank you all for
what you did.
No. 2, I understand that there is angst, as it should be,
by consumers, residential and industrial consumers, because the
prices are high. When prices are high, our economy is affected
in negative ways. But I do want to say to the members of this
committee that look at Louisiana as a producer that we are also
a great consumer of energy. So the Senators from Louisiana and
Texas can argue both sides of this argument, and I would say we
serve as a pretty good bellwether about trying to hit the right
balance.
In other words, when prices are high we make a little money
because we are producers, but because we consume so much energy
to produce for our industrial base we also feel the burden of
those high prices. So Louisiana's policies are a good
bellwether because we are a balance.
Having said that, let me just go on the record to say the
tax incentives that, Senator Wyden, you inferred in your
comments are mostly directed to independent petroleum
producers. For the record, they produce 85 percent of the wells
in the United States are run, not by the big oil companies that
are represented here, but by independent producers.
Sixty-five percent of the country's natural gas are
produced by these independent companies, which are smaller,
many of them located in Louisiana and Texas, but some of course
in Wyoming and the Midwest. They need these tax incentives
because they are smaller. They do not have the international
reach. They are not able to basically hedge against the
volatility of the price. That is why most of these tax cuts or
tax credits, tax incentives, are in the record. So I just
wanted to submit that for the record.
Let me ask. One of you mentioned that it takes so long to
put a new refinery in the United States that it really
diminishes your interest in doing so. Would any one of you want
to answer for the record how quickly you can build a refinery
in either Brazil or China compared to the building of a
refinery in the United States? Just roughly, does it take you
half the time, a fourth of the time, or about the same time?
Let us start with----
Mr. Raymond. Well, Senator, we are in the midst of starting
to construct a major refinery in China----
Senator Landrieu. Just quickly, if you can, just generally.
Mr. Raymond. An integrated chemical plant--it will take
about 3\1/2\ years.
Senator Landrieu. What does it take here?
Mr. Raymond. The comparable time would be 7 or 8.
Senator Landrieu. What about you, Mr. O'Reilly?
Mr. O'Reilly. 4 years for the last one we built, which was
in Thailand.
Senator Landrieu. How long would it take you here?
Mr. O'Reilly. Double that.
Mr. Mulva. Similar experience in terms of time of
construction, but it takes quite a bit longer on the permitting
side in the United States compared to other locations.
Senator Landrieu. So would it be fair to say that for all
of you it takes about at least twice as long to build a
refinery here?
Mr. Mulva. I do not know if it is twice as long, but ----
Senator Landrieu. 40 percent, 35, 40 percent more?
Mr. Mulva. It could be. But the other thing that is very
important is we think we can add an equivalent amount of
capacity by expanding our current facilities than to build, and
get the same effect. We get the supply into the marketplace and
the consumer far more quickly.
Mr. Pillari. I think an important part in the United States
is we have multiple layers of government and in some parts of
the world it does not exist that way. So if we can do parallel
processing of permitting I think it would be helpful to us.
Chairman Stevens. Senator, this will be your last question,
please.
Senator Landrieu. Okay, thank you, Mr. Chairman.
Let me ask on the OCS access. Are you aware that only 2.5
percent of OCS has been explored in the Nation? And are you
aware that there would be additional supplies of oil and gas
that could supply and help us with the demand situation? And do
you support any sort of revenue-sharing, starting with Mr.
Hofmeister from Shell?
Mr. Hofmeister. We are fully aware and we look forward to
the inventory that the energy bill calls for, and we would
support more revenue-sharing.
Mr. Pillari. We are interested in what the report will say.
We want to take a look at each part of it. And while I have not
personally been involved in revenue-sharing, we would be
interested in looking at anything.
Chairman Stevens. Thank you very much.
Senator Landrieu. Can they just finish, Mr. Chairman?
Mr. Mulva. We certainly support and are willing to consider
all alternatives in revenue-sharing.
Mr. O'Reilly. The same answer.
Mr. Raymond. The same.
Senator Landrieu. Thank you very much.
[The prepared statement of Senator Landrieu follows:]
Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From
Louisiana
The one-two punch of Hurricanes Katrina and Rita has focused this
country's attention on our energy situation like never before. The
short term impact to oil and gas production in the Gulf of Mexico is
unprecedented and the full impacts are likely to be still felt for
months to come.
As a result of Hurricanes Katrina and Rita blowing through the Gulf
Coast last month, almost 45 percent of normal daily oil production in
the Gulf of Mexico--which represents thirty percent of the nation's oil
production--and 41 percent of the normal daily gas production in the
Gulf of Mexico--which represents over 20 percent of the natural gas
produced domestically--were offline as of yesterday. 11 percent of the
nation's refining capacity is down or in the process of re-starting--40
percent of nation's capacity when fully operational. A number of
natural gas processing plants with an aggregate capacity of just under
8 billion cubic feet a day were not active as of last week. That
equates to about 13 percent of our daily consumption of natural gas.
While prices were up significantly even before these storms hit
they have been at record levels in their aftermath: oil hovering at or
above $60 a barrel and natural gas over $14 per thousand cubic feet.
The past two months have made clear something to the rest of the
country that those of us who live along and represent the Gulf Coast
have known for years: as oil and gas production goes in the Gulf of
Mexico so goes the price and supply of oil and gas for the rest of the
country.
Production on the outer continental shelf requires thousands of
miles of pipelines and onshore refining capacity. Louisiana is the
heart of this activity, hosting some 80 percent of the production in
the OCS.
Just a snapshot would show that 34 percent of the nation's natural
gas supply and 30 percent of the nation's crude oil supply is produced
in or offshore Louisiana or flowing through the state. 16 percent of
the total U.S. refinery capacity, half of the Strategic Petroleum
Reserve facilities and the nation's only deepwater supertanker port,
LOOP, as well as several major LNG terminals are located in Louisiana.
With the companies represented here today experiencing record
profits and the discussion focused on what can and should be done with
those profits, I can only hope that some of the discussion will focus
on re-investing some of these profits back into the areas that have
served as this industry's platform over the last fifty years.
Most of the testimony today from these five witnesses touched upon
the need to develop other areas of the OCS where production is
currently prohibited. It is estimated that sixty percent of the oil and
natural gas still to be discovered in U.S. will come from the OCS.
However, today only 2.5 percent of the 1.76 billion acres that make up
the OCS are leased. 97 percent of all OCS production is restricted to
the Central and Western Gulf of Mexico with most of the Pacific Coast
and the Eastern Gulf of Mexico as well as the entire Atlantic Seaboard
off limits.
While I support this effort, I must remind my colleagues and
witnesses at the table today that the areas where oil and gas presently
takes place in the Gulf of Mexico are going to continue to supply our
country with a substantial amount of its oil and gas for the
foreseeable future. Therefore sharing of the current revenues to
provide a robust and stable source for coastal impact assistance for
host states is critical.
Louisiana and the other Gulf Coast states have experienced the boom
and bust nature of the oil industry over the years. Now as you
experience record profits we expect reinvestment in our region.
Some of the companies represented here today recognized the value
of my state's coast to its interest well before either Hurricane
Katrina or Rita made landfall. I hope in the aftermath of these storms
that role is clear to everyone.
Prior to Hurricanes Katrina and Rita, Louisiana was losing more
than 24 square miles of our coastal land each year. Katrina and Rita
may have accelerated the land loss by several years. The erosion of
Louisiana's coast is of fundamental interest to all of us because these
coastal wetlands and barrier islands are the first line of defense for
protecting the offshore and onshore energy infrastructure in the Gulf
of Mexico against the combined wind and water forces of a hurricane. In
fact, a recent report by Louisiana State University found that every
2.7 miles of healthy marsh can reduce storm surge by as much as a foot.
As a result of coastal erosion, many pipelines that were once well
protected are now exposed and subject to open sea conditions.
Preserving these vital wetlands and the billions in energy
investments they protect are vital for the continuation and expansion
of the energy production in the Gulf of Mexico the country so
desperately relies on every day. Yet, as the barrier islands and
coastal wetlands of Louisiana continue to wash away, more offshore and
onshore infrastructure will be damaged by storms less destructive than
Katrina and Rita. Without energy assets like Port Fourchon, LA-1 and
the 20,000 miles of pipeline that crisscross our state, it would
literally be impossible to access the mineral resources of the OCS.
To maintain and even increase production from off our coasts we
must reinvest in the infrastructure that makes all of the activity
possible: port facilities, roads to transport equipment and supplies,
erosion control or barrier island and wetlands storm protection. The
high prices and disrupted supply we confront today due to the impact of
Katrina and Rita have only made the situation more urgent. The
continued erosion of Louisiana's coastal wetlands presents a clear and
present danger to our national energy security and makes our trading
and commercial position in the world economy more vulnerable.
Thanks to the leadership of the Chairman and Ranking Member of this
Committee and the good work of the Energy Conferees in the House and
Senate, Louisiana, as well as other coastal producing states, will
receive a significant amount of coastal impact assistance through the
Energy Policy Act of 2005. The wisdom of that policy should be clear to
everyone. The need to do more apparent.
I call on the companies represented here today follow Shell Oil
Company's lead and take a public stand in support of robust revenue
sharing with coastal producing states and join our efforts to
accomplish this important goal in the near term.
Chairman Stevens. We will now call on Senators Sununu and
Bill Nelson.
STATEMENT OF HON. JOHN E. SUNUNU,
U.S. SENATOR FROM NEW HAMPSHIRE
Senator Sununu. Thank you, Mr. Chairman.
I apologize to you, I suppose, in a manner of speaking, in
that I do not have a list of questions for the panel. I think
the panel in very reasonable opening statements tried to make a
few points from their perspective. Their profits are about 8
percent of revenues. It is a lot of money because they are very
big companies. 8 percent of revenues for net income is about
what the national average is at the moment. And obviously,
being large companies, you have invested a great deal in
capital expenditure, and I suppose that is fine as far as it
goes.
For our part, State and Federal regulators have passed a
lot of byzantine regulations that result in about 100 different
formulations of gasoline and other fuels to be sold. We all
know that no one wants a refinery built in their back yard, and
I think those are some of the access issues and the regulatory
issues that we absolutely need to deal with.
But we all know what is really on the table here or what is
really being discussed, and that is some kind of discriminatory
tax program, a windfall profits tax of sort. I do have great
concerns about that, in that we have a pretty clear picture of
what that means already, both theoretically and in practice.
One of the things that were handed out, this is a memo, ``Joint
Committee Staff.'' I assume this was put together by all the
staff. There is a summary of a Congressional Research Service
report, which is a nonpartisan group that supports all of us.
I want to read from this summary of a 1980 CRS report on
the windfall profit tax on crude oil, which sounds great when
you are making a ton of money and we want to show that we are
trying to do something about gas taxes. But I think it is
important that we talk about what a windfall tax really is.
In 1980--this is reading from the summary--``the Federal
Government enacted a windfall profit tax. The windfall profit
tax was a tax on oil produced domestically in the United
States. In economic terms, the windfall profit tax increased
the marginal cost of domestic oil production.'' I do not know
if we are really for increasing the domestic cost of oil
production, but that is what a tax tends to do, is increase the
cost of things.
``It reduced domestic oil production from between 3 and 6
percent.'' Are we for reducing domestic production? I hope not.
``And increased oil imports from between 8 and 16 percent.''
The CRS, Congressional Research Service, went on to say
that ``The windfall profit tax would reduce domestic oil
production and increase the level of oil imports,'' which at
the time was above 50 percent of demand. The profits tax was
repealed in 1988 because it was an administrative burden on the
Government and a compliance burden to the oil industry and
because it made the United States more dependent upon foreign
oil.
I will cut the summary of the Research Service report
there. But I think it is important to understand that, as much
as we all want to be seen as doing something here in Washington
about high gas prices or what might be perceived as excess
profits in the oil industry, we should not undertake
legislation that has been proven in the past to increase demand
and increase dependence on foreign imports of oil.
Taxes that discriminate against specific industries, even
one that may be as popular as the oil industry at the moment,
are a bad idea. Tax surcharges on energy and the energy
industry have been tried and they have failed in practice. That
does not mean that there are not a whole lot of things that
should be done better or practices that should be improved in
your companies or legislation that even might be passed that
could address concerns we have. But taxes and windfall profit
tax are not one of them.
Even more troubling to me is the fact that these are being
proposed now, on the heels of a huge energy bill that everyone
on this combined committee voted for except for I think four of
us. Senator Wyden voted against it, I voted against it, maybe
two or three other members sitting in the room here today voted
against this, because we do not need to be subsidizing oil and
gas production, for all the reasons that were described in a
very fair and reasonable way.
I think Senator Wyden is spot on when he talks about the
need to go back and look at these provisions. There were over
$12 billion in different kinds of tax subsidies in that energy
bill, not all of course going to the oil industry. There were
billions more in spending, programs that subsidize research for
oil and gas, for coal, for other areas of the energy industry,
that simply are not needed. And I think it----
Chairman Stevens. Senator, I am going to have to ask you to
wind up, if you will.
Senator Sununu. I absolutely will wind up. I appreciate
being given the 5 minutes, but my point is one of caution. I
think we need to be a little bit more circumspect in the kind
of policy ideas we are proposing. I think we need to go back
and look at that energy bill, and I think it does not serve
anyone's interest to just start trying to pass legislation to
make it look like we are doing something when it is going to
have counterproductive results.
Thank you, Mr. Chairman.
Chairman Stevens. Senator Bill Nelson is recognized for 5
minutes.
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you, Mr. Chairman.
To the oil industry's credit, in the immediate aftermath of
September 11 you froze gas prices. That was a patriotic thing
to do, so thank you. There was panic. Why did you not freeze
gas prices in the aftermath of Hurricane Katrina?
Mr. O'Reilly. Senator, I can tell you that in our company's
case, looking back on the affected areas in Mississippi,
Louisiana, and southern Alabama, we did. However, outside of
that area, to prevent a run on the bank we had to respond to
the market, although I know from looking back historically our
prices were conservative.
Mr. Mulva. Senator, for both hurricanes our companies in
the three or four-State area, we froze prices for several days,
but then in all of the markets what we looked at was the spot
price went up very quickly. We set our prices and lagged the
run-up in spot prices by 50 percent. We lagged it slowly and
used moderation. That was our approach because we felt supply
would respond rather quickly and over time the spot market
would come down, and so we lagged the market, the spot market,
in every situation, and now we are back into a more orderly
situation where you have the spot market at a little bit less
for gasoline than the physical market.
Senator Nelson. In the aftermath of September 11, the price
jumped about 40 cents a gallon and you all stepped in, froze
the prices, and assured the distribution, and things settled
down. In the aftermath of Katrina, likewise the price rose
about 40 cents almost overnight, exactly overnight as a matter
of fact, in gas stations. So why would there not be the similar
response?
Mr. Raymond. It was a different set of circumstances. In 9/
11----
Senator Nelson. Which is?
Mr. Raymond. In 9/11 the industry was not concerned about
whether there was adequate supply. No refinery was affected, no
shipment anywhere was affected. In Katrina and Rita, we were
very concerned about the adequacy of supply since we had lost,
A, a lot of refining capacity and, B, in the early days the
ability to move the product around. The pipelines were shut
down. We could not get supplies to service stations.
So from an industry supply point of view the circumstances
were quite different. In our own case, in the directly affected
areas we froze the price. As I commented earlier, outside those
areas what we tried to do is maintain continuity of supply and
at the same time avoid a shortage.
Mr. Hofmeister. Senator, from the point of view of Shell,
we also froze prices in the area itself for a period of time,
and then, like any non-economic decision, which it was, it had
an unintended consequence, which was when the price was lifted
it moved very, very rapidly, having other consequences for
local citizens. Nonetheless it was the right thing to do at the
time.
I think in addition, the debate that took place within our
own company with respect to a wider freeze option is that the
unavailability of supply for quite some time, which we knew
would be weeks and in some cases turned out to be months, would
create an artificial demand situation, in which we very
seriously were concerned about outages in various markets
around the country. And knowing that price is a rational
mechanism to keep the balance there, we decided as we did.
Mr. Pillari. Senator, I would, without repeating everything
that has already been said, we also did freeze prices for a
while. But I would not underestimate the importance of the fact
that even today, unlike 9/11, we still have refineries and we
still have infrastructure that is not in service. It is a very
different situation.
Senator Nelson. Mr. O'Reilly, let me ask you. You have the
leases that are left on Destin Dome off of northwest Florida.
What are your plans for those leases?
Mr. O'Reilly. Senator, we relinquished the leases. I
believe there are a few of them still in the hands of another
company not represented here today. But we relinquished them
after we settled out of court following our attempt to move
forward with development.
Senator Nelson. All of yours were bought back, then?
Mr. O'Reilly. Correct, Senator.
Senator Nelson. Which company is it that still has the
leases outstanding?
Mr. O'Reilly. I believe it is Murphy, but that is something
that I would have to check.
Senator Nelson. And that is in an area about 20 miles off
of Florida?
Mr. O'Reilly. That is 20 to 25 miles from the Panhandle,
correct, Senator.
Chairman Stevens. Senator, your time has expired. Sorry.
We now have Senators Allen and Burr, Snowe and Craig, and
those will be the last Senators to question the panel this
morning. We will not come back to this panel this afternoon. We
will come back to another panel of attorneys general and the
FTC.
Chairman Domenici. On our side, Senator Allen, you are
next.
STATEMENT OF HON. GEORGE ALLEN,
U.S. SENATOR FROM VIRGINIA
Senator Allen. Thank you, Mr. Chairman.
Thank you, gentlemen, for being here. Let me go real
quickly through some ideas where we can act presently to
actually ameliorate and reduce the cost of gasoline, and a big
picture view from you on how we can become less reliant, less
dependent on foreign sources of energy.
Every spring around Memorial Day gas prices go up,
regardless of hurricanes. It is because of the change in
formulations. We have a proliferation of boutique, is what they
are called, fuel specifications. Senator Burr from North
Carolina and I have teamed up. I am trying to bring some common
sense and expand refinery capacity, reduce prices at the pump.
Rather than having 100 different blends or boutique fuels,
which impact our limited refinery capacity which of course have
a big impact on the pipelines that have to clean out that other
blend before they bring in the boutique fuel. What we aim to do
is get it harmonized and to say the three or four cleanest
burning fuels to be used in the nonattainment areas, regions
with poor air quality, and have that as a national standard.
Let those jurisdictions or regions choose.
Some of you mentioned this in your remarks, the large
number of fuel types that limit flexibility and product
distribution, and particularly end up disrupting supply and
increasing costs. In the event that this measure passed that
Senator Burr and I are introducing, right quickly if you could,
could you estimate for us what impact that would have in
lowering the price per gallon at the pump for American
consumers if that were in effect next year? Go through
sequentially.
Mr. Raymond. I think, Senator, it is really impossible to
do that. You would have to look at it area by area. But there
is no doubt that the system would be much more efficient and
that would be passed on to consumers.
Mr. O'Reilly. Senator, I agree with that comment. When the
EPA waived some of the restrictions temporarily in the
aftermath of the hurricanes, it enabled a much faster response
because we were able to move gasoline from, say, Alabama into
the Atlanta market, which was very deficit and in trouble in
the aftermath of Katrina. So you could see right away that the
artificial barriers that exist and how much more efficiently
the system could function. So I certainly support what you are
trying to accomplish.
Senator Allen. Thank you.
Mr. Mulva. Senator, we support what you are trying to do.
The initiative going away from boutique fuels to more
standardization, it would not only be more efficient, but you
will have fewer outages in a given location by having
standardization of fuels.
Senator Allen. Thank you.
Mr. Pillari. I do not think you can predict what the price
would be, but what you can predict is that we could move fuels
around much more efficiently and more flexibly, which means
supply and demand would move into equilibrium more quickly,
which would then have an impact on the market price.
Senator Allen. Lowering it, right?
Mr. Pillari. It will certainly move into equilibrium.
Mr. Hofmeister. We believe that energy is a national
resource rather than a State resource, so we would support
simplification. Simply, we have a lot of experience in Europe
with this and I think we could learn some lessons from looking
across the ocean.
Senator Allen. Let me ask you all a question looking into
the future. Obviously we need more production here in the
United States for American consumers since it has a big impact
on our economy, on jobs, and this is a national security issue
as well. Having to worry about getting jerked around by some of
these people in the Middle East or Venezuela is not the way the
United States ought to be worrying about its national security.
There are innovations and some of you have touched on them,
whether that is solar photovoltaics, obviously we need to have
more nuclear, and clean coal. But as far as fuels, in the next
10 years what can our government do to help or stop hindering
the actual use of, whether it is hydrogen, whether it is fuel
cells, whether it is clean coal or these renewables, these
biofuels? What can we do in 10 years to get our automobiles,
rather than looking at just fossil fuels, looking at these
renewables and innovative approaches? What can we do in your
view to actually achieve this greater energy independence?
I am going to go the other way. Mr. Hofmeister?
Mr. Hofmeister. I really think this is the challenge for
industry rather than government.
Senator Allen. What can we do to help or stop harming?
Mr. Hofmeister. I think in the area of research grants, in
the area of enabling experimentation, in the area of enabling
the auto companies in particular to test a variety of alternate
ways of doing their business. I think in the case of hydrogen,
though, we have to be careful. I think we have to take that one
step at a time. I do not think we want to rush that because for
the main purpose that this is something that is going to
simply--we have to learn as we go. This is a whole new
technology. We do not want to push that too fast.
Mr. Pillari. I think, as was just said by Mr. Hofmeister,
this is a role for us. I think a consistent fiscal policy so we
know how we will be treated for the long term I think would be
helpful. I think reducing permitting issues----
Chairman Stevens. I am sorry, Senator; your time has
expired, and we have two extra Senators, two Senators who have
come back after I announced there would be no more Senators. So
we have a real problem here about time.
Senator Allen. Understood, Mr. Chairman.
Gentlemen, if you would please provide the answer to that
question in writing, I would appreciate it.
Thank you, Mr. Chairman.
Chairman Stevens. Senator Burr, you are recognized for 5
minutes, and then we will decide what to do with the other
Senators.
STATEMENT OF HON. RICHARD BURR,
U.S. SENATOR FROM NORTH CAROLINA
Senator Burr. I thank the chair. I do not think I will take
5 minutes and that may help the chair's quandary as it relates
to speakers. I think every question has been asked.
Let me thank all of you for your openness and willingness
to be here. Is there anybody that disagrees that new
refineries, defined as either expansion of current facilities
or new facilities, is in fact needed? Anybody that disagrees
that we need new capacity in refineries?
[No response.]
Senator Burr. Let the record show that nobody disagreed
with that.
Several of you have mentioned that the new ultra-low sulfur
diesel regulations that will take effect soon, which set new
specifications for on-road highway diesel fuels, that would
allow new heavy-duty trucks to reduce emissions by 90 percent,
older trucks to run cleaner, and light-duty diesel vehicles
such as SUVs to get significantly better fuel mileage, and for
a greater range of diesel retrofit technologies to be used,
that this is problematic right now from a standpoint of the
date certain that is set.
Can I have each one of you comment on whether you can meet
that date certain? Let us start with Mr. Hofmeister.
Mr. Hofmeister. Technically, we can. I think our big
concern is in the distribution of the fuel and the fact that as
it moves through pipelines it could pick up other sulfur
molecules.
Senator Burr. Mr. Pillari?
Mr. Pillari. That is the real issue for us as well. We can
make it, but moving it is still problematic.
Mr. Mulva. Same issue for us.
Mr. O'Reilly. We can meet it at the refinery.
Mr. Raymond. Same comment, Senator. We can meet it at the
refinery. The National Petroleum Council made some comments on
that in the last year with some suggestions to the EPA as to
how that would be managed.
Senator Burr. Well, my hope is, and I would encourage all
of you, if we can solve the refinery issue, which you have said
there is not an issue, hopefully collectively we can solve the
distribution issue, which is moving it through a pipeline. I
think it is important that we remember that, just like you have
suppliers, there are manufacturers out there that have
developed engines that are designed with the intent of running
on low-sulfur diesel, and anything that does not meet a time
line that is in sync cheats one side or the other.
Mr. Chairman, I thank you for your indulgence. I yield back
the balance.
Chairman Stevens. Thank you very much.
Senator Snowe and Senator Craig, you are recognized for 5
minutes each.
STATEMENT OF HON. OLYMPIA J. SNOWE,
U.S. SENATOR FROM MAINE
Senator Snowe. Thank you, Mr. Chairman.
I want to welcome all of you here today to answer some
obviously very significant questions, certainly for the State
that I represent, where 78 percent of Maine people depend upon
home heating oil for their fuel. And all the more concern,
given the prospects of winter. We have already experienced a 30
percent increase this year, which is 20 percent higher than it
was last year as well. So more than a 50 percent increase and
we have not yet had the onset of winter.
Home heating oil, natural gas, these are not your run of
the mill commodities. These are basic necessities of life, and
certainly that is true in Maine, as it is elsewhere throughout
the country. There is a recent survey that indicated one in
five people over the last few years went a day without some
basic necessity, whether it is food or prescription drugs or
forgoing paying their mortgage or rent payments, in order to
pay for their fuel.
So it does stretch credibility in many ways, in listening
to your responses here today, given the fact we are at record-
breaking revenues, record-breaking profits. And that is
understandable. You are in the profit-making business and you
should be. But the question is is that in the final analysis in
making those record-breaking profits, it mirrored a time where
people experienced historical increases in their fuel prices,
whether it is home heating oil, natural gas, or gasoline.
It is really hard to understand, and certainly most
difficult to explain to my constituents, as to exactly what
would suggest that that was necessary during that period of
time. I really would like to have a more direct explanation as
to what we say to our constituents as to exactly why that would
happen.
Can we start with you, Mr. Raymond?
Mr. Raymond. Well, we can, Senator. I think the point still
is that we operate in worldwide commodity markets. The prices
that we charge reflect those markets. I think our primary
focus, number one on our list is always to make sure that there
is adequacy of supply. We are not interested in shortages. In
order to maintain that adequacy of supply, we have to
participate in those worldwide markets, and that is ultimately
what gets reflected to the consumer.
Senator Snowe. Well, could you explain to me why-- my
office was approached by a captain of a tanker who said that
there was a tanker that went to Chile a month after the
hurricanes that was full of gasoline, that left for New Jersey?
Mr. Raymond. I cannot explain that, but I can assure you it
was not one of ours, because other than the traditional exports
that the country has always had to support the Caribbean and
part of Latin America, we have not participated in exporting
products from the United States.
Senator Snowe. Have any of you? Did any of you in recent
time during the hurricane and the aftermath?
[No response.]
Senator Snowe. Is that true of all of you?
Mr. O'Reilly. Well, I am not sure what the question is,
Senator. We had a question earlier about imports and exports of
products and I think I made the point that for every one
barrel--there are three barrels imported for every barrel
exported. We are linked to Mexico, we are linked to Canada, and
we are linked to the Caribbean. All of those markets kind of
run as one, so there is traffic back and forth.
Senator Snowe. Well, we get much of our supply from Canada,
but we saw spikes, as everybody else did in America, for these
major increases during this time.
Mr. O'Reilly. I think the hurricane--if I could get past--
the hurricane definitely caused a spike in prices, Senator. But
I think for heating oil there is a longer term concern, and
that is that that part of the barrel, the heating oil and
diesel part of the barrel that we call the distillate part of
the barrel, is in high demand. Europe is converting its
automotive fleet systematically from gasoline to diesel, which
is putting more worldwide pressure on the supply of diesel.
That is why expanding our refining capacity in this country
is so important, so that we can make more products such as
diesel, and hence the comments I made in both my opening
remarks as well as in my submitted written remarks about what
government policies need to be in place to assure adequate
supply to citizens of Maine and other States.
Senator Snowe. Well, I would hope the industry would
consider a supplemental fund for low income fuel assistance. I
think that that certainly would be an appropriate gesture under
these circumstances, given the profits that you are making,
given the fact they are recordbreaking, certainly, even in the
history of corporate America.
Chairman Stevens. Thank you very much.
Senator Craig is recognized for 5 minutes.
STATEMENT OF HON. LARRY E. CRAIG,
U.S. SENATOR FROM IDAHO
Senator Craig. Mr. Chairmen, thank you both for the
hearing.
Gentlemen, I hope you feel your time before this committee
was productive. I think any objective person listening to the
dialogue today that has gone on between this joint committee
and you would come away a much better informed consumer than
they did prior to listening, and I trust that you believe that
to be a beneficial experience.
There is a great deal we know about your industry. There is
a great deal the average citizen does not know. That gap of
knowledge will probably never be completed or totally
understood, as to why you market the way you do, why you price
the way you do, world markets, fungibility, and all those kinds
of things that we on these committees look at on a regular
basis.
Most of the questions have been asked. One specific to my
State of Idaho has not been asked. I have an attorney general
out there now scratching his head as to why Idaho gas prices
are higher. I always try to go out into Virginia to fuel up
because they are always 20 cents cheaper than they are here on
Capitol Hill. But when Capitol Hill is cheaper than Idaho--and
it is at this moment--I am frustrated.
Gas in Boise was $2.50 a gallon, $2.56 a gallon this
weekend. It slipped a few cents in the market. So it is awfully
difficult regionally in this country to understand why there
are anomalies of the kind that we have, but we have them. So my
attorney general is looking at it at this moment and a bit
frustrated. But so are my consumers.
Two town meetings this weekend, and I can tell you of the
300 some total people who attended those town meetings with me
what the number one question was. It was about you and your
profitability. I must tell you, it is not terribly fun
defending you, but I do, and I attempt to explain the markets.
But I cannot explain this one.
Can you tell me why Idaho's price is now higher than
Washington, D.C.'s, by a factor of 15 cents on the gallon? I
doubt it. Go ahead, Mr. Raymond. You started to reach for the
button.
Mr. O'Reilly. I was going to try, but go ahead.
Mr. Raymond. Well, I am going to let Dave answer, because
my first comment to you, Senator, is since we hardly market
anything in Idaho I do not have a dog in that fight.
Senator Craig. No, I know. I should have called Earl
Holding down in Salt Lake with Sinclair, but I know what his
answer is.
Mr. O'Reilly. We do market in Idaho, Senator, as you know.
I think your question is a reasonable one and I can certainly
understand why consumers would be concerned. I just have a
couple of comments.
You made the point that, and I think I made it earlier, I
think you might have heard, that we do have regional markets in
the gasoline system. You have underlying crude prices that
drive the general level of price for products, but then the
regional markets have their own supply and demand
characteristics. One of the issues in the inter-mountain area
is that there has been tremendous economic growth and
population growth in that area, and it is supplied by
relatively small refineries. You mentioned Holding, for
example, in Salt Lake. Well, there are other smaller refineries
in that area that are faced with some very challenging
investment propositions to meet the new fuel requirements. Some
of these investments, I think the affordability of these
investments for the small refiners to continue to supply the
markets in the inter-mountain region is a big question.
So I think you are seeing a tightness in the market. I
would assume that those prices will moderate, as they have been
in other parts of the country.
Senator Craig. They are moderating, yes.
Mr. O'Reilly. And that should help. But it is becoming more
of a challenge to supply product in the inter-mountain region,
where in past years it was a relatively easy market to supply.
Senator Craig. Well, gentlemen, thank you all. One last
concern. It has been expressed by others here on the panel in
different ways, and that is the cost, the price of diesel
today. When you look at rural States like Idaho that are tied
to markets and economies around the country by truck,
substantial disadvantages begin to occur. Diesel at the pump,
certainly not wholesale or even large volume buying, this
weekend in Idaho was about $3.20 a gallon. For my farmers, who
are seeing horrendously large input costs today because of what
is going on in the diesel market along with the natural gas for
fertilizers, are very, very frustrated at this moment.
I must tell you that, while the gas prices in Idaho are
moderating, the diesel prices are just sitting there. To my
knowledge they have not moved at all in the last month, except
up. They have leveled off but they have not come down. I do not
know that you can--you have already talked to the issue. You
have talked what is going on in Europe. You have talked of
trying to expand capacity in that area. But great economic
dislocations are occurring today as a result of that price.
Thank you all very much.
Chairman Stevens. Thank you, Senator Craig.
Senator Talent.
STATEMENT OF HON. JAMES M. TALENT,
U.S. SENATOR FROM MISSOURI
Senator Talent. Thank you, Mr. Chairman. I understand you
are in a hurry. I have two questions----
Chairman Domenici. Senator, we need to hear from you. You
were here early and you are entitled to be heard.
Senator Talent. Thank you, Mr. Chairman. I will try and be
as brief as I can.
Mr. O'Reilly, I appreciated one part of your--well, a lot
of your testimony, but one part of it especially I want to just
read to you. It is on page 15: ``Historical divisions are
irrelevant in the energy equation we now face. When a single
hurricane can knock out nearly 10 percent of our Nation's
gasoline supplies, it is clear that a new approach to dealing
with energy issues is needed. This is no time for a divisive
business as usual energy debate.''
Then the next page you say: ``We need to shift the
framework of the national energy dialogue to acknowledge that
improving America's access to oil and natural gas, investing in
new energy sources, such as hydrogen, fuel cells, and
renewables are in fact complementary goals that can help create
affordable, reliable energy supplies.''
So investing in renewables is a complementary goal with
investing in other kinds of energy, that is what I hear you
saying here?
Mr. O'Reilly. Yes, Senator. I think the point I was trying
to make in my testimony is I think we need to approach all
forms of energy supply and not necessarily one at the expense
of another, because I truly believe we are going to need it
all.
Senator Talent. Well, and I do too. I will say to you, sir,
it would have been good to have that kind of help a couple of
months ago when we put the renewable fuel standard on the
energy bill in this committee, and your industry uniformly
fought it to prevent us setting a renewable fuel standard that
would help us encourage the production of ethanol and
biodiesel. So I do not know whether this is an eleventh hour
conversion or maybe whether you were a dissenting voice at the
time. But it would be good if we could work together in the
future.
Are you in agreement with that?
Mr. O'Reilly. Absolutely.
Senator Talent. Yes, I think so too.
One other thing I wanted to, area--because you answered the
question about diesel, which is a question my farmers have got
as well. Mr. Mulva, this is in your testimony. On page 4 you
say: ``Until recently, accelerated levels of investment were
not encouraged because growing global demand could be met
largely from spare oil production in Russia and in OPEC
countries, and by taking advantage of spare global refining
capacity and spare capacity in oil field services and supplies.
That situation has changed and today the industry can offer the
prospects of profitable growth as it steps up its investment in
huge complex energy projects around the world.''
What you are describing it seems to me is the fact that you
all view, and I think this is understandable, you view this as
a global--it is a global market, and investment opportunities
are global for you. That is a perspective I can understand.
Now, Senator Allen touched on the point that for us, while we
understand that the economics of this is global, we have
particular interests in the United States of America that we
have to protect as well.
So in other words, my concern is that if we just let global
economics dictate investment and the creation of capacity, we
may be in a situation where in some kind of a perfect world
where there were no political differences between countries
everybody would have adequate supply at affordable prices, but
with that we may be in a situation where we have plenty of
capacity around the world, but we are cut off from it because
other governments control it and they do not want us to have
it. Of course, we have seen that with OPEC and other
situations.
Now, what would you suggest from our perspective that we
can do to make certain that we have adequate capacity here and
access here? We have talked about renewables, which is one way
because that is produced here. But do you or any others have
any suggestions along those lines?
And that is then all I have, Mr. Chairman.
Mr. Mulva. Senator, I did not have the opportunity of
responding to the Senator before, but really----
Senator Talent. Senator Allen raised the same point, which
as you have no doubt noticed, the fact that one Senator raises
a point will not keep other Senators from raising the same
point. It is almost an encouragement.
[Laughter.]
Mr. Mulva. Senator, so I was prepared and I will give you
the three points that I think that could really help us with
respect to the upstream part of the business and the downstream
refining part. We need access, access so we can explore. We
need streamlined approvals in permitting and regulation. That
is going to help us upstream and downstream. The third is it
helps us if we have the flexibility of doing these things--in
other words, I am saying no mandates as to how this is going to
be accomplished. That helps us do what we do best, which is
develop energy and supply for the marketplace.
Senator Talent. So you are asking to be allowed to explore
in areas where energy exists in the United States?
Mr. Mulva. Absolutely, and both upstream and downstream, in
the refining side and the infrastructure side, the pipeline, we
need streamlined permitting and regulation, not at the expense
of the environment in any way, but we just need to get the
permitting process and regulatory process streamlined.
When it comes down to renewables and whatever, we are all
for that, but we do not need mandates as to how to do that.
[The prepared statement of Senator Talent follows:]
Prepared Statement of Hon. James M. Talent, U.S. Senator From Missouri
This past summer we passed the first significant energy legislation
in 13 years. One of the key features of that legislation was the
promotion of ethanol as a means of increasing our domestic supply of
energy by growing it and thereby decreasing our dependence on foreign
oil. As I recall, the companies you represent vigorously opposed
ethanol then and continue to discourage its production and distribution
now.
However, I believe we agree that sustained high energy prices are
damaging to our economy and our way of life. It's been well documented
that high prices for gasoline, diesel, and home heating fuels take
money out of the pockets of all Americans, resulting in involuntarily
reductions in discretionary income. This means it costs more to take
the kids to school and soccer practice, to go to work, or to go
anywhere for that matter. It also hurts small business as people pay
more for gasoline have less to spend on other things.
All of you stated in your testimony that energy prices must come
down. This can happen by increasing supply, something ethanol can help
with, or by reducing demand. You've mentioned conservation as one form
of demand reduction, but I am concerned that the reduced demand we will
see and have already seen too much of is industries picking up and
moving overseas, taking millions of good, high paying jobs with them.
Refining capability was at 97 percent pre-Katrina, according to the
Energy Information Administration. That seems dangerously close to the
edge of a supply shortage, one that increased use of ethanol can help
alleviate. That tight of a margin implies a monopoly power to control
price through withholding supply. Now I can see that there is
competition for sales of gasoline to the consumer--gas stations on
opposite sides of the street from each other post their prices for all
to see and discount to keep business. There we are only talking about
five or six cents of the $3.00 or more per gallon of gasoline. The
larger share of costs by far is in the production and refining sectors.
Is there competition in the refining business? If there is, I would
expect that the lowest cost supplier would be expanding to take
business away from higher cost refiners, who would then become the
industry's excess capacity.
Chairman Stevens. Thank you very much.
The last Senator to be recognized for 5 minutes is Senator
Lautenberg.
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Thank you very much, Mr. Chairman, and
my apologies for extending this hearing.
Gentlemen, I respect very much your corporate leadership. I
come out of the corporate world and the company I started with
a couple of poor guys from the same neighborhood now has over
40,000 employees and the longest growth record of any company
in America at 10 percent each year over the previous year for
42 years in a row. So I respect your pursuit of profits.
But I also learned one thing in my corporate world and that
is that there are obligations that extend beyond simply the
profits. There are communal obligations, and particularly when
you are in a business like you are, which is almost a commodity
business.
I would like to ask a couple of things that would help me
understand what has been taking place here. Did your company or
any representatives in your companies participate in Vice
President Cheney's energy task force in 2001, the meeting?
Mr. Raymond. No.
Senator Lautenberg. Sir?
Mr. O'Reilly. No.
Mr. Mulva. We did not, no.
Mr. Pillari. No. I was not here then.
Senator Lautenberg. But your company was here.
Mr. Pillari. Yes.
Mr. Hofmeister. Not to my knowledge.
Senator Lautenberg. In order to shake loose the pricing
mechanism that exists within OPEC--and there is a pricing
mechanism there and a quota for production; am I correct with
that, in OPEC?
Mr. Raymond. There is a quota, but most people do not
observe it.
Senator Lautenberg. Most people do not observe it. Well,
let me ask you this. How would you feel if an opportunity was
presented in law to say that if they engage in any quota-
setting that they might not be permitted to join another
international organization, particularly the WTO, which insists
on free markets if you want to participate in the business
opportunity as well as membership?
Now, I have got a suggestion--I have got it in written
form--that the WTO, Mr. Chairman, exclude any organization--and
by the way, it is in their charter anyway--and that OPEC be
included for review as to whether or not their quota-setting
violates WTO rules. And the fact is that Saudi Arabia would
like to join and several members of OPEC are currently members
of the WTO.
Does that strike any of you as a good idea, a bad idea?
Mr. O'Reilly. Senator, I will try to comment on this. I
think the situation in the marketplace today is that all of the
producers are producing flat-out, and my understanding is that
Saudi Arabia in particular has indicated that it is adding
capacity, in the process of adding capacity. They have made
statements to that effect.
So what impact--I am not an expert on WTO, but my
observation is that today every producer seems to be stretched,
including the members of OPEC.
Senator Lautenberg. But they may be doing that, as Mr.
Raymond said earlier, they may have an agreement to that
effect. But the real outcome is that they could exceed the
agreement. But there is an agreement--is there any dispute
about that--as to what their quotas ought to be.
Mr. Raymond. No. No, I do not think there is, Senator. But
I guess the point I would make, if you look at it from say the
global oil markets, is that the whole consuming world is
dependent on the same pool of resources, and to the extent that
this country takes action for whatever reason to disrupt that
pool we end up penalizing ourselves.
Senator Lautenberg. Well, I do not know that we would
disrupt the pool. They are still in this business because they
need and they want the money that comes from their production.
But they cannot have it both ways. The fact is that I have had
for some time enormous resentment of the fact that when Saudi
Arabia dialed 911 in the early 1990s and asked us to come in to
save the life of their country, and then turned their back on
us when problems fell the other way. It is an outrage and I do
not think that we ought to let it go unnoticed.
Thanks, Mr. Chairman.
Chairman Stevens. Thank you very much.
We are going to ask members to submit to their respective
committees questions to be answered by the witnesses by
tomorrow at noon.
Senator Wyden. Mr. Chairman.
Chairman Stevens. Written questions.
Senator Wyden. Mr. Chairman.
Chairman Stevens. Yes?
Senator Wyden. Just on that point then, I really appreciate
you and Chairman Domenici indulging me on this. I have been
trying for many years to get at an anti-competitive set of
practices involving zone pricing and red-lining----
Chairman Stevens. Senator, I have got to be back here at 2
o'clock for another hearing.
Senator Wyden. Mr. Chairman, I would just like to clarify
that the response to the questions in this area that we could
have promptly, say within the next 2 weeks. Would that be
acceptable to you?
Chairman Stevens. I think we will ask them to be as prompt
as possible and 2 weeks if possible.
Senator Wyden. Thank you, Mr. Chairman.
Chairman Stevens. It depends on the questions that are
asked how long it takes to get answers.
Senator Wyden. Thank you.
Chairman Stevens. But they will be delivered to the
respective committees by noon tomorrow and the staff will
submit them to the witnesses.
Chairman Domenici. Mr. Chairman.
Chairman Stevens. Yes?
Chairman Domenici. Mr. Chairman, I know we want to get out
of here. I want to do two things. First, I want to thank you
for joining our committee or letting us join you, and thank the
witnesses.
I want to make two quick observations. We did not get to
ask you what you think about the future supply-demand
situation. I hope you will do that for us, your own company's
picture. Secondly, a comment with reference to my question on
how is crude oil priced. I hope you are expert enough to do a
better job in writing that out than you were in answering it
here, to tell us how it is priced, what happens to it.
Second, could you do the same thing on natural gas, please?
It comes out of the ground; what happens to it? How does it get
to $6? How does it get to $12? Who gets the money along the
way? Can you do that for us?
Thank you, Mr. Chairman.
Chairman Stevens. Thank you.
In my State, diesel is $6 a gallon in rural Alaska today,
diesel, and regular gasoline is over $5. We have as great an
interest in this subject as anyone. But I do thank you. I thank
you for your interest in increasing supply. I think that is the
answer for America, is to increase the supply and enter into a
new phase of conservation. We have all supported that.
We appreciate your appearance here. This committee will
stand in recess until 2 o'clock for the second panel.
[Whereupon, at 1:07 p.m., the Committee was recessed, and
reconvened at 2:01 p.m.]
Chairman Stevens. Could we ask the witnesses to take your
places at the table, please.
This really is a continuation of the hearing we held this
morning on energy prices. The purpose of this afternoon's
hearing is to discuss whether States have the tools they need
to address allegations of price-gouging and whether the
Congress should require the Federal Trade Commission to
increase its activities with regard to investigating these
charges.
With us today are three State attorneys general. We thank
you very much for taking the time and responding to our
request. The New Jersey Attorney General, Peter Harvey; South
Carolina Attorney General Henry McMaster; and the Arizona
Attorney General Terry Goddard. We are also going to hear from
Deborah Platt Majoras, Chairman of the Federal Trade
Commission.
Hurricanes Katrina, Rita, and Wilma severely damaged our
Nation's production and refining capabilities. We heard a lot
about that this morning. In the immediate aftermath of these
storms, there was a sharp rise in gasoline prices. Those of us
elected to public office have a duty to our constituents and
all Americans and we are concerned about these allegations of
consumer price-gouging.
Several members have responded to these allegations by
introducing price-gouging legislation. Some of those bills
suggest that the States should be preempted by Federal
legislation. Under these proposals, the Federal Trade
Commission would monitor, investigate, and prosecute those
suspected of price-gouging.
We are very interested in hearing from the witnesses their
thoughts on how to determine what really constitutes price-
gouging and whether the State and Federal Government--or the
Federal Government is best equipped to address these
activities. I look forward to your statements in this regard.
Senator Inouye.
Senator Inouye. Fine.
Chairman Stevens. Senator Inouye waives.
Senator Bingaman, do you have a statement?
Senator Bingaman. Very briefly, Mr. Chairman. I welcome the
witnesses. My understanding at least of the bill that I co-
signed related to price-gouging is that it would not preempt
the States. Rather, it would give to the Federal Trade
Commission authority to prosecute, just as some of the States
currently have statutes that contemplate prosecutions or
authorize prosecutions for price-gouging.
In fact, the idea would be that the Federal Government or
the State would have the authority to pursue a case of this
type and it would be up to the officials involved as to which
chose to move ahead. So I would just make that one
clarification.
But I look forward to the testimony and I will have some
questions after the testimony. Thank you, Mr. Chairman.
Chairman Stevens. Does any other Senator wish to make an
opening statement?
[No response.]
Chairman Stevens. If not, let us proceed with the witnesses
that we have before us. I hope you do not mind, ma'am; we would
like to hear from the attorneys general first to get the
background here before we get to the FTC issue. So may I call
on Mr. Harvey, Attorney General Harvey, first. You have to turn
on your mike.
STATEMENT OF PETER C. HARVEY, ATTORNEY GENERAL, STATE OF NEW
JERSEY
Mr. Harvey. That would help. Thank you.
Chairman Stevens, Co-Chairman Inouye, Chairman Domenici,
ranking member Bingaman, and members of the two committees: I
am Peter Harvey, attorney general of the State of New Jersey.
Thank you for inviting me to testify today about energy pricing
and profits. As New Jersey's top law enforcement officer, I
filed lawsuits in September against three oil companies and a
number of independent gas station operators alleging that they
violated New Jersey's Motor Fuels Act and Consumer Fraud Act in
connection with gasoline price increases in the wake of
Hurricane Katrina.
New Jersey's citizens, like consumers in other States, were
stunned by the steep price hikes that followed this tragic
storm in the Gulf States. Similar to other States, New Jersey
has a specific price-gouging law that is part of our Consumer
Fraud Act. It applies, however, only when a state of emergency
has been declared within our State. Its protections were not
available to us following Katrina because this disaster
occurred, as you know, in another region.
To protect our consumers, who rightly questioned whether
they were being treated fairly and honestly, we thoroughly
investigated what was happening at our gas stations in New
Jersey and took the strongest legal action we could under our
State laws. I am here to share our experience in New Jersey and
discuss why I believe we need a Federal price-gouging statute
that applies nationwide to the sale of essential goods and
services following a disaster occurring in a particular region
of the United States.
In the week after Katrina struck, gas prices in New Jersey
soared upward to an average of $3.16 by Labor Day. That was a
dollar higher than the average price just one month earlier.
Hundreds of concerned citizens telephoned New Jersey Consumer
Affairs and the State Office of Weights and Measures, both of
which are within the Attorney General's Office. The Acting
Governor, Richard Cody, also expressed concern about escalating
gas prices.
We responded by closely monitoring gas prices and
investigating individual complaints regarding gas retailers. To
be specific, we sent State, county, and municipal weights and
measures inspectors to visit more than 500 of New Jersey's 3260
gas stations. The Office of Weights and Measures in the
Division of Consumer Affairs has responsibility for ensuring
that all commercial weighing and measuring devices, including
gas pumps, accurately measure commodities being sold to
consumers.
In this case, under our oversight and pursuant to our
statutory enforcement authority, these State and local
inspectors conducted broader investigations to ensure that
gasoline retailers were complying with State laws and treating
consumers fairly. They monitored price changes and demanded
access to books and records that retailers are required by law
to maintain and make available to State inspectors.
The inspectors identified over 100 violations of New
Jersey's laws. On September 26, 2005, my office filed suit
against three oil companies, Hess, Motiva Shell, and Sunoco, as
well as various independent gas station operators. The suits
alleged violations at 31 gas stations, 13 owned by the three
oil companies and 18 independently owned. As I previously
stated, without a declared state of emergency in New Jersey our
State's price-gouging statute does not enable us to target gas
retailers and suppliers who seek to profit unjustly as the
result of a disaster occurring in another part of the country.
In our suits we instead alleged specific violations of New
Jersey's Motor Fuels Act and Consumer Fraud Act. Specifically,
we alleged that the defendants violated a provision in the
Motor Fuels Act that prohibits a gas retailer from changing gas
prices more than once in a 24-hour period. We also alleged that
price increases that violate the Motor Fuels Act constitute an
unconscionable commercial practice, in violation of our
Consumer Fraud Act.
In other instances, we alleged that defendants posted
prices on roadside signs that were lower than the actual prices
charged at the pumps, a violation of the advertising
regulations under the Consumer Fraud Act that prohibit
deceptive practices and misrepresentations in the sale of
merchandise. In addition, we charged defendants with not
maintaining and providing access to books and records required
to be kept under the Motor Fuels Act.
We were able to pursue claims against these retailers who
failed to obey our laws by their rapid escalation of prices. We
do believe that part of the volatility in gas prices in New
Jersey following Katrina was the result of retailers charging
prices based, not on what they actually paid, but what they
feared they might eventually pay or, worse yet, on what they
thought they could get away with, given the market conditions.
While some busy gas stations do get fuel deliveries more
than once a day, others were charging increasingly high prices
for the same gas that they had in the ground when the day or
week began.
New Jersey's Motor Fuels Act, enacted in 1938, was indeed
aimed at reducing volatility in gas pricing. However, this
trust-busting era legislation was originally intended to
maintain healthy competition by preventing one gas retailer,
who was perhaps in a stronger financial position, from
continuously undercutting a competitor's prices to drive the
competitor out of business. In other words, it was aimed at
preventing predatory pricing.
The Motor Fuels Act still carries the penalty schedule
originally enacted in 1938, with penalties ranging from $50 to
$200 and retail license suspension. Unfortunately, these
penalties are inadequate to punish an oil company, given the
enormous revenue generated by the sale of gasoline.
While the Motor Fuels Act applies to the unlawful pricing
conduct engaged in by certain oil companies in New Jersey, it
does not get to the heart of the price-gouging issue that we
experienced in the wake of Katrina. Our Consumer Fraud Act
casts a wider net and carries penalties of up to $10,000 for a
first offense and up to $20,000 for subsequent offenses.
However, this law is also inadequate because it still does not
get us beyond the gas retailer and onto the conduct of the
supplier or refinery. Moreover, it does not provide penalties
that for a big oil company represent more than a marginal cost
of doing business.
We are here today because serious questions have been
raised about why the major oil and gas companies posted record
profits for the most recent quarter while consumers, who rely
upon gas every day to get to work and run essential errands,
were getting squeezed financially with record high prices,
increased perhaps without any economic justification.
I believe that our experience with Hurricane Katrina
clearly points to the need for a Federal price-gouging statute.
When there is a state of emergency declared in New Jersey, we
have the ability under the price-gouging provisions of our
Consumer Fraud Act to take action against merchants operating
within the State who reap unconscionable profits from essential
commodities. In the impacted geographical area, we can prevent
those affected by the disaster from being unfairly exploited by
profiteers and sharp operators. However, when there is a
disaster or emergency occurring in one area of the country that
affects the supply and pricing of an essential nationally
distributed product, as with Katrina, we cannot do much about
it.
Congress should provide a mechanism that reduces the
volatility of gas prices across State lines. Even if the States
were to enact new laws to address these situations, a State by
State approach would prove difficult and inconsistent. A
nationwide problem demands a nationwide solution, though I
would recommend one that does not preempt State remedies and
ideally one that provides an enforcement for State attorneys
general.
Let me make one thing clear. I am not talking about
attacking profits. I am talking about attacking profiteering.
There is a difference. Consumers should not face artificially
inflated prices that bear no substantial relationship to the
supply of goods. Congress has long recognized the need to curb
profiteering. After the outbreak of the Civil War, Congress
enacted the Federal False Claims Act to prevent false claims
and overcharging by those who contracted with the Federal
Government to provide essential services. Its impact has
greatly expanded in recent years through private enforcement
actions authorized under the law.
A Federal price-gouging statute should take effect, when
needed, for a limited time span, perhaps for 60 days. The
purpose of the law should be to allow things to settle, just as
the New York Stock Exchange can now close the market to prevent
a crash if there is a large enough fall in stock prices. The
factors involved in fuel pricing are complex and sustained
attempts to control fuel prices might prove counterproductive.
Ultimately, we must have a balance that accommodates business
as well as the consumer. People must be able to buy essential
goods such as food, gasoline, home heating oil, and
electricity.
I would emphasize that in striking that balance we cannot
lose sight of just how essential these goods are to Americans.
For some, the cost of a tank of gas can be the obstacle that
prevents them from driving to a doctor's appointment or to the
grocery store for food. We hear stories during winter of
elderly Americans who freeze to death because they run out of
fuel oil and in summer of those who die in the heat for lack of
electricity and air conditioning.
People should not have to make life or death decisions
based upon prices that have been put out of their reach by
profiteering. Many will not have a choice and the result will
be death. Economics will self-select them to freeze, boil, or
live in darkness. If Katrina teaches us nothing else, it should
teach us that our emergency plans must include providing for
the poor, the immobile, the sick and the elderly, in other
words those with the least resources to help themselves.
Thank you for giving me the opportunity to testify here
today and to make my views known to you, and I will take
whatever questions you have when you wish to hear from me.
Thank you.
[The prepared statement of Mr. Harvey follows:]
Prepared Statement of Peter C. Harvey, Attorney General, State of New
Jersey
Chairman Stevens, Co-Chairman Inouye, Chairman Domenici, Ranking
Member Bingaman and Members of the two Committees. I am Peter Harvey,
Attorney General for the State of New Jersey. Thank you for inviting me
to testify today about energy pricing and profits.
As New Jersey's top law enforcement officer, I filed lawsuits in
September against three oil companies and a number of independent gas-
station operators alleging that they violated New Jersey's Motor Fuels
Act and Consumer Fraud Act in connection with gasoline price increases
in the wake of Hurricane Katrina. New Jersey citizens, like consumers
in other states, were stunned by the steep price hikes that followed
this tragic storm in the Gulf States. Similar to other states, New
Jersey has a specific price gouging law that is part of our Consumer
Fraud Act. It applies, however, only when a state of emergency has been
declared within our state. Its protections were not available to us
following Katrina because this disaster occurred in another region.
To protect our consumers, who rightly questioned whether they were
being treated fairly and honestly, we thoroughly investigated what was
happening at our gas stations in New Jersey and took the strongest
legal action we could under our state laws. I'm here to share our
experience in New Jersey and discuss why I believe that we need a
federal price gouging statute that applies nationwide to the sale of
essential goods and services following a disaster occurring in a
particular region of the United States.
A. NEW JERSEY'S INVESTIGATION
In the week after Katrina struck, gas prices in New Jersey soared
upward, to an average of $3.16 a gallon by Labor Day. That was a dollar
higher than the average price just one month earlier. Hundreds of
concerned citizens telephoned the New Jersey Division of Consumer
Affairs and the State Office of Weights and Measures, both of which are
within the Attorney General's Office. The acting Governor, Richard
Codey, also expressed concern about escalating gas prices. We responded
by closely monitoring gas prices and investigating individual
complaints regarding gas retailers.
To be specific, we sent state, county and municipal weights and
measures inspectors to visit more than 500 of New Jersey's 3,260 gas
stations. The Office of Weights and Measures in the Division of
Consumer Affairs has responsibility for ensuring that all commercial
weighing and measuring devices, including gas pumps, accurately measure
commodities being sold to consumers. In this case, under our oversight
and pursuant to our statutory enforcement authority, these state and
local inspectors conducted broader investigations to ensure that
gasoline retailers were complying with state laws and treating
customers fairly. They monitored price changes and demanded access to
books and records that retailers are required by law to maintain and
make available to state inspectors. The inspectors identified over 100
violations of New Jersey's laws.
B. OUR LAWSUITS AGAINST OIL COMPANIES AND GAS STATIONS
On September 26, 2005, my Office filed suit against three oil
companies, Hess, Motiva Shell and Sunoco, as well as various
independent gas-station operators. The suits allege violations at 31
gas stations: 13 owned by the three oil companies, and 18 independently
owned. As I previously stated, without a declared state of emergency in
New Jersey, our state's price gouging statute does not enable us to
target gas retailers and suppliers who seek to profit unjustly as a
result of a disaster occurring in another part of the country. In our
suits, we instead allege specific violations of New Jersey's Motor
Fuels Act and Consumer Fraud Act. Specifically, we allege that the
defendants violated a provision in the Motor Fuels Act that prohibits a
gas retailer from changing gas prices more than once in a 24-hour
period. We also allege that price increases that violate the Motor
Fuels Act constitute an unconscionable commercial practice in violation
of our Consumer Fraud Act. In other instances, we allege that
defendants posted prices on roadside signs that were lower than the
actual prices charged at the pumps, a violation of the advertising
regulations under the Consumer Fraud Act that prohibit deceptive
practices and misrepresentations in the sale of merchandise. In
addition, we charged defendants with not maintaining and providing
access to books and records required to be kept under the Motor Fuels
Act.
We were able to pursue claims against these retailers who failed to
obey our laws by their rapid escalation of prices. We do believe that
part of the volatility in gas prices in New Jersey following Katrina
was the result of retailers charging prices based not on what they
actually paid, but on what they feared they might eventually pay or,
worse yet, on what they thought they could get away with given the
market conditions. While some busy gas stations do get fuel deliveries
more than once a day, others were charging increasingly high prices for
the same gas they had in the ground when the day, or week, began. New
Jersey's Motor Fuels Act, enacted in 1938, was indeed aimed at reducing
volatility in gas pricing. However, this trust-busting era legislation
was originally intended to maintain healthy competition by preventing
one gas retailer, who is perhaps in a stronger financial position, from
continuously undercutting a competitor's prices to drive the competitor
out of business. In other words, it was aimed at preventing predatory
pricing. The Motor Fuels Act still carries the penalty schedule
originally enacted in 1938, with penalties ranging from $50 to $200 and
retail license suspension. Unfortunately, these penalties are
inadequate to punish an oil company given the enormous revenue
generated by the sale of gasoline.
While the Motor Fuels Act applies to the unlawful pricing conduct
engaged in by certain oil companies in New Jersey, it does not get at
the heart of the price gouging issue that we experienced in the wake of
Katrina. Our Consumer Fraud Act casts a wider net and carries penalties
of up to $10,000 for a first offense and up to $20,000 for subsequent
offenses. However, this law also is inadequate because it still does
not get us beyond the gas retailer and onto the conduct of the supplier
or refinery. Moreover, it does not provide penalties that, for a big
oil company, represent more than a marginal cost of doing business. We
are here today because serious questions have been raised about why the
major oil and gas companies posted record profits for the most recent
quarter when consumers who rely upon gas every day to get to work and
run essential errands were getting squeezed financially with record
high prices, increased, perhaps, without any economic justification. I
believe that our experience with Hurricane Katrina clearly points to
the need for a federal price gouging statute.
C. THE NEED FOR A FEDERAL PRICE GOUGING STATUTE
When there is a state of emergency declared in New Jersey, we have
the ability under the price gouging provisions of our Consumer Fraud
Act to take action against merchants operating within the state who
reap unconscionable profits from essential commodities. In the impacted
geographical area, we can prevent those affected by the disaster from
being unfairly exploited by profiteers and sharp operators. However,
when there is a disaster or emergency situation in one area of the
country that affects the supply and pricing of an essential, nationally
distributed product, as with Katrina, Congress should provide a
mechanism that reduces the volatility of prices across state lines.
Even if states were to enact new laws to address these situations, a
state-by-state approach would prove difficult and inconsistent. A
nationwide problem demands a nationwide solution, though I would
recommend one that does not pre-empt state remedies and, ideally, one
that provides an enforcement role for state attorneys general.
Let me make one thing clear: I am not talking about attacking
profits; I am talking about attacking profiteering. There is a
difference. Consumers should not face artificially inflated prices that
bear no substantial relationship to the supply of goods. Congress has
long recognized the need to curb profiteering. After the outbreak of
the Civil War, it enacted the Federal False Claims Act to prevent false
claims and overcharging by those who contracted with the Federal
Government to provide essential services. Its impact has greatly
expanded in recent years through private enforcement actions authorized
under the law. A federal price gouging statute should take effect, when
needed, for a limited time span, perhaps for 60 days. The purpose of
the law should be to allow things to settle, just as the New York Stock
Exchange can now close the market to prevent a crash if there is a
large enough fall in stock prices. The factors involved in fuel pricing
are complex, and sustained attempts to control fuel prices might prove
counterproductive.
Ultimately, we must have a balance that accommodates business as
well as the consumer. People must to be able to buy essential goods
such as food, gasoline, home heating oil and electricity. I would
emphasize that in striking that balance, we cannot lose sight of just
how essential these goods are to Americans. For some, the cost of a
tank of gas can be the obstacle that prevents them from driving to a
doctor's appointment or to the grocery store for food. We hear stories
during winter of elderly Americans who freeze to death because they run
out of fuel oil, and, in summer, of those who die in the heat for lack
of electricity and air conditioning. People should not have to make
life or death decisions based upon prices that have been put out of
their reach by profiteering. Many will not have a choice, and the
result will be death. Economics will self-select them to freeze, boil
or live in darkness. If Katrina teaches us nothing else, it should
teach us that our emergency plans must include providing for the poor,
the immobile, the sick and the elderly--in other words, those with the
least resources to help themselves.
Thank you again for the opportunity to testify. This is a critical
issue, and I am prepared to offer whatever assistance you might request
in the future as you address it. I look forward to answering any
questions that you have for me today.
Chairman Stevens. Thank you very much.
Next we will hear from the attorney general from South
Carolina, Henry McMaster.
STATEMENT OF HENRY McMASTER, ATTORNEY GENERAL, STATE OF SOUTH
CAROLINA
Mr. McMaster. Thank you, Mr. Chairman, members of the
committee. I also appreciate the opportunity to discuss this
with you today, this very important issue.
We have had some experience with this issue of price-
gouging in South Carolina, which has indicated the need for
strengthened laws in our State, and we are working on that now.
We have made a proposal. It has not been introduced. It will
not be until January.
Mr. Chairman, to answer your question, which is best
equipped to deal with price-gouging, the State or the Federal
Government, it might depend on whom the defendant is. If the
defendant is a big oil company, then perhaps that should be a
Federal question. Often a big oil--any big corporation that is
located outside of the jurisdiction of a State, particularly in
a lengthy civil action, discovery, with lawyers and all the
processes involved there with service of process and so forth,
it may be better to have a Federal response if a response is
necessary at all.
But as to the second question, Mr. Chairman, would we favor
Federal preemption, the answer to that is a solid no, we would
not. In our State the Federal authorities and the State
authorities cooperate very closely together and we have no
difficulty deputizing Federal agencies as State agents,
deputizing State agents as Federal agents, and participating
side by side with State and Federal prosecutors in the
courtroom, whether it be Federal or State, to enforce the
appropriate law. But we certainly would not want our laws in
South Carolina that have been written with some specificity and
utilitarian purpose for us to be preempted by something else.
We have a fairly good law now. The civil law is very broad,
the price-gouging. That is the one on unfair trade practices,
which outlaws as a civil offense anything that is unfair or
deceptive, very much as the FTC does. It is almost the same
thing. We have that and that is useful. But we have a price-
gouging law which is a part of that that we need to tune up a
little bit and I will mention that one specific point in a
minute.
But back to the day of the hurricane and thereafter. We got
550 direct complaints to my office within just a period of a
couple of weeks and we got about a thousand referrals from the
Department of Energy. We did the best we could to analyze them
all. We do not have that many people that we can send out to
inquire.
But what we found out was interesting. The pre-Katrina
prices in South Carolina, depending on where you were in the
State, were about $2.40 a gallon. A year ago, that is in
November 2004, they were about $1.88, $1.90, or $1.86. Just
before, the day before the hurricane, they were $2.40 on the
average. Shortly after the hurricane on August 29, September 5
and 6, they had gone up, depending on the part of the State, to
$3.23, $3.18, $3.13, and people were starting to complain very
vocally. In fact, people were starting to panic as well because
of predictions, very dire predictions of the consequences of
the hurricane. People were hoarding gas. There were people we
read about and heard about filling up their tanks from their
boats and both cars, all three cars, all that sort of thing, to
be sure not to run out, and by the weekend many of the gas
stations had plenty of gas but did not have any customers
because everybody had already gassed up.
Our Governor, Mark Sanford, very wisely decided not to
declare a state of emergency in South Carolina, which would
have triggered our price-gouging statute, which has a criminal
component, thinking--and I agreed with him on that--that to
make such a declaration would have made matters worse. It would
have caused people to panic even worse. What they had in
Louisiana, Alabama, and Mississippi, that was certainly a state
of emergency and a disaster, but what we had in South Carolina,
while highly inconvenient and troubling, was nothing like what
they had there. So he did not declare that and that was a good
decision.
But when we got those complaints we then began
investigating and we ran into the usual problems you run into,
whether it is in a civil case or a criminal case, and that is
is the complaint credible. We learned a lot of times that the
complaints that would come in of high prices simply had no
basis in fact. Either people were mistaken, they were imagining
things, or some in fact were just making it up, for reasons
unknown to us.
We had a lot of instances where there were legitimate
reasons. That is, the prices, as we later learned, had gone up,
but only incrementally, not huge increases one after another,
but they had gone up incrementally. But when we got the
information on the prices that the gas stations were being
charged, we saw that they were typically only 6 or 8 cents,
maybe a little more, maybe a little less, higher than what they
were being charged per gallon. I think the average was
something between 2 and 12 cents per gallon.
There were other legitimate factors, quirks, odd things
that happened. For instance, one employee raised the price way
up to $4.79 and he did so simply because he did not want to run
out of gas, because if they ran out of gas and had to put up a
sign then nobody would come into the store to buy all the other
things they sell and that is where they make most of the money.
So that is what we ran into in our investigation. We
gathered a lot of information. I am happy to say we had
cooperation from everyone we asked. Marathon, Ashland, BP,
Shell, ConocoPhillips, as well as American Petroleum Institute,
the South Carolina Petroleum Marketers Association, all came
and gave us information and maps and taught us about the two
pipelines, the Colonial and the Plantation Pipeline, that come
up from Louisiana and come and serve our State, and that is
where most of our gas comes from. They gave us a lot of
information.
What it boils down to is we have ended up with seven
stations that were charging $4.79 at the height of the prices
that we are investigating now for purpose of seeing if we
should bring a civil action against them under the Unfair Trade
Practices Act, which is very broad. It again is anything that
is unfair or deceptive. It is based on the FTC definition and
for a private party it is treble damages and attorney's fees.
If the Government brings the case it is $5,000 per instance,
which would be $5,000 per sale. So that is a good law to have.
But what we need is a criminal law that goes into effect in
the absence of a declaration of an emergency by the Governor.
In our State, with our current law, again a part of the Unfair
Trade Practices Act, says that if the Governor declares a state
of emergency then the attorney general may bring a criminal
case against someone who price-gouges in a number of
commodities, including gas. Price-gouging is defined as an
unconscionable increase in the price, which is based on a
mathematical sort of a formula. You take the average price--it
is all written in the law--for the 30 days prior to the event
in question, take the average, and if the increase is an
unconscionable increase over that then they are subject to
criminal prosecution. It is a misdemeanor, $1,000 or 30 days in
jail or both. But of course you have your prosecutorial
discretion that would go in there as well. You do not have to
prosecute everybody.
What we are asking for is this. Because our governor wisely
did not declare a state of emergency, we had no criminal law to
use as a deterrent. A good specific criminal law that everybody
can understand is a very good deterrent, we believe,
particularly something like this that is not done in panic, not
done as a result of alcohol and drugs and all those kind of
things, but something that is calculated out to see how much
profit is going to be made.
What we have asked for is an amendment to our price-gouging
law that would allow the attorney general to bring a criminal
prosecution against someone and have it triggered by our
governor declaring a state of emergency in our State or the
President declaring a state of emergency or--and this is the
new part--a Governor or the President declaring a state of
emergency in another State and the situation in that State
having a direct impact on things in our State.
What that would have done would have been tailor-made for a
situation as the one we experienced, where you had clearly
states of emergency in Louisiana, Mississippi and Alabama,
which because of those pipelines that come right through South
Carolina and that is where we get the vast majority of our
gas--Amerada Hess brings some in through the port. But that
would have been tailor-made for such a prosecution and we think
with the presence of that law we could have advised people and
made public service announcements of the presence of that law
and its ready application to those situations. We think that
would have helped.
We still have--back to the seven that we have ended up
with, we still have not decided what we are going to do with
them. We do not have the information available. But what it
boils down to is in South Carolina if our general assembly will
give the State this criminal authority that I have just
referred to, we think that we can handle things in our State
with that. If they do not, we would be delighted to have a
Federal law that would apply to these things.
Thank you very much.
[The prepared statement of Mr. McMaster follows:]
Prepared Statement of Henry McMaster, Attorney General, State of South
Carolina
Thank you Mr. Chairman and members of the Committees on Commerce,
Science & Transportation and Energy and Natural Resources for the
opportunity to testify on the issue of price gouging during periods of
abnormal market disruptions. My name is Henry McMaster and I am the
Attorney General for South Carolina.
South Carolina's most recent experience with allegations of price
gouging in the sale of a commodity occurred during the time periods
immediately before and after Hurricanes Katrina and Rita struck the
Gulf Coast on August 29 and September 24, 2005, respectively. The
lessons learned in this period with regard to retail gasoline pricing
are also applicable to possible price gouging for any other commodity
which may result from abnormal disruptions in the market. For this
reason, I will review the complexities of the gasoline pricing
situation and then discuss its applicability to other commodities in
general.
Like other states, South Carolina does not produce many of the
resources necessary to drive its economy. With regard to gasoline,
South Carolina does not have any native oil production; no refineries
are located in South Carolina. South Carolina's supply of gasoline, as
well as other commodities, is dependent on events which occur
elsewhere.
My office received more than five hundred and fifty complaints
directly from consumers and another 1,000 by referrals about alleged
price gouging by gasoline retailers in South Carolina after Hurricanes
Katrina and Rita struck the Gulf Coast. Our investigation of these
complaints opened our eyes to the complexities of investigating
allegations of price gouging, including (1) the difficulty of
determining whether complaints are legitimate and credible, (2) the
complexity of making determinations of whether price increases were
truly ``gouging'' or were based on legitimate business decisions or
increases in the costs to the retailer, (3) the importance of having
the tools necessary to investigate allegations of price gouging
immediately while the data are fresh, and (4) the interdependence of
all regions of the country with regard to price and supply allocation
when a catastrophic event occurs. To conduct our investigation to
enable us to understand the factors underlying the run-ups in the
retail, price of gasoline, we met with representatives of the various
companies involved in the flow of gasoline from its origin as crude oil
to the pump at retail gasoline stations. Enforcement specialists from
my office visited approximately one hundred gasoline retailers in
twenty counties in South Carolina (we have 46). We have also met with
representatives of Marathon Ashland Petroleum, LLC, BP America, Inc.,
Shell Oil Products US, and ConocoPhillips. Additionally, we had a
conference call with the chief economist and others of the American
Petroleum Institute, the trade association for the oil producers. To
further understand the retail marketing of petroleum products, we met
with representatives of the South Carolina Petroleum Marketers
Association. We met with an oil jobber to help us understand the
problems associated with supplying gasoline to retailers during a
period when less gasoline is physically available for distribution than
is needed to continue to supply retailers at the same rate as prior to
a market disrupting event.
As demonstrated by our efforts, the investigation of price gouging
complaints for any commodity will necessarily be a complex
investigation. As the result of the on-site investigations of various
retailers, we are doing follow-up investigations of four corporate
entities that own seven retail outlets. The complexities of the
production and marketing of any commodity, petroleum in particular,
makes it difficult to determine whether price increases are the result
of market forces and the workings of free enterprise or the result of
short-term profiteering which takes untoward advantage of the market
disruption. For example, we received a number of complaints about one
multi-station retailer whose prices for regular gasoline went up to
$3.519 per gallon on September 29. However, after reviewing his
records, it was determined that his supply costs had risen
substantially in line with his retail prices, so that the price
increases appeared to be the results of increased costs to the retailer
rather than price gouging. The records of another retailer indicate
that one of the retailer's employees, without direction from the
retailer, made an unauthorized price increase out of panic because the
employee thought the station would run out of gasoline; the employee
wanted to slow down the sales volume in order to avoid running out of
supply. As to the retailers under investigation, it is still too early
to determine whether or not they acted improperly. But we have learned
how difficult it is to make a determination of the true cause of
fluctuations in market price.
Investigative powers which can be implemented immediately are
necessary to determine whether rapid and large increases in the retail
prices of any necessary commodity are the result of short-term
profiteering or fraud instead of the market forces balancing the demand
for the commodity with the available supply. South Carolina has those
under the Unfair Trade Practice Act, 35-5-10 et seq.
The power to file civil actions concerning these changes in prices
also arise under the Unfair Trade Practice Act. Further, during a
declared state of emergency (by the Governor of South Carolina or the
President of the United States), one specific section of the Act also
makes it a crime (1) to rent or sell or offer to rent or sell a
commodity (broadly defined, including goods and services) at an
unconscionable price within the area for which the state of emergency
is declared during the time period that the state of emergency is
declared and (2) to impose unconscionable prices for the rental or
lease of a dwelling unit, including a motel or hotel unit or other
temporary lodging or self-storage facility. A willful violation
constitutes a misdemeanor punishable by a fine of not more than one
thousand dollars or imprisonment for not more than thirty days. An
``unconscionable price'' is a price which either represents a ``gross
disparity'' between the price of the covered commodity and the average
price at which the covered commodity was available during the thirty
days prior to the declaration of the state of emergency or that
``grossly exceeds'' the average price that was readily available for
the covered commodities and services in the trade area thirty days
prior to the declaration of the state of emergency. A price is not
considered to be an ``unconscionable price'' if the increase is
attributable to additional costs incurred or regional, national, or
international market trends. See South Carolina Statute Sec. 39-5-145,
a copy of which is attached as Attachment I.*
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* Attachments I-III have been retained in committee files.
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As mentioned, even without a declared emergency the Attorney
General in South Carolina has the power to investigate and punish
violations under the other sections of the Unfair Trade Practices Act,
all civil in nature, which declares ``unfair methods of competition and
unfair or deceptive acts or practices in the conduct of any trade or
commerce'' unlawful. The Attorney General may recover, on behalf of the
state, civil penalties not exceeding five thousand dollars per
violation for willful violations. See South Carolina Statutes Sec. 39-
5-20 and Sec. 39-5-110, copies of which are attached as Attachment II.
But other than price gouging during a declared state of emergency,
there are no statutes which specifically address ``price gouging'' in
South Carolina. This makes it difficult to prove price gouging, as the
available statutory authority in non-emergency times is only the
general prohibition against practices that are ``unfair'' or
``deceptive'', but which lacks a precise definition.
Under our competitive economic system, high prices or quick run-ups
in prices are not and should not be illegal absent certain compelling
circumstances. Taking risks and making a profit--or a loss--is the
American way. To effectively fight true price gouging, however, we need
authority to pursue price gougers in South Carolina when we are
suffering an abnormal disruption of our market as the result of an
event elsewhere. To this end, we are proposing an addition to South
Carolina's price gouging statute which would apply to a direct and
abnormal disruption in the market in South Carolina caused by an event
happening outside of South Carolina which results in the governor of
the other state, or the President, declaring a state of emergency or
disaster. This approach recognizes the regional impacts of events and
allows prosecutorial authorities to act quickly when unconscionable
prices are being charged, without the necessity of a locally declared
state of emergency. I believe such a law would have a salutary
deterrent effect. See proposed amendment to South Carolina Statute
Sec. 39-5-145, a copy of which is attached as Attachment III. I see no
need for additional federal legislation on these points.
Thank you for the opportunity to testify before this Committee on
the topic of price gouging. I will be glad to respond to any questions.
Chairman Stevens. Thank you very much.
We will now hear from Arizona Attorney General Terry
Goddard. We appreciate your coming and thank you.
STATEMENT OF TERRY GODDARD, ATTORNEY GENERAL, STATE OF ARIZONA
Mr. Goddard. Thank you, Mr. Chairman and members of the
committees. It is a pleasure to be here to talk about our
examination in Arizona of the gas market within our State and
hope that it bears some analogies for your deliberations across
the country. I will not talk about price-gouging because in
Arizona we do not have a price-gouging statute. We do not have
the advantages that have just been described to you. So perhaps
I am the example of the absence of any kind of consumer
protections in the area of gouging in prices. I cannot define
``gouging'' because we do not have a definition in Arizona.
What we do have to protect consumers are civil antitrust
provisions and consumer fraud protections, and we have tried to
use those both to investigate and, if the investigations prove
fruitful, we will be able to assess penalties to benefit
consumers. One such investigation has been completed and one is
now under way.
These tools, however, in summary are pretty ineffective
against what we have all been seeing in the gas market. For one
thing, the antitrust laws depend on an overt conspiracy. They
depend on meetings and communications, which in the gas market
are not necessary. Everybody can see what the prices are,
either in the public data or on the curb, and so that aspect of
collusion is probably never going to exist in the gas industry.
Consumer fraud requires deceptive statements and, as I am
going to show in a moment, usually it is news events that seem
to trigger the disruptions and the supply interruptions which
lead to higher prices.
In Arizona, we have two major examples of supply
disruptions and price spikes. The first was in 2003 when our
pipeline from Texas broke. It stopped delivering gas to the
Phoenix metropolitan area and the consequences were severe for
our State. And, in 2005 Hurricane Katrina also caused prices to
spike significantly.
I cannot underestimate the disruption that these price
increases of gasoline have caused to our economy. I know that
has been true across the country. In Arizona we are
particularly automobile dependent. We have very long distances
to travel. Commuting by car is the only way to get around. We
have very little public transportation. So getting to work for
consumers in Arizona has been a real struggle with the price
increases.
My office received hundreds, in fact in 2003 we in a couple
of days received over a thousand, complaints from consumers who
saw increases at the pump as price-gouging. So they were pretty
ready to define it even if our legislature had not.
Now, we investigated through our civil investigative
demands in 2003 and found no violation of the antitrust laws.
But we did learn a great deal about the industry and about how
gas was delivered to the State of Arizona. Perhaps the most
surprising finding, given the general disruptive aspect that
the increased prices had on our economy, was that both times,
in 2003 and 2005, retailers and wholesalers increased their
profits by two to three times during the supply disruption.
During the time when everybody else was tightening their belts,
profits soared.
In 2003 on July 30 the Kinder Morgan pipeline from Texas to
central Arizona ruptured. It was 50 years old and it simply
gave out. That disruption lasted off and on for about 2 weeks.
The immediate reaction was panic. People literally pumped the
stations dry and so the first weekend we had prices soaring to
40 to 50 cents above the national average, above $2. It may
seem cheap today, but at that point it was an incredible
increase. Some stations went up to $5 per gallon. That 2-week
period was very difficult for our State and the Governor
struggled to try to find ways to bring in additional supply.
Perhaps the best lesson that we got out of this whole
difficulty was that, as a result of the pipeline break, we
found how fragile our delivery system is. 90 percent of all the
gas coming into Arizona comes in two pipelines, and when we
tried to supplement the one that had broken using rail
transportation or trucks we found it was extremely difficult.
Rail was virtually impossible as a means to deliver any gas and
truck capacity was extended elsewhere and the Governor had to
request, and it was ultimately granted, an extension of
permitted driver hours of 10 hours more per week in order to
get trucks diverted to Arizona to help us move gas where the
pipeline used to be. We applied for an EPA waiver because we
have certain clean-burning fuel requirements for the center
part of the State and that was granted very quickly.
We even tried to use military equipment but we found out
that commercial nozzles would not service the military tankers.
Most of our military tankers were in Iraq, but the ones that
were in Arizona could not be used.
The other thing that we learned was that the industry's
``just in time'' delivery system leaves almost no cushion to
protect consumers. The reserves, such as they were, were gone
instantly. There are virtually no tank farms in Arizona. We had
at most 2 or 3 days of reserve in the best of times, usually
almost none.
Now, in 2005 the Katrina experience showed some very
similar aspects. A month before Katrina our prices were right
at the national average. We did not vary very much from that.
As soon as the hurricane hit and the crisis was on, everybody's
prices went up, but ours went up faster and stayed higher
longer. We paid 15 cents above the national average, which we
found surprising as almost none of our gas comes from the Gulf
Coast. Our prices for the first time in my memory went above
California's. That seems an abomination of nature. For one
thing, California has 10 cents per gallon higher taxes than we
do, and we buy most of our supply there. We are subject to the
same supply process. So how our prices got higher than theirs
is very hard to understand.
But the bottom line, when all was said and done, was that
retailer profits tripled. They went from an average of 10 cents
a gallon prior to Katrina to above 30 cents a gallon afterward.
We also found wholesalers----
Chairman Domenici. May I ask a clarifying question?
Chairman Stevens. Sure.
Chairman Domenici. How did you determine that that went up
that much? You just stated the profits went up how much? How
was that determined?
Mr. Goddard. The profits were a comparison between the
wholesale prices that AAA was able to determine and the prices
that were charged at the pump, our investigations confirmed
that, but I am primarily citing the AAA.
We also found that wholesale profits went up an equivalent
amount in one case from 9 cents before Katrina to 22 cents per
gallon afterward.
Gas sales in Arizona are not, certainly as I understand the
term, a competitive market. A supply disruption literally turns
competition on its head. We had examples in our investigation
of service stations who rushed to raise their prices. If they
found somebody else down the block had raised a price, they
would quickly match it. So instead of lowering prices through
competitive pressure, we found they were going up. That I find
hard to explain.
The industry explains it by saying that these stations were
engaged in replacement cost pricing. In other words, they were
trying to price their gas based on what the next load would
cost. Well, at the very best that is a speculative and
arbitrary exercise. If they err on the high side, obviously
that results in more profits for them.
But the thing that we found most dramatic was that
replacement cost pricing seems to apply when prices are going
up, but it does not seem to apply when the cost of supply goes
down. Up like a rocket, down like a feather, has now become a
truism for how gas prices operate in our State.
Arizona also has a very fragile, as I have mentioned, and
non-redundant delivery system--just two pipelines, almost no
other capacity to get gas into Arizona, which has no local
refinery, has no local access to crude. That means any supply
disruption causes a spike in prices. We now know a spike in
price means increased profits for the oil industry.
So the bottom line, ``just in time'' supplies eliminate the
buffers that protect consumers from supply disruptions, make
consumers in Arizona incredibly vulnerable. Supply disruptions
immediately led to price hikes and significant increases in
industry profits.
I only hope that the huge profits that have been talked
about in this committee this morning can, in some degree, be
diverted into diversifying our supply system, making sure that
States like Arizona--and I think it applies all across the
country--have some buffers against supply disruption, have some
way to protect consumers from sudden spikes in prices.
I also believe, with my colleagues, that we need a Federal
anti-price-gouging statute, one that does not preempt the
States, but allows us to use our unique knowledge and
investigative capacity within our environment, but also that
speaks to national problems, such as the Katrina situation.
It is a great pleasure to be here and I would be very happy
to answer questions.
[The prepared statement of Mr. Goddard follows:]
Prepared Statement of Terry Goddard, Attorney General, State of Arizona
INTRODUCTION
I respectfully submit this testimony as the Arizona Attorney
General on behalf of Arizona's consumers and businesses.
During two recent gasoline market disruptions, one in 2003 and one
in 2005, our state has suffered from major gasoline price spikes that
left consumers and business struggling to make ends meet.
Arizona consumers and businesses have little legal protection
against arbitrary and excessive price hikes, since our state does not
have anti-price gouging legislation. My Office has used every
investigative tool at its disposal under Arizona's civil antitrust and
consumer fraud statutes, but these tools are less than effective
against the practices of the oil and gas industry.
Just as I have strongly supported an anti-price gouging law for
Arizona, I also support the enactment of a national anti-price gouging
statute. A federal law, which would allow state Attorneys General to
take action in their own state courts and compliment any existing state
anti-price gouging measures, would greatly benefit this Nation's
consumers.
I. The Arizona Experience
A. The 2003 Pipeline Rupture: A Lifeline Broken
On July 30, 2003, the Kinder Morgan gasoline pipeline running from
Tucson to Phoenix ruptured, cutting off approximately one third of
Phoenix's fuel supply.\1\ Consumer ``panic buying'' exacerbated supply
shortages, causing gasoline stations to run out of fuel and fuel prices
to skyrocket. My Office received and verified consumer complaints that
some retail stations were charging more than $4 per gallon for
gasoline. Although the broken pipeline primarily affected the Phoenix
supply of gas, there were significant, if less drastic, price increases
in the rest of our State as well (see Attachment A).1a In
the weeks following the pipeline rupture, my Office received more than
1,000 complaints of alleged ``price gouging.''
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\1\ The Phoenix metropolitan area is Arizona's largest population
center.
\1a\ Attachments A-C have been retained in committee files.
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The only tools at my disposal to investigate alleged violations of
law during pipeline break were Arizona's civil antitrust \2\ and
consumer protection statutes.\3\ Pursuant to Arizona's antitrust act,
the Attorney General may investigate alleged anticompetitive behavior
and file a civil suit if there is evidence of collusion, such as price
fixing, or exploitation of market power by a firm with a dominant
market share. Our consumer fraud act prohibits the use of any deception
or misrepresentation made by a seller or advertiser of merchandise.
While both statutory schemes are crucial consumer protection tools,
they have proven ineffective in protecting Arizona consumers against
sudden, drastic gasoline price increases inflicted during an abnormal
market disruption.
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\2\ Arizona Revised Statutes Sec. 44-1401 et seq.
\3\ Arizona Revised Statutes Sec. 44-1521 et seq.
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After the pipeline break, my Office issued civil investigative
demands to gasoline suppliers under Arizona's antitrust statutes, to
determine whether any illegal, anticompetitive, or collusive behavior
contributed to the soaring prices consumers were paying at the pump.
The investigation revealed no violation of Arizona's antitrust laws but
did reveal that profit margins during that period were two to three
times higher than profit margins when there was no supply
disruption.\4\ However, the increased profits earned by the wholesale
and retail segments of the industry during and immediately after the
supply disruption underscored the need for an anti-price gouging law
that would protect consumers from profiteering during a supply
emergency.
---------------------------------------------------------------------------
\4\ Many other state and federal antitrust investigations failed to
establish violations of antitrust law.
---------------------------------------------------------------------------
Our 2003 antitrust investigation following the pipeline break led
me to conclude that there is a serious supply problem in Arizona and
many Western states, especially during a supply disruption or
emergency. The West's gasoline supply is tighter and thus more
vulnerable to price spikes and product shortages than other areas of
the country because we have very few pipelines to transport refined
product,\5\ rapid population growth in Phoenix, Las Vegas, and Central
and Southern California, geographic isolation from alternative
suppliers, and specialized fuel blends, which may deter alternative
suppliers from refining gasoline for the Western states.\6\
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\5\ Arizona is almost completely dependent upon two rather small
Kinder Morgan pipelines to bring fuel into the State. One is from Texas
and the other is from California (see Attachment B).
\6\ Peterson D. and Mahnovski, S. 2003. ``New forces at work in
refining: Industry views of critical business operations trends'', Rand
Corporation. Retrieved May 17, 2004 from www.rand.orq/publications/MR/
MR1707/.
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Moreover, the entire oil industry has moved to a ``just-in-time''
delivery system, vastly reducing the numbers of refineries nationwide,
and minimizing inventories at storage sites (``tank farms''). The
effect is a constant and precarious supply/demand balancing act, which
is exceedingly beneficial to industry in lowered operating costs, but
very harmful to consumers as supply vulnerability sets the stage for
price spikes. The slightest interruption with one of the two pipelines
or with any of the refineries that produce Arizona's special fuel blend
causes shortages and price spikes in our gas market. This unstable
supply situation creates an opportunity for oil companies and gasoline
retailers to increase prices and profits during any supply disruption,
and particularly during emergencies.
Among the surprises coming out of the post 2003 pipeline break
investigation in Arizona was the discovery that the oil industry has so
little flexibility. Arizona had almost no ability to obtain petroleum
products by alternatives to the pipeline. It was not possible to move
gas by tank car since the railroad yards had few storage tanks or
facilities to off-load gas. In addition, there was little ability to
ship large quantities of gas by truck on short notice. Not only were
most of the tanker trucks already spoken for elsewhere, driver hour
restrictions prevented overtime to relieve the pressure in Arizona. The
Governor requested and received an extension of the overtime limits,
which provided some relief. It was not possible to use the National
Guard tank trucks since most were on deployment in Iraq and those
remaining were incompatible with commercial nozzles. In addition, most
military drivers were not licensed to carry petroleum products on the
highways.
Additionally, the specialized fuel blends used in Arizona were hard
to replace with alternative sources. As a result, the Governor
requested, and was granted, a waiver by the Environmental Protection
Agency, which allowed the Phoenix area to use conventional fuel for a
limited period of time during the disruption. While these measures were
intended to alleviate the supply shortages, they had minimal immediate
effect since they took time to implement.
Although it seems counterintuitive, any calamity that disrupts the
oil and gasoline market seems to benefit the oil industry. Virtually
any bad news means higher prices and much higher profits for the
industry. Since prices tend to come down much more slowly than they go
up, all segments of the industry reap benefits. Given the financial
windfalls involved, there is no incentive for industry to improve
infrastructure or provide supply ``cushions,'' as those measures would
only stabilize prices and benefit consumers.
To further complicate matters, the lack of transparency in the oil
industry, both with respect to upstream pricing and supply, often leads
to uncertainty and confusion among consumers and government agencies
alike. When we consider the importance of gasoline to our daily life,
our economy, and our security, this lack of transparency is alarming.
Not only do consumer fears of stations running out of gas lead to
``panic buying,'' but many state and local government officials are
left guessing about the fuel supply situation when a supply emergency
occurs.
Recognizing that persistent supply disruptions were not unique to
Arizona, I looked for ways to coordinate state and federal dialogue
regarding gasoline issues. In 2004, I co-chaired the National
Association of Attorneys General's Gasoline Pricing Task Force with
then Nevada Attorney General Brian Sandoval. We held face-to-face
discussions with the United States Department of Energy, the
Environmental Protection Agency, the White House Office of General
Counsel, and the Federal Trade Commission about the causes of high
gasoline prices especially in Arizona and the Western United States.
Every federal agency we spoke to directed us to a different federal
agency to discuss our concerns.
I concluded from this effort that no single federal agency is
responsible for ensuring a stable, affordable supply of gasoline for
the nations' consumers and businesses. The alphabet soup of agencies
involved in oil and gas oversight has the inevitable consequence that
no agency has responsibility. It is left to the state enforcers, then,
to investigate and prosecute illegal, exploitative behavior, especially
during a disaster.
B. The Ripple Effect: Katrina and the 2005 Experience
Late this summer, Arizona, like the rest of our Nation, experienced
significant fuel price spikes attributed to Hurricane Katrina. In the
month prior to Hurricane Katrina, Arizona's fuel prices were at or
around the national average prices. Then, although Arizona receives its
fuel from California and West Texas--not the Gulf Coast areas afflicted
by the hurricane--Arizona prices spiked to approximately 15 cents above
the national average in the hurricane's aftermath (see Attachment C).
Consumer reaction was strong. Since the beginning of August 2005,
my Office has received hundreds of consumer complaints regarding high
gasoline prices. An overwhelming number of these complaints reference
price gouging and point to 30 cent price increases at retail gasoline
stations that occurred at the time Hurricane Katrina struck the Gulf
Coast.
Although, in the past, Arizona's fuel prices sometimes exceeded the
national average, the price at the pump seldom, if ever, exceeded
California's prices. There is good reason for this. Approximately two-
thirds of Arizona's gas comes from California, so we are subject to the
same supply dynamics as California. In addition, California's gasoline
taxes are approximately 10 cents higher than Arizona's. Yet, for nearly
two weeks, in early and mid September 2005, Arizona's prices exceeded
California's prices by about 8 cents per gallon (an 18 cent difference
when adjusted for the tax difference).
Concerned about possible market and supply manipulation and alleged
misrepresentations by the oil industry, I issued antitrust and consumer
fraud civil investigative demands allowed under Arizona law to Arizona
fuel wholesalers and retailers. My Office is currently reviewing the
information provided to determine whether any anticompetitive or
fraudulent activity occurred during that time period.
C. The ``Replacement Cost'' Factor
Gasoline retailers and their trade associations claim that gasoline
stations must immediately raise their prices in response to a
threatened supply disruption because they must raise enough money to
pay for their next shipment of potentially higher priced fuel. They
call this arbitrary and speculative behavior ``replacement cost''
pricing. Whatever the reason, gasoline retailers actually seemed to be
competing to raise prices during the Katrina episode. I personally
observed that as soon as one station posted higher prices, others in
the area quickly matched it. To do otherwise, retailers told my Office,
would be to risk being overrun by customers and pumped dry.
Unfortunately for consumers, retailers only adhere to ``replacement
cost'' pricing when raising prices. They are very slow to lower their
prices as the supply emergency abates and replacement costs decrease.
This phenomenon is so widely known that it is commonly referred to as
``up like a rocket, down like a feather.'' According to AAA Arizona,
post Katrina and Rita profit margins for retail gasoline stations in
Arizona swelled to three times higher than normal. ``As wholesale
prices drop, station owners tend to pass along those savings to
motorists at a snail's pace.'' Ken Alltucker, State's Gasoline
Retailers Cash in. Stations Pocketing Year's Biggest Profits, Arizona
Republic, November 1, 2005.
Documents provided by some retailers and wholesalers in response to
my Office's current investigation corroborate AAA's statements about
higher-than-normal profits. Preliminary information indicates that some
Arizona retailers, whose average per gallon profit margins prior to
Hurricane Katrina were 10 cents per gallon, were suddenly making profit
margins of 30 cents after Hurricane Katrina struck. At least one
Arizona wholesaler's profit margin was 22 cents per gallon post
Katrina, when its pre Katrina profit margins were six to nine cents per
gallon.
II. Legal Remedies: Price Gouging Legislation
A. What is Price Gouging?
Of the 28 states, the District of Columbia and two territories with
protections against price gouging, none has identical legislation.
Thus, nationally there is no common definition of ``price gouging''.
However, there are some common elements. Most states require that a
state of emergency be declared \7\ for the law to go into effect, and
most cover pricing of essential products and services only.\8\ Some
states prohibit any price increase during a state of emergency, while
others allow a 10 or 20 percent increase.\9\ While some states prohibit
only retailers from increasing their prices and profit margins, others
have more effective laws that hold the entire production and supply
chain accountable.
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\7\ Most legislation requires the President or the Governor to
declare the emergency, although some states allow counties and mayors
to make the declarations to activate their laws. E.g. California
includes the President, Governor, or County or City Executive Officer.
Cal. Penal Code Sec. 396.
\8\ These products and services often include food, water, shelter,
medical supplies, and fuel.
\9\ Hawaii (H.R.S. 209-9) and Louisiana (LSA-R.S. 29:732, et seq.
and 14:329.6 et seq.) do not allow any increase; California allows a 10
percent increase; Alabama (Ala. Code Sec. 8-31-3) allows a 15 percent
increase; New York (NY Gen Bus 396-R) prohibits an unconscionable or
excessive increase.
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B. Price Gouging Laws Work
Traditional price gouging laws are not in effect during periods of
``business as usual''. Rather, they only go into effect when the normal
competitive checks and balances of the free market are disrupted by a
disaster or other emergency. When a population is trapped and desperate
for essential supplies, like food, water, shelter and gasoline, victims
do not have the opportunity to shop around or wait to purchase
essential products until the prices go down. Demand is steady
regardless of the price, so unscrupulous businesses can and sometimes
do take advantage of consumers.
Antitrust and consumer fraud laws cover some aspects of rogue
business behavior; however, they are not designed to effectively
protect consumers from price gouging. Traditional antitrust tools,
which require an overt conspiracy, are unlikely to succeed in this
highly concentrated industry where the small numbers of participants
know exactly what competitors are doing from publicly available data
and would have no need to meet or communicate directly to coordinate
price activity. The best and perhaps the only way to effectively
protect vulnerable consumers in these circumstances is through anti-
price gouging laws.
III. Arizona's Predicament
After each of the two major gasoline price spikes in
Arizona, there was an outcry from Arizona consumers, pleading
for my Office ``to do something,'' to protect them. Most
consumers simply assumed that charging exorbitant prices for
essential goods, especially gasoline, during a time of crisis
would be illegal. They were shocked to find out that in
Arizona, as in many states, there are no such protections.\10\
I listened to countless consumers angered and frustrated with
the situation.\11\
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\10\ A poll by the Arizona Republic newspaper in December of 2003
revealed that 85 percent of Arizonans believe price gouging should be
illegal.
\11\ One Arizona consumer wrote:
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I am sure that you have noticed the continuing rise of gas
prices. I understand there is a war going on, and now this
hurricane will have some impact, but please take the following
to heart. If gas prices don't go down, I may not be able to
continue to take my child places, like 4-H meetings, the
library, etc. I can't even visit my older child at college, and
she is just 2 hours away. We will all have to consider whether
or not to continue working, we may not have the means to even
get to work. What about all the other bills, if we pay for gas
to get to work how will we pay for our utilities and even our
house payments. At present my family is spending about $500 a
month just in gas. I don't know how much longer we can do this.
Do you recommend we all get gas credit cards and max them
out??? I don't know if you can do anything to help us out, if
so please do something! There just isn't any reasonable answer
for this that I can come up with. The American people need
help!
While I shared my fellow consumers' outrage, it was my unfortunate
duty to inform them that our State had no anti-price gouging law. I
supported two efforts in the Arizona Legislature to pass anti-price
gouging legislation. Both times, the bills did not even get a vote in
committee and never reached the floor of either house.
I initiated investigations in 2003 and 2005 with the legal tools at
hand: civil antitrust and consumer fraud law and their attendant
remedies. Even if the evidence from my current investigation reveals
what would be ``price gouging'' in any other state, under Arizona law I
may not have a legal basis for suing the companies involved. Without
evidence of collusion or deceptive conduct, our current antitrust and
consumer fraud statutes do not provide consumer relief.
It is important that states have the ability to tailor their own
state laws to the needs of their local communities, to cover the
essential goods and services applicable to them, to address other local
issues. However, it is also important that all Americans have some
basic protections against price gouging. For this, a federal law could
protect all American consumers against price gouging during national or
regional disasters or abnormal market disruptions. I believe that not
just gasoline, but all essential commodities and services should be
covered in both federal and state legislation. Water, essential foods,
vaccines and other medical supplies, shelter and transportation all
could be affected during a disaster or abnormal market disruption.
During a state of emergency, the normal supply and demand of the
free market may be disrupted. Without legal protections, the suppliers
of critical commodities can, and many will, charge what the market will
bear. During a state of emergency, consumers have no market choice
about where, and at what price, they can purchase essential commodities
and services.
It is important to note that the oil industry's price increases
have had a ripple effect throughout Arizona's economy. For instance,
Arizona Public Service Company, one of Arizona's largest electric
companies requested a 20 percent rate increase, citing increased fuel
prices as a major factor behind its request. Arizona consumers will, in
all likelihood, continue. to feel the economic pinch of the post
Katrina gasoline price increases for months to come.
conclusion
The oil industry often tells us that high fuel prices are simply
the result of supply and demand and that the market is the best arbiter
of price. The fact is that the inelastic demand for oil and gas and the
concentration of major industry players makes a mockery of competition.
The ``just in time'' delivery system and a lack of alternative supplies
means that any supply disruption, however slight, provides an excuse to
raise prices. In the Arizona experience, price spikes mean larger
profits for the industry, whether they are caused by the change in
seasonal fuel blends, pipeline breaks, or major emergencies like
Hurricane Katrina. In both major Arizona price spikes investigated by
my Office, some Arizona gasoline companies enjoyed profit levels two to
three times above pre-supply disruption profit levels.
I am here on behalf of Arizona consumers to tell you that market
forces are not working. The industry's lack of reinvestment in refining
capacity, product storage, and delivery infrastructure serves only the
industry's financial interests, while exposing consumers, especially in
states like Arizona without anti-price gouging laws, to huge price
spikes when the market experiences a supply disruption. It is up to
you, our nation's lawmakers, to stop this noncompetitive, exploitative
and economically disruptive situation. I urge you to adopt an anti-
price gouging law that will allow the Federal Trade Commission to
protect consumers on a national level and state Attorneys General to
protect consumers in the state courts.
Chairman Stevens. Thank you very much.
I am going to yield to Senator Domenici--well, it had been
my intention to probably deal with questions. Let me announce
this. We have been told there are three votes, two votes that
start at 3:20 and two votes that start at 5:30. So maybe we
should listen to Ms. Majoras now. Would you please make your
statement.
STATEMENT OF HON. DEBORAH PLATT MAJORAS, CHAIRMAN,
FEDERAL TRADE COMMISSION
Ms. Majoras. Thank you very much, Chairman Stevens,
Chairman Domenici, members of the committees. I am Deborah
Majoras, the Chairman of the Federal Trade Commission. I appear
today to present the Commission's testimony on the
effectiveness of laws in preventing price gouging. The views
expressed in the written testimony represent the views of the
Commission. My oral presentation and responses to questions are
my own and may, but do not necessarily, represent the views of
the entire Commission.
I share the keen interest of both committees on the issue
of energy prices. Americans depend heavily on automobile
transportation for their day-to-day survival. The cost of
transportation is a significant item in their budgets and the
price of gasoline, prominently displayed on gas station
placards, is a substantial and visible part of that cost.
Naturally, sharp increases cause concern for all Americans.
Over the past 20 years, we have become used to relatively
low gasoline prices, and our demand rose by 30 percent over
that period. The United States now must import more than 60
percent of crude oil from foreign sources, leaving us
vulnerable to world market supply and pricing decisions. Even
before Hurricane Katrina, increasing crude oil prices have
resulted in rising gasoline prices during much of 2005. And now
we share our rising demand with rising demand in newly
industrialized nations like China and India.
Meanwhile, it is not enough to import the crude or pump it
out of the ground. It then must be refined into gasoline. U.S.
refiners are operating at high capacity rates, which means that
virtually any interruption in their operations will have a
significant impact on supply and thus prices.
It was in this already tight market that Hurricanes Katrina
and Rita hit, initially disrupting over 95 percent of crude oil
production in the Gulf as well as numerous refineries and
pipelines. With supplies severely interrupted by the
hurricanes, our consumers watched in horror as prices at
gasoline stations increased substantially and rapidly,
sometimes multiple times in a single day.
Even as we all looked for ways to help our fellow citizens
ravaged by these hurricanes, we were concerned that some
appeared to be taking advantage of the victims' plight by
gouging them with high prices. This has led to the debate over
whether the tools law enforcers currently have are sufficient
to deal with sharp price increases in times of crisis.
Given the importance of the gasoline industry to consumers,
the FTC scrutinizes this industry for illegal conduct like no
other. To protect consumers, we carefully review proposed oil
industry mergers, challenging them at lower levels of
concentration than in any other industry. We scrutinize price
movements and business practices and challenge anticompetitive
conduct. We review the weekly prices of gasoline and diesel
fuel in 360 retail areas and 20 wholesale regions, an exercise
we undertake in no other industry. We constantly conduct
research to learn more about this critical industry and then
share that knowledge with Americans, producing recently a study
reviewing industry mergers and a study that explains how
gasoline is priced. Currently, as mandated by section 1809 of
the Energy Policy Act, we are investigating the industry for
price manipulation and any gouging.
It is understandable that many are calling on the FTC to
seek out and prosecute those who are perceived to be taking
advantage of our citizens at a most vulnerable point. But
neither the antitrust laws nor any other Federal statute makes
it illegal to charge prices that are considered to be too high,
as long as companies set those prices independently.
The omission of a Federal price-gouging law is not, I
believe, inadvertent, nor does it condone the practice. Rather,
it reflects a sound policy choice that we should not be quick
to reverse. Regardless of how repugnant price gouging is, a law
that prohibits it is a form of price control, which might seem
attractive and humane in the short run, but is likely to harm
consumers more in the long run.
The free movement of prices plays a critical role in
protecting consumers from even greater hardship. They signal
the producers to increase or decrease their supply, and in a
period of shortage, higher prices create incentives for
suppliers to send more product into the market that needs it
the most, something we just experienced as substantial imports
from Europe have helped ease prices even as, as of yesterday,
almost 50 percent of Gulf Coast crude oil production is still
shut in.
Higher prices also signal the consumers to decrease their
demand. During this recent shortage, we in fact saw signs of
decreased demand in the United States not witnessed for 20
years.
We should not ignore what we know. In the 1970s, price
controls that were established to deal with the energy crunch
resulted in massive shortages and endless lines at the pump.
Higher prices, as tough as they are to swallow--and they are--
help curtail panic buying and topping off practices that cause
retailers to run out of gasoline. The choice during times of
emergency--high-priced gasoline or no gasoline at all--is not a
good one, but unfortunately it is a choice that must be made.
Another problem with outlawing prices that are considered
to be excessive is that it is difficult to distinguish fairly
between a malevolent gouger and an honest retail gas station
owner who is responding responsibly to tough market conditions.
Imagine that gas station owner A is a selfish and heartless
citizen who has decided to use a national emergency as an
opportunity to raise prices by 30 percent above the pre-
emergency level, but without regard to costs or availability of
supply. He knows that eventually competition will require him
to lower the price, but he will make as much as he can during
this time when our consumers are confused and panicked. Gas
station owner B, on the other hand, is a good citizen. He has
no desire to gouge consumers, but not only is the cost of his
supply increasing, but the supply he has on hand is dwindling
fast. He observes the lines at his station and sees that
consumers are coming in consistently to top off the tank
because they are worried about what the future might hold. At
this rate of demand, he knows that he will run out of gasoline,
so he raises the price by 30 percent above the pre-emergency
rate.
Now A and B are charging the same price. So how do we
distinguish between the one who has gouged and the one who
reacted wisely to tough market forces? Further, regardless of
motive, both have engaged in pricing behavior that prompts
consumers to reduce their gasoline consumption, which in turn
reduces the time of shortage--and this is the important point--
results in all consumers getting needed supply more quickly.
Beyond the fairness and enforcement issues, a broad Federal
statute may chill legitimate and helpful price responses that
look the same as gouging. Retailers may be encouraged simply to
maintain the current price until they run out of gasoline, and
there will be no incentive to speed new supply to the markets
affected by the emergency.
If Congress disagrees, however, and believes that
enforcement against price gouging is worth the cost, then it
should take into account that State officials, given their
proximity to local retail outlets, can react more expeditiously
to complaints consumers file about local prices. Most of the
reports of alleged gouging that the FTC staff have reviewed
involved individual retailers that raised prices sharply in
response to dramatic increases in demand or expectations of
decreased supply right after the hurricanes, but reduced their
prices just as quickly when no other stations followed suit or
when their suppliers assured them that their storage tanks
would soon be refilled. It is more effective and efficient for
State and local officials knowledgeable about the local
situation to handle such complaints.
I remain convinced that strong enforcement of the antitrust
laws is the best way to protect consumers from market failures,
and the Commission is committed to strong enforcement. But we
need to remember that a market failure is not the same as a
market producing a result that is tough and that we do not
like. As demonstrated over the past 75 days, if we do not like
high prices then we can, for example, use less gasoline and
that will help bring the price back down.
There are no quick fixes to the gas price situation, and we
should not tell consumers otherwise. Even if Congress were to
pass price-gouging legislation, it would not impact the price
spikes to which we are vulnerable as long as we depend so
heavily on gasoline and particularly on foreign supplies, do
not explore alternative sources of energy, do not look
seriously at our rising demand, and ignore our tight refining
capacity.
Tough decisions lie ahead, and Americans need us to address
these decisions with courage, candor, and resolve. The FTC
stands ready to work with Congress in any way possible.
Thank you very much, Mr. Chairman.
[The prepared statement of Ms. Majoras follows:]
Prepared Statement of Hon. Deborah Platt Majoras, Chairman,
Federal Trade Commission
I. INTRODUCTION
Chairman Stevens, Chairman Domenici, and members of both
Committees, I am Deborah Platt Majoras, the Chairman of the Federal
Trade Commission. I appear before you to present the Commission's
testimony on the impact of recent supply disruptions on petroleum
markets; FTC initiatives to protect consumers by safeguarding
competitive markets in the production, distribution, and sale of
gasoline; and an important recent Commission study on the factors that
affect gasoline prices.\1\
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\1\ This written statement presents the views of the Federal Trade
Commission. My oral presentation and responses to questions are my own
and do not necessarily represent the views of the Commission or any
other Commissioner.
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Recent events underscore the crucial role played by the energy
industry in our economy. Not only do changes in energy prices affect
consumers directly, but the price and availability of energy also
influence many other economic sectors. No other industry's performance
is more deeply felt, and no other industry is so carefully scrutinized
by the FTC.
Prior to Hurricane Katrina, increasing crude oil paces had resulted
in rising gasoline prices during much of this year. Despite these
rising prices, the demand for gasoline during this past summer was
strong and exceeded summer demand in 2004. Then, in this already tight
market, Hurricanes Katrina and Rita severely disrupted the important
Gulf Coast supply of crude oil and gasoline. At one point, over 95
percent of Gulf Coast crude oil production was inoperable, and numerous
refineries and pipelines were either damaged or without electricity.\2\
In the period immediately following Hurricanes Katrina and Rita,
gasoline prices rose sharply to $3.00 per gallon or more in many
markets. Although a good portion of Gulf Coast petroleum infrastructure
has been put back into production, nearly 68 percent of crude oil
production remained shut in as of a week ago.\3\
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\2\ See Minerals Mgmt. Serv., U.S. Dep't of the Interior, Release
No. 3328, Hurricane Katrina Evacuation and Production Shut-in
Statistics Report as of Tuesday, August 30, 2005, at http://
www.mms.gov/ooc/press/2005/pressO830.htm.
\3\ See Minerals Mgmt. Serv., U.S. Dep't of the Interior, Release
No. 3398, Hurricane Katrina/Hurricane Rita Evacuation and Production
Shut-in Statistics Report as of Tuesday, November 1, 2005, at http://
www.mms.gov/ooc/press/2005/press1101.htm.
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Substantially in response to the price effects of this massive and
continuing supply disruption, demand for gasoline has decreased
somewhat. This reduced demand, together with the resumption of a
significant fraction of production in the hurricane-damaged region and
increased gasoline imports, has brought both wholesale and retail
gasoline prices back down to or below pre-hurricane levels. It is
important to remember, however, that Katrina and Rita damaged
significant parts of the energy infrastructure in the Gulf Coast
region, including oil and natural gas production and refining and
processing facilities. Some adverse effect on energy prices may persist
until the infrastructure recovers fully--a process that could take
months.
The Commission is closely scrutinizing prices and examining any
activity in the gasoline industry that may decrease competition and
thus harm consumers. The Commission and its staff have developed
expertise in the industry through years of investigation and research.
The agency has carefully examined proposed mergers and has blocked or
required revisions of any that have threatened to harm consumers by
reducing competition.\4\ Indeed, the Commission has challenged mergers
in the oil industry at lower levels of consolidation than in any other
industry. In addition, the Commission has conducted investigations of
price movements in particular regions of the nation to determine if
they result in any part from anticompetitive practices, and
investigated and recently settled a complaint against Unocal for
monopolization activities that allegedly could have cost consumers
billions of dollars in higher gasoline prices. In addition to law
enforcement, the Commission places a premium on careful research and
industry monitoring to understand current petroleum industry
developments and to identify accurately obstacles to competition,
whether arising from private behavior or from public policies. The
petroleum industry's performance is shaped by the interaction of
extraordinarily complex, fast-changing commercial arrangements and an
elaborate set of public regulatory commands. A well-informed
understanding of these factors is essential if FTC actions are to
benefit consumers.
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\4\ Since 1981, the FTC has filed complaints against 19 large
petroleum mergers. In 13 of these cases, the FTC obtained significant
divestitures. In one of these, Exxon/Mobil, the Commission required the
largest divestiture ever, including divestiture of over 2000 retail
stations and a refinery. Of the six other matters, the parties in four
cases abandoned the transactions altogether after agency antitrust
challenges; one case resulted in a remedy requiring the acquiring firm
to provide the Commission with advance notice of its intent to acquire
or merge with another entity; and the Commission sought dismissal of
the sixth complaint (Aloha Petroleum) based on changed circumstances
that restored allegedly threatened competition.
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In 2004, the FTC staff published a study reviewing the petroleum
industry's mergers and structural changes as well as the antitrust
enforcement actions that the agency has taken in the industry over the
past 20 years.\5\ Then, in early July of this year, the Commission
published a study that explains the competitive dynamics of gasoline
pricing and price changes.\6\ This study is based on years of research
and experience, as well as information learned at conferences of
industry, consumer, academic, and government participants held by the
Commission over the past four years, and explains how gasoline prices
are set.
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\5\ Bureau of Economics, Federal Trade Commission, The Petroleum
Industry: Mergers, Structural Change, and Antitrust Enforcement (2004)
[hereinafter Petroleum Merger Report], available at http://www.ftc.gov/
os/2004/08/040813mergersinpetrolberpt.pdf.
\6\ Federal Trade Commission, Gasoline Price Changes: The Dynamic
of Supply, Demand, and Competition (2005) [hereinafter Gasoline Price
Changes], available at http://www.ftc.gov/reports/gasprices05/050705
gaspricesrpt.pdf.
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The Commission makes its expertise in this industry available to
the public in other ways as well. Thousands of consumers have visited
the Commission's ``Oil and Gas Industry Initiatives'' website,\7\ as
well as the website recently established by the Commission's Bureau of
Consumer Protection to provide advice on identity theft and other
important consumer protection matters in the wake of the hurricanes.\8\
As you know, this is the fourth time in recent weeks the Commission has
shared its expertise on gasoline markets in testimony before
Congressional committees.\9\
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\7\ See http://www.ftc.gov/ftc/oilgas/index.html.
\8\ See http://www.ftc.gov/bcp/conline/events/katrinalindex.html.
\9\ Previous prepared statements of the Commission are available at
http://www.ftc.gov/os/testimony/050907gaspricetest.pdf (before the
House Committee on Energy and Commerce, Sept. 7, 2005); http://
www.ftc.gov/os/testimony/050921gaspricetest2.pdf (before the Senate
Committee on Commerce, Science and Transportation, Sept. 21, 2005);
http://www.ftc.gov/os/testimony/050922katrinatest.pdf (before the House
Energy and Commerce Subcommittee on Commerce, Trade, and Consumer
Protection, Sept. 22, 2005).
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Congress has also turned to the Commission to investigate whether
businesses have manipulated markets and prices to the detriment of
consumers. Section 1809 of the recently enacted Energy Policy Act \10\
mandates an FTC investigation ``to determine if the price of gasoline
is being artificially manipulated by reducing refinery capacity or by
any other form of market manipulation or price gouging practices.'' In
response to that legislation and also to the concerns raised by the
hurricanes, the Commission has launched an investigation to scrutinize
whether unlawful conduct affecting refinery capacity or other forms of
illegal behavior have provided a foundation for price manipulation. The
FTC staff is looking at pricing decisions and other conduct in the wake
of Katrina to understand what has occurred and identify any illegal
conduct. The Commission recently issued civil investigative demands to
a number of companies in this investigation and anticipates reporting
to Congress on the findings of this investigation next spring. Any
identification of unlawful conduct will result in aggressive FTC law
enforcement activity.
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\10\ Energy Policy Act of 2005, Pub. L. No. 109-58, Sec. 1809, _
Stat. _ (2005).
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The Commission's testimony today addresses gasoline pricing issues
in three parts. It first considers the issue of price gouging. In an
economy in which producers are generally free to determine their own
prices and buyers are free to adjust their purchases, it is unusual
when many parties call for some sort of price caps on gasoline. The
testimony considers the problems inherent in a price gouging law and
describes the current Commission investigation of petroleum industry
conduct in the wake of the hurricanes.
The testimony next reviews the basic tools that the Commission uses
to maintain competition in the petroleum industry and thereby ensure
competitive prices for consumers: challenging potentially
anticompetitive mergers, prosecuting nonmerger antitrust violations,
monitoring industry prices and behavior to detect possible
anticompetitive conduct, and researching petroleum sector developments.
The nation's economy is based on the premise that competition produces
the lowest prices and highest quantity and quality of goods and
services, and the highest rate of innovation, for the betterment of all
consumers. This review of the Commission's petroleum industry agenda
highlights the FTC's contributions to promote and maintain competition
in the industry.
The final part of this testimony reviews some useful learning the
Commission has derived from its conferences and research and its review
of recent gasoline price changes. Among other findings, this discussion
highlights the paramount role that crude oil prices play in determining
both the levels and the volatility of gasoline prices in the United
States. It also discusses how demand has increased substantially over
the past few years, both in the United States and in the developing
economies of China and India. When worldwide supply and demand
conditions resulted in crude oil prices in the range of $70 per barrel
after Katrina--a level from which we are doubtless all glad to have
seen the price recede by more than $10 per barrel since the
hurricanes--it was not surprising to see higher gasoline prices
nationwide.
II. PRICE GOUGING
The Commission is very conscious of the swift and severe price
spikes that occurred immediately before and after Katrina and Rita made
landfall, and of the pain that these price increases have caused
consumers and small businesses. There have been numerous calls in
Congress and elsewhere for investigations of ``price gouging,''
particularly at the retail gasoline level, and for legislation making
price gouging (or offenses defined in such alternative terms as
``unconscionably excessive prices'') a violation of federal law.
The FTC is keenly aware of the importance to American consumers of
free and open markets and intends faithfully to fulfill its obligation
to search for and stop illegal conduct, which undermines the market's
consumer benefits. We caution, however, that a full understanding of
pricing practices before and since Katrina may not lead to a conclusion
that a federal prohibition on ``price gouging'' is appropriate.
Consumers understandably are upset when they face dramatic price
increases within very short periods of time, especially during a
disaster. But price gouging laws that have the effect of controlling
prices likely will do consumers more harm than good. Experience from
the 1970s shows that price controls produced longer lines at the pump--
and prolonged the gasoline crisis. While no consumer likes price
increases, in fact, price increases lower demand and help make the
shortage shorter-lived than it otherwise would have been.
Prices play a critical role in our economy: they signal producers
to increase or decrease supply, and they also signal consumers to
increase or decrease demand. In a period of shortage--particularly with
a product, like gasoline, that can be sold in many markets around the
world--higher prices create incentives for suppliers to send more
product into the market, while also creating incentives for consumers
to use less of the product. For instance, sharp increases in the price
of gasoline can help curtail the panic buying and ``topping off'
practices that cause retailers to run out of gasoline. In addition,
higher gasoline prices in the United States have resulted in the
shipment of substantial additional supplies of European gasoline to the
United States.\11\ If price gouging laws distort these natural market
signals, markets may not function well and consumers will be worse off
Thus, under these circumstances, sound economic principles and
jurisprudence suggest a seller's independent decision to increase price
is--and should be--outside the purview of the law.
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\11\ Total gasoline imports into the United States for September
and the first three weeks of October were approximately 34 percent
higher than imports over the same seven-week period in 2004. See U.S.
Dep't of Energy, Energy Information Admin. (``ETA''), U.S. Weekly
Gasoline Imports (Oct. 26, 2005), available at http://www.eia.doe.gov/
oil_gas/petroleum/info_glance/gasoline.html.
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To be sure, there may be situations in which sellers go beyond the
necessary market-induced price increase. A seller who does not want to
run out of a supply of gasoline to sell might misjudge the market and
attempt to charge prices substantially higher than conditions warrant
or than its competitors are charging. News stories of gasoline
retailers panicking and setting prices of $6.00 per gallon are evidence
of such misjudgments after the hurricanes. But the market--not price
gouging laws--is the best cure for this. Temporary prices that are
wildly out of line with competitors' prices do not last when consumers
quickly discover that other stations are charging lower prices. A
single seller in a competitive market cannot unilaterally raise prices
for long above the level justified by supply and demand factors. As
long as they are not sustained by collusive activity, departures from
competitive prices cannot endure for long in such a market. The few
retailers who raised prices to the $6.00 level reduced them just as
quickly when it became apparent that they had misjudged the market.
Even if Congress outlaws price gouging, the law likely would be
difficult to enforce fairly. The difficulty for station managers, as
well as for enforcers, is knowing when the managers have raised prices
``too much,'' as opposed to responding to reduced supply conditions. It
can be very difficult to determine the extent to which any more
moderate price increases are necessary. Examination of the federal
gasoline price gouging legislation that has been introduced and of
state price gouging statutes indicates that the offense of ``price
gouging'' is difficult to define. For example, some bills define
``gouging'' as consisting of a 10 or 15 percent increase in average
prices, while most leave the decision to the courts by defining gouging
in nebulous terms such as ``gross disparity'' or ``unconscionably
excessive.'' Some, but not all, make allowances for the extra costs
that maybe involved in providing product in a disaster area. Few, if
any, of the proposed bills or state laws take account of market
incentives for sellers to divert supply from their usual customers in
order to supply the disaster area, or incentives for consumers to
reduce their purchases as much as possible, minimizing the shortage.
Ultimately, the inability to agree on when ``price gouging'' should be
prohibited indicates the risks in developing and enforcing a federal
statute that would be controversial and could be counterproductive to
consumers' best interest.
We note that at least 28 states have statutes that address short-
term price spikes in the aftermath of a disaster, and we understand
that a number of these states have opened investigations of gasoline
``price gouging.'' If Congress mandates anti-``gouging'' enforcement in
spite of the problems discussed above, then state officials--because of
their proximity to local retail outlets--can react more expeditiously
at the retail level than a federal agency could to the complaints that
consumers have filed about local gasoline prices. Most of the reports
of alleged gasoline price gouging that the FTC staff has seen involved
individual retailers that raised their prices sharply in reaction to
dramatic increases in consumer demand or expectations of decreased
supply right after the hurricanes--and reduced their prices just as
quickly when no other gas stations followed suit, or when their
suppliers assured them that their storage tanks would be refilled. It
would be far more efficient for state and local officials close to
these incidents (and knowledgeable about the local situation) to handle
any such complaints.
For all of these reasons, the Commission remains persuaded that
federal price gouging legislation would unnecessarily hurt consumers.
Enforcement of the antitrust laws is the better way to protect
consumers. The FTC will thoroughly investigate gasoline pricing
practices and will aggressively respond to any manipulation of gasoline
prices we are able to uncover that violates federal antitrust law. The
Commission believes that passage of federal price gouging legislation
before completion of the Section 1809 investigation is premature at
best. Commission findings regarding possible market manipulation from
this study could help inform Congressional committees as they wrestle
with the difficult issues presented by rapid price increases in periods
of shortage.
III. FTC ACTIVITIES TO MAINTAIN AND PROMOTE COMPETITION IN THE
PETROLEUM INDUSTRY
A. The Price Monitoring Project
Given the importance of the petroleum industry to the U.S. economy,
and to the pocketbook of most consumers, the Commission decided it
needed more detailed and more timely knowledge of pricing practices in
both wholesale and retail markets. Three years ago, the FTC launched a
program unique to the petroleum industry to actively and continuously
monitor prices of gasoline and diesel fuel in approximately 360 retail
areas and 20 wholesale regions.\12\ This initiative to monitor gasoline
and diesel prices identifies ``unusual'' price movements \13\ and then
examines whether any such movements might result from anticompetitive
conduct that violates Section 5 of the FTC Act. FTC economists
developed a statistical model for identifying such movements.
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\12\ See FTC, Oil and Gas Industry Initiatives, at http://
www.ftc.gov/ftc/oilgas/index.html.
\13\ An ``unusual'' price movement in a given area is a price that
is significantly out of line with the historical relationship between
the price of gasoline in that area and the gasoline prices prevailing
in other areas.
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The staff reviews daily data from the Oil Price Information
Service, a private data collection agency, and receives information
weekly from the public gasoline price hotline maintained by the U.S.
Department of Energy (``DOE''). The staff monitoring team uses an
econometric model to determine whether current retail and wholesale
prices are anomalous in comparison to the historical price
relationships among cities. If the FTC staff detects unusual price
movements in an area, it researches the possible causes, including,
where appropriate, through consultation with the state attorneys
general, state energy agencies, and the ETA.
In addition to monitoring DOE's gasoline price hotline complaints,
this project includes scrutiny of gasoline price complaints received by
the Commission's Consumer Response Center and of similar information
provided to the FTC by state and local officials. If the staff
concludes that an unusual price movement likely results from a
business-related cause (i.e., a cause unrelated to anticompetitive
conduct), it continues to monitor but--absent indications of
potentially anticompetitive conduct--it does not investigate
further.\14\ The Commission's experience from its past investigations
and from the current monitoring initiative indicates that unusual
movements in gasoline prices typically have a business-related cause.
The FTC staff further investigates unusual price movements that do not
appear to be explained by business-related causes to determine whether
anticompetitive conduct may underlie the pricing anomaly. Cooperation
with state law enforcement officials is an important element of such
investigations.
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\14\ Business-related causes include movements in crude oil prices,
supply outages (e.g., from refinery fires or pipeline disruptions), or
changes in and/or transitions to new fuel requirements imposed by air
quality standards.
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B. Merger Enforcement in the Petroleum Industry
The Commission has gained much of its antitrust enforcement
experience in the petroleum industry by analyzing proposed mergers and
challenging transactions that likely would reduce competition, thus
resulting in higher prices.\15\ In 2004, the Commission released data
on all horizontal merger investigations and enforcement actions from
1996 to 2003.\16\ These data show that the Commission has brought more
merger cases at lower levels of concentration in the petroleum industry
than in other industries. Unlike in other industries, the Commission
has obtained merger relief in moderately concentrated petroleum
markets. Moreover, our vigorous merger enforcement has preserved
competition and thereby kept gas prices at a competitive level.
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\15\ Section 7 of the Clayton Act prohibits acquisitions that may
have anticompetitive effects ``in any line of commerce or in any
activity affecting commerce in any section of the country.'' 15 U.S.C.
Sec. 18.
\16\ Federal Trade Commission Horizontal Merger Investigation Data,
Fiscal Years 1996-2003 (Feb. 2, 2004), Table 3.1, et seq.; FTC
Horizontal Merger Investigations Post-Merger HHI and Change in HHI for
Oil Markets, FY 1996 through FY 2003 (May 27, 2004), available at
http://www.ftc. gov/opa/2004/05/040527petrolactionsHHIdeltachart.pdf.
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Several recent merger investigations illustrate the FTC's approach
to merger analysis in the petroleum industry. An important recently
completed case involved Chevron's acquisition of Unocal. When the
merger investigation began, the Commission was in the middle of an
ongoing monopolization case against Unocal that would have been
affected by the merger. The Commission settled both the merger and the
monopolization matters with separate consent orders that preserved
competition in all relevant merger markets and obtained complete relief
on the monopolization claim.\17\
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\17\ Chevron Corp., FTC Docket No. C-4144 (July 27, 2005) (consent
order), at http://www.ftc.gov/os/caselist/0510125/050802do0510125.pdf;
Union Oil Co. of California, FTC Docket No. 9305 (July 27, 2005)
(consent order), at http://www.flc.gov/os/adjpro/d9305/050802do.pdf.
The nonmerger case is discussed infra at 16-17.
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Another merger case that resulted in a divestiture order resolved a
complaint concerning the acquisition of Kaneb Services and Kaneb Pipe
Line Partners, companies that engaged in petroleum transportation and
terminaling in a number of markets, by Valero L.P., the largest
petroleum terminal operator and second largest operator of liquid
petroleum pipelines in the United States. The complaint alleged that
the acquisition had the potential to increase prices in bulk gasoline
and diesel markets.\18\ The FTC's divestiture order succeeds in
maintaining import possibilities for wholesale customers in Northern
California, Denver, and greater Philadelphia and precludes the merging
parties from undertaking an anticompetitive price increase.\19\
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\18\ Valero L.P., FTC Docket No. C-4141 (June 14, 2005)
(complaint), at http://www.ftc.gov/os/caselist/0510022/
050615com.0510022. pdf.
\19\ Valero L.P., FTC Docket No. C-4141 (July 22, 2005) (consent
order), at http://www.ftc.gov/os/caselist/0510022/050726do0510022.pdf.
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Most recently, the Commission filed a complaint on July 27, 2005,
in federal district court in Hawaii, alleging that Aloha Petroleum's
proposed acquisition of Trustreet Properties' half interest in an
import-capable terminal and retail gasoline assets on the island of
Oahu would have reduced the number of gasoline marketers and could have
led to higher gasoline prices for Hawaii consumers.\20\ To resolve this
case, the parties executed a 20-year throughput agreement that will
preserve competition allegedly threatened by the acquisition.\21\
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\20\ Aloha Petroleum Ltd., FTC File No. 051 0131 (July 27, 2005)
(complaint), at http://www.ftc.gov/os/caselist/1510131/050728comp
1510131.pdf .
\21\ FTC Press Release, FTC Resolves Aloha Petroleum Litigation
(Sept. 6, 2005), available at http://www.ftc.gov/opa/2005/09/
alohapetrol.htm.
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In the past few years, the Commission has brought a number of other
important merger cases. One of these challenged the merger of Chevron
and Texaco,\22\ which combined assets located throughout the United
States. Following an investigation in which 12 states participated, the
Commission issued a consent order against the merging parties requiring
numerous divestitures to maintain competition in particular relevant
markets, primarily in the western and southern United States.\23\
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\22\ Chevron Corp., FTC Docket No. C-4023 (Jan. 2, 2002) (consent
order), at http://www.ftc.gov/os/2002/01/chevronorder.pdf.
\23\ Id.
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Another petroleum industry transaction that the Commission
challenged successfully was the $6 billion merger between Valero Energy
Corp. (``Valero'') and Ultramar Diamond Shamrock Corp.
(``Ultramar'').\24\ Both Valero and Ultramar were leading refiners and
marketers of gasoline that met the specifications of the California Air
Resources Board (``CARB''), and they were the only significant
suppliers to independent stations in California. The Commission's
complaint alleged competitive concerns in both the refining and the
bulk supply of CARE gasoline in two separate geographic markets--
Northern California and the entire state of California--and the
Commission contended that the merger could raise the cost to California
consumers by at least $150 million annually for every one-cent-per-
gallon price increase at retail.\25\ To remedy the alleged violations,
the consent order settling the case required Valero to divest: (a) an
Ultramar refinery in Avon, California; (b) all bulk gasoline supply
contracts associated with that refinery; and ) 70 Ultramar retail
stations in Northern California.\26\
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\24\ Valero Energy Corp., FTC Docket No. C-4031 (Feb. 19, 2002)
(consent order), at http://www.ftc.gov/os/2002/02/valerodo.pdf
\25\ Valero Energy Corp., FTC Docket No. C-4031 (Dec. 18, 2001)
(complaint), at http://www.ftc.gov/os/2001/12/valerocmp.pdf.
\26\ Valero Energy Corp., supra note 24.
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Another example is the Commission's 2002 challenge to the merger of
Phillips Petroleum Company and Conoco Inc., alleging that the
transaction would harm competition in the Midwest and Rocky Mountain
regions of the United States. To resolve that challenge, the Commission
required the divestiture of: (a) the Phillips refinery in Woods Cross,
Utah, and all of the Phillips-related marketing assets served by that
refinery; (b) Conoco's refinery in Commerce City, Colorado (near
Denver), and all of the Phillips marketing assets in Eastern Colorado;
and (c) the Phillips light petroleum products terminal in Spokane,
Washington.\27\ The Commission's order ensured that competition would
not be lost and that gasoline prices would not increase as a result of
the merger.
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\27\ Conoco Inc. and Phillips Petroleum Corp., FTC Docket No. C-
4058 (Aug. 30, 2002) (Analysis of Proposed Consent Order to Aid Public
Comment), at http://www.ftc.gov/os/2002/08/conocophillipsan.htm. Not
all oil industry merger activity raises competitive concerns. For
example, in 2003, the Commission closed its investigation of Sunoco's
acquisition of the Coastal Eagle Point refinery in the Philadelphia
area without requiring relief. The Commission noted that the
acquisition would have no anticompetitive effects and seemed likely to
yield substantial efficiencies that would benefit consumers. Sunoco
Inc./Coastal Eagle Point Oil Co., FTC File No. 031 0139 (Dec. 29, 2003)
(Statement of the Commission), at http://www.ftc.gov/os/caselist/
0310139/031229stmt0310139.pdf. The FTC also considered the likely
competitive effects of Phillips Petroleum's proposed acquisition of
Tosco. After careful scrutiny, the Commission declined to challenge the
acquisition. A statement issued in connection with the closing of the
investigation set forth the FTC's reasoning in detail. Phillips
Petroleum Corp., FTC File No. 011 0095 (Sept. 17, 2001) (Statement of
the Commission), at http://www.ftc.gov/os/2001/09/
phillipstoscostmt.htm.
Acquisitions of firms operating mainly in oil or natural gas
exploration and production are unlikely to raise antitrust concerns,
because that segment of the industry is generally unconcentrated.
Acquisitions involving firms with de minimis market shares, or with
production capacity or operations that do not overlap geographically,
are also unlikely to raise antitrust concerns.
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C. Nonmerger Investigations into Gasoline Pricing
In addition to scrutinizing mergers, the Commission aggressively
polices anticompetitive conduct. When it appears that higher prices
might result from collusive activity or from anticompetitive unilateral
activity by a firm with market power, the agency investigates to
determine whether unfair methods of competition have been used. If the
facts warrant, the Commission challenges the anticompetitive behavior.
Several petroleum cases of recent years are illustrative. On March
4, 2003, the Commission issued the administrative complaint against
Unocal discussed earlier, stating that it had reason to believe that
Unocal had violated Section 5 of the FTC Act.\28\ The Commission
alleged that Unocal deceived the California Air Resources Board
(``CARB'') in connection with regulatory proceedings to develop the
reformulated gasoline (``RFG'') standards that CARB adopted. Unocal
allegedly misrepresented that certain technology was non-proprietary
and in the public domain, while at the same time it pursued patents
that would enable it to charge substantial royalties if CARB mandated
the use of Unocal's technology in the refining of CARB-compliant
summertime RFG. The Commission alleged that, as a result of these
activities, Unocal illegally acquired monopoly power in the technology
market for producing the new CARB-compliant summertime RFG, thus
undermining competition and harming consumers in the downstream product
market for CARB-compliant summertime RFG in California. The Commission
estimated that Unocal's enforcement of its patents could potentially
result in over $500 million of additional consumer costs each year.
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\28\ Union Oil Co. of California, FTC Docket No. 9305 (Mar. 4,
2003) (complaint), at http://www.ftc.gov/os/2003/03/unocalcmp.htm.
---------------------------------------------------------------------------
The proposed merger between Chevron and Unocal raised additional
concerns. Although Unocal had no horizontal refining or retailing
overlaps with Chevron, it had claimed the right to collect patent
royalties from companies that had refining and retailing assets
(including Chevron). If Chevron had unconditionally inherited these
patents by acquisition, it would have been in a position to obtain
sensitive information and to claim royalties from its own horizontal
downstream competitors. Chevron, the Commission alleged, could have
used this information and this power to facilitate coordinated
interaction and detect any deviations.
The Commission resolved both the Chevron/Unocal merger
investigation and the monopolization case against Unocal with consent
orders. The key element in these orders is Chevron's agreement not to
enforce the Unocal patents.\29\ The FTC's settlement of these two
matters is a substantial victory for California consumers. The
Commission's monopolization case against Unocal was complex and, with
possible appeals, could have taken years to resolve, with substantial
royalties to Unocal--and higher consumer prices--in the interim. The
settlement provides the full relief sought in the monopolization case
and also resolves the only competitive issue raised by the merger. With
the settlement, consumers are benefitting immediately from the
elimination of royalty payments on the Unocal patents, and potential
merger efficiencies could result in additional savings at the pump.
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\29\ Chevron Corp., supra note 17.
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The FTC undertook another major nonmerger investigation during
1998-2001, examining the major oil refiners' marketing and distribution
practices in Arizona, California, Nevada, Oregon, and Washington (the
``Western States'' investigation).\30\ The agency initiated the Western
States investigation out of concern that differences in gasoline prices
in Los Angeles, San Francisco, and San Diego might be due partly to
anticompetitive activities. The Commission's staff examined over 300
boxes of documents, conducted 100 interviews, held over 30
investigational hearings, and analyzed a substantial amount of pricing
data. The investigation uncovered no basis to allege an antitrust
violation. Specifically, the investigation detected no evidence of a
horizontal agreement on price or output or the adoption of any illegal
vertical distribution practice at any level of supply. The
investigation also found no evidence that any refiner had the
unilateral ability to raise prices profitably in any market or reduce
output at the wholesale level. Accordingly, the Commission closed the
investigation in May 2001.
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\30\ FTC Press Release, FTC Closes Western States Gasoline
Investigation (May 7, 2001), available at http://www.ftc.gov/opa/2001/
05/westerngas.htm. In part, this investigation focused on ``zone
pricing'' and ``redlining.'' See Statement of Commissioners Sheila F.
Anthony, Orson Swindle and Thomas B. Leary, available at http://
www.ftc.gov/os/2001/05/wsgpiswindle.htm, and Statement of Commissioner
Mozelle W Thompson, available at http://www.ftc.gov/os/2001/05/
wsgpithompson.htm, for a more detailed discussion of these practices
and the Commission's findings. See also Cary A. Deck & Bart J. Wilson,
Experimental Gasoline Markets, Federal Trade Commission, Bureau of
Economics Working Paper (Aug. 2003), available at http://www.ftc.gov/
be/workpapers/wp263.pdf, and David W. Meyer & Jeffrey H. Fischer, The
Economics of Price Zones and Territorial Restrictions in Gasoline
Marketing, Federal Trade Commission, Bureau of Economics Working Paper
(Mar. 2004), available at http://www.ftc.gov/be/workpapers/wp271.pdf.
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In addition to the Unocal and Western States pricing
investigations, the Commission conducted a nine-month investigation
into the causes of gasoline price spikes in local markets in the
Midwest in the spring and early summer of 2000.\31\ As explained in a
2001 report, the Commission found that a variety of factors contributed
in different degrees to the price spikes, including refinery production
problems, pipeline disruptions, and low inventories. The industry
responded quickly to the price spike. Within three or four weeks, an
increased supply of product had been delivered to the Midwest areas
suffering from the supply disruption. By mid-July 2000, prices had
receded to pre-spike or even lower levels.
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\31\ Midwest Gasoline Price Investigation, Final Report of the
Federal Trade Commission (Mar. 29, 2001), available at http://
www.ftc.gov/os/2001/03/mwgasrpt.htm; see also Remarks of Jeremy Bulow,
Director, Bureau of Economics, Federal Trade Commission, The Midwest
Gasoline Investigation, available at http://www.ftc.gov/speeches/other/
midwestgas.htm.
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iv. commission report on factors that affect the price of gasoline
Identifying the causes of high gasoline prices and gasoline price
spikes requires a thorough and accurate analysis of the factors--
supply, demand, and competition, as well as federal, state, and local
regulations--that drive gasoline prices, so that policymakers can
evaluate and choose strategies likely to succeed in addressing high
gasoline prices.
The Commission addressed these issues by conducting extensive
research concerning gasoline price fluctuations, analyzing specific
instances of apparent gasoline price anomalies, and holding a series of
conferences \32\ on the factors that affect gasoline prices. This work
led to the publication of a report \33\ that draws on what the
Commission has learned about the factors that can influence gasoline
prices or cause gasoline price spikes. The report makes numerous
significant findings, but three basic lessons emerge from this
collective work.
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\32\ FTC Press Release, FTC to Hold Second Public Conference on the
US. Oil and Gasoline Industry in May 2002 (Dec. 21, 2001), available at
http://www.flc.gov/opa/2001/12/gasconf.htm.
\33\ Gasoline Price Changes, supra note 6.
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First, in general, the price of gasoline reflects producers' costs
and consumers' willingness to pay. Gasoline prices rise if it costs
more to produce and supply gasoline, or if people wish to buy more
gasoline at the current price--that is, when demand is greater than
supply. Second, how consumers respond to price changes will affect how
high prices rise and how low they fall. Limited substitutes for
gasoline restrict the options available to consumers to respond to
price increases in the short run. Because gasoline consumers typically
do not reduce their purchases substantially in response to price
increases, they are vulnerable to substantial price increases. Third,
producers' responses to price changes will affect how high prices rise
and how low they fall. In general, when there is not enough gasoline to
meet consumers' demands at current prices, higher prices will signal a
potential profit opportunity and may bring additional supply into the
market.
The vast majority of the Commission's investigations and studies
have revealed market factors as the primary drivers of both price
increases and price spikes. A complex landscape of market forces
determines gasoline prices in the United States.
A. Worldwide Supply, Demand, and Competition for Crude Oil Are the Most
Important Factors in the National Average Price of Gasoline in
the United States
The world price of crude oil, a commodity that is traded on world
markets, is the most important factor in the price of gasoline in the
United States and all other markets. Over the years from 1984 through
2003, changes in crude oil prices explained approximately 85 percent of
the changes in the price of gasoline. United States refiners compete
with refiners all around the world to obtain crude oil. The United
States now imports more than 60 percent of its crude from foreign
sources, and these costs are passed on to retailers and then consumers.
If world crude prices rise, then U.S. refiners must pay higher prices
for the crude they buy.
Crude oil prices are not wholly market-determined. Since 1973,
decisions by OPEC have been a significant factor in the prices that
refiners pay for crude oil. Over time, OPEC has met with varying
degrees of success in raising crude oil prices. However, when demand
surges unexpectedly, as in 2004, OPEC decisions on whether to increase
supply to meet demand can have a significant impact on world crude oil
prices.
Overall, the long-run trend is toward significantly increased
demand for crude oil. Over the last 20 years, United States consumption
of all refined petroleum products increased on average by 1.4 percent
per year, leading to a total increase of nearly 30 percent.\34\
---------------------------------------------------------------------------
\34\ Id. at 19.
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Although they have receded from the record levels they reached
immediately after Hurricanes Katrina and Rita, crude oil prices have
been increasing rapidly in recent months. Demand has remained high in
the United States, and large demand increases from rapidly
industrializing nations, particularly China and India, have made
supplies much tighter than expected.\35\
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\35\ This phenomenon was not limited to crude oil: other
commodities that form the basis for expanded growth in developing
economies, such as steel and lumber, also saw unexpectedly rapid growth
in demand, along with higher prices. Id. at 27.
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B. Gasoline Supply, Demand, and Competition Produced Relatively Low and
Stable Prices From 1984 Until 2004, Despite Substantial
Increases in United States Gasoline Consumption
Consumer demand for gasoline in the United States has risen
substantially, especially since 1990.\36\ Although consumption fell
sharply from 1978 to 1981, by 1993 consumption rose above 1978 levels,
and it has continued to increase at a fairly steady rate since then. In
2004, U.S. gasoline consumption averaged about 9 million barrels per
day.
---------------------------------------------------------------------------
\36\ Id. at 48.
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Despite high gasoline prices across the nation, demand generally
has not fallen off in 2005. Although there are reports of some
diminution in demand in the wake of the hurricanes, it remains to be
seen whether this is a long-term reduction. Gasoline demand this summer
driving season was above last year's record driving-season demand and
well above the average for the previous four years. Higher prices post-
Katrina finally resulted in some falloff in demand. A preliminary
estimate indicates that gasoline demand for September of 2005 was
approximately 3.5 percent lower than demand during September 2004.\37\
---------------------------------------------------------------------------
\37\ EIA, DOE/EIA-0208(2005-34), Weekly Petroleum Status Report,
Oct. 28, 2005, at 17, tbl.11, at http://www.eia.doe.gov/oil_gas/
petroleum/data_publications/weekly_petroleum status_report/wpsrr.html.
---------------------------------------------------------------------------
Notwithstanding these substantial demand increases in the pre-
hurricane time periods, increased supply from U.S. refineries and
imports kept gasoline prices relatively steady until 2004. A comparison
of ``real'' average annual retail gasoline prices and average annual
retail gasoline consumption in the United States from 1978 through 2004
shows that, in general, gasoline prices remained relatively stable
despite significantly increased demand.\38\ The data show that, from
1986 through 2003, real national average retail prices for gasoline,
including taxes, generally were below $2.00 per gallon (in 2004
dollars). By contrast, between 1919 and 1985, real national average
retail gasoline prices were above $2.00 per gallon (in 2004 dollars)
more often than not.\39\
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\38\ ``Real'' prices are adjusted for inflation and therefore
reflect the different values of a dollar at different times; they
provide more accurate comparisons of prices in different time periods.
``Nominal'' prices are the literal prices shown at the time of
purchase.
\39\ See Gasoline Price Changes, supra note 6, at 43-47.
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Average U.S. retail prices have been increasing since 2003,
however, from an average of $1.56 in 2003 to an average of $2.27 in the
first ten months of 2005.\40\ In the last several months, the prices
have moved even higher. Setting aside whatever short-term effects may
be associated with Hurricanes Katrina and Rita, it is difficult to
predict whether these increases represent the beginning of a longer-
term trend or are merely normal market fluctuations caused by
unexpectedly strong short-term worldwide demand for crude oil, as well
as reflecting the effects of instability in such producing areas as the
Middle East and Venezuela.
---------------------------------------------------------------------------
\40\ The higher prices in 2005 appear to be the result of market
factors that have uniformly affected the entire country. At least for
the part of this year that preceded Hurricane Katrina, the FTC's
Gasoline Price Monitoring Project has detected no evidence of
significant unusual local or regional gasoline pricing anywhere in the
United States during this summer driving season. This contrasts with
the past two summers, during which various regional supply shocks, such
as the Arizona pipeline shutdown and the Northeast blackouts of August
2003, and the several unanticipated regional refinery outages and late
summer hurricanes during the summer of 2004, significantly increased
prices in some areas above levels that might be expected based on
historical price patterns.
Because of the hurricane-induced shocks to supply, historical price
relationships from one area to another no longer held in many instances
after Katrina. The pattern of post-Katrina price relationships,
however, does appear to be generally consistent with the specifics of
Katrina's and Rita's impact on the supply infrastructure and with the
degree to which particular regions depend on or compete with supplies
from the Gulf Coast region. Those few areas in which pricing patterns
are not consistent are part of our ongoing investigation pursuant to
Section 1809 of the Energy Policy Act of 2005.
---------------------------------------------------------------------------
One reason why long-term real prices have been relatively contained
is that United States refiners have taken advantage of economies of
scale and adopted more efficient technologies and business strategies.
Between 1985 and 2005, U.S. refineries increased their total capacity
to refine crude oil into various refined petroleum products by 8.9
percent, moving from 15.7 million barrels per day in 1985 to 17.133
million barrels per day as of August 2005 through the expansion of
existing refineries and the use of new technologies.\41\ This
increase--approximately 1.4 million barrels per day--is roughly
equivalent to adding approximately 10 to 12 average-sized refineries to
industry supply.
---------------------------------------------------------------------------
\41\ Petroleum Merger Report, supra note 5, at 196, tbl.7-1; EIA,
DOE/EIA-0340(04)/l, 1 Petroleum Supply Annual 2004, at 78, tbl.36
(2005), at http://www.eia.doe.gov/pub/oil_gas/petroleum/
data_publications/petroleum_supply_annual/psa_volume1/current/pdf/
volume1_all.pdf. EIA, DOE/EIA-0208(2005-33), Weekly Petroleum Status
Report, August 24, 2005, at http://www.eia.doe.gov/pub/oil_gas/
petroleum/data_publications/weekly_ petroleum_status_report/historical/
2005/2005_08_24/pdf/wpsrall.pdf.
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Offsetting some of the observed efficiency gains, increased
environmental requirements since 1992 have likely raised the retail
price of gasoline by a few cents per gallon in some areas. Because
gasoline use is a major factor in air pollution in the United States,
the U.S. Environmental Protection Agency--under the Clean Air Act
\42\--requires various gasoline blends for particular geographic areas
that have not met certain air quality standards. Although available
information shows that the air quality in the United States has
improved due to the Clean Air Act,\43\ costs come with the benefits (as
they do with any regulatory program). Estimates of the increased costs
of environmentally mandated gasoline range from $0.03 to $0.11 per
gallon.\44\ A recognition that environmental requirements can increase
gasoline prices came in the post-Katrina period when the EPA
temporarily suspended certain boutique fuel requirements in order to
increase the supply of conventional gasoline into affected areas.\45\
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\42\ Beginning with the Clean Air Act Amendments of 1970 (Pub. L.
No. 91-604, 84 Stat. 1698) and continuing with further amendments in
1990 (Pub. L. No. 101-549, 104 Stat. 2468) and the Energy Policy Act of
1992 (Pub. L. No. 102-486, 106 Stat. 2776), Congress has mandated
substantial changes in the quality of gasoline, as well as diesel, that
can be sold in the United States.
\43\ Robert Larson, Acting Director of the Transportation and
Regional Programs, Environmental Protection Agency, Remarks at the FTC
Conference on Factors that Affect Prices of Refined Petroleum Products
79-80 (May 8, 2002).
\44\ See EIA, 1995 Reformulated Gasoline Market Affected Refiners
Differently, in DOE/EIA-0380(1996/01), Petroleum Marketing Monthly
(1996), and studies cited therein. Environmental mandates are not the
same in all areas of the country. The EPA requires particular gasoline
blends for certain geographic areas, but it sometimes allows variations
on those blends. Differing fuel specifications in different areas can
limit the ability of gasoline wholesalers to find adequate substitutes
in the event of a supply shortage. Thus, boutique fuels may exacerbate
price variability in areas, such as California, that are not
interconnected with large refining centers in other areas.
\45\ U.S. Environmental Protection Agency, Fuel Waiver Response to
Hurricanes 2005, available at http://www.epa.gov/compliance/katrina/
waiver/index.html.
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FTC studies indicate that higher retail prices are generally not
caused by excess oil company profits. Although recent oil company
profits may be high in absolute terms, industry profits have varied
widely over time, as well as over industry segments and among firms.
EIA's Financial Reporting System (``FRS'') tracks the financial
performance of the 28 major energy producers currently operating in the
United States. Between 1973 and 2003, the annual average return on
equity for FRS energy companies was 12.6 percent, while it was 13.1
percent for the Standard & Poor's Industrials.\46\ The rates of return
on equity for FRS companies have varied widely over the years, ranging
from as low as 1.1 percent to as high as 21.1 percent during the period
from 1974 to 2003.\47\ Returns on equity vary across firms as well.
---------------------------------------------------------------------------
\46\ See Gasoline Price Changes, supra note 6, at 61.
\47\ Id.
---------------------------------------------------------------------------
High absolute profits do not contradict numbers showing that oil
companies may at times earn less (as a percentage of capital or equity)
than other industrial firms. This simply reflects the large amount of
capital necessary to find, refine, and distribute petroleum products.
C. Other Factors, Such as Retail Station Density, New Retail Formats,
and State and Local Regulations, Also Can Affect Retail
Gasoline Prices
The interaction of supply and demand and industry efficiency are
not the only factors that impact retail gasoline prices. State and
local taxes can be a significant component of the final price of
gasoline. In 2004, the average state sales tax was $0.225 per gallon,
with the highest state tax at $0.334 per gallon (New York).\48\ On
average, about 9 percent of a gallon of gasoline is accounted for by
state taxes. Some local governments also impose gasoline taxes.\49\
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\48\ Id. at 111 (noting that the other four states with the highest
average taxes on gasoline in 2004 were Wisconsin ($0.33 per gallon),
Connecticut ($0.325 per gallon), Rhode Island ($0.306 per gallon), and
California ($0.301 per gallon)).
\49\ Id. For example, all areas in Florida also have a local tax
between $0.099 and $0.178 per gallon. Similarly, Honolulu has a local
tax of $0.165 per gallon.
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Local regulations may also have an impact on retail gasoline
prices. For example, bans on self-service sales or below-cost sales
appear to raise gasoline prices. New Jersey and Oregon ban self-service
sales, thus requiring consumers to buy gasoline bundled with services
that increase costs--that is, having staff available to pump the
gasoline.\50\ Some experts have estimated that self-service bans cost
consumers between $0.02 and $0.05 per gallon.\51\ In addition, 11
states have laws banning below-cost sales, so that a gas station is
required to charge a minimum amount above its wholesale gasoline
price.\52\ These laws harm consumers by depriving them of the lower
prices that more efficient (e.g., high-volume) stations can charge.
---------------------------------------------------------------------------
\50\ See, e.g., Oregon Rev. Stat., ch. 480, Sec. 480.315.
\51\ See Michael G. Vita, Regulatory Restrictions on Vertical
Integration and Control: The Competitive Impact of Gasoline Divorcement
Policies, 18 J. Reg. Econ. 217 (2000); see also Ronald N. Johnson &
Charles J. Romeo, The Impact of Self-Service Bans in the Retail
Gasoline Market, 82 Rev. Econ. & Stat. 625 (2000); Donald Vandegrift &
Joseph A. Bisti, The Economic Effect of New Jersey's Self-Service
Operations Ban on Retail Gasoline Markets, 24 J. Consumer Pol'y 63
(2001).
\52\ See Gasoline Price Changes, supra note 6, at 113.
---------------------------------------------------------------------------
One of the biggest changes in the retail sale of gasoline in the
past three decades has been the development of such new formats as
convenience stores and high-volume operations. These new formats appear
to lower retail gasoline prices. The number of traditional gasoline-
pump-and-repair-bay outlets has dwindled for a number of years, as
brand-name gasoline retailers have moved toward a convenience store
format. Independent gasoline/convenience stores--such as RaceTrac,
Sheetz, QuikTrip, and Wawa--typically feature large convenience stores
with multiple fuel islands and multi-product dispensers. They are
sometimes called ``pumpers'' because of their large-volume fuel sales.
By 1999, the latest year for which comparable data are available,
brand-name and independent convenience store and pumper stations
accounted for almost 67 percent of the volume of U.S. retail gasoline
sales.\53\
---------------------------------------------------------------------------
\53\ Petroleum Merger Report, supra note 5, at 246 tbl.9-5.
---------------------------------------------------------------------------
Another change to the retail gasoline market that appears to have
helped keep gasoline prices lower is the entry of hypermarkets.
Hypermarkets are large retailers of general merchandise and grocery
items, such as Wal-Mart and Safeway, that have begun to sell gasoline.
Hypermarket sites typically sell even larger volumes of gasoline than
pumper stations--sometimes four to eight times larger.\54\
Hypermarkets' substantial economies of scale generally enable them to
sell significantly greater volumes of gasoline at lower prices.
---------------------------------------------------------------------------
\54\ Id. at 239.
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This list of factors that have an impact on retail gasoline prices
is not exhaustive, but it shows that prices are set by a complex array
of market and regulatory forces working throughout the economy. In the
long run, these forces have combined to produce relatively stable real
prices in the face of consistently growing demand. Short-run
variations, while sometimes painful to consumers, are unavoidable in an
industry that depends on the demand and supply decisions of literally
billions of people.
V. CONCLUSION
The Federal Trade Commission has an aggressive program to enforce
the antitrust laws in the petroleum industry. The Commission has taken
action whenever a merger or nonmerger conduct has violated the law and
threatened the welfare of consumers or competition in the industry. The
Commssion continues to search for appropriate targets of antitrust law
enforcement, to monitor retail and wholesale gasoline and diesel prices
closely, and to study this industry in detail.
Thank you for this opportunity to present the FTC's views on this
important topic. I would be glad to answer any questions that the
Committee may have.
Chairman Domenici. Thank you very much, ma'am.
We are going to now proceed with questions and we are going
to do it a little differently. Senator Craig, you are going to
take my place and go first on our side, followed by Senator
Bingaman, and then Senator Stevens will take over on his side.
Senator Craig.
Senator Craig. Mr. Chairman, thank you very much.
I guess my question is first to the three attorneys
general. Under the laws that you have within your States today,
have you ever found and have been successful in prosecuting
price-gouging?
Mr. Harvey. We have not, at least during my tenure we have
not. Have we ever? I am not sure we can cite any reported cases
that show that we have. One of the limitations of our price-
gouging statutes in New Jersey is that you must have a declared
state of emergency in New Jersey.
Senator Craig. Most States are like that.
Mr. Harvey. Right. And you must have prices that exceed
more than 10 percent of the price that was charged prior to the
emergency. That has not been sufficiently documented in the
past. So I am not aware of any suits being brought.
Senator Craig. South Carolina?
Mr. McMaster. No, Senator, I am not aware of any in South
Carolina. We have had a few suits----
Senator Craig. Turn your mike on, would you please.
Mr. McMaster. I am sorry.
We have had none in South Carolina that I am aware of under
the price-gouging statute, which is a part of the Unfair Trade
Practice Act. But we have had a number of cases under the
Unfair Trade Practice Act, which is a civil mechanism that
prohibits unfair and deceptive acts.
Senator Craig. Successful?
Mr. McMaster. Yes, sir, they have been successful.
As I mentioned, there are two sides to it. One is the
private side, where any individual can bring suit and receive
treble damages and attorney's fees. In my State most of the
times when anybody sues in any sort of a business type lawsuit,
where there is a breach of contract or anything else, the
Unfair Trade Practice Act is always included in there as one of
the causes of action.
But since I have been Attorney General, since January 2003,
we have had one case of the Unfair Trade Practice Act. That was
against a power company that had put an assessment, a city
assessment for using the telephone poles, in the bills to the
customers and some of the customers did not live in the city.
So we brought a case against one and the others agreed to--they
all agreed to pay some damages back to the people. So that law
has worked well.
But we have had no prosecutions or civil actions under
price-gouging in my State.
Senator Craig. Arizona?
Mr. Goddard. Senator Craig, we have no price-gouging
statute, so I cannot say that we have ever had a successful
prosecution.
Senator Craig. Do you want one?
Mr. Goddard. Very definitely, I have been to the
legislature at virtually every opportunity to urge passage of
such a bill. Some of our colleagues who are not here,
specifically Florida, have used their price-gouging statutes
successfully against gougers when the hurricanes hit them.
Mr. Harvey. Senator Craig, could I add something?
Senator Craig. Yes.
Mr. Harvey. Had there been a declared state of emergency in
New Jersey, we could have used ours for this Katrina incident.
Instead, we used the Motor Fuels Act and the Consumer Fraud Act
provisions. There were suppliers, at least retailers, who had
increased their prices as many as five times in a single day,
which violated our Motor Fuels Act. Some of these prices would
have exceeded the 10 percent statutory threshold. But we simply
did not have a declared state of emergency in New Jersey.
Mr. McMaster. Senator, if I could add to that, we made it
very clear in public service announcements that the Unfair
Trade Practice Act was available as a remedy and we would bring
those investigations and suits vigorously. But that does not
have the teeth and the deterrent effect that a criminal action
has, and without a declared state of emergency we did not have
that available.
Senator Craig. Well, the reason I ask that question, I have
a survey here that reflects 35 States that have these laws.
None of them have been successful in finding gouging. A variety
of things have happened--state of emergency declaration. I
mean, there are the mechanics within the law that trigger the
action, there is no question about it.
I think the ultimate concern I have, or at least as we walk
through this in trying to understand who is on first here or
who should not be, is that it is a very complicated process to
determine what is or is not fair in the market. So is it fair,
because I watch this going on now, for a single retailer to
have, let us say, ten locations in a metro market and have four
different prices at those ten different locations? It is called
zone pricing. Is that gouging or is that marketing?
Does anyone wish to respond to that? And I have seen in the
case of my major metro area in Idaho a difference of nearly 10
cents in the same retailer, but in a different location where
there is less competition and more traffic. Is that gouging or
is that sound pricing?
Chairman Stevens. That will be your last question, but the
gentleman should answer.
Senator Craig. Thank you.
Mr. McMaster. I would say, depending on how the price is,
that would probably be zone marketing. If the price is $2.40
versus $2.50, maybe that is marketing. But if it is $5.20 or as
opposed to $5.30, that might be gouging.
Senator Craig. Is that not in the eye of the investigative
beholder?
Mr. McMaster. It is, and that is the difficulty with the
law. In my State we have again a mathematical formula. You take
the prior 30 days and compare that to what the current incident
is and if it seems to be unconscionable to the prosecutor and
in his or her discretion they think it deserves criminal
prosecution, then you prosecute, assuming a state of emergency.
Senator Craig. Mr. Harvey.
Chairman Stevens. Senator, we are just going to have to
move on.
Senator Craig. Oh, I will. Thank you, gentlemen, ladies.
Chairman Stevens. Senator Salazar.
STATEMENT OF HON. KEN SALAZAR,
U.S. SENATOR FROM COLORADO
Senator Salazar. Thank you very much, Senator Stevens and
Chairman Domenici and Senator Inouye, for holding this hearing.
Thank you for the panelists who are here and my former
colleagues from the National Associations of Attorneys General.
The question I have for you is on price-gouging and the
definition to be adopted. It seems to me that what we have is a
tremendous amount of noise going on all over the country about
price-gouging and whether or not it has occurred. Part of the
problem we have is that we do not have a set definition of what
price-gouging is.
I know that our staffs put together a couple of
alternatives on how you would define price-gouging, and let me
read you two of them and I would like you to comment on how you
would define it and whether you think that there is a
definition that would make sense nationwide for price-gouging.
One of them basically says retailers charging more than a
defined percentage above the price charged immediately prior to
the proclamation of a state emergency. A second alternative is
retailers charging an unconscionably high price that is not
attributable to increased wholesale price.
So as between those two definitions of price-gouging, which
one do you think would fit the best if in fact the Congress
were to move forward and pass a national price-gouging statute,
or do you have some other alternative that would give us a
definition of what price-gouging is? Whoever wants to respond.
Mr. Harvey. As between those two, the first would be more
acceptable to me because it has more definition. I still do not
think that either is sufficiently specific to give notice and
protection to consumers as well as businesses. I would suggest
taking a look at the laws we have in New Jersey. For example,
we apply a 10 percent rule and we also include increased costs
that may be attributable to the retailer. It is true that a
business that faces increased costs, for example if a pipeline
shuts down in one part of the country and that was the normal
area of supply and you have to go to another part of the
country, those costs should be built in, and then there maybe
should be a 10 percent additional price increase allowed, and
the window should be----
Senator Salazar. You would do a numerical calculation,
right, General Harvey?
Mr. Harvey. I would.
Senator Salazar. How about you, Mr. McMaster?
Mr. McMaster. I like the second definition better. It is
similar to the one in South Carolina. It uses the words
``unconscionable.'' It is based on a different formula there.
But I think that gives your prosecutor, your authorities, more
flexibility and still gives plenty of notice to those who would
violate the law.
Mr. Goddard. Senator Salazar, I proposed a provision that
really was sort of a blend between the two. We do not use the
word ``unconscionable'' because it is subjective. I tried to
use a numerical model--this is a prospective law, not one that
was passed by a legislature, but I believe it combines the best
of both of your proposals. It also took into account the
defense of increased costs and I think that is critical. If a
retailer has soaring costs to deal with, that is not gouging.
But if, as we found to be the case in Arizona, they simply
charged what the market would bear because people were lined up
at the pumps and they had no choice as to where to go, I
believe that is something that needs to be penalized.
And this is not price control. We are only talking about
emergency situations, where the normal supply and demand has
broken down and where consumers are truly the victims of
unconscionable actions.
Senator Salazar. Chairman Majoras, if in fact it was
limited to the emergency circumstances that General Goddard was
just describing, would it still be your position as Chairman of
the Commission to oppose that kind of a price-gouging
definition?
Ms. Majoras. Senator Salazar, I am actually worried that
during a time of crisis it would make it worse, and here is
why. Both of these definitions are looking at price only as
connected to cost. What they are not taking into account is
that price is also used to regulate supply in the marketplace.
So if in fact in a place that is experiencing an emergency the
gas stations that are going to run out of supply cannot raise
the price, what is going to happen is two things. No. 1, they
are going to have a shortage and run out of gas; and No. 2,
supplies from elsewhere around the country where refiners and
gas stations can get more money because they do not have the
price cap placed on them are not going to immediately move
supply into the area of emergency, which I submit is the first
thing we want to happen when we have an emergency, is to get
more gasoline into that area. That is what I am worried about.
Senator Salazar. Thank you.
Thank you, Mr. Chairman.
[The prepared statement of Senator Salazar follows:
Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado
Chairman Stevens, Chairman Domenici, Senator Inouye, Senator
Bingaman, I want to thank you all very much for holding this very
important hearing.
This morning, the Committee on Agriculture is holding a similar
hearing. The Agriculture Committee is receiving testimony regarding the
effects of high energy prices on family farms and ranches around the
country. As I travel around Colorado, the concern expressed to me most
often relates to increasing fuel prices and how those high prices are
affecting our farmers, ranchers and rural communities. I expect that is
true of my distinguished colleagues on these committees as well.
High fuel prices are hurting Colorado families, farmers and
ranchers. I know that during harvest time, no one is hurt by high gas
and diesel prices more than farmers and ranchers.
This is what I am hearing from my state.
During harvest, agricultural producers are some of the
largest fuel consumers in the U.S. and producers are facing
enormous fuel costs. For example, in Grand Junction, Colorado,
diesel prices are still over $3.00.
I have heard from a farmer in Brandon, Colorado who has seen
a 238 percent increase in diesel costs and a 71 percent
increase in gasoline costs since the summer of 2004. This
operation will burn 800 to 1,000 gallons of diesel per day
during the heavy farming season, and if fuel prices do not
moderate, this farmer will realize a doubling of fuel costs for
2006, equating to an additional $65,000 annually in expenses.
I have also heard from another farmer in northeastern
Colorado who, in order to cover the increasing price of fuel,
has applied for additional loans only to be turned down because
he is already overextended with existing loans.
These anecdotes are not unique to Colorado. After five years of
weather-related disasters such as droughts, hurricanes or fires, these
higher input costs are having a severe impact not only on producer's
ability to harvest this year, but also in their ability to secure
financing to operate next year. This is a crisis that is undermining
the stability of farming operations in Colorado and across the
country--this is a crisis, an emergency that must be addressed.
In the long-term, we must address energy conservation, new
technologies and a balanced development of existing fuel supplies. We
must continue to expand opportunities in renewable energy. We must do
right by America by investing in ethanol, biodiesel, wind and biomass.
Ethanol, for example, is good for our land and water, good for our
rural communities, and good for consumers. It not only provides a
value-added product for producers, but also paves the way to energy
freedom for our country.
At the moment, most of our biofuels are ethanol, and most of that
is derived from corn, but we must make these investments and transition
into a more diverse set of feedstocks that will help our national
security, our national economy and our producers by allowing our
farmers from all over the country to grow crops that can be used to
make transportation fuels. These diverse feedstocks will include
potatoes, tobacco, sugar, wood waste and more. We must make these
investments and fully implement and utilize important energy and
conservation programs in the farm bill and energy bill to do so.
Such energy efficiency and renewable energy development is
something that producers across the country agree on. These investments
will allow them to begin to tackle the alarming increases in energy
prices and will be a far cheaper form of energy, especially for their
individual operations.
At the same time we face this emergency of rising input costs on
farms, ranches and rural communities across this country, Congress has
cut $3 billion in agricultural spending. This is $3 billion cut that
will contribute to the decline of the safety-net for these operations--
we are not doing everything we can on behalf of those farmers, ranches
and agribusinesses.
It seems to me that we are failing rural America. It seems to me
that we must address this emergency from two sides. We must address
this crisis in the long-term--by developing our renewable technologies,
fully implementing the recently passed energy bill and working to
expand the conservation and energy titles in the farm bill. But we also
are facing a short-term problem. Our producers are seeing increasing
input costs, which are not covered by production.
For example, according to statistics from Colorado State University
(CSU), for a wheat farmer in Colorado it would take a 40 bushel average
yield per acre and an average price of $4.00 per bushel to cover all
costs and break even. However, the average yield in 2005, for example,
was 24 bushels per acre and the average price is projected at $3.34 per
bushel.
I hope that the oil company executives who will testify here today
realize the real world implications of these high prices--American
farms are in real trouble. I also hope they understand why the
increases in profits to the tune of billions of dollars that are being
reporting are perceived by many Americans as a slap in the face to
those in danger of losing their family farm or ranch.
Chairman Stevens. Thank you very much.
I am going to yield my time to Senator Snowe. Senator
Inouye yields his time to Senator Pryor. Because you waited so
long last time, we are looking at the last first this time.
Senator Snowe.
Senator Snowe. Thank you, Mr. Chairman.
One of the questions I want to address is how do we
determine price-gouging.
Ms. Majoras. Me?
Senator Snowe. Yes. I would like to ask, because I gather
you do not think we ought to grant the Federal Trade Commission
authority to combat price gouging.
Ms. Majoras. I worry that it would make things worse for
consumers in the long run. Currently, the Federal Trade
Commission, which does not have authority to attack price
gouging, does not therefore have a definition of it.
Nonetheless, in this debate we have struggled about what would
define it, and there are some great difficulties in doing that.
Senator Snowe. This gets back to the original question
about gas pricing that occurred this fall. The first panel this
morning, chief executive officers of the major oil companies,
gave a variety of explanations as to why they were experiencing
record profits and record revenues, not only record-breaking
for their industry but record-breaking for corporate America.
How do we make the distinction between fair and unfair
profits? We do not have a Federal price gouging law, but are
there other ways of being able to go after companies who charge
unjust prices? Because as I said this morning, oil is not a run
of the mill commodity; it is a basic necessity. People are
forgoing food, prescription drugs, and making mortgage or rent
payments, according to many surveys.
One recent survey, based on a project that was done over
the last 3 or 4 years, said one in five households went a day
forgoing necessities in order to pay for fuel prices. This is a
major issue, as we face the onset of winter. I wonder, how do
we go about making the distinction as to what is the normal
price increase and as to what is a situation in which oil
companies are exploiting vulnerable people, such as the
emergency situation we were in in the fall?
Ms. Majoras. Well, Senator Snowe, if there is
anticompetitive behavior going on between and among these
gasoline companies, we will find that and we will prosecute.
Currently, the FTC is undertaking an investigation to see
whether market manipulation at all is going on in this industry
and to see whether there has been some form of gouging. It is a
major investigation. We have sent out dozens of subpoenas in
the industry and we will expect to report to Congress on it
next spring. We can give reports along the way.
But once we conduct that, I hope to have better answers for
you, Senator Snowe, in terms of on a going-forward basis what
do we need to do, because, as I said in my opening remarks, we
are vulnerable to these types of price spikes. As long as we
accept the tight refining capacity and the dependence that we
have on foreign oil, we are going to be in for a tough road. So
we do need to find some solutions.
Senator Snowe. Even if we did not have a Federal price-
gouging law, would the FTC, in its ongoing investigation and
study, acknowledge price-gouging if it is found?
Ms. Majoras. Well, what we are going to try to do--and
again, it is not defined, so we are working on how we would----
Senator Snowe. You know the essence of it. I do not think
it is a secret about how to define price-gouging. Price-gouging
is defined in State laws in various ways, but pretty much all
definitions are the same.
Ms. Majoras. Essentially, yes, although I do not
necessarily agree with everyone, how they would define it,
because I think they do not take into account some actually
very rational price behavior that would be good for consumers.
But yes, of course, Senator, we are trying to work with what we
know you want us to do. While that does not mean we would
prosecute it, when we come back to you and tell you what we
have found in the study, we will lay it out for you and we will
say, this is what we have found that these companies and these
retail stations did when they raised price during this time.
Senator Snowe. Do you investigate speculation in the
commodities market at all?
Ms. Majoras. We do not. That falls within the jurisdiction
of the CFTC.
Senator Snowe. Thank you, Mr. Chairman.
Chairman Stevens. Thank you very much.
Senator Pryor.
Senator Pryor. Thank you, Mr. Chairman.
I want to welcome these three attorneys general here.
Senator Salazar and Senator Bingaman and I used to serve in
that office in our home States. We welcome you to the Senate
today.
Let me just give you very briefly my philosophy and my
approach on this. Consumer protection issues generally, I
think, if the law is structured the right way and the attorney
general does his job or her job in their home State, can really
help to clean up the marketplace and really make that State a
very good place for business to occur. Likewise, with regard to
antitrust laws--and by the way, Arkansas does have an antitrust
law. It also has a separate price-gouging statute, which are
different. I think those type laws, if drafted properly, can be
very effective in making sure that the marketplace in your
jurisdiction stays free.
We want free markets and we want robust competition, but we
need to make sure that the laws of supply and demand are
working appropriately. So actually, I think consumer protection
laws, price-gouging laws, antitrust laws, can all be very good
for business in this country and in your various States.
Also, to Senator Craig's question a few moments ago. After
9/11; when I was the attorney general in my State; we did find
price-gouging in our State under our price-gouging law. Our law
is not limited just to gasoline. It also has a number of other
emergency-type products in there. So again, I think this was
very good in settling the market down; and the threat, the
deterrent, that the attorney general can offer again can be
very good for the State; very good for consumers.
So let me ask our attorneys general just a few very quick
questions, especially General Harvey and General McMaster. Have
you found it difficult in your States to enforce price-gouging
fairly? Has fairness been an issue in your States?
Mr. Harvey. It has not been an issue for us in New Jersey.
We have had very few--we have approached excessive pricing
through the Consumer Fraud Act, not really through the price-
gouging aspect of the Consumer Fraud Act.
Senator Pryor. I understand.
Mr. Harvey. But fairness has not really been an issue.
Senator Pryor. What about you, General McMaster?
Mr. McMaster. Fairness on whose part? On the prosecutor's
part or on the----
Senator Pryor. I think on the prosecutor, on the State's
part. Has that been a problem, that the law has not been
applied fairly?
Mr. McMaster. No, sir. It has not been applied much. There
have been a lot, several private actions and a few State
actions since I have been in office since 2003, but it has not
been used much by the government.
Senator Pryor. Do you two think that a price-gouging
legislation in your States, does your consumers more harm?
Mr. Harvey. No, I think it does more good than harm, and I
think if there is a Federal price-gouging statute you may want
to consider giving concurrent jurisdiction to the States, the
State attorneys general, to enforce it along with the Federal
Government.
Senator Pryor. I agree with that.
Mr. McMaster?
Mr. McMaster. I think ours has done much more good than
harm. I do not know that it has done any harm. Our problem is
it is not strong enough. We only have the criminal sanctions
when there has been a declaration of an emergency.
Senator Pryor. Right, I understand.
Do you believe that price-gouging statutes are
counterproductive to the consumer's best interests and they
actually in effect hurt consumers?
Mr. Harvey. No.
Mr. McMaster. Not on the State level. I do not know about
on the Federal level because I do not know of a proper
definition that would apply fairly and evenly nationwide.
Senator Pryor. Have you, either of you, experienced long
lines at the gas pumps or gas shortages in your States because
you have price-gouging statutes?
Mr. Harvey. No, and even when we brought our three lawsuits
against Sunoco, Amerada Hess, and Motiva Shell and certain
independent operators, there were no lines. In fact, what we
saw is prices began to decrease.
Senator Pryor. Lastly, Chairwoman Majoras, I want to be
clear on something. The opinions you expressed today, are these
the unanimous view of the FTC?
Ms. Majoras. The written remarks most certainly are, and
certainly parts of my oral I took from the written, so yes.
Senator Pryor. It is unanimous with the FTC?
Ms. Majoras. There was one of our Commissioners who was not
in town and abstained. But the three of us who remained, yes.
Senator Pryor. Thank you.
Chairman Stevens. Thank you very much, Senator.
Now we will turn to the other side here. Senator Bingaman
and then Senator Wyden, recognized for 5 minutes.
Senator Bingaman. Thank you very much.
Ms. Majoras, let me ask about this section 1809 price-
gouging study that was in the energy bill. The way I read that
legislation, which the President signed in August, it directs
that the FTC conduct an investigation of price-gouging, and
report back to Congress within 90 days of enactment. You have
said that you are planning to report back next spring. How did
you conclude that we did not mean 90 days when we said 90 days?
Ms. Majoras. Well, we received a letter from several
Senators who had put that provision in, telling us that they
meant we could begin it within 90 days. We have had several
discussions with members of staff from various members. The
fact of the matter is we can give you a report within 90 days.
It will not be worth much, I am afraid, Senator, if you really
want us to look at whether there has been market manipulation
and whether there has been price gouging on a widespread scale.
So we have had several discussions with members about this
issue.
Senator Bingaman. Well, just for the record, I was not one
of them, Mr. Chairman. I felt that we meant 90 days when we
said 90 days. I think the problem with waiting until next
spring is that many of these issues may have subsided and gone
off the national agenda to some extent. So I do not know how
timely your report will be once we finally see it.
I am somewhat troubled by the testimony that the Commission
has provided here. I have always thought the Federal Trade
Commission's job was to be the advocate for the consumer at the
Federal level and it seems as though the gist of your testimony
is that the consumer is better off the higher the price is,
that somehow or other that inures to the benefit of the
consumer because it increases supply and it has a variety of
virtues which, I mean, I guess are arguable.
It does not strike me that enacting price-gouging
legislation at the Federal level, if it is properly enforced,
could harm the consumer. It is not controlling prices. You
imply that this is a way of controlling prices. Did I
understand your testimony correctly?
Ms. Majoras. Well, sure, partly it is a way. It puts a cap
on prices at a particular time.
Senator Bingaman. It puts a cap on unconscionable prices,
but any price that can be justified by virtue of cost or the
increase in the price of the commodity or the market price,
that is clearly not covered by price-gouging legislation as I
understand it.
Ms. Majoras. Senator, let me first make absolutely clear
that, yes, without question the FTC is advocating for the
consumer, and that is why I am sitting here saying something
that is difficult to say. If on a widespread scale we do not
allow retailers to price to control for shortages, in other
words if we only look at their cost, their historic cost, and
we do not allow them to look at the fact that they are about to
run out of gasoline, then we will have shortages. We have seen
it happen in the past. So that is what I am worried about. The
last thing in the world our consumers need during an emergency
is to not have access to any gasoline whatsoever.
The problem, sir, is, that if we could be perfect in our
enforcement, we could zero in just on the guys who are truly
unconscionably taking advantage of our citizens. But the
problem is that every statute you pass and enforce, not just a
few cases here and there, but seriously enforce, will provide
incentives. And if I am an honest retailer who really wants to
do the right thing, I am going to be so afraid to raise my
price, even when I feel like I need to, to prevent a shortage,
because, for heaven's sakes, I might have to go to jail for it.
So that is what I am talking about.
Senator Bingaman. Well, let me just say, Mr. Chairman, I
think the argument that we should not have tough anti-gouging
legislation on the books because it might discourage lawful
price increases, I just think that is a specious argument. The
truth is prosecutors, these attorneys general sitting at the
table with you, every day of the week make decisions as to who
to prosecute and who not to prosecute based on who they think
is out to take advantage of the situation, and that can be done
at the Federal level. It has been done at the Federal level in
other areas.
The argument that this is difficult to enforce and there
are a lot of subjective issues and therefore we do not want to
put this kind of a statute on the books just strikes me as
unfounded. So we have a basic disagreement about this issue.
Thank you, Mr. Chairman.
Chairman Stevens. Senator Wyden, you are recognized for 5
minutes.
Senator Wyden. Mr. Chairman, I think we just have heard
from Ms. Majoras an astounding theory of consumer protection.
What you have told us, Ms. Majoras, is essentially there are no
prices that are ever too high, because somehow if the
Government does anything ever under any circumstance that is
going to create the shortage and the like.
Ms. Majoras. No, that is not what I said, Senator.
Senator Wyden. Well then, why do you not tell me what you
think is an appropriate government role here? That is what all
of us are asking. What we know now is 28 States have laws on
the books. The gentlemen sitting next to you say that they can
do it. So for the life of me I cannot figure out why somebody
who is working constructively cannot work this out in a
bipartisan way so that we can have a tool that can be truly
useful in the marketplace.
You and I have been at this for almost 2 years now and you
always have an excuse for why the Government should not act. We
still have not gotten a response to what the Government
Accountability Office said on mergers.* Of course there are
reasons why gasoline prices are going up--the demand in China
and the mischief of OPEC. There are plenty of reasons. But the
Government Accountability Office said that the FTC is a
significant factor in why people are getting clobbered on the
west coast of the United States, and to this day you have not
responded to it.
---------------------------------------------------------------------------
* See appendix I for response.
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So why do we not just stick to the issue before us today
and tell me why it is so difficult for the Federal Trade
Commission to work out an arrangement so that the Federal
Government can stand up for consumers the way 28 States do, the
way these attorneys general do? Why can we not figure out a way
to get that done?
Ms. Majoras. Well, we can, and I am trying to be
constructive, Senator. I am sitting here and I am telling you
what we think and what these fine folks behind me who devote
their lives to working on these markets think about this issue.
If we pass price-gouging legislation, sir, that only looks
at cost as the only element that goes into price during a time
of shortage and we enforce that on a wide scale, I submit to
you that we will be back here because we will be experiencing
shortages that are worse for our consumers. That is what I am
trying to tell you. The proposals really only take into account
price.
Senator Wyden. Are there any significant gaps right now in
the agency's ability to protect consumers?
Ms. Majoras. In this industry?
Senator Wyden. Yes.
Ms. Majoras. No.
Senator Wyden. Well, that is contrary to even what FTC
people have told us. I have sat in hearings where the FTC has
said that the agency cannot do anything about a company that
gouges unilaterally. I think that is a significant gap, do you
not?
Ms. Majoras. No, I do not think it is a significant gap. I
do not. As we have said, we have States who can take care of
this. These are local issues. States are in a much better place
to respond very quickly to local market conditions. And the
fact of the matter is what we saw in the alleged gouging
instances--and we have been watching them and we have been
looking at them as closely as we can--is that the price came
down almost as quickly as it went up.
Senator Wyden. You think when a multinational oil company
gouges the American consumer and they have stations all over
that that is not a national--that is not a matter of national
concern? That is just a local concern?
Ms. Majoras. First of all, 80 percent of the stations are
independently owned and operated. So that is what you are
talking about.
Senator Wyden. Just respond to my question. We have got
multinational companies. You have said when they raise prices
unilaterally that ought to be a local concern. So you do not
think there is anything the Federal Government ought to do
about unilateral action by an oil company, no matter how much
they raise the prices?
Ms. Majoras. Well, today there is no--today we allow
companies to raise the price as they see fit and allow
competition in the marketplace to bring that price back down.
Senator Wyden. And you have said that that should not
change. You have said that there are no significant gaps in the
agency's authority. I think that contradicts what folks from
the Federal Trade Commission have said.
Let me just ask one last question. This morning the
ExxonMobil CEO testified that when the ExxonMobil deal was
under review the, quote, ``FTC was not interested in ExxonMobil
expanding its refinery capacity.'' Now, that was the largest
oil merger in history. Should not the FTC consider the impact
on refining capacity, including expansion, of an oil mega-
merger?
Ms. Majoras. No, no, you misinterpreted what he said. We--
--
Senator Wyden. Those were his exact words, Ms. Majoras.
Ms. Majoras. Well, he did not like it because we required
him to do a divestiture. In order to do the ExxonMobil merger,
we said, you cannot own both of these refineries. We need to
protect competition for consumers in the refinery market, so
you have to sell one. And they sold it to Valero. That is what
happened in that merger, Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Chairman Stevens. Ms. Majoras, two Senators have requested
that you provide each of the committees the names of the
Senators who agreed that that report should be delayed. Would
you do that for us, please?
Ms. Majoras. Absolutely.
Chairman Stevens. Senator Cantwell, I am going to yield to
you and then I will be the closing Senator.
Senator Cantwell. Thank you, Mr. Chairman.
Attorney General Goddard, in your testimony you talked
about the importance of the fact that the entire oil industry
moved to ``just in time'' delivery system, which vastly, as you
say in your report, quote, ``vastly reduces the numbers of
refineries, minimizes inventories and storage tanks.'' Do you
want to elaborate on that?
Mr. Goddard. Senator, I would be happy to. What we found in
our research and in our investigations is that ``just in
time,'' may reduce industry costs, but makes the consumer
hypervulnerable to any supply interruption, any time that there
is maintenance on a refinery, because they run refineries at 96
percent or higher of capacity. During a pipeline break such as
we suffered in Arizona, there was no extra tank farm storage
capacity to pick up the slack in the 2 weeks that the pipeline
was down. There were no other alternatives out there in the
market.
What I think we are looking at is a structural situation in
the industry, which has been able to cut all the items that
might provide some redundancy in the market, they have taken
them away. Gas is the only industry that I know of where bad
news is good news. When they have a reverse of any kind, prices
spike. When prices spike, profits in the last two major
disruptions, triple.
I would like to respond to something that the chairwoman
just said, because it is all well and good to respond to
shortages with increased prices. That is an important factor.
But we have seen most of the profits on the downhill side when
supplies are adequate. Prices never come down as fast as they
go up. In fact, ``up like a rocket, down like a feather,'' is
the rule.
Senator Cantwell. But is not the net result of switching
over to ``just in time'' inventories that we have gone from oil
companies having something like 26 or 30 days of oil reserves
to ``just in time'' inventory, only leaving them maybe with a
couple of days of inventory?
Mr. Goddard. Senator, that is the situation in Arizona. I
cannot speak for others, but we have essentially a couple of
days of inventory, if that.
Senator Cantwell. So we all know when you only have a
little bit of supply, of course the price goes up, right?
Mr. Goddard. As soon as there is any disruption or
potential disruption in the market, a price spike ensues
immediately.
Senator Cantwell. So this morning I asked the oil company
executives about exports for that very reason and to provide
this committee with information about whether they had exported
prior to Katrina supply, whether they had ever diverted,
purchased and then diverted supply coming to the United States,
and whether they would supply us with information about the
paper trading exchange in the off-exchange that they do related
to the spot market.
Do you think that information will be helpful in trying to
pinpoint this particular issue about potential manipulation of
supply?
Mr. Goddard. Senator, I certainly do. As a consumer in
Arizona, if at the time that we were having emergency
situations some of our suppliers were diverting their supply
overseas, I would feel doubly betrayed.
Senator Cantwell. Do you think that you had access to this
information in your investigations before?
Mr. Goddard. Senator, we have not had access to any
information outside of the geographical limits of our State.
One of the problems we have with petroleum industry numbers is
the transparency is hazy at best. The reason I was reluctant to
answer Senator Domenici's question about profits is that under
our civil investigative demands, we must keep the information
we get confidential. So it is very difficult to have a clear
analysis using just the resources that I have in Arizona of the
industry and its practices. We certainly cannot investigate
beyond the borders of our State.
Senator Cantwell. So certainly you would like access to
that information, even if it was in your own State, correct?
Mr. Goddard. Absolutely, Senator.
Senator Cantwell. Well, hopefully we will have the oil
company executives respond, as they said in the committee
hearing this morning, and actually provide that information. So
maybe we can draw the line between what has happened with
exports and potential of supply.
I think this is a critical part of why you need Federal
legislation to make sure that supply is not manipulated and
that there is transparency in the market. That is exactly what
we found out with electricity, that we did not have as much
transparency as we thought we had.
If I could make a point about one of the Federal bills that
we are looking at S. 1735, which 25 of my colleagues have
signed onto, does give the attorneys general additional
authority in section 5 and it preserves in section 7 their
existing authorities.
So I would love to hear further comments at another time on
that legislation.
Thank you, Mr. Chairman.
Chairman Stevens. Thank you very much.
I am sure you cannot see this from where you are, but this
is the Energy Information Administration's gasoline pipelines
of the country. As a westerner, I am interested in the fact
that Washington State has one; a touch comes up from Utah
through Idaho and over into Wyoming; California has two, maybe
three, pipes for gasoline. But the Eastern side of the country
has enormous capacity for gasoline pipelines. The Western
United States has very little.
It does seem to me that the supply concepts of the FTC are
reasonable concepts to consider, but I also think that the
attorneys general have had something to say. You have an
attorneys general association, do you not?
Mr. Goddard. Yes, sir.
Chairman Stevens. Have you all discussed this question of
the adequacy of State laws in price-gouging circumstances at
that association?
Mr. Harvey. For about 2 years, Senator, we have been
looking, in large part raised by Attorney General Charlie Crist
in Florida and Attorney General Bill Lockyear in California,
among others, of course Attorney General Goddard as well. We
have been looking at this issue of price-gouging and gasoline
pricing for at least 2 years.
We always seem to face in all of our States price increases
that attend certain times of the year, that do not seem to have
any supply or market justification. They just appear and then
disappear.
Chairman Stevens. I am an old prosecutor. I do not really
like the sound of your law, Mr. Attorney General, that says the
Governor has to trigger it. I believe with what Attorney
General McMaster said. I believe that a little bit of law
enforcement and winning one case and advertising it means a lot
in terms of law enforcement.
I would like to suggest that perhaps your association could
get together and give us the portion of a bill we might
consider. We are going to have to consider these bills some
time. I do not think we will get them done before this session
is over, but we are going to consider them. It does seem to me
that the States ought to take on the role of dealing with local
concerns and particularly the independent refiners. 80 percent
of these people are independent gas station owners. These that
are within one State, the States ought to have a law that takes
care of them and provides the adequate needs for publicity that
violators will be prosecuted.
I disagree with you to a certain extent, Ms. Majoras. I do
believe that we need a Federal statute that has a criminal
penalty. We have to look at it in terms of what the standard
would be for that penalty.
I do want to ask the attorney generals this. I have said
this before before this committee. I come from a background of
having worked in a little gas station back in the 1930s, and
that is a long time ago. But still, when the price went up the
person I worked for had to raise the price in order to buy the
next load of gas. Now, that is the replacement theory that you
seem to sort of disapprove. Am I wrong, Mr. Harvey?
Mr. Harvey. No, no, sir, you are not. Senator, what we
found in New Jersey, and one of the reasons that we brought the
suits that we brought, is that prices were being charged based
upon oil, based upon gas that was already in the ground. It had
been bought 2 days before, 3 days before, 4 days before. There
was no supply issue. So customers were being charged price
increases----
Chairman Stevens. Well, but that is my point. When they
sell that, how are they going to buy the next gas to replace
what is in that tank unless they raise the price?
Mr. Harvey. We would argue that, whatever price-gouging
statute that is formulated here, that it reach also beyond the
retailers to the suppliers and the refineries. I do not think
it should be limited to retailers because I agree with you
that----
Chairman Stevens. But these prices went up primarily
because of overseas pricing.
Mr. Harvey. Not necessarily. We did not experience that in
New Jersey. What we saw was not a gasoline shortage. We just
saw multiple price increases. And we did not see a supply
shortage.
Chairman Stevens. Well, we have been reading for months
about the increasing shortage of crude oil worldwide and that
it is going to get worse. As a matter of fact, I have seen
charts that indicate we ought to be expecting increases now
through the years ahead as China and India and other countries
start consuming more and more crude oil, unless we find some
additional supply somewhere.
Mr. Harvey. I have no doubt about that, but we are talking
about the narrow period in the days following Hurricane
Katrina, when there was sufficient supply in New Jersey. There
were in some instances five price increases in a single day,
and it went on for multiple days. After we filed suit----
Chairman Stevens. Were these independent stations?
Mr. Harvey. Some were. Amerada Hess, however, is a refinery
and owner that owns many of its own stations.
Chairman Stevens. It is still pretty much of an independent
in the world scene.
Mr. Harvey. That is true. But you did have some company-
owned stores, which is why we sued both the company and as well
as some independents.
Chairman Stevens. Well, I am belaboring it and I do think
we have to get back--this report, when do you think we are
going to get it from the FTC, Ms. Majoras?
Ms. Majoras. If we do it right, Senator, we will get it
done in the spring. As I said, we have sent out dozens of
subpoenas to lots of different companies so we can try to do
this overall and get it right.
We have offered and we are happy to provide any of our
initial findings along the way. But as you can imagine, a 30-
day study is not worth as much as a 6-month study in terms of
our work. So that is the situation we are facing.
Senator Wyden. Mr. Chairman.
Chairman Stevens. Yes. I am trying to listen to three
people at one time. Yes, sir, Senator.
Senator Wyden. I would like to be able to submit some
questions for Ms. Majoras in writing. I think she distorted
what Mr. Raymond said and what I asked about. He was talking
about the refinery they kept, and I would like to submit some
questions to her in writing.
Chairman Stevens. That is fine as long as we are still
going to abide by the same concept as this morning. Questions
must be submitted by tomorrow noon.
Senator Wyden. Absolutely.
Chairman Stevens. And we will submit them through the two
committees.
Ms. Majoras. If I may, Mr. Chairman, because I have just
been accused of distortion. I will obviously respond to it, and
if I misunderstood Senator Wyden's question then I will answer
it. But I was responding to what I thought he said this
morning, and I do not appreciate accusations of distortion.
Thank you, Mr. Chairman.
Chairman Stevens. We do thank you all. I want to come down
and thank you personally for coming. But I think we will just
sort of stand at ease for a minute. Senator Domenici said he
wished to come back after the vote. As a matter of fact, we are
in the middle of four votes that run through. For all intents
and purposes, unless you want to wait for 2 hours, this hearing
is over. Thank you.
[Whereupon, at 3:31 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Daniel K. Akaka, U.S. Senator From Hawaii
Chairman Domenici and Chairman Stevens, thank you for holding this
timely hearing on energy prices and profits. There is nothing closer to
the hearts of Americans than gasoline prices, and consumers in Hawaii
know a lot about high gasoline prices. Our state has had the highest
average gasoline prices in the nation for over 20 years. Today the
national average is $2.36 per gallon for regular; and in Hawaii it is
$2.82. For premium, the national average is $2.60 per gallon; and in
Hawaii, it is $3.04. To make matters worse, on the islands other than
Oahu, the price is even higher.
Hawaii's energy situation is unique for several reasons, not the
least of which is the state's almost complete dependence on petroleum
for its transportation energy sector but also for its electricity
sector. Hawaii depends on imports to meet almost all its energy needs.
This dependency, combined with other factors--such as the costs of
transporting refined products interisland, high real estate prices and
a number of regulations specific to Hawaii--means that gasoline prices
in the state are the most expensive in the nation. Although accusations
of collusion and market control have remained unproven in the courts,
many in the state remain suspicious that the market is ``broken,'' that
there is collusion, and that the high profits of oil companies today
are unfair and prove that something is ``wrong.''
Hawaii's energy markets are an integrated system. Policies that
affect gasoline also affect other products as well, such as syngas or
propane, and the refineries that process crude oil into jet fuel, and
other residual energy sources. It is for this reason that the policies
surrounding oil markets--and gasoline prices in particular--are so
important.
I know that many on this panel have questions about the large
profits that are being reported and about possible legislation. I look
forward to the testimony of the distinguished witnesses today and I
have questions that I would like to ask the witnesses at the
appropriate time.
______
Prepared Statement of Hon. John D. Rockefeller IV, U.S. Senator From
West Virginia
I want to thank both Chairman Stevens and Chairman Domenici for
arranging this hearing. West Virginians have been asking when Congress
was going to do something about the high costs they've been paying at
the pump, the devastating cost of natural gas for our manufacturing
sector, and the likelihood that a cold winter will mean our seniors and
others on fixed incomes will have to choose between food, medicine, and
heating their homes.
We know that there are no simple answers. I supported the Energy
bill the President signed into law earlier this year, and I have
recently joined the Ranking Member of the Energy Committee in asking
Interior Secretary Norton to open some portions of the Gulf of Mexico
that are closed to drilling. We know that this country has insufficient
refining capacity, and that we tend to drive too much and in vehicles
that are not as fuel efficient as they could be.
West Virginians understand that the demand for both petroleum
products and natural gas is high here, and exploding in Asia. What they
may not understand--and what I surely do not understand--is how
American oil companies can plead so many problems in carrying out their
business and then turn around and make so much money in a few months
that even some of my most distinguished, pro-business colleagues are
calling on them to contribute to LIHEAP and to otherwise answer for
their profits.
My colleagues know, and undoubtedly our audience knows, that my
name is Rockefeller, and they know who my great-grandfather was. If you
think that makes me side with the oil companies, you haven't followed
my career very closely. I am prepared, with no hesitation, to call the
profits--profits that these companies are making off the backs of West
Virginians--what they are, obscene. I'm not anti-capitalism, but I will
always be anti-gouging.
I look forward to hearing from our witnesses how what they're doing
to my constituents isn't gouging, and I again want to thank the two
chairmen for providing the nation with this opportunity to probe these
companies' actions.
______
Response to Written Questions Submitted by Hon. Ted Stevens to
Hon. Deborah Platt Majoras
Question 1. Thank you for your testimony and your work on the
gasoline market analysis mandated by Section 1809 of the Energy Policy
Act of 2005 (P.L. 109-58). With respect to the latter, and any
additional investigations required by Congress (such as the Pryor/
Miladski amendment to H.R. 2862), I would appreciate any specific
attention you can give to the State of Hawaii and its unique situation
with a small market and small number of gasoline providers.
In your 2003 testimony before the Hawaii State Legislature,
testifying on the effects of the wholesale gasoline price cap, you
suggested that the more consumer friendly way to reduce gasoline prices
in Hawaii would be through policies that reduce costs and/or promote
competition.
For example, you suggested that you would expect the cost of
imported gasoline to influence the price that marketers pay for
gasoline in Hawaii. In other words, if we had more importers of refined
product, it could help bring down the price of gasoline in Hawaii. So
far; we have only one gasoline importer. Are there federal policies or
actions that the FTC can identify that could help increase the number
of gasoline importers and thus bring down the price of gasoline (both
with and without the price cap law)?
Answer. Imports of gasoline into Hawaii--or, more precisely,
credible threats to import gasoline--play an important role in limiting
the bulk supply price that the two Hawaii refiners (Chevron and Tesoro)
can charge. This is so even though those two refineries (situated on
Oahu) can produce enough gasoline to supply the entire state--and can
do so more cheaply than an importer. (Indeed, there have been few
recent gasoline imports into the state.) Nevertheless, a firm that can
import a full cargo of gasoline can use that ability to negotiate a
bulk supply contract with Chevron or Tesoro at a price no higher than
``import parity,'' i.e., the cost of importing the cargo. Each firm
capable of importing gasoline can achieve an import parity price
(although that price may vary from firm to firm depending on each one's
cost to import). As a general matter, competition at the wholesale and
retail levels in Hawaii benefits from the presence of more bulk
suppliers that can credibly threaten to import.
In its recent law enforcement action against Aloha Petroleum's then
proposed acquisition of Trustreet's petroleum interests in Hawaii, the
FTC took steps to maintain competition at the bulk supply level by
ensuring that at least two firms would remain capable of importing
gasoline into Hawaii. Although Aloha has been the only regular importer
of gasoline into the state in recent years, Trustreet also was able to
import by virtue of its 50 percent interest in the Barber's Point
terminal, which it shared with Aloha.\1\ The Commission's action was
resolved when Aloha agreed to lease half the capacity of the Barber's
Point terminal for 20 years to Mid Pac, a firm that markets gasoline in
Hawaii under the ``Union 76'' brand name. With this 20-year throughput
agreement, Mid Pac replaced the acquired Trustreet as a firm that can
credibly threaten to import gasoline into Hawaii and thereby preserved
competition allegedly threatened by the acquisition,
---------------------------------------------------------------------------
\1\ Trustreet and Aloha jointly imported a cargo of gasoline in
2002.
---------------------------------------------------------------------------
To the extent that federal policies help reduce the cost of
imports, they could improve the ability of firms to bargain with the
Oahu refiners and thus could have some impact on bulk supply prices.\2\
One such policy initiative would be to relax the restrictions imposed
by the Jones Act, which increases the costs of shipments to and from
United States ports by requiring that they be made on U.S.-built, -
owned, and -flagged vessels. In addition, to the extent that federal or
state laws or regulations increase the cost of owning and operating a
marine storage terminal in Hawaii, relaxing those requirements could
have some effect on bulk supply prices. It is important to recognize
that any benefits that such statutory or regulatory requirements may
provide come at a cost to an efficient gasoline market.
\2\ The 2003 testimony before the Hawaii State Legislature to which
the question refers was that of Jerry Ellig, then-Deputy Director of
the FTC's Office of Policy Planning, entitled ``Competition and the
Effects of Price Controls in Hawaii's Gasoline Market'' (Jan. 28,
2003), available at http://www.ftc.gov/be/v030005.htm.
---------------------------------------------------------------------------
Question 2. Some analysts have concluded that Hawaii's gasoline
market is competitive, with certain inefficiencies; and that the
inefficiencies (high costs and less than vigorous competition), occur
between the wholesale and retail level. Can you please expand on how
these inefficiencies (between the wholesale and retail level) occur and
how they contribute to high gasoline prices in Hawaii? In addition,
what recommendations would the FTC have with respect to solving the
inefficiencies to create a more competitive market with respect to that
sector?
Answer. As a report prepared by Stillwater Associates noted,
certain structural characteristics make Hawaii's wholesale gasoline
market less efficient than its mainland counterparts.\3\ These
characteristics--such as a limited number of bulk suppliers--are the
result of Hawaii's position as a relatively small market that is
distant from mainland gasoline markets. The state's size in terms of
gasoline demand and its geographic position relative to other gasoline-
producing areas lead to certain diseconomies of scale in gasoline
production and marine supply that cannot be changed.
---------------------------------------------------------------------------
\3\ Stillwater Associates LLC, Study of Fuel Prices and Legislative
Initiatives for the State of Hawaii (Aug. 5, 2003) (``Stillwater
Report''), available at http://www.stillwaterassociates.com/
Presentations/Study of Fuel Prices for the State of Hawaii.pdf.
---------------------------------------------------------------------------
Land in Hawaii is more expensive--and land ownership arrangements
in the state are more complex--than in most areas of the United States,
and this contributes to higher retail costs. Other inefficiencies are
the result of laws and regulations that increase costs and distort
investment decisions in Hawaii. These include ``anti-encroachment''
legislation that limits oil companies and jobbers from opening stations
near dealer-operated stations; rent caps for lessee-dealer stations;
and the state's wholesale price cap.\4\ The removal or reduction of
these regulatory impediments to entry or expansion likely would make
the wholesale and retail gasoline sectors in Hawaii more competitive.
Nonetheless, they would not eliminate the underlying problem associated
with a small, isolated market.\5\ In addition, taxes on retail gasoline
sales in Hawaii are above the average figure for the United States as a
whole.
\4\ Federal Trade Commission, Gasoline Price Changes: The Dynamic
of Supply, Demand, and Competition 110 (2005), available at http://
www.ftc.gov/reports/gasprices05/050705 gaspricesrpt.pdf
\5\ The discussion in the text concerning regulatory impediments
presents my views and should not be viewed as an official
recommendation of the Commission.
---------------------------------------------------------------------------
Question 3. In addition some islands, particularly Maui and West
Hawaii, are affected by logistical bottlenecks that further impair
competition and cost effectiveness. What are the anti-competitive
forces with respect to market entry on those islands, and how could it
be solved?
Answer. The Neighbor Islands have a number of disadvantages
relative to Oahu. First, those islands incur added transportation costs
because they must obtain gasoline supplies from the refiners or marine
terminal owners on Oahu. Second, there are fewer terminal owners on the
Neighbor Islands than on Oahu, and it is uncertain whether these
smaller markets will accommodate entry by additional terminals. Third,
the small size of the market on the smaller Neighbor Islands cannot
support the number of jobbers and retailers that exist on Oahu or the
Big Island. In this vein, the Stillwater Report noted that Aloha does
not do business on Maui, while both Aloha and Tesoro are absent from
Kauai.\6\ Moreover, according to that report, prices are higher on Maui
than on Kauai because Maui lacks unbranded gas stations.\7\ Fourth, the
smaller size of the market on these islands also likely results in
lower throughput per station, which would raise average costs and
therefore increase prices.
---------------------------------------------------------------------------
\6\ Stillwater Report, supra note 3, at 61.
\7\ Id. Aloha supplies gasoline to Costco elsewhere in the state
but does not own a terminal on Maui, and thus Costco does not sell
gasoline on Maui. Extant terminal owners on Maui may be disinclined to
make space available to Aloha so as to prevent low-priced competition
from Costco. (It is almost never a violation of the antitrust laws for
one firm to refuse to deal with another. So long as a firm makes the
decision unilaterally, in its own business interests, it is not
obligated to share its facilities with a potential competitor.)
---------------------------------------------------------------------------
There is probably little that can be done to eliminate the costs
associated with being situated on small Neighbor Islands distant from
the refining center on Oahu, including entry impediments inherent in
small markets where scale economies may be important. In addition,
there are no indications of restrictions on terminal access that could
be challenged under the antitrust laws.
Question 4. Earlier this year I asked the FTC to investigate a
price spike in diesel fuel in Oregon. At that time, it was attributed
largely to a pipeline outage. However, diesel prices remain higher than
gasoline prices in my state. I am asking you to initiate a new
investigation as to why diesel prices remain so high in Oregon, and to
report your findings to me by December.
Answer. In response to requests from Senators Smith and Wyden and
Representative Hooley, as well as in response to consumer complaints
collected as part of the Commission's Gasoline and Diesel Price
Monitoring project, the FTC staff examined diesel pricing in the
Pacific Northwest during February and March 2005. As the question
notes, a pipeline outage contributed to unusual diesel price increases
in the region at that time. The following discussion provides more
details regarding the higher-than-predicted diesel prices in the
Pacific Northwest during the winter and spring of 2005. As I will
subsequently explain, however, current prices for diesel fuel in
Oregon--unlike the prices experienced in the Pacific Northwest last
winter and spring--are not out of line with diesel pricing throughout
the United States and the rest of the world.
The pricing models that the FTC's economists use showed that retail
diesel prices in Idaho, Montana, Oregon, Utah, and Washington rose
above their predicted ranges in mid-February of 2005. Thus, beyond the
increase in diesel prices that has occurred this year across the
nation--much of which has stemmed from increases in the worldwide price
of crude oil--additional factors affected diesel prices in these
western states.
In particular, several disruptions to supply in the Pacific
Northwest appear to have exacerbated local prices there. Multiple
refineries in Washington--a major source of supply to Oregon--
experienced planned and unplanned unit outages during the period,
including facilities operated by Shell, Tesoro, and ConocoPhillips. For
example, Tesoro reportedly idled most of its Anacortes, Washington,
refinery for maintenance and repair purposes for 30 days, during which
it discontinued production of diesel fuel. Several of the refinery
maintenance operations in the Pacific Northwest were major turnarounds
involving hydrotreater upgrades necessary to produce the ultra-low-
sulfur diesel mandated for 2006. In addition, because refineries in
Montana and Utah ship diesel and other light petroleum products to the
Pacific Northwest, diesel pricing in the Pacific Northwest felt the
effects of additional supply shortfalls in certain Rocky Mountain
states caused by refinery turnarounds and by problems with the
acquisition of synthetic crude oil after a January 2005 fire at
Suncor's Alberta oil sands facility. Moreover, the Olympic Pipeline,
which transports fuel from refineries in Washington to Oregon, was shut
down for several days for planned maintenance at the end of February.
The rapid rise in Oregon diesel prices was consistent with these supply
disruptions.
By contrast, current diesel prices in Oregon--unlike prices last
winter and spring--are not high relative to the rest of the country. As
the enclosed Figure 1 * shows, prices in Portland have been at or below
their predicted ranges since the area recovered from the diesel price
spike that it experienced earlier this year. Figure 2--which shows
statewide average diesel prices for Oregon and Washington relative to
the United States average--also demonstrates that diesel prices in
Oregon are not abnormally high relative to the rest of the nation.\8\
---------------------------------------------------------------------------
* Figures 1-4 have been retained in committee files.
\8\ With the exception of a short period between Hurricanes Katrina
and Rita, diesel prices rose steadily across the United States until
mid-October.
---------------------------------------------------------------------------
Nationally, diesel prices have consistently exceeded gasoline
prices for most of the past 16 months. Our research has shown that this
shift in the relative prices of diesel and gasoline is attributable
primarily to worldwide supply and demand factors--particularly the
increased dependence of European countries on diesel--and this trend
was exacerbated by the timing and magnitude of the Gulf Coast refinery
disruptions in the wake of the hurricanes.
No. 2 diesel fuel is used as a transportation fuel in trucks and
automobiles. Because New York is a major market for trading in No. 2
diesel, and because the New York spot price is thus a widely recognized
benchmark for trading in this product, we enclose a graph that compares
New York Harbor spot prices for diesel and gasoline. Figure 3 plots the
difference between the New York No. 2 diesel spot price and the New
York conventional gasoline spot price since 1997. As that figure shows,
until the second half of 2004, diesel prices typically exceeded
gasoline prices only for short periods--typically during winter months,
when demand for heating oil (another petroleum distillate similar to
diesel) was in greatest demand. Since July 2004, however, the New York
diesel spot price has exceeded the conventional gasoline spot price in
each month except August and September 2005. According to the Energy
Information Administration (``EIA''), this diesel-to-gasoline price gap
stems largely from a strong shift away from gasoline toward diesel that
has posed challenges to global diesel supply and has affected U.S.
distillate markets.\9\ Middle distillates' share of total gasoline and
distillate consumption in Europe has increased from approximately 60
percent to around 65 percent since 1999, and European daily consumption
of diesel fuel is roughly 500,000 barrels per day higher than it was
five years ago.\10\ All of this may portend a long-term trend toward
observed diesel prices that generally exceed gasoline prices.\11\
---------------------------------------------------------------------------
\9\ J. Hackworth & J. Shore, U.S. Dep't of Energy, EIA,
``Distillate in Depth--The Supply, Demand, and Price Picture'' (Winter
Fuels Conference, Oct. 12, 2005), available at http://www.eia.doe.gov/
pub/oil--gas/petroleum/presentations / 2005 / distillate2005 /
distillate2005-- files/frame.html.
\10\ According to the EIA, despite European refinery investments in
hydrotreater and hydrocracker upgrades to facilitate increased diesel
production, Europe's refineries have been unable to keep pace with
increased diesel demand in the region, and reliance on diesel imports
(particularly in the former Soviet Union) has increased.
\11\ The increased demand for diesel in Europe has left some
European refineries with excess capacity to produce gasoline, which is
why those refineries were able quickly to produce and ship more
gasoline to the United States after the hurricanes. These additional
imports helped limit the effect of the hurricanes on gasoline prices.
---------------------------------------------------------------------------
In addition to this possible long-term trend, recent events have
played a major role. The price gap between diesel and gasoline has
widened substantially since late September, and the national average
retail price of diesel has exceeded the average retail price of
gasoline by over 50 cents per gallon since mid-October.\12\ This sudden
and dramatic increase in diesel prices relative to gasoline prices is
attributable to the supply disruptions associated with Hurricanes
Katrina and Rita.
---------------------------------------------------------------------------
\12\ See Figures 3 and 4.
---------------------------------------------------------------------------
According to the EIA, Rita affected distillate stocks more than
gasoline stocks. Distillate stocks fell by 5.6 million barrels for the
week that ended September 30 (the week following Rita), while gasoline
stocks fell by 4.4 million barrels. Rita had much less impact on
gasoline inventories than on distillate inventories because increased
imports after the hurricane bolstered gasoline supplies far more than
distillate supplies and because refineries shifted some production from
distillates to gasoline. A large gap between diesel and gasoline prices
likely will persist until distillate inventories recover for the winter
heating season. Although the Commission's monitoring program and other
detection efforts have not unearthed evidence of anticompetitive
conduct in the diesel fuel industry in Oregon or elsewhere in the
nation, we will remain vigilant in our search for any such evidence.
Question 5. ExxonMobil's CEO Lee Raymond testified at this hearing
that when the Exxon-Mobil merger was under review, the ``FTC wasn't
interested in ExxonMobil expanding its refinery capacity.'' I
understood Mr. Raymond's comments to refer to expanding capacity at the
California refinery that ExxonMobil retained following the merger,
rather than the refinery that the company divested as a condition of
the merger. I would not think that Mr. Raymond would have any concern
about the expansion of a refinery that was no longer owned by his
company. My question to you at the hearing was: Shouldn't the FTC
consider the impact on refining capacity, including expansion, of the
refineries involved in an oil mega-merger like the Exxon-Mobil merger?
You answered that the FTC required divestiture of a different refinery
than the one I understood Mr. Raymond to be referring to. To be clear,
I am asking whether in reviewing oil mergers, the FTC should consider
the impact on refining capacity including whether refineries retained
following the merger can expand or should be encouraged to expand
capacity to increase supply and provide lower prices for consumers?
Answer. In reviewing mergers in the petroleum industry or any other
industry, the Commission considers it crucial to evaluate whether the
merger is likely to lead to increased productive capacity and a
consequent increase in supply, with lower prices for consumers. In this
regard, our analysis of a proposed merger looks very carefully at
whether the transaction is likely to produce substantial efficiencies
that will outweigh probable anticompetitive effects and that could not
be achieved absent the transaction. For example, if a merger between
two refineries would allow more efficient utilization of intermediate
products across refineries that would in turn increase the total
production of gasoline at the two refineries, and if this optimization
would be unlikely without the merger, then the FTC would recognize this
expected output increase as a procompetitive benefit of the
acquisition. Our analysis also counts as a procompetitive benefit of a
merger any planned or expected increase in capacity at the refineries
retained by the merged firm following the acquisition.
In his November 9 testimony, I understand that Mr. Raymond was
discussing the FTC challenge to Exxon's plan to merge with Mobil--and
thereby to take over Mobil's refinery in Torrance, California, which
competed with Exxon's Benicia refinery in the production of CARB
gasoline. With respect to this aspect of the Exxon/Mobil merger, the
Commission determined after a very searching analysis that the
transaction would reduce consumer welfare for Californians unless the
merged firm divested either the Benicia or the Torrance refinery (and
related marketing assets). In order to remedy the anticompetitive
effects of this aspect of the merger, the Commission ordered ExxonMobil
to divest the Benicia refinery to an FTC-approved third party. The
Benicia refinery was in fact divested to Valero Energy Corp.--at that
time a new entrant in California--and that refinery remains fully
operational today. The FTC did not want Exxon to add to its position in
the CARB refining market through an anticompetitive acquisition of a
competing refinery.\13\ At no time has the Commission or its staff told
Mr. Raymond or any other oil industry executive that the FTC would
oppose ExxonMobil's expansion of capacity at the Torrance refinery or
the construction of a new refinery in California. It is in the
interests of all consumers for ExxonMobil and other refiners to compete
vigorously to take additional market share. We would expect such
competition to include refinery construction and expansion where
warranted.
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\13\ The Commission alleged that the Exxon/Mobil merger would
increase the Herfindahl-Hirschman Index in a market defined by the
capacity to refine and market CARB gasoline by 171, to a post-merger
level of 1,699. See, e.g., Federal Trade Commission, Bureau of
Economics, The Petroleum Industry: Mergers, Structural Change, and
Antitrust Enforcement 196 (2004), available at http://www.ftc.gov/os/
2004/08/040813mergersinpetrolberpt.pdf.
---------------------------------------------------------------------------
Your question also raises a broader issue that pertains to all
industries. The FTC has no authority to prohibit any firm in any
industry from increasing productive capacity through internal
expansion. The only legal basis on which a federal antitrust agency can
limit corporate expansion is to challenge mergers and acquisitions that
are unlawful because they have the potential to create or enhance
market power without yielding countervailing benefits such as the
creation of new productive capacity. Internal corporate growth through
capacity expansion would not raise this concern, and the statutes that
we enforce do not give us authority to prohibit internal expansion.
Moreover, it would be contrary to the interests of consumers to limit
such expansion--even expansion by a firm with a large market share. For
consumers to receive the best goods and services at the lowest prices,
our economy depends on the efforts of all firms to compete vigorously
to grow their market share. Indeed, one of the key factors that the
Commission considers in analyzing a proposed merger is the parties'
plans to achieve merger-related efficiencies, including expansions of
capacity. It would be bad economics and bad policy for an antitrust
agency to tell any company that it may not expand capacity.
* * * * * * *
Finally, in response to your oral request at the hearing, I would
like to elaborate on my testimony regarding the timing of the agency's
issuance of a report under Section 1809 of the Energy Policy Act of
2005. As I noted at the hearing, the Commission already has begun an
investigation under Section 1809 to determine whether the price of
gasoline is being artificially manipulated. Our investigation will be
thorough. Indeed, the Commission has already issued extensive civil
investigative demands to a number of companies in this investigation.
It is essential that our staff be afforded adequate time to collect
and analyze the information necessary for this investigation. As the
sponsors of Section 1809 themselves recognized, a credible
investigation of these issues will take more than 90 days. On September
19, Senators Stabenow, Dorgan, and Boxer, along with six other
Senators, clarified in a letter (enclosed) to me that ``[t]he Stabenow-
Dorgan-Boxer provision, included in the Energy Policy Act of 2005
(Public Law 109-58) [i.e., Section 1809], allows the Commission 90 days
to begin its investigation'' and urged the Commission to submit its
report to Congress ``as soon as possible'' (emphasis added). Similarly,
an August 18 press release (enclosed) from Sen. Dorgan stated that
section 1809 requires the FTC to ``launch'' an investigation within the
first 90 days. In light of these statements and the needs of the
investigation, I anticipate reporting to Congress on the findings of
this investigation in spring 2006.
We have informed Members of Congress of the anticipated release
date in staff briefings in September 2005, and in a number of letters
responding to congressional inquiries about gasoline prices this fall.
In the meantime, I anticipate that our staff will be able to brief the
appropriate congressional committees on the status of the investigation
periodically.
I appreciate you concern about energy pricing and profits, Mr.
Chairman, and I thank you for this opportunity to respond to the
Committees' questions.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
Hon. Deborah Platt Majoras
Question 1. FTC investigations have found that companies withheld
supplies from the market in order to keep prices high. For example, the
FTC stated in a March 2001 report concluding its Midwest Gasoline Price
Investigation:
``An executive of this company [the company was not
disclosed] made clear that he would rather sell less gasoline
and earn a higher margin on each gallon sold than sell more
gasoline and earn a lower margin. Another employee of this firm
raised concerns about oversupplying the market and thereby
reducing the high market prices. A decision to limit supply
does not violate the antitrust laws absent some agreement among
firms. Firms that withheld or delayed shipping additional
supply in the face of a price spike did not violate the
antitrust laws. In each instance, the firms chose strategies
they thought would maximize their profits.''
Does the FTC stand by its 2001 finding that oil companies have
withheld oil products from the market in order to prevent prices from
falling?
Answer. The Commission did not find in its Midwest Gasoline Price
Investigation that firms withheld oil products from the market in order
to keep prices high. Rather, the Commission determined that some firms
increased their Gulf Coast production of gasoline for shipment into the
Midwest only after it was clear that higher prices in the Midwest would
make such shipments profitable. The Commission also found that one firm
had a higher-than-expected inventory for a short period, accurately
anticipated a tight market, and sold this inventory at a rate that
maximized its profits at prevailing prices. In the context of localized
product shortages caused by refinery production problems and pipeline
disruptions, the Commission found no conduct--either collusive or on
the part of any individual firm--that violated the antitrust laws. The
salient fact found by the investigation was the Commission's conclusion
that ``[t]he gasoline price spike in the Midwest was short-lived. Soon
after prices spiked, additional gasoline was produced and imported to
the region, and prices dropped as quickly and dramatically as they had
risen.'' \1\ Rather than withhold gasoline, most firms moved extra
product into the region in order to take advantage of higher prices,
and consumers benefitted accordingly.
---------------------------------------------------------------------------
\1\ Final Report of the Federal Trade Commission, Midwest Gasoline
Price Investigation (Mar. 29, 2001), available at http://www.ftc.gov/
os/2001/03/mwgasrpt.htm.
---------------------------------------------------------------------------
Several factors that contributed to the price spike in the Midwest
in the summer of 2000 were largely beyond the immediate control of the
industry participants. These included production problems at
refineries,\2\ two important pipeline disruptions,\3\ and low
inventories.\4\
---------------------------------------------------------------------------
\2\ Production problems during this period stemmed from several
sources. First, there were problems with meeting the new fuel
specification requirements for reformulated gasoline, known as ``RFG
II.'' In particular, Midwest refiners' use of ethanol as an oxygenate
in RFG II made it more costly and difficult to achieve the required low
vapor pressure for summertime gasolines. Second, some Midwest
refineries were shut down longer than expected for maintenance,
replacement, or modification of processing units. Third, several
refinery disruptions arose unexpectedly from damage to refining
equipment caused by fires or thunderstorms.
\3\ The Explorer Pipeline, which transports gasoline from
refineries on the Gulf of Mexico to Chicago, was closed for five days
in March 2000 because of a rupture, and its capacity was thereafter
reduced to 90 percent until December 2000. In addition, the Wolverine
Pipeline, which carries one-third of Michigan's gasoline supply, was
shut down for nine days in June, and subsequently operated at only 80
percent of capacity for a month, causing shortages in Detroit and
northern Ohio.
\4\ Gasoline inventories were low in the Midwest in the spring and
summer of 2000 because of the high price of crude oil and the
expectation (reflected in futures prices) that crude oil prices would
fall. Oil companies hoped to rebuild inventories with lower-priced
crude oil in the future. In addition, many industries, including the
petroleum industry, have moved to just-in-time distribution techniques
in recent years in order to reduce ongoing inventory costs. Finally,
the Explorer Pipeline break and refinery production problems made it
difficult to rebuild inventories in advance of the summer driving
season. Further compounding the problem was the need to drain storage
tanks of the winter-grade formulation before switching to the summer-
grade formulation. As a result of these factors, low inventory levels
made it more difficult to respond to unexpected supply problems.
---------------------------------------------------------------------------
On the other hand, the industry as a whole made errors in supply
forecasts and underestimated the potential for supply shortages in the
Midwest in the spring and early summer of 2000. For instance, in
determining how they would comply with the stricter EPA regulations for
summer-grade RFG that took effect that spring, three Midwestern
refiners each independently concluded that it would be more profitable
to expend capital on refinery upgrades only to the extent necessary to
supply their branded gas stations and fulfill their contractual
obligations. As a result of these decisions, these three firms did not
have summer-grade RFG available to sell on the spot market, as they had
in prior years. When prices unexpectedly rose, these firms realized the
significance of the RFG shortfall in the Midwest. Each quickly
concluded that it made economic sense to ship extra product into the
area, and they juggled their output mixes at Gulf Coast refineries and
produced and shipped more RFG by barge into the Midwest. The
Commission's investigation did not unearth evidence of an agreement
among these firms.
Not every firm made the same misestimation regarding supply
shortages, however. One firm made a different decision in 1999 and
expended the capital necessary to increase its summer-grade RFG
production substantially. This firm, which had more abundant supplies
of RFG and had capacity available to produce even more RFG at the time
of the price spike, therefore faced very strong demand for its product.
Not surprisingly, this company decided to charge what the market would
bear and to release its inventory over time consistent with profit-
maximization. It was able to sell at higher prices while its
competitors scrambled to get more product into the market, and it
enjoyed higher profits for a limited period.
I reiterate that the Commission found no evidence that firms in the
industry agreed to limit supply into the Midwest in order to take
advantage of higher prices. Rather, once the extent of the supply
disruption became apparent, the firms moved more product from the Gulf
Coast into the Midwest, and prices dropped sharply.
Question 2. If oil companies have enough market power that they can
keep the price of oil high by withholding supplies from the market,
isn't that by definition an anti-competitive practice?
Answer. This question raises issues with implications beyond the
petroleum industry. An answer to this question requires consideration
of the reasons why certain business practices are deemed
anticompetitive. Congress decreed long ago that the nation's economy
would be largely free from government regulation and that the national
common market would be governed by the principles of competition.
Competitive market forces would best guarantee for consumers the
benefits of efficiency and innovation in the production and
distribution of goods and services. Nevertheless, because these
benefits will not be available if competitive markets are compromised
by restrictive business practices, certain practices are deemed
anticompetitive if they restrict output or raise prices.
The three primary areas of concern covered by the antitrust laws
are anticompetitive mergers, collusion among competitors, and
exclusionary or predatory practices by a firm with market power.
Mergers may be anticompetitive if they increase the merged firm's
potential to wield market power or increase the likelihood of
coordinated behavior among the firms remaining in the market.
Agreements among competitors to engage in conduct that leads to output
restrictions and increased prices also are anticompetitive and, indeed,
certain horizontal conduct, including naked price fixing, is considered
so pernicious that the law condemns it summarily.
Conduct by a single firm is anticompetitive only if the firm has
sufficient market share that its unilateral reduction in output would
be a substantial portion of the total market, and only if its decision
to restrict output cannot be counteracted relatively quickly by its
competitors or by new entrants. The Commission's long history of
investigating and studying the petroleum industry has shown that such
unilateral power is rare in petroleum markets. It should be noted that
anticompetitive unilateral conduct often closely resembles fair but
aggressive business behavior, and enforcement policy must distinguish
very carefully between them to avoid stifling commercial practices that
actually benefit consumers. If law enforcement policy were costless and
frictionless and enforcers were omniscient--which they are not--it
might be possible to differentiate every instance of anticompetitive
conduct from the type of aggressively procompetitive conduct that the
law encourages. In recognition of the imperfections in the law
enforcement system, antitrust enforcers are at great pains to avoid
taking enforcement actions that chill competitive unilateral conduct--
in other words, not to reduce incentives for firms, even firms with
large market shares, to compete vigorously in their markets.
According to the report on the FTC's Midwest Gasoline Price
Investigation, the firm that correctly anticipated the shortages of
summertime RFG ``found itself with considerable market power in the
short term.'' The firm exercised that power by refusing to release its
inventory all at once, which would have reduced the market price.
Instead, it chose to release inventory at a rate consistent with a
higher and more profitable price that it could temporarily obtain. This
higher price, however, could not be sustained for long, as buyers
turned to the firm's competitors that were rushing additional product
into the Midwest from the Gulf Coast. The antitrust laws do not condemn
this conduct as anticompetitive.
First, as I have noted, this temporary market situation stemmed
largely from unanticipated factors and was alleviated in only a few
weeks. Temporary market power occurs frequently because of supply
problems arising from (among other sources) natural disasters or
government-imposed environmental policies, because of sudden increases
in demand caused by changes in consumer taste, or because some firms
simply respond more quickly than their rivals to opportunities to enter
new or emerging markets.
Second, and more important, such an exercise of short-term market
power typically benefits rather than harms consumers overall. It is the
prospect of profits that provides the incentive for supply, capital,
and entrepreneurs to be attracted to markets in the first place. It is
unlikely that additional supplies from the Gulf Coast would have been
forthcoming so quickly absent the profit opportunity signaled by the
high prices in the Midwest. These short-term profit opportunities can
also have long-term consequences. The expansion of pipeline capacity to
bring refined product from the Gulf Coast into the Midwest was
doubtless driven by the potential profit opportunities to supply the
Midwest.\5\
---------------------------------------------------------------------------
\5\ See Bureau of Economics, Federal Trade Commission, The
Petroleum Industry: Mergers, Structural Change, and Antitrust
Enforcement 209 (discussing the Centennial Pipeline's entry into the
Midwest and the expansion of the Explorer Pipeline in that region),
available at http://www.ftc.gov/os/2004/08/
040813mergersinpetrolberpt.pdf.
---------------------------------------------------------------------------
As for the firm with the abundant inventory, to have a policy that
penalizes firms--particularly firms that ordinarily enjoy modest market
shares--if they exercise temporary market power would put at risk the
very forces that drive the competitive economy. If the antitrust laws
were to condemn the conduct at issue in the Midwest Gasoline situation,
it would perversely penalize the firm that more accurately anticipated
market conditions by refining more gasoline and building inventory
ahead of the market. Restraining firms' ability to reap the rewards of
better decision-making may leave even less supply of gasoline products
for consumers during future market dislocations. The opportunity to
profit by correctly anticipating market shifts--which may also involve
the possession of temporary market power--is part of the incentive that
drives supply into all markets, to the benefit of all consumers. Even
if this temporary market power is the result of unforeseen
circumstances, penalizing it may dull future incentives to enter the
market and may drive fungible capital into other markets, to the
detriment of gasoline consumers.
The Commission deeply appreciates the concern that you and your
colleagues have expressed about consumers in petroleum markets, and the
agency will steadfastly maintain its extensive efforts to promote
competition and protect consumers in those markets. If you or your
staff have any questions or comments, please feel free to call me or
have your staff call Anna Davis, the Director of our Office of
Congressional Relations, at (202) 326-2195.
______
Response to Written Questions Submitted by Hon. Ron Wyden to
Hon. Deborah Platt Majoras
Question 1. Please respond to the conclusions reached by the
Government Accountability Office (GAO) in its May 2004 report on Energy
Markets: Effects of Mergers and Market Concentration in the U.S.
Petroleum Industry (``GAO Report'') regarding the effects of certain
petroleum industry mergers on wholesale gasoline prices.
Answer. First, the GAO's econometric models do not properly control
for the numerous factors that cause gasoline prices to increase or
decrease. These omissions undermine the GAO Report's estimates of the
effects of concentration and mergers on wholesale gasoline prices.
Second, the GAO Report does not measure concentration in any
properly defined geographic market. If a merger impacts competition, it
does so in the particular geographic region in which the merging firms
compete. The GAO Report measures concentration for refinery capacity at
the PADD \1\ level when analyzing wholesale rack prices in the
corresponding PADD. The FTC staff's experience from decades of
assessing the competitive effects of mergers in the petroleum industry
is that PADDs generally do not correspond to properly defined
geographic markets for wholesale gasoline. GAO's failure to delineate a
properly defined geographic market calls into question the validity of
its conclusions about the effect of concentration and mergers on
wholesale gasoline prices.
---------------------------------------------------------------------------
\1\ ``PADD'' stands for ``Petroleum Administration for Defense
District.'' PADD I consists of the East Coast. PADD II consists of the
Midwest. PADD III includes the Gulf Coast. PADD IV consists of the
Rocky Mountain region. PADD V is made up of the West Coast plus Alaska
and Hawaii.
---------------------------------------------------------------------------
Third, by focusing exclusively on wholesale prices, the GAO Report
fails to address the effects of concentration and mergers on retail
gasoline prices. FTC staff's research indicates that wholesale price
effects are not necessarily indicative of retail price effects. Indeed,
rack wholesale gasoline prices and retail prices do not always move
together, in part because rack prices do not necessarily measure actual
wholesale transaction prices, which are also affected by discounts, and
in part because significant quantities of gasoline reach the pump
without going through wholesalers. The GAO's failure to assess the
effects of concentration and mergers on retail gasoline prices--that
is, the prices that ordinary consumers pay at the pump--further
undermines the credibility and importance of its findings.
The Commission, however, has never refused to acknowledge studies
that reach conclusions different from those drawn in our staff's own
analytical work. Instead, we analyze those studies and attempt to
discern the reasons for the differing conclusions. We adopt new
approaches and refine our work when we find new methodologies that
appear superior. Accordingly, we have spent additional significant
resources analyzing the GAO Report, in an effort to determine whether,
despite the already-identified significant deficiencies, it presents
any useful methodological advances in the analysis of petroleum mergers
and joint ventures.
In both our merger analyses and our evaluation of the GAO Report,
we look for the best way to use real-world data to gauge whether
gasoline prices rose after petroleum industry mergers--including after
FTC-required divestitures--from the levels that would have prevailed in
the absence of the mergers. It might appear easy to determine the
reasons for a gasoline price increase, but it is not. It is a very
difficult task, in large part because gasoline prices change
continually for numerous reasons. For example, during periods of
increased merger activity in the petroleum industry, gasoline prices
also were significantly affected by other important changes in gasoline
supply and demand conditions unrelated to mergers, such as fluctuations
in crude oil prices, variations among regions in access to refineries
and to petroleum product pipelines, the proliferation of ``boutique
fuel'' requirements in various states and localities, and differences
in state and local gasoline taxes.\2\ In light of the multiple causes
of gasoline price changes, economists use a variety of statistical
methods to try to isolate the price effects of mergers from the price
effects of contemporaneous changes in other factors that affect supply
and demand. It is necessary to conduct a considerable amount of
testing--typically involving alternative assumptions and statistical
methods--before we can have confidence in any particular estimate of a
merger's effect on gasoline prices.
---------------------------------------------------------------------------
\2\ See Federal Trade Commission, Gasoline Price Changes: The
Dynamic of Supply, Demand, and Competition (2005), available at http://
www.ftc.gov/reports/gasprices05/050705gaspricesrpt.pdf.
---------------------------------------------------------------------------
In recognition of these complexities, FTC staff has devoted a
substantial amount of time to comparing different approaches to
estimating the price effects of petroleum mergers, including those used
in the GAO Report and in their own studies. On January 14, 2005, the
FTC's Bureau of Economics sponsored a public conference featuring five
prominent economists who presented their views on the GAO Report and on
an FTC staff report about the Marathon-Ashland (``MAP'') joint
venture.\3\ The MAP Study and the GAO Report differed in their
econometric methodologies and in their conclusions regarding the price
effects of the MAP joint venture.\4\
---------------------------------------------------------------------------
\3\ Christopher T. Taylor and Daniel S. Hosken, Bureau of
Economics, Federal Trade Commission, The Economic Effects of the
Marathon-Ashland Joint Venture: The Importance of Industry Supply
Shocks and Vertical Market Structure (last revised May 7, 2004),
available at http://www.ftc.gov/be/workpapers/wp270.pdf (``MAP
Study'').
\4\ The MAP Study concluded that wholesale prices for conventional
gasoline did not increase after formation of the joint venture.
Wholesale prices for reformulated gasoline (``RFG'') did increase
approximately 18 months after the transaction, but the MAP Study
concluded that this increase was more likely attributable to changes in
required fuel specifications in the St. Louis, Missouri, area. The MAP
Study found no increases in retail prices attributable to the joint
venture.
The GAO Report, on the other hand, concluded that the MAP joint
venture led to wholesale price increases for both RFG and conventional
gasoline. The GAO Report did not analyze the effects of mergers or
joint ventures on retail prices.
---------------------------------------------------------------------------
The five experts invited to serve as panelists at this public
conference--all prominent in the fields of industrial organization or
applied econometrics--were Professor Jerry Hausman of the Massachusetts
Institute of Technology, Professor Dennis Carlton of the University of
Chicago, Professor Halbert White of the University of California at San
Diego, Professor Kenneth Hendricks of the University of Texas at
Austin, and Dr. Scott Thompson of the Antitrust Division of the U.S.
Department of Justice.\5\
---------------------------------------------------------------------------
\5\ Although GAO declined our invitation to participate formally in
the conference, GAO's then-chief economist was in the audience.
---------------------------------------------------------------------------
To assist these expert panelists, the FTC's Bureau of Economics
furnished them in advance with copies of the GAO Report, the FTC
staff's MAP Study, and a Technical Report prepared by FTC economists
that assessed the methodology and findings of the GAO Report.\6\ The
Technical Report began with the construction of a ``baseline model''
that represented FTC staff's effort to understand the assumptions,
methods, and analysis used in the GAO Report. A baseline model enables
a researcher systematically to vary initial assumptions and technical
procedures employed in a study in order to gauge the effect of such
variations on the study's results and conclusions. To construct the
baseline model for the Technical Report, the FTC staff needed to
understand the underlying assumptions of the GAO Report. To that end,
during the latter part of 2004, our economists had a series of helpful
exchanges with GAO economists to clarify technical issues that were not
transparent in the GAO Report. GAO economists answered our staffs
questions about their data and methodological decisions and provided us
with written documentation on certain issues, such as the identity of
wholesale terminals that they assumed were either affected or
unaffected by particular mergers.
---------------------------------------------------------------------------
\6\ FTC Staff Technical Report, Robustness of the Results in GAO's
2004 Report Concerning Price Effects of Mergers and Concentration
Changes in the Petroleum Industry (Dec. 21, 2004), available at http://
www.ftc.gov/ftc/workshops/oilmergers/ftcstafftechnicalreport122104.pdf.
---------------------------------------------------------------------------
Citing confidentiality restrictions and agency protocols, however,
GAO staff stated that they could not provide FTC staff with certain of
their data inputs and their statistical programming codes. In light of
GAO's inability to share with FTC staff the proprietary price data that
GAO used, our staff purchased the same data, with respect to RFG and
CARE gasoline, from the Oil Price Information Service.
FTC staffs Technical Report focused on GAO's analysis of the
effects of mergers on prices for RFG and for gasoline that meets the
criteria prescribed by the California Air Resources Board (``GARB
gasoline'')--two types of gasoline that GAO concluded were affected by
seven of the eight mergers that GAO analyzed. The Technical Report
sought to mimic the GAO's econometric analyses and to assess whether
the use of alternative methodologies, modified statistical techniques,
or additional real-world data would produce changes in the study's
findings and conclusions.
The introductory portion of the January 14, 2005, conference
outlined the major results of the GAO Report and the FTC staff's MAP
Study. A number of in-depth panel sessions followed, addressing topics
such as general econometric issues encountered in estimating the price
effects of petroleum industry mergers; technical issues encountered in
estimating the effects of market concentration on prices; issues
involved in the measurement of economic variables; the sensitivity of
econometric estimates to changes in underlying assumptions; and the
implications for merger policy of current learning regarding
consummated petroleum mergers.
The panelists generally agreed on a number of important points.\7\
First, they agreed that the need to control for the many nonmerger
developments that affect gasoline prices makes it difficult to estimate
reliably the price effects of petroleum mergers. Second, the panelists
agreed that there are many conceptual and statistical problems with
estimates of the effect of concentration on prices such as those
contained in the GAO Report, including the assumptions about relevant
markets that underlie GAO's concentration measurements.
---------------------------------------------------------------------------
\7\ There were also areas of disagreement among the panelists. For
example, they debated the relative advantages and disadvantages of an
econometric methodology--the ``treatments approach''--that differs
significantly from the approaches used by GAO and FTC researchers. In
addition, there were differing opinions as to the suitability of market
concentration measures in assessing the likely competitive effects of
proposed mergers.
---------------------------------------------------------------------------
Third, and significantly, the panelists agreed that the GAO Report
and the MAP Study, by themselves, did not provide a basis to modify
merger enforcement policy. The panelists cautioned against drawing
strong conclusions from these studies, in part because the studies came
to widely different conclusions about the price effects of particular
mergers. Not only did the GAO and FTC studies come to different
conclusions about the MAP joint venture, but the GAO Report's results
themselves were mixed. The GAO Report provided 28 statistical estimates
of the effects of eight mergers on wholesale prices of branded or
unbranded gasoline across three gasoline types or specifications:
conventional gasoline, RFG, and CARB gasoline. The GAO Report
associated a statistically significant price increase with a merger in
16 cases. In seven cases, however, the report found statistically
significant price decreases associated with mergers. No statistically
significant merger price effect was found in the five other cases.
Finally, the panelists agreed that further exploration of technical
issues raised by both the GAO Report and the MAP Study would be
beneficial. To this end, they urged consideration of new, alternative
methodologies and called for additional studies of consummated
mergers.\8\
---------------------------------------------------------------------------
\8\ In the panelists' view, there is likely to be more benefit to
public policy development in studying the effects of specific mergers
than in conducting more general studies of the relationship between
concentration and prices.
---------------------------------------------------------------------------
In the months following the January 14, 2005, conference, FTC staff
followed up on the panelists' recommendations and conducted further
analysis of the statistical and methodological approaches employed in
the GAO Report. Using the baseline model developed in their Technical
Report, FTC economists found additional indications that GAO
researchers' methodological approach and assumptions did not yield
reliable estimates of merger effects. In particular, the FTC staff
tested whether the use of varying assumptions caused the overall
results to change. Indeed, our staff found that when they allowed the
effects of variables used by GAO (such as capacity utilization and
inventory-to-demand ratios) to assume different values in the pre- and
post-merger periods, the estimates of the effects of some mergers
analyzed by GAO changed significantly. Another very serious deficiency
in GAO's methodology was identified when FTC staff applied the baseline
model--i.e., the model that represents GAO's own methodology--and found
significant merger-associated price increases at terminal rack
locations where (according to GAO's own researchers) only one or
neither of the merging parties supplied gasoline before the merger.
Clearly, any price increases at such locations in fact stemmed from
causes other than the merger, because the merging parties never
competed head-to-head there. Yet, GAO's flawed methodology found a
merger impact where there could not have been such an impact.
Our staff also has been working with Professor Halbert White (one
of the expert panelists at the January 14, 2005, conference) to develop
an alternative econometric methodology--the ``treatments approach''
referred to above--to assess the competitive effects of consummated
petroleum mergers. This methodology may provide more accurate estimates
of merger effects than the alternatives when data are imperfect and
when there are difficulties in specifying all variables that
significantly affect gasoline prices. We are continuing to study this
issue and to refine our approach, with the goal of making our merger
policies even more effective.
The FTC staff has taken a number of additional steps to follow up
on the January 14, 2005, conference's findings and recommendations.
First, the staff expanded its examination of the MAP joint venture to
cover all cities in which both Marathon and Ashland sold RFG prior to
the joint venture. The staff also increased the number of control
cities (i. e., comparison cities not affected by the formation of the
joint venture) to increase confidence in the model's conclusions. These
revisions, however, did not change the key finding of the original MAP
Study that no price increase was attributable to the formation of the
joint venture.
Second, the January 14, 2005, conference served as a springboard
for an FTC staff retrospective concerning MAP's 1999 acquisition of the
Michigan marketing assets of Ultramar Diamond Shamrock. In July 2005,
the FTC released the Bureau of Economics' study of this transaction,
finding no evidence that the transaction was associated with an
increase in retail gasoline prices.\9\
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\9\ John Simpson and Christopher T. Taylor, Bureau of Economics,
Federal Trade Commission, Michigan Gasoline Pricing and the Marathon
Ashland and Ultramar Diamond Shamrock Transaction (last revised July
27, 2005), available at http://www.ftc.gov/be/workpapers/wp278.pdf. The
GAO Report had concluded that the MAP/UDS merger led to higher
wholesale prices for gasoline.
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As I explained in my November 8 letter, the Commission is
conducting an investigation to determine whether the price of gasoline
is being manipulated, as directed by Section 1809 of the Energy Policy
Act of 2005.\10\ As part of this investigation, the agency is seeking
information from the petroleum industry concerning the possible effects
that industry mergers and joint ventures since 1997 may have had on
light petroleum product prices. As we examine past mergers and joint
ventures as part of our Section 1809 investigation, we will continue to
draw upon the learning stemming from last January's conference.
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\10\ The Commission also is conducting an investigation pursuant to
Section 632 of the Science, State, Justice, Commerce, and Related
Agencies Appropriations Act, 2006, Pub. L. No. 109-108, 119 Stat. 2290
(Nov. 22, 2005), that is focused on gasoline prices in the wake of
Hurricane Katrina.
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The FTC will steadfastly continue its extensive efforts to maintain
competition and protect consumers in petroleum markets.
Question 2. Please explain how ``the mergers the agency has
allowed'' have not harmed consumers and competition.
Answer. We are not aware of any conclusive evidence that recent oil
industry mergers have weakened competition or led to higher gasoline
prices. As discussed in detail in the enclosed August 2004 FTC staff
report entitled The Petroleum Industry: Mergers, Structural Change, and
Antitrust Enforcement, most sectors of the petroleum industry at the
national, regional, and state levels remain unconcentrated or
moderately concentrated, even though the industry has undergone
substantial restructuring and consolidation over the past 20 years.\1\
Throughout this petroleum industry consolidation, the Commission has
remained vigilant to protect against mergers and acquisitions that may
harm consumers and competition. In particular, since 1981, the FTC has
filed complaints against 19 large petroleum mergers. In 13 of these
cases, the FTC obtained significant divestitures in specific markets to
protect competition that otherwise may have been diminished by the
merger. Of the six other matters, the parties in four cases abandoned
the transactions altogether after the FTC's respective antitrust
challenges; one case resulted in a remedy requiring the acquiring firm
to provide the Commission with advance notice of its intent to acquire
or merge with another entity; and the sixth case was resolved with the
execution by the parties of a 20-year throughput agreement that will
preserve competition allegedly threatened by the acquisition.
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\1\ Recent industry consolidation and restructuring have been
accompanied by efficiency-enhancing trends toward greater economies of
scale at many levels in the petroleum industry. For example, average
refinery size has increased, refineries on average have become more
productive per unit of crude oil input, and many very small (and less
efficient) refineries have closed. Although the number of refineries
has fallen since the late 1990s, total industry capacity to produce
refined petroleum products has increased. Moreover, changes such as
improvements in supply management technologies have reduced the demand
for product terminal space, and have encouraged joint use of
underutilized facilities through product exchanges and joint ventures.
Brand-name companies and independent wholesalers alike have combined
operations to take advantage of scale economies in gasoline marketing.
In many cases, mergers and acquisitions (and the exit of some firms)
have facilitated the achievement of these greater economies of scale.
Other notable changes reflected in the recent restructuring of the
industry include increased gasoline sales through non-traditional
retail outlets, such as grocery stores and hypermarkets, and the rise
to national prominence of a number of substantial independent refiners.
All of these trends--from increased refinery efficiency to the
proliferation of new gasoline retailing formats--promise benefits to
consumers.
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Notably, under the especially strict approach that it has taken in
reviewing oil mergers, the Commission has obtained relief in markets at
lower concentration levels than in other industries. Data released last
year on all of the FTC's horizontal merger investigations and
enforcement actions from 1996 to 2003 show that the Commission has
brought more merger cases at lower levels of concentration in the
petroleum industry than in any other industry throughout the economy.
Mergers in moderately concentrated markets (with more competitors with
lower market shares) have generally led to fewer antitrust challenges
than mergers in highly concentrated markets (with fewer competitors and
higher market shares).\2\ The Commission has taken a more aggressive
enforcement stance in the petroleum industry, however, and has secured
relief in a number of oil merger matters involving markets that were
only moderately concentrated.\3\
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\2\ The Commission and the Department of Justice measure market
concentration by means of the Herfindahl-Hirschman Index (``HHI''),
which is calculated by summing the squares of the market shares of all
firms in the market. FTC and Department of Justice Horizontal Merger
Guidelines (``Merger Guidelines'') Sec. 1.5. Under the Merger
Guidelines, markets with HHIs between 1000 and 1800 are deemed
``moderately concentrated,'' while markets with HHIs exceeding 1800 are
deemed ``highly concentrated.'' Merger Guidelines Sec. 1.51.
\3\ FTC Horizontal Merger Investigation Data, Fiscal Years 1996-
2003 (Feb--2, 2004), Table 3.1 et seq., available at http://
www.ftc.gov/opa/2004/02/horizmerger.htm; FTC Horizontal Merger
Investigations Post Merger HHI and Change in HHI for Oil Markets,
Fiscal Years 1996-2003 (May 27, 2004), available at http://www.ftc.gov/
op a/2004/05/040527petrolactionsHHIdeltachart.pdf.
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As an example, in its review of the Exxon/Mobil merger--which was
coordinated with the European Commission, 13 states, and the District
of Columbia--the Commission identified potential competitive problems
in both moderately concentrated markets (gasoline refining and gasoline
marketing and retailing) and highly concentrated markets (e.g., jet
turbine oil).\4\ The consent order that the FTC issued in settlement of
this very intensive investigation required the respondents to sell or
assign more than 2,400 Exxon and Mobil gas stations, as well as an
Exxon refinery in California, terminals, a pipeline, and other assets.
The most significant portions of the consent order resolved problems in
moderately concentrated or highly concentrated markets involving
gasoline refining and marketing in California, and involving gasoline
marketing and retailing in many regions of the Northeast and Mid-
Atlantic and in parts of California and Texas. Based on potential
increases in concentration and other relevant market factors such as
entry conditions, the Commission required sweeping divestitures in all
of the many moderately concentrated markets involved, as well as in the
highly concentrated markets. Specifically, the Commission required the
respondents to divest company-owned retail outlets and to reassign
franchise and supply contracts, and gave acquirers the right to use the
Exxon or Mobil brand name for a limited period of time at the divested
retail outlets they acquired.
---------------------------------------------------------------------------
\4\ In the Matter of Exxon Corp., FTC Docket No. C-3907 (consent
order issued Jan. 26, 2001), available at http://www.ftc.gov/os/2001/
01/exxondo.pdf.
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Similarly, as a consequence of its investigation of the Chevron/
Texaco merger, the Commission issued a consent order in early 2002 that
went beyond providing relief in highly concentrated markets by
requiring divestitures in moderately concentrated gasoline markets.\5\
The complaint that accompanied the FTC's order alleged that competition
likely would be harmed in a number of relevant markets, including (1)
gasoline marketing in numerous metropolitan areas in the western and
southern United States; (2) the refining, bulk supply, and marketing of
California Air Resources Board gasoline in California; (3) the refining
and bulk supply of gasoline and jet fuel in the Pacific Northwest; and
(4) the pipeline transportation of crude oil and natural gas in various
geographic markets. To maintain competition, the Commission required
comprehensive divestitures and other relief. Twelve states assisted the
Commission in conducting the Chevron/Texaco investigation and
fashioning the consent order.
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\5\ In the Matter of Chevron Corp., FTC Docket No. C-4023 (consent
order issued Jan. 2, 2002), available at http://www.ftc.gov/os/2002/01/
chevronorder.pdf.
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As you noted, the GAO issued a report last year on its study of
eight petroleum industry mergers, including that agency's finding that
six of those transactions led to increased wholesale gasoline prices,
averaging about one to two cents per gallon.\6\ There are serious
questions, however, about GAO's methodology and the robustness of its
conclusions. Although I do not believe that the GAO report represents
conclusive evidence that oil mergers have led to higher prices--or, by
implication,,that the FTC has not done enough to protect the public
against anticompetitive oil mergers--we have taken the GAO report's
findings very seriously. In January 2005, our Bureau of Economics
sponsored a conference featuring five prominent expert economists, who
presented their views on the GAO report and on an FTC study of the
Marathon-Ashland joint venture, which used a methodology that differed
from GAO's and reached different conclusions from those of the GAO
report.\7\ As input into the conference, the Bureau of Economics also
prepared a technical report that pointedly questioned the GAO's
methodology and findings.\8\ The experts at the conference agreed on
the difficulties involved in properly identifying the price effects of
mergers in an econometric study. They also agreed that it would be
.premature to change merger enforcement policy based only on these two
studies. They recommended that additional merger studies be undertaken
and that various technical, statistical issues be explored further.
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\6\ GAO, Energy Markets: Effects of Mergers and Market
Concentration in the U.S. Petroleum Industry (GAO-04-96), available at
http://www.gao.gov/new.itemsld0496.pdf.
\7\ Christopher T. Taylor and Daniel S. Hosken, Bureau of
Economics, Federal Trade Commission, The Economic Effects of the
Marathon Ashland Joint Venture: The Importance of Industry Supply
Shocks and Vertical Market Structure (last revised May 7, 2004),
available at http://www.ftc.gov/be/workpapers/wp270.pdf.
\8\ FTC Staff Technical Report (Dec. 21, 2004), available at http:/
/www.ftc.gov/ftc/workshops/oilmergers/
ftcstafftechnicalreport122104.pdf.
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Since the conference, FTC economists have continued to follow up on
the recommendations of the expert panel. They have produced an
additional merger retrospective, which found no evidence of a merger-
related price increase in the Marathon-Ashland/Ultramar Diamond
Shamrock transaction.\9\ In considering the expert panel's technical
comments, FTC economists have also found new indications that GAO's
econometric methodology may not have properly identified merger
effects. Moreover, FTC economists have been working with one of the
expert panelists in developing an alternative--and potentially
superior--econometric methodology to assess the possible effects of
consummated mergers. I would also add that the Commission's ongoing
price manipulation investigation under Section 1809 of the Energy
Policy Act will include a fresh inquiry into whether past oil mergers
have had anticompetitive effects.
---------------------------------------------------------------------------
\9\ John Simpson and Christopher T. Taylor, Bureau of Economics,
Federal Trade Commission, Michigan Gasoline Pricing and the Marathon
Ashland and Ultramar Diamond Shamrock Transaction (last revised July
27, 2005), available at http://www.ftc.gov/be/workpapers/wp278.pdf.
---------------------------------------------------------------------------
As the Commission confirmed most recently in its September 21
testimony before the Senate Committee on Commerce, Science, and
Transportation and its September 22 testimony before the House Energy
and Commerce Subcommittee on Commerce, Trade, and Consumer Protection,
we continue to use all of our available tools to promote competition
and protect consumers in the petroleum industry, including careful
scrutiny of industry behavior to detect anticompetitive conduct,
effective challenges to mergers and practices that violate any laws
that the Commission enforces, and comprehensive research to understand
petroleum sector developments.\10\ Thus, for example, in June of this
year, the Commission announced settlements of three important petroleum
industry cases: its challenge to Chevron Corporation's proposed
acquisition of Unocal Corporation; its administrative litigation to
address allegations that a Unocal subsidiary violated the antitrust
laws by defrauding the California Air Resources Board in connection
with reformulated gasoline regulatory proceedings; and its challenge to
Valero's proposed acquisition of Kaneb Services LLC and Kaneb Pipe Line
Partners. In addition, the FTC filed a federal court complaint in July
2005 challenging a petroleum merger in Hawaii that allegedly would have
reduced the number of gasoline marketers and bulk suppliers in the
state and would have led to higher gasoline prices for Hawaii
consumers.\11\ I have enclosed copies of the Commission news releases
describing these cases for your review.
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\10\ I have enclosed copies of those Commission testimonies for
your review.
\11\ The Hawaii lawsuit was resolved with the execution of the 20-
year throughput agreement described on page 2 of this letter.
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Pursuant to the Commission's gasoline and diesel price monitoring
project, we continuously monitor price movements in 20 wholesale
regions and approximately 360 retail areas across the nation to
identify corporate conduct in petroleum markets that may violate the
antitrust laws. Our economists and attorneys scrutinize every unusual
price movement to ascertain whether it arises from conduct in violation
of the antitrust laws or instead stems from another cause, such as
pipeline disruptions, refinery production problems, low inventories,
transitions to new fuel requirements imposed by government air quality
standards, or some other supply-related problem. Although these
examinations by our staff to date have revealed market-related causes
for the unusual price movements detected before Hurricane Katrina, the
Commission will take swift and decisive action if our scrutiny of price
movements in the aftermath of Katrina or Rita--or at any other time--
reveals the use of illegal anticompetitive practices. Of course, a
possible link between any identified unlawful activity and recent
changes in market structure or any other structural factor would
receive close attention.
In addition, in response to Section 1809 of the Energy Policy Act
of 2005, the Commission has begun an investigation to determine whether
the price of gasoline is being artificially manipulated. This
investigation of course will include a review of possibly
anticompetitive behavior in the wake of Hurricanes Katrina and Rita.
The Commission's Bureau of Competition is conducting the investigation
in close consultation and cooperation with the Bureau of Economics, and
they will pursue the investigation, and the Commission will report to
Congress, as expeditiously as possible. As the FTC staff moves forward
with this investigation, it will be able to brief the appropriate
committees periodically about its progress. I expect the Commission's
report pursuant to Section 1809 to be completed in the spring of 2006.
The Commission investigation also will be informed by our extensive
previous investigations and research in the petroleum industry. In
particular, the Commission issued a report in early July--Gasoline
Price Changes: The Dynamic of Supply, Demand, and Competition--that
examines in detail numerous factors that produce fluctuations in
gasoline prices, including the cost of crude oil, increasing domestic
and international demand, and federal, state, and local regulations.
The report is based on research and on the expertise that the FTC has
acquired in investigating oil-related antitrust matters, holding public
hearings, undertaking empirical economic studies, and preparing
extensive reports on oil-related issues over the past 30 Years.\12\
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\12\ I have enclosed a copy of that report for your information. It
is also available at http://www.ftc.gov/opa/2005/07/gaspricefactor.htm.
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The Commission deeply appreciates your concern about consumers in
petroleum markets, and the agency will steadfastly maintain its
extensive efforts to promote competition and protect consumers in those
markets.
______
Response to Written Questions Submitted by Hon. Ted Stevens to
David J. O'Reilly
Question 1. Do you think given budget deficits and record profits
for oil companies that it is appropriate to divert tax benefits (from
LIFO accounting method) for large integrated oil companies such as
yours to pay for such a measure?
Answer. No. LIFO has been a generally accepted accounting method
for tax purposes since 1938 and all taxpayers with inventory have the
ability to use LIFO. Changing the rules for one industry on a one-time
basis is very poor tax policy. It has never been shown that the use of
LIFO generates an improper accounting of costs and income for the oil
and gas industry, and changing the rules would be contrary to the
requirement that taxpayers utilize consistent accounting methods to
account for income and expenses from year-to-year. Imposing such a
large economic penalty, which would particularly impact the refining
and marketing sector, would be counterproductive to fulfilling the
national energy policy objectives of increasing investments in
additional domestic production and refining capacity.
Question 1a. Does this seem like an equitable approach given that
the high cost of oil enable you to not only bank large profits, but
also to use accounting methods to substantially reduce taxes? Is it
fair to report less taxes when you're profiting the most?
Answer. It is very poor public policy to deny the oil and gas
industry the ability to continue to use an accounting method which is
available to other industries. LIFO is a well-established accounting
practice that is applied for all taxpayers with inventories. Over the
long-term, LIFO does not overstate or understate taxes. Over the past 7
decades, the LIFO method of accounting has been demonstrated to show an
appropriate matching of revenues and expenses. It is inconsistent with
sound tax policy and accounting practice to change the use of these
well-established principles at a particular moment for a select
industry to secure additional revenues. Further, as this accounting
change would impact principally the integrated refining and marketing
segment of the industry and is discriminatory, it further distorts the
competitive playing field even within the energy industry. It is
counterproductive to impose a higher tax burden on an industry, and an
industry segment, where shortages are occurring when additional
investments by that very industry and industry segment are needed to
alleviate the shortages. Using the tax law to impose such a penalty
would act as a large economic disincentive for investment to integrated
refiners and marketers in an environment when the national policy and
focus has been on trying to increase domestic refining capacity and
refined product supplies.
Question 2. I realize that you reinvest some of these profits in
exploration for more product. In each quarter, have you reinvested the
same percentage of the profits to reinvestment? What have your
reinvestment percentages been to your total profits? Do they vary from
quarter to quarter or year to year?
Answer. Chevron is investing aggressively in energy development
including oil and gas exploration, production, transportation,
refining, marketing, and development of alternatives. Since 2002 and
through the first 9 months of 2005, Chevron has invested more than we
earned--$32 billion in capital expenditures worldwide compared with
$31.6 billion in earnings. During this period, on average, roughly 75
percent of our annual capital program has been invested in the upstream
sector (oil and gas production) and roughly 17 percent in the
downstream (refining and marketing). The remainder goes to chemicals,
technology, power and other.
We do not believe quarter by quarter comparisons, or even single
year by single year comparisons, of capital spending versus earnings is
particularly meaningful information. But, multi-year data is
meaningful, as provided above. Our capital expenditures are planned
often years in advance and are based on investment opportunities
available. Our major capital projects require sustained spending
commitments over multiple years for the new energy capacity to be
installed. Thus, we maintain high levels of spending even during
periods of depressed earnings.
Question 3. To what non-profit organizations and academic research
that address global climate change does your company donate financial
support to and how much do you donate each year?
Answer. Chevron contributes to the funding of academic research
programs on climate science, engineering, and economics policy research
at the Massachusetts Institute of Technology (MIT) Joint Program on the
Science and Policy of Global Change, MIT Carbon Sequestration
Initiative, and the International Energy Agency's Greenhouse Gas R&D
Programme for a total of approximately $165,000 annually. In addition,
Chevron also provides approximately $25,000 annually to the non-profit
organization Resources for the Future which conducts independent
research on environmental and energy issues. Climate change is
addressed as part of their research portfolio
Question 4. Your industry has taken the position in its SEC filings
and at yesterday's hearing that the escalation of its fuel prices is
the result of increases in crude oil process. However, if your retail
gas prices were raised simply to cover your increased costs in
purchasing crude oil, your net profits would remain the same. Everyone
knows this is not happening. Can you identify for this committee the
reason that the rise in gasoline prices is far out-pacing the rise in
crude oil prices?
Answer. Crude oil and gasoline markets are different markets. While
increases in gasoline prices have generally followed increases in crude
oil prices over time, the hurricanes impacted the markets differently.
Crude prices are driven by overall product demand, the available crude
supplies, and the available refining capacity to convert the crude to
products. Crude supplies were impacted by the hurricane, but the
release from the SPR helped alleviate this constraint.
Gasoline prices are determined by supply, demand, and other
competitive factors in the marketplace for products. Following the
hurricanes, demand for refined products remained relatively unchanged,
but because roughly one fourth of U.S. refining capacity was shut down,
there was less available supply of products until those refineries
could restart. This temporarily reduced demand for crude oil and
lessened price pressures for that commodity. The U.S. gasoline market,
however, remained short relative to demand, resulting in temporarily
higher prices. Higher prices attracted product imports from around the
world. Gasoline prices have now fallen to pre-hurricane levels, as
refinery production is being restored and as additional product was
imported into the United States.
A significant majority of Chevron's profits come from the
exploration and production of crude oil throughout the world. Chevron's
profits from its U.S. refining and marketing operations are actually
below those for 2004 for the first nine months of the year--partially
due the effects of the hurricanes.
Question 4a. Even though crude oil prices have risen this year,
your companies aren't actually incurring those costs, are they? Isn't
the gasoline and heating oil that your firms are currently selling on
the market actually being produced from inventories that your companies
purchased when the price of crude oil was much lower?
Answer. Yes, we are incurring these costs. Crude oil and petroleum
product inventories turn over very quickly, since refineries typically
have only a few weeks of inventory of crude supplies. More
significantly, prices for crude oil and refined products are set by the
marketplace responding to supply and demand. While increases in
gasoline prices have generally followed increases in crude oil prices
over time, the hurricanes impacted the markets differently as indicated
in the response to the previous question.
Question 4b. If you're producing oil from crude that you bought at
$40 per barrel, but selling it at a price that is purportedly based
upon a $70 per barrel cost to you, wouldn't that account for the 90%
increase in profits we've seen?
Answer. Chevron's worldwide profits for the first nine months of
2005 were up about 12% over those for 2004. The vast majority of those
profits were from Chevron's worldwide crude oil exploration and
production operations. Chevron's profits from its U.S. refining and
marketing operations for the first nine months of 2005 were lower than
for last year--largely due to the effects of the hurricanes.
Question 5. I have alluded to the vital role petroleum plays in our
economy and society, from the price of bread to the price of a plane
ticket to the price of heating one's home. While you're obviously in
the business for profit, there are other sectors of the economy where
we put a limit on selling commodities at unconscionable prices. How
much more of a toll do these fuel prices have to take on our society
before Congress steps in and places similarly appropriate regulations
on your industry?
Answer. The oil and gas industry in the United States is very
competitive, and on a comparable basis, oil and company profits,
including Chevron's, as a percentage of sales revenue are in line or
less than many other industry and business sectors. Further, U.S.
retail gasoline and diesel prices are extremely competitive compared to
most other developed countries, or when compared to historical U.S.
energy prices adjusted for inflation. Additional detailed comparative
information can be supplied either by the American Petroleum Institute
or the U.S. Department of Energy on these factors.
Price controls or other actions to regulate energy prices would be
very poor public policy, and as we have seen from history, are likely
exacerbate the current supply and price situation. Chevron is investing
aggressively to increase reliable supplies of energy, including
investments in oil and gas exploration, production, transportation,
refining, marketing, and development of alternatives. Please refer to
Chevron's written testimony about what Chevron is doing to help meet
America's energy needs. Chevron makes a number of policy
recommendations for the Role of the U.S. Government, and in Attachment
C: Global Energy Equation and U.S. Energy Policy: A Declaration of
Interdependence, to promote investment that would help ensure more
reliable and affordable supplies of energy.
Question 5a. Many consumers would say that raising the price of gas
by $2 per gallon over the past 2 years,\1\ while reaping over $25
billion in profits is price gouging. Many lawmakers would agree. What
do you say to them?
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\1\ Dec. 2003 price per gallon on East Coast was $1.30; in August
2005 it was $3.25
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Answer. The oil and gas industry in the United States is very
competitive, and on a comparable basis, oil and company profits,
including Chevron's, as a percentage of sales revenue are in line or
less than many other industry and business sectors. Gasoline prices are
determined by supply and demand, and in times such as those that
followed the recent hurricanes, supply is disrupted and that puts
upward pressure on prices. Prices have now fallen as refineries damaged
in the hurricanes have come back on line and there is more supply in
the market. Further, demand has tapered off somewhat, and that puts
downward pressure on gasoline prices. Attached below from Chevron's
written testimony (Attachment B) \2\ are regular gasoline prices by
region, both prior to, and after the hurricanes occurred.
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\2\ Retained in Committee files.
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______
Response to Written Questions Submitted by Hon. Pete V. Domenici to
David J. O'Reilly
Question 1. What are you doing to bring oil prices down?
Answer. Crude oil is priced in a global market that has been
impacted by a combination of rising oil demand and tightening supply.
Increases in the price of oil largely can be attributed to a surge in
global demand, particularly in China, developing Asia and the United
States, and resulting in less spare production capacity among other
factors. The hurricanes in the U.S. Gulf Coast further magnified the
tightness in oil markets by shutting in nearly one quarter of domestic
refining capacity and roughly one third of domestic oil production.
Price volatility is oftentimes a result of rapid changes in supply,
demand, and other competitive and geopolitical factors in the
marketplace. Nonetheless; Chevron is investing aggressively to increase
reliable supplies of energy, including investments in oil and gas
exploration, production, transportation, refining, marketing, and
development of alternatives. Since 2002, Chevron has invested $32
billion in capital expenditures worldwide--more than it earned over
this same period. This year alone, Chevron's 2005 capital investment
program for the nine month period ending September 30, 2005 totaled
$7.1 billion--a 26 percent increase over spending for the same period
last year.
In our written testimony, Chevron makes a number of policy
recommendations for the Role of the U.S. Government, and in Attachment
C: Global Energy Equation, and U.S. Energy Policy: A Declaration of
Interdependence, to promote investment that would help ensure more
reliable and affordable supplies of energy.
Question 2. What is the relationship between the price of oil that
Americans are paying and the profits you are making?
Answer. Oil is a globally traded commodity and its pricing is a
reflection of the interplay between supply and demand, as well as other
competitive and geopolitical forces. Current high crude oil prices
reflect a changing of the balance between world supply and rising
demand, and when that demand/supply relationship is disrupted by events
such as a hurricane, which causes lost production, then prices can
increase until additional supplies can be brought back in line to meet
demand.
The oil and gas industry is one of the world's largest, so its
revenues are large. But so are its costs, both for finding and
producing crude oil and gas from all over the globe, and refining crude
oil into gasoline and other refined products. As the demand for crude
oil increases, it is becoming harder and more costly to replace the
depleting resource base. The industry is continuing to explore for and
produce from more challenging--and more costly--locations in order to
satisfy this growing demand. These new potential sources of energy
supplies (such as in the deepwater, Arctic or tapping into
unconventional resource bases) are more expensive to bring to market.
They require higher investments, and the higher revenues the industry
is now seeing will enable the investments needed to bring these new
energy supplies to market.
That said, the oil and gas industry in the United States is also
very competitive. On a comparable basis, oil and gas company profits as
a percentage of sales are in line with or less than many other industry
and business sectors. Further, U.S. retail gasoline and diesel prices
are extremely competitive compared to most other developed countries,
or when compared to historical U.S. energy prices adjusted for
inflation. Additional detailed comparative information can be supplied
either by the American Petroleum Institute or the U.S. Department of
Energy on these factors.
Question 3. The question I hear most from people is how is the
price of oil is set? Many Americans think oil companies are rigging
prices to reap big profits. How would you respond to that?
Answer. Oil is a globally traded commodity and its pricing is a
reflection of the interplay between supply and demand, as well as other
competitive and geopolitical forces. As noted above, the oil and gas
industry in the United States is very competitive, and on a comparable
basis, oil and gas company profits as a percentage of sales are in line
with or less than many other industry and business sectors. There are
many thousands of participants in the oil markets as buyers and
sellers, and therefore the notion that any company could actually
``rig'' crude prices in an industry this competitive is not plausible.
Chevron's percentage of global oil and gas production is approximately
2%.
Question 4. Americans are being burdened with high oil, natural
gas, and gasoline prices while you all are raking in record profits.
What do you say to those people that blame you for this and say that it
is unfair?
Answer. Chevron understands its important role in providing energy
to American consumers. The price of oil is a globally traded commodity
and its pricing is a reflection of the interplay between supply and
demand, as well as other competitive and geopolitical forces. Current
high prices reflect a changing of the balance between world supply and
rising demand, and when that demand/supply relationship is disrupted by
events such as a hurricane, which causes lost production, then prices
can rise until additional supplies can be brought back in line to meet
demand.
The oil and gas industry is one of the world's largest, so its
revenues are large. But so are its costs, both for finding and
producing crude oil and gas from all over the globe and refining crude
oil into gasoline and other refined products. As noted above, higher
revenues being generated today in the energy industry will enable the
investments needed over coming years to bring new--and more costly--
energy supplies to market.
The United States has historically enjoyed some of the lowest
energy costs of most developed nations. However domestic supplies have
declined, while demand both in the United States and elsewhere around
the world continues to increase. In addition, U.S. policy choices have
hindered development of additional supplies. In our written testimony,
Chevron makes a number of policy recommendations for the Role of the
U.S. Government, and in Attachment C: Global Energy Equation, and U.S.
Energy Policy: A Declaration of Interdependence, to promote investment
that would help ensure more reliable and affordable supplies of energy.
Question 5. Americans want to know if it is not costing so much
more to produce a barrel of oil, why are prices rising so high?
Answer. Crude oil is priced in a global market that has been
impacted by the combination of rising oil demand and tight supply. As
in any other industry or market (real estate, clothing food,
electronics, etc.), prices are set by supply, demand and other
competitive and geopolitical factors in the marketplace. While the cost
of producing oil has increased over the past few years, the rise in oil
price has been driven more by a surge in the rate of oil demand growth,
particularly in China and developing Asia, and the United States and
resulting in less spare production capacity across the oil supply chain
and the global refining system. Adding new increments of production
capacity is increasingly complex and expensive, and often takes
multiple years to achieve. The hurricanes in the U.S. Gulf Coast
further magnified the tightness in oil markets by shutting in nearly
one quarter of domestic refining capacity and roughly one third of
domestic oil production.
Question 6. What is your company's response to proposals for
enactment of a Windfall Profits Tax?
Answer. Chevron opposes a windfall profits tax. Oil and gas
industry profits are not excessive compared to other industries.
Imposing such a punitive tax would discourage long-term investment in
the very sector where tightness of supply currently exists and thereby
exacerbate the conditions presently contributing to higher prices. The
oil and gas industry operates in a highly cyclical and capital
intensive, high risk business, where large investments are needed for
continued exploration and production. A windfall profits tax would
create a disincentive at the very time America needs more investment in
energy production and refining capacity. Moreover, as previously
reported by the Congressional Research Service, the 1980 windfall
profits tax reduced domestic oil production and increased reliance on
annual oil imports, thereby adversely affecting America's energy
security. Such a significant change in U.S. tax law would also send the
signal for other governments to change tax regimes in their own
countries. This would discourage energy investment globally, and would
not lead to additional energy supplies.
Question 7. Do you believe that Americans are dangerously dependent
on oil and its refined products?
Answer. Globally, energy markets for oil, natural gas, and refined
products are becoming more interdependent, which has ramifications for
America's energy policy. Please refer to Chevron's written testimony
about what Chevron is doing to help meet America's energy needs, for
the Role of the U.S. Government, and Attachment C: Global Energy
Equation, and U.S. Energy Policy: A Declaration of Interdependence.
Question 8. The International Energy Agency's recent Global Outlook
report expresses concern about world energy supplies and reliance on
the Middle East for oil. Do you think the IEA's anxiety is justified?
Answer. The Middle East will continue to be important from an
energy perspective, since roughly two thirds of the global oil and gas
reserves are located there. As noted in Chevron's written testimony,
over the last several years, there has been a significant shift in the
relationship between oil and gas supply and demand globally, and
markets are becoming more interdependent, which has ramifications for
America's energy policy. Per the answer above, please refer to specific
sections of Chevron's written testimony.
______
Response to Written Questions Submitted by Hon. Lisa Murkowski to
David J. O'Reilly
Question. First, thank you for being willing in your written
testimony to support oil exploration and development in the Arctic
coastal plain. If the coastal plain, including the Native-owned lands
are opened by Congress this year, how quickly do you believe industry
will attempt to explore in the area and what is your view as to how
long it might take for the area to produce oil? Does your company have
any interest in actually engaging in exploration or oil production
operations in Alaska given current events?
Answer. If the ANWR coastal plain is opened by Congress this year,
a date would presumably be set for a lease sale which would give
industry time to collect seismic data and evaluate the value of
acreage. It is likely that seismic data acquisition could begin within
12-18 months; exploration drilling could commence 12-24 months after
the first lease sale; and production could begin as early as five years
after exploration drilling starts, depending on permits for pipelines.
Chevron continues to strongly support opening the ANWR coastal plain
for environmentally responsible oil and gas exploration and
development, and our long-term interest in ANWR is demonstrated by the
maintenance of our 92,000 acre lease position on the coastal plain.
______
Response to Written Questions Submitted by Hon. James M. Talent to
David J. O'Reilly
Question 1. The recent hurricanes have highlighted the need for
increasing refinery capacity, which was already operating at a tight
margin of 97 percent. While that is laudable for efficiency purposes,
it allows no room for error in case of sudden outages or demand
increases. What is the optimal amount of spare refining capacity to
ensure a reliable supply of finished petroleum products at stable
prices?
Answer. The refined product markets are large, global and flexible,
with product imports being an economic component of meeting total U.S.
product demand. In fact, the United States has routinely imported
petroleum products since the end of World War II. While the recent high
crude utilization rates may seem to leave no room for sudden outages,
our refineries have been able to meet customer demands by maintaining
the appropriate inventories and acquiring product from our system or
from other suppliers. As noted in our testimony, Chevron is investing
to increase refining capacity in the United States through our existing
refining network. Further, Chevron recommended a number of policy
changes that the U.S. government can implement to create a better
climate for refinery investment, which are highlighted in our written
testimony.
Question 2. How has industry consolidation impacted the amount of
spare production and refining capacity?
Answer. Domestic refining capacity has continued to grow over time,
even as the number of operating refineries has declined. EIA data show
that since 1950, while the number of refineries has decreased from over
300 to about 150 today, the U.S. refining capacity has more than
doubled, from roughly 7 million barrels per day to almost 17 million
barrels per day. We do not believe that industry consolidation has
impacted refining capacity. There are other reasons why some refineries
have closed, such as the economics related size and efficiency, and
investments needed for environmental and other compliance requirements
and fuel reformulations.
With respect to oil and gas production, Chevron does not know how
industry consolidation has impacted production capacity, if it has at
all. In many cases, consolidation has led to property sales to
independent E&P companies, who continue to operate those fields. For
Chevron, consolidation has focused on improving efficiencies and
reducing operating expenses. These efficiency gains have provided
sufficient incentive to move ahead with production enhancement projects
which were previously marginal.
Question 3. Describe the degree of competition between refineries
for crude oil supplies and sales to retailers. What percentage of crude
oil processed in the U.S. is processed by integrated companies (i.e.,
those produce and refine) versus refined by independent refining
companies?
Answer. Chevron faces significant competition from U.S. refining
and marketing companies for crude oil supply and sales to retailers.
The Federal Trade Commission (FTC) concluded in its 2004 report The
Petroleum Industry: Mergers, Structural Change and Enforcement that
despite substantial industry restructuring and consolidation, ``most
sectors of the petroleum industry at the national, regional, or state
level generally remain unconcentrated or moderately concentrated.''
Total U.S. refining capacity is approximately 16.8 million barrels
per day. Overall, integrated oil companies provide just over half of
the capacity with independent refining companies making up the balance.
By comparison, Chevron's share of U.S. refining capacity today is
approximately 5.5%, while the largest U.S. refiner is an independent
refiner with approximately 13.5% of U.S. refining capacity (Valero).
Question 4. How has the amount of refining capacity tracked changes
in demand for gasoline and diesel over the last 30 years?
Answer. Product demand in the United States has grown at a pace of
1-2% per year over this period. As noted in Chevron's written testimony
(see Attachment D), * U.S. refining capacity has grown at nearly the
same rate through modification and expansion of existing refineries. As
noted on that chart, the percentage of refining capacity being operated
has generally been increasing over the last two decades. There have
been no new refineries constructed in the United States during that
time.
* The information referred to has been retained in Committee files.
---------------------------------------------------------------------------
Question 5. Explain to me your company's plan to increase refining
capacity in the U.S. to meet the need for new refinery capability.
Answer. We are always evaluating opportunities to expand our
capacity where demand warrants and it is economic to do so. As noted in
Chevron's written testimony, Chevron is making investments to improve
reliability and increase production capacity at our refineries in
Richmond and El Segundo, CA, and Pascagoula, MS. Chevron has expanded
capacity over the past ten years and has plans to continue to do so in
the future.
Question 6. EPAct 2005 removed the requirement to include
oxygenates from gasoline, largely because of concerns over the use of
MTBE. What is the impact on the price of removing oxygenates from
gasoline?
Answer. There is no way to predict the impact of MTBE reduction on
the market as other factors of supply and demand come into play.
Unfortunately, the 2005 Energy Bill actually did little to directly
address MTBE use. Prior Congressional action effectively required the
use of MTBE, yet Congress has not passed new legislation protecting the
industry from defective product claims advanced by the plaintiffs'
trial bar. Oxygenates are useful in meeting the specifications for
reformulated gasoline and for extending volume. When oxygenates are
removed from gasoline, other hydrocarbon components can be used to make
up part or all of the lost volumes. Nor is there reason to believe that
all oxygenates will be dropped from gasoline because of the EPAct 2005
changes; ethanol use is likely to rise. And, finally, many other market
conditions enter into the supply/demand equation which ultimately
determines price. Chevron has already eliminated MTBE use in many
places where Chevron refines and markets gasoline.
Question 7. Are there other oxygenates that can be used in place of
MTBE, such as using ethanol to make ETBE, and how does the cost of such
alternative additives compare to the cost of gasoline?
Answer. Ethanol can be used to replace MTBE to some degree and
under some circumstances. However, it should not be viewed as a direct
gallon-for-gallon replacement since its physical characteristics differ
from those of MTBE in several important respects. Averaged over the
long run, ethanol and MTBE have both been more expensive than wholesale
gasoline. Ethanol has remained competitive with MTBE only because its
cost is subsidized by the Federal Government. Chevron has no plans to
make ETBE, which has many of the same physical characteristics as MTBE.
Question 8. Have you studied the use of ETBE, the cost of
converting MTBE plants and how long it would take to do so, and whether
ETBE avoids the leakage/water contamination problems that were caused
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE
and use it to increase the volume of gasoline produced by a barrel of
oil compare to the cost of expanding existing or adding new refinery
capability?
Answer. Chevron has studied the use of ETBE, including the cost of
converting MTBE plants, but has decided against using it in Chevron
gasolines. ETBE has many of the same physical characteristics as MTBE.
Question 9. What, if anything, is preventing your company from
using ETBE in place of MTBE?
Answer. As noted above, Chevron has decided against using ETBE in
the gasolines it manufactures.
______
Response to Written Questions Submitted by Hon. Gordon H. Smith to
David J. O'Reilly
Question 1. I have a bill, S. 1743, to give the Federal Trade
Commission, additional authority to prevent and punish price gouging in
the aftermath of a major disaster. My bill provides effective authority
to the Federal Trade Commission to protect consumers from being
victimized in the wake of a disaster without hampering the normal
functioning of the free market. It even recognizes that there are
legitimate reasons why prices may increase. Do you think that this
consumer protection authority should be available to the FTC?
Answer. Chevron has indicated its support for the Barton bill which
contains price gouging provisions among other important energy policy
provisions including fuel waivers during emergencies, boutique fuels,
and permit streamlining, among other issues. However, Chevron agrees
with the FTC that ``price gouging'' legislation is likely to do
consumers more harm than good. As noted in the prepared statement
presented by FTC Chairman Deborah Platt Majoras on November 9, 2005 to
the Senate Committees on Energy and Natural Resources and Commerce,
Science, and Transportation.
``Experience from the 1970's shows that price controls
produced longer lines at the pump--and prolonged the gasoline
crisis. While no consumer likes price increases, in fact, price
increases lower demand and help make the shortage shorter-lived
than it otherwise would have been.
``Prices play a critical role in our economy: they signal
producers to increase or decrease supply, and they also signal
consumers to increase or decrease demand. In a period of
shortage--particularly with a product like gasoline, that can
be sold in many markets around the world--higher prices create
incentives for suppliers to send more product into the market,
while also creating incentives for consumers to use less of the
product. For instance, sharp increases in the price of gasoline
can help curtail the panic buying and `topping off' practices
that cause retailers to run out of gasoline. In addition,
higher gasoline prices in the United States have resulted in
the shipment of substantial additional supplies of European
gasoline to the United States. If price gouging laws distort
these natural market signals, markets may not function well and
consumers will be worse off. Thus, under these circumstances,
sound economic principles and jurisprudence suggest a seller's
independent decision to increase price is--and should be--
outside the purview of the law.''
Question 1a. Would this serve as a deterrent to price gouging by
individual retailers?
Answer. Any beneficial deterrent effect of price gouging
legislation would be more than offset by the detrimental effects
discussed above.
Question 2. Can you tell me why diesel prices continue to remain
significantly higher than gasoline prices in Oregon?
Answer. Transportation fuel prices are determined by supply, demand
and other competitive factors in the marketplace. Demand for diesel
products has been increasing in both the U.S. and Europe, and is
expected to continue increasing as we enter the winter season. The
recent impact of hurricanes significantly affected both U.S. gasoline
and diesel supplies because of refinery outages. The market works in a
way that supplies move to the highest demand. Because of higher demand
for diesel than gasoline, notably in the European Union, the United
States ended up attracting less diesel imports which have led to
continuing higher prices for diesel in Oregon and the rest of the
country.
______
Response to Written Questions Submitted by Hon. Jim Bunning to
David J. O'Reilly
Question 1. Some analysts believe that OPEC is approaching its
current oil production capacity. Given this, are oil companies looking
at alternative sources of energy, such as liquid fuels made from coal,
in order to expand their business and maintain energy supplies for the
United States? Please include a review of the level of investment your
company is making this year and the projected investment over the next
three years in coal to liquid fuels initiatives.
Answer. Chevron is established as one of the world's premier
producers and refiners of heavy hydrocarbons. Fundamental to our
success is a complete suite of advanced research, engineering, and
operational capabilities to produce clean transportation fuels and
products from the increasing supply of challenged resources such as
extra-heavy oil, bitumen, tar, coal, and shale oils. Components of our
heavy oil processing technology have been made available to other
refiners in the U.S. and around the world through technology licensing
agreements.
For several decades, Chevron has sustained investments in the full
technology pipeline from basic R&D in catalytic chemistry through the
deployment of world-scale processing facilities. For the past few
years, we have been significantly expanding our core R&D programs in
heavy hydrocarbon conversion technology to meet the challenge of
producing advanced fuels from these very large, but technically and
economically difficult resource bases. Our R&D expenditures in heavy
hydrocarbon conversion technology for 2005 will be an estimated $50
million. We will continue to invest in R&D expenditures in subsequent
years.
Question 2. I have been concerned with the lag time between the
wholesale cost of a barrel of oil and the retail price of a gallon of
gasoline. As we saw following the hurricane, in an ascending market
where wholesale oil prices increase, there is a lag period of a few
days before retail gas prices reflect this change. Similarly one would
expect a lag in a descending market. My concern is that retail prices
are not dropping as quickly as they rose, relative to the change in oil
prices. Could you explain why price movements vary during a complete
market cycle and whether you believe any part of the energy industry is
unfairly profiting from this price lag?
Answer. Crude oil and gasoline markets are different markets. While
increases in gasoline prices have generally followed increases in crude
oil prices over time, the hurricanes impacted the markets differently.
Crude prices are primarily driven by overall product demand, the
available crude supplies, and the available refining capacity to
convert the crude to products. Crude supplies were impacted by the
hurricane, but the release from the Strategic Petroleum Reserve helped
alleviate this constraint.
Gasoline prices are determined by supply, demand, and other
competitive factors in the marketplace for products. Following the
hurricanes, demand for refined products remained relatively unchanged,
but because roughly one-fourth of U.S. refining capacity was shut down,
there was less available supply of products until those refineries
could restart. This temporarily reduced demand for crude oil and
lessened price pressures for that commodity. The U.S. gasoline market,
however, remained short relative to demand, resulting in temporarily
higher prices. Higher prices attracted product imports from around the
world. Gasoline prices have now fallen to pre-hurricane levels, as
refinery production is being restored and as additional product was
imported into the United States.
Question 3. Boosting our domestic energy production is vitally
important not only to our economy but also to our national security.
Many of the countries we import oil from today are unstable,
jeopardizing the reliability of sustained production. Please provide a
chart for each of the last five years reflecting the percentage of your
exploration and production budget that invested in the United States
versus that invested overseas. Please also provide a chart reflecting
your current projections of the percentage of your exploration and
production budgets that will be allocated to projects in the United
States versus overseas for the next five years.
Answer. Since 2002, Chevron has invested $32 billion in total
capital expenditures worldwide. This year alone, Chevron's 2005 capital
investment program for the nine month period ending September 30, 2005
totaled $7.1 billion--a 26 percent increase over spending for the same
period last year. Chevron does not disclose capital programs beyond the
current year.
Question 4. The disruption caused by the recent hurricanes
displayed the United States' vulnerability when it comes to domestic
energy supply and production. What suggestions do you have to
strengthen our energy supply and production capability?
Answer. Chevron encourages the opening of federal and state lands
and waters that are currently off limits to oil and gas exploration and
production. These include the eastern Gulf of Mexico, the Atlantic and
Pacific coasts, ANWR, and onshore locations across the United States.
These areas can be developed with minimal environmental impacts, and
the government has significant environmental safeguards currently in
place. In addition, streamlined permitting of liquefied natural gas
terminals in the U.S. will speed increases in the diversity of the U.S.
energy supply.
Question 5. It has been suggested that the United States consider
developing a strategic gasoline and natural gas reserve, similar to
Strategic Petroleum Reserve we currently have. Some analysts suggest
that such reserves may minimize price spikes in these commodities
during periods of market supply disruptions. What are your views on
whether a strategic natural gas or gasoline reserve would be feasible
and whether they might help minimize price increases during periods of
market uncertainty?
Answer. Chevron does not believe that establishing gasoline or
other refined product reserves would ensure stability of price and
supply. There would be costs and logistical challenges for establishing
and maintaining such reserves and could result in unintended
consequences, such as raising the cost of gasoline or jet fuel. These
challenges include determining when and where to store products,
dealing with a number of fuel specifications, and the need to rotate
storage of products to prevent them becoming stale, among other issues.
Chevron believes a comprehensive national energy policy that addresses
both supply and demand would have a more significant impact on market
stability.
Chevron believes that additional natural gas storage is being
developed today and that market forces are the most efficient means for
adding new storage. However, Chevron could support studying the
establishment of a U.S. natural gas reserve. Such a review would need
to assess fundamental technology and market differences, and other
issues, associated with natural gas storage as compared to crude oil
storage.
Question 6. China is becoming a bigger world oil player. This not
only has tightened the world oil market but also has produced national
security concerns for us. What concerns or problems do you see have
arisen since China became a bigger world energy player?
Answer. China's increased demand for energy has raised important
questions for the United States about how to more effectively work with
China both to ensure increased energy supplies to meet growing global
demand as well as ensure focus on energy efficiency and conservation
measures. Such a dialogue between the two largest energy importers in
the world is extremely important.
Chinese energy demand, having grown rapidly, has outstripped its
domestic sources of energy supply. It is now looking abroad for
resources, as are many other counties, including the United States.
Globally, demand is increasing, spare production capacity is
increasingly constrained, and energy markets have become more
interdependent. As noted in Chevron's written testimony, the United
States needs to work more actively with other countries to gain access
to additional sources of energy and to ensure a level investment
playing field across national boundaries.
Question 7. While there have been expansions and efficiency gains
at existing refineries, no refinery has been built in the United States
in 30 years. Since the oil companies are now making record earnings,
are there plans to build new refineries in the United States?
Answer. Chevron currently has no plans to build new refineries in
the United States. Instead, we are focusing our efforts on adding
capacity at existing refineries because it is typically more cost-
effective, and fewer permitting barriers exist. We are always
evaluating opportunities to expand our capacity where demand warrants
and it is economic to do so. As noted in Chevron's written testimony,
Chevron is making investments to improve reliability and increase
production capacity at our refineries in Richmond and El Segundo, CA,
and Pascagoula, MS. Chevron has expanded capacity over past ten years.
Question 8. The 2005 Energy Bill implemented a controlled phase-out
of MTBE. Many companies, however, are planning on completely halting
its use. How will a sudden halt of the use of MTBE affect the gasoline
market and refineries?
Answer. There is no way to predict the impact of MTBE reduction on
the market as other factors of supply and demand come into play.
Unfortunately, the 2005 Energy Bill actually did little to directly
address MTBE, although there is clearly a disincentive to continued use
of MTBE. Prior Congressional action effectively required the use of
MTBE, yet Congress has not passed new legislation protecting the
industry from defective product claims advanced by the plaintiff trial
bar. Chevron has had a long-standing goal of eliminating MTBE from our
gasolines and we continue to work aggressively to fulfill that goal.
Years ago we stopped manufacturing MTBE in our own refineries but have
not been able to obtain sufficient supply of non-MTBE gasoline from
other sources to completely eliminate it from the gasolines we sell. As
other companies increase the availability of non-MTBE gasoline to us,
we will make greater progress toward meeting our goal. Of note, there
was little market/price reaction to the MTBE phase-outs in California,
New York and Connecticut which have already occurred.
Question 9. I have noticed very large differences between the price
of gasoline in different areas of the country. For example, I recently
saw gasoline in northern Virginia that was much more expensive than
gasoline in northern Kentucky. Please explain why there can be such a
significant difference in gasoline prices in different areas of the
country.
Answer. Gasoline prices vary across geographic areas because of
differences in supply, demand and competitive forces from region to
region. In addition, regional differences in factors such as taxes,
supply proximity and disruptions, and special formulated gasoline
requirements can affect price levels in different states and regions.
Below are Several Questions on Oil and the Commodities Futures Market
Question 10. When was oil first traded on the world-wide
commodities futures market?
Answer. NYMEX launched crude oil futures trading in 1983.
Question 10a. Would the price of oil be affected if oil was taken
off the commodities futures market and no longer traded?
Answer. It is our belief that the futures market adds transparency
and liquidity, thereby providing a better reflection of the oil's
``true'' value over time. It has been suggested that futures market
speculation distorts the price of oil. However, speculation occurs in
physical markets as well (e.g. buying for storage). Ultimately, and
over the long term, it is the relative state of the physical supply/
demand balance that determines price levels.
Question 10b. Would oil then be bought and sold as a true supply
and demand product?
Answer. The answer to this question is covered in the prior answer
above.
______
Response to Written Questions Submitted by Hon. Jeff Bingaman to
David J. O'Reilly
Question 1. Section 392 of the Energy Bill, which was negotiated
with the involvement of the Chairman and Ranking Member of the Energy
and EPW Committees, contains permitting streamlining language. The
Energy Policy Act of 2005 permits the EPA Administrator to enter into a
refinery permitting cooperative agreement with a state. Under such an
agreement, each party identifies steps, including decision timelines,
it will take to streamline the consideration of federal and state
environmental permits for a new refinery. I want to ask you several
questions about that provision, since you have supported streamlining:
A. Have you requested that EPA issue any regulations or take any
action to implement these new provisions?
Answer. Section 392 of the Energy Bill requires the Governor to
request a permitting cooperative agreement for siting and construction
of new refineries. Chevron has not pursued this provision since we have
not planned a new refinery since this bill was enacted.
If yes, when?
If no, when do you anticipate you will do so?
Answer. Chevron currently has no plans to build new refineries in
the United States. Instead, we are focusing our efforts on adding
capacity at existing refineries because it is typically more cost-
effective, and fewer permitting barriers exist. We are always
evaluating opportunities to expand our capacity where demand warrants
and it is economic to do so. As noted in Chevron's written testimony
(page 9), Chevron is making investments to improve reliability and
increase production capacity at our refineries in Richmond and El
Segundo, CA, and Pascagoula, MS. Chevron has expanded capacity over
past ten years.
Question 1a. Have you worked with any state to encourage them to
enter into an agreement with EPA under Section 392 of EPAct?
Answer. We have not worked with states since we have no current
plans to build a new refinery, as noted above.
Question 1b. Do you support the EPAct streamlining provisions?
Answer. We support provisions to streamline federal, state and
local requirements. EPAct is a good first step, but it does not address
the most troublesome permitting challenges a facility must overcome in
order to gain approvals from multiple levels of government. The
permitting process could be significantly improved without compromising
environmental protection by eliminating duplicate requirements,
creating single approval authority, providing regulatory certainty and
limiting third party ability to protract the project approval process
indefinitely.
Question 1c. Do you have any examples of where a state came to EPA
and said we want to work closely with you on permitting a new refinery
or refinery expansion and EPA refused to provide technical assistance
and even financial resources under existing law to that state?
Answer. No. A state would not usually advocate approval of a new
refinery or refinery expansion project to EPA. States and local
authorities are bound, as is the EPA, by a statutory and regulatory
framework for processing permits. It is this cumulative compilation of
federal, state and local requirements as well as review and approval
timelines that creates investment uncertainty and barriers to capacity
expansion projects.
A better example of the state/federal difficulty is the requirement
for EPA oversight and/or approval of federally required permits and
State Implementation Plans. These federal approvals must be sought even
in those situations where the state is granted federal authority to
administer the environmental program. When EPA withholds these
approvals or disputes the states' implementation interpretations, it
creates substantial delays in granting individual permits and amplifies
regulatory uncertainty.
Question 2. In answer to several of the questions at today's
hearing (Nov. 9) the witnesses have noted that the market for petroleum
and petroleum products is a global one and should be viewed in that
context. Please list all planned refinery construction that your
company plans to undertake globally. Please list them by country and
include the projected size of the facility, including the projected
capacity for all units and their potential product yields in addition
to the project's total investment cost.
Answer. In addition to refining projects in the United States,
Chevron currently has clean fuels projects underway at its refineries
in Singapore and South Africa. Chevron is evaluating additional
refinery investments in a number of locations globally. For competitive
reasons, we do not share specific information on projects until they
have been publicly announced.
Question 3. The International Energy Agency (IEA) has just released
its World Energy Outlook 2005. It contains a piece on the global
refining picture. The study notes a lack of investment in upstream and
downstream capacity has contributed to the extreme tightness in global
oil markets. What are your thoughts in response to this? What is your
company doing in response (actions)? What is your company doing
(investments/analysis) in the ``MENA'' regions? Do you agree with the
IEA's projections?
Answer. Chevron believes The IEA's assessment of tightness in the
global refining picture is a reasonably accurate for near-term
conditions. Globally, refinery utilization has increased to the point
where complex upgrading capacity to produce more light products
(gasoline and diesel fuel, as opposed to fuel oil and other heavy
products) is nearly full. However, as the IEA points out, there are
complications and risks associated with additional investment in new
refineries, including:
1. environmental restrictions and local resistance hamper
additional refinery investments
2. increasing light product demand and shrinking fuel oil
markets require expensive upgrading units to produce lighter
refined products,
3. tightening fuel specifications and trend towards heavier
crude oils also require refiners to make refinery investments,
and
4. uncertainty in investment economics due to the length of
time to build new refining capacity.
Nevertheless, many analysts expect refining capacity to grow by
over 1 million barrels per day each year before 2010 as refiners
respond to the current tightness. However, we do not necessarily agree
with the IEA's demand growth projections and, consequently, their
estimated need for refining capacity. Even so, demand growth appears
sufficiently strong near-term to encourage more refining investments
globally. Chevron is evaluating additional refinery investments in a
number of locations globally. For competitive reasons, we do not share
specific information on projects until they have been publicly
announced.
Question 4. Voluntary standards--Post hurricanes, what is the
industry doing to come up with voluntary standards/best practices for
back-up power supply to critical energy infrastructure (refineries,
pipelines, etc.) and natural disaster recovery? Will the API undertake
such an effort? If not, what is your company doing?
Answer. Chevron has taken several steps to reduce impacts from the
hurricanes, including building a dike around our Pascagoula refinery
following Hurricane Georges in 1998 to reduce the risk of flooding
damage, and more recently placing of generators at marketing terminals
and various service station locations to provide emergency power.
Chevron is evaluating several projects that would minimize the impact
of future hurricanes. These projects could help minimize the wind
damage, reduce impact from flooding as well as allow a more rapid
startup of the refinery after such an event.
Question 5. A number of witnesses testified that failure of the
electricity system resulting from hurricanes Rita and Katrina
contributed in great part to the inability to get refineries restarted,
or to get natural gas pipelines restarted. What are the arrangements
for backup power in case of such emergencies at your critical
facilities?
Answer. We can only speak to Chevron's experience. Lack of
electrical power to our facility was not the limiting factor in
restarting the Pascagoula refinery after Hurricane Katrina. Although we
secured temporary electrical generators to restart our fuel terminal,
there were many steps and procedures that needed to be executed before
the refinery could be safely restarted. Electrical power supply did not
limit the full refinery restart. Electrical generators were used at
many marketing terminals and service stations to provide emergency
power, until normal power service was restored.
Question 6. How many of your plants have on site cogeneration
facilities? Which plants have these facilities?
Answer. Four of Chevron's U.S. refineries have cogeneration
facilities located on site: they are our facilities at Pascagoula, MS;
El Segundo, CA; Richmond, CA; and Kapolei, HI.
Question 7. Are there regulatory barriers at the either the state
or federal level that prevent the installation of cogeneration plants
at your facilities that do not have them?
Answer. Construction of cogeneration facilities has associated
regulatory barriers including permitting difficulties, as well as
difficulties/uncertainties whether one can sell excess power to the
electrical grid system. Our decisions to install cogeneration
facilities are based on the economics of fuel and electricity costs,
reliability of the electrical delivery system as well as existing
refinery infrastructure and utility balances.
Question 8. Would the presence of cogeneration facilities at your
refineries reduce the recovery time during such emergencies?
Answer. Chevron has cogeneration facilities at its Pascagoula
refinery, which was impacted by the hurricanes. Although cogen
facilities are an alternative source of electrical power, they need a
fuel source and utility water to operate. Restoring the natural gas
supply and water supply were critical to reestablishing electrical
power to the facility.
Question 9. Witnesses at earlier hearings testified that there are
a number of modern natural gas generation facilities in the Louisiana/
Texas area that are not used to their full capacity. Are there natural
gas generation facilities in close proximity to your refinery
facilities that could be used for backup generation at the refineries?
Answer. By modern natural gas generation facilities, Chevron is
assuming this question is asking whether cogeneration facilities were
available to help provide back-up power generation at refineries. As
noted in our response to question #6 above, Chevron's Pascagoula
refinery, which was our only refinery impacted by the hurricanes, has
its own cogeneration capacity.
Question 10. Would use of generators that are in close proximity to
refineries to provide backup power during such emergencies mean that
recovery times might be shortened, since the restoration time for a
nearby facility might be less than the restoration time for the
transmission facilities for traditional utilities?
Answer. Chevron used portable generators at its Pascagoula refinery
to provide power to its fuel truck loading rack. This loading rack was
used to supply motor gasoline and diesel fuel to emergency services in
the initial days following the hurricane. Chevron used the generator to
provide electricity until sufficient power was restored by the local
utility. Additionally, Chevron used generators at many marketing
terminals and service stations, until power was restored.
Environment
Question 11. Please specify exactly which, if any, Federal or State
environmental regulations have prevented your company from expanding
refinery capacity or siting a new refinery, and documentation on the
exact details of the project prevented.
Answer. Several regulations impose economic burdens to existing
operations and new projects. However, New Source Review (NSR) presents
one of the most significant disincentives to new investment. NSR not
only presents a cumbersome, uncertain permitting process, but more
importantly, can trigger additional requirements including installing
costly emission controls, acquiring emission offset credits from other
sources and in some cases initiating re-permitting of entire existing
co-located process units. Projects under consideration to increase
production capacity must factor all these burdens into the economic
justification for investment. In some cases, refinery capacity
expansion projects have been constrained or deferred to avoid this
uncertain and time consuming process.
Question 11a. How much have so-called ``boutique fuel''
requirements added to the average retail price, where applicable, and
the average wholesale price per gallon of the gasoline sold by your
company?
Answer. Because it is impossible to separate out all the factors
that affect supply and demand, Chevron cannot isolate the single impact
boutique fuels have on the price of gasoline. However, there is no
question that the proliferation of boutique fuels has added to the
complexity associated with the regional supply and distribution of
fuels. Further, boutique fuels can result in market instability in
local markets for short periods of time when supplies of a designated
fuel are interrupted and substitutes, while physically available, are
not allowed for use.
Question 11b. If the EPA or the Congress were to act to minimize
the number of ``boutique fuel'' formulations required by the states to
protect air quality, how many should there be and what should the
specifications of each be in order to maintain air quality and improve
fungibility?
Answer. Minimizing the number of ``boutique fuels'' would be
helpful. It is equally important to align them with the regional supply
and distribution system. Many proposals to reduce the number still
leave open the possibility that several could be required in one
region. In addition, several proposals still allow state and local
jurisdictions to create their own boutiques. Should these shortcomings
be rectified, Chevron believes an acceptable list could be forged from
S. 1859 (BURR/ALLEN) and H.R. 3893 (BARTON) which generally limit the
number of boutique gasolines to five and diesel fuels to two.
Question 12. Streamlining New Source Review (NSR) permitting
constraints was mentioned as an incentive that would encourage refiners
to supply more product to the U.S. market. How many air quality permit
applications for refinery expansions has your company submitted for NSR
over the last ten years? How long did it take the EPA, or the
applicable State, to approve or deny each permit application, after
receipt of a complete permit application? What was the expected
percentage increase in product output of the expansion?
Answer. We have submitted approximately 200 permits (from our 5
refineries) that are subject to NSR (federal and local) review for our
refineries in the last 10 years. However, this number is not in itself
meaningful since some districts require individual permits for sources
and others allow multiple sources within a project to be included in a
single permit. In general, a major refinery in a non-attainment area
will have to seek approximately 2 to 4 major NSR permits a year. These
permits are necessary for preventative maintenance projects such as
replacing a tank or a pump, and may take 3 to 9 months to obtain. More
significant projects such as process debottlenecking and major unit
upgrades can take 2 years or longer.
Typical refinery projects subject to NSR permitting include new
fuel projects, and other refinery modifications. Due to new
technologies and improved efficiency, the new or upgraded equipment
will usually have much lower emissions than the previous equipment, but
still be subject to NSR even when actual emissions do not increase.
Question 12a. How would you propose to streamline NSR and still
maintain local air quality and prevent any increase in total annual
emissions from such expansions?
Answer. Codifying many of the reforms in EPA's 2002/2003 NSR reform
package would offer significant relief without increasing actual
emissions. In particular:
Plant-wide applicable limits--Allow facilities to make
process changes, throughput increases and debottlenecking
improvements in any way necessary to accommodate business needs
and new technology as long as their total overall plant
emissions stay the same.
Clarify that routine repair and maintenance projects are not
defined as new or modified sources. This would encourage
facilities to increase reliability and energy efficiency.
Eliminate unnecessary re-permitting of entire units co-
located with a modification when emissions from the existing
equipment would stay within permitted limits.
In addition, we support provisions in the House passed Bill
(H.R. 3893) that would streamline permitting process for
projects that increase facility efficiency and reliability.
Question 13. How much did the fuel specification waivers that have
been granted by EPA to date, due to the supply disruptions caused by
the hurricanes, reduce the average retail price of the gasoline or
other refined products made by your company?
Answer. It is impossible to determine the how fuel specification
waivers granted by EPA to date impacted the retail price of gasoline or
other refined products since those are determined by available supply,
demand and other competitive factors in the marketplace. However, the
EPA waivers were very effective in making both gasoline and diesel
supplies more widely available to the public (see copy of Chevron
letter previously sent by Mr. Michael Wirth, President of Chevron
Global Supply & Trading, to EPA Administrator Johnson, with copies to
Chairman Domenici and Senator Bingaman, which provides examples of
where Chevron was able to provide additional supplies because of the
waivers, dated October 10, 2005). Directionally, the waivers lessened
the extent both in terms of volume and time to which certain markets
were experiencing very tight supplies.
Question 14. One witness indicated that ``getting two 100-year
hurricanes in four weeks'' caused a great deal of chaos and disruption
in the gasoline supply chain. The National Oceanic and Atmospheric
Administration has projected that the country and the Gulf of Mexico
have entered a cyclical period of 20-30 years during which the Gulf and
coastal areas are likely to experience a greater frequency of
hurricanes and higher odds of those hurricanes making landfall in the
U.S. What preparations has your company made to deal with a greater
hurricane frequency to decrease repetition of the supply disruption
that occurred this year?
Answer. Following hurricanes and other natural disasters, Chevron
evaluates how our onshore and offshore oil and gas production
facilities and processes performed. Chevron also participates in
similar ongoing industry evaluations. We use the evaluations to guide
improvements to our assets and processes, and to help guide design
specifications for new facilities which are being constructed. Our
primary focus is protecting our employees and contractors, followed
closely by protecting the environment. Even in the face of these
significant storms, our facilities did very well--we had no injuries to
our personnel and we had only minor environmental impact, in spite of
significant facility damage.
The installation of a 22-foot dike wall after 1998 Hurricane
Georges reduced the risk of damage at our Pascagoula Refinery.
Hurricane Katrina-related storm surge damage to the Pascagoula area
outside the refinery was far greater than was experienced during
Hurricane Georges. Yet in contrast, the flooding inside the refinery
was reduced such that we were able to return the refinery to normal
operation in 6 weeks after Katrina as opposed to 4 months after
Hurricane Georges.
We are evaluating several projects that will minimize the risk of
damage from future hurricanes such as Katrina. These projects include
efforts to minimize the wind damage, further reduce impact from
flooding as well as allow a more rapid startup of the refinery after
the event.
Question 15. Over the last 50 years, average annual sea surface
temperatures have increased in the Gulf of Mexico and, according to the
National Academy of Sciences and other similar scientific expert
bodies, are expected to continue increasing as the oceans continue
warming due to accelerating global climate change. The Administration's
Climate Action Report (2002) stated ``model simulations indicate that,
in a warmer climate, hurricanes that do develop are likely to have
higher wind speeds and produce more rainfall.'' What preparations has
your company made to deal with a greater likelihood of greater
hurricane intensity so as to decrease repetition of the disruption that
occurred this year?
Answer. See the answer to question above.
Question 16. How has your company disclosed to shareholders and
investors the risks associated with the potential impacts on your
company's assets in the Gulf of Mexico or indirect impacts on its
assets elsewhere, of either the expected greater frequency of
hurricanes making landfall in the U.S. or the probable greater
intensity of hurricanes in the region?
Answer. Chevron includes many forward-looking statements in its
filings with the Securities and Exchange Commission to assist the
investor in making his or her investment decision. The company also
makes disclosure of factors of risk and other matters that could
materially affect financial results in the future.
Among these various disclosures are the following that were
included in the company's 2004 Form 10-K relating to weather conditions
and their possible impact on the company's operations and financial
results:
Page 2:
``CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING
INFORMATION FOR THE PURPOSE OF `SAFE-HARBOR' PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
. . .''
``This Annual Report on Form 10-K . . . contains
forward-looking statements . . . These statements are
not guarantees of future performance and are subject to
certain risks, uncertainties and other factors, some of
which are beyond our control and are difficult to
predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted
in such forward-looking statements . . .''
``Among the factors that could cause actual results
to differ materially are . . . potential disruption or
interruption of the company's production or
manufacturing facilities due to . . . severe weather .
. . Unpredictable or unknown factors not discussed
herein also could have material adverse effects on
forward-looking statements.''
Page 4:
``Risk Factors . . .''
``. . . some inherent risks could materially impact
the company's financial results of operations or
financial condition . . .''
``The company's operations could be disrupted by
natural or human factors.''
``. . . The company's operations and facilities are
therefore subject to disruption from either natural or
human causes, including hurricanes . . . which could
result in suspension of operations, or harm to people
or the natural environment.''
Page FS-3:
``Upstream Year-to-year changes in exploration and
production earnings align most closely with industry
price levels for crude oil and natural gas. Crude oil
and natural gas prices are subject to external factors
over which the company has no control, including . . .
weather-related damages and disruptions . . . Moreover,
any of these factors could also inhibit the company's
production capacity in an affected region.''
Similar disclosures are included in the company's SEC Form 10-Q
reports. In the third quarter 2005 SEC Form 10-Q, the following was
included in the ``Cautionary Statements'' on page 2:
``Among the important factors that could cause actual results
to differ materially from those in the forward-looking
statements are unknown or unexpected problems in the resumption
of operations affected by Hurricanes Katrina and Rita and other
severe weather in the Gulf of Mexico . . .''
The company makes no reference in its SEC filings to long-range
weather forecasts in the company's many areas of operation.
finances, production, imports, etc.
Question 17. Please provide for each of last ten years your
company's--
Gross revenue of U.S. operations
Answer. Chevron's United States sales and operating revenues for
1998 through 2004 are summarized below. The data exclude amounts
associated with internal transfers between Chevron segments, which are
eliminated for preparation of the company's consolidated income
statement. As a result of the Chevron merger with Texaco in 2001, an
SEC Form 8-K was filed and included combined Chevron and Texaco
comparative data for U.S. operations beginning only in 1998. No other
pre-merger combined data prior to 1998 for U.S. operations were
required under the rules of accounting and SEC disclosure.
----------------------------------------------------------------------------------------------------------------
$ billions 2004 2003 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
U.S. sales and other operating revenues................. $71.0 $55.9 $43.5 $46.7 $52.1 $35.2 $30.2
----------------------------------------------------------------------------------------------------------------
Source: Chevron Form 10-K (2004 and 2001)--``Operating segments and geographic data'' footnote to the
consolidated financial statements. Chevron Form 8-K (2001).
Total capital expenditures in the U.S.
Answer. Chevron's total capital and exploratory expenditures (C&E)
in the United States from 1998 through 2004 are summarized below. The
first SEC Form 10-K following the Chevron-Texaco merger included
combined Chevron and Texaco comparative data for U.S. capital and
exploratory expenditures beginning only in 1999. No other pre-merger
combined data prior to 1999 for U.S. capital and exploratory
expenditures were required under the rules of accounting and SEC
disclosure.
----------------------------------------------------------------------------------------------------------------
$ billions 2004 2003 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
U.S. C&E expenditures................................... $3.0 $2.6 $3.8 $6.0 $4.3 $3.4 $4.1
----------------------------------------------------------------------------------------------------------------
Source: Chevron and Texaco Form 10-Ks; includes Chevron's and Texaco's share of affiliate expenditures.
Net profit of U.S. operations
Answer. Net income from Chevron's operations in the United States
for 2001 through 2004 is summarized below. Data prior to 2001 are not
readily available because the split between U.S. and international
income for years prior to the Chevron-Texaco merger was not presented
for all activities in the pre-merger financial statements because such
a disclosure was not required. The information below was obtained from
the Chevron SEC Form 10-Ks.
------------------------------------------------------------------------
$ billions 2004 2003 2002 2001
------------------------------------------------------------------------
U.S. net income (loss)................. $5.4 $3.9 $(1.8) $0.4
------------------------------------------------------------------------
Source: Chevron Form 10-Ks.
Total taxes paid to the Federal government
Answer. See answer/chart directly below.
Total taxes paid to State governments
Answer. As was reported in the annual reports that Chevron filed
with the Securities and Exchange Commission, Chevron accrued the
following current Federal and State tax amounts for 1998-2004 (see
attached table below). As a result of the Chevron merger with Texaco in
2001, an SEC Form 8-K was filed and included combined Chevron and
Texaco comparative data for U.S. operations beginning only in 1998. No
other pre-merger combined data prior to 1998 for U.S. operations were
required under the rules of accounting and SEC disclosure.
CHEVRON CORPORATION--SUMMARY OF U.S. TAXES ACCRUED 1998-2004
[$ Millions]
----------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Income taxes
Federal............................................... (215) 307 1,238 946 (72) 1,147 2,266
State and local....................................... 32 (50) 185 276 21 133 368
-------------------------------------------------------
Total................................................... (183) 257 1,423 1,222 (51) 1,280 2,634
Federal and State non income taxes
Excise taxes on products and merchandise.............. 3,568 3,767 3,909 3,954 3,990 3,744 4,147
Import duties and other levies, and property and other 397 399 370 418 360 320 364
miscellaneous........................................
Payroll taxes......................................... 196 165 139 148 141 138 137
Taxes on production................................... 160 158 238 225 179 244 257
-------------------------------------------------------
Total................................................... 4,321 4,489 4,656 4,745 4,670 4,446 4,905
=======================================================
Total income and non income............................. 4,138 4,746 6,079 5,967 4,619 5,726 7,539
----------------------------------------------------------------------------------------------------------------
The earliest year of combined financial statement results for Chevron and Texaco in an SEC filing is 1998. All
years exclude data for Unocal Corporation, which Chevron acquired in 2005.
Total donated to charity
Answer. Chevron's charitable contributions over the three year
period ended December 31, 2004 were:
Year ($ Millions)
2002.............................................................. $62.8
2003.............................................................. $60.8
2004.............................................................. $63.8
Source of Contributions Data: 2002-2004--Chevron Charitable
Contributions yearly data files.
Question 18. How much additional petroleum refining capacity do you
expect your company to install in the United States over the next 10
years?
Answer. Chevron always evaluates opportunities to expand our
capacity where demand exists and it is economic to do so. As noted in
Chevron's written testimony, Chevron is making investments to improve
reliability and increase production capacity at our refineries in
Richmond and El Segundo, CA, and Pascagoula, MS. Many analysts expect
world-wide demand for petroleum products to increase by approximately
10 million barrels per day over the next 10 years. Chevron intends to
be a global supplier of energy and will want to continue to invest to
meet the needs of our customers.
Question 19. What percentage of profits over the last 10 years has
your company re-invested in capital, exploration, drilling, and
production in the United States? Please provide an annual total for
those U.S. expenditures and a clear breakdown.
Answer. The table below shows Chevron's U.S. expenditures related
to capital, exploration and production for the periods 1999 through
2004. Drilling expenditures are included in each of the categories. The
first SEC Form 10-K following the Chevron-Texaco merger included
combined Chevron and Texaco comparative data for U.S. capital and
exploratory expenditures beginning only in 1999. No other pre-merger
combined data prior to 1999 for U.S. capital and exploratory
expenditures were required under the rules of accounting and SEC
disclosure.
----------------------------------------------------------------------------------------------------------------
$ Billions 2004 2003 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
U.S. upstream (exploration and production) capital and $1.8 $1.6 $1.9 $2.4 $2.4 $1.8 $2.7
exploratory expenditures..................................
U.S. production expense.................................... 2.0 2.0 2.0 2.1 2.1 2.0 2.2
Total U.S. upstream capital and exploratory expenditures 3.8 3.6 3.9 4.5 4.5 3.8 4.9
and production expense....................................
Net income worldwide....................................... 13.3 7.2 1.1 3.3 7.7 3.2 1.9
Percentage of total net income reinvested in U.S. upstream 28% 50% 342% 136% 59% 116% 255%
capital, exploration, drilling and production.............
----------------------------------------------------------------------------------------------------------------
Source: Chevron SEC Form 10-Ks.
Please note the percentage relationships in the table above are not
correlated with any percentage-expenditure targets set by the company.
That is, capital and exploratory expenditure spending is aimed at
economic projects in the United States and outside the United States
that are available investment opportunities, without regard for their
geographic location. The production expense shown for the United States
represents the level of spending necessary to optimize the production
from U.S. producing properties. Currently the greatest number of
investment opportunities lies in areas outside the United States. The
company possibly would have had higher capital and exploratory spending
in the United States during these years if additional economic
investment opportunities had been available. However, certain areas in
the United States have been placed off-limits for the exploration and
production of oil and gas.
Question 20. What percentage of profits over the last 10 years has
your company re-invested in non-petroleum energy supply and production
in the United States? Please provide a total and the results of such
investment.
Answer. Chevron has interpreted the question of ``non-petroleum''
energy investments in to include all non-crude oil (i.e., non-liquid
hydrocarbons) energy investments, including investments in natural gas,
coal, power, geothermal, pipelines, and shipping, as well as
alternative energy and advanced energy technologies, such as gas-to-
liquids, renewables, hydrogen, fuel cells and batteries. Detailed
information of the total annual investment in these types of activities
in the United States is not readily available in the company's
accounting records, however, globally these expenditures over the last
10 years are in the billions of dollars.
Globally, Chevron is making significant investments from the
wellhead to the end consumer to bring new natural gas supplies to
markets, including the United States. Chevron has major natural gas
development projects underway in Australia, Nigeria, and Angola where
natural gas will be liquefied for shipment on LNG tankers to markets in
the United States and around the world. Chevron has recently contracted
for two state-of-the-art LNG tankers to add to its shipping fleet.
Chevron is also partnering with Sasol in a joint venture--Sasol
Chevron--aimed at converting natural gas to high quality diesel fuel
utilizing its gas-to-liquids (GTL) technology. Sasol-Chevron has
announced a memorandum of understanding with Qatar Petroleum for a $6
billion GTL initiative.
Chevron is investing in major pipeline systems to provide export
capability of both liquids and natural gas to world markets. Chevron is
a partner in the Caspian Pipeline Consortium (CPC) to bring oil
supplies from Kazakstan to ports on the Black Sea, and with the
acquisition this year of Unocal, Chevron is also a partner in the Baku-
Tbilisi-Ceyhan pipeline (BTC) which will bring oil from the Caspian Sea
region to the Mediterranean port at Ceyhan.
In the United States, Pittsburg and Midway Coal Company is a wholly
owned Chevron subsidiary, which provides coal to utilities from mines
operating in Wyoming, New Mexico, and Alabama.
Chevron Energy Solutions (CES) develops, engineers and constructs
holistic energy efficiency, conservation and power system projects for
institutions and businesses. CES has developed energy efficiency and
renewable projects for large-scale facilities operated by the U.S.
Postal Service, the Department of Defense, hospitals and public
schools.
Chevron is the world's largest producer of geothermal energy,
having developed more than 1000 MW of capacity. In 2004 Chevron
announced a $128 million plan to expand our Daajat geothermal power
plant in Garut, West Java, Indonesia.
Chevron invested in a 22.5 MW wind farm at the Nerefco refinery in
the Netherlands, the first large-scale wind project on a brownfield
refinery. Chevron has one of the largest solar photovoltaic
installations in the U.S., a 5090 kw solar array at our Bakersfield,
California production location.
Chevron is a joint venture participant with COBASYS, working to
commercialize nickel-metal hydride batteries for such applications as
hybrid electric vehicles and stationary power supply devices.
Chevron is also leading a consortium in a five-year demonstration
of hydrogen infrastructure and fuel-cell vehicles by building six
hydrogen energy service stations with fueling facilities for small
fleets of fuel-cell vehicles and capacity to generate high-quality
electrical power from stationary fuel cells.
Question 21. On average for the last ten years, please compare your
company's overall capital expenditures in the United States to its
expenditures elsewhere.
Answer. The table below shows Chevron's capital and exploratory
expenditures for the periods 1999 through 2004 and the percentage
applicable to U.S. expenditures. Some of the exploratory expenditures
are capitalized. Other amounts may be expensed under the applicable
accounting rules if a project is not successful or if the project does
not move into the development phase within a certain time period.
------------------------------------------------------------------------
$ Billions 2004 2003 2002 2001 2000 1999
------------------------------------------------------------------------
Capital and exploratory
expenditures:
Total United States......... $3.0 $2.6 $3.8 $6.0 $4.3 $3.4
Total Worldwide............. 8.3 7.4 9.3 12.0 9.5 10.1
Percentage United States...... 36% 35% 41% 50% 45% 33%
------------------------------------------------------------------------
Source: Chevron SEC Form 10-Ks; includes share of affiliate
expenditures.
As stated in the response to question 8, the percentage
relationships in the table above are not correlated with any
percentage-expenditure targets set by the company. That is, capital and
exploratory expenditure spending is aimed at economic projects in the
United States and outside the United States that are available
investment opportunities, without regard for their geographic location.
Currently the greatest number of investment opportunities lies in areas
outside the United States. The company possibly would have had higher
capital and exploratory spending in the United States during these
years if additional economic investment opportunities had been
available. However, certain areas in the United States have been made
off-limits for the exploration and production of oil and gas.
The first SEC Form 10-K following the Chevron-Texaco merger
included combined Chevron and Texaco comparative data for U.S. capital
and exploratory expenditures beginning only in 1999. No other pre-
merger combined data prior to 1999 for U.S. capital and exploratory
expenditures were required under the rules of accounting and SEC
disclosure.
Question 22. What percentage of your company's gross revenue was
collected in the United States in each of the last 10 years?
Answer. Chevron's U.S. sales and operating revenue for 1998 through
2004 are summarized below. The data exclude amounts associated with
internal transfers between Chevron segments, which are eliminated for
preparation of the company's consolidated income statement. As a result
of the Chevron merger with Texaco in 2001, an SEC Form 8-K was filed
and included combined Chevron and Texaco comparative data for U.S.
operations beginning only in 1998. No other pre-merger combined data
prior to 1998 for U.S. operations were required under the rules of
accounting and SEC disclosure. The company does not believe the
percentage relationships for the 3 years 1995-1997 would differ
significantly from the fairly stable relationships shown below for the
7 years 1998-2004.
----------------------------------------------------------------------------------------------------------------
2004 2002 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
U.S. sales and operating revenues as a % of total.............. 47% 47% 44% 45% 44% 42% 42%
----------------------------------------------------------------------------------------------------------------
Source: Chevron SEC Form 10-Ks and 8-K.
Question 23. How much of your company's revenue collected in the
United States was used to pay for purchasing crude oil from OPEC
countries?
Answer. Detailed information regarding revenue collected in the
United States used to purchase crude oil from OPEC countries is not
readily available in the company's accounting records. Revenues in any
geographic area are not specifically earmarked for purchasing crude oil
from OPEC countries or for any other purpose. The use of cash to fund
company operations is independently determined from the source of such
cash.
Question 24. Do you support S. 1794 or something like it create
gasoline and jet fuel reserves to ensure stability of price and supply?
Should it be extended to diesel and other fuels like natural gas?
Answer. Chevron does not believe that establishing gasoline or
other refined product reserves would ensure stability of price and
supply. There would be costs and logistical challenges for establishing
and maintaining such reserves and could result in unintended
consequences, such as raising the cost of gasoline or jet fuel. These
challenges include determining when and where to store products,
dealing with a number of fuel specifications, and the need to rotate
storage of products to prevent them becoming stale, among other issues.
Chevron believes a comprehensive national energy policy that addresses
both supply and demand would have a more significant impact on market
stability.
Chevron believes that additional natural gas storage is being
developed today and that market forces are the most efficient means for
adding new storage. However, Chevron could support studying the
establishment of a U.S. natural gas reserve. Such a review would need
to assess fundamental technology and market differences, and other
issues associated with natural gas storage as compared to crude oil
storage.
Question 25. On average for the last ten years, how much of what is
refined by your company in the U.S. stays in the U.S.?
Answer. Through the first 3 quarters of 2005 the percentage of
gasoline (including blendstocks), jet and diesel refined at our U.S.-
based refineries that was sold in the United States was 98.6%. A small
percentage of products sold to other parties at a refinery dock may
have been resold outside the United States, but we cannot confirm final
sales destinations for such sales. Due to the tight timeframe for
developing a response, we were unable to provide an exact percentage
for the prior nine years; however, we do not believe there would have
been a material difference in this percentage.
Question 25a. What amount of refined product did your company
import in 2004 and in 2005?
Answer. Today, Chevron imports more refined products into the
United States each year than it exports. We imported a total of 9.8
million barrels of gasoline (including gasoline blendstocks), jet and
diesel fuels through the first three quarters of 2005 and 13.1 million
barrels in 2004.
Question 25b. What are your assumptions about demand growth in
India in China?
Answer. The EIA forecasts that China's oil demand will grow between
3.9% and 5.1% and India's will grow between 3.0% and 4.0% annually
between 2002 and 2025. Chevron believes these forecasts are within
likely ranges.
Question 25c. How have your investments in the United States
increased the energy security of the country?
Answer. Energy markets are increasingly interdependent from a
global perspective. Oil is a globally-traded commodity; any investments
anywhere in the world that adds supplies benefits all consumers,
including those in the United States. And, while natural gas is not yet
a globally-traded commodity, natural gas markets are also moving in
that direction. Likewise, any investments in global refinery capacity
that are generating additional supplies of petroleum products benefit
U.S. markets.
Question 26. What market signals will occur in advance of peaking
world oil production and what is the appropriate policy or set of
policies for the U.S. government to adopt when such signals occur?
Answer. In advance of peaking conventional world oil production, we
would expect to see expensive, long-lead projects that generate non-
conventional oil from bitumen and shale, as well as diesel and other
products from gas, coal and biomass become economic enough for large
scale production to proceed. Access to all of these resources, both
here and abroad, will be key to an orderly transition from conventional
oil. Chevron in its written testimony provides a series of policy
recommendations that the U.S. government should consider related to
enhancing U.S. Energy Policy.
______
Response to Written Questions Submitted by Hon. Daniel K. Akaka to
David J. O'Reilly
Question 1. I have some questions about the Chevron refinery in
Hawaii. As you know, Chevron is one of two refineries that we have in
Hawaii, and it is very important to us. It is well-known that no new
refineries have been built since 1976. It is also well-known that
Hawaii has the highest gasoline prices nationwide over the last twenty
years, so I am naturally interested in anything that will help dampen
gasoline prices for my constituents.
Do you expect to expand refinery capacity in Honolulu? Right now,
Chevron is considered a ``small'' refinery in terms of its output (less
than 75,000 barrels per day throughput). Do you have any plans to
expand the capacity of the refinery on Oahu?
Answer. Because of factors including the current investment climate
in Hawaii, additional regulatory requirements (wholesale price cap,
state ethanol mandate, rent caps, etc), and the sizeable investment
that would be needed to increase refining capacity, we have no plans to
increase capacity at this time. We are always evaluating opportunities
to expand our capacity where demand warrants and it is economic to do
so.
Question 2. What factors would make it possible to expand refinery
capacity, assuming that Hawaii did not have the wholesale gas price cap
law? Would expanding capacity help bring down the price of gasoline?
Answer. Chevron believes that Hawaii currently has sufficient
refinery capacity relative to the size of its market. Because it is not
supported by local demand, we believe the sizeable investment required
to increase refinery capacity would not be likely to result in a return
which would justify the investment.
Hawaii's relatively high gasoline prices are not caused by a
shortage of refinery capacity. Factors that make gasoline more
expensive in Hawaii than other locations include: (1) higher taxes, (2)
more market regulation, and (3) higher costs of doing business. In
addition, the wholesale price cap that went into effect in Hawaii
effective September 1, 2005 interferes with the normal operation of the
marketplace. It is the best interests of consumers if prices are set by
supply, demand and competitive forces in the marketplace.
Question 3. I understand from the Stillwater and Associates 2003
report on Act 77 (the Hawaii gas cap law) that refineries in Hawaii
have low margins on jet fuel and residual fuel oil for power
generation, and that Hawaii refiners compensated with higher gasoline
prices. What would be the effect of changing such margins on those
fuels on the pump price of gasoline?
Answer. There would probably be little or no effect. The Stillwater
and Associates Report in 2003 indicates that margins for each of these
products are set by supply and demand for those products in the
marketplace. It also points out that the two Hawaii refineries (unlike
many more complex refineries on the Mainland) have little ability to
vary the slate of products which they produce from a barrel of crude
oil.
Question 4. Realistically, what policies at the federal level could
help bring gasoline prices down for Hawaii in the short term? What
about in the long term?
Answer. As noted in Chevron's written testimony, U.S. policy
actions that create more regulatory certainty and create a better
investment climate including elimination of boutique fuels, permit
streamlining, and access to potentially resource-rich areas will
provide more reliable and affordable supplies of energy for the United
States. The United States needs more investments in energy supplies,
energy infrastructure, and enabling energy imports. Government actions
to promote those investments would help secure reliable supplies of
energy for American consumers.
Question 5. Would a windfall profits tax affect your profitability
in Hawaii, or would it have no effect at all on refineries in general?
Answer. Chevron opposes a windfall profits tax. Oil and gas
industry profits are not excessive compared to other industries, and
such a tax would reduce available capital and would discourage long-
term investment strategies by the oil and gas industry, including
potentially Hawaii. Moreover, as previously reported by the
Congressional Research Service, the 1980 windfall profits tax reduced
domestic oil production and increased reliance on annual oil imports
which adversely affected America's energy security. Such a significant
change in U.S. tax law would also send the signal for other governments
to change tax regimes in their own countries. This would discourage
energy investment globally, and would not lead to additional energy
supplies.
______
Response to Written Questions Submitted by Hon. Ron Wyden to
David J. O'Reilly
Question. All over America, the oil industry drives up the price at
our gas pumps by redlining and zone pricing. ``Redlining'' is when your
companies draw a phony line around a community to lock out competition
and raise prices for the consumers. ``Zone pricing'' is plain old
discrimination and it takes place when one oil company supplies gas to
several gas stations located near each other and one station is charged
much more than the others for the same type of gas. This drives
stations out of business, reducing choice and raising prices for
consumers. To help hurting consumers at our gas pumps, will you company
commit to stop redlining and zone pricing? Yes or no?
Answer. ``Red-lining'' is a phrase that historically has been used
in the insurance industry, not the oil industry. If you mean
distinguishing between direct-served and jobber-served areas, Chevron
generally does not allow jobbers to serve stations in areas that are
directly served by Chevron. Generally jobbers are set up to serve areas
where Chevron has decided it will not make direct deliveries. The
Federal Trade Commission has recognized that territorial restrictions
may allow a branded refiner to implement a more efficient distribution
system. Chevron believes that its approach on this subject is both
rational and promotes competition.
A ``price zone'' is simply another term for a local marketplace.
Chevron sets it retailer prices by zones, or local markets, because the
competitive environment differs from local market to local market. Each
price zone contains stations that Chevron believes are generally
subject to the same competitive pressures. The Federal Trade Commission
has noted that zone pricing may provide branded refiners the
flexibility to meet localized competition resulting in lower prices
than might otherwise occur. Chevron believes that it would be
counterproductive and anticompetitive to ignore local market forces in
making pricing decisions.
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
David J. O'Reilly
Question 1. I'm aware that the cost of crude oil is driven by the
world market and that its cost is currently significantly above
historic averages. But I'm not aware of any substantive increases in
the cost of producing crude oil, the cost of refining it into various
petroleum products such as gasoline and diesel, and the cost of
transportation of refined products to markets. Through the end of
September 2005, the price of crude had increased 40 percent in 2005
while gasoline prices increased almost 80 percent. If the percent
difference in the prices isn't pure profit, please explain to me how
you account for the difference in the substantially lower increase in
crude oil when compared to gasoline.
Answer. Crude oil and gasoline markets are different markets. While
increases in gasoline prices have generally followed increases in crude
oil prices over time, the hurricanes impacted the markets differently.
Crude prices are primarily driven by overall product demand, the
available crude supplies, and the available refining capacity to
convert the crude to products. Adding new increments of crude oil
production capacity is increasingly complex and expensive, and often
takes multiple years to achieve. Crude supplies were impacted by the
hurricane, but the release from the Strategic Petroleum Reserve helped
alleviate this constraint.
Gasoline prices are determined by supply, demand, and other
competitive factors in the marketplace for products. Following the
hurricanes, demand for refined products remained relatively unchanged,
but because roughly one-fourth of U.S. refining capacity was shut down,
there was less available supply of products until those refineries
could restart. This temporarily reduced demand for crude oil and
lessened price pressures for that commodity. The U.S. gasoline market,
however, remained short relative to demand, resulting in temporarily
higher prices. Higher prices attracted product imports from around the
world. Gasoline prices have now fallen to pre-hurricane levels, as
refinery production is being restored and as additional product was
imported into the United States.
Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to
149. Further, no new refineries have been built in the U.S. since 1976.
In 1981, the 321 refineries had a capacity of 18.6 million barrels a
day. Today, the remaining 149 refineries produce 16.8 million barrels a
day. I recognize the difficult financial, environmental, and legal
considerations associated with the location and construction of new
refineries. But I fail to understand the closure of existing refineries
even if they required investment to enhance their efficiency and
production capability unless, of course, this mechanism is being used
to increase the price of gasoline and other refined products. Please
help me understand why you would shut down refineries in the face of
the supply and demand situation. What conditions would have to exist
for you to invest in new refining capacity? I have heard the industry
claim that up to $48 billion has been used on capital expenditures for
existing refineries. If those investments were not used for capacity
increases, what were they used for?
Answer. Even though the total number of existing refineries in the
U.S. has decreased over the past 20 years, total refinery capacity has
increased because the average size, sophistication, and capacity of
existing refineries have increased (see Chevron's written testimony,
included as Attachment D). The rationalization of refining capacity has
occurred in part because smaller refineries lacked the financial
resources to complete facility upgrades needed to comply with
environmental and fuel reformulation requirements. They also lacked the
scale needed to economically justify the capital investment necessary
and compete efficiently. The Federal Trade Commission noted in a 2004
report on petroleum industry mergers that refinery closures ``have
overwhelmingly involved small, relatively unsophisticated facilities.
Of the 57 refineries closed since 1990, 23 had distillation capacities
of 10 MBD or less, only seven had capacities greater than 50 MBD, and
only two had capacities greater than 100 MBD.'' The Petroleum Industry:
Mergers, Structural Change and Enforcement, p. 185.
Nonetheless, Chevron always evaluates opportunities to expand our
capacity where demand warrants and it is economic to do so. As noted in
Chevron's written testimony, Chevron is making investments to improve
reliability and increase production at our refineries in Richmond and
El Segundo, CA, and Pascagoula, MS. Chevron has expanded capacity over
the past ten years and has plans to continue to do so in the future.
Question 3. The recent hurricanes resulted in the need to import
substantial refined products such as gasoline, diesel fuel and aviation
fuel to meet U.S. demand. The question has been raised as to whether
the country should develop a strategic reserve of finished petroleum
products. What would be your reaction if the Federal government either
directly or by way of contract with the private sector sought to create
a strategic reserve of finished petroleum products? Since these
products have a limited shelf-life, one proposal is to obtain and
operate a number of refineries and have the products be used by the
Federal government. Appreciate your comments on this proposal.
Answer. Chevron does not believe that establishing gasoline or
other refined product reserves would ensure stability of price and
supply. There would be costs and logistical challenges for establishing
and maintaining such reserves and could result in unintended
consequences, such as raising the cost of gasoline or jet fuel. These
challenges include determining when and where to store products,
dealing with a number of fuel specifications, and the need to rotate
storage of products to prevent them becoming stale, among other issues.
Chevron believes a comprehensive national energy policy that addresses
both supply and demand would have a more significant impact on market
stability. Further Chevron believes private enterprise is best suited,
rather than the government, to own and operate refineries.
Question 4. Given the recent profitability of the oil industry, I
am interested to learn more on the disposition of these profits,
particularly to enhance both production and refining capacity. Are any
of these profits being used to enhance production and refining capacity
for the benefit of other countries? What fraction of your profits is
being invested for production and for refining? What percentage of
profits have been used for stock buybacks and mergers and acquisitions?
Answer. Re: Profits being used to enhance production and refining
capacity for the benefit of other countries--Crude oil is a globally-
traded commodity. Investments anywhere in the world that add to the
supply of crude oil benefit all consumers, including those in the
United States. While natural gas is not yet a globally-traded
commodity, industry investments are rapidly moving markets in that
direction. Likewise, investments in global refinery capacity that
generate additional supplies of petroleum products benefit U.S.
markets.
Re: Fraction of profits being reinvested for production and
refining--Chevron is investing all across the value chain. Since 2002,
Chevron has invested $32 billion in capital expenditures worldwide--
more than it earned over this same period.
For the nine-month period ended September 30, 2005, Chevron's
capital and exploratory expenditures totaled $7.1 billion, a 26 percent
increase over spending for the same period last year. Approximately
three-fourths of total capital spending for the nine-month period ended
September 30, 2005, or $5.5 billion, was invested in upstream
(exploration and production) activities. About $1.3 billion, or 18
percent of total spending, was for global downstream (refining,
marketing and transportation).
Our capital expenditures are planned often years in advance and are
based on investment opportunities available. Our major capital projects
require sustained spending commitments over multiple years for the new
energy production capacity to be installed. Thus, we maintain high
levels of spending even during periods of depressed earnings.
Re: Percentage of profits used for stock buy-backs and mergers and
acquisitions--In 2004, Chevron announced a $5 billion common stock
repurchase program. Purchases under this program totaled $4.3 billion
through September 2005.
In August 2005, Chevron acquired 100 percent of the outstanding
common shares of Unocal Corporation. The aggregate purchase price
included approximately $7.5 billion cash as partial consideration of
the total purchase price. This was the largest of the company's recent
merger and acquisition activity involving cash. From time to time, the
company also makes relatively minor property acquisitions in the normal
course of business.
Question 5. You've all said profits are cyclical, and that your
companies have also suffered from the volatility of the oil markets.
Would your stockholders be better served if domestically produced oil
was sold at a fixed rate that included a generous profit margin above
the production, refining, and distribution costs?
Answer. No, our stockholders are best served when market forces are
allowed to act unfettered and when the U.S. government consistently
advances a comprehensive energy policy that promotes a stable and
encouraging investment climate for the responsible development of
energy supplies. This question raises the prospect of establishing
comprehensive price controls. History shows price controls and other
interference with normal market mechanisms do not accomplish the
intended effect. Gasoline price controls in effect in the 1970s and
early 1980s were poor public policy. Prices shot up to their maximum
allowed levels, the industry's quality of service dropped, and
consumers were forced to wait for hours in long lines to purchase gas
during that period. These consequences are not in the best interest of
our shareholders or consumers.
Question 6. Do you believe that global warming is occurring? Do you
believe that man-made activities have a role in this phenomenon? How
will global warming impact your companies in term of added costs for
oil and gas development, or allow access to new areas for oil and gas
development?
Answer. Chevron recognizes and shares the concerns that governments
and the public have about climate change. Although Chevron does not
have specific expertise in climate science, Chevron has been
implementing a business-driven, four-fold action plan dedicated to
reducing our greenhouse gas (GHG) emissions. The action plan is focused
on improving energy efficiency, investing in research, pursuing
opportunities in innovative energy technologies, and supporting
economically sound policies that protect the environment.
We have developed a comprehensive program to manage GHG emissions
that is being integrated into our business decisions. We include GHG
emissions analysis in the planning of all major capital projects,
acquisitions and divestitures.
We also support and assess the work of reputable scientific
institutions such as the Massachusetts Institute of Technology (MIT)
Joint Program on the Science and Policy of Global Climate Change, MIT
Carbon Sequestration Initiative. We also monitor the activities of the
Intergovernmental Panel on Climate Change, and the U.S. National
Academy of Sciences on all aspects of the climate change issue.
One of the most critical environmental challenges facing the world
today is finding ways to provide and use reliable, affordable energy
while reducing long-term growth in GHG emissions. Technology offers a
variety of potential solutions, including efficiency improvements;
CO2 capture and geologic storage; the use of trees, plants
and soils to store carbon; and the development of commercially viable
non-fossil-fuel energy systems. Regarding costs and access for oil and
gas development, at this time the impact is unclear.
For more information, regarding Chevron climate change activities,
our website can be visited at http://www.chevron.com/social--
responsibility/environment/global--climate.asp
Question 7. Is it accurate that United States LNG terminals in
Massachusetts and Maryland are only operating at half capacity? Do you
believe if these plants were operated at a higher capacity it would
have changes the market dynamics that determine the current price?
Answer. Chevron does not own or operate the referenced LNG
terminals in Massachusetts and Maryland and cannot comment on whether
they are operating at their rated capacity. We would recommend the
Committee get information directly from the terminal owners on this
question.
Question 8. Please state for the record your company position on
fuel economy standards. Are there other incentives that you support
that you feel are better for consumers than the Corporate Average Fuel
Economy paradigm?
Answer. Chevron has not taken a position on Corporate Average Fuel
Economy standards at this time. Chevron will defer to Congress and
other policymakers whether to address changes in fuel economy
standards. Chevron has clearly supported efforts to conserve energy,
and recognizes that conservation is one of the cheapest forms of
``new'' energy that we have. Many automakers (including Ford, Toyota,
and Honda) are making more fuel-efficient vehicles, which consumers are
increasingly purchasing, indicating that market forces are working to
help encourage introduction of these new vehicles.
Question 9. I understand that over the past 5 years companies in
your industry have downsized significantly. Now there is a shortage in
workers and equipment to increase drilling. Please explain that
dynamic.
Answer. By its very nature, the economics of oil and gas production
runs in long-term cycles. High market prices of oil and gas attract
investment, spur drilling and associated industry activity, and
increase the demand for workers and equipment. When market prices fall,
investment goes elsewhere, workers move to other jobs, and equipment
sits idle. We are now in the part of the cycle where prices are high,
resulting in demand for workers and equipment. These cycles peak and
trough over multi-year periods, which is how long it takes for new
investment to bring oil or gas to the market place.
Question 10. As you probably know, Congress is likely to open up
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas
exploration. Do you have plan to bid for leases in this area? What does
the price of oil have to be to make ANWR exploration and extraction be
economically viable?
Answer. Chevron continues to strongly support opening the ANWR
coastal plain for environmentally responsible oil and gas exploration
and development, and our long-term interest in ANWR is demonstrated by
the maintenance of our 92,000 acre lease position on the coastal plain.
As a matter of long standing policy, Chevron does not comment on future
leasing plans. We will evaluate any future bidding opportunities as
they arise.
Question 11. I understand that many of your resources and equipment
are working flat out to rebuild infrastructure in the Gulf of Mexico.
If there is no capacity to expand oil and gas exploration, what good is
opening up sensitive environmental areas to increased drilling going to
do for the consumer in the short run?
Answer. Repairing the platforms and pipelines in the Gulf of Mexico
is a short-term anomaly to our normal activity, and we expect most
repairs to be completed in the near future. Oil and gas exploration and
production are longer term activities that include gathering seismic
data, exploratory drilling and production of new resources found that
collectively take years to complete. If areas were opened today, the
capacity for exploration and production would be available when needed.
Question 12. Given the growing demand for oil in Asia, do you
believe that oil derived from the Arctic National Wildlife Refuge could
be diverted to supply Asian markets? If drilling in the Arctic National
Wildlife Refuge is authorized this year, when will it begin to have an
impact on gasoline prices? What do you believe that effect will be?
Answer. We believe that most oil produced from ANWR will be
directed to lower 48 markets. Gasoline prices are driven by supply,
demand, and other market conditions. An ANWR opening could have an
immediate impact on market perceptions of long-term supply/demand
dynamics, but at this time it is impossible to quantify its impact.
Question 13. Do you support more transparency in the oil and
natural gas markets, as would be provided in my bill S. 1735?
Answer. We believe the existing mechanisms and services provide
sufficient information on market prices. We also believe the
transparency provisions of S. 1735, which require additional data
collection and dissemination by the FTC, are not needed and will not
measurably improve the quality of price information available to the
public, government and market participants.
Question 14. How has the last 3 years of escalating gasoline prices
affected demand by American drivers? Have we seen a correlation between
a certain level of price increase and less demand by American drivers?
What is the actual level of reduced demand today compared to 3 years
ago (please respond in the context of a doubling of retail gasoline
prices)?
Answer. The extent to which changes in price for gasoline over the
past three years affected the demand for gasoline is unclear. Based on
EIA data, consumption of gasoline has increased from an average of
8.880 million barrels per day in 2003, to 9.140 million barrels per day
in 2005, an increase of almost 3% over the period. Gasoline consumption
in 2005 has increased by about 0.8% over 2004.
Question 15. What is the crude oil extraction costs for major oil
producing countries, including our own? How does that compare with oil
derived from shale or coal?
Answer. Chevron does not have data on crude oil extraction costs
for other oil producing countries, as production in many countries is
run by national oil companies and this information is not made public.
In the United States, operating costs have been rising since the mid-
1990s, and have jumped significantly since 2002 due to high demand on
purchased goods and services.
Some methods for producing oil from shale indicate that production
may be profitable at current crude prices of about $60 per barrel.
Chevron has submitted an application to the U.S. government to build
and operate an experimental shale oil pilot facility. If successful, in
several years we should have much more information on the costs and
technical issues of producing oil from the country's extensive oil
shale resource.
Question 16. Regarding foreign exporting, inventory maintenance,
and other practices of your company, please provide a response to each
of the following questions and information requests:
a. For each and every export shipment to a foreign country of
gasoline, distillate fuel oil, propane, or liquefied natural gas
occurring from January 1, 2005 to present, please provide the date,
product type, volume, domestic port of exit, foreign destination,
transportation costs, and the sale price or transfer value upon arrival
at the foreign destination.
Answer. Today, Chevron imports more refined products into the
United States each year than it exports. The attached table (Attachment
1)* includes the requested data for gasoline and distillate fuel oil
exports. There was no export activity involving propane or LNG.
---------------------------------------------------------------------------
* Attachments 1-3 have been retained in committee files.
Question 16a. Since January 1, 2001 to present, please identify the
number of shipments wherein your company exported gasoline, distillate
fuel oil or jet fuel and the sales price or transfer value received at
the destination was less than the amount that would have been received
had the product been marketed by your firm in the United States.
Answer. Due to contractual commitments, differences in foreign and
U.S. fuel specifications, the long lead time between the point of
committing to an export and when the actual delivery occurs, constantly
changing conditions in foreign and U.S. markets and many other factors,
it would be extremely difficult if not impossible to reconstruct the
details behind each export that would be necessary in order to answer
this question.
Question 16b. Since January 1, 2001 to present, please identify the
date, product, volume(s), foreign port of origin, expected U.S. port of
entry, and eventual port of final destination in each instance wherein
your company basically ``turned a ship away'' (whether proprietary
product or acquired from a third party) by changing the shipments
expected arrival in a U.S. port to a foreign port.
Answer. If the premise of the question is that Chevron would direct
a cargo destined for a U.S. port to another location in order to reduce
supply into the US, Chevron disagrees with that premise. However,
Chevron does not maintain a database that would facilitate answering a
question about cargoes originally destined to the United States which
ended up being shipped to a non-U.S. location. In the normal course of
business, changing refinery operations, market conditions or other
business reasons can result in cargoes originally destined for one
location to be redirected to another location or destination. For
example, following hurricanes Katrina and Rita, in response to the
temporary shortages of refined product, Chevron contracted for
shipments of fuel to supply customers in the United States. Some of
those cargoes were originally destined to other markets, including
other U.S. ports. As another example, following Hurricane Katrina,
cargoes of crude oil which were destined for our Pascagoula refinery
had to be redirected because our wharf and terminal were damaged by the
storm and could not accept them.
Question 16c. From 1995 until present, please identify by month the
inventory levels maintained by your company for gasoline and distillate
fuel oil in both barrels and converted to ``days of cover'' or ``days
of supply'' for your firm's distribution and sales volumes within each
of the Petroleum Allocation Defense Districts (PADDS) in the United
States.
Answer. For purposes of this question, Chevron defined the ``days
of supply'' as inventory divided by average daily sales. The attached
table (Attachment 2) presents data for the period 1/1/2003 to present.
Prior period data is not readily available.
Question 16d. From January 1, 2005 to present, provide the details
of each ``spot market'' (as commonly referred to in the industry for
bulk sales, in volumes exceeding 5,000 barrels per transaction)
including the date, identity of both the seller and purchaser, location
of the product being sold, and the selling price.
Answer. The attached table (Attachment 3) provides the requested
transaction details other than purchaser and seller identities. We
generally consider purchaser and seller identities to be business
confidential. If Committee members have questions about particular
Chevron spot transactions, we would be happy to discuss such questions
with the staff further.
Question 16e. Describe your company's use of ``in-house trading
platforms,'' and identify all individuals in your company by name,
address, email, and phone number that were authorized during 2005 to
either exchange, trade, sell or purchase gasoline or distillate fuel
oil on either the ``spot market'', NYMEX futures market, or via
``forward paper'' purchase rights.
Answer. Chevron uses two internal software systems to track trades.
One system is used primarily to track non-U.S. waterborne movements of
products and the second to track movements of product within the U.S.
For privacy reasons, we are not providing the identifying information
requested concerning employees. We have numerous employees who are
authorized to conduct such activity. If Committee members have
questions about Chevron trading activities or the activities of
individual Chevron traders, we would be happy to discuss such questions
with the staff further.
Question 16f. Please identify all third party reporting services,
including but not limited to Oil Price Information Service (OPIS),
Lundberg Surveys, Platts, and Oil Intelligence that your company
regularly supplies transaction data or marketing information and all
individuals of the company by name, address, email, and phone number
that were authorized during 2005 to provide the information or data to
such third parties.
Answer. For privacy reasons, we are not providing the identifying
information requested concerning employees. Chevron has a select number
of people within the company who are authorized to conduct such
activity. Chevron provides information on crude oil transactions to the
following third party reporting services--Platt's, Bloomberg, Dow Jones
(Telerate), Reuters, Argus, RIM (in Asia only) and APPI (Far East
only). Chevron provides information on products transactions to
Platt's, Argus or OPIS. Chevron reports natural gas transactions which
meet the reporting requirements of the Federal Energy Regulatory
Commission's (FERC) Policy Statement on Natural Gas and Electric Price
Indices (Docket No. PL03-3) and participates in both Bidweek and Daily
Price Reporting to the following index publications: Platt's,
Bloomberg, Natural Gas Intelligence (NGI), Natural Gas Weekly (NGW),
Ioenergy and Argus Media. An independent group within Chevron also
communicates with these third party reporting services to obtain
feedback on the reporting described in this paragraph, to offer
improvements to the transparency of the data used in index development
and to discuss any issues with the information supplied by Chevron.
If Committee members have additional questions about Chevron price
reporting activities, we would be happy to discuss such questions with
the staff further.
Question 16g. Please identify the branded and unbranded ``rack
prices'' that were reported by your company to third party reporting
services such as OPIS and the branded and unbranded ``rack prices''
that were actually charged distributors or jobbers by your company each
day, from January 1, 2005 to present, at the truck loading terminal(s)
that typically supply gasoline stations in Houston, TX, Atlanta, GA,
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR, and Seattle,
WA.
Answer. Chevron does not report its terminal rack prices to price
reporting services such as OPIS. Nor during 2005 has Chevron sold
unbranded gasoline at the rack to distributors or jobbers at any of the
locations identified, or branded gasoline at terminals that supply
gasoline stations in New York or Chicago.
Chevron's branded rack prices for the other terminal locations from
January 1, 2005--November 1, 2005 are set forth in the attached table
(Attachment 4). * As noted earlier in Chevron's written testimony (see
Attachment B), the hurricanes impacted markets throughout the United
States and elsewhere around the world.
* The information referred to has been retained in Committee files.
---------------------------------------------------------------------------
Question 16h. Will your company commit that it will take no efforts
to retaliate against any firm or individual that is a potential witness
before this Committee or cooperates with any investigation into the oil
industry by Congress or another governmental authority?
Answer. Chevron does not and will not engage in the type of conduct
suggested by the question.
Question 16i. From January 1, 2005 to present, for each instance
known to your company wherein a third party (not your company) exported
gasoline, distillate fuel oil, propane, or liquefied natural to a
foreign country, please provide any of the details known to your
company including the identity of the exporter, date, product type,
volume, domestic port of exit, foreign destination, transportation
costs, and the sale price or transfer value upon arrival at the foreign
destination.
Answer. Chevron has only limited anecdotal information regarding
third party shipping activity and Chevron does not attempt to validate
such information.
Question 16j. Since January 1, 2001 to present please identify the
identity, date, product, volume(s), foreign port of origin, expected
U.S. port of entry, and eventual port of final destination in each
instance wherein your company is aware a third party (not your company)
basically ``turned a ship away'' (whether proprietary product or
acquired from a third party) by changing the shipments expected arrival
in a U.S. port to a foreign port.
Answer. Chevron does not possess this information. Chevron has
anecdotal information about third party shipping activity, but it is
not validated and Chevron does not know a third party's instruction to
its vessels.
Question 16k. Please provide an itemized list of tax deductions and
credits taken under the U.S. tax code for 2004, by your parent company
and subsidiaries.
Answer. For 2004, Chevron claimed tax deductions for salaries,
wages, compensation, rents, interest, bad debts, taxes and licenses,
charitable contributions, depreciation, depletion, advertising,
employee benefits and other miscellaneous business expenses. Chevron
also claimed foreign tax credits, general business tax credits and non-
conventional fuel credits.
Response to Written Questions Submitted by Hon. Ken Salazar to
David J. O'Reilly
Question 1. The Agriculture Committee is looking at the impacts
these high energy prices are having on agricultural producers around
the country. To sum it up: they are hurting. It seems to me that there
is tremendous potential for our country to grow fuels such as ethanol
and bio-diesel. This approach offers many benefits to rural America as
well as to the country as a whole. What type of investments is your
company making (and planning to make) in these types of renewable fuels
in the United States?
Answer. Chevron has spent more than $1 billion since 2000 on the
next generation of energy by focusing on the pragmatic development of
renewables and alternative energy sources, and the creation of more
efficient ways of using the energy.
Chevron Energy Solutions (CES) develops, engineers and constructs
holistic energy efficiency, conservation and power system projects for
institutions and businesses. CES has developed energy efficiency and
renewable projects for large-scale facilities operated by the U.S.
Postal Service, the Department of Defense, hospitals and public
schools.
Chevron is the world's largest producer of geothermal energy having
developed more than 1000 MW of capacity. In 2004 Chevron announced a
$128 million plan to expand our Daajat geothermal power plant in Garut,
West Java, Indonesia.
Chevron invested in a 22.5 MW wind farm at the Nerefco refinery in
the Netherlands, the first large-scale wind project on a brownfield
refinery. Chevron has one of the largest solar photovoltaic
installations in the U.S., a 5090 kw solar array, at our Bakersfield,
California production location.
Chevron is a joint venture participant with COBASYS, working to
commercialize nickel-metal hydride batteries for such applications as
hybrid electric vehicles and stationary power supply devices.
Chevron is also leading a consortium in a five-year demonstration
of hydrogen infrastructure and fuel-cell vehicles by building six
hydrogen energy service stations with fueling facilities for small
fleets of fuel-cell vehicles and capacity to generate high-quality
electrical power from stationary fuel cells.
Question 1a. Rural America is crying out for investment in
renewable fuels, and I encourage your companies to look at the
potential of renewable fuels. In terms of a percentage of your capital
expenditures, how much money did your company spend this year to
develop renewable fuel sources in the United States? What will that
percentage be going forward?
Answer. Detailed information is not readily available. See answer
to question above regarding Chevron investments in renewables,
alternative energy sources, and the creation of more efficient ways of
using energy.
Question 1b. Will you also provide this committee with some
examples of renewable fuel projects that your company is pursuing
outside the United States?
Answer. See answer above.
Question 2. As a few of you note in your testimony, diesel prices
have remained high while unleaded gasoline prices have come down. It
seems as if we are getting lower priced unleaded gas at the expense of
diesel. Since diesel is the fuel of choice in agriculture, it is a sort
of a double whammy on our producers. What is being done, or what can be
done, to get diesel prices back in line with the price of gasoline?
Answer. Transportation fuel prices are determined by supply, demand
and other competitive factors in the marketplace. Demand for diesel
products has been increasing in both the U.S. and Europe, and is
expected to continue increasing as we enter the winter season. The
recent impact of hurricanes significantly affected both U.S. gasoline
and diesel supplies because of refinery outages. The market works in a
way that supplies move to the highest demand. Because of higher demand
for diesel than gasoline, notably in the European Union, the United
States ended up attracting less diesel imports which have led to
continuing higher prices for diesel.
Question 2a. If demand for diesel is so high in Europe and high
prices don't attract the supplies necessary to lower prices, isn't that
a good indicator that we should work to produce more diesel in the
United States and look to biodiesel as an option?
Answer. As noted in our testimony, Chevron is investing to increase
refining capacity in the United States through our existing refining
network. Further, there are policy recommendations that the U.S.
government can implement to create a better investment climate for
refinery investment, which are highlighted in our written testimony.
Lastly, biodiesel and diesel made from natural gas (Gas-to-Liquids
technology) may create additional and alternative supplies of diesel
fuel.
Question 3. For the record, will you tell me what your company has
spent on capital expenditures in cash, not including write offs such as
amortization or depreciation. Will you also provide the figures spent
on cash dividends and stock buyback for the same time period?
Capital expenditures: The table below shows Chevron's capital and
exploratory expenditures for the periods 2000 through September 30,
2005. Some of the exploratory expenditures are capitalized. Other
amounts may be expensed under the applicable accounting rules if a
project is not successful or if the project does not move into the
development phase within a certain time period.
----------------------------------------------------------------------------------------------------------------
Total for
the period Nine months
$ Billions 1/1/2000 ended 9/30/ 2004 2003 2002 2001 2000
through 9/ 2005
30/2005
----------------------------------------------------------------------------------------------------------------
Capital an exploratory expenditures............... $53.6 $7.1 $8.3 7.4 $9.3 $12.0 $9.5
----------------------------------------------------------------------------------------------------------------
Source: Chevron Form 10-Ks.
Cash dividends and stock buy-back: Dividends and share repurchases
under repurchase programs for the periods 2000 through September 30,
2005 totaled $17.4 billion and $5.9 billion, respectively.
Question 4. On November 1st, Senator Grassley asked your companies
to contribute 10% of your record profits to supplement LIHEAP funding
for the less fortunate. Will your companies support Senator Grassley's
proposal?
Answer. Chevron supports full funding of the LIHEAP program but
does not believe funding should be done by the energy industry.
Chevron's role is to invest to provide new energy supplies, examples of
which are highlighted in our written testimony. Since 2002, Chevron has
re-invested the equivalent of our profits to help produce more energy.
The government's role is to best determine the priority and the funding
of programs such as LIHEAP. Congress's prioritization and funding of
LIHEAP should be completely independent of oil industry earnings.
Question 5. I'd like to encourage you to actively work with the
Department of Energy and any other relevant federal agency on
initiating a public/private education campaign focused on energy
education and conservation. In the meantime, will you tell me what your
company has done on its own initiative?
Answer. As noted at the hearing, Chevron would be receptive to
working with DOE and other on a public/private campaign on energy
education and conservation. As a company, Chevron has launched a new
thought/advertising campaign called ``Will You Join Us'' http://
www.willyoujoinus.com/ that highlights energy issues, helps put energy
issues into context (particularly around near term, real energy
solutions and alternatives) and helps educate the public about steps
they can take to conserve energy.
______
Response to Written Questions Submitted by Hon. Mel Martinez to
David J. O'Reilly
Question. What are each of your companies doing for us to develop
that ingenuity and that know-how into independence of fossil fuels as
we've known them in the past, utilizing renewables, utilizing ethanol
and maybe other technologies as well?
Answer. As noted in Chevron's written testimony to the Committee,
in the short term, globally energy markets are becoming more
interdependent rather than independent (see written testimony
Attachment C: Global Energy Equation, and U.S. Energy Policy: A
Declaration of Interdependence). Please refer to Chevron's written
testimony about what Chevron is doing to help meet America's energy
needs, including research and development expenditures and investments
in energy efficiency, and alternatives such hydrogen infrastructure and
fuel cell vehicles, advanced batteries, and renewables such as solar
photovoltaic installations. Chevron suggests policy recommendations for
the U.S. government to consider.
______
Response to Written Questions Submitted by Hon. George Allen to
David J. O'Reilly
Question. But insofar as fuels, in the next 10 years what can our
government do to help or stop hindering the actual use of--whether it's
hydrogen, whether it's fuel cells, whether it's clean coal or these
renewables, these biofuels, what can we do in 10 years to get our
automobiles--rather than looking at just fossil fuels, looking at these
renewables and innovative approaches--what can we do, in your view, to
actually achieve this greater energy independence?
Answer. As noted above, and in Chevron's written testimony to the
Committee, in the short term, globally energy markets are becoming more
interdependent rather than independent (see written testimony
Attachment C: Global Energy Equation, and U.S. Energy Policy: A
Declaration of Interdependence). Please refer to Chevron's written
testimony about what Chevron is doing to help meet America's energy
needs, including research and development expenditures and investments
in energy efficiency, and alternatives such hydrogen infrastructure and
fuel cell vehicles, advanced batteries, and renewables such as solar
photovoltaic installations. On page 13, Chevron suggests policy
recommendations for the U.S. government to consider.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
David J. O'Reilly
Question 1. Did the existence of price gouging statutes in
Louisiana, Mississippi and Alabama play any role in your decision to
freeze prices after Hurricane Katrina?
Answer. No.
Question 2. In the last decade, has your company ever withheld
supply of crude oil or refined product from the market in order to
prevent prices from falling?
Answer. No.
Question 3. Please describe any business relationship or
transaction your company or any of its subsidiaries, wherever located
and wherever incorporated, whether wholly owned or not, have had with
Iranian nationals (except employment of Iranian expatriates), the
Iranian government, individuals or corporations located or incorporated
in Iran, or any representative of these people or companies.
Answer. Based upon due inquiry, except for the employment of or
possible transactions with Iranian expatriates outside Iran and the
other incidental matters mentioned below, we are not aware of any
instance in which Chevron Corporation or any of its owned, controlled
or operated subsidiaries has, since the combination of Chevron and
Texaco occurred in late 2001, entered into any business relationship or
performed any transaction with any instrumentality of the Iranian
government, with any Iranian national or with any individual or
corporation that is located or incorporated in Iran, or with any
representative of such persons.
Chevron and its subsidiaries have taken only those actions that the
U.S. sanctions permit U.S. companies to take, namely (i) to acquire and
analyze preexisting geological and geophysical data and information
about Iranian oil and gas fields, (ii) to participate in public
conferences concerning Iranian oil and gas properties, and (iii) to
meet and become acquainted with the personnel of the Iranian government
who manage Iran's oil and gas assets. Chevron has not, of course,
entered into any agreements or negotiations for agreements with Iran or
made any business proposals to Iran. Neither has Chevron provided any
information to Iran concerning our analysis of the geological and
geophysical information that we have acquired.
The foregoing actions have involved incidental transactions that
are related to attendance at public conferences, to the acquisition of
preexisting data and to travel to Iran, all of which are transactions
that the U.S. sanctions permit U.S. companies to conduct. Our
subsidiaries have also maintained and renewed preexisting trademark
registrations in Iran, to protect our valuable trademarks and trade
names from being misappropriated by others. Finally, Chevron has made
humanitarian donations to U.S. nonprofit relief organizations for their
use in connection with natural disasters which have occurred in Iran.
______
Response to Written Questions Submitted by Hon. Olympia J. Snowe to
Peter C. Harvey
Question 1. State of Emergency as Trigger for Price Gouging--Most
state price gouging laws are applicable only in situations arising from
a declared emergency. My home State of Maine is different in that the
law applies in any instance where there is evidence of ``unjust and
unreasonable profits in the sale, exchange or handling of
necessities.'' Why did your state legislature choose to limit its law's
impact to declared states of emergency?
Answer. The purpose of New Jersey's law is to ensure that merchants
do not worsen the harm or loss suffered by people who are facing an
emergency, or attempting to mitigate the harm or loss incurred as a
result of the emergency, by artificially inflating the prices they are
charged for essential goods or services. It should be noted that New
Jersey's law applies only when a state of emergency has been declared
in New Jersey by the Governor and only in the geographical area of the
State where the emergency is declared. It prohibits excessive price
increases in the sale of any merchandise ``consumed or used as a direct
result of an emergency or which is consumed or used to preserve,
protect, or sustain the life, health, safety or comfort of persons or
their property.'' The statute is not a price control provision. Its
language makes that clear. Rather, it is a provision aimed at
protecting people who are recovering from a disaster or an emergency.
The law seeks to strike a balance between respecting market
conditions and protecting consumers. The ``Legislative findings''
section of the law states, ``While the pricing of merchandise is
generally best left to the marketplace under ordinary conditions, when
a declared state of emergency results in abnormal disruptions of the
market, the public interest requires that excessive and unjustified
price increases in the sale of certain merchandise be prohibited.''
Question 1a. How frequently do states declare a state of emergency?
Answer. During the past five years, New Jersey has declared
weather-related states of emergency 16 times, or roughly 3 times per
year.
Question 1b. Has there ever been a situation where there is
evidence of an unconscionable increase in price outside of a declared
emergency?
Answer. Yes. Generally we allow sellers to charge what the market
will bear and rely on competition to keep prices in check. However,
there certainly are instances of situational pricing which a reasonable
person would consider to be unconscionable, where sellers exploit the
immediate needs of consumers and the lack of alternative, less costly
sources for essential goods or services. A good example is the tow
truck driver who doubles or triples the standard fee ordinarily charged
for a tow or repair service for a stranded motorist at 3 a.m. when no
other tow truck is available. To determine whether ``unconscionable''
pricing occurred after Katrina would require a complex analysis of
supply and market conditions nationwide after the hurricane.
Question 2. The Department of Energy established a 1-800 phone
number as well as Web form for consumers to report possible instances
of price gouging. According to the DOE, the information they receive is
forwarded to the Department of Justice, the Federal Trade Commission,
and the affected State's Attorney General. Have you been receiving this
information?
Answer. Yes.
Question 2a. Is it helpful?
Answer. Yes.
Question 2b. What do your offices do with this information once it
is received?
Answer. Follow up, investigate and, where appropriate, take action.
Question 3. As a former Attorney General, I recognize the enormity
of the job that you perform with limited resources. In September, I
wrote to Attorney General Gonzales and asked the Department of Justice
to provide technical and financial support to state attorneys general
to investigate price gouging. What, if any, assistance have you
received from the DOJ?
Answer. None to date.
Question 3a. What, if any, additional assistance could the Federal
Government provide to your offices?
Answer. State attorneys general would welcome federal financial
assistance to support investigations and enforcement targeting price
gouging and other consumer issues affecting essential commodities such
as gasoline, home heating oil, food and non-alcoholic beverages. State
attorneys general also have a need for economic and technical expertise
from the Federal Government, as well as relevant data, which would be
helpful to prove price gouging in many cases. Proving gas price gouging
after Katrina would have demanded analysis of highly technical issues
of supply and pricing in the energy industry.
Question 4. Are you aware of price gouging for fuel--or other
commodities--in your state following Hurricane Katrina? Are there
investigations underway? Do you have adequate state authority?
Answer. As I testified before the Committees on November 9, 2005, I
filed four lawsuits on September 26, 2005 on behalf of New Jersey
against three oil companies, Hess, Motiva Shell and Sunoco, and a
number of independent gas station operators in connection with gas
price increases after Hurricane Katrina. In the week after Katrina
struck, gas prices in New Jersey soared to an average of $3.16 a gallon
by Labor Day, a dollar higher than the average just one month earlier.
We sent inspectors to more than 500 gas stations in response to
consumer complaints. Although New Jersey's price gouging law applies
only when a state of emergency has been declared in the state, we were
able to pursue claims alleging the defendants violated New Jersey's
Motor Fuels Act and Consumer Fraud Act, including a provision in the
Motor Fuels Act prohibiting a gas retailer from changing gas prices
more than once in a 24-hour period.
Since the November 9 hearing, New Jersey has reached a cooperative
settlement with Amerada Hess in which the company agreed to pay
$372,391, a portion of which will be used to fund consumer protection
initiatives by our Division of Consumer Affairs, including efforts to
address the home heating needs of seniors and low-income families in
New Jersey. I have attached our press release regarding the settlement
to supplement my answer to this question.
We do believe that some retailers engaged in what could be
appropriately called price gouging after Katrina by artificially
inflating their gas prices based not on what they actually paid, but on
what they believed could be charged given the fears raised about
gasoline supply. Given the limitations of our price gouging law, our
legal efforts were grounded on the Motor Fuels Act, an antiquated
statute enacted in 1938 to prevent predatory pricing. The original
intent of the Act was to prevent one gas retailer from repeatedly
undercutting a competitor's prices to drive the competitor out of
business. It provided a tool for us to address the volatility in gas
prices in New Jersey following Katrina, but not an ideal tool.
While the New Jersey Legislature could expand the state price
gouging statute beyond in-state emergencies, I believe our experience
with Katrina points to the need for a federal price gouging statute. A
federal price gouging statute should take effect for a limited time
span, perhaps for 60 days, in order to help stabilize pricing when a
disaster or emergency in one geographic area of the country affects the
supply and pricing of an essential, nationally distributed product. As
I stated previously, proving gas price gouging after Katrina would have
demanded analysis of highly technical issues of supply and pricing in
the energy industry. It was a problem that apparently went beyond
retailers to the major oil and gas companies, which posted record
profits at the same time that consumers were paying record prices. It
went beyond state lines. We need a solution that brings federal
expertise and resources to bear on the problem and that provides for
consistent enforcement nationwide. The enforcement statute should
address not only retailers, but also wholesalers, suppliers and
manufacturers. A federal price gouging statute should not preempt
additional state remedies and, ideally, should provide an enforcement
role for State attorneys general.
[NEWS ATTACHMENT]
Office of the Attorney General
attorney general harvey announces settlement with amerada hess
NEWARK--Amerada Hess Corporation today voluntarily settled a
lawsuit filed in September by the Attorney General's Office, with a
portion of the settlement proceeds funding an energy and motoring
assistance program for low-income residents, Attorney General Peter C.
Harvey and Consumer Affairs Director Kimberly Ricketts announced.
Amerada Hess is the only one of the three oil companies named in
the State's lawsuits to reach voluntary settlement of the matter to
date.
``This settlement, first and foremost, is about protecting the
rights of our consumers,'' said Acting Governor Richard J. Codey. ``It
represents a cooperative understanding between the State of New Jersey
and Amerada Hess that protects the interests of all of our residents,
and also benefits those most in need--low-income families and
individuals on fixed incomes who have been hit hard by rising energy
prices.''
``Our goal is always to make sure that New Jersey consumers get
what they pay for,'' said Attorney General Harvey. ``Gasoline is
essential to our lives and it must be priced consistent with the law.
Amerada Hess showed good corporate citizenship by reaching this
settlement with our Office. We expect other oil companies to follow
Hess's lead.''
The Attorney General filed suit in September against Amerada Hess,
Motiva Shell, Sunoco and various independent gas station operators for
alleged violations of the State Motor Fuels Act and Consumer Fraud Act.
In settling the lawsuit, Amerada Hess agreed to adhere to state law
regarding the pricing of gasoline. Both sides agreed to settle the
matter without an admission of any violation having occurred.
Amerada Hess has agreed to pay $372,391 in settlement. These funds
will be used to reimburse state and county investigative and legal
costs.
A portion of the funds will also be used to fund future consumer
protection initiatives at the Division of Consumer Affairs, including
efforts to address the home heating needs of seniors and low-income
families in New Jersey.
``At its very core, the mission of the Division of Consumer Affairs
is the protection of New Jersey's consumers and, with this settlement,
we have done just that,'' said Kimberly Ricketts, Consumer Affairs
Director. ``This is a good example of how government and private
industry can work together in a productive and beneficial manner.''
Deputy Attorney General Brian Brennan represented the State in the
settlement with Amerada Hess.
______
Response to Written Questions Submitted by Hon. Pete V. Domenici to
Ross J. Pillari
Question 1. What are you doing to bring oil prices down?
Answer. BP is continuing to invest for sustainable production
growth. Over the past 5 years, BP has invested $45 bn in the
exploration and production segment. BP's oil and gas production has
grown more than twice as fast as the world's total production from
2000-2004 (5.4% for BP against 2% for the world.) Due to the
investments over the past five years and our plans for the future, this
strong contribution to supply is set to continue. BP is directly
involved in oil fields which are expected to contribute almost half of
non-OPEC production growth over the medium term.
Over the next five years, our plans show the start up of some 35
major projects. This is in addition to the eight projects which have
already come on stream in 2004 and 2005 and which are ramping up
production. Combined, these projects are expected to develop around 5.5
billion barrels oil equivalent of BP net reserve and underpin our
estimates that we will continue to grow production through the end of
this decade at a cumulative average growth rate of around 5% p.a. In
the longer run, we expect the growth rate to lie in the range of 2% to
5% p.a.
Question 2. What is the relationship between the price of oil that
Americans are paying and the profits you are making?
Answer. We don't report profits on a geographic or segment basis as
we do not have an effective means to allocate taxes and interest at
these detailed levels. For the first nine months of 2005, BP's U.S.
operating profit (before interest and taxes) was $8.2 Billion. This
represents 35% of BP's global operating profit for 2005.
Question 3. The question I hear most from people is how is the
price of oil set? Many Americans think oil companies are rigging prices
to reap big profits. How would you respond to that?
Answer. Oil companies do not set the price of crude. Crude oil is
bought and sold on the international marketplace and the price paid
reflects the market conditions of the day. Like any commodity market,
there is a balance between the world's supply and demand for crude oil.
When there is a disruption in supply, whether perceived or real, prices
will normally increase, unless there is a corresponding reduction in
demand. Similarly, when there is a surge in demand, as has been
happening recently, prices will increase unless there is a
corresponding supply response.
The unusually strong global consumption growth of last year, led by
China, has had the effect of bringing almost all of the world's
available oil capacity into production. There has always been enough
oil in aggregate to meet world demand, but most estimates now place
spare production capacity at only around 1-1.5 million b/d, compared to
an historic average of around 3 million b/d. This provides little
flexibility in the system for supply disruption or strong demand, and
markets naturally drive prices up in such a situation. There is general
agreement that build up of significant additional excess capacity will
take time, even though there is no shortage of potentially producible
oil resources and there have been no reported cases of refineries
cutting runs due to a lack of crude supply.
To date, the rise in oil price has had minimal impact on either
demand or supply. This is not surprising because in the short run,
demand is relatively inelastic. Consumer behaviors take time to change.
Lead times to develop additional supplies are long, so despite record
levels of industry investment, the production impact is not yet
detectable.
Question 4. Americans are being burdened with high oil, natural
gas, and gasoline prices while you all are raking in record profits.
What do you say to those people that blame you for this and say that it
is unfair?
Answer. The high prices experienced by American consumers are a
result of natural market forces. Demand is squeezing available supply
driving prices up. It is a normal characteristic of free markets that
producers receive higher profits when their products are in more
demand. Oil companies invest billions of dollars in high-risk, long-
term investments for exploration, development and technology. In most
years, oil companies do not receive a very large return on those
investments. On average, the returns realized by oil companies are
significantly below those of biotechs, financial firms and computing
industries in particular and all industry in general, despite the level
of risk undertaken.
Question 5. Americans want to know if it is not costing so much
more to produce a barrel of oil, why are prices rising so high?
Answer. Prices are set by the market not by relative production
costs. So the high demand for crude is what is driving the price, not
its lifting cost. However, the cost of production is rising. BP has
experienced oilfield cost increases of between 10-12% in 2005.
Additionally, increased demand brings more expensive hydrocarbons into
the market such as heavy oil, tar sands and deepwater fields)
Question 6. What is your company's response to proposals for
enactment of a Windfall Profits Tax?
Answer. A windfall profits tax would discourage energy investment
in the U.S. and decrease domestic energy security and employment. For
example, the Congressional Research Services (CSR) found that when the
windfall profit tax was imposed during 1980-1988 domestic oil
production dropped as much as 6% and oil imports grew as much as 16%.
BP has had a consistent investment strategy over the last ten years in
the U.S. of about $6 billion/year independent of oil price and company
profits.
Question 7. Do you believe that Americans are dangerously dependent
on oil and its refined products?
Answer. American dependence on oil and refined products has both
costs and benefits. The amount of oil consumed to produce a dollar of
GDP continues to decline, and the amount spent on oil, although it has
increased in recent years, remains below previous peaks.
Relying on imported oil & refined products enables the U.S. to tap
in to lower-cost supplies. And, given that both crude oil and refined
product markets are global, the U.S. would be vulnerable to disruptions
(in the production of crude oil or refined products) even if it were
self-sufficient. On the other hand, U.S. dependence on foreign
production is in itself a function of U.S. oil consumption. Given the
current distribution of oil reserves, the larger U.S. consumption, the
larger its dependence on foreign oil supplies.
Question 8. The International Energy Agency's recent Global Outlook
report expresses concern about world energy supplies and reliance on
the Middle East for oil. Do you think the LEA's anxiety is justified?
Answer. The IEA's role is to provide information (on behalf of its
consuming-country members) on energy market risks today and in the
future. As such, it is appropriate for the IEA to analyze and publicize
risks to global energy supplies, including dependence on Middle East
oil. The Middle Eastern share of world oil exports has not increased
substantially over the last 20 years. It is nonetheless important to
keep those risks in perspective by also assessing the benefits accruing
to the U.S. and world economies by consuming fossil fuels (including
Middle East oil).
______
Response to Written Questions Submitted by Hon. Lisa Murkowski to
Ross J. Pillari
Question 1. In your agreement on an Alaska natural gas pipeline
that you are negotiating with the State of Alaska under the state's
Stranded Gas Act, do you anticipate making a firm commitment to develop
the Alaska gas pipeline project or do you anticipate accepting an
agreement that will only involve a series of spending and work
commitments? If the latter is the case, how long will it be before a
binding construction commitment deadline is reached?
Answer. Negotiations with the State of Alaska are ongoing and we
continue to make progress. A fiscal contract agreement with the State
of Alaska that is approved by the Legislature will enable the Alaska
Gas Pipeline project to move forward to the next phase of permitting
and engineering. We will quickly begin this work after gaining
Legislative approval for the fiscal contract in Alaska. This
engineering work leading to an Open Season as stipulated in the Federal
Legislation will result in the filing of permit applications with the
Federal Energy Regulatory Commission, which is responsible for the
issuance of a Certificate of Public Convenience and Necessity following
application review. Estimated spend by project sponsors prior to final
FERC approval is approximately $1 billion.
A project construction sanction decision would occur following
issuance of FERC approvals.
To summarize, once the fiscal contract is approved by the
legislature and signed into law, the producers would begin advancing
the project. Initial estimates of the project work plan include:
3 years project planning, permitting, engineering, for
regulatory applications
2 years regulatory review; final permits.
1 to 2 years preconstruction activity--ROW preparation,
ordering steel, compressors, etc.
3 years construction
First gas flow to North American consumers
Question 2. If there is a concern about tying up your investment
capital in a single project, if a pipeline company presented you with a
proposal to take all of the risk of construction of the Alaska pipeline
project and to ship your gas at a reasonable tariff, would you commit
the gas you control to that pipeline within a reasonable time period?
If not, why?
Answer. BP has built several basin opening pipelines around the
world where the risk profile was such that it required direct BP
involvement. We have the capital, the financial capability and the
organizational capability needed to undertake an Alaska Gas project
provided the potential risks and rewards are balanced.
The resource owners, including the State of Alaska, shoulder the
risk in the case of an Alaska Gas pipeline, because it is their firm
commitment to use and pay for the pipeline that enables the project to
be financed.
No other entity is as motivated to develop a highly efficient, low
cost pipeline than the resource owners (producers and state). That is
because low costs translate into lower tolls. Lower tolls mean higher
netbacks and more revenues. That is good for Alaska, the producers and
consumers.
BP has consistently indicated a willingness to work with any party
than can reduce risk and add value to a project. If a pipeline company
could actually guarantee a cost of service matched to our projected
production needs that is more competitive than what we believe we can
do ourselves, we would obviously be interested. This has been, and
always will be, the case. It's good business. It is the way industry
operates.
Indeed, we hope and expect the pipeline industry will develop
competitive proposals to move gas out of Alberta to U.S. markets. This
would be a much larger challenge for the pipeline industry than for the
Alaska to Alberta segment given the costs and risks involved. However,
nothing in the agreement we are negotiating with the State of Alaska
would preclude this from happening. In fact, an agreement between the
producers and the State would be a necessary prerequisite for this to
happen.
Question 3. In your companies' view, is it less risky to invest
billions of dollars in new LNG facilities to import natural gas from
foreign sources, than to invest in the Alaska gas line project? If not,
why are you investing in LNG projects before making a firm commitment
to the Alaska project?
Answer. We are attempting to do both as soon as possible because
the nation needs both sources of natural gas. The fact that we invested
in LNG facilities to bring gas to the U.S. before investing in the
Alaska gas line project does not indicate a preference for LNG over the
Alaska gas line--it merely says that, for a variety of reasons, we were
able to bring on LNG investments earlier than the Alaska gas line. The
fact that we did so has been to the benefit of the gas consumers of the
U.S.
Question 4. All of your companies are global in scope. This nation
is concerned about its reliance on foreign sources of crude oil. Does
it make sense for the United States to increase its reliance on foreign
LNG while allowing Alaska's natural gas reserves to continue to remain
in the ground?
Answer. As mentioned above, the nation needs both sources of
natural gas--it is not in an ``either/or'' situation. So the fact LNG
trade into the U.S. increases does not mean that the Alaska gas line is
any less likely to proceed. As well as LNG and the Alaska gas line, the
nation also needs to increase its conservation of all types of energy
so that reliance on all types of energy production is mitigated.
______
Response to Written Questions Submitted by Hon. James M. Talent to
Ross J. Pillari
Question 1. The recent hurricanes have highlighted the need for
increasing refinery capacity, which was already operating at a tight
margin of 97 percent. While that is laudable for efficiency purposes,
it allows no room for error in case of sudden outages or demand
increases. What is the optimal amount of spare refining capacity to
ensure a reliable supply of finished petroleum products at stable
prices?
Answer. There are a number of factors that impact supply, including
global refining capacity. Despite the major supply disruption to the
U.S. markets post-Katrina and Rita, the global refining capacity was
available to minimize longer market impacts. Historically, a global
refining operating utilization of 90% has allowed for enough spare
capacity to reduce market impacts to supply disruptions.
Question 2. How has industry consolidation impacted the amount of
spare production and refining capacity?
Answer. It has had no impact that we have observed. BP sold 4
refineries in the U.S. during the most recent consolidation activity
and each of those refineries continues to operate today under its new
owners.
Question 3. Describe the degree of competition between refineries
for crude oil supplies and sales to retailers. What percentage of crude
oil processed in the U.S. is processed by integrated companies (i.e.,
those produce and refine) versus refined by independent refining
companies?
Answer. Both the market for crude oil and the market for the sale
of refined products are extremely competitive. BP, one of the largest
crude oil producers in the U.S. has only about 8.7% of U.S. refinery
capacity. Per API, the integrated oil companies process approximately
53% of the Refining capacity while the Independents process the
remainder.
Question 4. How has the amount of refining capacity tracked changes
in demand for gasoline and diesel over the last 30 years?
Answer.
As shown in the attached API charts,* the gap between U.S.
refining capacity and gasoline/diesel demand has decreased over
the past 30 years.
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* The charts has been retained in committee files.
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U.S. refining capacity has been steadily increasing over the
past 10 years, driven mainly by `capacity creep'.
Refining capacity alone doesn't give a complete picture. It
may not capture other feedstocks (NGL's, condensates, etc). It
also does not reflect changes in the upgrading capability of
refineries, i.e. at constant capacity a refinery may have
increase gasoline and diesel yields while reducing fuel oil.
In the case of gasoline, growing U.S. demand has been
complementary to an increasing supply surplus from Europe
(caused by lower economic growth and the trend towards diesel).
Question 5. Explain to me your company's plan to increase refining
capacity in the U.S. to meet the need for new refinery capability.
Answer. Refinery margins are very volatile and margins over the
last 10-15 years have not been high enough on average to justify
building a new refinery. BP is planning a $2 billion project focused on
bringing Canadian crude to our existing Northern tier refineries
(Whiting, IN; Toledo, OH, Cherry Point, WA). This investment will
improve the security of crude supply and give better assurance of
keeping refinery runs at maximum. Modest increases in gasoline
production are anticipated.
Outside the Canadian crude project, BP is spending approximately
$700 million per year to insure that our U.S. refineries operate
safely, in an environmentally appropriate way and achieve a high degree
of availability to the American public.
Question 6. EPAct 2005 removed the requirement to include
oxygenates from gasoline, largely because of concerns over the use of
MTBE. What is the impact on the price of removing oxygenates from
gasoline?
Answer. Assuming that with the elimination of the oxygen
requirement for Federal Reformulated Gasoline less MTBE will be blended
into refinery gasoline stocks, total domestic gasoline production could
decline somewhat. Impact on price is unknown since blending ethanol,
imports and other strategies will undoubtedly take up the shortfall.
Question 7. Are there other oxygenates that can be used in place of
MTBE, such as using ethanol to make ETBE, and how does the cost of such
alternative additives compare to the cost of gasoline?
Answer. The oxygen requirement of RFG has predominantly been met
with either MTBE or ethanol. With the elimination of the oxygen
requirement, if an oxygenate is to be used it will likely be ethanol.
In future years, advances in biofuels production technology may lead to
the economic production of other oxygenates and/or blending components.
The cost of such alternatives is unknown.
Question 8. Have you studied the use of ETBE, the cost of
converting MTBE plants and how long it would take to do so, and whether
ETBE avoids the leakage/water contamination problems that were caused
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE
and use it to increase the volume of gasoline produced by a barrel of
oil compare to the cost of expanding existing or adding new refinery
capability?
Answer. Yes, we have studied. ETBE is an ether with properties
similar to MTBE and it can impart an odor/taste to water, if not
properly contained. BP has no current plans to use ETBE as a gasoline
component.
Question 9. What, if anything, is preventing your company from
using ETBE in place of MTBE?
Answer. ETBE is an ether with properties similar to MTBE and it can
impart an odor/taste to water, if not properly contained.
______
Response to Written Questions Submitted by Hon. Gordon H. Smith to
Ross J. Pillari
I have a bill, S. 1743, to give the Federal Trade Commission,
additional authority to prevent and punish price gouging in the
aftermath of a major disaster. My bill provides effective authority to
the Federal Trade Commission to protect consumers from being victimized
in the wake of a disaster without hampering the normal functioning of
the free market. It even recognizes that there are legitimate reasons
why prices may increase.
Question 1. Do you think that this consumer protection authority
should be available to the FTC?
Answer. We have not reviewed your bill. BP supports market-based
pricing that insures an adequate supply from local and global markets
at all times. During times of emergency, it is important that supply
can be moved to the areas that need it. This should not be inhibited.
We also believe that the FTC currently has consumer protection
authority sufficient to address improper conduct during emergencies.
Question 2. Would this serve as a deterrent to price gouging by
individual retailers?
Answer. We can't predict how individual retailers would respond to
increased activity by the FTC.
Question 3. Can you tell me why diesel prices continue to remain
significantly higher than gasoline prices in Oregon?
Answer. The primary driver of why diesel fuel prices are higher
than gasoline is that available inventory for diesel fuel is much lower
than that for gasoline relative to historical levels. Diesel fuel
stocks are at the lowest level that they have been since sometime in
2000 on the west coast while Gasoline stocks are the at the highest
level they have been since 1995 (See attached charts--based on DOE
information).*
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* The charts have been retained in committee files.
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______
Response to Written Questions Submitted by Hon. Jim Bunning to
Ross J. Pillari
Question 1. Some analysts believe that OPEC is approaching its
current oil production capacity. Given this, are oil companies looking
at alternative sources of energy, such as liquid fuels made from coal,
in order to expand their business and maintain energy supplies for the
United States? Please include a review of the level of investment your
company is making this year and the projected investment over the next
three years in coal to liquid fuels initiatives.
Answer. We do not believe that the world is reaching peak oil
production yet. There are still enormous quantities of conventional oil
worldwide, close to 1.2 trillion barrels proven as well as additional
unproven and yet to find barrels.
However we understand the need to maintain a healthy diversity in
the supply of energy and see a number of emerging opportunities to
convert a variety of unconventional hydrocarbons including: heavy oils,
coal, stranded gas, and biomass, into liquids--in many ways these
unconventional liquids represent the next frontier for the oil
industry.
Today less than 2.5Mboe/d is produced from unconventional
resources. We see three principle challenges to further development of
unconventional liquids moving forward: firstly reduction in production
costs driven by scale and technology advances (currently unconventional
technologies range in costs from $25-80/bbl); secondly, and equally
important, will be securing the right policy frameworks to enable
development of these higher cost resources in competitive markets and
where oil prices can still be influenced by OPEC; lastly, converting
most of these unconventional resources, especially coal, is
significantly more carbon intensive than conventional oil, and so we
will need to find ways of reducing carbon emissions.
BP currently invests in the region of $35MM per year in conversion
technologies (not including heavy oil) and are projecting an increase
in spend to over $55MM by 2010. In addition we invest approximately
$10MM today in technologies to reduce the carbon impact of conversion
processes; this will rise to over $20MM by 2010. We believe this is
sufficient to ensure we have a number of technologies ready to
commercialize low carbon conversion technologies, including coal to
liquids, post 2010 depending on the price and policy environment of
particular markets.
Question 2. I have been concerned with the lag time between the
wholesale cost of a barrel of oil and the retail price of a gallon of
gasoline. As we saw following the hurricane, in an ascending market
where wholesale oil prices increase, there is a lag period of a few
days before retail gas prices reflect this change. Similarly one would
expect a lag in a descending market. My concern is that retail prices
are not dropping as quickly as they rose, relative to the change in oil
prices. Could you explain why price movements vary during a complete
market cycle and whether you believe any part of the energy industry is
unfairly profiting from this price lag?
Answer. We believe the profits earned by the industry reflect a
fair return on investment over the long term. Describing the pricing
environment in our business as having a ``complete market cycle,'' is
not entirely accurate. There is no beginning or end in the market
place, but rather periods of rising or falling prices and various
levels of volatility. Retail prices do tend to lag wholesale movements
up and down over time, however retail prices do not move as a result of
wholesale price changes alone. The wholesale price is only one of many
factors that are considered when setting prices. Other factors that are
considered when setting retail prices include competitor price, year-
to-date volume and margin performance, supply, etc.
Question 3. Boosting our domestic energy production is vitally
important not only to our economy but also to our national security.
Many of the countries we import oil from today are unstable,
jeopardizing the reliability of sustained production. Please provide a
chart for each of the last five years reflecting the percentage of your
exploration and production budget that invested in the United States
versus that invested overseas. Please also provide a chart reflecting
your current projections of the percentage of your exploration and
production budgets that will be allocated to projects in the United
States versus overseas for the next five years.
Answer. The table below indicate the absolute spend in the U.S.
over the past 5 years for investment in exploration and production.
This indicates the amount spent in the U.S. expressed as a percentage
of the total exploration and production investment for the year. As you
can see, for BP the spend in the U.S. for E&P has remained constant at
around $4 bn since the integration of Arco into the portfolio and the
percentage spend has averaged around 45%. This investment is greater
than the average percentage profits generated by the U.S. over the
period of around 37%. The significant percentage drop in 2003
investment is attributable to the significant investment we made in the
Russian TNK-BP joint venture that year.
BP would expect future investment levels in exploration and
production to remain at about two-thirds of BP's total global
investment. BP would expect the total investment to be around $15 bn
going forward (plus or minus largely dependent on inflationary and
foreign exchange effects). As to which geographies will be allocated
funding, that would depend on the relative economic regime, including
accessibility to resources, fiscal and political stability, and market
growth.
EXPLORATION & PRODUCTION CAPITAL EXPENDITURES AND ACQUISITIONS
[$ millions]
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
USA......................................................... 3,140 4,047 4,116 3,906 3,913
Global...................................................... 6,344 8,753 9,483 15,192 11,088
USA %....................................................... 49% 46% 43% 26% 35%
----------------------------------------------------------------------------------------------------------------
Figures from BP's F&OI 2000-2004
Question 4. The disruption caused by the recent hurricanes
displayed the United States' vulnerability when it comes to domestic
energy supply and production. What suggestions do you have to
strengthen our energy supply and production capability?
Answer. Our recommendation is to simplify the current boutique fuel
situation across the U.S. This would increase the industry's ability to
provide product to the American public by simplifying delivery
logistics across the U.S. Another recommendation is to consolidate and
facilitate the permitting process for new projects. Because the scale
of oil and gas projects is so large, regulatory certainty is needed
before investments can be made and the many avenues available to delay
or challenge permits substantially increases the lead time to get new
projects on stream. Continuing to promote energy conservation is
another important government initiative.
Question 5. It has been suggested that the United States consider
developing a strategic gasoline and natural gas reserve, similar to
Strategic Petroleum Reserve we currently have. Some analysts suggest
that such reserves may minimize price spikes in these commodities
during periods of market supply disruptions. What are your views on
whether a strategic natural gas or gasoline reserve would be feasible
and whether they might help minimize price increases during periods of
market uncertainty?
Answer. BP does not support the creation of a product reserve
because we believe it would be ineffective. Unlike crude, the storage
of product requires regular rotation of stock which is a complex and
costly logistical issue. With the multitude of product types across the
U.S., it is reasonably likely that the right product would not be
available in the right place when needed. It is also likely, especially
in events of natural disaster that the infrastructure (people, roads,
pipelines, trucks etc.) would not be available to access the reserve.
Lastly, when use of the product reserve would be required, it would be
sold in to the market at spot prices which would be reflective of the
emergency conditions. Thus unless there was a really large reserve, it
wouldn't have the desired effect of avoiding price spikes. All these
factors indicate that a product reserve would bring costs to consumers
without necessarily giving them improved access to product in an
emergency situation.
Question 6. China is becoming a bigger world oil player. This not
only has tightened the world oil market but also has produced national
security concerns for us. What concerns or problems do you see have
arisen since China became a bigger world energy player?
Answer. Just as energy demand increases accompanied economic growth
in the United States, China's rapidly developing economy now also
requires more energy inputs. This is a natural development. As other
countries grow, we can expect similar increases in needs for energy.
Regular functioning of the international market system plays a large
role in ensuring that the world copes with these new demands. Alternate
and renewable fuels should be considered where appropriate. Meanwhile
major consuming countries should continue seeking ways to improve
energy efficiency.
China's share in World oil consumption was 8.2% in 2004. It is
likely to rise if high economic growth is maintained, but we do think
global oil markets can and will adapt to this, if market forces are
allowed to work.
Question 7. While there have been expansions and efficiency gains
at existing refineries, no refinery has been built in the United States
in 30 years. Since the oil companies are now making record earnings,
are there plans to build new refineries in the United States?
Answer. Refinery margins are very volatile and margins over the
last 10-15 years have not been high enough on average to justify
building a new refinery. BP is planning a $2 billion project focused on
bringing Canadian crude to our existing Northern tier refineries
(Whiting, IN; Toledo, OH, Cherry Point, WA). This investment will
improve the security of crude supply and give better assurance of
keeping refinery runs at maximum. Modest increases in gasoline
production are anticipated.
Outside the Canadian crude project, BP is spending approximately
$700 million per year to insure that our U.S. refineries operate
safely, in an environmentally appropriate way and achieve a high degree
of availability to the American public.
Question 8. The 2005 Energy Bill implemented a controlled phase-out
of MTBE. Many companies, however, are planning on completely halting
its use. How will a sudden halt of the use of MTBE affect the gasoline
market and refineries?
Answer. A sudden halt in the use of MTBE could result in a
reduction in the volume of domestic gasoline production, resulting in
an increase in imports.
Question 9. I have noticed very large differences in the price of
gasoline in different areas of the country. For example, I recently saw
gasoline in northern Virginia that was much more expensive than
gasoline in northern Kentucky. Please explain why there can be such a
significant difference in gasoline prices in different areas of the
country.
Answer. There are a number of factors that can influence price
differences between geographies. A major factor is competition between
individual retail outlets. Pricing may also be impacted by tax
differentials between Virginia and Kentucky. There can also be a
significant market differential based on the availability of supply and
overall markets in each area.
Question 10. Below are several questions on oil and the commodities
futures market:
When was oil first traded on the world-wide commodities
futures market?
Would the price of oil be affected if oil was taken off the
commodities futures market and no longer traded?
Would oil then be bought and sold as a true supply and
demand product?
Answer. The International Petroleum Exchange (IPE) was founded in
1980 and the first contract, for Gas Oil futures, was launched the
following year. The IPE Brent Crude futures contract was launched in
June 1988. The WTI crude futures contract first traded in March 1983 on
the NYMEX. Any statement about the impacts of eliminating commodity
trading of crude oil would be pure speculation.
______
Response to Written Questions Submitted by Hon. Jeff Bingaman to
Ross J. Pillari
Section 392 of the Energy Bill, which was negotiated with the
involvement of the Chairman and Ranking Member of the Energy and EPW
Committees, contains permitting streamlining language. The Energy
Policy Act of 2005 permits the EPA Administrator to enter into a
refinery permitting cooperative agreement with a state. Under such an
agreement, each party identifies steps, including decision timelines,
it will take to streamline the consideration of federal and state
environmental permits for a new refinery. I want to ask you several
questions about that provision, since you have supported streamlining:
Question 1. Have you requested that EPA issue any regulations or
take any action to implement these new provisions? If yes, when? If no,
when do you anticipate you will do so?
Answer. BP has not requested EPA to take steps to implement these
provisions and has no current plans to do so in the future.
Question 1a. Have you worked with any state to encourage them to
enter into an agreement with EPA under Section 392 of EPAct?
Response: No.
Question 1b. Do you support the EPAct streamlining provisions?
Answer. Yes. We believe the additional authorities assigned to the
EPA Administrator may prove to be useful and valuable.
Question 1c. Do you have any examples of where a state came to EPA
and said we want to work closely with you on permitting a new refinery
or refinery expansion and EPA refused to provide technical assistance
and even financial resources under existing law to that state?
Response: No.
Question 2. In answer to several of the questions at today's
hearing (Nov 9) the witnesses (you) have noted that the market for
petroleum and petroleum products is a global one and should be viewed
in that context. Please list all planned refinery construction that
your company plans to undertake globally. Please list them by country
and include the projected size of the facility, including the projected
capacity for all units and their potential product yields in addition
to the project's total investment cost.
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 3. The International Energy Agency (IEA) has just released
its World Energy Outlook 2005. It contains a piece on the global
refining picture. (Please see the summary below.) The study notes a
lack of investment in upstream and downstream capacity has contributed
to the extreme tightness in global oil markets. What are your thoughts
in response to this? What is your company doing in response (actions)?
What is your company doing (investments/analysis) in the ``MENA''
regions? Do you agree with the IEA's projections?
World Energy Outlook 2005: IEA Projects Growth in Middle East and
North Africa Oil and Natural Gas Sectors through 2030 but a Lack of
Investment would Push up Prices and Depress GDP Growth
11/7/2005 London--``The importance of the Middle East and North
Africa (MENA) to global oil and gas markets cannot be underestimated.
These countries have vast resources, but these resources must be
further developed. Investment should not be delayed,'' said Mr. William
C. Ramsay, Deputy Executive Director of the Paris-based International
Energy Agency, as he presented findings from the World Energy Outlook
2005: Middle East and North Africa Insights (WEO-2005) today in London.
Noting that a lack of investment in upstream and downstream capacity
has contributed to the extreme tightness in the global oil market in
recent months, Mr. Ramsay highlighted the critical role that this
region will play in meeting growth in global energy demand.
The WEO-2005 expects global energy markets to remain robust through
2030. If policies remain unchanged, world energy demand is projected to
increase by over 50% between now and 2030. World energy resources are
adequate to meet this demand, but investment of $17 trillion will be
needed to bring these resources to consumers. Oil and gas imports from
the Middle East and North Africa will rise, creating greater dependence
for IEA countries and large importers like China and India. Energy-
related CO2 emissions also climb--by 2030, they will be 52%
higher than today. ``These projected trends have important implications
and lead to a future that is not sustainable--from an energy-security
or environmental perspective. We must change these outcomes and get the
planet onto a sustainable energy path,'' added Mr. Ramsay.
WEO 2005 focuses on the energy prospects in the Middle East and
North Africa to 2030, covering in detail developments in Algeria,
Egypt, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United
Arab Emirates. Internal demand, resources, policies, investment,
production, exports, even energy use for water desalination, all are
examined. ``To our knowledge, this is the first time that any
publication with a focus on the Middle East and North Africa has
undertaken such an extensive, country-by-country review of the energy
sector of the region. At a time when experts debate whether the world
will run out of energy, these results are particularly relevant,'' Mr.
Ramsay said.
In the MENA region, domestic energy demand is driven by surging
populations, economic growth and heavy energy subsidies. Primary energy
demand more than doubles by 2030. At the same time, MENA oil production
will increase by 75% by 2030 and natural gas production will treble,
allowing more gas exports. The region's share in global oil production
will increase from 35% today to 44% in 2030. However, this means the
countries of the Middle East and North Africa would need to invest, on
average, $56 billion per year in energy infrastructure. The level of
upstream oil investment required will be more than twice that of the
last decade.
But what if adequate investment is not made or consuming countries'
policies change? To assess these risks, WEO 2005 develops two other
scenarios, each of them far from unlikely: a Deferred Investment
Scenario, in which investment in the producing countries is delayed,
whether deliberately or inadvertently; and a World Alternative Policy
Scenario, in which energy-importing countries take determined action to
cut demand and change the pattern of fuel use, driven by high prices,
environmental or security goals, or all three.
The two scenarios have significant implications for MENA countries.
In the Deferred Investment Scenario, energy prices rise sharply. Global
energy-demand growth falls, cutting the region's oil and gas export
revenues by more than $1 trillion from 2004-2030. World GDP growth
slows down. Deferred investment could be the result of many factors,
but whatever the cause, the results are higher prices, greater
uncertainty and market inefficiencies.
The WEO World Alternative Policy Scenario examines the consequences
of new policies under consideration in consuming countries. ``The G8
Plan of Action, agreed at the Gleneagles Summit in July 2005, launched
detailed initiatives to promote cleaner energy and combat the impact of
climate change. The IEA was asked to play an important role. This
strong global commitment indicates that governments are already
adopting alternative policies--such as those in the World Alternative
Policy Scenario--to achieve the G8 goals,'' explained Mr. Ramsay. Under
this Scenario, global oil and gas demand growth is lower, but the world
continues to rely heavily on MENA oil and gas. CO2 emissions
fall 16% below the level of the Reference Scenario--but still increase
around 30% by 2030.
Assumptions about international energy prices have been revised
significantly upwards in WEO-2005, as a result of changed market
expectations after years of underinvestment in oil production and the
refinery sector. The average IEA crude oil import price, a proxy for
international prices, averaged $36.33 per barrel in 2004 and peaked at
around $65 (in year-2004 dollars) in September 2005. In the Reference
Scenario, the price is assumed to ease to around $35 in 2010 (in year-
2004 dollars) as new crude oil production and refining capacity comes
on stream. It is then assumed to rise slowly, to near $39 in 2030. In
the Deferred Investment Scenario the oil price reaches $52 in 2030.
The World Energy Outlook 2005 contains over 600 pages of detailed
statistics and in-depth analysis. The study was produced by the IEA
with input from many international experts from producing countries,
industry and organizations including OPEC. The IEA's prestigious annual
WEO series has long been recognized as the authoritative source for
global long-term energy market analysis and has received honors for
analytical excellence including awards from the Russian Academy of
Sciences, the U.S. Department of Energy and numerous public and private
organizations.
Answer. We do not believe that refining constraints contribute
directly to the absolute level of oil price. Oil prices are high
because of limited spare capacity and perceptions of increased geo-
political risks. Supply interruptions from the recent hurricanes in the
Gulf of Mexico have also tightened crude oil availability. The global
refining system still has spare distillation capacity that can be used
when needed. This has been demonstrated in the wake of hurricanes
Katrina and Rita when at one point about 5 mmb/d of U.S. Gulf Coast
capacity was shutdown. However, the rapid increase in oil demand growth
since 2003 and the need for Saudi Arabia to produce increased marginal
volumes of Arab Heavy has considerably tightened refinery upgrading
capacity. This has resulted in relative over-supply of fuel oil
compared to light and middle distillates. As a result the prices of
heavy crudes that contain high fuel yields have deteriorated relative
to lighter grades. It is this widening of the so-called ``light-heavy''
spread that reflects the constraints in the global refining system
rather than the absolute oil price.
Industry investment must be based on long-term price expectations
(guided by history) due to the long lead-times needed to bring new
projects onstream and the long economic lives of those projects. But
the industry clearly does respond to changes in prices (and especially
to changes in future expectations): A June 2005 survey by Lehman
Brothers shows that over 300 leading upstream companies planned to
increase Exploration & Development spending in 2005.
The IEA forecast is a `business as usual' scenario that is
consistent with the IEA's role of informing (on behalf of its
consuming-country members) of energy market risks today and in the
future.
As context, BP has no refining assets in the Middle East or North
African region.
Question 4. Voluntary standards--Post hurricanes, what is the
industry doing to come up with voluntary standards/best practices for
back-up power supply to critical energy infrastructure (refineries,
pipelines, etc.) and natural disaster recovery? Will the API undertake
such an effort? If not, what is your company doing?
Answer. The loss of the power grid was a major cause of delays in
restarting refineries, pipelines, and gas processing plants after
Hurricanes Katrina and Rita. Even if one component of the fuel supply
system has back-up electricity capability, it is of little use when
other components are without power. Electricity is critical to the
whole supply chain. Oil production can't be restored unless there is
electricity for pipelines to move the oil. For natural gas to flow, the
natural gas processing plants must have electric power. Moreover,
product pipelines must have power to move product.
The priority restoration of power to the major pipelines was a
critical action that prevented potential shortages and panic at a
critical time with a holiday increase in demand. Policymakers should
consider establishing emergency powers authorities for priority power
restoration for all components of the oil and natural gas
infrastructure to be used in emergency situations.
The government should do whatever it can to make the electric grid
more robust and reliant. Improvements to the reliability of electric
power will significantly enhance the availability of petroleum products
during periods of temporary emergency, such as that which occurred in
the Gulf Coast region post-hurricane.
BP is reviewing its own requirements to evaluate whether additional
stand-by power capability is necessary to operate critical
infrastructure.
Question 5. A number of witnesses testified that failure of the
electricity system resulting from hurricanes Rita and Katrina
contributed in great part to the inability to get refineries restarted,
or to get natural gas pipelines restarted. What are the arrangements
for backup power in case of such emergencies at your critical
facilities?
Answer. The following examples identify backup power that was
arranged in anticipation of Hurricane Rita:
A small, back-up generator that could operate independently
of the power grid was installed at the Texas City refinery to
provide on-site power for safety, security and instrument
control panels.
Diesel generators were leased and installed to provide power
to major oil pipelines, such as Capline in which BP has an
ownership interest.
BP procured 2 portable generators to supply our product
terminals.
BP generally relies upon backup power from the grid or the local
utility for operations at its Texas City refinery and works with the
local utility or grid operator to enable power restoration at critical
energy infrastructure facilities.
BP has on-site cogeneration facilities at its Texas City refinery.
These cogeneration facilities are designed to support steady-state
industrial operations, not to provide power restoration following a
hurricane or similar event. However, BP and Cinergy, its partner in the
cogeneration facility, are investigating installation of a backup
generator at the Texas City refinery that could startup independently
from the grid (black-start capability) and provide power for startup of
the cogeneration facilities and power to the refinery. Even though this
may be technically possible, on-site management will need to address
operational issues.
In light of other emergency situations, such as a cascading effect
(or outage) experienced on the power grid that was not in the immediate
proximity of the BP facility, these on-site cogeneration facilities
would enable the BP facility to isolate itself from the power grid and
continue limited operations.
While some of BP's other facilities have on-site generation or
cogeneration, BP generally relies upon power via contract from the grid
or the local utility for most of its facilities including: processing
facilities and pipeline pumping or compressor stations.
Question 6. How many of your plants have on site cogeneration
facilities? Which plants have these facilities?
Answer. For BP's largest refineries in the USA:
There are cogeneration facilities located on-site at the BP
refineries in Texas City, Texas and Carson, California.
There is a cogeneration facility in Whiting, Indiana which
provides steam to the BP refinery.
BP does not currently have an on-site cogeneration facility
at its Cherry Point, Washington refinery. However, BP has been
actively pursuing a project to add a 500 MW facility at this
site.
Additionally, BP has cogeneration facilities at its Green Lake and
Chocolate Bayou Chemical Plants in Texas, the Wilmington Coke Calciner
in California, at a production facility in Wattenburg, Colorado, and at
the Naperville Research Center in Illinois. BP obtains steam from an
on-site cogeneration facility at a chemical plant in Decatur, Alabama.
Question 7. Are there regulatory barriers at the either the state
or federal level that prevent the installation of cogeneration plants
at your facilities that do not have them?
Answer. While state or federal rules may not prevent or prohibit
the installation of cogeneration plants at our facilities, there are
key aspects that may significantly inhibit the economic viability of
this type of investment in the future. BP has worked to overcome these
obstacles to arrange for on-site cogeneration at most refineries.
Key aspects that must be addressed when considering installation of
on-site cogeneration facilities include:
Transmission Access including: 1) interconnection studies,
wherein the host utility performs a study to determine whether
transmission upgrades are necessary prior to interconnecting
with a new power plant; and 2) the scope, priority, timing and
cost of required transmission upgrades.
Permitting Issues including: 1) the time period for permits
and siting approval which is typically one to three years; and
2) purchase or acquisition of offsets for emissions prior to
permitting.
Negotiating a Utility Interconnection Agreement specifying
the terms of interconnection.
Availability and cost of contracting with the local utility
for Backup, Standby and Maintenance power.
The ability to sell excess power to a local utility under
PURPA.
Question 8. Would the presence of cogeneration facilities at your
refineries reduce the recovery time during such emergencies?
Answer. Cogeneration facilities coupled with back-up generation
that could operate independently of the power grid (black-start
capability) may reduce the recovery time in bringing an industrial
facility (refinery) back on line.
BP and Cinergy, its partner in the Texas City cogeneration
facilities, are investigating installation of a small backup generator
that could startup independently of the grid (black-start capability)
at the Texas City site which would provide auxiliary power to the
cogeneration facilities. Auxiliary power would enable start-up of the
cogeneration units and provide power to the refinery for partial
operation in the event of a power outage. Depending upon the nature of
the power outage on the grid (i.e. damage to transmission lines), on-
site cogeneration facilities coupled with backup generation with black-
start capability may reduce the recovery time to bring the refinery
back on line
There are certain emergencies and outages where on-site
cogeneration facilities are beneficial. One example involves a
cascading outage on the utility system or power grid that is not in the
immediate proximity of the BP facility. In this case, BP can isolate
certain operations from the utility power grid, or, in some instances,
may help stabilize the grid while enabling the refinery to continue
producing transportation fuels.
Question 9. Witnesses at earlier hearings testified that there are
a number of modern natural generation facilities in the Louisiana/Texas
area that are not used to their full capacity. Are there natural gas
generation facilities in close proximity to your refinery facilities
that could be used for backup generation at the refineries?
Answer. BP is not aware of any under-utilized power generation
facilities near our refinery in Texas.
Question 10. Would use of generators that are in close proximity to
refineries to provide backup power during such emergencies mean that
recovery times might be shortened, since the restoration time for a
nearby facility might be less than the restoration time for the
transmission facilities for traditional utilities?
Answer. A coordinated program with local utilities and/or the grid
operator is necessary to energize the grid in a safe and effective
manner while providing early power restoration to critical energy
infrastructure.
Recent examples of this type of prioritization and communication
that enabled early power restoration to critical facilities are:
Prior to landfall of Hurricane Wilma, BP requested and
received priority designation for the Port Everglades Terminal
in Hollywood, Florida resulting in power restoration within two
to three days to the terminal.
After Hurricane Wilma made landfall, a utility asked BP to
identify critical portions of its retail gasoline network for
power restoration so that the public could obtain gasoline and
diesel fuel.
Establishing a priority for power restoration to critical energy
infrastructure (to the extent practical along with high-priority human
needs) would be beneficial.
If there were near-by generators that could startup independently
from the grid (with black-start capability) that could follow load and
re-synchronize with the grid when the grid was operational, this could
be beneficial to provide for limited operations and duration if both
the generator and the refinery were disconnected from the grid
(isolated).
Environment
Question 11. Please specify exactly which, if any, Federal or State
environmental regulations have prevented your company from expanding
refinery capacity or siting a new refinery, and documentation on the
exact details of the project prevented.
Answer. BP does not believe that any Federal or State environmental
regulations have literally ``prevented'' us from expanding refinery
capacity or siting a new refinery. Rather, the complex and overlapping
environmental regulations have had the effect of discouraging efforts
to expand refining capacity. In particular, New Source Review (NSR)
regulations have created a disincentive to expanding refining capacity.
In general, new refinery construction has been largely uneconomic
for most of the past 20 years due to the low level of profitability in
the industry. And, although profitability has improved over the past
few years, what capital is available for refining has gone mainly for
construction of pollution control equipment required by Federal and
State regulations, and to construction of processing capability
necessary to furnish fuels required by Federal fuels regulations.
Question 11a. How much have so-called ``boutique fuel''
requirements added to the average retail price, where applicable, and
the average wholesale price per gallon of the gasoline sold by your
company?
Answer. Typically, the more stringent the standards are for a
``boutique fuel'', the greater the cost to produce such a fuel. The
production cost of a ``boutique fuel'' will likely vary from refinery
to refinery. Retail and wholesale prices are a function of supply and
demand and it is impossible to quantify the impact that cost has on
short term prices.
Question 11b. If the EPA or the Congress were to act to minimize
the number of ``boutique fuel'' formulations required by the states to
protect air quality, how many should there be and what should the
specifications of each be in order to maintain air quality and improve
fungibility?
Answer. Reducing the number of ``boutique fuel'' formulations to
five would help to maintain air quality and reduce logistical
constraints. The five-fuel slate for the summer season would consist of
9.0, 7.8 and 7.0 psi RVP conventional gasoline, RFG and GARB gasoline
with GARB gasoline limited to California and its natural distribution
system.
Question 12. Streamlining New Source Review (NSR) permitting
constraints was mentioned as an incentive that would encourage refiners
to supply more product to the U.S. market. How many air quality permit
applications for refinery expansions has your company submitted for NSR
over the last ten years? How long did it take the EPA, or the
applicable State, to approve or deny each permit application, after
receipt of a complete permit application? What was the expected
percentage increase in product output of the expansion?
Answer. BP and its predecessor companies submitted two major NSR/
PSD permit applications over the last 10 years. Information is not
readily available concerning the length of time required for permit
processing. Neither of the permitted projects resulted in a net
increase of product output from the refinery.
It should be noted that while there were only two projects
submitted for formal Federal NSR/PSD permitting, there were other
projects for which considerable effort was expended to design the
project to ``net out'' from the NSR/PSD thresholds and thus avoid the
formal process. Also, there were many other projects which were
inherently below the Federal NSR/PSD thresholds and thus were subject
to state-only (or ``minor'') NSR permitting.
Question 12b. How would you propose to streamline NSR and still
maintain local air quality and prevent any increase in total annual
emissions from such expansions?
Answer. BP supports full implementation of the NSR/PSD regulatory
reforms which EPA developed over the past 15 years. The three rules
were written by EPA after a fully collaborative stakeholder process; we
believe they offer the best chance of clarifying and streamlining the
NSR process while protecting air quality.
Question 13. How much did the fuel specification waivers that have
been granted by EPA to date, due to the supply disruptions caused by
the hurricanes, reduce the average retail price of the gasoline or
other refined products made by your company?
Answer. The RVP waiver allowed BP to produce additional gasoline at
its refineries by blending additional butane into the gasoline pool and
significantly increase supply to the affected areas. We cannot say
what, if any impact this has had on retail gasoline prices as the
retail price is determined by a number of factors.
Additionally, with respect to the distillate market, the sulfur
waivers on diesel fuel did not directly increase BP refinery production
of diesel fuel, but did allow customers to substitute high sulfur
diesel at the terminal which likely reduced the overall level of diesel
outages in many locations. Again, cannot determine the impact on retail
prices as the retail price is determined by a number of factors.
Question 14. One witness indicated that ``getting two 100-year
hurricanes in four weeks'' caused a great deal of chaos and disruption
in the gasoline supply chain. The National Oceanic and Atmospheric
Administration has projected that the country and the Gulf of Mexico
have entered a cyclical period of 20-30 years during which the Gulf and
coastal areas are likely to experience a greater frequency of
hurricanes and higher odds of those hurricanes making landfall in the
U.S. What preparations has your company made to deal with a greater
hurricane frequency to decrease repetition of the supply disruption
that occurred this year?
Question 15. Over the last 50 years, average annual sea surface
temperatures have increased in the Gulf of Mexico and, according to the
National Academy of Sciences and other similar scientific expert
bodies, are expected to continue increasing as the oceans continue
warming due to accelerating global climate change. The Administration's
Climate Action Report (2002) stated ``model simulations indicate that,
in a warmer climate, hurricanes that do develop are likely to have
higher wind speeds and produce more rainfall.'' What preparations has
your company made to deal with a greater likelihood of greater
hurricane intensity so as to decrease repetition of the disruption that
occurred this year?
Answer. BP experienced direct impacts to facilities and production
in the Gulf of Mexico (GoM) during the 2005 hurricane season. As a
result, we have taken a comprehensive approach to mitigate impacts,
going forward. For BP, the following are key areas of focus: Deepwater
Facility Design & Operating Systems; Shelf Production Facilities;
Export Systems & Flow Assurance Program; and Mobile Drilling Unit
(MODU) rigs.
Deepwater Facility Design and Operating Systems
Improved communication links with offshore facilities--Each
facility now has an independent satellite phone system as back-ups to
existing micro-wave and satellite systems. We are moving forward with
installation of a subsea fiber optic network project that will improve
communication and monitoring of offshore facilities. We are also
establishing more reliable metocean monitoring systems to allow remote
monitoring of facility movements in storm conditions so we can improve
future designs.
Personnel transportation--BP has charted a fleet of the most modern
and capable helicopters that have long-range and wide weather
operations windows. These aircraft will enable BP to reduce evacuation
and response times, improve safety and enhance our ability to conduct
better post-storm assessments.
Future Deepwater Facility Design Criteria--BP has begun evaluating
future facilities' design criteria and plans exist to review metocean
conditions from the recent past (wind, waves, currents, hurricanes,
other storms) to determine what has been the real impact of severe
conditions and how BP can and should respond.
Outer Continental Shelf (Shelf) Production Facilities
BP has initiated work on three severely damaged platforms and three
damaged caissons to remediate or decommission them prior to the 2006
hurricane season. Evacuation procedures have been strengthened to
ensure that lift boats are moved to shore during low sea states before
the storm. This will reduce risk of damage to production facilities
from these vessels moving around in storms. Our aim is to decrease the
impact of future hurricanes by focusing on strengthening the basic
structures of our platforms and increasing investment in preventative
maintenance.
Export Systems and Flow Assurance Program
BP is working with industry to provide multiple, economically
viable, access points to BP's production facilities. Having redundant
crude oil and natural gas transportation options will help minimize
supply disruptions and expedite the return of any lost production to
the market place.
Mobile Drilling Unit Rigs
Industry, MMS and the Coast Guard are working collaboratively to
identify short and long term actions which can be taken to make MODU's
more robust in times of increased hurricane activity. From this
collaboration, interim guidelines will be developed for the 2006
hurricane season. There is concern about moored rigs and their station
keeping capability during hurricanes. Key areas of focus include:
reducing the probability of station keeping failure, reducing
consequences in the event of station keeping failure, and achieving
objectives with minimal impacts to exploration and development
activity.
Question 16. How has your company disclosed to shareholders and
investors the risks associated with the potential impacts on your
company's assets in the Gulf of Mexico or indirect impacts on its
assets elsewhere, of either the expected greater frequency of
hurricanes making landfall in the U.S. or the probable greater
intensity of hurricanes in the region?
Answer. In part I, Item 3 of our annual 20-F document, BP discloses
external, reputational and operational risks associated with our
business. The risk of adverse weather conditions is noted within the
Operational Risks section.
finances, production, imports, etc.
Please provide for each of last ten years your company's:
Gross revenue of U.S. operations
Total capital expenditures in the U.S.
Net profit of U.S. operations
Total taxes paid to the Federal government
Total taxes paid to State governments
Total donated to charity
Answer. Note: Data is provided since 2000 because that is the year
when BP completed the major consolidation of the Arco and Burmah
Castro) acquisitions. Using financial and operational data prior to
2000 would not be comparable as BP was a much smaller company than it
is today.
GROSS REVENUE OF U.S. OPERATIONS
[$ millions]
----------------------------------------------------------------------------------------------------------------
Sales to third parties 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
USA.............................................................. 71,084 84,696 80,381 108,910 130,652
----------------------------------------------------------------------------------------------------------------
Figures from BP's Annual Report & Accounts.
TOTAL CAPITAL EXPENDITURES, ACQUISITIONS IN THE U.S.
[$ millions]
------------------------------------------------------------------------
IFRS IFRS
2000 2001 2002 2003 2004
------------------------------------------------------------------------
USA............................ 34,037 6,160 6,095 5,967 6,005
------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial
Reporting Standards (IFRS). Prior year data is presented in accordance
with UK GAAP, unless otherwise noted. Figures from BP's F&OI 2000-
2004.
OPERATING PROFIT OF U.S. OPERATIONS
BP does not report net profit by geography due to the difficulties
in allocating tax and interest at a segment and geographic level. As an
indicator, however, we provide the following chart, which is the
operating profit (pre-tax and pre-interest) by geography. The USA
percentage of the total has averaged around 37% over this period.
------------------------------------------------------------------------
IFRS IFRS
2000 2001 2002 2003 2004
------------------------------------------------------------------------
USA............................. 7,627 7,183 2,764 5,935 8,720
------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial
Reporting Standards (IFRS). Prior year data is presented in accordance
with UK GAAP, unless otherwise noted. Figures from BP's F&OI 2000-
2004.
TOTAL TAXES PAID IN THE U.S.
[$ millions]
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Federal income................................................... 2,206 2,039 (240) 1,089 2,072
State Income..................................................... 353 153 157 392 351
Excise **........................................................ 6,865 8,501 8,841 9,389 10,121
Production & severance **........................................ 793 658 533 770 894
Real estate personal property.................................... 544 430 421 248 277
----------------------------------------------------------------------------------------------------------------
** Primarily U.S., however, includes expense related to foreign jurisdictions unable to separate in time
allotted.
BP SOCIAL INVESTMENT
[$ millions]
----------------------------------------------------------------------------------------------------------------
Global investment 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
UK................................................................. 15.4 14.9 13.9 12.7 11.7
Rest of Europe..................................................... 5.3 8 6.2 8.2 6.5
U.S................................................................ 46 52.9 46.3 31.5 25.7
Rest of World...................................................... 14.9 18.9 18.8 22 43.8
--------------------------------------------
Global total..................................................... 81.6 94.7 85.2 74.4 87.7
----------------------------------------------------------------------------------------------------------------
* Per BP Sustainability Report.
Question 17. How much additional petroleum refining capacity do you
expect your company to install in the United States over the next 10
years?
Answer. Refinery margins are very volatile and margins over the
last 10-15 years have not been high enough on average to justify
building a new refinery. BP is planning a $2 billion project focused on
bringing Canadian crude to our existing Northern tier refineries
(Whiting, IN; Toledo, OH, Cherry Point, WA). This investment will
improve the security of crude supply and give better assurance of
keeping refinery runs at maximum. Modest increases in gasoline
production are anticipated.
Outside the Canadian crude project, BP is spending approximately
$700 million per year to insure that our U.S. refineries operate
safely, in an environmentally appropriate way and achieve a high degree
of availability to the American public.
Question 18. What percentage of profits over the last 10 years has
your company re-invested in capital, exploration, drilling, and
production in the United States? Please provide an annual total for
those U.S. expenditures and a clear breakdown.
Answer. Note: Data is provided since 2000 because that is the year
when BP completed the major consolidation of the Arco and Burmah
Castrol acquisitions. Using financial and operational data prior to
2000 would not be comparable as BP was a much smaller company than it
is today.
REINVESTMENT OF PROFITS
[$ millions]
----------------------------------------------------------------------------------------------------------------
Total BP 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Replacement cost profit for the period............................. 9,392 8,456 5,691 12,432 15,432
Capital expenditures and acquisitions.............................. 47,549 14,091 19,093 20,012 17,249
Ratio.............................................................. 506% 167% 335% 161% 112%
----------------------------------------------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial Reporting Standards (IFRS). Prior year data
is presented in accordance with UK GAAP. Figures are shown in brackets because they are outflows. Figures from
BP's F&OI 2000-2004.
Question 19. What percentage of profits over the last 10 years has
your company re-invested in non-petroleum energy supply and production
in the United States? Please provide a total and the results of such
investment.
Answer. BP has invested approximately $600 million in our
alternative energy business over the past five years. BP Solar is in
the process of more than doubling its annual global manufacturing
capacity from 90MW to 200MW to be complete by the end of 2006. The
first part of that expansion is seen in a $25 million investment at our
Frederick, Maryland plant--that part of the expansion project is now
complete and the company is focusing on finalizing the rest of the
expansion plan at facilities in Madrid, Bangalore, and Sydney.
Question 20. On average for the last ten years, please compare your
company's overall capital expenditures in the United States to its
expenditures elsewhere.
Answer. Note: Data is provided since 2000 because that is the year
when BP completed the major consolidation of the Arco and Burmah
Castrol acquisitions. Using financial and operational data prior to
2000 would not be comparable as BP was a much smaller company than it
is today
CAPITAL EXPENDITURE INCLUDING ACQUISITIONS
[$ millions]
------------------------------------------------------------------------
IFRS IFRS
2000 2001 2002 2003 2004
------------------------------------------------------------------------
USA............................ 34,037 6,160 6,095 5,967 6,005
% of total..................... 72% 44% 32% 30% 36%
------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial
Reporting Standards (IFRS). Prior year data is presented in accordance
with UK GAAP, unless otherwise noted. Figures from BP's F&OI 2000-
2004.
Question 21. What percentage of your company's gross revenue was
collected in the United States in each of the last 10 years?
Answer. Note: Data is provided since 2000 because that is the year
when BP completed the major consolidation of the Arco and Burmah
Castro) acquisitions. Using financial and operational data prior to
2000 would not be comparable as BP was a much smaller company than it
is today.
----------------------------------------------------------------------------------------------------------------
Gross revenue 2001 2002 2003 2004 2005
----------------------------------------------------------------------------------------------------------------
USA........................................................... 71,084 84,696 80,381 108,910 130,652
Global........................................................ 148,062 174,218 178,721 232,571 285,059
Ratio......................................................... 48% 49% 45% 47% 46%
----------------------------------------------------------------------------------------------------------------
Figures from BP's Annual Report & Accounts.
Question 22. How much of your company's revenue collected in the
United States was used to pay for purchasing crude oil from OPEC
countries?
Answer. There is no reasonable way to determine what amount of U.S.
generated revenue was used to purchase OPEC originated crude over the
last 10 years.
Question 23. Do you support S. 1794 or something like it create
gasoline and jet fuel reserves to ensure stability of price and supply?
Should it be extended to diesel and other fuels like natural gas?
Answer. BP does not support the creation of a product reserve
because we believe it would be ineffective. Unlike crude, the storage
of product requires regular rotation of stock which is a complex and
costly logistical issue. With the multitude of product types across the
U.S., it is reasonably likely that the right product would not be
available in the right place when needed. It is also likely, especially
in events of natural disaster that the infrastructure (people, roads,
pipelines, trucks etc.) would not be available to access the reserve.
Lastly, when use of the product reserve would be required, it would be
sold in to the market at spot prices which would be reflective of the
emergency conditions. Thus unless there was a really large reserve, it
wouldn't have the desired effect of avoiding price spikes. All these
factors indicate that a product reserve would bring costs to consumers
without necessarily giving them improved access to product in an
emergency situation.
Question 24. On average for the last ten years, how much of what is
refined by your company in the U.S. stays in the U.S.?
Answer. Initial review shows that more than 90% of finished product
(gasoline and distillate) produced by our refineries stays in the U.S.
Remaining product is largely sold to customers in Canada, Mexico and
the Caribbean.
Question 24a. What amount of refined product did your company
import in 2004 and in 2005?
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 24b. What are your assumptions about demand growth in
India; in China?
Answer. We believe that oil demand in China and India will continue
to grow with economic activity. In looking at demand we use consensus
estimates from a variety of external forecasters including FACTS and
Parpinelli-Technon.
Question 24c. How have your investments in the United States
increased the energy security of the country?
Answer. Over the last 5 years BP has invested over $31 billion in
the United States to serve our customers and help meet the nation's
need for energy.
Our U.S. investments have included continued expenditures in mature
operations such as $700 million per year in Alaskan North Slope fields,
a 30% increase in lower-48 natural gas fields over the last two years
to $1.5 billion this year, and over $650 million per year in refinery
investments. Additional investments have also been made to maintain
terminal and pipeline capability and to meet new regulations affecting
distribution and marketing.
For the future we see continued opportunities to invest in the
United States. Projects currently announced include:
$2 billion for new development and infill drilling in the
Wamsutter natural gas field in Wyoming. This investment is
expected to double BP's net production to 250 million standard
cubic feet by the end of the decade.
Two proposed LNG projects, one on the East Coast and one on
the Gulf Coast at a cost of $1.2 billion. These projects will
allow us to access our natural gas 32 of 61 position in
Trinidad and elsewhere in the world; and if approved,
potentially add 2.4 billion cubic feet send out capacity of LNG
to supply markets in the USA.
$300 million to increase the use of Canadian heavy oil at
BP's Midwest refineries in order to secure a North American
source of crude oil supply.
$2 billion per year sanctioned investment through the rest
of the decade as a part of our continuing program to invest
over $15 billion in exploration and production in the Gulf of
Mexico.
BP has publicly announced its intention to participate in
the nearly $20 billion Alaskan Natural Gas Pipeline to bring
Alaskan gas to the lower 48. We, together with other interested
parties, are nearing completion of a commercial agreement with
the State of Alaska.
Building on the success of BP Solar--which expects to hit
revenues of $1 billion in 2008--BP Alternative Energy will
manage an investment program in solar, wind, hydrogen and
combined-cycle-gas-turbine (CCGT) power generation, which could
amount to $8 billion over the next ten years.
Question 25. What market signals will occur in advance of peaking
world oil production and what is the appropriate policy or set of
policies for the U.S. government to adopt when such signals occur?
Answer. Global oil reserves are sufficient to permit oil production
to continue rising for many years. In fact, global proved reserves have
been rising, not falling over time (which is true even if only looking
at non-OPEC countries). Global natural gas and coal reserves are even
more abundant.
While non-OPEC conventional crude oil output may eventually
plateau, total non-OPEC supply--including natural gas liquids,
heavy oil, gas-to-liquids, coal-to-liquids, and biofuels--could
continue rising, especially if prices remain above historical
averages.
The appropriate role for government policy is to ensure
access to known resources at a competitive investment regime.
Government should ensure that any externalities--environmental,
etc.--are reflected in the price of competing energy sources.
And policy should seek to encourage outcomes rather than
dictate specific paths or options.
______
Response to Written Questions Submitted by Hon. Ron Wyden to
Ross J. Pillari
Question. All over America, the oil industry drives up the price at
our gas pumps by redlining and zone pricing. ``Redlining'' is when your
companies draw a phony line around a community to lock out competition
and raise prices for the consumers. ``Zone pricing'' is plain old
discrimination and it takes place when one oil company supplies gas to
several gas stations located near each other and one station is charged
much more than the others for the same type of gas. This drives
stations out of business, reducing choice and raising prices for
consumers. To help hurting consumers at our gas pumps, will you company
commit to stop redlining and zone pricing? Yes or no?
Answer. Zone pricing is a practice we use to recognize different
competitive conditions that exist in different geographic areas.
Various studies conducted by independent agencies and task forces have
consistently found that zone pricing results in reduced consumer prices
because it allows for greater competition. See, Md. Task Force on Zone
Pricing (2001); and similar reports in Ohio, Penn and Minn. The FTC
issued a report in 2001 discussing zone pricing exists, but concluding
there was no evidence of collusion among refiners (see press release
below). BP will continue to zone price as we believe this is fair to
our dealers and ultimately our customers in the form of competitive
prices.
For Release: May 7, 2001
FTC Closes Western States Gasoline Investigation
Investigation Finds No Illegal Activity By Oil Refiners
The Federal Trade Commission today announced the completion of its
investigation of various marketing and distribution practices employed
by the major oil refiners in Arizona, California, Nevada, Oregon, and
Washington (``Western States''). After an almost three-year
investigation, the Commission found no evidence of conduct by the
refiners that violated federal antitrust laws.
According to Commissioners Sheila F. Anthony, Orson Swindle and
Thomas B. Leary, the FTC initiated the investigation to explain the
differences in the price of gasoline between Los Angeles, San Francisco
and San Diego. Regarding the particular question that was
investigated--whether there was a violation of antitrust laws--the
investigation produced no evidence of illegal conduct by the refiners.
The Commissioners write that ``[t]he investigation produced no
evidence of horizontal agreement on price or output at any level of
supply.'' While zone pricing--the practice whereby refiners ``set
uniform wholesale prices and supply branded gasoline directly to their
company-operated and leased stations and to some independent open
dealer stations within a small but distinct geographic area called a
`price zone.' ''--exists in the Western States, the investigation found
no evidence of collusion between oil companies in furtherance of this
practice.
In addition, the Commissioners state that ``the investigation
revealed no evidence of conspiracy or coordination'' in marketing
practices known as ``redlining''--the refiners' practice of preventing
independent gasoline distributors--``jobbers''--``from competing with
them to supply branded gasoline to independent dealers in metropolitan
areas.''
In the absence of such a conspiracy, redlining ``likely would be
evaluated under the rule of reason,'' which ``would require the
Commission to show actual or prospective consumer harm. `` However, the
investigation ``uncovered no evidence that any refiner had the ability
profitably to raise price market-wide or reduce output at the wholesale
level, nor did it find a situation in which a refiner adopted redlining
in a metropolitan area and increased market-wide prices.'' As a result
of these findings, the Commission voted to close the investigation.
Commissioner Mozelle W. Thompson stated in a concurring statement
that despite voting with the majority, he remains ``somewhat troubled
by the practice of site-specific redlining that some West Coast
refiners utilize as part of their distribution strategies.'' Thompson
adds that ``[s]uch vertical restraints could be unlawful in those
circumstances where--whether in the Western States or other gasoline
markets--the practice leads to higher-than-otherwise wholesale
prices.'' He concludes by saying he believes that, ``should the
Commission find evidence in any future investigation that site-specific
redlining results in anticompetitive effects without generating
countervailing consumer benefits, it would challenge the practice.''
The Commission vote to close the investigation was 4-0, with
Chairman Robert Pitofsky recused from participating.
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
Ross J. Pillari
Question 1. I'm aware that the cost of crude oil is driven by the
world market and that its cost is currently significantly above
historic averages. But I'm not aware of any substantive increases in
the cost of producing crude oil, the cost of refining it into various
petroleum products such as gasoline and diesel, and the cost of
transportation of refined products to markets. Through the end of
September 2005, the price of crude had increased 40 percent in 2005
while gasoline prices increased almost 80 percent. If the percent
difference in the prices isn't pure profit, please explain to me how
you account for the difference in the substantially lower increase in
crude oil when compared to gasoline.
Answer. In the long-run prices reflect the marginal cost of
production. However, in the short-term, prices can move from marginal
cost due to disruptions to supply. The scale of the price response to
supply disruption is affected in part by the availability of spare
productive capacity and inventory levels. Price spikes by definition
are short-lived as they sow the seeds of their own destruction by
providing a signal to market participants to increase supply from other
sources and to limit demand. During the U.S. hurricane season, the
price of gasoline increased relatively more than crude as the loss of
gasoline supply exceeded that of crude. Moreover, inventories of
gasoline were and continue to be at lower levels relative to history
than those of crude, increasing the price sensitivity of gasoline to
supply disruption relative to that of crude.
In the long-run, refined product supply is tied to the marginal
cost of production, with sustained prices above this level encouraging
new supplies which in turn brings prices back to this marginal cost.
For crude oil, cartel behaviour by OPEC does impact crude price but it
should be noted that non-OPEC supply does respond to market principles.
Notwithstanding this, the price of both crude oil and refined product
is not always tied to the cost of production due to short-term events,
as experienced this year.
In the short-run, prices will move above marginal cost on occasions
when supply is constrained and/or demand exceeds expectations. In
addition, prices are affected by the level of spare productive capacity
and inventories.
Additional information is available in the paper below prepared by
the American Petroleum Institute.
November 22, 2005
Market Determination of Petroleum Prices
Crude oil and refined petroleum product prices are determined by
the forces of supply and demand in the world market. For both crude and
products, the growth in spot markets and futures trading has increased
substantially the transparency of the price-setting process. American
refiners pay the world price for crude oil and distributors pay the
world price for imported petroleum products. U.S. oil companies do not
set these prices. The world market does. Whether a barrel of crude oil
is produced in Texas or Saudi Arabia, it is sold in the highly
competitive world marketplace, which is comprised of hundreds of
thousands of buyers and sellers of crude oil from around the world.
CRUDE OIL MARKET
In the crude oil market, several ``marker crudes'' are widely
traded in both spot and futures markets.\1\ Changes in the prices of
these marker crudes are quickly translated into prices for other
crudes, with minor differences reflecting quality and transportation
differentials. The best known of these markets are the New York
Mercantile Exchange (where contracts for future delivery of West Texas
Intermediate oil are traded) and the International Petroleum Exchange
(where contracts for Brent crude are traded).
---------------------------------------------------------------------------
\1\ The term ``futures markets'' refers to those organized
exchanges where standardized contracts for the delivery of crude and
petroleum products at various future dates are bought and sold.
---------------------------------------------------------------------------
These markets have expanded substantially in the last 20 years and
have also contributed to a significant increase in the trading of crude
oil on so-called ``spot markets,'' which are markets in which crude oil
is bought and sold without long-term contracts. Trading of crudes on
the spot market has increased significantly over the past two decades
and has greatly facilitated refiners' ability to obtain adequate crude
supplies. Moreover, as refiners compete for available crude supplies,
the price on any given day reflects the independent judgments of the
thousands of oil companies, petroleum consumers, investment banks and
speculators regarding both the current supply and demand balance and
the outlook for how this may change in future months.
Because of the fungibility of the crude oil market, changes in the
price for crudes traded on the futures markets are quickly translated
into changes in prices for crudes on spot markets, causing world oil
prices to move together, as seen on the graph on page 2.* While crude
oil prices fluctuate on a minute-by-minute basis, a change in market
conditions (for example, concerns about a political disturbance in a
producing country) could cause prices to increase for crude that would
be delivered months in the future. These higher future prices will, in
turn, cause market participants to alter their perceptions of the
current balance of supply and demand, possibly building inventories in
anticipation of future market tightness, thereby taking crude off the
current market and causing current prices to potentially rise.
---------------------------------------------------------------------------
* The graph has been retained in committee files.
---------------------------------------------------------------------------
The price changes for these marker crude oils can, in turn, lead to
equivalent changes (with adjustments for quality and transportation
differentials) in the prices for all other crudes. In this manner,
expected changes in the future supply or demand for crude oil can very
quickly be translated into changes in the prices paid for crude being
bought and sold today.
REFINED PETROLEUM PRODUCT MARKET
Conceptually, the market for refined petroleum products is very
similar to the crude oil market, with widespread trading of products on
both the spot and futures markets.
Because it is the major component of petroleum product costs,
changes in crude oil prices have a significant effect on petroleum
product prices. In fact, the Federal Trade Commission has concluded:
``Over the last 20 years, changes in crude oil prices have explained
85% of the changes in the price of gasoline in the U.S.'' Thus, changes
in the future price of crude oil can lead to similar changes in the
price of gasoline and other petroleum products. However, changes in the
supply or demand of petroleum products arising from factors unrelated
to the crude market (such as an expected hurricane that would interfere
with refinery operations or colder than normal weather in the Northern
Hemisphere) can also cause the price paid for product to be delivered
today or months from now to rise or fall independent of crude oil price
changes.
Similar to the crude oil market, a change in the price of gasoline
or heating oil to be delivered some months in the future can lead to
similar changes in the price paid for product to be delivered next
month, which, in turn, will affect the prices being paid today on the
spot market. These changes will also provide market participants with
signals about whether they should be building up or drawing down
inventories, thereby either adding to or subtracting from the supply of
product currently on the market. A change in this spot price could, in
turn, lead to a similar change in the wholesale, or ``rack,'' price
paid for unbranded gasoline by retailers and, in turn, in the prices
paid by motorists at the pump.
In the wholesale gasoline market, there are generally several
different prices quoted, depending on the relationship between the
supplier and retailer and on the terms, if any, of their contractual
relationship. Thus, the wholesale price paid by different retailers
will likely differ slightly depending on such factors as whether there
is a long-term supply agreement or whether the retailer has the right
to use the supplier's brand. However, through the mechanism described
above, a change in the market forces affecting the future supply or
demand of petroleum product is quickly translated into a change in the
prices being paid for gasoline at the pump today.
Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to
149. Further, no new refineries have been built in the U.S. since 1976.
In 1981, the 321 refineries had a capacity of 18.6 million barrels a
day. Today, the remaining 149 refineries produce 16.8 million barrels a
day. I recognize the difficult financial, environmental, and legal
considerations associated with the location and construction of new
refineries. But I fail to understand the closure of existing refineries
even if they required investment to enhance their efficiency and
production capability unless, of course, this mechanism is being used
to increase the price of gasoline and other refined products. Please
help me understand why you would shut down refineries in the face of
the supply and demand situation. What conditions would have to exist
for you to invest in new refining capacity? I have heard the industry
claim that up to $48 billion has been used on capital expenditures for
existing refineries. If those investments were not used for capacity
increases, what were they used for?
Answer.
Refining is a highly volatile business. Investment decisions
are based on long-term trends.
There are numerous risk factors affecting the profitability
of new refining capacity: demand growth, changes in crude
quality & availability, refining technology, vehicle
technology, regulations, competitor actions, etc.
In the recent past, investment has been focused on clean
fuels, regulatory requirements and extensive expenditures to
maintain existing facilities.
Refinery investment is often directed toward environmental
compliance and safety and maintenance issues
BP evaluates new investment options globally and has
invested in existing refineries to maintain supply in global
markets. With numerous factors impacting gasoline and diesel
markets, the best and most efficient investments in the U.S.
continue to be increasing capacity on existing refineries.
Question 3. The recent hurricanes resulted in the need to import
substantial refined products such as gasoline, diesel fuel and aviation
fuel to meet U.S. demand. The question has been raised as to whether
the country should develop a strategic reserve of finished petroleum
products. What would be your reaction if the Federal government either
directly or by way of contract with the private sector sought to create
a strategic reserve of finished petroleum products? Since these
products have a limited shelf-life, one proposal is to obtain and
operate a number of refineries and have the products be used by the
Federal government. Appreciate your comments on this proposal.
Answer. BP does not support the creation of a product reserve
because we believe it would be ineffective. Unlike crude, the storage
of product requires regular rotation of stock which is a complex and
costly logistical issue. With the multitude of product types across the
U.S., it is reasonably likely that the right product would not be
available in the right place when needed. It is also likely, especially
in events of natural disaster that the infrastructure (people, roads,
pipelines, trucks etc.) would not be available to access the reserve.
Lastly, when use of the product reserve would be required, it would be
sold in to the market at spot prices which would be reflective of the
emergency conditions. Thus unless there was a really large reserve, it
wouldn't have the desired effect of avoiding price spikes. All these
factors indicate that a product reserve would bring costs to consumers
without necessarily giving them improved access to product in an
emergency situation.
Question 4. Given the recent profitability of the oil industry, I
am interested to learn more on the disposition of these profits,
particularly to enhance both production and refining capacity. Are any
of these profits being used to enhance production and refining capacity
for the benefit of other countries? What fraction of your profits is
being invested for production and for refining? What percentage of
profits have been used for stock buybacks and mergers and acquisitions?
Answer. Note: Data is provided since 2000 because that is the year
when BP completed the major consolidation of the Arco and Burmah Castro
acquisitions. Using financial and operational data prior to 2000 would
not be comparable as BP was a much smaller company than it is today.
DISPOSITION OF FUNDS
[$ millions]
----------------------------------------------------------------------------------------------------------------
Total BP 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Replacement cost profit............................................ 9,392 8,456 5,691 12,432 15,432
Share buybacks..................................................... 2,000 1,300 700 2,000 7,524
Capital expenditures............................................... 11,107 13,167 13,303 13,986 14,408
Acquisitions....................................................... 36,442 924 5,790 6,026 2,841
----------------------------------------------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial Reporting Standards (IFRS). Prior year data
is presented in accordance with UK GAAP. Figures are shown in brackets because they are outflows. Figures from
BP's F&OI 2000-2004.
Question 5. You've all said profits are cyclical, and that your
companies have also suffered from the volatility of the oil markets.
Would your stockholders be better served if domestically produced oil
was sold at a fixed rate that included a generous profit margin above
the production, refining, and distribution costs?
Answer. What is being suggested here is creation of a public
utility model rather than a free market. We do not agree that
shareholders are better served in a price regulated market.
Question 6. Do you believe that global warming is occurring? Do you
believe that man-made activities have a role in this phenomenon? How
will global warming impact your companies in term of added costs for
oil and gas development, or allow access to new areas for oil and gas
development?
Answer. While the science of climate change is unproven in absolute
terms, BP believes there is sufficient evidence to suggest that human
activity could affect the earth's climate in a serious way and that
precautionary action should be taken.
BP was one of the first companies to commit to reducing
CO emissions from its operations, establishing a goal in
1997 to reduce emissions by 10% from 1990 levels. BP achieved this
objective several years early in 2001 and has established new goals to
maintain these levels going forward.
On November 29, 2005, BP announced plans to create a new business
unit called BP Alternative Energy. This business will be dedicated to
developing alternative energy sources (solar, wind, hydrogen, combined-
cycle-gas-turbine) for power generation. Investment in this new segment
could amount to $8 billion over the next 10 years.
BP's press release announcing the new business may be found at:
http://www.bp.com/
genericarticle.do?categoryld=2012968&contentld=7012352
Additionally, Lord John Browne's remarks regarding this new
business may be found at: http://www.bp.com/
genericarticle.do?categoryld=98&contentld=7012385
You may find additional detail regarding BP's position on Climate
Change on our website: http://www.bp.com/
subsection.do?categoryld=4451&contentld=3072030
Question 7. Is it accurate that United States LNG terminals in
Massachusetts and Maryland are only operating at half capacity? Do you
believe if these plants were operated at a higher capacity it would
have changes the market dynamics that determine the current price?
Answer. For 2005, including forecasts for December, BP intends to
utilize about 90% of its allocated theoretical capacity at Cove Point.
BP does not own capacity at the Massachusetts terminal.
Question 8. I understand that Shell and BP have entered into the
market and are now operating in the black. If that is accurate, what
barriers are you experiencing in expanding this promising market? What
federal incentives can Congress provide to help promote the solar
energy market? How about advancing the shift to a hydrogen fueled
economy?
Answer. BP has been a leader in the solar business for
approximately 30 years and the solar business achieved profitability
for the first time in 2004.
Enacting simple and uniform net metering and electricity grid
interconnection standards and effective electricity time-of-use
policies would help level the regulatory playing field currently
disadvantaging distributed energy sources such as solar.
Extension of the current tax credits for residential and commercial
solar customers for at least five years and incentives for
technologies, like solar, that promote grid reliability and help reduce
grid congestion could help promote solar market growth.
As to hydrogen, BP has been investing in hydrogen demonstration
programs for the last five years. We are a major partner in the world's
two largest--Europe's hydrogen bus demonstration project, known as
Clean Urban Transport for Europe (CUTE) and the U.S. Department of
Energy's fuel cell vehicle and infrastructure validation program. In
total we are involved in more than 10 refueling stations around the
world, testing a different technology, storage or delivery pathway at
each one. These practical demonstrations help companies such as BP
learn about what is required to help deliver the hydrogen economy.
In addition to the demonstration programs we are involved in we
also participate in a number of committees involved in developing codes
and standards for hydrogen transport (for example the DOE tech teams).
BP is also an active member of the California Fuel Cell Partnership,
the world's premier hydrogen transport organization, bringing together
a unique combination of auto manufacturers, energy companies,
technology suppliers and legislators. BP supports a variety of work in
academia in the area of hydrogen for transport and maintains links with
institutions such as the University of Delaware and UC Davis.
Since hydrogen can be made, transported and stored in a variety of
ways it is very versatile as a fuel source, but that also creates
challenges. As a result commercial availability of hydrogen and fuel
cell cars is still several years away since it is not clear which
pathways will be most economic. Fuel cell technology also needs to come
down dramatically in cost and improve in driving range in order for
customers to buy fuel cell vehicles.
Question 9. Please state for the record your company position on
fuel economy standards. Are there other incentives that you support
that you feel are better for consumers then the Corporate Average Fuel
Economy paradigm?
Answer. BP fully supports conservation including increased vehicle
efficiency standards. As to specific programs and tools, BP believes it
is the role of government to select them and determine their funding.
Question 10. I understand that over the past 5 years companies in
your industry have downsized significantly. Now there is a shortage in
workers and equipment to increase drilling. Please explain that
dynamic.
Answer. Over the past five years this industry has seen relatively
low oil prices and industry consolidation. Now it is experiencing high
oil prices. This dynamic is not uncommon for cyclical industries.
During the low price environment, the industry saw a curtailment of
investment in drilling activity. This forced those who were employed in
the drilling sector to find employment elsewhere, thus reducing the
size of the workforce.
Now, the industry is in a period of high oil prices and demand for
workers skilled in drilling are highly desired because of the surge in
spending on drilling activity, new finds and other activities.
Meantime, U.S. universities and colleges are producing fewer
graduates with degrees in math, science and engineering. Therefore,
there is a smaller pool of potential employees from which to choose.
Combine this with the fact that the average age in the oil and gas
industry is approximately 50 and you see the real challenge the
industry is facing.
In an effort to plan for the future and meet some immediate needs,
BP is working with local, state and federal officials and educators to
try to build the right educational and training programs to meet the
needs of the industry, going forward.
Question 11. As you probably know, Congress is likely to open up
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas
exploration. Do you have plan to bid for leases in this area? What does
the price of oil have to be to make ANWR exploration and extraction be
economically viable?
Answer. BP does not comment publicly on its intentions regarding
competitive exploration lease sales. Should the Congress and the
President agree that energy development in ANWR is in the best interest
of the United States, we will evaluate the opportunity, assess it
against the other exploration opportunities in our global portfolio,
and then decide, on the basis of many factors including compatibility
with a clean environment and healthy wildlife populations--whether the
coastal plain is a place BP should explore.
Question 12. I understand that many of your resources and equipment
are working flat out to rebuild infrastructure in the Gulf of Mexico.
If there is no capacity to expand oil and gas exploration, what good is
opening up sensitive environmental areas to increased drilling going to
do for the consumer in the short run?
Answer. It is true that the industry is working hard to rebuild
infrastructure in the Gulf of Mexico. We are also focused on
maintaining and enhancing production in the area. While the industry is
presently facing challenges in labor and equipment markets; just as in
other sectors, if new opportunities are made available the industry
will size itself accordingly. Industry has proven repeatedly that it
can meet challenges, if given opportunities.
Question 13. Given the growing demand for oil in Asia, do you
believe that oil derived from the Arctic National Wildlife Refuge could
be diverted to supply Asian markets? If drilling in the Arctic National
Wildlife Refuge is authorized this year, when will it begin to have an
impact on gasoline prices? What do you believe that effect will be?
Answer. Crude oil is a global commodity and where it ends up is a
function of market conditions at the time it is produced. Historically,
the natural market for Alaskan crude is the West Coast of the United
States.
Question 14. Do you support more transparency in the oil and
natural gas markets, as would be provided in my bill S. 1735?
Answer. BP supports more transparency in the oil and natural gas
markets and supports the view taken by the Acting Chairman of the
Commodity Futures Trading Commission who stated:
``To deal with the price reporting problems, there have been those
who have called for an invasive government presence in the price
reporting business. Some have called for the creation of a centralized
data hub to which all natural gas, and possibly electricity prices
would be reported. Under some proposals this would be a government-
sanctioned entity with the power to force companies to report prices.
In other scenarios, advocated by some in Congress, the hub would be a
government regulator. As one can imagine, such an endeavor would be a
huge undertaking as the regulator/data hub sought to ensure the
integrity of prices in a widely diverse market. As an alternative I
supported, and still do support, an industry initiative such as that
proposed by the Committee of Chief Risk Officers, that establishes
guidelines for reporting prices. I believe that such industry
initiatives can be very effective in stemming the price reporting
problems in a less costly fashion than by interposing a regulator into
a job that the market can perform itself.'' \2\
---------------------------------------------------------------------------
\2\ Overview of the North American Energy, Commodities and
Developing Products Markets Sharon Brown-Hruska, Acting Chairman U.S.
Commodity Futures Trading Commission International Swaps and
Derivatives Association (ISDA) New York, November 17, 2004.
Question 15. How has the last 3 years of escalating gasoline prices
affected demand by American drivers? Have we seen a correlation between
a certain level of price increase and less demand by American drivers?
What is the actual level of reduced demand today compared to 3 years
ago (please respond in the context of a doubling of retail gasoline
prices)?
Answer. Information on gasoline demand in the DOE web site lags by
a little over 2 months so we are just getting insights into demand post
the Katrina environment. However, over the past 3 years gasoline demand
as increased by 3% annually in an environment that also experienced
increasing gasoline prices. While demand growth appears to have slowed
in September following Katrina, it is unclear how this may impact full
year 2005 growth rates.
Question 16. What is the crude oil extraction cost for major oil
producing countries, including our own? How does that compare with oil
derived from shale or coal?
Answer. BP does not have independent data on cost of oil extraction
for different countries and production costs vary significantly with a
given country for different projects. In general, finding and
development costs industry-wide have been rising in recent years.
BP does not have investments in oil extraction from shale or coal.
Question 17. Regarding foreign exporting, inventory maintenance,
and other practices of your company, please provide a response to each
of the following questions and information requests: For each and every
export shipment to a foreign country of gasoline, distillate fuel oil,
propane, or liquefied natural gas occurring from January 1, 2005 to
present, please provide the date, product type, volume, domestic port
of exit, foreign destination, transportation costs, and the sale price
or transfer value upon arrival at the foreign destination.
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 17a. Since January 1, 2001 to present, please identify the
number of shipments wherein your company exported gasoline, distillate
fuel oil or jet fuel and the sales price or transfer value received at
the destination was less than the amount that would have been received
had the product been marketed by your firm in the United States.
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 17b. Since January 1, 2001 to present, please identify the
date, product, volume(s), foreign port of origin, expected U.S. port of
entry, and eventual port of final destination in each instance wherein
your company basically ``turned a ship away'' (whether proprietary
product or acquired from a third party) by changing the shipments
expected arrival in a U.S. port to a foreign port.
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 17c. From 1995 until present, please identify by month the
inventory levels maintained by your company for gasoline and distillate
fuel oil in both barrels and converted to ``days of cover'' or ``days
of supply'' for your firm's distribution and sales volumes within each
of the Petroleum Allocation Defense Districts (PADDS) in the United
States.
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 17d. From January 1, 2005 to present, provide the details
of each ``spot market'' (as commonly referred to in the industry for
bulk sales, in volumes exceeding 5,000 barrels per transaction)
including the date, identity of both the seller and purchaser, location
of the product being sold, and the selling price.
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 17e. Describe your company's use of ``in-house trading
platforms,'' and identify all individuals in your company by name,
address, email, and phone number that were authorized during 2005 to
either exchange, trade, sell or purchase gasoline or distillate fuel
oil on either the ``spot market'', NYMEX futures market, or via
``forward paper'' purchase rights.
Answer. BP does not publicly disclose personal information about
its individual employees.
Question 17f. Please identify all third party reporting services,
including but not limited to Oil Price Information Service (OPIS),
Lundberg Surveys, Platts, and Oil Intelligence that your company
regularly supplies transaction data or marketing information and all
individuals of the company by name, address, email, and phone number
that were authorized during 2005 to provide the information or data to
such third parties.
Answer. The third parties that we presently report to are the
following: PLATTS, OPIS, CMAI, JJ&A, ICIS and Dewitt's (to the last
four entities, we report chemicals (aromatics) only). BP does not
publicly disclose personal information about its individual employees.
Question 17g. Please identify the branded and unbranded ``rack
prices'' that were reported by your company to third party reporting
services such as OPIS and the branded and unbranded ``rack prices''
that were actually charged distributors or jobbers by your company each
day, from January 1, 2005 to present, at the truck loading terminal(s)
that typically supply gasoline stations in Houston, TX, Atlanta, GA,
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR, and Seattle,
WA.
Answer. East of Rockies, BP generally does not provide any rack
prices to OPIS. BP sends a price notification of our branded and
unbranded rack prices directly to our customers each day. OPIS then
surveys a panel of customers to collect this information for its daily
reporting. If there are any discrepancies between what we send to our
customers and what OPIS publishes it is related to what the customer
provided to OPIS as a part of its daily survey. On the West Coast, BP
does report to OPIS for most finished products.
Regarding information on actual prices charged to distributors and
jobbers, this information is commercially sensitive and proprietary. We
are willing to meet with you privately to discuss these matters under
proper protections of confidentiality.
Question 17h. Will your company commit that it will take no efforts
to retaliate against any firm or individual that is a potential witness
before this Committee or cooperates with any investigation into the oil
industry by Congress or another governmental authority?
Response: Yes.
Question 17i. From January 1, 2005 to present, for each instance
known to your company wherein a third party (not your company) exported
gasoline, distillate fuel oil, propane, or liquefied natural to a
foreign country, please provide any of the details known to your
company including the identity of the exporter, date, product type,
volume, domestic port of exit, foreign destination, transportation
costs, and the sale price or transfer value upon arrival at the foreign
destination.
Answer. We do not have information available pertaining to third
parties.
Question 17j. Since January 1, 2001 to present please identify the
identity, date, product, volume(s), foreign port of origin, expected
U.S. port of entry, and eventual port of final destination in each
instance wherein your company is aware a third party (not your company)
basically ``turned a ship away'' (whether proprietary product or
acquired from a third party) by changing the shipments expected arrival
in a U.S. port to a foreign port.
Answer. We do not have information available pertaining to third
parties.
Question 17k. Please provide an itemized list of tax deductions and
credits taken under the U.S. tax code for 2004, by your parent company
and subsidiaries.
Answer. This information is proprietary and confidential under laws
and regulations pertaining to tax returns. BP complies fully with the
tax filing requirements for companies operating in the United States.
If there are particular tax issues you wish to discuss, BP is willing
to meet with you to discuss them.
Question 17l. For each and every export shipment to a foreign
country of gasoline, distillate fuel oil, or propane from BP's Cherry
Point refinery in Washington state occurring from January 1, 2001 to
the present, please provide the date, product type, volume, domestic
port of exit, foreign destination, transportation costs, and the sale
price or transfer value upon arrival at the foreign destination.
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 17m. For each and every export shipment to a foreign
country of gasoline, distillate fuel oil, or propane from BP's Cherry
Point refinery in Washington state occurring from January 1, 2001 to
the present, please provide the date, product type, volume, domestic
port of exit, foreign destination, transportation costs, and the sale
price or transfer value upon arrival at the foreign destination.
Answer. This information is commercially sensitive and proprietary.
We are willing to meet with you privately to discuss these matters
under proper protections of confidentiality.
Question 17n. Since January 1, 2001 to present, please identify the
number of shipments from BP's Cherry Port refinery wherein your company
exported to a foreign destination gasoline, distillate fuel oil or jet
fuel and the sales price or transfer value received at the destination
was less than the amount that would have been received had the product
been marketed by your firm in the United States.
Answer. Taking into account the entire slate of products produced
by the Cherry Point refinery, no exports to a foreign destination
yielded a lower overall refinery realization or value than if that
product had been marketed in the United States.
Question 17o. Isn't it true that the refining capacity at BP's
Cherry Point refinery has over time grown from 96,000 barrels per day
to 225,000 barrels per day?
Answer. Yes, since the refinery went into operation in 1971, BP has
increased its capacity from about 100,000 barrels per day to today's
225,000 barrels per day. However, current operations and future growth
opportunities are being challenged by interpretations of the Magnuson
Amendment. The Magnuson Amendment was enacted in 1977 to thwart plans
for a crude oil pipeline project from Cherry Point to the upper
Midwest. The legislation was not intended to restrict the ability of
the Washington refineries to meet the regional demand for petroleum
products. However, as a result of a recent federal court decision, BP
faces a litigation risk that Cherry Point will not be able to obtain
the crude oil needed to meet growing demand for gasoline and other
products. Furthermore, lack of access to additional crude supplies acts
as a deterrent to possible expansion of the refinery. The West Coast
refineries together do not produce enough petroleum products to meet
the regional demand. BP supports clarifying legislation to ensure that
the Magnuson Amendment does not exacerbate the imbalance between supply
and demand in the West Coast states.
Question 17p. Isn't it true that BP has previously stated that the
Cherry Point refinery can take crude from the TransMountain Pipeline?
Isn't it true that BP has also previously stated that the Cherry Point
refinery can transport refined product by rail and via the Olympic
pipeline?
Answer. BP gets 100% of its crude supply via water borne shipments.
The refinery runs a combination of Alaska and foreign crudes based on
availability. There is a pipeline that supplies crude oil from Canada
to some of the other Washington based refineries. This pipeline is
currently at capacity.
BP ships finished product by truck, vessel and the Olympic
pipeline. Rail shipments are only available for butane and propane. The
Olympic Pipeline is also operating at capacity and is currently unable
to ship additional product from Cherry Point.
Question 17q. Isn't it true that the BP refinery is in a Foreign
Trade Zone enabling you to export oil products overseas without
tariffs? Since 2001, how much money has BP saved as a result of this
tax benefit?
Answer. The BP Cherry Point Refinery is an active Foreign Trade
Zone and has operated under zone status since October 2002. While there
are benefits from being in a Foreign Trade Zone, they are not derived
from the export of oil products.
Question 18. We request that you provide an explanation why your
industry trade association would put out information about Senator
Feinstein's amendment stating that major oil companies need to expense
these exploration costs when each of you as the Chief Executive
Officers of the API member companies affected by the Feinstein
amendment told two Senate Committees that your companies didn't need
these incentives.
Answer. Senator Wyden's question at the Senate hearing specifically
referred to his proposed amendment to repeal the tax incentives that
were enacted earlier in 2005 in the energy bill. Mr. Pillari's response
to this specific question which Senator Wyden asked was ``I would agree
with what has just been said and say it's a minimal impact on us.''
With this answer, he agreed with the other witnesses who said that the
new incentives in the bill would have a minimal impact on our company.
Senator Feinstein's amendment dealt with the expensing of
intangible drilling costs (IDC), which have been the law in the tax
code for decades. Expensing of IDC has been allowed on an optional
basis from the early days of income taxation. Early deductibility under
the regulations was not mandated by the statute but was a recognition
by the tax administrator of the nature of these costs and an
appreciation of the risk and ``intangible'' character of these costs.
When, in 1945, a court found the regulations for current
deductibility invalid because of the lack of express statutory
authority, Congress expressly confirmed the deductibility of IDC,
initially in a House Concurrent Resolution and finally in what is now
IRC sec. 263(c).
______
Response to Written Questions Submitted by Hon. Ken Salazar to
Ross J. Pillari
Question 1. The Agriculture Committee is looking at the impacts
these high energy prices are having on agricultural producers around
the country. To sum it up: they are hurting. It seems to me that there
is tremendous potential for our country to grow fuels such as ethanol
and bio-diesel. This approach offers many benefits to rural America as
well as to the country as a whole. What type of investments is your
company making (and planning to make) in these types of renewable fuels
in the United States?
Answer. BP is one of the largest blenders of ethanol in the U.S. In
2005 alone, BP will introduce gasoline-ethanol blends to more than
twenty new markets in the U.S. This has been achieved through a mix of
investment in blending capability at a number of proprietary
distribution terminals and contracting for blending services at a
number of third party terminals. This has all been done on the basis of
economics that were supportive of this investment and product offering.
Question 1a. Rural America is crying out for investment in
renewable fuels, and I encourage your companies to look at the
potential of renewable fuels. In terms of a percentage of your capital
expenditures, how much money did your company spend this year to
develop renewable fuel sources in the United States?
Answer. In 2005, BP is investing approximately $7 million for
blending of renewable fuels at proprietary terminals.
Question 1b. What will that percentage be going forward?
Answer. BP is currently conducting research in next generation bio-
fuels and evaluating options for expansion of conventional bio-fuels in
our operations.
Question 1c. Will you also provide this committee with some
examples of renewable fuel projects that your company is pursuing
outside the United States?
Answer. Outside of the U.S., BP's marketing activities are focused
in Europe and Australia/New Zealand.
BP is one of the largest blenders of biodiesel in Europe
with most of its efforts focused on Germany.
The blending of ethanol into gasoline is not common practice
in Europe due to a differing distribution infrastructure and
the absence of vapor pressure relief for gasoline-ethanol
blends.
Question 2. As a few of you note in your testimony, diesel prices
have remained high while unleaded gasoline prices have come down. It
seems as if we are getting lower priced unleaded gas at the expense of
diesel. Since diesel is the fuel of choice in agriculture, it is a sort
of a double whammy on our producers. What is being done, or what can be
done, to get diesel prices back in line with the price of gasoline?
Answer. As is the case with gasoline, market prices for diesel are
set by supply and demand.
Demand patterns for gasoline and diesel in the U.S. are
significantly different. Demand for gasoline is largely driven
by individual consumers who appear to have significantly
reduced discretionary driving in response to high prices.
Diesel demand in the U.S. is largely driven by commercial and
agricultural uses with considerably less discretionary demand.
This was particularly the case for agricultural demand with
supply disruptions coming during harvest season.
Supply of both fuels was severely impacted by the loss of
domestic refinery production caused by Hurricanes Katrina and
Rita. In the case of gasoline, high domestic prices attracted
gasoline imports from refineries in Europe and the rest of the
world to help cover the shortfall while the U.S. refineries
ramped back up. Imports were not so readily available for
diesel because global refining capacity for diesel is much more
tightly balanced. Refineries have limited capability to shift
production between gasoline and diesel. Supply conditions for
diesel are likely to improve as domestic refining production
recovers.
Question 2a. If demand for diesel is so high in Europe and high
prices don't attract the supplies necessary to lower prices, isn't that
a good indicator that we should work to produce more diesel in the
United States and look to biodiesel as an option?
Answer. Refining investments have long economic lifetimes (15+
years) so investment decisions, whether for diesel or other products,
need to consider the expected refining business environment over a
similar time frame. BP bases its investment decisions on many factors
including a forward view of supply and demand and tests those decisions
against a range of possible scenarios.
Biodiesel has grown considerably in 2005 with the initiation of the
$1.00/gal federal tax credit, current diesel prices and initiation of
the MN biodiesel mandate. However, it still remains well below 1% of
the U.S. diesel supply. Significant new biodiesel production capacity
has been announced. If current conditions persist, market forces may be
expected to attract the output from these new plants into the diesel
supply.
Question 3. For the record, will you tell me what your company has
spent on capital expenditures in cash, not including write offs such as
amortization or depreciation. Will you also provide the figures spent
on cash dividends and stock buyback for the same time period?
Answer.
CASH BASIS
----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Capital expenditures..................................... (10,037) (12,181) (12,098) (11,885) (12,286)
Acquisitions, net of cash acquired....................... (6,265) (1,210) (4,324) (211) (1,503)
Buybacks................................................. (2,103) (1,133) (573) (1,889) (7,208)
Dividends paid........................................... (4,439) (4,881) (5,304) (5,674) (6,074)
----------------------------------------------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial Reporting Standards (IFRS). Prior year data
is presented in accordance with UK GAAP. Figures are shown in brackets because they are outflows. Figures from
BP's F&OI 2000-2004.
Question 4. On November 1st, Senator Grassley asked your companies
to contribute 10% of your record profits to supplement LIHEAP funding
for the less fortunate. Will your companies support Senator Grassley's
proposal?
Answer. LIHEAP (Low Income Home Energy Assistance Program) is a
government program that provides financial assistance to families who
are unable to afford their utility bills. BP agrees with the intent of
the program. However, BP believes that it is the role of government to
determine the funding levels for specific programs through allocation
of its general revenues. BP does not make direct contributions to
government programs but pays substantial amounts in federal and state
income taxes which are the primary source of government funds.
Question 5. I'd like to encourage you to actively work with the
Department of Energy and any other relevant federal agency on
initiating a public/private education campaign focused on energy
education and conservation. In the meantime, will you tell me what your
company has done on its own initiative?
Answer. BP is highly supportive of industry efforts geared to
energy efficiency and public education focusing on energy education,
efficiency and conservation.
BP has been engaged in a partnership with the National Renewable
Energy Lab that has produced a traveling energy education vehicle and
interactive program for teachers and students.
BP has created a partnership with the Enterprise Foundation where
we donate solar systems to needy families in inner-city Los Angeles.
BP has a long-standing relationship with the National Energy
Education Development project that promotes the improvement of energy
education capabilities of educators across the country. BP's A+ for
Energy program in California (delivered by NEED) provides grants and
scholarships to teachers for the delivery of energy and conservation
education. The program is being expanded to Texas. NEED also helps
deliver the Solar Connection program in Chicago, which offers selected
schools solar systems and companion curriculum.
BP has built hydrogen fueling station pilot projects at Los Angeles
International Airport, in Florida and Southeast Michigan and will build
more in 2006. A number of educational visits have occurred as part of
the demonstrations of the technology overall hydrogen fueling
initiatives. In addition, BP is in partnership with Ford and Daimler
Chrysler to bring fuel technology to the U.S.
BP continues to expand its solar partnerships with companies like
Whole Foods and Home Depot where installations of solar systems are
actively promoted to the public.
As a member of the American Petroleum Institute (API), BP is
supporting an extensive effort led by API to encourage consumers to
save energy. This campaign includes television, radio and newspaper
ads.
As a member of the Center for LNG, BP has supported educational
aspects regarding the need for diversified fuel supply and issues
related to LNG.
______
Response to Written Questions Submitted by Hon. Olympia J. Snowe to
Ross J. Pillari
I have introduced legislation that will offer an up to $500 tax
credit to working low and middle income individuals for the cost of
home heating expenses. According to the National Energy Assistance
Directors Association, heating costs for the average family using
heating oil are projected to hit $1,666 for the upcoming winter. This
represents an increase of $403 over last winter's prices and $714 over
the winter heating season of 2003-2004. Meanwhile, profits of oil and
gas rose 62 percent in the third quarter for companies in the Standard
& Poor 500 Index. I am proposing to offset the $500 tax credit for home
heating expenses by curtailing the benefit large oil companies receive
by using the LIFO accounting method.
Question 1. Do you think given budget deficits and record profits
for oil companies that it is appropriate to divert tax benefits for
large integrated oil companies such as yours to pay for such a measure?
Answer. BP pays U.S. federal income tax at a 35% rate as well as a
number of other taxes including excise, property, royalties and
severance taxes. It is important to note that with the increased
profits that BP has seen this year, we have paid a commensurate
increase in taxes to the U.S. government. On a group basis, 2005 income
taxes are expected to increase by 60% over 2004 payments and increases
in the U.S. are of a similar magnitude.
It is appropriate for the Federal Government including the Congress
to make decisions about how to use the revenues received from taxpayers
from payment of federal income taxes. It is not appropriate for a
taxpayer such as BP to determine the proper use of federal tax
payments. With respect to use of the LIFO accounting method, the
current LIFO accounting rules apply to all industries, and it is
inappropriate to change the rules for the oil industry only. In
addition, this change would result in a significant financial impact to
the refinery side of the business at a time when Congress has expressed
an intention to increase refinery capacity.
Question 1a. Does this seem like an equitable approach given that
the high cost of oil enables you to not only bank large profits, but
also to use accounting methods to substantially reduce taxes? Is it
fair to report less taxes when you're profiting the most?
Answer. LIFO (last-in/first-out) is an accounting methodology that
tracks and values a taxpayer's inventory for purposes of determining
the cost of goods sold, which is deducted by the business from its
gross income, and for determining the value of its inventory at year
end. This inventory accounting method is based upon the assumption that
the last goods brought into inventory are the first goods sold. The use
of LIFO inventory accounting is not new and has been an accepted method
under the tax code to determine a taxpayer's income since the 1930s.
Like taxpayers in other industries, many oil and gas companies properly
elected to use LIFO for their downstream inventory. At a time when the
industry anticipated continued rising costs, LIFO was acknowledged to
be the best method for tracking the true cost of inventory products.
Denying access to standard accounting methods to a single industry is
unfair.
The revenue raising measure that you are proposing is neither
equitable nor is it sound tax policy. Energy prices are only one of a
multitude of elements affecting the income tax that BP pays. For every
other corporation that is subject to income tax the mix will be
different. The common denominator for all of these taxpayers is taxable
income to which a rate of 35% is applied. To the extent that BP's
taxable income has increased because of energy prices 35% of that
income will be paid to the Federal Government. From a policy
perspective, a multiplicity of statutory tax rates would undermine the
general neutrality of the income tax system in this country. It would
also attract capital to industries that are adequately capitalized (and
thus selling products at the lowest prices) and be a disincentive to
investment in those that need it most.
Question 2. Your third quarter profits have certainly been a
lightning rod that has riled consumers as they continue to pay 30
percent more in Maine for their home heating oil for the winter.
I realize that you reinvest some of these profits in exploration
for more product. In each quarter, have you reinvested the same
percentage of the profits to reinvestment? What have your reinvestment
percentages been to your total profits? Do they vary from quarter to
quarter or year to year?
Answer. Note: Data is provided since 2000 because that is the year
when BP completed the major consolidation of the Arco and Burmah
Castro) acquisitions. Using financial and operational data prior to
2000 would not be comparable as BP was a much smaller company than it
is today.
GLOBAL CAPITAL EXPENDITURES & ACQUISITIONS
[$ millions]
----------------------------------------------------------------------------------------------------------------
Total BP 2000 2001 2002 2003 2004
----------------------------------------------------------------------------------------------------------------
Replacement cost profit............................................ 9,392 8,456 5,691 12,432 15,432
Capital expenditures............................................... 11,107 13,167 13,303 13,986 14,408
Acquisitions....................................................... 36,442 924 5,790 6,026 2,841
Ratio.............................................................. 506% 166% 335% 161% 112%
----------------------------------------------------------------------------------------------------------------
Figures from BP's F&OI 2000-2004.
Question 3. To what non-profit organizations and academic research
that address global climate change does your company donate financial
support to and how much to you donate each year?
Answer. BP supports a wide range of innovative research through
partnerships with many diverse organizations. This research seeks
largely to address the challenge of developing secure, reliable and
affordable supplies of energy while at the same time reducing the
impact of energy production and use on our natural environment. In 2003
our expenditures on all research totaled $349 million while in 2004
those expenditures increased to $439 million. Following are several
specific examples of climate-related expenditures to non-profit
organizations and/or academic research.
Princeton University, U.S.--With Ford Motor Company, BP
sponsors the Carbon Mitigation Initiative, a 10 year, $20
million project that aims to find safe, effective and
affordable strategies to reduce CO2 emissions and
solve the problem of climate change.
The Carbon Capture Project (CCP)--BP is leading a public-
private collaboration made up of industry, governments, NGOs
and other stakeholders, funding commercial and academic
research into carbon capture and storage. BP funding of this
initiative has been approximately $12 million to date with an
expectation to spend several million more over coming years.
Stanford University, U.S.--BP supports a three-year, $2
million research program on public aspects of modern energy
markets and climate change.
The Chinese Academy of Sciences and Tsinghua University--BP
supports ``Clean Energy Facing the Future''--a 10-year, $10
million program to develop and deploy new clean energy
technologies for China and the rest of the world.
The Tsinghua BP Clean Energy Research and Education Centre--
an energy and environmental studies center established through
a grant from BP.
World Resources Institute--a project with leading
environmental NGO to study the public policy aspects of a
framework to enable a wider scale deployment of carbon capture
and storage as a means to address greenhouse gas emissions.
BP Solar Neighbors--a community program whereby celebrities
help bring attention to the benefits of solar power, and help
low-income families use solar power to reduce their energy
bills. Every time an invited celebrity purchases a BP solar
system for their home, BP donates a similar system to be
installed on a low-income family's home in South Central Los
Angeles. These families also become clean electricity users and
learn about energy efficiency and solar energy so they can
become environmental role models in their communities.
A Plus for Education--A BP program that awards $2 million in
annual grants and scholarships to California K-12 teachers to
implement creative and innovative educational programs to teach
students about energy and energy conservation. The program will
also be rolled out in Texas in 2006.
There has been much discussion about the skyrocketing costs of
gasoline, heating oil, and other petroleum products over the past year,
magnified by the three hurricanes which have hit the Gulf Coast region
this year. In response to these inquiries into the rising prices and
your soaring profits, you have asserted that these increases are tied
to market forces, particularly rising prices of crude oil.
I've reviewed your financial filings from the Securities and
Exchange Commission, and they paint a very stark picture when compared
to the financial misery being experienced by millions of Americans.
ExxonMobil, for example, has realized a net income of $25.42 billion in
the first nine months of 2005, an increase of $8.5 billion over the
first nine months of 2004. Exxon's third quarter net income this year
was $9.92 billion, up a full 90%.
Similarly, ConocoPhillips' net income for the third quarter of 2005
was $3.8 billion, compared with $2.006 billion during the same time
period in 2004. Conoco's filing attributes this jump in profit to
``higher crude oil, natural gas and natural liquid gas prices,''
``improved refining margins,'' and ``equity earnings from our
investment in LUKOIL.''
In my State of Maine, the median state income is $17,044 per year.
A full 78 percent of Mainers use heating oil to warm their houses in
wintertime, and this, combined with gasoline prices of anywhere from
$2.50 to $3.00 per gallon paints a harsh picture for Maine and New
England this winter. Petroleum is not any run-of-the-mill commodity. It
is the lifeblood of commerce in this country, with fuel costs being
built into the price of every other good bought and sold on the market.
And in places like New England where petroleum heats most homes, it's
literally a life-and-death commodity.
Question 4. Your industry has taken the position in its SEC filings
and at yesterday's hearing that the escalation of its fuel prices is
the result of increases in crude oil prices. However, if your retail
gas prices were raised simply to cover your increased costs in
purchasing crude oil, your net profits would remain the same. Everyone
knows this is not happening. Can you identify for this committee the
reason that the rise in gasoline prices is far out-pacing the rise in
crude oil prices?
Answer. In the long run retail product prices must be sufficient to
recover costs of raw materials, manufacture and transportation. In the
short run, however, product prices are not cost-driven. The significant
increase in crude oil prices over the last two years has caused
refiners to look to recovering their increased costs. Refiners are only
able to recover these cost increases, however, to the extent that
demand is sufficient to absorb product at the increased price. If
demand exceeds supply at a given price, the price will increase to the
point that supply equals demand. This is the equilibrium price for a
free market commodity.
Severe interruptions in the supply chain, such as that caused by
the recent hurricanes, drive prices up because overall demand is
bidding for scarce supplies. The severe peaking in the wake of the
hurricanes was driven primarily by refinery and other supply chain
interruptions rather than underlying crude oil prices.
Question 4a. Even though crude oil prices have risen this year,
your companies aren't actually incurring those costs, are they? Isn't
the gasoline and heating oil that your firms are currently selling on
the market actually being produced from inventories that your companies
purchased when the price of crude oil was much lower?
Answer. This question relates to LIFO inventory accounting
procedures which are standard in many industries. LIFO accounting
recognizes that a barrel of crude oil consumed today has to be replaced
in inventory by a barrel purchased at today's price, therefore having
an economic cost equal to the current crude oil price. In a rising raw
material market, the theoretical input costs may appear to be lower
than spot market prices for the input materials. In a falling market,
the inverse is true, and costs can appear to exceed realizations for
the finished goods. Over time, LIFO accounting, which is a generally
accepted accounting procedure, fairly portrays manufacturing profit
margins.
Question 4b. If you're producing oil from crude that you bought at
$40 per barrel, but selling it at a price that is purportedly based
upon a $70 per barrel cost to you, wouldn't that account for the 90%
increase in profits we've seen?
Answer. Product prices are set by the supply/demand balance in the
market, not by the price of raw material inputs, although if product
prices are not sufficient over the long term to cover input and other
costs, the enterprise will fail. BP's profits in 2005 are attributable
largely to the production and sale of crude oil, not to the sale of
refined products.
Question 5. I've alluded to the vital role petroleum plays in our
economy and society, from the price of bread to the price of a plane
ticket to the price of heating one's home. While you're obviously in
the business for profit, there are other sectors of the economy where
we put a limit on selling commodities at unconscionable prices. One
example is usury law, where lenders are prohibited from charging
unconscionable rates for borrowing money--because we recognize that
access to cash is critical to enterprise. How much more of a toll do
these fuel prices have to take on our society before Congress steps in
and places similarly appropriate regulations on your industry? Many
consumers would say that raising the price of gas by $2 per gallon over
the past 2 years, while reaping over $25 billion in profits is price
gouging. Many lawmakers would agree. What do you say to them?
Answer. Prices for crude oil and refined products represent market
driven commodity prices established by supply and demand. Neither the
comparison of current prices to historical prices nor the profitability
of market participants is sufficient to establish ``price gouging.'' If
demand outpaces supply, prices will increase. Historically cheap
commodities may, in this way, become expensive over time. High prices
and strong profitability attract entry in the free market model, and
entry and competition drive prices down if sufficient supplies are
available to meet demand. If sufficient supplies are not available,
high prices encourage shifting to substitutes for the product in short
supply. This leads to innovation and expansion of the economy overall.
Free markets have served the United States well. BP believes that
regulatory regimes that interfere with natural market forces do not
work well and should not be considered in response to if the short run-
up in consumer prices attributable largely to the hurricanes.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
Ross J. Pillari
Question 1. In the last decade, has your company ever withheld
supply of crude oil or refined product from the market in order to
prevent prices from falling?
Answer. No.
Question 2. Please describe any business relationship or
transaction your company or any of its subsidiaries, wherever located
and wherever incorporated, whether wholly owned or not, have had with
Iranian nationals (except employment of Iranian expatriates), the
Iranian government, individuals or corporations located or incorporated
in Iran, or any representative of these people or companies.
Answer. The Iran-Libya Act of 1996 (ILSA), renewed in 2001,
mandates that the President impose sanctions on persons or entitles
which make new investments over $20 million for the development of
petroleum resources in Iran. Moreover, the Executive Orders of 1995 and
ILSA restrict American company trade and investment with Iran without
specific OFAC waiver authority.
Since the enactment of these laws and regulations, BP America, Inc
and its subsidiaries have fully complied with all laws and regulations
governing American company activity with Iran.
______
Response to Written Questions Submitted by Hon. Pete V. Domenici to
John Hofmeister
Question 1. What are you doing to bring oil prices down?
Answer. Shell does not control the price of oil. Oil is a
commodity, and prices are set by the marketplace. Crude oil and natural
gas prices fluctuate substantially and unpredictably. The industry must
manage its business in the face of these severe price fluctuations. The
business requires massive investment over long periods of time--even
when prices are relatively low--to ensure that there will be energy
supplies in the future. The energy consumed today is made possible by
investments made years or even decades ago.
Oil and gas industry earnings per dollar of sales are in line with
all U.S. industry during the second quarter of 2005. The energy
industry overall earned 7.6 cents for every dollar of sales, compared
to an average of 7.9 cents for all U.S. industry. The total dollar
numbers may be large, but so are the billions of dollars that petroleum
companies have invested to supply energy to U.S. consumers--and will
need to re-invest--to meet future demand in a safe and environmentally
sustainable way.
Shell has a history of making significant investments in the U.S.
and is dedicated to growing the North American energy supply. Shell is
an industry leader in the Deepwater Gulf of Mexico, beginning with the
development of our Auger field over a decade ago. Over the past five
years, Shell gross production in the Gulf of Mexico has been nearly one
billion barrels of oil equivalent, and over the same period Shell has
reinvested almost $7 billion in new offshore supply capacity.
Shell is aggressively pursuing natural gas prospects in onshore
North American basins. We are building new supply positions by
developing both conventional and unconventional gas resources. Shell is
investing in oil shale in Colorado, where we are testing a process to
unlock very large oil shale resources by conversion in the ground--
using electric heaters to gradually heat the rock formation to release
light oil and gas. This technology has the potential to recover over 10
times as much as traditional retort technologies, in a more
environmentally sensitive way.
Question 2. What is the relationship between the price of oil that
Americans are paying and the profits you are making?
Answer. See Answer to Question 1, above.
Question 3. The question I hear most from people is how is the
price of oil set? Many Americans think oil companies are rigging prices
to keep big profits. How would you respond to that?
Answer. See Answer to Question 1, above.
Question 4. Americans are being burdened with high oil, natural gas
and gasoline prices while you all are raking in record profits. What do
you say to those people that blame you for this and say that it is
unfair?
Answer. See Answer to Question 1, above.
Question 5. Americans want to know if it is not costing so much
more to produce a barrel of oil, why are prices rising so high?
Answer. See Answer to Question 1, above.
Question 6. What is your company's response to proposals for
enactment of a Windfall Profits Tax?
Answer. History has demonstrated that a windfall profit tax does
not work. In the 1980s, the windfall profit tax (WPT) drained $79
billion in industry revenues that could have been invested into the
U.S. economy to fund new production and infrastructure. A WPT
discourages investment in domestic production and increases U.S.
dependence on imported oil. The Congressional Research Service
concluded that between 1980 and 1986 the WPT reduced domestic oil
production by as much as 1.6 billion barrels.
Question 7. Do you believe that Americans are dangerously dependent
on oil and its refined products?
Answer. Most American consumers and the U.S. economy currently
depend on fossil fuels to heat and cool their homes, power their cars
and run their businesses. Regardless of the answer to this question,
Shell's goal is to invest both in new supplies of oil and gas, as well
as in alternative energies and energy technologies of the future, all
in an effort to meet U.S. energy needs today and tomorrow.
Question 8. The International Energy Agency's recent Global Outlook
report expresses concern about world energy supplies and reliance on
the Middle East for oil. Do you think the IEA's anxiety is justified?
Answer. IEA is in the best position to comment on its analysis.
______
Response to Written Questions Submitted by Hon. Jim Bunning to
John Hofmeister
Question 1. Some analysts believe that OPEC is approaching its
current oil production capacity. Given this, are oil companies looking
at alternative sources of energy, such as liquid fuels made from coal,
in order to expand their business and maintain energy supplies for the
United States? Please include a review of the level of investment your
company is making this year and the projected investment over the next
three years in coal to liquid fuels initiatives.
Answer. Shell believes that coal-to-liquids (CTL) could play a role
in addressing the USA's energy needs, particularly given the scale of
U.S. coal resources and the strength of its established coal industry.
Although CTL technology has been proven, the commercialization of the
process remains challenged by high relative capital intensity, which
argues for CTL projects of large scale coupled with a high confidence
of sustained energy prices sufficient to stimulate private sector
investment. Shell's clean coal business unit in the U.S. is focusing on
delivering in North America the coal gasification process to a number
of projects some of which include processes to convert natural gas to
liquids.
Question 2. I have been concerned with the lag time between the
wholesale cost of a barrel of oil and the retail price of a gallon of
gasoline. As we saw following the hurricanes, in an ascending market
where wholesale oil prices increase, there is a lag period of a few
days before retail gas prices reflect this change. Similarly one would
expect a lag in a descending market. My concern is that retail prices
are not dropping as quickly as they rose, relative to the change in oil
prices. Could you explain why price movements vary during a complete
market cycle and whether you believe any part of the energy industry is
unfairly profiting from this price lag?
Answer. Retail gasoline prices tend to move more slowly than the
underlying cost of product. This ``lag'' effect is evident during
periods when prices are rising as well as those times when prices are
falling. The best way to measure profitability is over a longer period
of time, after the market has experienced several rising and falling
cycles. This type of longer-term measurement provides a more realistic
representation of profitability.
Question 3. Boosting our domestic energy production is vitally
important not only to our economy but also to our national security.
Many of the countries we import oil from today are unstable,
jeopardizing the reliability of sustained production. Please provide a
chart for each of the last five years reflecting the percentage of your
exploration and production budget that invested in the Untied States
versus that invested overseas. Please also provide a chart reflecting
your current projection of the percentage of your exploration and
production budgets that will be allocated to projects in the United
States versus overseas for the next five years.
CAPITAL EXPENDITURES FOR EXPLORATION AND PRODUCTION
------------------------------------------------------------------------
% invested in
Year U.S.
------------------------------------------------------------------------
2000.................................................. 27
2001.................................................. 26
2002.................................................. 14
2003.................................................. 18
2004.................................................. 13
------------------------------------------------------------------------
Our capital expenditure budgets are approved on an annual basis
during the month of December, and therefore we cannot provide the data
for the next five years.
Question 4. The disruption caused by the recent hurricanes
displayed the United States' vulnerability when it comes to domestic
energy supply and production. What suggestions do you have to
strengthen our energy supply and production capability?
Answer. To secure energy supply in the United States, industry must
re-invest profits to meet both short and long-term needs. Congress
should ``do no harm'' by distorting markets or seeking punitive taxes
on an industry working hard to meet the energy demands. Other policy
initiatives might include:
Access to Resources. Gaining access to diverse energy resources is
a key to securing--energy supply to meet future needs. U.S. oil and gas
production must be broadened to other parts of the country in order to
ensure reliable and adequate energy supplies. Our current dependence on
Gulf production was highlighted when Hurricane Katrina shut in 92
percent of the Gulf's oil output and 83 percent of its natural gas
production. Shell is actively exploring for oil and gas in all the
areas in North America that are currently available, but most of the
Outer Continental Shelf (OCS) is not available. Yet, there are about
300 trillion cubic feet of natural gas and more than 50 billion barrels
of oil yet to be discovered on the OCS surrounding the Lower 48. Alaska
OCS has an estimated 122 trillion cubic feet of natural gas and 25
billion barrels of oil. Access to oil and gas resources off our
coastlines would be an important step, particularly in light of the
fact that the hurricanes highlighted the U.S. dependence on the Gulf
Coast for domestic oil and gas supply.
OCS Revenue Sharing. For years, the Gulf of Mexico has shouldered
the burden of the U.S. offshore energy production. OCS revenues should
be shared with states and communities that have production off their
coasts, in order to mitigate the impacts of offshore development.
Conservation. Conservation is important in ensuring future energy
supply. Energy efficiency and conservation affect demand and that, in
turn, affects the market. Shell has found significant cost savings in
our own facilities from energy conservation.
Workforce. Today, nearly 50 percent of all oil and gas industry
workers are over the age of 50. The available skilled workforce is
aging, and interest in energy-related educational opportunities is
shrinking. We need engineers, scientists, inventors, drillers,
geologists and skilled trades people to meet our energy needs. Shell
has funded a number of workforce initiatives and encourages governments
to consider the same.
Question 5. It has been suggested that the United States consider
developing a strategic gasoline and natural gas reserve, similar to the
Strategic Petroleum Reserve we currently have. Some analysts suggest
that such reserves may minimize price spikes in these commodities
during periods of market supply disruptions. What are your views on
whether a strategic natural gas or gasoline reserve would be feasible
and whether they might help minimize price increases during periods of
market uncertainty?
Answer. The creation of strategic reserves for natural gas,
gasoline or other products must be carefully considered. The creation
of such reserves would involve tremendous costs, logistical challenges
and operational complexities. Comprehensive studies should be done to
determine whether such reserves are feasible, cost-effective or
helpful.
Note, for example, that proposals to create gasoline product
reserves have been considered and rejected several times by the
California Energy Commission, which found that ``a strategic fuel
reserve could have several unintended consequences, which could limit
its effectiveness as a tool to moderate gasoline price spikes and could
reduce the total supply of gasoline to the state.'' The National
Petroleum Council also concluded that strategic product reserves are
not appropriate for the U.S.
Question 6. China is becoming a bigger world oil player. This not
only has tightened the world oil market but also has produced national
security concerns for us. What concerns or problems do you see have
arisen since China became a bigger world energy player?
Answer. China's rapid economic growth has resulted in a
corresponding growth in energy demand. Because energy markets are
global, it is impossible to isolate a single nation or region in
evaluating energy supply/demand forecasts. Keeping pace with worldwide
growth in energy demand will be a challenge. It will require very large
investments in complex, costly and technologically demanding projects.
Question 7. While there have been expansions and efficiency gains
at existing refineries, no refinery has been built in the United States
in 30 years. Since the oil companies are now making record earnings,
are there plans to build new refineries in the United States?
Answer. Neither Shell nor Motiva (a U.S. joint venture between
Shell and Saudi Refining, Inc) currently have plans to build a new
refinery in the United States. However, from 1994 to 2004 Shell and
Motiva refineries in the U.S. increased overall capacity by about 30
percent and invested significant capital expenditures to do so. Shell
will continue to consider optimizing its refining assets in all markets
to take advantage of existing site infrastructure for expansion and
debottlenecking. Motiva recently announced that several options are
being considered to increase production of gasoline, diesel and
aviation fuels at its Gulf Coast refining network. Capacity expansion
projects being considered range from 100,000 barrels per day to 325,000
barrels per day.
Question 8. The 2005 Energy Bill implemented a controlled phase-out
of MTBE. Many companies, however, are planning on completely halting
its use. How will a sudden halt of the use of MTBE affect the gasoline
market and refineries?
Answer. It is unclear if there will be a sudden halt in the use of
MTBE. However, a sudden halt could reduce the total gasoline pool
depending on what refiners choose to do to replace the lost volume.
Question 9. I have noticed very large differences between the
prices of gasoline in different areas of the country. For example, I
recently saw gasoline in northern Virginia that was much more expensive
than gasoline in northern Kentucky. Please explain why there can be
such a significant difference in gasoline prices in different areas of
the country.
Answer. Prices in markets will vary as every market is subject to
unique conditions. Fuel prices are affected by a number of factors
including the cost of crude, formulation requirements, state taxes,
supply and distribution logistics, local market conditions,
environmental regulations and operating costs. These factors vary in
each market.
Question 10. When was oil first traded on the worldwide commodities
futures market?
Answer. To the best of our knowledge, the first contract on a
regulated futures exchange was in 1978, when a Heating Oil contract was
introduced on the New York Mercantile Exchange.
Question 10a. Would the price of oil be affected if oil was taken
off the commodities futures market and no longer traded?
Answer. There is no reason to believe prices would be higher or
lower on average. Prices would continue to reflect supply/demand
fundamentals, as they do now. However, prices might become less
reflective of true market conditions at any given moment.
Question 10b. Would oil then be bought and sold as a true supply
and demand product?
Answer. Oil currently is priced by supply and demand.
______
Response to Written Questions Submitted by Hon. James M. Talent to
John Hofmeister
Question 1. The recent hurricanes have highlighted the need for
increasing refinery capacity, which was already operating at a tight
margin of 97 percent. While that is laudable for efficiency purposes,
it allows no room for error in case of sudden outages or demand
increases. What is the optimal amount of spare refining capacity to
ensure a reliable supply of finished petroleum products at stable
prices?
Answer. Shell is not aware of an industry specific optimal amount
of spare refining capacity. Competitive forces within a free market
system are the best way to determine capacity, supply and prices. A
free and competitive market ultimately serves the best interest of the
consumer.
Question 2. How has industry consolidation impacted the amount of
spare production and refining capacity?
Answer. Shell is not aware of industry consolidation directly
impacting spare production and refinery capacity. Since 1990, according
to API, refinery capacity has grown from 15.5 to 17 million barrels per
day.
Question 3. Describe the degree of competition between refineries
for crude oil supplies and sales to retailers. What percentage of crude
oil processed in the U.S. is processed by integrated companies (i.e.,
those produce and refiner) versus refined by independent refining
companies?
Answer. There is a tremendous amount of competition between U.S.
refineries for crude oil supplies. Several factors come into play when
buying crude oil--the quality, sulfur, gravity, country of origin/
location, method of shipping, as well as the location of the refinery
and financial factors, including term contracts and market conditions.
Availability of crude barrels is a significant factor. Weather and
unplanned outages of refineries/production facilities affect the global
market.
Percentages of crude oil produced by integrated companies versus
independent refining companies can be found on the DOE website. The
information includes all refiners. www.eia.doe.gov
Question 4. How has the amount of refining capacity tracked changes
in demand for gasoline and diesel over the last 30 years?
Answer. According to DOE data acquired by API, the amount of
refined product supplied to the U.S. market over the last 30 years has
exceeded U.S. refining capacity, except for a period from 1980 to 1984.
Demand has been met by a combination of both domestic refined product
and the importation of refined products from overseas. Since 1985,
there has been stronger growth in demand compared to refining capacity;
however, refining capacity has continued to increase since 1994.
Question 5. Explain to me your company's plan to increase refining
capacity in the U.S. to meet the need for new refinery capability.
Answer. Shell will continue to consider optimizing its refining
assets in all markets to take advantage of existing site infrastructure
for expansion and debottlenecking. Motiva recently announced that
several options are being considered to increase production of
gasoline, diesel and aviation fuels at its Gulf Coast refining network.
Capacity expansion projects being considered range from 100,000 barrels
per day to 325,000 barrels per day. Note, too, that we have increased
capacity as demand has grown. From 1994 to 2004 Shell and Motiva
refineries in the U.S. increased overall capacity by about 30 percent
while investing significant capital expenditures to do so.
Question 6. EPAct 2005 removed the requirement to include
oxygenates from gasoline, largely because of concerns over the use of
MTBE. What is the impact on the price of removing oxygenates from
gasoline?
Answer. The price impact will vary depending on market conditions.
Question 7. Are there other oxygenates that can be used in place of
MTBE, such as using ethanol to make ETBE, and how does the cost of such
alternative additives compare to the cost of gasoline?
Answer. As of May 2006, it will no longer be necessary under
federal law to use oxygenates in gasoline. Refiners may choose to use
an oxygenate, such as ethanol, and will likely make such choices based
on a variety of factors. The relative costs of alternative additives
vary depending on market conditions and may be more or less than the
cost of other gasoline components.
Question 8. Have you studied the use of ETBE, the cost of
converting MTBE plants and how long it would take to do so, and whether
ETBE avoids the leakage/water contamination problems that were caused
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE
and use it to increase the volume of gasoline produced by a barrel of
oil compare to the cost of expanding existing or adding new refinery
capability?
Answer. Yes, Shell has studied the cost of converting MTBE plants.
At this time, however, Shell has no plans to use ETBE as a gasoline
additive in the U.S.
Question 9. What, if anything, is preventing your company from
using ETBE in place of MTBE?
Answer. While Shell is not prevented from using ETBE in place of
MTBE, Shell has no plans at this time to use ETBE as a gasoline
additive in the U.S. ETBE has chemical properties similar to MTBE.
Therefore, use of ETBE as a replacement for MTBE may not be
significantly different from a groundwater perspective.
______
Response to Written Questions Submitted by Hon. Gordon H. Smith to
John Hofmeister
Question 1. I have a bill, S. 1743, to give the Federal Trade
Commission, additional authority to prevent and punish price gouging in
the aftermath of a major disaster. My bill provides effective authority
to the Federal Trade commission to protect consumers from being
victimized in the wake of a disaster without hampering the normal
functioning of the free market. It even recognizes that there are
legitimate reasons why prices may increase. Do you think that this
consumer protection authority should be available to the FTC?
Answer. The FTC already has effective authority to protect
consumers from unlawful pricing practices.
Question 2. Would this serve as a deterrent to price gouging by
individual retailers?
Answer. Shell has a strong history of competitive pricing and does
not condone price gouging in any form. It is unknown what effect S.
1743 might have on independent retailers
Question 3. Can you tell me why diesel prices continue to remain
significantly higher than gasoline prices in Oregon?
Answer. Nationally, diesel prices have been higher than gasoline
for an extended period of time. Diesel and gasoline prices are impacted
by similar market fundamentals, but they can and do operate
independently if the underlying supply and demand is impacted for one
product more than the other. In the case of diesel, growing economies
tend to expand demand as industry uses fuel to power factories,
utilities use diesel fuels to generate electricity, and transportation
demand increases as goods are moved from one part of the country to the
other. At the same time, diesel supply is impacted as refineries
experience planned or unplanned maintenance and begin the necessary
modifications to reduce the amount of sulfur contained in diesel fuels.
All of these elements impact the ultimate price a consumer pays for
diesel fuel.
______
Response to Written Questions Submitted by Hon. Jeff Bingaman to
John Hofmeister
Question 1. Section 392 of the Energy Bill, which was negotiated
with the involvement of the Chairman and Ranking member of the Energy
and EPW Committees, contains permitting streamlining language. The
Energy Policy Act of 2005 permits the EPA Administrator to enter into a
refinery permitting cooperative agreement with a state. Under such an
agreement, each party identifies steps, including decisions timelines,
it will take to streamline the consideration of federal and state
environmental permits for a new refinery. I want to ask you several
questions about that provision, since you have supported streamlining:
Have you requested that EPA issue any regulations or take any action to
implement these new provisions? If yes, when? If no, when do you
anticipate that you will do so?
Answer. Neither Shell nor Motiva has formally requested this step.
However, on the refinery expansion project that Motiva is considering
along the Gulf Coast, if Motiva submits a permit application to either
Texas or Louisiana the company would meet with EPA Region 6 officials
as well as EPA HQ to brief them on the project and to set out the
desired timeline for permitting.
Question 1a. Have you worked with any state to encourage them to
enter into an agreement with EPA under Section 392 of EPAct?
Answer. Neither Shell nor Motiva has formally used this process.
Question 1b. Do you support EPAct streamlining provisions?
Answer. Yes, we do support the streamlining provisions.
Question 1c. Do you have any examples of where a state came to EPA
and said we want to work closely with you on permitting a new refinery
or refinery expansion and EPA refused to provide technical assistance
and even financial resources under existing law to that state?
Answer. Shell is not in a position to know about interactions
between individual states and the EPA.
Question 2. In answer to several of the questions at today's
hearing (Nov. 9) the witnesses (you) have noted that the market for
petroleum and petroleum products is a global one and should be viewed
in that context. Please list all planned refinery construction that
your company plans to undertake globally. Please list them by country
and include the projected size of the facility, including the projected
capacity for all units and their potential product yields in addition
to the project's total investment cost.
Answer. Shell Oil Company is the domestic operating company of
Royal Dutch Shell and as such SOC has no investments planned outside of
the U.S. Previously in this questionnaire, we mentioned Motiva
expansion plans are being considered in the U.S. In Singapore,
affiliates of Royal Dutch Shell recently announced the awarding of
contracts for basic design and engineering for a potential world-scale
ethylene cracker facility at the Pulau Bukom manufacturing complex.
Potential product yields and investment costs have not been disclosed.
Question 3. The International Energy Agency (IEA) has just released
its World Energy Outlook 2005. It contains a piece on the global
refining picture. The study notes a lack of investment in upstream and
downstream capacity has contributed to the extreme tightness in global
oil markets. What are your thoughts in response to this? What is your
company doing in response (actions)? What is your company doing
(investments/analysis) in the ``MENA'' regions? Do you agree with IEA's
projections?
Answer. The IEA report summary provides a plausible explanation for
tight global oil markets. Actions taken by Shell include the following:
Globally, this year Royal Dutch Shell plc has expended a total of
$15 billion in capital investments: $10 billion in exploration and
production, $2 billion in gas and power and $3 billion in downstream.
In the U.S., Shell Oil Company has invested over the last five years
virtually 100 percent of U.S. after-tax earnings in U.S. projects to
meet future energy needs.
Returning production and refining capacities to pre-hurricane
levels is a priority. The U.S. Congressional Budget Office estimates
the energy sector sustained capital losses from hurricanes Katrina and
Rita between $18 billion to $31 billion.
Shell has major upstream investments in the Gulf of Mexico, where
we have reinvested almost $7 billion in the last five years. We are
pursuing natural gas in the Gulf as well as onshore. We have a major
oil shale investment in Colorado, testing a process to unlock very
large oil shale resources.
Motiva Enterprises LLC, a joint venture between Shell Oil Company
and Saudi Refining Inc, announced in September that it is studying
options for major capacity expansion at its refineries in the U.S. Gulf
Coast--a project that, once decided, will take years to complete.
Shell is investing in LNG and hydrogen as well as renewable energy
sources such as solar and wind. Although renewable energy technologies
are a small part of the total global energy mix, their annual growth
rate outperforms traditional fuels. Shell has major developing new
technologies such as coal gasification, oil shale, gas-to-liquids and
biofuels we will be able to put more supply into the marketplace.
Question 4. Voluntary standards--Post hurricanes, what is the
industry doing to come up with voluntary standards/best practices for
back-up power supply to critical energy infrastructure (refineries,
pipelines, etc.) and natural disaster recovery? Will the API undertake
such an effort? If not, what is your company doing?
Answer. It our understanding that API is evaluating this important
issue. Shell continuously strengthens its preparation and response
activities, and to ensure that consumers have an adequate supply of
fuel at all times--especially during emergencies. For example, shortly
after Hurricane Katrina, the Shell Pipeline Company procured thirteen
1-megawatt generators. These units are capable of powering even our
largest electric pump drivers and were later needed to make critical
movements from our Port Arthur Products Station in the absence of
commercial power. We are reviewing needs at other critical facilities
and intend to make similar back-up power procurements where
practicable.
Question 5. A number of witnesses testified that failure of the
electricity system resulting from hurricanes Rita and Katrina
contributed in great part to the inability to get refineries restarted,
or to get natural gas pipelines restarted. What are the arrangements
for backup power in case of such emergencies at your critical
facilities?
Answer. See Answer to Question 4, above.
Question 6. How many of your plants have on site cogeneration
facilities? Which plants have these facilities?
Answer. Five of our plants in the U.S. have on-site cogeneration:
Shell Deer Park Refinery and Chemical (Texas); Motiva Port Arthur
Refinery (Texas); Shell Geismar Chemical (Louisiana); Shell Los Angeles
Refinery (California); Shell Martinez Refinery (California).
In addition to the above facilities, Shell is a minority owner of
the March Point Cogeneration Company, a cogeneration facility located
on the Puget Sound Refinery property.
Question 7. Are there regulatory barriers at either the state or
federal level that prevent the installation of cogeneration plants at
your facilities that do not have them?
Answer. Four of our plants do not have cogeneration facilities:
Motiva Convent Refinery (Louisiana); Motiva Norco Refinery and Shell
Norco Chemical; (Louisiana); Mobile (Alabama); Puget Sound (Washington)
(reference March point Cogeneration note above).
Decisions to build cogeneration facilities are based on
environmental regulations, local electricity costs, plant requirements
and internal economics. Cogeneration projects have been considered at
the above plants and did not meet internal economics or could not
compete with local utility electricity costs.
Question 8. Would the presence of cogeneration facilities at your
refineries reduce the recovery time during such emergencies?
Answer. Recovery time for our plants is dependent upon many factors
including parts of facility impacted by severe weather, natural gas
supplies (that may feed a cogeneration facility), electricity and
availability of feedstocks. Recovery time could be reduced if
cogeneration facilities were on site and functional when traditional
utility facilities are out.
Question 9. Witnesses at earlier hearings testified that there are
a number of modern natural generation facilities in Louisiana/Texas
area that are not used to their full capacity. Are there natural gas
generation facilities in close proximity to your refinery facilities
that could be used for backup generation at the refineries?
Answer. There are no generation facilities in close proximity that
could be used for back-up generation.
Question 10. Would the use of generators that are in close
proximity to refineries to provide backup power during such emergencies
mean that recovery times might be shortened, since the restoration time
for a nearby facility might be less than the restoration time for the
transmission facilities for traditional utilities?
Answer. Generally, yes, when electricity is a critical path item.
environment
Question 11. Please specify exactly which, if any, Federal or State
environmental regulations have prevented your company from expanding
refinery capacity or siting a new refinery, and documentation on the
exact details of the project prevented.
Answer. We are not aware of any environmental regulations that have
prevented us from expanding refinery capacity or siting a new refinery.
Question 11a. How much have so-called ``boutique fuel''
requirements added to the average retail price, where applicable, and
the average wholesale price per gallon of the gasoline sold by your
company?
Answer. Boutique fuels generally cost more to produce because they
require special production and handling, which can cause inefficiencies
in the distribution system. In the event that supply or transportation
is disrupted, boutique fuels create the potential for significant price
volatility because supplies cannot be readily shifted between areas.
Question 11b. If the EPA or the Congress were to act to minimize
the number of ``boutique fuel'' formulations required by the states to
protect air quality, how many should there be and what should the
specifications of each be in order to maintain air quality and improve
fungibility?
Answer. Refiners now produce numerous, different fuels to satisfy
state and federal requirements. There are several factors to consider
when evaluating whether or not to reduce the number of boutique fuels
such as ensuring air quality needs, the impact on supply, cost issues
and distribution compatibility. After weighing those factors, we
recommend reducing the number of gasoline formulations to approximately
5 in order to streamline and simplify this complex system. There is a
proposal by API to consolidate fuel requirements to five standardized
fuels, which Shell supports. The proposal would provide states with
fuel options that ensure continued progress toward attaining air
quality standards. The fuel options available to states would depend on
air quality need, cost-effectiveness, the availability of other, more
cost-effective emissions controls, and compatibility with the nation's
gasoline manufacturing and distribution system.
Question 12. Streamlining New Source Review (NSR) permitting
constraints was mentioned as an incentive that would encourage refiners
to supply more products to the U.S. market. How many air quality permit
applications for refinery expansions has your company submitted for NSR
over the last ten years? How long did it take the EPA, or the
applicable State, to approve or deny each permit application, after
receipt of a complete permit application? What was the expected
percentage increase in product output of the expansion?
Answer. In the last ten years, neither Shell nor Motiva has
submitted applications for air quality permits for significant refinery
expansions under NSR.
Question 12b. How would you propose to streamline NSR and still
maintain local air quality and prevent any increase in total annual
emissions from such expansions?
Answer. Shell supports the streamlining of the NSR process. In
addition, we strive to minimize emissions in the planning and design of
manufacturing facilities. We expect careful government review of these
plans, and work closely with all permitting agencies to achieve the
best result both in terms of the environment and the supply of energy
to consumers.
Question 13. How much did the fuel specification waivers that have
been granted by EPA to date, due to the supply disruptions caused by
the hurricanes, reduce the average retail price of the gasoline or
other refined products made by your company?
Answer. Typically, fuel prices increase when interruptions to the
supply or transportation systems occur. The speed and willingness of
the EPA to grant fuel waivers was incredibly helpful in quickly and
efficiently improving the fuel supply in areas directly or indirectly
impacted by hurricanes.
Question 14. One witness indicated that ``getting two 100-year
hurricanes in four weeks'' caused a great deal of chaos and disruption
in the gasoline supply chain. The National Oceanic and Atmospheric
Administration has projected that the country and the Gulf of Mexico
have entered a cyclical period of 20-30 years during which the Gulf and
coastal areas are likely to experience a greater frequency of
hurricanes and higher odds of those hurricanes making landfall in the
U.S. What preparations has your company made to deal with a great
hurricane frequency to decrease repetition of the supply disruption
that occurred this year?
Answer. See Answer to Question 15, below.
Question 15. Over the last 50 years, average annual sea surface
temperatures have increased in the Gulf of Mexico and, according to the
National Academy of Sciences and other similar scientific expert
bodies, are expected to continue increasing as the oceans continue
warming due to accelerating global climate change. The Administration's
Climate Action Report (2002) states ``model simulations indicated that,
in a warmer climate, hurricanes that do develop are likely to have
higher wind speeds and produce more rainfall.'' What preparations has
your company made to deal with a greater likelihood of greater
hurricanes intensity so as to decrease repetition of the disruption
that occurred this year?
Answer. We prepare for and monitor tropical storm developments
every year and incorporate learning's from previous years. We have
safely evacuated and redeployed people over the last two seasons, just
as we have done for decades. We are currently undertaking an assessment
of our offshore operations to determine what future actions and
modifications may be required to prevent future disruptions. Shell
supports the expansion of oil and gas production to new areas both
onshore and offshore, subject to appropriate environmental and land use
regulations.
Question 16. How has your company disclosed to shareholders and
investors the risks associated with the potential impacts on your
company's assets in the Gulf of Mexico or indirect impacts on its
assets elsewhere, of either the expected greater frequency of
hurricanes making landfall in the U.S. or the probably greater
intensity of hurricanes in the regions?
finances, production, imports, etc.
Please provide for each of the last ten years your company's--
Gross revenue of U.S. operations
Total capital expenditures in the U.S.
Net profit of U.S. operations
Total taxes paid to the Federal government
Total taxes paid to State governments
Total donated to charity.
------------------------------------------------------------------------
Gross Capital U.S.
Year revenue expenditures earnings
------------------------------------------------------------------------
1995............................. 24.3 2.9 1.4
1996............................. 28.8 3.2 1.7
1997............................. 28.5 3.5 1.7
1998............................. 16.6 4.0 -2.4
1999............................. 17.3 1.5 1.7
2000............................. 26.1 1.5 3.1
2001............................. 21.1 2.3 1.9
2002............................. 54.7 6.6 2.0
2003............................. 75.1 2.5 2.7
2004............................. 102.9 1.6 4.7
------------------------------------------------------------------------
All amounts are in billion dollars.
Total taxes paid to the Federal government
Total taxes paid to State governments
SHELL OIL COMPANY AND ITS CONSOLIDATED SUBSIDIARIES
------------------------------------------------------------------------
Year Federal State
------------------------------------------------------------------------
1995................................................. 667 35
1996................................................. 295 51
1997................................................. 648 40
1998................................................. 192 39
1999................................................. 811 39
2000................................................. 1,343 51
2001................................................. 908 75
2002................................................. 229 27
2003................................................. 1,330 45
2004................................................. 2,115 133
------------------
Total............................................ 8,538 535
------------------------------------------------------------------------
All tax amounts in millions of dollars.
Total donated to charity.
------------------------------------------------------------------------
Donations
Year (Millions $)
------------------------------------------------------------------------
1995.................................................... 16.2
1996.................................................... 19.2
1997.................................................... 23.2
1998.................................................... 26.3
1999.................................................... 26.2
2000.................................................... 32.1
2001.................................................... 36.7
2002.................................................... 35.8
2003.................................................... 36.3
2004.................................................... 32.4
------------------------------------------------------------------------
YTD 2005 (through Third Quarter) $24.8 million. The above amounts
reflect U.S. donations only.
Question 17. How much additional petroleum refining capacity do you
expect your company to install in the United States over the next 10
years?
Answer. Shell will continue to consider optimizing its refining
assets in all markets to take advantage of existing site infrastructure
for expansion and debottlenecking. Motiva recently announced that
several options are being considered to increase production of
gasoline, diesel and aviation fuels at its Gulf Coast refining network.
Capacity expansion projects being considered range from 100,000 barrels
per day to 325,000 barrels per day. Note, too, that we have increased
capacity as demand has grown. From 1994 to 2004 Shell and Motiva
refineries in the U.S. increased overall capacity by about 30 percent
while investing significant capital expenditures to do so.
Question 18. What percentage of profits over the last 10 years has
your company re-invested in capital, exploration, drilling and
production in the United States? Please provide an annual total for
those U.S. expenditures and a clear breakdown.
----------------------------------------------------------------------------------------------------------------
Capital Exploration
Year U.S. exploration expense CapEx + % of U.S.
earnings (CapEx) (Expl Exp) Expl Exp earnings
----------------------------------------------------------------------------------------------------------------
1995................................................ 1.4 2.9 0.2 3.1 221%
1996................................................ 1.7 3.2 0.3 3.5 206%
1997................................................ 1.7 3.5 0.3 3.8 224%
1998................................................ -2.4 4.0 0.4 4.4 N/A
1999................................................ 1.7 1.5 0.2 1.7 100%
2000................................................ 3.1 1.5 0.2 1.7 55%
2001................................................ 1.9 2.3 0.3 2.6 137%
2002................................................ 2.0 6.6 0.2 6.8 340%
2003................................................ 2.7 2.5 0.3 2.8 104%
2004................................................ 4.7 1.6 0.4 2.0 43%
----------------------------------------------------------------------------------------------------------------
All amounts are in billions of dollars.
Question 19. What percentage of profits over the last 10 years has
your company re-invested in non-petroleum energy supply and production
in the United States? Please provide a total and the results of such
investment.
Answer. Shell has invested in hydrogen, solar and wind energy in
the U.S. over the last 10 years. The capital and earnings from these
businesses are in addition to the amounts reported in the response to
question 18. We do not typically report U.S. numbers for these
businesses.
Question 20. On average for the last ten years, please compare your
company's overall capital expenditures in the United States to its
expenditures elsewhere.
------------------------------------------------------------------------
Total
U.S. capital worldwide % U.S.
Year expenditures capital capital
expenditures expenditures
------------------------------------------------------------------------
1995.......................... 2.9 11.0 26%
1996.......................... 3.2 11.0 29%
1997.......................... 3.5 12.3 28%
1998.......................... 4.0 12.9 31%
1999.......................... 1.5 7.4 20%
2000.......................... 1.5 6.1 25%
2001.......................... 2.3 9.6 24%
2002.......................... 6.6 22.4 29%
2003.......................... 2.5 12.3 20%
2004.......................... 1.6 12.7 13%
-----------------------------------------
Average:.................. 3.0 11.8 25%
------------------------------------------------------------------------
Question 21. What percentage of your company's gross revenue was
collected in the United States in each of the last 10 years?
------------------------------------------------------------------------
% net proceeds
Year collected in
U.S.
------------------------------------------------------------------------
1995................................................... 22%
1996................................................... 22%
1997................................................... 22%
1998................................................... 18%
1999................................................... 16%
2000................................................... 19%
2001................................................... 17%
2002................................................... 33%
2003................................................... 38%
2004................................................... 39%
------------------------------------------------------------------------
Shell only reports net proceeds by region, not gross revenue.
Difference between the two is mainly taxes collected by Shell on behalf
of various taxing authorities.
Question 22. How much of your company's revenue collected in the
United States was used to pay for purchasing crude oil from OPEC
countries?
Answer. Shell does not keep records in this format.
Question 23. Do you support S. 1794 or something like it to create
gasoline and jet fuel reserves to ensure stability of price and supply?
Should it be extended to diesel and other fuels like natural gas?
Answer. See answer to Question 5. from Senator Bunning's questions.
Question 24. On average for the last ten years, how much of what is
refined by your company in the U.S. stays in the U.S.?
Answer. Shell's U.S. retail supply requirements generally exceed
Shell's U.S. gasoline refining capacity.
Question 24a. What amount of refined product did your company
import in 2004 and 2005?
Answer. Much of the data that is requested by this Question is the
subject of a supplemental subpoena issued by the Federal Trade
Commission on November 23, 2005 with a return date of January 4, 2006.
This response requires the compilation of a large amount of export and
import data over a five-year period of time, and historical tax
expenditure data. Shell is willing, upon request, to provide non-
proprietary information to the Committee as soon as the response to the
FTC subpoena is completed.
Question 24b. What are your assumptions about demand growth in
India in [sic] China?
Answer. In its World Energy Outlook 2004, the International Energy
Agency states that global primary energy demand is set to rise by 59%
from now until 2030. Two-thirds of the new demand will come from the
developing world, especially China and India.
Question 24c. How have your investments in the United States
increased the energy security of the country?
Answer. Shell has invested virtually 100% of its U.S. profits in
the U.S. over the last five years to meet the energy needs of the U.S.
Question 25. What market signals will occur in advance of peaking
world oil production and what is the appropriate policy or set of
policies for the U.S. government to adopt when such signals occur?
Answer. History has shown that estimates of recoverable resources
have continuously increased over time, despite the effects of
cumulative production, as we better understand the nature of the fields
we drill and as we discover new fields. Predictions of peaking oil
production typically focus on conventional crude oil produced from
reservoirs in much the same way as the industry has operated in the
past. New technology is enabling more development of conventional
resources, and development in deep and ultra-deep water that were
previously deemed inaccessible.
Technology will also add significant new ``unconventional''
resources to the hydrocarbon supply mix in the form of extra-heavy oil,
tar sands, gas-to-liquids, coal-to liquids and biofuels.
The growth of oil production could be constrained for other
reasons, such as onerous policies related to access, licensing and
leasing, and fiscal terms and conditions. Such onerous factors could
give the appearance of peaking oil production. Government policies that
create a favorable investment climate, put oil production back on a
growth path. Specifically, policymakers in the U.S. should consider:
Lifting the current drilling/leasing moratoria in certain
areas on the Outer Continental Shelf (OCS), in a manner that
ensures industry's impact is minimized, and environmental
resources are protected;
Developing an equitable and fair system to share OCS
revenues with coastal states and nearby communities and to
share federal onshore oil and gas revenues with local
communities.
Developing policies that foster development of
unconventional domestic resources, such as oil shale and tar
sands, and innovative technologies, such as coal gasification
processes.
Providing extended and/or flexible lease terms for
production in frontier areas in the offshore and offering an
opportunity for development of consortia to test new technology
in clearly defined, high-risk areas; and
Providing additional funds, including direct funding from
federal oil and gas royalties, bonus bids and rental fees, to
BLM and MMS and state wildlife management agencies to perform
their environmental and regulatory responsibilities in a timely
fashion.
______
Response to Written Questions Submitted by Hon. Ron Wyden to
John Hofmeister
Question. All over America, the oil industry drives up the price at
our gas pumps by redlining and zone pricing. ``Redlining'' is when your
companies draw a phone line around a community to lock out competition
and raise prices for the consumers. ``Zone pricing'' is plain oil
discrimination and it takes place when one oil company supplies gas to
several gas stations located near each other and one station is charged
much more than the others for the same type of gas. This drives
stations out of business, reducing choice and raising prices for
consumers. To help hurting consumers at our gas pumps, will your
company commit to stop redlining and zone pricing? Yes or no?
Answer. We will continue to utilize appropriate and legal measures
to address competitive factors in the marketplace, and will need
sufficient flexibility to deal with the circumstances affecting each of
the classes of trade in their respective market areas. We disagree that
zone pricing is illegally discriminatory. We take care to operate
within federal and state pricing regulations. Legally implemented, zone
pricing has been an effective method of addressing the impact of
extremely competitive conditions within a local market area. Responding
to such competition is beneficial to both the impacted retailers and to
consumers.
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
John Hofmeister
Question 1. I'm aware that the cost of crude oil is driven by the
world market and that its cost is currently significantly above
historic averages. But I'm not aware of any substantive increases in
the cost of producing crude oil, the cost of refining it into various
petroleum products such as gasoline and diesel, and the cost of
transportation of refined products to markets. Through the end of
September 2005, the price of crude had increased 40 percent in 2005
while gasoline prices increased almost 80 percent. If the percent
difference in the prices isn't pure profit, please explain to me how
you account for the difference in the substantially lower increase in
crude oil when compared to gasoline.
Answer. Retail gasoline prices tend to move more slowly than the
underlying cost of product. This ``lag'' effect is evident during
periods when prices are rising as well as those times when prices are
falling. The best way to measure profitability is over a longer period
of time, after the market has experienced several rising and falling
cycles. This type of longer-term measurement provides a more realistic
representation of profitability.
Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to
149. Further, no new refineries have been built in the U.S. since 1976.
In 1981, the 321 refineries had a capacity of 18.6 million barrels a
day. Today, the remaining 149 refineries produce 16.8 million barrels
per day. I recognize the difficult financial, environmental, and legal
considerations associated with the location and construction of new
refineries. But I fail to understand the closure of existing refineries
event if they required investment to enhance their efficiency and
production capability unless, of course, this mechanism is being used
to increase the price of gasoline and other refined products. Please
help me understand why you would shut down refineries in the face of
the supply and demand situation. What conditions would have to exist
for you to invest in new refining capacity? I have heard the industry
claim that up to $48 million has been used on capital expenditures for
existing refineries. If those investments were not used for capacity
increases, what were they used for?
Answer. According to information compiled by API, the number of
U.S. refineries peaked in 1981, when there were 315 operating
refineries. We believe that some owed their existence largely to
government subsidies to small refiners that ended in 1981 and that many
closed because they were small and inefficient. As the industry faced
increasing requirements for cleaner fuels and improved environmental
performance, the number of refineries continued to shrink-from 194 in
1990 to 144 at the end of 2004. However, growth in capacity at existing
refineries has largely offset the effect of refinery closures-
particularly in the later part of the last decade, with the result that
total refinery capacity in the U.S. has grown from 15.5 to 17 million
barrels per day since 1990.
Shell has invested in new refining capacity in order to help
satisfy demand. From 1994 to 2004 Shell refineries in the U.S.
increased overall capacity by about 30 percent and invested significant
capital expenditures to do so. Shell will continue to consider
optimizing its refining assets in all markets to take advantage of
existing site infrastructure for expansion and debottlenecking. Motiva
recently announced that several options are being considered to
increase production of gasoline, diesel and aviation fuels at its Gulf
Coast refining network. Capacity expansion projects being considered
range from 100,000 barrels per day to 325,000 barrels per day.
Capital expenditures not used for adding capacity include costs of
modifications to comply with clean air and boutique fuel requirements,
as well as maintenance and improvements to sustain and improve asset
integrity. In addition to product demand, key factors for any proposed
refinery expansion would include the overall cost to design, engineer,
build and operate new processing units; favorable indicators of future
crude supply and related costs; and expected return on investment.
Question 3. The recent hurricanes resulted in the need to import
substantial refined products such as gasoline, diesel fuel and aviation
fuels to meet U.S. demand. The question has been raised as to whether
the country should development a strategic reserve for finished
petroleum products. What would be your reaction if the Federal
government either directly or by way of contract with the private
sector sought to create a strategic reserve of finished petroleum
products? Since these products have a limited shelf-life, one proposal
is to obtain and operate a number of refineries and has the products be
used by the Federal government. Appreciate your comments on this
proposal.
Answer. See the Answer to Question #5 from Senator Bunning's
questions.
Question 4. Given the recent profitability of the oil industry, I
am interested to learn more on the disposition of these profits,
particularly to enhance both production and refining capacity. Are any
of these profits being used to enhance production and refining capacity
for the benefit of other countries? What fraction of your profits is
being invested for production and for refining? What percentage of
profits have [sic] been used for stock buybacks and mergers and
acquisitions?"
Answer. From 2000 through 2004, Shell bought back approximately
$7.0 billion in its own stock on a global basis. During that same time
period, Shell spent nearly $14.0 billion in U.S. capital expenditures,
which represents 134% of U.S. Business Segment Earnings for that
period.
Question 5. You've all said profits are cyclical, and that your
companies have also suffered from the volatility of the oil markets.
Would your stockholders be better served if domestically produced oil
was sold at a fixed rate that included a generous profit margin above
the production, refining and distribution costs?
Answer. Competitive and open markets are the most effective way of
operating commodity businesses.
Question 6. Do you believe that global warming is occurring? Do you
believe that man-made activities have a role in this phenomenon? How
will global warming impact your companies in terms of added costs for
oil and gas development, or allow access to new areas for oil and gas
development?
Answer. We share the concern that the emission of greenhouse gases
(GHG) from human activities could lead to changes in the global climate
and might impact development and access. We are engaged with the World
Business Council for Sustainable Development, which advocates change in
infrastructure and lifestyle over the coming decades to address the
issue of climate change. No single solution or single industry can
deliver this change.
Question 7. Is it accurate that United States LNG terminals in
Massachusetts and Maryland are only operating at half capacity? Do you
believe if these plants were operated at a higher capacity it would
have changed the market dynamics that determine the current price?
Answer. The Maryland facility (Dominion Cove Point LNG regas)
operated at approximately 80-90 percent for Shell's capacity in 2005.
Shell holds one-third of the capacity at this terminal. We do not
utilize the Massachusetts terminal. Market dynamics for LNG are at the
global level and occasional spot cargos would not likely have an
impact.
Question 8. I understand that Shell and BP have entered into the
market and are now operating in the black. If that is accurate, what
barriers are you experiencing in expanding this promising market? What
federal incentives can Congress provide to help promote the solar
energy market? How about advancing the shift to a hydrogen-fueled
economy?
Answer. The renewables and hydrogen industries are still in the
investment stage. Shell has invested nearly $1 billion in new energies
between 2002-2005, with over $300 million invested in the U.S. alone
over the last five years. Shell Wind is the No. 2 wind company in the
U.S. and the vast majority of its 740MW Wind portfolio operates in the
USA where we have seven large wind farm projects. Shell Solar is the
No. 2 solar company in the U.S.
Policymakers should be aware that these emerging industries require
a stable and predictable investment climate if they are to grow. In
addition, we support extending the 30 percent federal solar tax credit
for ten years; lifting the $2000 credit cap on residential systems; and
a stable and consistent production tax credit for wind energy projects.
Shell Hydrogen has hydrogen projects in the United States, Iceland,
The Netherlands, Japan and Luxembourg. In the U.S., Shell is pleased to
be working with federal and state policymakers on a number of important
efforts. The goal of introducing hydrogen as a fuel on a significant
scale requires an unprecedented joint undertaking by government, the
automotive industry, and energy companies. Strong government support
and structures are required to shape a coordinated and geographically
concentrated introduction of vehicles and deployment of fueling
infrastructure.
Question 9. Please state for the record your company position on
fuel economy standards. Are there other incentives that you support
that you feel are better for consumers than the Corporate Average Fuel
Economy paradigm?
Answer. Shell does not have a position on the U.S. CAFE policy
debate. However, Shell does support conservation measures and
recognizes that energy efficiency improvements -- whether in vehicles,
in residences, or in businesses--can make a difference in energy
demand.
Question 10. I understand that over the past 5 years companies in
your industry have downsized significantly. How there is a shortage in
workers and equipment to increase drilling. Please explain that
dynamic.
Answer. Workers in the industry who are in highest demand in the
current market are those with the specialized technical education,
training, and experience required to find and produce oil and gas,
typically individuals with university degrees in specific engineering
and science disciplines. This pool of talent has been shrinking over
the past 15-20 years due to two important factors. First, technology
continues to advance making many processes and activities less labor
intensive. Second, and most significantly, U.S. domestic oil industry
growth has been constrained by both legislation and low price/low
return on investment environment. This lack of stability has had its
impact. Portrayed and viewed as a sunset, 'old energy' for the past 15-
20 years, the oil business has failed to attract in sufficient numbers
those with the aptitude to learn the specialized technical skills
needed to be successful in our industry who have opted for industries
they viewed as offering greater long-term opportunity. It is too soon
to know if this trend can be reversed but if the industry is to be
successful in attracting new talent, it will take a number of years of
what would be considered higher than normal growth opportunities in the
U.S. Growth is needed to change the dynamic for the industry to be
considered sustainable enough for students on college campuses today to
begin specializing for jobs in our industry in greater numbers.
Throughout this timeframe, despite these challenges we have remained
active on university campuses to encourage continued interest in our
industry and continue to do so.
With respect to the availability of drilling rigs and other
equipment required to find and produce oil, this too has been driven by
supply and demand. As noted, the overall trend in the U.S. is one of a
shrinking oil industry, over a period of nearly 20 years. During the
last 20 years, oil prices have fallen to $10 twice (1986 and 1998) and
lingered at the $20 level most of the time. Owners of needed rigs and
equipment require significant levels of investment and lead time, and
many companies who provided such equipment and related oil field
services in the past have gone out of business. Remaining companies who
survived over the past 15-20 years are understandably cautious that the
current price environment will not be sustained, exposing them to great
risk in any investment they make. In addition, both rig companies and
service companies face the same challenges as majors and independents
in attracting people and retaining them.
Question 11. As you probably know, Congress is likely to open up
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas
exploration. Do you have plans to bid for leases in this area? What
does the price of oil have to be to make ANWR exploration and
extraction be economically viable?
Answer. Although Shell has no current exploration and production
plans for the Arctic National Wildlife Refuge (ANWR), Shell supports
exploration and development on public lands, including lands such as
ANWR, subject to appropriate environmental and land use regulations to
ensure that industry's footprint is minimized and that biological
resources and the environment are protected. Any future Shell decision
with regard to ANWR will be guided by our evaluation of any acreage
that may eventually be made available for lease and a positive
assessment at that time that leasing and development activity can be
done without significant adverse impact on the environment.
We look forward to continuing our policy of engaging with
stakeholders as Shell considers business opportunities in Alaska and on
other public lands made available for leasing, where Shell can best use
our technological expertise to responsibly develop vital oil and
natural gas resources.
For competitive reasons, Shell cannot reveal our economic criteria
or any internal economic assessment of areas that could potentially be
offered for leasing in the future. From a geographical perspective,
ANWR is no more remote than the National Petroleum Reserve--Alaska
(NPRA). Recent lease sales in NPRA have attracted aggressive bids from
many companies. These bids were made in 2004, prior to the increases in
oil and gas commodity prices seen in 2005.
Question 12. I understand that many of your resources and equipment
are working flat out to rebuild infrastructure in the Gulf of Mexico.
If there is no capacity to expand oil and gas exploration, what good is
opening up sensitive environmental areas to increased drilling going to
do for the consumer in the short run?
Answer. Oil and gas production is an investment cycle business
where 5 to 10 years is necessary to develop new production. Actions
taken in the short run to improve the industry's ability to drill in
any prospective new areas will benefit consumers over the long run.
Question 13. Given the growing demand for oil in Asia, do you
believe that oil derived from the Arctic National Wildlife Refuge could
be diverted to supply Asian markets? If drilling in the Arctic National
Wildlife Refuge is authorized this year, when will it begin to have an
impact on gasoline prices? What do you believe that effect will be?
Answer. Any material new oil that is brought onto the market should
have a downward effect on oil prices. The actual impact on global
prices cannot be known without knowing the global supply and demand
balance at the time that that production occurs. The world oil market
is a fungible market in which crude oil and products move to markets
where they obtain the highest value and/or incur the lowest cost of
transportation. All else being equal, oil from ANWR and other material
new oil should be good for U.S. consumers, regardless of where actual
crude volumes are ultimately delivered.
Question 14. Do you support more transparency in the oil and
natural gas markets, as would be provided in my bill S. 1735?
Answer. Current laws and regulations provide transparency and we
are not aware that they need to be modified. Concerns about or
proposals to improve current laws and regulations should be fully
understood and carefully studied to ensure no unintended consequences.
Question 15. How has the last 3 years of escalating gasoline prices
affected demand by American drivers? Have we seen a correlation between
a certain level of price increase and less demand by American drivers?
What is the actual level of reduced demand today compared to 3 years
ago (please respond in the context of a doubling or retail gasoline
prices)?
Answer. Gasoline demand has increased over the last three years
despite considerable volatility in prices. The Energy Information
Administration (EIA) collects, reports and analyzes data regarding
supply and demand within the energy sector and might be better situated
to provide the analysis requested.
Question 16. What is the crude oil extraction costs for major oil
producing countries, including our own? How does that compare with oil
derived from shale or coal?
Answer. The costs of exploration, development and production of
crude oil can vary significantly between countries and between types of
resources, even within the same country. On the technical side, costs
vary with reservoir depth, reservoir size, the characteristics of the
oil in the reservoir, the needs for supporting infrastructure and
whether the oil is in an onshore or offshore location. In the latter
case, water depth is also an important variable. On the institutional
side costs are heavily influenced by the fiscal regime, local content
requirements, local partnership requirements and access to material
opportunities.
A recent report from the International Energy Agency (IEA)
``Resources to Reserves: Oil & Gas Technologies for the Energy Markets
of the Future'' (September 2005) included an estimate of the
distribution of costs for different resource types and different
resource regions. The report can be accessed through the IEA website at
http://www.iea.org/
IEA's report sites a varying ranges of costs for crude extraction
from between $5-$15 for Middle East OPEC suppliers at the low end, up
to a wide range of $25 to $70 for some oil shale developments at the
high end. Shell does not necessarily endorse this range as an accurate
assessment for the potential cost of oil shale production. Because
there has never been commercial oil shale development in the United
States, neither Shell nor the oil industry has any history of actual
unit production costs. However, assuming that Shell's research
continues to advance, we hope to make a commercial decision by the end
of this decade that could lead to first generation commercial
production in the next decade.
Question 17. Regarding foreign exporting, inventory maintenance,
and other practices of your company, please provide a response to each
of the following questions and information requests: For each and every
export shipment to a foreign country of gasoline, distillate fuel oil,
propane, or liquefied natural gas occurring from January 1, 2005 to
present, please provide the date, product type, volume, domestic port
of exit, foreign destination, transportation costs, and the sale price
or transfer value upon arrival at the foreign destination.
Answer. Much of the data that is requested by this question is the
subject of a supplemental subpoena issued by the Federal Trade
Commission on November 23, 2005 with a return date of January 4, 2006.
This response requires the compilation of a large amount of export and
import data over a five-year period of time, and historical tax
expenditure data. Shell is willing to provide, upon request, non-
proprietary information to the Committee to this question as soon as
the response to the FTC subpoena is completed
Question 17a. Since January 1, 2001 to present, please identify the
number of shipments wherein your company exported gasoline, distillate
fuel oil, or jet fuel and the sales price or transfer value received at
the destination was less than the amount that would have been received
had the product been marketed by your firm in the United States.
Answer. See Response to Question 17, above.
Question 17b. Since January 1, 2001 to present, please identify the
date, product, volume(s), foreign port of origin, expected U.S. port of
entry, and eventual port of final destination in each instance wherein
your company basically ``turned a ship away'' (whether proprietary
product or acquired from a third party) by changing the shipments
expected arrival in a U.S. port to a foreign port.
Answer. See Response to Question 17, above.
Question 17c. From 1995 until present, please identify by month the
inventory levels maintained by your company for gasoline and distillate
fuel oil in both barrels and converted to ``cays of cover'' of ``day of
supply'' for your firm's distribution and sales volumes within each of
the Petroleum Allocation Defense Districts (PADDS) in the United
States.
Answer. See Response to Question 17, above.
Question 17d. From January 1, 2005 to present, provide the details
of each ``spot market'' (as commonly referred to in the industry for
bulk sales, in volumes exceeding 5,000 barrels per transaction)
including the date, identify of both the seller and purchasers,
location of the product being sold, and the selling price.
Answer. See Response to Question 17, above.
Question 17e. Describe your company's use of ``in-house trading
platforms'' and identify all individuals in your company by name,
address, email, and phone number that were authorized during 2005 to
either exchange, trade, sell or purchase gasoline or distillate fuel
oil on either the ``spot market'', NYMEX futures market, or via
``forward paper'' purchase rights.
Answer. See Response to Question 17, above.
Question 17f. Please identify all third party reporting services,
including but not limited to Oil Price Information Service (OPIS),
Lundberg surveys, Platts, and Oil Intelligence that your company
regularly supplies transaction data or marketing information.
Answer. See Response to Question 17a, above.
Question 17g. Please identify the branded and unbranded ``rack
prices'' that were reported by your company to third party reporting
services such as OPIS and the branded and unbranded ``rack prices''
that were actually charged distributors or jobbers by your company each
day, from January 1, 2005 to present, at the truck loading terminal(s)
that typically supply gasoline stations in Houston, TX, Atlanta, GA,
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR and Seattle,
WA.
Answer. See Response to Question 17, above.
Question 17h. Will your company commit that it will take no efforts
to retaliate against any firm or individual that is a potential witness
before this Committee or cooperates with any investigation into the oil
industry by Congress or another governmental authority?
Answer. The question appears to ask whether Shell will comply with
existing provisions of the civil and criminal laws concerning
interference with witnesses. Shell has complied, and will continue to
comply, with all such laws.
Question 17i. From January 1, 2005 to present, for each instance
known to your company wherein a third party (not your company) exported
gasoline, distillate fuel oil, propane, or liquefied natural to a
foreign country, please provide any of the details known to your
company including the identify of the exporter, date, product type,
volume, domestic port of exit, foreign destination, transportation
costs, and the sale price or transfer value upon arrival at the foreign
destination.
Answer. See Response to Question 17, above.
Question 17j. Since January 2, 2001 to present please identify the
identity, date, product, volume(s), foreign port of origin, expected
U.S. port of entry, and eventual port of final destination in each
instance wherein your company is aware a third party (not your company)
basically ``turned a ship away'' (whether proprietary product or
acquired from a third party) by changing the shipments expected arrival
in a U.S. port to a foreign port.
Answer. See Response to Question 17, above.
Question 17k. Please provide an itemized list of tax deductions and
credits taken under the U.S. tax code for 2004, by your parent company
and subsidiaries.
Answer. See Response to Question 17, above.
______
Response to Written Questions Submitted by Hon. Ken Salazar to
John Hofmeister
Question 1. The Agriculture Committee is looking at the impacts
these high-energy prices are having on agricultural producers around
the country. To sum it up: they are hurting. It seems to me that there
is tremendous potential for our country to grow fuels such as ethanol
and bio-diesel. This approach offers many benefits to rural American as
well as to the country as a whole. What type of investments is your
company making (and planning to make) in these types of renewable fuels
in the United States?
Rural American is crying out for investment in renewable fuels, and
I encourage your companies to look at the potential of renewable fuels.
In terms of a percentage of your capital expenditures, how much money
did your company spend this year to develop renewable fuel sources in
the Untied States? What will that percentage be going forward?
Answer. Shell currently blends ethanol into gasoline in many
states. Investments include investments in terminal ethanol blending
equipment. With the enactment of the Renewable Fuels Standard in the
recently passed energy bill, which requires the use of 4.0 billion
gallons of renewable fuel in 2006 up to 7.5 billion gallons of
renewable fuels in 2012, use of ethanol and other renewable fuels will
increase.
Shell purchased an equity stake in Iogen Energy Corporation, a
world-leading bioethanol technology company, in May 2002. The U.S. $29
million investment will enable the Canadian based company to develop
more rapidly the world's first commercial-scale biomass to ethanol
plant. Traditionally manufactured ethanol costs significantly more than
gasoline. The type of feedstock used accounts for well over half of the
final ethanol cost. By developing the commercial scale ability to
produce ethanol from biomass, Shell and Iogen hope to reduce the cost
of producing ethanol thus making it more competitive. However, the
specification of the gasoline into which ethanol (produced via whatever
process) is blended has to be changed in order to meet the final fuel
specifications. This together with the changes required in the
logistical infrastructure in order to make the blended product
available at service stations makes it unlikely that traditionally
manufactured ethanol will ever be able to compete directly with mo-gas
on a cost basis.
Question 1a. Will you also provide this committee with some
examples of renewable fuel projects that your company is pursuing
outside the United States?
Answer. Shell is, we believe, the largest marketer of biofuels by
volume in the world, selling 2.4 billion litres of biofuel in 2004,
mostly in the USA and Brazil where government policies favor ethanol.
Shell markets bio-esters in Europe, and has technology development
programs in advanced biofuels such as cellulose ethanol (Iogen,
discussed above) and biomass-to-liquids (Choren investment).
Use of biofuels as a vehicle fuel might be favored for purposes of
(1) reducing carbon-dioxide emissions, (2) increasing domestic energy
security and/or and (3) supporting agricultural production. Biofuels do
cost more to produce than conventional fuels, and this cost must be
covered. To create consumer demand for biofuels the cost must be
reduced, and the performance of the fuel must assured. Further, biofuel
technologies are relatively inefficient, typically delivering only 20-
30% more energy than is consumed in their production. Advanced
processes are being developed and need to be refined.
For information on Shell Wind, Solar and Hydrogen, please see
response to Senator Cantwell Question 8, above.
Question 2. As a few of you note in your testimony, diesel prices
have remained high while unleaded gasoline prices have come down. It
seems as if we are getting lower priced unleaded gas at the expense of
diesel. Since diesel is the fuel of choice in agriculture, it is a sort
of a double whammy on our producers. What is being done, or what can be
done, to get diesel prices back in line with the price of gasoline?
If demand for diesel is so high in Europe and high prices don't
attract the supplies necessary to lower prices, isn't that a good
indicator that we should work to produce more diesel in the United
States and look to biodiesel as an option?
Answer. Nationally, diesel prices have been higher than gasoline
for an extended period of time. Diesel and gasoline prices are impacted
by similar market fundamentals, but they can and do operate
independently if the underlying supply and demand is impacted for one
product more than the other. In the case of diesel, growing economies
tend to expand demand as industry uses fuel to power factories,
utilities use diesel fuels to generate electricity, and transportation
demand increases as goods are moved from one part of the country to the
other. At the same time, diesel supply is impacted as refineries
experience planned or unplanned maintenance and begin the necessary
modifications to reduce the amount of sulfur contained in diesel fuels.
All of these elements impact the ultimate price a consumer pays for
diesel fuel.
Question 3. For the record, will you tell me what your company has
spent on capital expenditures in case, not including write offs such as
amortization or depreciation. Will you also provide the figures spent
on cash dividends and stock buyback for the same time period?
------------------------------------------------------------------------
Stock Capital
Year Dividends buyback expenditures
------------------------------------------------------------------------
2000............................ 5.4 0.0 6.1
2001............................ 5.2 4.0 9.6
2002............................ 5.5 1.3 22.4
2003............................ 6.5 0.0 12.3
2004............................ 7.6 1.7 12.7
------------------------------------------------------------------------
All amounts are for Shell worldwide and are in billions of dollars.
Question 4. On November 1, Senator Grassley asked your companies to
contribute 10% of your record profits to supplement LIHEAP funding for
the less fortunate. Will your companies support Senator Grassley's
proposal?
Answer. Shell believes such public service funding decisions are
more properly suited for the role of government than for private
industry. Shell will direct its efforts to finding more energy so that
Americans can not only heat and cool their homes, but also fuel their
vehicles and power their businesses.
Question 5. I'd like to encourage you to actively work with the
Department of Energy and any other relevant federal agency on
initiating a public/private education campaign focused on energy
education and conservation. In the meantime, will you tell me what your
company has done on its own initiative?
Answer. Shell has a long-term commitment to educating consumers
about vehicle maintenance and driving safety, starting with the Shell
Answer Man campaign, which provided useful information to consumers for
approximately 40 years. While the Answer Man campaign was ended in the
1990's, we continue to educate reporters and consumers about issues
relevant to today's drivers, including fuel technology, alternative
fuels and fuel economy. Over the last few years we have conducted one-
on-one meetings with reporters to discuss conventional fuels, emerging
fuels and future fuels, and have issued press releases and tips books
designed to educate consumers on better caring for their vehicles and
driving for improved fuel economy.
Question 6. In your testimony you mention workforce-training
efforts Shell has in Louisiana and Wyoming. Will you provide my office
with more information about these programs? Colorado's returning
veterans will be excited to learn about these opportunities.
Answer. Shell is involved in numerous workforce-training efforts in
Louisiana, Wyoming and other parts of the U.S. Workforce training is a
priority issue for the future viability of oil and gas development in
the U.S.
In Louisiana, we are in the process of creating the Center for
Petroleum Workforce Development in conjunction with LSU, the State of
Louisiana and the City of New Orleans to offer an education and
training curriculum tailored to maintain a top level producing
operations, drilling and support workforce to meet the growing needs of
the oil and gas industry in the Gulf of Mexico, onshore United States
and globally. Shell is also leading the effort to form the first PTEC
(Process Technology) Advisory Council for the Greater New Orleans area,
and we are in the process of identifying the Technical/Community
Colleges where we would implement this curriculum. We expect to resume
our efforts to make this opportunity available to inner city youth in
2006.
Workforce efforts are also underway in Wyoming and the Rockies in
general. Shell is actively involved with Rock Springs (Wyoming)
Community College and has worked along with the school and others in
our industry to implement a PTEC program there. Through an industry
group called Center for the Advancement of Process Technology, Shell
sponsors scholarship opportunities for students entering or currently
enrolled in Process Technology programs at over 40 technical/community
colleges located in Alabama, Alaska, California, Canada, Colorado,
Delaware, Illinois, Indiana, Louisiana, Mississippi, Montana, New
Jersey, New Mexico, North Dakota, Oklahoma, Texas, Virgin Islands,
Washington, and Wyoming.
Shell also sponsors a technical scholarship to support students
pursuing four-year engineering and geosciences degrees at accredited
universities. Scholarships are renewable and students have an
opportunity to participate in internships at a Shell facilities. Shell
offers student internship job opportunities in offshore Gulf of Mexico,
at a Louisiana chemical plant, in the Rockies and Alaska.
Shell is also partnering with the President's National Hire
Veterans Committee to explore how Shell can proactively tap exiting
military personnel for operator and craft jobs across Shell locations,
including Louisiana and the Rocky Mountain Region.
______
Response to Written Questions Submitted by Hon. Olympia J. Snowe to
John Hofmeister
Question 1. I have introduced legislation that will offer an up to
$500 tax credit to working low and middle income individuals for the
cost of home heating expenses. According to the National Energy
Assistance Directors Association, heating costs for the average family
using heating oil are projected to hit $1,666 for the upcoming winter.
This represents an increase of $403 over last winter's prices and $714
over the winter heating season of 2003-2004. Meanwhile, profits of oil
and gas rose 62 percent in the third quarter for companies in the
Standard & Poor 500 index. I am proposing to offset the $500 tax credit
for home heating expenses by curtailing the benefit large oil companies
receive by using the LIFO accounting method. Do you think given budget
deficits and record profits for oil companies that it is appropriate to
divert tax benefits for large integrated oil companies such as yours to
pay for such a measure?
Answer. We do not believe that it is appropriate to tax selected
oil companies under the LIFO proposal for a number of reasons.
Oil is a commodity, and prices are set by the marketplace. Crude
oil and natural gas prices fluctuate substantially and unpredictably.
The industry must manage its business in the face of these severe price
fluctuations. The business requires massive investment over long
periods of time--even when prices are relatively low--to ensure that
there will be energy supplies in the future. Oil and gas industry
earnings per dollar of sales are in line with all U.S. industry during
the second quarter of 2005. The energy industry overall earned 7.6
cents for every dollar of sales, compared to an average of 7.9 cents
for all U.S. industry. The total dollar numbers may be large, but so
are the billions of dollars that petroleum companies have invested to
supply energy to U.S. consumers--and will need to reinvest--to meet
future demand. Developing these energy resources will require a
tremendous capital investment by our company, year in and year out, in
periods of high and low prices.
In addition, the LIFO methodology is a long-standing and well-
accepted methodology that is available to taxpayers. This methodology
is based upon the assumption that the last goods brought into inventory
are the first goods sold. In a time of rising prices, LIFO is
acknowledged to be the best method for tracking the true cost of
products in inventory and cost of goods sold. This one-time accounting
method change has been universally opposed as inappropriate tax and
accounting policy. In our view, the proposal is inequitable and
punitive, as it arbitrarily subjects a select group of oil companies to
taxation without policy justification. Furthermore, the proposal would
result in disincentives to the domestic oil and gas industry at a time
when the country needs more domestic oil and gas. Shell supports and
relies upon stable regulatory and fiscal policies that enable companies
to develop energy projects and secure energy supplies. We respectfully
request that Congress ``do no harm'' by distorting markets or seeking
punitive taxes on an industry working hard to respond to high prices
and supply shortfalls.
Question 1a. Does this seem like an equitable approach given that
the high cost of oil enables you to not only bank large profits, but
also to use accounting methods to substantially reduce taxes? Is it
fair to report less taxes when you're profiting the most?
Answer. See Response to Question 1, above.
Question 2. Your third quarter profits have certainly been a
lightning rod that has riled consumers as they continue to pay 30
percent more in Maine for their home heating oil for the winter.
I realize that you reinvest some of these profits in exploration
for more product. In each quarter, have you reinvested the same
percentage of the profits to reinvestment? What have your reinvestment
percentages been to your total profits? Do they vary from quarter to
quarter or year to year?
Answer. Shell has reinvested roughly 100% of its U.S. earnings back
into U.S. businesses over the last 5 years. The percentage invested
varies from year to year and from quarter to quarter.
Question 3. To what non-profit organizations and academic research
that address global climate change does your company donate financial
support to and how much do you donate each year?
Answer. The majority of Shell's research and development investment
on future energy technologies is focused in house through Shell
Renewables and Shell Global Solutions. In addition we are partners in a
number of industry consortia, which are engaged in the development of
technologies such as hydrogen fuel cells and carbon sequestration.
Shell makes an annual donation of $100,000 to the MIT Joint Program on
the Science and Policy of Global Change. We are closely involved with a
number of non-profit organizations that address climate change (e.g.
Pew Center).
The Shell Group established The Shell Foundation, a UK registered
charitable organization with a goal to promote sustainable development,
which includes projects related to energy and climate change. In
December 2000 Shell announced an endowment to the Shell Foundation of
$250 million.
Shell has other climate change related investment programs
throughout the world. For example, in the UK we recently launched Shell
Springboard--a program to encourage small businesses with big ideas on
climate change. Springboard offers a financial boost of up to
40,000 for a small number of UK businesses who submit the
most compelling plans for a product or service, which helps combat
climate change.
Question 4. There has been much discussion about the skyrocketing
costs of gasoline, heating oil, and other petroleum products over the
past year magnified by the three hurricanes, which have hit the Gulf
Coast region this year. In response to these inquiries into the rising
prices and your soaring profits, you have asserted that these increases
are tied to market forces, particularly the rising prices of crude oil.
I've reviewed your financial filings from the Securities and
Exchange Commission and they paint a very stark picture when compared
to the financial misery being experienced by millions of Americans.
ExxonMobil, for example, has realized a net income of $25.42 billion in
the first nine months of 2005, an increase of $8.5 billion over the
first nine months of 2004. Exxon's third quarter net income this year
was $9.92 billion, up a full 90%.
Similarly, ConocoPhillips' net income for the third quarter of 2005
was $3.8 billion, compared with $2.006 billion during the same time
period in 2004. Conoco's filing attributes this jump in profit to
``higher crude oil, natural gas and natural liquid gas prices,''
``improved refining margins,'' and ``equity earnings from our
investment in LUKOIL.''
In my State of Maine, the median state income is $17,044 per year.
A full 78 percent of Mainers use heating oil to warm their houses in
wintertime, and this, combined with gasoline prices of anywhere from
$2.50 to $3.00 per gallon paints a harsh picture for Maine and New
England this winter. Petroleum is not any run-of-the-mill commodity. It
is the lifeblood of commerce in this country, with fuel costs being
built into the price of every other good bought and sold on the market.
And in places like New England where petroleum heats most homes, it's
literally a life-and-death commodity.
Your industry has taken the position in its SEC filings and at
yesterday's hearing that the escalation of its fuel prices is the
result of increases in crude oil prices. However, if your retail gas
prices were raised simply to cover your increased costs in purchasing
crude oil, your net profits would remain the same. Everyone knows this
is not happening. Can you identify for this committee the reason that
the rise in gasoline prices is far out-pacing the rise in crude oil
prices?
Answer. Fuel prices are affected by a number of factors including
the cost of crude, formulation requirements, state taxes, supply and
distribution logistics, local market conditions, environmental
regulations and operating costs.
Question 4a. Even though crude oil prices have risen this year,
your companies aren't actually incurring those costs, are they? Isn't
the gasoline and heating oil that your firms are currently selling on
the market actually being produced from inventories that your companies
purchased when the price of crude oil was much lower?
Answer. Our refineries typically only hold enough crude to make
sure they don't slow down due to supply disruptions. There is generally
only a 10 to 20 day supply of crude oil feedstock at the refinery or in
the process of being delivered. Crude oil used at Shell refineries is
bought from a variety of sources both domestically and internationally.
The price paid is set by the marketplace on the day it is purchased.
Occasionally, crude oil feedstock is purchased from distant suppliers,
such as those in the Far East. In such cases, the price is set by the
marketplace at the time of purchase, which might be six to eight weeks
before it is processed by the refinery.
Question 4b. If you're producing oil from crude that you bought at
$40 per barrel, but selling it at a price that is purportedly based
upon a $70 per barrel cost to you, wouldn't that account for the 90%
increase in profits we've seen?
Answer. See Response to Question 4a, above.
Question 5. I've alluded to the vital role petroleum plays in our
economy and society, from the price of bread to the price of a plane
ticket to the price of heating one's home. While you're obviously in
the business for profit there are other sectors of the economy where we
put a limit on selling commodities at unconscionable prices. One
example is usury law, where lenders are prohibited from charging
unconscionable rates for borrowing money-because we recognize that
access to cash is critical to enterprise. How much more of a toll do
these fuel prices have to take on our society before Congress steps in
and places similarly appropriate regulations on your industry?
Answer. It remains to be seen what steps Congress will take to
address the nation's energy policy issues. A number of policy proposals
that Congress might want to consider are identified in my written and
oral testimony.
Question 5a. Many consumers would say that raising the price of gas
by $2 per gallon over the past 2 years, while reaping over $25 billion
in profits is price gouging. Many lawmakers would agree. What do you
say to them?
Answer. The attention focused on the oil industry during periods of
higher profits vastly outweighs the focus when profits are down due to
the same cyclical factors that have moved markets for years, and have
caused this industry to be a ``feast or famine'' business. We kept
exploring, producing, refining, transporting and satisfying consumer
demand for products when oil prices dropped below $10 per barrel. We
must take the long-term view of the business, and hope that our ability
to recover costs and make a profit returns when the pricing environment
changes.
Now we are in one of those periods where the pricing environment
has been more favorable to the oil industry, and we are generating the
cash needed to keep investing in the future of energy and to pay much
more in taxes as well. No one knows how long this period will last, and
conditions will inevitably change. Recently, gasoline prices have
declined by nearly $1 per gallon as conditions have returned to a more
typical environment. Neither the rise in price nor the fall back down
should influence energy policy or company strategies in a significant
way.
Consumers should consider that they pay much more per gallon for
many other types of consumer products that don't require the same
degree of sophisticated business activity to place in commerce--foods,
cleaning supplies and other household products, for example. The oil
industry is among the most efficient in the world in delivering highly
refined products to consumers, and must comply with an impressive array
or environmental laws and regulations in the process, as well as other
forms of business regulation, many of which vary considerably across
state lines. We must make a wide variety of different fuels to satisfy
local regulatory specifications, adding more cost to the process.
In conclusion, we disagree that the volatility in pricing, and the
varying impact of such volatility on profits, means that the industry
has engaged in price gouging.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
John Hofmeister
Question 1. In the last decade, has your company ever withheld
supply of crude oil or refined product from the market in order to
prevent prices from falling?
Answer. Shell has not withheld crude oil or refined product from
the market in order to prevent prices from falling.
Question 2. Please describe any business relationship or
transaction your company or any of its subsidiaries, wherever located
and wherever incorporated, whether wholly owned or not, have had with
Iranian nationals (except employment of Iranian expatriates), the
Iranian government, individuals or corporations located or incorporated
in Iran, or any representative of these people or companies.
Answer. I am president of Shell Oil Company, which is a wholly
owned subsidiary of Royal Dutch Shell plc (RDS). Shell Oil Company is
not involved in activities in Iran. It is well-known, however, that
certain RDS subsidiaries have a history in Iran that spans nearly 50
years.
For the record, I am a U.S. citizen. Therefore, consistent with
U.S. law and with our corporate policy, I do not advise or otherwise
participate in any RDS activities relating to potential or actual
transactions in or for Iran.
______
Response to Written Questions Submitted by Hon. Olympia J. Snowe to
James J. Mulva
Question 1. I have introduced legislation that will offer an up to
$500 tax credit to working low and middle income individuals for the
cost of home heating expenses. According to the National Energy
Assistance Directors Association, heating costs for the average family
using heating oil are projected to hit $1,666 for the upcoming winter.
This represents an increase of $403 over last winter's prices and $714
over the winter heating season of 2003-2004. Meanwhile, profits of oil
and gas rose 62 percent in the third quarter for companies in the
Standard & Poor's 500 index. I am proposing to offset the $500 tax
credit for home heating expenses by curtailing the benefit large oil
companies receive by using the LIFO accounting method.
A) Do you think given budget deficits and record profits for oil
companies that it is appropriate to divert tax benefits for large
integrated oil companies such as yours to pay for such a measure?
B) Does this seem like an equitable approach given that the high
cost of oil enables you to not only bank large profits, but also to use
accounting methods to substantially reduce taxes? Is it fair to report
less taxes when you're profiting the most?
Answer. LIFO has been a generally accepted accounting method under
the Internal Revenue Code since 1938 and therefore is considered to
generate a clear reflection of a taxpayer's income. All taxpayers with
inventory have the ability to elect to use LIFO. It is not a loophole
established for the petroleum industry.
Revaluing LIFO inventories for select oil and gas companies is bad
tax policy because it would be contrary to the requirement that
taxpayers utilize consistent accounting methods to account for income
and expenses from year to year, and it would create a bad precedent
that could be used to penalize other industries as a means of raising
revenues.
A one-time increase in the LIFO inventory valuation would generate
a substantial negative tax impact in the year of the change, as many
oil and gas companies have inventories reflecting years of historical
costs. Such a penalty is equivalent to a windfall profits tax and would
provide a huge economic disincentive to invest in new oil and gas
supplies and refining capacity. It would also hurt U.S. companies'
ability to compete with foreign companies for oil and natural gas
resources around the world.
We also don't see a windfall. Even with the highest price
environment our industry has seen in 22 years, adjusted for inflation,
our profit margin of 7.7 cents per dollar of sales is near or below the
average of all industries.
Question 2. Your third quarter profits have certainly been a
lightning rod that has riled consumers as they continue to pay 30
percent more in Maine for their home heating oil for the winter. I
realize that you reinvest some of these profits in exploration for more
product. In each quarter, have you reinvested the same percentage of
the profits to reinvestment? What have your reinvestment percentages
been to your total profits? Do they vary from quarter to quarter or
year to year?
Answer. Our reinvestment percentages are reflected in the table
below. Since 1995, we have invested, on average, the equivalent of 189%
of our earnings into our business. Annual reinvestment percentages have
ranged from 87% to 865%.
There is no distinct relationship between quarterly profitability
and the amount we invest in expanding our business in a given quarter,
therefore quarterly reinvestment percentages can vary significantly.
Because of the magnitude and complexity of the projects that we
undertake and the long-term commitment they represent, investment plans
are contemplated well in advance of actual expenditures, based on a set
of long-term economic assumptions e.g. estimated commodity prices,
estimated costs, estimated tax expenses etc. As long as there is no
major shift in those long-term assumptions, investment activity
continues despite the fact that investment may exceed earnings in a
given quarter or a given year. Given the long term investment horizon
associated with our asset base, a temporary increase or decrease in
earnings will not normally immediately result in a significantly higher
or lower investment in a given quarter or year.
CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER 2002)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Capital Reinvestment U.S. capital Reinvestment
$MM Net income expenditures & as % of net U.S. net expenditures & as % of net
\1\ investments \2\ income income \3\ investments \4\ income
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................................ 469 (1,456) 310% 335 (923) 276%
1996............................................................ 1,303 (1,544) 118% 1,130 (841) 74%
1997............................................................ 959 (2,043) 213% 710 (1,059) 149%
1998............................................................ 237 (2,052) 865% 263 (936) 357%
1999............................................................ 609 (1,690) 278% 376 (919) 244%
2000 *.......................................................... 1,862 (8,460) 454% 1,250 (7,707) 617%
2001 *.......................................................... 1,661 (10,054) 605% 1,305 (8,887) 681%
2002 **......................................................... (295) (4,388) ............ (910) (2,043) ............
2003............................................................ 4,735 (6,169) 130% 2,513 (2,493) 99%
2004............................................................ 8,129 (9,496) 117% 4,659 (2,520) 54%
2005............................................................ 9,850 (8,573) 87% 5,626 (3,140) 56%
---------------------------------------------------------------------------------------
10 Year Avg................................................... 2,683 (5,084) 189% 1,569 (2,861) 182%
--------------------------------------------------------------------------------------------------------------------------------------------------------
* 2000 Includes Alaska acquisition--($6,443MM), 2001 Includes Tosco Acquisition--($7,038MM).
** The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this table. Sources:
\1\ Net Income. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2000 (ConocoPhillips 2004 Annual Report, page 108); 1999-1995 (Phillips 2001
Annual Report, page 95).
\2\ Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2000 (ConocoPhillips 2004 Annual Report, page 108);
1999-1995 (Phillips 2001 Annual Report, page 95).
\3\ U.S. Net Income. A domestic and international breakdown is provided externally for the major company segments (I.e. E&P and R&M). Midstream and
Emerging businesses are internally reported as domestic and international and this breakdown is included in the above total. The Chemical and
Corporate Segments have been included in the U.S. total.
\4\ U.S. Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2002 (ConocoPhillips 2004 Annual Report, page
45); 2001 (ConocoPhillips 2003 Annual Report, page 49); 2000 (ConocoPhillips 2002 Annual Report, page 49); 1999 (Phillips 2001 Annual Report, page 47
adj. to exclude discontinued ops.); 1998 (Phillips 2000 Annual Report, page 47 adj. to exclude discontinued ops.); 1997 (Phillips 1999 Annual Report,
page 44); 1996 (Phillips 1998 Annual Report, page 42); 1995 (Phillips 1997 Annual Report, page 40).
Question 3. To what non-profit organizations and academic research
that address global climate change does your company donate financial
support to and how much do you donate each year?
Answer. ConocoPhillips has numerous projects focused on or related
to global climate change. Some are part of an overall corporate
initiative while other projects are being researched and implemented
locally with lessons learned and best practices to be shared across the
company.
As stated in our 2003 Climate Change Position Statement,
ConocoPhillips recognizes that human activity, including the burning of
fossil fuels, is contributing to increased concentrations of greenhouse
gases (GHG) in the atmosphere, which can lead to adverse changes in
global climate. While the debate continues over the extent of human
contributions and the timing and magnitude of future impacts, the
company is committed to taking action now to begin addressing the
issue.
In 2004, ConocoPhillips took several actions toward implementing
our climate change position. The company's E&P and R&M business
segments began assessing data to develop objectives to reduce GHG
emissions. Guidance for integrating climate change considerations into
ConocoPhillips' project planning and approval processes is being
developed in conjunction with efforts to integrate sustainable
development. The company actively engages in discussions on climate
change and supports third-party studies and research through
memberships in the American Petroleum Institute (API) and the
International Petroleum Industry Environmental Conservation
Association, the World Business Council for Sustainable Development,
and the International Emissions Trading Association among others.
In 2004, ConocoPhillips created a Global Gas unit within its E&P
business to focus the company's efforts in the development and
management of lower-carbon natural gas. The company is performing
internal research and participating in a number of joint industry
projects that are focused on increasing its understanding of carbon
dioxide (CO2) sequestration, and reducing capture and
storage costs through development and application of new technology.
These projects include WESTCARB (the U.S. Department of Energy's West
Coast Regional Sequestration Partnership), the SINTEF Group study of
CO2 for enhanced oil recovery and disposition in aquifers in
Norway, and the Alberta Research Council's Enhanced Coalbed Methane
Consortium. ConocoPhillips also is a member of CO2Net, the
European network of CO2 researchers, developers and users of
CO2 mitigation technology. In addition, ConocoPhillips has
joined the CO2 Capture Project.
We participate in a number of joint industry/government initiatives
that address the capture and sequestration of Carbon Dioxide. These
organizations are non-profit and most of them also involve the academic
community. This includes almost one million dollars annually to support
two research efforts on CO2 capture and long term geological
storage as a viable green house gas mitigation technique. Additionally,
ConocoPhillips sponsors a $700,000 per year research effort at the
University of Bergen in Norway to evaluate the sequestration of
CO2 and production of methane from methane hydrates.
ConocoPhillips sponsors numerous academic fellowships on many
different subjects related to the oil and gas industry. Though not
climate change specific, some are associated with climate change such
as a $70,000 fellowship at the University of Oklahoma to improve the
efficiency of diesel fuel which will consequently reduce carbon dioxide
and other emissions.
Our individual operations research and implement many local efforts
that are climate change-related. Our operations in Norway are spending
more than three million dollars on climate change initiatives including
studies of climate for the arctic environment, using waste
CO2 in reservoir management and wind-powered generation for
offshore platforms. Our extensive refinery efficiency improvement
effort makes us a lower cost refiner and reduces greenhouse gas
emissions. Likewise, our efforts to reduce gas flaring in production
directly relates to climate change because flaring produces greenhouse
gases. Finally, our clean fuels program will help all consumers reduce
their individual greenhouse gas emissions from driving.
Question 4. There has been much discussion about the skyrocketing
costs of gasoline, heating oil, and other petroleum products over the
past year, magnified by the three hurricanes which have hit the Gulf
Coast region this year. In response to these inquiries into the rising
prices and your soaring profits, you have asserted that these increases
are tied to market forces, particularly the rising prices of crude oil.
I've reviewed your financial filings from the Securities and
Exchange Commission, and they paint a very stark picture when compared
to the financial misery being experienced by millions of Americans.
ExxonMobil, for example, has realized a net income of $25.42 billion in
the first nine months of 2005, an increase of $8.5 billion over the
first nine months of 2004. Exxon's third quarter net income this year
was $9.92 billion, up a full 90%.
Similarly, ConocoPhillips' net income for the third quarter of 2005
was $3.8 billion, compared with $2.006 billion during the same time
period in 2004. Conoco's filing attributes this jump in profit to
``higher crude oil, natural gas and natural liquid gas prices,''
``improved refining margins,'' and ``equity earnings from our
investment in LUKOIL.''
In my State of Maine, the median state income is $17,044 per year.
A full 78 percent of Mainers use heating oil to warm their houses in
wintertime, and this, combined with gasoline prices of anywhere from
$2.50 to $3.00 per gallon paints a harsh picture for Maine and New
England this winter. Petroleum is not any run-of-the-mill commodity. It
is the lifeblood of commerce in this country, with fuel costs being
built into the price of every other good bought and sold on the market.
And in places like New England where petroleum heats most homes, it's
literally a life-and-death commodity.
Question 4a. Your industry has taken the position in its SEC
filings and at yesterday's hearing that the escalation of its fuel
prices is the result of increases in crude oil prices. However, if your
retail gas prices were raised simply to cover your increased costs in
purchasing crude oil, your net profits would remain the same. Everyone
knows this is not happening. Can you identify for this committee the
reason that the rise in gasoline prices is far out-pacing the rise in
crude oil prices?
Answer. During the recent hurricanes in the third quarter, refined
product supply was impacted more than crude supply. The United States
lost five million barrels per day or nearly 30% of its total refining
capacity at the peak, and this substantially reduced the industry's
ability to supply the market with gasoline and diesel fuel. The market
price of gasoline increased rapidly due to the real and very
significant shortage of supply caused by Gulf Coast refining and
distribution shutdowns.
The hurricanes shut down 1.5 million barrels per day of Gulf of
Mexico crude production at the peak. This event normally would create a
significant shortage of U.S. crude oil supply and a large, rapid
associate increase in crude oil price. However, with about two million
barrels per day of U.S. refining capacity down for an extended period
and a release of crude from the U.S. Strategic Petroleum Reserve, a
severe crude shortage did not develop and the crude price increase was
tempered.
According to DOE data, in the third quarter of 2005 versus the
third quarter of 2004, the WTI crude price rose by 44%. During that
same period, a simplified Gulf Coast refinery margin called a light oil
price spread (two-thirds regular gasoline plus one-third heating oil
minus WTI crude) more than doubled due to the hurricanes. The retail
gasoline price reflects both the crude price increase as well as the
increase in refining margins resulting from the hurricane-induced
shutdown of U.S. refining capacity.
Product prices increased as a result of the imbalance, which
moderated demand and attracted new supplies from overseas, which to a
large degree restored the supply/demand balance. Gasoline prices have
now fallen to below pre-hurricane levels.
The U.S. Federal Trade Commission's assessment that 85% of the
changes in retail gasoline prices are caused by crude price changes has
historically been true. However, there were unique circumstances in the
third quarter caused by the hurricanes and their impact on such a large
portion of the nation's refining capacity.
It is also important to note that the marketplace sets prices in
accordance with the laws of supply & demand. These prices do not
necessarily reflect production costs at any given moment. Sometimes
supply/demand conditions set prices above and sometimes below costs and
an acceptable return. Historically, over the last 20 years, both crude
prices and refining margins have been set at levels that gave the
petroleum industry sub-par returns when compared with other industries.
Between 1990 and 2002, the average return on equity for the petroleum
industry was 11.3%, lower on average than the 12.6% return for the S&P
industrials. The refining & marketing sector has an even lower
historical return on capital than the total petroleum sector. Between
1990 and 2002, the refining and marketing sector had a return on
capital employed of 5.0% versus 7.1% for the total petroleum industry.
While the petroleum industry has been criticized for having a large
concentration of energy infrastructure in the Gulf Coast, we are there
because of the energy resources and because that is where we have been
able to get energy infrastructure sited. Much of New England, including
Maine, suffers from a lack of energy infrastructure due to community
opposition to expansions. For example, ConocoPhillips made an attempt
to provide Maine consumers with competitive options to home heating oil
by bringing LNG into the state. We worked closely with the citizens and
city council of Harpswell, Maine where we hoped to site an LNG
regasification facility. There was support of the State, Labor, some of
the commercial fishermen and most of the citizens who grew up in the
area, but the project failed on a close vote. That project could have
been a real energy supply success story for Maine.
Question 4b. Even though crude oil prices have risen this year,
your companies aren't actually incurring those costs, are they? Isn't
the gasoline and heating oil that your firms are currently selling on
the market actually being produced from inventories that your companies
purchased when the price of crude oil was much lower?
Answer. First it is important to note that the marketplace sets
prices in accordance with the laws of supply and demand. These prices
do not necessarily reflect production costs at any given moment.
Sometimes supply/demand conditions set prices above and sometimes below
costs and an acceptable level of return. Over the long-run, prices on
average equate to cost and an acceptable level of return or there will
be too much or too little supply, which will push prices back towards a
cost-based equilibrium level. In the short-term, there can be a series
of imbalances that lead to prices being above and below a long-term
cost-based equilibrium.
During a supply disruption, like we saw after the hurricanes,
prices rise for all available supplies, including those in storage.
There is about a three-week time lag between when crude is purchased
and put in storage and when refined products are produced. Since the
market was in a period of rising prices after the hurricanes, by the
time the crude was turned into products, it was worth more. During
periods of price decline, crude would be worth less by the time it was
refined into products.
Question 4c. If you're producing oil from crude that you bought at
$40 per barrel, but selling it at a price that is purportedly based
upon a $70 per barrel cost to you, wouldn't that account for the 90%
increase in profits we've seen?
Answer. ConocoPhillips reported third-quarter 2005 net income of
$3.8 billion, up 89% from this quarter last year. Of this increase, 48%
came from our worldwide oil and gas exploration and production
operations, 38% of this increase came from our worldwide refining and
marketing operations and 15% came from our strategic alliance with
LUKOIL, which we entered into during the fourth quarter of 2004.
According to U.S. Department of Energy data on spot prices for West
Texas Intermediate crude, the increase in the third quarter of 2005
over the third quarter of 2004 was 44%. Our exploration and production
earnings were up by closer to 60% during this period because they were
also helped by higher natural gas prices and higher crude oil sales.
Earnings from our U.S. refining and marketing operations were about
$1.1 billion in the third quarter of 2005, compared with $505 million a
year ago. U.S. Department of Energy data for a simplified refining
margin in the Gulf Coast, called a crack spread (2/3 regular gasoline,
1/3 heating oil minus WTI) more than doubled in the third quarter of
2005, versus the third quarter of 2004 as a result of the hurricanes
and shutting in of nearly 30% of the nation's refinery capacity at the
peak. The doubling of our U.S. refining & marketing earnings was
consistent with the doubling of the Gulf Coast light oil spread or
simplified refining margin. Thus, our earnings are reflective of the
change in commodity prices.
It is important to remember that crude and gasoline prices are set
in the marketplace by a large number of buyers, sellers, traders and
financial players based on global and regional supply and demand
conditions and may be higher or lower than costs and a profit on any
given day, depending upon market conditions. In the third quarter of
2002, for example, this simplified refinery margin (Gulf Coast crack
spread) was 60% below where this spread was in the third quarter of
2004. 2002 was a particularly weak year for refining margins due to
weak demand resulting from September 11, 2001 and the economic slowdown
in the United States. Over the long run average, refinery margins
equate to costs plus a modest return but at any given moment, margins
will vary based on market conditions. The U.S. refining business has
historically had sub-par returns, given the large capital investments
required to stay in business, and the large investments required to
reduce emissions and make clean fuels. While the environmental
investments are very important, they usually do not provide a return.
Between 1990 and 2002, the average return on equity for the petroleum
industry was 11.3%, lower on average than the 12.6% return for the S&P
industrials. The refining & marketing sector had an even lower
historical return on capital than the total petroleum sector. Between
1990 and 2002, the refining and marketing sector had a return on
capital employed of 5.0% versus 7.1% for the total petroleum industry.
Question 5. I've alluded to the vital role petroleum plays in our
economy and society, from the price of bread to the price of a plane
ticket to the price of heating one's home. While you're obviously in
the business for profit, there are other sectors of the economy where
we put a limit on selling commodities at unconscionable prices. One
example is usury law, where lenders are prohibited from charging
unconscionable rates for borrowing money--because we recognize that
access to cash is critical to enterprise.
How much more of a toll do these fuel prices have to take on our
society before Congress steps in and places similarly appropriate
regulations on your industry?
Answer. Imposing a regulatory scheme on the petroleum industry as a
result of price increases that arose from world-wide events and weather
related incidents is bad economic policy and could discourage capital
investments aimed at increasing refining capacity. This would result in
less supply being available in the marketplace and will do nothing to
ensure lower prices for consumers.
Question 5a. Many consumers would say that raising the price of gas
by $2 per gallon over the past 2 years (Dec. 2003 price per gallon on
East Coast was $1.30; in August 2005 it was $3.25) while reaping over
$25 billion in profits is price gouging. Many lawmakers would agree.
What do you say to them?
Answer. Calling the increase in gasoline prices between the two
times cited in the question ``price gouging'' disregards the fact that:
(a) during the same time frames world wide crude oil prices more than
doubled (b) the costs of refining and marketing gasoline increased, and
(c) the August 2005 gasoline price was driven by the devastation
wreaked on oil producing platforms in the Gulf of Mexico, shut ins of
the refining complex in the Gulf Coast region (which produces 44% of
America's gasoline), and the shutdown of the Colonial Pipeline which
delivers most of the gasoline to the East Coast of the United States
from the Gulf Coast region, all of which were occasioned by Hurricane
Katrina. The East Coast gasoline price has now dropped to $2.21 per
gallon (November 21, 2005--DOE) as refinery production has been
restored and gasoline imports have been brought in from Europe to
replace lost domestic supplies.
We are also in a commodity business and our prices and profits
swing up and down with prices set in global and regional highly
transparent markets. On average, the petroleum business has had sub-par
returns historically. ConocoPhillips' third-quarter revenues of about
$50 billion generated about $3.8 billion of income. This represents a
profit margin of 7.7 cents per dollar of sales, near or below the
average of all industries. With this level of profit in the highest
price environment our industry has experienced in 22 years, adjusted
for inflation, we don't see how our profits can be construed as
gouging.
______
Response to Written Questions Submitted by Hon. Jeff Bingaman to
James J. Mulva
Question 1. Section 392 of the Energy Bill, which was negotiated
with the involvement of the Chairman and Ranking Member of the Energy
and EPW Committees, contains permitting streamlining language. The
Energy Policy Act of 2005 permits the EPA Administrator to enter into a
refinery permitting cooperative agreement with a state. Under such an
agreement, each party identifies steps, including decision timelines,
it will take to streamline the consideration of federal and state
environmental permits for a new refinery. I want to ask you several
questions about that provision, since you have supported streamlining:
Have you requested that EPA issue any regulations or take any action to
implement these new provisions? If no, when do you anticipate you will
do so?
Answer. No, we have not as they relate only to new refineries.
The Section as written is specific only for the construction of a
new refinery. We have no current plans to build a new refinery in the
United States. ConocoPhillips plans to invest $4-5 billion, on top of
our other refinery investments of $1-2 billion per year. This multi-
year investment program is aimed at growing our U.S. refining capacity
by about 11 percent and improving our capability of handling lower
quality oils in order to make 15 percent more clean fuels such as
gasoline, diesel and heating oil by the year 2011. These expansions
will add enough clean fuels product to be the equivalent of adding one
world-scale refinery to our domestic refining system.
Question 1a. Have you worked with any state to encourage them to
enter into an agreement with EPA under Section 392 of EPAct?
Answer. No, we have not.
Question 1b. Do you support the EPAct streamlining provisions?
Answer. The provision, if utilized as intended by all parties, may
be helpful in the project timeline of a new refinery in the United
States. However, the provision as we interpret it is applicable solely
to the construction of a new refinery. As such, the provision has
little if any value to ConocoPhillips. ConocoPhillips currently owns
and operates twelve refineries in the United States. We have an
aggressive growth plan for these refineries that not only adds domestic
capacity to the United States but will increase the facilities'
robustness in their flexibility to handle more difficult-to-refine
crudes including heavy oils and will expand our conversion capabilities
to clean fuels.
This investment program is a large downstream expansion but is
dependent upon the securing of permits to proceed. We are disappointed
that the provisions in EPAct 2005 addressed only new refineries and
provided limited or no additional permit streamlining for other
capacity and/or crude and product flexibility projects.
Question 1c. Do you have any examples of where a state came to EPA
and said we want to work closely with you on permitting a new refinery
or refinery expansion and EPA refused to provide technical assistance
and even financial resources under existing law to that state?
Answer. No. However, this does not mean that the permitting
processes in existence today are efficient or certain in their timing
and application. A federal facilitator coordinating the permitting
process for qualifying projects could provide all parties with improved
understanding and commitments to time and content of applications and
eliminate the overlap between federal agencies and/or federal and state
agency efforts.
Question 2. In answer to several of the questions at today's
hearing (Nov. 9) the witnesses have noted that the market for petroleum
and petroleum products is a global one and should be viewed in that
context. Please list all planned refinery construction that your
company plans to undertake globally. Please list them by country and
include the projected size of the facility, including the projected
capacity for all units and their potential product yields in addition
to the project's total investment cost.
Answer. ConocoPhillips plans to invest $4-5 billion, on top of our
other refinery investments of $1-2 billion per year. This multi-year
investment program is aimed at growing our U.S. refining capacity by
about 11 percent and improving our capability of handling lower quality
oils in order to make 15 percent more clean fuels such as gasoline,
diesel and heating oil by the year 2011. These expansions will add
enough clean fuels product to be the equivalent of adding one world-
scale refinery to our domestic refining system.
The following table provides some of our preliminary estimates for
these U.S. refinery projects. Note that most of these projects are in
the early design phase. As such, individual unit capacities and
specific product yields are not yet defined. We have provided a rough
estimate of our intended crude capacity increases, clean product
volumes (a total of gasoline, jet fuel and diesel) expected, the types
of units that will be added or modified, and an early estimate of the
capital investment costs. Note that we have not done final engineering
or applied for the permits, which could change our plans. Thus, these
are very rough estimates and are subject to change.
ConocoPhillips is also considering opportunities to build grass
roots refining capacity, and acquire existing refining capacity. On
November 25, we announced that we would acquire Louis Dreyfus' 275MBPD
refinery near Wilhelmshaven, Germany, subject to regulatory approvals.
Should we be successful in acquiring the Wilhelmshaven refinery, we
will consider upgrading investments to increase diesel and gasoline
output.
PROPOSED MAJOR CONOCOPHILLIPS U.S. REFINERY CAPACITY RELATED CONSTRUCTION
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Estimated
facility Projected clean Total
Refinery Country Ownership crude crude product investment Major units being added
interest capacity capacity increase cost ($MM) or modified
(MBPD)\1\ (MBPD)\2\ (MBPD)\3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Los Angeles........................... USA...................... 100% 139 179 34 495 Crude Unit
Hydrocracker
Coker
FCC
San Francisco......................... USA...................... 100% 115 122 6 235 Hydrocracker
Ferndale.............................. USA...................... 100% 93 105 10 455 Crude Unit
Coker
FCC
Wood River............................ USA...................... 100% 306 331 21 1230 Crude Unit
Hydrocracker
Coker
FCC
Borger................................ USA...................... 100% 146 146 \4\ 0 230 Coker
FCC
Billings.............................. USA...................... 100% 58 83 21 395 Crude Unit
FCC
Alliance.............................. USA...................... 100% 247 287 34 270 Crude Unit
Coker
FCC
Sweeny................................ USA...................... 100% 229 259 26 705 Crude Unit
Coker
FCC
Bayway................................ USA...................... 100% 238 238 \4\ 0 300 Crude Unit
FCC
--------------------------------------------------------------------------
U.S. total.......................... ....................... 1571 1750 152 4315
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Utilizes corporate stated crude capacities. Sweeny and San Francisco capacities were updated as of 2005, respectively.
\2\ Calculated growth added to stated corporate capacity.
\3\ Clean product increase estimated as crude increase multiplied by average system clean product yield of .85.
\4\ Major emphasis of project is to process heavier, higher sulfur crudes.
Question 3. The International Energy Agency (IEA) has just released
its World Energy Outlook 2005. It contains a piece on the global
refining picture. (Please see the summary below.) The study notes a
lack of investment in upstream and downstream capacity has contributed
to the extreme tightness in global oil markets. What are your thoughts
in response to this? What is your company doing in response (actions)?
What is your company doing (investments/analysis) in the ``MENA''
regions? Do you agree with the IEA's projections?
World Energy Outlook 2005: IEA Projects Growth in Middle East
and North Africa Oil and Natural Gas Sectors through 2030 but a
Lack of Investment would Push up Prices and Depress GDP Growth
11/7/2005 London--``The importance of the Middle East and
North Africa (MENA) to global oil and gas markets cannot be
underestimated. These countries have vast resources, but these
resources must be further developed. Investment should not be
delayed,'' said Mr. William C. Ramsay, Deputy Executive
Director of the Paris-based International Energy Agency, as he
presented findings from the World Energy Outlook 2005: Middle
East and North Africa Insights (WEO-2005) today in London.
Noting that a lack of investment in upstream and downstream
capacity has contributed to the extreme tightness in the global
oil market in recent months, Mr. Ramsay highlighted the
critical role that this region will play in meeting growth in
global energy demand.
The WEO-2005 expects global energy markets to remain robust
through 2030. If policies remain unchanged, world energy demand
is projected to increase by over 50% between now and 2030.
World energy resources are adequate to meet this demand, but
investment of $17 trillion will be needed to bring these
resources to consumers. Oil and gas imports from the Middle
East and North Africa will rise, creating greater dependence
for IEA countries and large importers like China and India.
Energy-related CO2 emissions also climb--by 2030,
they will be 52% higher than today. ``These projected trends
have important implications and lead to a future that is not
sustainable--from an energy-security or environmental
perspective. We must change these outcomes and get the planet
onto a sustainable energy path,'' added Mr. Ramsay.
WEO 2005 focuses on the energy prospects in the Middle East
and North Africa to 2030, covering in detail developments in
Algeria, Egypt, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia
and the United Arab Emirates. Internal demand, resources,
policies, investment, production, exports, even energy use for
water desalination, all are examined. ``To our knowledge, this
is the first time that any publication with a focus on the
Middle East and North Africa has undertaken such an extensive,
country-by-country review of the energy sector of the region.
At a time when experts debate whether the world will run out of
energy, these results are particularly relevant,'' Mr. Ramsay
said.
In the MENA region, domestic energy demand is driven by
surging populations, economic growth and heavy energy
subsidies. Primary energy demand more than doubles by 2030. At
the same time, MENA oil production will increase by 75% by 2030
and natural gas production will treble, allowing more gas
exports. The region's share in global oil production will
increase from 35% today to 44% in 2030. However, this means the
countries of the Middle East and North Africa would need to
invest, on average, $56 billion per year in energy
infrastructure. The level of upstream oil investment required
will be more than twice that of the last decade.
But what if adequate investment is not made or consuming
countries' policies change? To assess these risks, WEO 2005
develops two other scenarios, each of them far from unlikely: a
Deferred Investment Scenario, in which investment in the
producing countries is delayed, whether deliberately or
inadvertently; and a World Alternative Policy Scenario, in
which energy-importing countries take determined action to cut
demand and change the pattern of fuel use, driven by high
prices, environmental or security goals, or all three.
The two scenarios have significant implications for MENA
countries. In the Deferred Investment Scenario, energy prices
rise sharply. Global energy-demand growth falls, cutting the
region's oil and gas export revenues by more than $1 trillion
from 2004-2030. World GDP growth slows down. Deferred
investment could be the result of many factors, but whatever
the cause, the results are higher prices, greater uncertainty
and market inefficiencies.
The WEO World Alternative Policy Scenario examines the
consequences of new policies under consideration in consuming
countries. ``The G8 Plan of Action, agreed at the Gleneagles
Summit in July 2005, launched detailed initiatives to promote
cleaner energy and combat the impact of climate change. The IEA
was asked to play an important role. This strong global
commitment indicates that governments are already adopting
alternative policies--such as those in the World Alternative
Policy Scenario--to achieve the G8 goals,'' explained Mr.
Ramsay. Under this Scenario, global oil and gas demand growth
is lower, but the world continues to rely heavily on MENA oil
and gas. CO2 emissions fall 16% below the level of
the Reference Scenario--but still increase around 30% by 2030.
Assumptions about international energy prices have been
revised significantly upwards in WEO-2005, as a result of
changed market expectations after years of underinvestment in
oil production and the refinery sector. The average IEA crude
oil import price, a proxy for international prices, averaged
$36.33 per barrel in 2004 and peaked at around $65 (in year-
2004 dollars) in September 2005. In the Reference Scenario, the
price is assumed to ease to around $35 in 2010 (in year-2004
dollars) as new crude oil production and refining capacity
comes on stream. It is then assumed to rise slowly, to near $39
in 2030. In the Deferred Investment Scenario the oil price
reaches $52 in 2030.
The World Energy Outlook 2005 contains over 600 pages of
detailed statistics and in-depth analysis. The study was
produced by the IEA with input from many international experts
from producing countries, industry and organizations including
OPEC. The IEA's prestigious annual WEO series has long been
recognized as the authoritative source for global long-term
energy market analysis and has received honors for analytical
excellence including awards from the Russian Academy of
Sciences, the U.S. Department of Energy and numerous public and
private organizations.
Answer.
Comments on Investment
The main drivers for present elevated prices are the exceptionally
strong global economic recovery and resulting demand growth and supply
disruptions, including the recent hurricanes in the Gulf of Mexico.
While sustained strong prices help encourage investment, for many years
the industry has recorded poor historical returns, which have limited
capital available for investment. Between 1990 and 2002, the average
return on equity for the petroleum industry was 11.3 percent, lower on
average than the 12.6 percent average return for the S&P industrials.
The refining & marketing sector has an even lower historical return on
capital than the total petroleum sector. Between 1990 and 2002, the
refining and marketing sector had an average return on capital employed
of 5.0 percent versus an average of 7.1 percent for the total petroleum
industry. Given the degree of price, technical, capital and political
risk in our projects, the price levels and returns in the 1980s and
1990s did not allow the industry to attract sufficient capital. The IEA
report acknowledged that average financial returns over the past three
decades have usually been very low and that uncertainty about future
investment returns discourages investment.\1\
---------------------------------------------------------------------------
\1\ International Energy Agency, World Energy Outlook 2005,
November 2005, page 98.
---------------------------------------------------------------------------
Until recently, accelerated levels of investment were not
encouraged because growing global demand could be met largely from
spare oil production capacity in Russia and in OPEC countries, and by
taking advantage of spare global refining capacity and spare capacity
in oilfield services and supplies. As a result, the market did not
provide the economic incentives for new grassroots investment. Within
the past two years, the free market metrics have encouraged the
industry to recalibrate the investment dial to higher, more aggressive
levels of spending.
In the exploration, development and production business, investment
by private oil companies has also been constrained by a lack of access
to low-cost reserves, including in the United States. The opportunities
available tend to be more remote, complex, or involve lower quality
crude oil that requires higher prices to be economically produced.
Expansion in the refining business has also been constrained by the
need to dedicate investments to a ``stay in business'' program for
emissions reductions and clean fuels projects. These projects, while
useful for ensuring a cleaner environment, do not expand and sometimes
reduce supplies. Difficulties in permitting have also constrained
refinery investment in the United States.
Now that the market is identifying that new supplies are needed and
peak clean fuel investments are nearing completion, the private sector
will likely make these investments without need of any new government
incentives. However, the industry does need governments at all levels
to be thorough--but at the same time--to streamline permitting and
environmental review processes so we can make these investments and add
energy supplies.
ConocoPhillips has been aggressively investing in refining, and in
developing new natural gas supplies for the United States. The projects
described below are all very large and will require significant capital
expenditures in the future.
Over the past five years, ConocoPhillips has spent $4.0 billion
worldwide, of which $3.2 billion was spent domestically, to expand and
modernize our refineries and upgrade marketing operations.
Going forward, we are planning an expanded incremental investment
program, whereby we expect to invest $4-5 billion, on top of our
ongoing refinery investments of $1-2 billion per year. This investment
program is aimed at growing our U.S. refining capacity by about 11
percent and improving our capability of handling lower quality oils in
order to make 15 percent more clean fuels such as gasoline, diesel and
heating oil by the year 2011. These expansions will add enough clean
fuels product to be the equivalent of adding one world scale refinery
to our domestic refining system.
ConocoPhillips is making major investments in North American Arctic
natural gas through the Mackenzie Delta and Alaskan North Slope
pipelines. Initial development of Mackenzie Delta will access about 6
trillion cubic feet of gas, which is expected to come on stream in the
year 2011 at approximately 1 billion cubic feet per day. As other
fields are added, the pipeline will have the capacity to be expanded to
1.8 billion cubic feet per day. The total cost of this pipeline is
estimated to be at least $6 billion.
The Alaskan North Slope presently has an estimated 35 trillion
cubic feet of natural gas, which would increase total U.S. gas reserves
by approximately 20 percent. When the pipeline connecting this gas with
the lower 48 market is completed, about 4.0-4.5 billion cubic feet per
day will be added to natural gas supplies. This equates to about 8
percent of present U.S. natural gas production. This project
exemplifies what we have been saying about capital-intensive projects
that require many years before we see a return on the investment. The
Alaska pipeline alone is expected to cost about $20 billion and take
ten years before the first cubic foot of gas is sold on the market. In
October 2005, ConocoPhillips joined Governor Murkowski of Alaska in
announcing that we have reached an agreement in principle on terms and
conditions that would move the Alaskan natural gas pipeline closer to
reality. Once the agreement is completed by all gas owners, the Alaska
legislature will, hopefully, act on that agreement, passing it quickly.
While it is not a short-term solution, gas from Alaska will eventually
make a sizable contribution in addressing the market problems we are
anticipating for natural gas.
ConocoPhillips is also investing aggressively in bringing liquefied
natural gas (LNG) to the U.S. market. We are progressing LNG projects
in Qatar and Nigeria and aggressively pursuing projects in Russia,
Venezuela and Australia. These are all multi-billion dollar projects.
We expect to bring our first cargo of Qatari gas to the United States
in 2009. We are also developing an LNG supertanker to bring gas to the
United States. We are participating in the construction of an LNG
regasification facility at Freeport, Texas. We are pursuing a second
LNG regasification terminal in Compass Port, offshore Alabama, although
it is currently bogged down in the permitting process. We are committed
to making the investments in these two facilities, which total over
$1.5 billion. We are also pursuing permitting of regasification
facilities on the East and West Coasts, as well as an additional Gulf
Coast terminal.
To bolster U.S. and global oil supplies, ConocoPhillips is
expanding conventional crude production in Venezuela, Russia and the
Far East. There is likely to be a bridge of unconventional heavy-oil
and natural gas before the world transitions to alternative fuels in a
major way. ConocoPhillips has invested and continues to invest heavily
in unconventional heavy oil production in Venezuela and Canada. Our
company recently announced that we will be partnering with a Canadian
company to develop the $2.1 billion Keystone pipeline to bring over 400
thousand barrels per day of much-needed Canadian heavy oil production
to our U.S. mid-continent refineries.
There is an estimated 7 trillion barrels of unconventional oil in
place globally versus conventional estimates of 3 trillion barrels.
Technology improvement will be important in raising the present low
recovery rates of unconventional oil. We are building additional
upgrading capacity in our refineries to process unconventional heavy
crude, while exploring opportunities to apply our proprietary
technology for turning natural gas into a slate of clean refined oil
products, which will enhance clean diesel supplies.
ConocoPhillips' Investments in MENA Region
ConocoPhillips' Middle East and North Africa regional office is in
Doha, Qatar. Regional activities comprise pursuit of new business
opportunities throughout the region in addition to a number of existing
and emerging businesses.
Through its subsidiary, Dubai Petroleum Company, ConocoPhillips
produced first oil in 1969 and continues to operate four offshore oil
fields.
In Syria, we have a service contract with the Syrian Petroleum
Company that expires on December 31, 2005. Our current plan is to honor
that contract to its termination date. We expect our presence in Syria
to end in 2006, once the formalities of closing out the service
contract are accomplished. We have no plans to seek additional business
in Syria.
In 2003, ConocoPhillips and Qatar Petroleum signed a heads of
agreement for the development of Qatar Gas 3 a large scale (7.8 MMTPA)
LNG project located in Qatar with the U.S. Gulf Coast targeted as the
primary gas sales market. Development activities continue with a final
investment decision expected soon. If the project is approved, first
gas is expected in late 2009. Also in 2003, ConocoPhillips signed a
Statement of Intent with Qatar Petroleum for the development of a large
scale gas to liquids (GTL) plant located in Qatar. Currently this
project is on hold by Qatar Petroleum, owing to the unprecedented level
of industrial development activities in Qatar.
In 2004, ConocoPhillips and LUKOIL announced their intent to seek
the right to develop the West Qurna field in Iraq. Subject to
confirmation of LUKOIL rights under its PSA (production sharing
agreement) related to the field, as well as governmental authorities
and parties to the contract, ConocoPhillips expects to enter into
further agreements regarding the assignment of a 17.5 percent interest
in the PSA by LUKOIL.
Since spring 2004, following U.S. government approval,
ConocoPhillips together with partners Amerada Hess and Marathon have
been negotiating with the Libyan Government and the Libyan National Oil
Company to re-enter the Oasis concession (Waha Oil Company) the
companies departed in 1986. These negotiations are continuing.
Views on IEA's Projections
We generally agree with the IEA's reference case and its view of
how challenging it will be to get $17 trillion (2004 dollars) of
investment between 2004 and 2030. We believe that governments around
the world can help by maintaining an attractive investment climate and
removing barriers to investment, such as allowing greater resource
access, streamlined--but thorough--permitting processes and stable
fiscal terms. We would like to put in perspective one comment made in
the report that the level of annual Upstream investment in MENA
countries will have to double to meet the IEA's production forecast.
The level of investment in MENA countries over the last 15 years was
constrained by the enormous amount of excess capacity these countries
held in the mid-1980s as they continued to lose market share to non-
OPEC production and an extended period of relatively weak prices and
returns on investment. The market is now providing the price incentive
for investment. Earlier this year, Saudi Arabia announced an investment
program to expand their oil production capacity by 1.5 million barrels
per day (from 11-12.5 million barrels per day) or by 14 percent by
early 2009.
Question 4. Voluntary standards--Post hurricanes, what is the
industry doing to come up with voluntary standards/best practices for
back-up power supply to critical energy infrastructure (refineries,
pipelines, etc.) and natural disaster recovery? Will the API undertake
such an effort? If not, what is your company doing?
Answer. First, it is worth noting that our industry has established
voluntary pre-hurricane shutdown procedures to protect people, the
environment and equipment. Shutting down the complex refinery processes
that may be in the path of hurricanes is a proactive step to reduce the
chances for more extensive damage. The severity of the recent
hurricanes and local infrastructure devastation has been unprecedented.
Our company has faced different challenges from hurricanes Katrina and
Rita, and there is no single common solution or best practice for post-
hurricane disaster recovery. We have extensive existing best practices
to repair and restart our refineries. The first step of any recovery
effort is a critical assessment of the condition of all equipment and
infrastructure. We will continue to work hard to develop future best
practices to minimize downtime at our refineries and other critical
infrastructure facilities.
Our industry has shown great resilience in working within the
storm-devastated areas to set priorities for both the good of the
community and the energy industry. The API should be consulted directly
for positions on potential standards of disaster recovery. We are
active members of the API and will participate in any activities
undertaken.
Question 5. A number of witnesses testified that failure of the
electricity system resulting from hurricanes Rita and Katrina
contributed in great part to the inability to get refineries restarted,
or to get natural gas pipelines restarted. What are the arrangements
for backup power in case of such emergencies at your critical
facilities?
Answer. One-half of our U.S. refineries have owned cogeneration
plants or local area third-party cogeneration plants with contracts to
supply electricity to the refineries. Each major storm event we
witnessed this year brought with it widespread devastation. An on-site
or local area cogeneration plant is much like a refinery in terms of
storm exposure to wind and flood damage.
Storm damage to on-site cogeneration plants can occur to the same
degree as the damage to the refinery. Additionally, cogeneration plants
normally require connectivity to a regional electrical grid system in
order to start up. Thus, damage to adjacent regional power distribution
grids will have a significant impact on the ability to restart either
the cogeneration plant or the refinery.
As an example, following Hurricane Rita, both our Lake Charles
refinery and the local area third-party NISCO cogeneration plant, of
which we own 36 percent, experienced hurricane damage. The same
hurricane also produced widespread devastation in the region. The
startup timing of both plants was dependent on the completion of
repairs to the portions of the damaged regional power distribution
system.
In cases where storm devastation is this widespread, there are
often many additional concerns for refinery restarts such as
availability of refinery workers and contractors who have been
displaced, critical local services like police and firefighting, fresh
water supplies, etc. In cases of such severe devastation, the civil/
community needs may be given first priority for manpower or critical
backup equipment such as portable generators, etc.
Question 6. How many of your plants have on site cogeneration
facilities? Which plants have these facilities?
Answer. Roughly one half of our U.S. refineries have owned
cogeneration plants or local area third party cogeneration plants with
contracts to supply electricity to the refineries.
Los Angeles, CA--Owned cogeneration that provides a portion
of the total electricity requirement for the plant.
San Francisco, CA--Owned cogeneration that provides a portion
of the total electricity requirement for the plant.
Lake Charles, LA--We own 36 percent of a local area
cogeneration plant, this percentage ownership supplies a
majority of the electricity needs for our plant.
Bayway, NJ--Third-Party local area Cogeneration supplies
power to our plant on contract.
Sweeny, TX--Third-Party local area Cogeneration supplies
power to our plant on contract.
Borger, TX--Third-Party local area Cogeneration supplies
power to our plant on contract.
Ponca, OK--Third-Party local area Cogeneration that supplies
power to our plant on contract--note, this cogeneration will
shut down in 2006.
Question 7. Are there regulatory barriers at either the state or
federal level that prevent the installation of cogeneration plants at
your facilities that do not have them?
Answer. No.
Question 8. Would the presence of cogeneration facilities at your
refineries reduce the recovery time during such emergencies?
One-half of our U.S. refineries have owned cogeneration plants or
local area third-party cogeneration plants with contracts to supply
electricity to the refineries. Each major storm event we witnessed this
year brought with it widespread devastation. An on-site or local area
cogeneration plant is much like a refinery in terms of storm exposure
to wind and flood damage.
Storm damage to on-site cogeneration plants can occur to the same
degree as the damage to the refinery. Additionally, cogeneration plants
normally require connectivity to a regional electrical grid system in
order to start up. Thus, damage to adjacent regional power distribution
grids will have a significant impact on the ability to restart either
the cogeneration plant or the refinery.
As an example, following hurricane Rita, both our Lake Charles
refinery and the local area third-party NISCO cogeneration plant, of
which we own 36 percent, experienced hurricane damage. The same
hurricane also produced widespread devastation in the region. The
startup timing of both plants was dependent on the completion of
repairs to the portions of the damaged regional power distribution
system.
In cases where storm devastation is this widespread, there are
often many additional concerns for refinery restarts such as
availability of refinery workers and contractors who have been
displaced, critical local services like police and firefighting, fresh
water supplies, etc. In cases of such severe devastation, the civil/
community needs may be given first priority for manpower or critical
backup equipment such as portable generators, etc.
Question 9. Witnesses at earlier hearings testified that there are
a number of modern natural gas generation facilities in the Louisiana/
Texas area that are not used to their full capacity. Are there natural
gas generation facilities in close proximity to your refinery
facilities that could be used for backup generation at the refineries?
Answer. Natural gas production and distribution was disrupted
during the hurricanes so natural gas-fired power generation plants
would not have helped. Unless the facilities are immediately adjacent,
power lines would connect them to the refinery, and power lines were
severely impacted during the hurricanes.
Question 10. Would use of generators that are in close proximity to
refineries to provide backup power during such emergencies mean that
recovery times might be shortened, since the restoration time for a
nearby facility might be less than the restoration time for the
transmission facilities for traditional utilities?
Answer. One-half of our U.S. refineries have owned cogeneration
plants or local area third-party cogeneration plants with contracts to
supply electricity to the refineries. Each major storm event we
witnessed this year brought with it widespread devastation. An on-site
or local area cogeneration plant is much like a refinery in terms of
storm exposure to wind and flood damage. Storm damage to on-site
cogeneration plants can occur to the same degree as the damage to the
refinery. Additionally, cogeneration plants normally require
connectivity to a regional electrical grid system in order to start up.
Thus, damage to adjacent regional power distribution grids will have a
significant impact on the ability to restart either the cogeneration
plant or the refinery.
As an example, following hurricane Rita, both our Lake Charles
refinery and the local area third-party NISCO cogeneration plant, of
which we own 36 percent, experienced hurricane damage. The same
hurricane also produced widespread devastation in the region. The
startup timing of both plants was dependent on the completion of
repairs to the portions of the damaged regional power distribution
system.
In cases where storm devastation is this widespread, there are
often many additional concerns for refinery restarts such as
availability of refinery workers and contractors who have been
displaced, critical local services like police and firefighting, fresh
water supplies, etc. In cases of such severe devastation, the civil/
community needs may be given first priority for manpower or critical
backup equipment such as portable generators, etc.
environmental questions
Question 11. Please specify exactly which, if any, Federal or State
environmental regulations have prevented your company from expanding
refinery capacity or siting a new refinery, and documentation on the
exact details of the project prevented.
Answer. At this time we are not aware of any projects that have
been directly prevented as a result of any specific Federal or State
regulation. However, the Clean Air Act, Resource Conservation and
Recovery Act, Clean Water Act, Toxic Substance Control Act,
Comprehensive Environmental Response Compensation and Liability Act,
Oil Pollution Act, Solid Waste Disposal Act, Hazardous and Solid Waste
Amendments, etc. give rise to many regulatory programs. Each of the
resulting regulatory programs gives rise to numerous design, operation,
maintenance, monitoring and reporting obligations for refineries.
Specifically, these obligations arise from (but are not limited to) New
Source Review and Prevention of Significant Deterioration, Refinery
Maximum Achievable Control Technology (MACT) I, Refinery MACT II,
Heater and Boiler MACT, New Source Performance Standards (NSPS) Subpart
J, NSPS Subpart K, NSPS Subpart GGG, NSPS Subpart VVV, NSPS Subpart
QQQ, National Emissions Standards for Hazardous Air Pollutants (NESHAP)
for Benzene Waste Operations, National Pollution Discharge Elimination
System, Spill Prevention Control and Countermeasures, Stormwater
Pollution Prevention, Hazardous Waste Regulations, etc. In addition,
many of the environmental programs have extensive permitting processes
which can require years of negotiation. Cumulatively, the programs add
significant cost and time to refinery construction or expansion.
Ultimately, the cost and time of the environmental requirements must be
included in a refinery construction or expansion project, increasing
costs and reducing the return on investment. All of these factors must
be considered as part of the investment decision during the project
planning process and make refinery construction and expansion efforts
less attractive in the absence of significant improvement of the long-
term refining margin outlook.
Question 11a. How much have so-called ``boutique fuel''
requirements added to the average retail price, where applicable, and
the average wholesale price per gallon of the gasoline sold by your
company?
Answer. Boutique fuels generally represent barriers to market entry
for refiners who do not have the flexibility to make these more
difficult-to-produce specialty fuels. Additionally, not all
transportation systems can accommodate the addition of a specialty
grade without giving up some shipping flexibility. Boutique fuels also
limit the amount of storage that can be held for any given fuel since
these fuels must be held in separate tanks. These factors make meeting
boutique fuels demand more difficult, particularly when operating
problems occur and when these fuels are first introduced. In general,
these factors increase the price to produce these specialty fuels but
the magnitude depends on market conditions.
In addition, the transition periods when products with new
specifications are introduced tend to have greater price volatility
since the supply system needs to go through an adjustment period to
accommodate the new product. Similarly, when there are different
seasonal specifications (e.g., summer and winter gasoline), inventories
must be drawn down at the end of one season to enable switching to a
different seasonal specification. The switching points will have low
inventories and leave the market more vulnerable to supply disruption.
Question 11b. If the EPA or the Congress were to act to minimize
the number of ``boutique fuel'' formulations required by the states to
protect air quality, how many should there be and what should the
specifications of each be in order to maintain air quality and improve
fungibility?
Answer. EPAct 2005 has initiated the process of reducing the
proliferation of boutique fuels. In addition, Congress directed the
U.S. EPA to merge southern and northern grades of RFG, beginning the
process of reducing the number of ``boutiques''. Congress also directed
the Agency, in concert with the Department of Energy, to study the
boutique fuels in this country to identify.and make recommendations to
Congress for a more efficient federal fuel system.
In reviewing the various boutique gasolines in this country, five
(5) primary summer gasoline types evolve as reasonable candidates for a
future slate. These are California gasoline, Conventional Gasoline at
9.0 psi Reid Vapor Pressure (RVP), Conventional Gasoline at 7.8 psi
RVP, Conventional Gasoline at 7.0 psi RVP, and RFG. However, states
have adopted various versions of these fuels (sulfur controls, ethanol
mandates, additives and other unique specifications or controls) that
have complicated the delivery infrastructure and their
interchangeability should shortages occur in one area when supplies are
ample in another. This has become even more apparent with the impact of
the hurricanes that severely tested the supply and distribution for
motor fuels in this country.
We support Congress in its efforts to look for means of
rationalizing the number of boutique fuels. We believe this effort must
include a review of the air quality benefits, fungibility, costs and
supply impact to assure unintended consequences of taking action does
not occur. Any such reduction of fuels on a federal basis must preempt
state and local controls in order to assure no overlapping controls
exist that defeat the intended purpose of the rationalization.
The U.S. EPA has taken action to bring diesel fuels used on the
highway and in non-road application to a common specification. However,
we have recently begun to experience the bifurcation of the diesel
markets by independent state action to adopt unique ``boutique'' diesel
fuels beyond the federally directed specifications. Most recently the
state of Texas has adopted a unique diesel fuel that is manufactured
solely for the eastern half of Texas. Likewise, Minnesota this year has
imposed a formulation mandate for diesel fuel sold in the state.
California has had its unique diesel fuel for several years. These
actions do not bode well for the future of a single nationwide diesel
fuel with federally imposed ultra-low sulfur content to enable the next
generation of low emission vehicles. We encourage Congress to include
diesel fuel harmonization as further actions are considered relative to
the proliferation of ``boutique'' fuels.
Question 12. Streamlining New Source Review (NSR) permitting
constraints was mentioned as an incentive that would encourage refiners
to supply more product to the U.S. market. How many air quality permit
applications for refinery expansions has your company submitted for NSR
over the last ten years? How long did it take the EPA, or the
applicable State, to approve or deny each permit application, after
receipt of a complete permit application? What was the expected
percentage increase in product output of the expansion?
Answer. At least 20 major PSD (prevention of significant
deterioration) permits have been applied for in the last 10 years.
Permit approvals range from 9 to 24 months, with typical permit
approval occurring in the 12- to 15-month window. In addition to major
PSD permitting, numerous (well over 100) minor permitting activities
have occurred at the same time. Permit approvals for minor permits
range from 3 to 12 months with approvals generally occurring in about 6
to 9 months. In addition to the permit approval process, some
consideration should be given to the time required to prepare permit
applications, which can take as much as 6 to 12 months (for bigger
projects) before a permit is ready for submission to the agency.
The permitting experiences relied on for the previous examples have
resulted in relatively modest increases of either crude capacity or
product conversion. Many past permits have resulted in no capacity
increase but have focused on improved product quality, increased
reliability, increased refinery efficiency, or have been required for
regulatory compliance (e.g. to meet clean fuels requirements).
Due to the evolution of implementation, the various permitting
programs (federal, state and local) have had the effect of becoming a
disincentive to some small, cost-effective projects which in the past
were an important way a refinery met growing demand in a traditionally
low margin environment. With larger projects having much longer
implementation cycles (e.g. multiple years), overall flexibility to
meet market fluctuations has diminished.
Question 12a. How would you propose to streamline NSR and still
maintain local air quality and prevent any increase in total annual
emissions from such expansions?
Answer. The following is a list of some specific potential options
to consider for improving the permitting process:
To mandate the use of the NSR Reform rules (not all states
have implemented to date)
Codify that NSR programs cannot be altered by states
Codify a 10-year refinery PAL (plantwide applicability
limit) which is applicable in all states, incorporate (and
reduce emissions) as new federal regulations are implemented,
but wait for the 10-year term of the PAL to end before applying
any State Implementation Plan-required emissions reductions due
to NAAQS (National Ambient Air Quality Standard) attainment
For post-Katrina reconstruction, allow for expedited
permitting provided that objective is to rebuild
Reasonable permit review--a deadline-based approach designed
to coordinate and eliminate overlap among numerous permitting
processes
Energy projects get priority review due to national security
significance
Time limits on government reviews (90 days)
Grant DOE authority as facilitator, if requested, for
ensuring timely review of all permits to build new refineries
or add new capacity
Initiate federal, state, and local review process
simultaneously
Public participation addressed via 45-day comment period
To allow project construction to begin concurrent with a
complete permit application to the state, rather than final
permit approval (e.g. expand allowable work to include actual
construction such as making tie-ins, building supports and
foundations, perhaps even building and setting new equipment
such as furnaces, vessels, exchangers, pumps, etc.)
Encourage more flexible permit terms and conditions. For
example, allow physical changes and modifications to refineries
to be permitted ``prospectively'' (e.g. if a project is
anticipated to increase production, set allowable increases in
the permit for the anticipated pollutant increases even though
specific project information is unknown, thus allowing for
future modifications so long as the capped emission limits for
pollutants are not exceeded)
Extend to refineries the recently proposed rule for electric
generating units which clarifies that Federal NSRIPSD
permitting is triggered only if there is an increase in the
maximum hourly emissions rate of a source which then yields a
significant increase in the annual mass emissions of the
pollutant in question. This proposal, dated Oct. 20, 2005 at FR
61081-61103 utilizes the New Source Performance Standard (NSPS)
as the initial emissions test for determining emissions
increase
Calculate emission increases using past-actual to future-
actual analysis instead of past actual to future potential
Question 13. How much did the fuel specification waivers that have
been granted by EPA to date, due to the supply disruptions caused by
the hurricanes, reduce the average retail price of the gasoline or
other refined products made by your company?
Answer. ConocoPhillips' U.S. refining system was able to supply
approximately 340 thousand barrels of extra gasoline due to the RVP
waivers. This helped increase the supply of gasoline which would likely
directionally reduce the price of gasoline. However, it is difficult to
isolate the price impact since there are many other suppliers and
operating factors that impact the overall supply and demand balance and
marketplace. The diesel waivers proved to be burdensome and difficult
to implement, resulting in minimal ConocoPhillips supply increases.
Question 14. One witness indicated that ``getting two 100-year
hurricanes in four weeks'' caused a great deal of chaos and disruption
in the gasoline supply chain. The National Oceanic and Atmospheric
Administration has projected that the country and the Gulf of Mexico
have entered a cyclical period of 20-30 years during which the Gulf and
coastal areas are likely to experience a greater frequency of
hurricanes and higher odds of those hurricanes making landfall in the
U.S. What preparations has your company made to deal with a greater
hurricane frequency to decrease repetition of the supply disruption
that occurred this year?
Answer. First, it is worth noting that our industry has established
voluntary pre-hurricane shutdown procedures to protect people, the
environment and equipment. Shutting down the complex refinery processes
that may be in the path of hurricanes is a proactive step to reduce the
chances for more extensive damage. The severity of the recent
hurricanes and local infrastructure devastation has been unprecedented.
Our company has faced different challenges from hurricanes Katrina and
Rita, and there is no single common solution or best practice for post-
hurricane disaster recovery. We have extensive existing best practices
to repair and restart our refineries. The first step of any recovery
effort is a critical assessment of the condition of all equipment and
infrastructure. We will continue to work hard to develop future best
practices to minimize downtime at our refineries and other critical
infrastructure facilities.
Our industry has shown great resilience in working within the
storm-devastated areas to set priorities for both the good of the
community and the energy industry. The API should be consulted directly
for positions on potential standards or disaster recovery. We are
active members of the API and will participate in any activities
undertaken.
Question 15. Over the last 50 years, average annual sea surface
temperatures have increased in the Gulf of Mexico and, according to the
National Academy of Sciences and other similar scientific expert
bodies, are expected to continue increasing as the oceans continue
warming due to accelerating global climate change. The Administration's
Climate Action Report (2002) stated ``model simulations indicate that,
in a warmer climate, hurricanes that do develop are likely to have
higher wind speeds and produce more rainfall.'' What preparations has
your company made to deal with a greater likelihood of greater
hurricane intensity so as to decrease repetition of the disruption that
occurred this year?
First, it is worth noting that our industry has established
voluntary pre-hurricane shutdown procedures to protect people, the
environment and equipment. Shutting down the complex refinery processes
that may be in the path of hurricanes is a proactive step to reduce the
chances for more extensive damage. The severity of the recent
hurricanes and local infrastructure devastation has been unprecedented.
Our company has faced different challenges from hurricanes Katrina and
Rita, and there is no single common solution or best practice for post-
hurricane disaster recovery. We have extensive existing best practices
to repair and restart our refineries. The first step of any recovery
effort is a critical assessment of the condition of all equipment and
infrastructure. We will continue to work hard to develop future best
practices to minimize downtime at our refineries and other critical
infrastructure facilities.
Our industry has shown great resilience in working within the
storm-devastated areas to set priorities for both the good of the
community and the energy industry. The API should be consulted directly
for positions on potential standards or disaster recovery. We are
active members of the API and will participate in any activities
undertaken.
Question 16. How has your company disclosed to shareholders and
investors the risks associated with the potential impacts on your
company's assets in the Gulf of Mexico or indirect impacts on its
assets elsewhere, of either the expected greater frequency of
hurricanes making landfall in the U.S. or the probable greater
intensity of hurricanes in the region?
Answer. All of ConocoPhillips worldwide operations, like all
activities conducted by industry, governments, non-government
organizations and private individuals, have a degree of external risk
involved. This external risk might be as a result of acts of God such
as extreme weather or earthquakes or man-made actions such as political
change, terrorism or war. ConocoPhillips assesses and takes steps to
manage these risks when warranted. ConocoPhillips seeks to be
transparent about the location of all our operations through our Annual
Report to Stockholders, Fact Book, our Forms 10-K and 10-Q and many
other documents, allowing shareholders and investors to make their own
evaluations of the degree of risk involved. We do include a safe harbor
statement in our various documents describing the risks involved in any
forward-looking statement. The Forms 10-K, 10-Q and Annual Report to
Stockholders specifically state (among many other possible factors)
that differences from forward-looking statements could result from
potential disruption or interruption of our operations due to
accidents, extraordinary weather events, civil unrest, political events
or terrorism.
financial, production and import questions
Question 17. Please provide for each of last ten years your
company's: Gross revenue of U.S. operations; Total capital expenditures
in the U.S.; Net profit of U.S. operations.
Answer. Please see chart below.
CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER 2002)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Capital Reinvestment U.S. capital Reinvestment
$MM Net income expenditures & as % of net U.S. net expenditures & as % of U.S.
\1\ investments \2\ income income \3\ investments \4\ net income
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995.............................................................. 469 (1,456) 310% 335 (923) 276%
1996.............................................................. 1,303 (1,544) 118% 1,130 (841) 74%
1997.............................................................. 959 (2,043) 213% 710 (1,059) 149%
1998.............................................................. 237 (2,052) 865% 263 (936) 357%
1999.............................................................. 609 (1,690) 278% 376 (919) 244%
2000 *............................................................ 1,862 (8,460) 454% 1,250 (7,707) 617%
2001 *............................................................ 1,661 (10,054) 605% 1,305 (8,887) 681%
2002 **........................................................... (295) (4,388) ............ (910) (2,043) ............
2003.............................................................. 4,735 (6,169) 130% 2,513 (2,493) 99%
2004.............................................................. 8,129 (9,496) 117% 4,659 (2,520) 54%
2005.............................................................. 9,850 (8,573) 87%. 5,626 (3,140) 56%
-------------------------------------------------------------------------------------
Average......................................................... 2,683 (5,084) 189% 1,569 (2,861) 182%
--------------------------------------------------------------------------------------------------------------------------------------------------------
* 2000 Includes Alaska acquisition--($6,443MM), 2001 Includes Tosco Acquisition--($7,038MM).
** The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this table. Sources:
\1\ Net Income. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2000 (ConocoPhillips 2004 Annual Report, page 108); 1999-1995 (Phillips 2001
Annual Report, page 95).
\2\ Capital Expenditures & Investments. 2005 YID through September (ConocoPhillips 3Q, 10Q); 2004-2000 (ConocoPhillips 2004 Annual Report, page 108);
1999-1995 (Phillips 2001 Annual Report, page 95).
\3\ U.S. Net Income. A domestic and international breakdown is provided externally for the major company segments (I.e. E&P and R&M). Midstream and
Emerging businesses are internally reported as domestic and international and this breakdown is included in the above total. The Chemical and
Corporate Segments have been included in the U.S. total.
\4\ U.S. Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2002 (ConocoPhillips 2004 Annual Report, page
45); 2001 (ConocoPhillips 2003 Annual Report, page 49); 2000 (ConocoPhillips 2002 Annual Report, page 49); 1999 (Phillips 2001 Annual Report, page 47
adj. to exclude discontinued ops.); 1998 (Phillips 2000 Annual Report, page 47 adj. to exclude discontinued ops.); 1997 (Phillips 1999 Annual Report,
page 44); 1996 (Phillips 1998 Annual Report, page 42); 1995 (Phillips 1997 Annual Report, page 40).
CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER
2002)
------------------------------------------------------------------------
U.S. %
Sales & U.S. sales sales &
$MM operating & operating operating
revenue \1\ revenue \1\ revenue
------------------------------------------------------------------------
1995.............................. 13,368 11,310 85%
1996.............................. 15,731 13,211 84%
1997.............................. 15,210 12,633 83%
1998.............................. 11,545 9,535 83%
1999.............................. 15,396 13,019 85%
2000.............................. 22,155 18,700 84%
2001.............................. 24,892 22,466 90%
2002.............................. 56,748 46,674 82%
2003.............................. 104,246 74,768 72%
2004.............................. 135,076 96,449 71%
2005.............................. 128,184 95,461 74%
-------------------------------------
Average......................... 49,323 37,657 76%
------------------------------------------------------------------------
\1\ Sales & Operating Revenue, U.S. Sales & Operating Revenue. 2005 YTD
through September (ConocoPhillips 3Q, 10Q); 2004-2002 (ConocoPhillips
2004 Annual Report, page 97); 2001 (ConocoPhillips 2003 Annual Report,
page 97); 2000 (ConocoPhillips 2002 Annual Report, page 92); 1999
(Phillips 2001 Annual Report, page 83); 1998-1996 (Phillips 1998
Annual Report, page 67); 1995 (Phillips 1997 Annual Report, page 63).
Question 17a. Total taxes paid to the Federal Government
Answer. Total U.S. and International tax provisions for the years
2003, 2004 and 2005 (YTD September) were $3,744 million, $6,262 million
and $7,068 million, as reflected in our financial statements. Of these
amounts, federal and state tax provisions were $1,346 million, $2,604
million and $3,159 million for the same time periods.
CONOCOPHILLIPS REPORTED--TAX PROVISION
----------------------------------------------------------------------------------------------------------------
Federal
$MM tax State tax Total U.S. International Total
provision provision company
----------------------------------------------------------------------------------------------------------------
2003............................................. 1,173 173 1,346 2,398 3,744
2004............................................. 2,335 269 2,604 3,658 6,262
2005 \1\......................................... 2,715 444 3,159 3,909 7,068
----------------------------------------------------------------------------------------------------------------
\1\ Total Company tax provision. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2003 (ConocoPhillips
2004 Annual Report).
Question 17b. Total taxes paid to State governments
Answer. State tax provisions for the years 2003, 2004, and year-to-
date 2005 were $173 million, $269 million and $444 million
respectively.
Question 17c. Total donated to charity
Answer. Over the past three years, ConocoPhillips' charitable
donations were $36 million in 2003, $39 million in 2004 including $2
million pledged for tsunami victims, and $44 million to date in 2005
including $7 million pledged for Gulf Coast disaster relief.
Question 18. How much additional petroleum refining capacity do you
expect your company to install in the United States over the next 10
years?
Answer. Our current, formal forward planning for expanding our
refining business generally goes out six years. ConocoPhillips plans to
invest $4-5 billion, on top of our other refinery investments of $1-2
billion per year. This multi-year investment program is aimed at
growing our U.S. refining capacity by about 11 percent and improving
our capability of handling lower quality oils in order to make 15
percent more clean fuels such as gasoline, diesel and heating oil by
the year 2011. These expansions will add enough clean fuels product to
be the equivalent of adding one world-scale refinery to our domestic
refining system.
Question 19. What percentage of profits over the last 10 years has
your company re-invested in capital, exploration, drilling, and
production in the United States? Please provide an annual total for
those U.S. expenditures and a clear breakdown.
Answer. We have invested a total of $34.4 billion in capital
expenditures and investments in the Exploration and Production (E&P)
part of our business since 1995. This represents the equivalent of 147
percent of our earnings for this period. For the same time frame, U.S.
E&P capital expenditures and investments totaled $15.5 billion, or 116
percent of U.S. E&P net income of $13.4 billion.
EXPLORATION AND PRODUCTION CAPITAL EXPENDITURES AND INVESTMENTS RELATIVE TO NET INCOME
[Millions of dollars]
[Phillips Petroleum Company Prior to September 2002]
----------------------------------------------------------------------------------------------------------------
U.S. E&P
capital Capital
U.S. E&P expenditures Total E&P expenditures
capital U.S. E&P and capital Total E&P and
Year expenditures net income investments expenditures net income investments
and as a % of and as a % of
investments U.S. E&P net investments U.S. E&P net
income income
----------------------------------------------------------------------------------------------------------------
1995............................ (329) 239 138% (856) 373 229%
1996............................ (294) 320 92% (981) 493 199%
1997............................ (381) 360 106% (1,346) 609 221%
1998............................ (311) (32) n/a (1,406) (67)
1999............................ (320) 379 84% (1,079) 570 189%
2000 \1\........................ (7,394) 1,388 533% (8,120) 1,945 417%
2001............................ (1,354) 1,342 101% (2,516) 1,699 148%
2002 \2\........................ (1,205) 1,156 104% (3,276) 1,749 187%
2003............................ (1,418) 2,374 60% (4,508) 4,302 105%
2004............................ (1,314) 2,942 45% (5,249) 5,702 92%
2005 \3\........................ (1,221) 2,965 41% (5,018) 6,004 84%
-------------------------------------------------------------------------------
Total......................... (15,541) 13,433 116% (34,355) 23,379 147%
----------------------------------------------------------------------------------------------------------------
\1\ 2000 Includes Alaska acquisition--($6,443MM).
\2\ The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this table.
\3\ Through September 30, 2005.
Question 20. What percentage of profits over the last 10 years has
your company reinvested in non-petroleum energy supply and production
in the United States? Please provide a total and the results of such
investment.
Answer. Over the last 10 years, including both Conoco and Phillips
activities prior to the merger, we have invested about $435 million in
alternative energy supply technologies. Chief among these is our
investment in gas-to-liquids technologies, which target the ability to
economically develop and produce stranded natural gas reserves.
Stranded natural gas reserves are those located in areas which cannot
currently be economically transported to market. In addition, we have
invested in coal-to-liquids technologies, and are stepping-up our
investment in coal/petroleum coke gasification technologies.
Question 21. On average for the last ten years, please compare your
company's overall capital expenditures in the United States to its
expenditures elsewhere.
Answer. Increased spending outside the U.S. is occurring because
North America only has about 12 percent of the world's undiscovered oil
and gas reserves (IEA estimate), and because of limited resource access
to the most highly prospective areas in the United States. In addition,
some of our spending outside the U.S. (e.g., Qatar LNG, Venezuela,
Canada) will be to increase energy supplies to the U.S. in the form of
LNG or unconventional heavy oil.
CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER 2002)--CAPITAL EXPENDITURES AND
INVESTMENTS
----------------------------------------------------------------------------------------------------------------
Capital U.S. capital U.S. % capital
$MM expenditures & expenditures & expenditures &
investments \1\ investments \2\ investments
----------------------------------------------------------------------------------------------------------------
1995.......................................................... (1,456) (923) 63%
1996.......................................................... (1,544) (841) 54%
1997.......................................................... (2,043) (1,059) 52%
1998.......................................................... (2,052) (936) 46%
1999.......................................................... (1,690) (919) 54%
2000 *........................................................ (8,460) (7,707) 91%
2001 *........................................................ (10,054) (8,887) 88%
2002 **....................................................... (4,388) (2,043) 47%
2003.......................................................... (6,169) (2,493) 40%
2004.......................................................... (9,496) (2,520) 27%
2005.......................................................... (8,573) (3,140) 37%
-------------------------------------------------
Average..................................................... (5,084) (2,861) 56%
----------------------------------------------------------------------------------------------------------------
* 2000 Includes Alaska acquisition--($6,443MM), 2001 Includes Tosco Acquisition--($7,038MM).
** The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this table.
Sources:
\1\ Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2000
(ConocoPhillips 2004 Annual Report, page 108); 1999-1995 (Phillips 2001 Annual Report, page 95).
\2\ U.S. Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2002
(ConocoPhillips 2004 Annual Report, page 45); 2001 (ConocoPhillips 2003 Annual Report, page 49); 2000
(ConocoPhillips 2002 Annual Report, page 49); 1999 (Phillips 2001 Annual Report, page 47 adj. to exclude
discontinued ops.); 1998 (Phillips 2000 Annual Report, page 47 adj. to exclude discontinued ops.); 1997
(Phillips 1999 Annual Report, page 44); 1996 (Phillips 1998 Annual Report, page 42); 1995 (Phillips 1997
Annual Report, page 40).
Question 22. What percentage of your company's gross revenue was
collected in the United States in each of the last 10 years?
Answer.
CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER
2002)--SALES & OPERATING REVENUE
------------------------------------------------------------------------
U.S. %
Sales & U.S. sales sales &
$MM operating & operating operating
revenue \1\ revenue \1\ revenue
------------------------------------------------------------------------
1995.............................. 13,368 11,310 85%
1996.............................. 15,731 13,211 84%
1997.............................. 15,210 12,633 83%
1998.............................. 11,545 9,535 83%
1999.............................. 15,396 13,019 85%
2000.............................. 22,155 18,700 84%
2001.............................. 24,892 22,466 90%
2002.............................. 56,748 46,674 82%
2003.............................. 104,246 74,768 72%
2004.............................. 135,076 96,449 71%
2005.............................. 128,184 95,461 74%
-------------------------------------
Average......................... 49,323 37,657 76%
------------------------------------------------------------------------
Sources:
\1\ Sales & Operating Revenue, U.S. Sales & Operating Revenue. 2005 YTD
through September (ConocoPhillips 3Q, 10Q); 2004-2002 (ConocoPhillips
2004 Annual Report, page 97); 2001 (ConocoPhillips 2003 Annual Report,
page 97); 2000 (ConocoPhillips 2002 Annual Report, page 92); 1999
(Phillips 2001 Annual Report, page 83); 1998-1996 (Phillips 1998
Annual Report, page 67); 1995 (Phillips 1997 Annual Report, page 63).
Question 23. How much of your company's revenue collected in the
United States was used to pay for purchasing crude oil from OPEC
countries?
Answer.
CONOCOPHILLIPS U.S.--ANNUAL CRUDE OIL PURCHASES FROM OPEC COUNTRIES
[$ millions]
----------------------------------------------------------------------------------------------------------------
OPEC
purhcases
Purchases Total U.S. sales as a
Direct from OPEC crude oil and percent
Year purchases countries purchases operating of U.S.
from OPEC via third from OPEC revenue sales and
parties countries operating
revenues
----------------------------------------------------------------------------------------------------------------
2003................................................ $2,099 $2,723 $4,822 $74,768 6.4%
2004................................................ $2,558 $4,790 $7,348 $96,449 7.6%
2005................................................ $3,626 $5,666 $9,292 $95,461 9.7%
----------------------------------------------------------------------------------------------------------------
Question 24. Do you support S. 1794 or something like it to create
gasoline and jet fuel reserves to ensure stability of price and supply?
Should it be extended to diesel and other fuels like natural gas?
Answer. The holding and management of a strategic gasoline reserve
is complex and challenging, but deserves further study. Unlike the SPR
crude oil reserve that only needs to get crude to 140 refineries, half
of whose capacity are in three states, a strategic gasoline reserve or
reserves will have to supply more than 1,500 terminals across all
states. Also, unlike crude oil, it is difficult to store gasoline for
long periods of time as the inventory must by turned over seasonally to
match required products specifications and to avoid product (aging)
degradation. Location is very important, as it must be away from areas
that are likely to experience frequent supply logistics disruptions
such as power outages and hurricanes to avoid the potential loss of
power and disruptions to the distribution systems. The reserve must be
distributed across the country since it is impossible to predict when
and where there will be outages. Additionally, the numerous regional
and local fuels specification requirements severely complicate design
of strategic reserves due to the very large number of different grades
required in different locations around the United States. In addition,
the cost of storage is high so it is important to do a cost-benefit
analysis to determine whether the costs of holding this inventory are
worth the benefits of avoided disruption costs.
It is also important that this reserve not be used for price
management purposes but rather be saved for use when there is a
physical disruption to supplies. It would not ultimately be beneficial
to consumers to have the government remove the price signals when there
is a supply disruption. Price rises during a disruption play an
important role in the marketplace to moderate demand to avoid physical
shortages and attract additional supplies from around the world.
Question 25. On average for the last ten years, how much of what is
refined by your company in the U.S. stays in the U.S.?
Answer. In August, 2002, ConocoPhillips was formed from the merger
of Conoco, Inc. and Phillips Petroleum Company. This merger and
acquisition resulted in multiple accounting and computer systems,
making it impossible to provide 10 years worth of data in the short
time period provided. However, we were able to gather data from January
2004. Using data from January 2004, over 98 percent of the clean
products produced by our refineries stayed in the United States. Those
products are finished gasoline, gasoline blending components, diesel,
heating oil, kerosene and jet fuel.
Question 25a. What amount of refined product did your company
import in 2004 and in 2005?
------------------------------------------------------------------------
Imports in Bbls 2004 2005
------------------------------------------------------------------------
Alkylate......................................... 306,313 411,110
Butane........................................... 0 236,357
Reformate........................................ 339,545 405,341
Naphtha.......................................... 2,696,303 3,405,293
Isomerate........................................ 93,146 0
Gasoline blendstocks........................... 3,435,307 4,458,101
Diesel........................................... 264,622 419,751
Light cycle oil.................................. 0 126,369
Diesel......................................... 264,622 546,120
RBOB............................................. 1,831,202 2,523,945
Conv gasoline.................................... 2,182,254 3,578,795
Finished gasoline.............................. 4,013,456 6,102,740
----------------------
Total............................................ 7,713,385 11,106,961
------------------------------------------------------------------------
Question 25b. What are your assumptions about demand growth in
India in China?
Answer. As China and India continue to grow and modernize their
economies they will have relatively rapid energy demand growth. China
and India today consume approximately 9 million barrels per day, or
about 11 percent of world oil demand. We would agree with the U.S.
Department of Energy's forecast that between 2002 and 2015 oil demand
in these 2 countries will more than double. In 2015, China's share of
world demand will be about 14 percent. However, we have already seen a
substantial amount of this growth in the last two years, and the growth
rate is expected to moderate. A significant amount of demand growth in
the last year was due to the use of off-grid diesel generators
resulting from power shortages. As China adds more coal-fired and other
electric generation capacity, diesel demand use for purposes of power
generation will likely be reduced.
Natural gas presents a similar picture as oil for China and India
but demand is less advanced than oil use due to the lack of
infrastructure for distributing gas. According to the U.S. Department
of Energy, these two countries consumed a little over 2 trillion cubic
feet of natural gas in 2002, or 2.3 percent of worldwide demand of 92
trillion cubic feet. DOE projects that by 2015, these two countries
will be consuming over 5 trillion cubic feet, and by 2025, they will be
consuming over 9 trillion cubic feet or about 6 percent of the world's
natural gas consumption.
DOE projects natural gas to overtake coal as the second largest
source of energy by 2025. Growth in coal demand will be concentrated
primarily in China and India, both of which possess sizable coal
reserves. China and India today account for over 40 percent of global
coal demand, and this will grow to about 48 percent of total world coal
demand by 2025.
Question 25c. How have your investments in the United States
increased the energy security of the country?
Answer. ConocoPhillips has been aggressively investing in refining
and in developing new natural gas and crude supplies for the United
States. By increasing supplies, these projects are increasing energy
security in the United States.
The projects described below are all very large and will require
significant capital expenditures in the future.
Over the past five years, ConocoPhillips has spent $4.0
billion worldwide, of which $3.2 billion was spent
domestically, to expand and modernize our refineries and
upgrade marketing operations.
Going forward, we are planning an expanded incremental
investment program, whereby we expect to invest $4-5 billion,
on top of our other refinery investments of $1-2 billion per
year. This investment program is aimed at growing our U.S.
refining capacity by about 11 percent and improving our
capability of handling lower quality oils in order to make 15
percent more clean fuels such as gasoline, diesel and heating
oil by the year 2011. These expansions will add enough clean
fuels product to be the equivalent of adding one world-scale
refinery to our domestic refining system.
ConocoPhillips is making major investments in North American
Arctic natural gas through the Mackenzie Delta and Alaskan
North Slope pipelines. The initial development of Mackenzie
Delta will access about 6 trillion cubic feet of gas, which is
expected to come on stream in the year 2011 at approximately 1
billion cubic feet per day. As other fields are added, the
pipeline will have the capacity to be expanded to 1.8 billion
cubic feet per day. The total cost of this pipeline is
estimated to be at least $6 billion.
The Alaskan North Slope presently has an estimated 35
trillion cubic feet of natural gas, which would increase total
U.S. gas reserves by approximately 20 percent. When the
pipeline connecting this gas with the lower 48 market is
completed, about 4.0-4.5 billion cubic feet per day will be
added to natural gas supplies. This equates to about 8 percent
of present U.S. natural gas production. This project
exemplifies what we have been saying about capital-intensive
projects that require many years before we see a return on the
investment. The Alaska pipeline alone is expected to cost about
$20 billion and take ten years before the first cubic foot of
gas is sold on the market. In October 2005, ConocoPhillips
joined Governor Murkowski of Alaska in announcing that we have
reached an agreement in principle on terms and conditions that
would move the Alaskan natural gas pipeline closer to reality.
Once the agreement is completed by all gas owners, the Alaska
legislature will hopefully act on that agreement, passing it
quickly. While it is not a short-term solution, gas from Alaska
will, eventually, make a sizable contribution in addressing the
market problems we are anticipating for natural gas.
ConocoPhillips is also investing aggressively in bringing
liquefied natural gas (LNG) to the U.S. market. We are
progressing LNG projects in Qatar and Nigeria and aggressively
pursuing projects in Russia, Venezuela and Australia. These are
all multi-billion dollar projects. We expect to bring our first
cargo of Qatari gas to the United States in 2009. We are also
developing an LNG supertanker to bring gas to the United
States. We are participating in the construction of an LNG
regasification facility at Freeport, Texas. We are pursuing a
second LNG regasification terminal in Compass Port, offshore
Alabama, although it is currently bogged down in the permitting
process. Investments in these two facilities are expected to
total over $1.5 billion. We are also pursuing permitting of
regasification facilities on the East and West Coasts as well
as an additional Gulf Coast terminal.
To bolster U.S. crude supplies and improve energy security
through diversification of supply sources, ConocoPhillips is
expanding conventional crude production in Venezuela, and
continues to invest heavily in unconventional heavy oil
production in Venezuela and Canada. This crude supply will
likely come to the United States. Our company recently
announced that we will be partnering with a Canadian company to
develop the $2.1 billion Keystone pipeline, which will bring
over 400 thousand barrels per day of much needed Canadian heavy
oil production to our U.S. mid-continent refineries. We are
also building additional upgrading capacity in our refineries
to process unconventional heavy crude.
While we are aggressively investing in the United States, we
could do much more if not deterred by U.S. policies. Increased
resource access and permit streamlining changes could open new
opportunities for furthering our nation's energy security.
Question 26. What market signals will occur in advance of peaking
world oil production and what is the appropriate policy or set of
policies for the U.S. government to adopt when such signals occur?
Answer. Many of the ``signals'' commonly quoted as signs of
production peaking have alternative explanations and thus may be false
signals. For example, the reduction in reserve-to-production ratios can
be a sign of efficiency improvement, and doesn't necessarily mean that
production is peaking. Similarly, lower reserve additions after the
1980s reflect the fact that privatizations around the world opened up
known reserves for development so that the industry could bring
reserves to market without exploring as much with the associated risk.
Returns and investment in this industry are highly cyclical so it is
easy to mistake the downside of the investment cycle for a peak.
In addition, peak forecasts often assume static technology and
ignore the important role of technology in expanding the resource base
that can be economically produced. Peak predictions also often ignore
the role of unconventional oil and natural gas. For example, there are
estimated to be 7 trillion barrels of unconventional oil in place
(versus 3 trillion barrels of conventional) and two-thirds of that is
in North America. Recovery rates are relatively low today but
technological improvement will change that over time. Finally, peak
forecasts often fail to take into account that host government tax
rates may be reduced over time to offset rising costs in mature areas.
This will extend the economic life of fields.
To believe that the peak of global oil production was approaching,
we would want to see an acceleration of decline rates in existing
production and multiple years of high investment and drilling activity
without much of an increase in overall production. Trends in lower 48
natural gas production illustrate what happens when production
approaches peak. In the early 2000s, there was a 50 percent increase in
drilling rates and little appreciable production increase. Recovery
rates per well are dropping steeply and existing production is
declining at a rate of 30 percent per year, up from a rate of 15
percent per year in the early 1990s. This trend will continue if new
areas remain off limits for development.
It would be prudent to prepare for the day global production peaks
long before the signals occur. Governments around the world should be
supportive of the development of alternative energy sources and fuel
efficiency improvement today. When the signals do occur, we should see
sustained higher oil prices, which will help commercialize the new
technologies that have been developed.
______
Response to Written Questions Submitted by Hon. James M. Talent to
James J. Mulva
Question 1. The recent hurricanes have highlighted the need for
increasing refinery capacity, which was already operating at a tight
margin of 97 percent. While that is laudable for efficiency purposes,
it allows no room for error in case of sudden outages or demand
increases. What is the optimal amount of spare refining capacity to
ensure a reliable supply of finished petroleum products at stable
prices?
Answer. The U.S. refining industry operates at a very high level of
utilization and efficiency. In order to provide refined products at the
most economic prices to the consumer, the markets take advantage of
excess capacity outside of the U.S., allowing for relatively low-priced
product imports. (The U.S. has imported petroleum products routinely
for decades to meet consumer demand. In 2004, net gasoline imports were
about 800 thousand barrels per day (mbd) or 9 percent of market needs.)
Recently the U.S. experienced severe supply disruptions following
Hurricanes Rita and Katrina. These interruptions, while severe, were
also short-term in nature as demonstrated by gasoline markets self-
correcting to below pre-hurricane levels within a little over one
month. During the recent hurricane impact periods, U.S. gasoline
imports increased substantially, which helped restore the supply and
demand balance.
Furthermore, pricing impacts and inventory draws reflected these
same short-term supply disruptions, with impacts mitigated by the
proactive steps taken by the major oil companies to constrain wholesale
prices and dramatically increase supplies.
While the ``optimum'' will vary by location and how easy it is to
obtain alternative supplies, we believe, and prices reflect, that
global refining capacity has become too tight so we have plans in place
to add refining capacity. Going forward, we are planning an expanded
incremental investment program, whereby we expect to invest $4-5
billion, on top of our other refinery investments of $1-2 billion per
year. This investment program is aimed at growing our U.S. refining
capacity by about 11 percent and improving our capability of handling
lower quality oils in order to make 15 percent more clean fuels such as
gasoline, diesel and heating oil by the year 2011. These expansions
will add enough clean fuels product to be the equivalent of adding one
world-scale refinery to our domestic refining system.
We do not need any new government incentives to make these
investments. However, we do need thorough--but expedited--permitting
and regulatory environmental reviews so we can quickly make the
investments, thereby adding capacity and refined product supply.
Question 2. How has industry consolidation impacted the amount of
spare production and refining capacity?
The U.S. Federal Trade Commission in a study published in 2004
stated that ``mergers of private oil companies have not significantly
affected worldwide concentration in crude oil. This fact is important
because crude oil prices are the chief determinant of gasoline
prices.'' \2\ In the same report, the FTC concluded that despite some
increases over time, concentration for most levels of the petroleum
industry has remained low to moderate. This report also observed that
industry developments have lessened the incentive to be vertically
integrated throughout all or most levels of production, distribution
and marketing. Several significant refiners have no crude oil
production, and integrated petroleum companies today tend to depend
less on their own crude oil production. Thus, there has been a trend of
majors selling capacity to independent refiners. The FTC report
concluded that mergers have contributed to the restructuring of the
petroleum industry in the last two decades but have had only a limited
impact on industry concentration.\3\
---------------------------------------------------------------------------
\2\ U.S. Federal Trade Commission, Bureau of Economics, ``The
Petroleum Industry: Mergers, Structural Change, and Antitrust
Enforcement'', August 2004, page 12.
\3\ U.S. Federal Trade Commission, Bureau of Economics, ``The
Petroleum Industry: Mergers, Structural Change, and Antitrust
Enforcement'', August 2004, page 16.
---------------------------------------------------------------------------
There has been a reduction in the number of refineries being
operated but it is not related to mergers. Between 1973 and 1981,
government control on the pricing and allocation of crude oil favored
small refineries and provided incentives for companies to own and
operate small, inefficient refineries. The elimination of these
government controls in 1981 spurred the eventual exit of many
inefficient refineries. The number of domestic operable refineries
declined from 319 in 1980 to 149 in 2004. According to the FTC,
refinery closures overwhelmingly have involved small, relatively
unsophisticated facilities.\4\ The oil industry has done a commendable
job of expanding and increasing the utilization of existing refineries.
Despite the fact that the closure of inefficient refineries reduced the
total number of refineries by more than half since 1980, U.S. refining
capacity fell by only 6 percent, and this impact was more than offset
by efficiency improvements that allowed the industry to increase
refinery runs by 14 percent. Additionally, there has been substantial
excess capacity outside of the United States until recently, allowing
for relatively low-priced product imports.
---------------------------------------------------------------------------
\4\ U.S. Federal Trade Commission, Bureau of Economics, ``The
Petroleum Industry: Mergers, Structural Change, and Antitrust
Enforcement'', August 2004, page 7.
---------------------------------------------------------------------------
Other issues constraining capacity that don't relate to
consolidation are the historical weak returns in the refining industry
and the need to invest a great deal of capital for reducing refinery
emissions and making clean fuels. As a result of the strong economic
recovery in 2004 and spending focused on clean fuels rather than
expansion, demand growth during the recent economic recovery has
outpaced supply growth.
The two hurricanes exacerbated this tightness by disabling 5
million barrels per day (mmbd) or nearly 30 percent of the nation's
refining capacity at the peak (September 25, 2005, 4 mmbd shutdown for
Rita, 879 mbd shutdown from Katrina).
Question 3. Describe the degree of competition between refineries
for crude oil supplies and sales to retailers. What percentage of crude
oil processed in the U.S. is processed by integrated companies (i.e.,
those produce and refine) versus refined by independent refining
companies?
Integrated companies make up roughly 55 percent of total U.S.
refining capacity.\5\ The balance of U.S. refining is made up of very
large (e.g., Valero, the largest U.S. refiner) to much smaller
independent companies. ConocoPhillips utilizes only 10 percent of its
equity production in U.S. refineries. Like all other integrated
companies, ConocoPhillips must compete for the balance of crude
supplies from the same domestic and import markets as the independent
refining companies.
---------------------------------------------------------------------------
\5\ U.S. Department of Energy, EIA Website eia.doe.gov, Report of
Capacity of Operable Petroleum Refineries by State as of 1/1/05.
---------------------------------------------------------------------------
Integrated company `brands' make up roughly 60 percent \6\ of the
total U.S. retail gasoline markets. Much of this market share is made
up of branded jobbers (i.e., independent businesses that establish
their own pump prices). The balance of the U.S. retail market is made
up of independent and unbranded companies.
---------------------------------------------------------------------------
\6\ Lundberg Survey Incorporated, Share of Market Data, June 2004
(subscriber confidential).
Question 4. How has the amount of refining capacity tracked changes
in demand for gasoline and diesel over the last 30 years?
Note: A graph accompanying this question has been retained in
committee files.
Answer. The refining industry has historically not attracted
sufficient investment because of unattractive returns. Between 1990 and
2002, it had a ROCE of 5.2 percent versus 7.1 percent for the total
petroleum industry. Refining is highly capital intensive and the
industry spends a great deal on mandated emissions reduction and clean
fuels production, which generally do not have a return on investment.
Additionally, there has been substantial excess capacity outside the
U.S. until recently, allowing for relatively low-priced product
imports.
As a result of this low return, coupled with difficulties in
permitting, no grassroots refineries have been built in the U.S. since
the mid-1970s. For many of the same reasons, inefficient refineries
that were not economic in a free market (built during small refinery
entitlement program) were closed. However, the oil industry has worked
diligently to expand and increase the utilization of existing
refineries. Despite the fact that the closure of inefficient refineries
reduced the total number of refineries by more than half since 1980,
U.S. refining capacity fell by only 6 percent, and this impact was more
than offset by efficiency improvements that allowed us to increase
refinery runs by 14 percent.
While the U.S. refining industry has the potential for making
substantial amount of investment going forward in response to recent
increases in refining margins and provisions of the National Energy
Policy Act, substantial barriers remain for building grassroots
refineries. The biggest barrier is that future refinery margins are not
expected to be high enough to justify the high cost of grassroots
building. The cost of expanding existing capacity is about half that of
adding grassroots capacity so it is a more viable option. Additionally,
there is still a strong need to streamline the permitting process and
to provide more certainty to the future regulatory environment.
Question 5. Explain to me your company's plan to increase refining
capacity in the U.S. to meet the need for new refinery capability.
Answer. We have announced a multi-year capital investment plan to
increase capacity and improve utilization at nine of our twelve U.S.
refineries. Going forward, we are planning an expanded incremental
investment program, whereby we expect to invest $4-5 billion, on top of
our other refinery investments of $1-2 billion per year. Measured in
terms of improved output, the investments in the aggregate are
anticipated to yield the equivalent of adding a world-scale refinery to
the company's U.S. refining system.
Question 6. EPAct 2005 removed the requirement to include
oxygenates from gasoline, largely because of concerns over the use of
MTBE. What is the impact on the price of removing oxygenates from
gasoline?
Answer. While EPAct 2005 removed the statutory requirement for
oxygen in the federal formula for Reformulated Gasoline (RFG),
immediately in California and after 270 days for the balance of the
country upon enactment by the President of the United States, EPAct
2005 did not affect the U.S. Environmental Protection Agency's
regulatory requirement for oxygen in RFG. We understand from public
statements by the EPA that the requirement continues to exist unless
and until the Agency acts to remove it through regulatory process.
In any case, we have not attempted nor do we believe it possible to
estimate the impact, if any, on the price of removing oxygenates from
gasoline. This is dependent in a major way upon the availability of
other components, demand, imports, and other environmental constraints
imposed on non-oxygenated gasoline. We note that the EPA's Tier 2
gasoline sulfur standards are stepping down from a 300 parts per
million cap limit to an 80 parts per million cap limit beginning
January 1, 2006 and that the federally imposed renewable fuel standard
also becomes mandatory beginning in the same time frame. The regulatory
provisions defining the renewable program remain to be proposed. These
two additional constraints may very well overwhelm any impact of
removing the oxygen mandate from RFG when ultimately allowed by the
EPA.
Question 7. Are there other oxygenates that can be used in place of
MTBE, such as using ethanol to make ETBE, and how does the cost of such
alternative additives compare to the cost of gasoline?
Answer. There may be other suitable oxygenates that can be used in
gasoline in the United States. However, state government limitations,
e.g. California and New York, suggests that ETBE and other ethers or
heavy alcohols may not be considered acceptable substitutes in the
United States. The only oxygenate of sizable market availability that
we are aware of is ethanol. The cost of ethanol varies substantially
but has historically been above the cost of that to produce and supply
non-ethanol containing gasoline. Delivered cost of ethanol is dependent
in a major way upon availability, subsidies, demand, imports, raw
material costs and other features known best by the ethanol producers.
Question 8. Have you studied the use of ETBE, the cost of
converting MTBE plants and how long it would take to do so, and whether
ETBE avoids the leakage/water contamination problems that were caused
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE
and use it to increase the volume of gasoline produced by a barrel of
oil compare to the cost of expanding existing or adding new refinery
capability?
Answer. In the past, we have considered the blending characteristic
of ETBE in gasoline and its impact on octane and other specification
values for gasoline. However, we have not recently considered the cost
of converting any MTBE plant to ETBE production because state
government limitations, e.g. California and New York, suggest that ETBE
and other ethers or heavy alcohols may not be considered acceptable
substitutes in the United States. Additionally, we are not aware of any
current ETBE blending in gasoline in the United States.
Question 9. What, if anything, is preventing your company from
using ETBE in place of MTBE?
Answer. State government limitations, e.g. California and New York,
suggest that ETBE and other ethers or heavy alcohols may not be
considered acceptable substitutes in the United States.
______
Response to Written Questions Submitted by Hon. Gordon H. Smith to
James J. Mulva
Question 1. I have a bill, S. 1743, to give the Federal Trade
Commission, additional authority to prevent and punish price gouging in
the aftermath of a major disaster. My bill provides effective authority
to the Federal Trade Commission to protect consumers from being
victimized in the wake of a disaster without hampering the normal
functioning of the free market. It even recognizes that there are
legitimate reasons why prices may increase. Do you think that this
consumer protection authority should be available to the FTC?
Answer. We concur with the statements of FTC Chairman Majoras, who
testified before these Committees on November 8, 2005. Chairman Majoras
noted that the large price-spikes reported in a few instances after the
hurricanes quickly corrected themselves through normal market
operations and that price-gouging legislation can actually harm
consumers if it dampens natural market prices, which serve as an
important market signal. Chairman Majoras concluded that federal price-
gouging legislation ``would unnecessarily hurt consumers'' and that
``[e]nforcement of the antitrust laws is the better way to protect
consumers.''
Question 1a. Would this serve as a deterrent to price gouging by
individual retailers?
Answer. We believe the FTC Act already empowers the FTC to prohibit
unfair trade practices that are detrimental to consumers.
Question 2. Can you tell me why diesel prices continue to remain
significantly higher than gasoline prices in Oregon?
Answer. U.S. diesel prices are higher than gasoline prices due to a
tighter global diesel supply-demand balance, which stems from the
strong trend in Europe toward dieseling the passenger car fleet and
robust diesel demand in Asia. Global and U.S. diesel demand have been
and will likely continue to grow at a faster rate than gasoline demand.
Thus, the trend of global diesel prices moving above gasoline prices is
not likely to be reversed even when immediate supply losses from the
hurricanes are restored.
The long-term strengthening diesel prices was exacerbated by the
hurricanes, which temporarily shut down nearly 30 percent of U.S.
refining capacity at the peak. While the U.S. made up lost gasoline
supplies through imports and specification waivers, diesel fuel did not
have the same options. Diesel demand and price strength in Europe made
it difficult for the U.S. to attract as much diesel as gasoline
supplies. European refineries have excess gasoline production capacity
due to dieselization so they were able to provide additional gasoline
supplies. In addition, diesel prices gain strength in the winter as
diesel is blended and/or re-graded into the heating oil market.
Oregon must compete in the global and regional markets for diesel
supplies and it often doesn't have as attractive logistics for
obtaining products as other regional ports. Since Oregon does not have
refineries, the state must import all of its fuels from states such as
Washington, California or from foreign countries. Most fuel supplies
are imported from Washington via pipeline (up to its maximum capacity)
and marine shipments from California or foreign locations into
Portland. While Oregon has logistical disadvantages that raise its
supply cost, Oregon is mostly experiencing the same supply and demand
and pricing trends that are being experienced by U.S. and global
markets.
______
Response to Written Questions Submitted by Hon. Jim Bunning to
James J. Mulva
Question 1. Some analysts believe that OPEC is approaching its
current oil production capacity. Given this, are oil companies looking
at alternative sources of energy, such as liquid fuels made from coal,
in order to expand their business and maintain energy supplies for the
United States? Please include a review of the level of investment your
company is making this year and the projected investment over the next
three years in coal to liquid fuels initiatives.
Answer. We have not seen evidence that OPEC is approaching its peak
capacity. Nevertheless, we believe it is important to develop new
technologies to supplement existing supplies and ease the transition
once peak oil production is reached. The points below highlight some of
our activities in this area. The information reflects activities of
both Conoco and Phillips prior to our merger in 2002 and the merged
company since then. We have omitted forward-looking spending because it
is confidential, competitively sensitive, and could mislead
shareholders because there are a number of factors and approvals that
need to occur before this spending can occur.
Coal-to-Liquids Activity (CTL)
Includes:
Specific Coal-to-products activities
E-Gas gasification technology activities
Related Gas-to-Liquids (GTL) activities
CTL and Related Technology Development
Offered support to University of Kentucky/Purdue/Southern
Illinois University to utilize Wabash River gasification
facility for the FT Development Center activities outlined in
the Energy Policy Act of 2005
Various proprietary analysis and lab work
Project Support
Examples included below. This excludes proprietary studies and
those that we are contractually committed to not disclose.
Completed feasibility study for gasification project in
Illinois to refuel ammonia plant and provide syngas to coal-to-
liquids demonstration plant (Rentech Development project with
Royster-Clark in East Dubuque, 5,000 barrels per day Fischer-
Tropsch liquids)
Considering proposals for feasibility studies to 6
prospective coal-to-liquids facilities.
Presented at Gasification Technologies Conference that
ConocoPhillips was developing an E-Gas CTL template and
reference plant.
E-Gas Technoloqy Development Proqram Expenditures
Spent $16 MM from 2003-2005.
Potential E-Gas/CTL Projects
_______________________________________________________________________
Program Description
1. Technology Development--Coal to Gasoline
2. Technology Development--Coal to Clean Diesel
3. Technology Development--CTL Joint effort with DOE
a) Support initial studies with universities
b) Demonstration unit at Wabash (50% cost share)
4. Project Development efforts--CTL Td Party licensing
a) Development of E-Gas coal-to-liquids template
b) Proposal preparation for commercial CTL requests
5. Potential Project Development
_______________________________________________________________________
ConocoPhillips Fischer-Tropsch (F-T) Technology Development Program--
Related to GTL Program
Highlights:
Developed proprietary reactor system for conversion of
synthesis gas to diesel via Fisher-Tropsch technology
Developed proprietary upgrading scheme to maximize
production of distillates from F-T derived materials
Participated in DOE program to better understand and improve
performance of F-T derived fuels
Developed significant intellectual property portfolio for F-
T technology
Operated 400 barrel per day demonstration plant in Ponca
City, Oklahoma for more than one year
Continuing technology development and optimization at lab
and pilot plant scale, including catalyst development
Actual Proqram Expenditures since Program Inception
Note that spending for programs in individual years is
confidential, proprietary information that cannot be disclosed
for competitive reasons or due to confidentiality agreements
------------------------------------------------------------------------
------------------------------------------------------------------------
1997............................... ........... Catalyst screening and
laboratory set-up
1998............................... ........... Catalyst development
at laboratory scale;
Preliminary flowsheet
development
1999............................... ........... Continued lab scale
development and
initial pilot plant
work
2000............................... ........... Technology development
at lab and pilot
plant scale
2001............................... ........... Continued technology
development at lab
and pilot plant
scale;
Ultraclean fuels
program work with DOE
using FT diesel
2002............................... ........... Continued technology
development at lab
and pilot plant
scale;
Continuation of DOE
fuels program;
Construction of
Demonstration Plant
for scale-up of
technology
2003............................... ........... Continued technology
development at lab
and pilot plant
scale;
Continuation of DOE
fuels program
Complete Demo Plant
construction and
begin operations of
it
2004............................... ........... Continued technology
development at lab
and pilot plant
scale;
Full operations of
Demonstration Plant
2005............................... ........... Continued technology
development at lab
and pilot plant
scale;
Operated Demonstration
Plant
Optimization of
technology
Total............................ $184 MM Total portion of
actual GTL
expenditures that
apply to CTL
------------------------------------------------------------------------
Question 2. I have been concerned with the lag time between the
wholesale cost of a barrel of oil and the retail price of a gallon of
gasoline. As we saw following the hurricane, in an ascending market
where wholesale oil prices increase, there is a lag period of a few
days before retail gas prices reflect this change. Similarly one would
expect a lag in a descending market. My concern is that retail prices
are not dropping as quickly as they rose, relative to the change in oil
prices. Could you explain why price movements vary during a complete
market cycle and whether you believe any part of the energy industry is
unfairly profiting from this price lag?
Answer. The price of crude oil impacts the price of gasoline.
However, additional factors such as regional spot markets affect retail
street prices as well. Crude oil is sold on the world market. It is
priced based on its own buyers and sellers. Directionally, retail pump
prices are impacted by crude oil prices; however the impact may be
delayed because of regional gasoline spot markets or may be
overshadowed by regional spot market events. Crude oil represents
roughly 50 percent of the cost per gallon of gasoline, so ultimately an
effect is seen albeit, delayed.
During the recent hurricanes, refined product supply was impacted
more than crude supply. The United States lost nearly 30 percent of its
total refining capacity at the peak and this substantially reduced the
industry's ability to supply the market with gasoline and diesel.
Refined product prices rose as a result of this imbalance to moderate
demand, attract new supplies from overseas and restore the supply/
demand balance. The hurricanes also shut down one million barrels per
day of Gulf of Mexico crude production. This event normally would
create a significant shortage of U.S. crude oil supply and a large,
rapid associated increase in crude oil price. However, with about two
millions barrels per day of U.S. refining down for much of the same
period and a release of crude from the U.S. Strategic Petroleum
Reserve, a severe crude shortage did not develop and the crude price
increase was tempered.
The branded pump price changes lag spot product price changes. This
minimizes dramatic upward changes in cost for independent marketers and
consumers. The result is that during a rising market, branded customers
are insulated from steeply rising costs. Except for 356 retail
locations (including fee-operated stores), ConocoPhillips does not sell
at the retail level. This accounts for approximately 4.3 percent of
total gallons sold through our U.S. marketing operations. Pump prices
are set in the marketplace with independent marketers posting prices
based on their business economics and supply and demand fundamentals.
In a rising market, pump prices, set by independent marketers, lag spot
product prices. This ultimately lessens the impact on the driving
public. The result for suppliers during a rising market is negatively
impacted marketing margins.
The appearance of retail prices rising more than they later fall
(price asymmetry) can be misleading. Because of time lags in the
gasoline distribution system, retail prices may continue to rise even
after wholesale prices have begun falling, giving the appearance of
pattern price asymmetry. However, when allowance is made for the lagged
adjustment times, the perceived pattern asymmetry may disappear. The
GAO studied gasoline price asymmetry and concluded that during a market
price shock, retail gas prices would rise and fall in price
symmetrically, with over half the price adjustment occurring in the
first month, but with complete price adjustment to shocks taking as
long as 17 weeks.\7\
---------------------------------------------------------------------------
\7\ U.S. General Accounting Office, Energy Security and Policy:
Analysis of the Pricing of Crude Oil and Petroleum Products, Report
GAO/RCED-93-17, U.S. Government Printing Office (Washington, DC, March
1993).
Question 3. Boosting our domestic energy production is vitally
important not only to our economy but also to our national security.
Many of the countries we import oil from today are unstable,
jeopardizing the reliability of sustained production. Please provide a
chart for each of the last five years reflecting the percentage of your
exploration and production budget that is invested in the United States
versus that invested overseas. Please also provide a chart reflecting
your current projections of the percentage of your exploration and
production budgets that will be allocated to projects in the United
States versus overseas for the next five years.
Answer. The chart below provides historical information for U.S.
and international exploration and production capital expenditures.
While not yet approved, it is anticipated that the company's Board of
Directors will approve various capital expenditures during the next
five years with the result that between 18-27 percent of new capital
expenditures will be located in the United States.
While expenditures tend to shift with opportunities outside the
United States, note that a significant portion of the capital
expenditures outside of the United States will be directed towards
increasing supplies that will go to the United States (e.g., LNG
projects, Canadian oil sands).
E&P CAPITAL EXPENDITURES
[$Millions]
----------------------------------------------------------------------------------------------------------------
U.S. E&P International Total E&P U.S. E&P
capital E&P capital capital capital
Year expenditures expenditures expenditures as % of
and and and total E&P
investments investments investments capital
----------------------------------------------------------------------------------------------------------------
2000 \1\.................................................. (7,394) (726) (8,120) 91%
2001 \1\.................................................. (1,354) (1,162) (2,516) 54%
2002 \2\.................................................. (1,205) (2,071) (3,276) 37%
2003...................................................... (1,418) (3,090) (4,508) 31%
2004...................................................... (1,314) (3,935) (5,249) 25%
2005 \3\.................................................. (1,221) (3,797) (5,018) 24%
----------------------------------------------------------------------------------------------------------------
\1\ Phillips heritage only prior to merger as reported.
\2\ COP after August 30, 2002. Phillips prior to that.
\3\ Through September 30, 2005.
Note: Year 2000 includes Alaska acquisition. The merger of Conoco and Phillips in August 2002 is not considered
an acquisition in this table.
Question 4. The disruption caused by the recent hurricanes
displayed the United States' vulnerability when it comes to domestic
energy supply and production. What suggestions do you have to
strengthen our energy supply and production capability?
Answer. This country needs additional refining capacity, pipelines,
and other critical energy infrastructure to be added in the United
States or in markets that can serve the United States. The private
sector will likely make these investments without need of any new
government incentives now that the market is providing signals that
this capacity is needed. However, the industry does need governments at
all levels to be thorough--but at the same time--to streamline
permitting and environmental review processes so we can make these
investments and add energy supplies.
We think serious consideration should be given to the issue of
access to resources. ConocoPhillips is not pursuing the opening of
national parks, the Everglades and other such sensitive areas to energy
development. But with the entire East and West Coasts, the Eastern Gulf
of Mexico and key areas in Alaska all closed to entry, it is
understandable why supply/demand is tight. The industry's only access
to new offshore development remains the Central and Western Gulf of
Mexico.
The Eastern Gulf of Mexico probably has more natural gas potential
for consumers than about any place in the lower 48 states. When outer
continental shelf lease sale 181 was withdrawn from development,
another key prospect for finding badly needed natural gas reserves was
removed from consideration. We would encourage the Senate to consider
reinstating that sale and revisiting access in other areas. Our
industry has the technological know-how and the track record necessary
to protect Florida's treasures and, at the same time, explore and
produce in the Eastern Gulf in a safe and environmentally responsible
manner.
The Rocky Mountain region of the country is another area where new
natural gas production can make a difference. But the leasing and
permitting process has hampered development in areas such as the San
Juan basin of New Mexico and the Powder River basin to the north.
Funding and staffing appear to be improving but continue to be key
challenges in these areas. Local BLM personnel are doing a commendable
job with the resources they have but more funding for permitting and
related staffing must be directed to those areas.
Our company is particularly concerned about permitting and siting
issues associated with building new LNG receiving terminals. LNG offers
one of the most promising options for meeting the growing natural gas
needs of American consumers in the near term. The permitting and
approval of new regasification terminals are occurring significantly
slower than we expected, and many terminals are being delayed or may be
cancelled altogether due to local opposition. We are concerned that all
of the new terminals will be sited in the U.S. Gulf Coast because of
difficulties in permitting terminals closer to other consuming regions.
Recent hurricanes demonstrated the need to diversify the location of
key energy infrastructure.
The siting of LNG terminals was addressed in earlier energy policy
legislation. However, the Federal Government, the states and the
individual localities where these facilities are planned need to have
continued dialogue and cooperation on siting issues. There also needs
to be better cooperation among the various federal agencies charged
with evaluating and permitting these facilities.
Our energy supply and production capability can only be
strengthened by the development of all energy sources--coal, including
coal gasification, nuclear, alternative energy with appropriate
environmental safeguards--as well as conservation and efficiency
standards. We will need to include all of these to diversify supply
sources and put some needed slack back in our system.
Question 5. It has been suggested that the United States consider
developing a strategic gasoline and natural gas reserve, similar to
Strategic Petroleum Reserve we currently have. Some analysts suggest
that such reserves may minimize price spikes in these commodities
during periods of market supply disruptions. What are your views on
whether a strategic natural gas or gasoline reserve would be feasible
and whether they might help minimize price increases during periods of
market uncertainty?
Answer. The holding and management of a strategic gasoline reserve
is complex and challenging, but deserves further study. Unlike the SPR
crude oil reserve that only needs to get crude to 140 refineries, half
of whose capacity is in three states, a strategic gasoline reserve or
reserves will have to supply more than 1,500 terminals across all U.S.
states. Also, unlike crude oil, it is difficult to store gasoline for
long periods of time as the inventory must by turned over seasonally to
match required products specifications and to avoid product (aging)
degradation. Location is very important as it must be away from areas
that are likely to experience frequent supply logistics disruptions
such as power outages and hurricanes to avoid the potential loss of
power and disruptions to the distribution systems. The reserve must be
distributed across the country since it is impossible to predict when
and where there will be outages. Additionally, the numerous regional
and local fuels specification requirements severely complicate design
of strategic reserves due to the very large number of different grades
required in different locations around the United States. In addition,
the cost of storage is high so it is important to do a cost-benefit
analysis to determine whether the costs of holding this inventory are
worth the benefits of avoided disruption costs.
It is also important that this reserve not be used for price
management purposes but rather be saved for use when there is a
physical disruption to supplies. It would not ultimately be beneficial
to consumers to have the government remove the price signals when there
is a supply disruption. Price rises during a disruption play an
important role in the market place to moderate demand to avoid physical
shortages and attract additional supplies from around the world.
A strategic natural gas reserve is feasible, although a
sophisticated analysis would be advisable to determine the potential
effectiveness. Working gas storage capacity in the United States
exceeds 3.3 trillion cubic feet. Storage capacity could be expanded to
facilitate a strategic reserve. Cost for such an expansion would be
influenced by various factors including the type of storage facilities
required, injection/withdrawal capacities, pipeline interconnections
and the cost to acquire the gas to be placed in storage. Gas storage
facilities include depleted reservoirs, aquifers, salt caverns and LNG
storage tanks. Each type of facility has different technical and
economic characteristics. Key factors that would determine if strategic
gas reserves could influence price volatility in the manner desired
include: (1) location of stored gas relative to load centers, (2) the
rate at which stored gas could be delivered to the pipeline system, and
(3) the ability of the downstream pipeline infrastructure to move gas
to market without constraint.
Question 6. China is becoming a bigger world oil player. This not
only has tightened the world oil market but also has produced national
security concerns for us. What concerns or problems do you see have
arisen since China became a bigger world energy player?
Answer. China is reaching a phase of its economic development that
is commodity-intensive, and per-capita income in some regions has
reached a level that allows Chinese consumers to purchase cars and
appliances, resulting in sharply rising energy consumption. But there
are still many consumers in China who do not have access to adequate
energy resources. For example, according to the International Energy
Agency, there are over 700 million people in China who rely on
traditional biomass for cooking and heating today. The World Health
Organization estimates that, each year, 1.6 million women and children
in developing countries are killed by the fumes from indoor biomass
stoves. Over half are in China and India. As incomes rise in developing
countries, households typically switch to modern energy services for
cooking, heating, lighting and electrical appliances and transport
fuels for personal mobility. An important means to reducing global
poverty is to increase developing country access to energy. However,
rapid growth in demand in China and other developing countries is
tightening the global energy supply/demand balance. The United States
can do its part in allowing affordable energy to citizens of the U.S.
and the world by promoting conservation and the more efficient use of
energy. The United States can also play a role in transferring more
efficient energy technologies to China and other developing countries.
Question 7. While there have been expansions and efficiency gains
at existing refineries, no refinery has been built in the United States
in 30 years. Since the oil companies are now making record earnings,
are there plans to build new refineries in the United States?
Answer. We don't have knowledge of other companies' expansion plans
but ConocoPhillips is planning an expanded incremental investment
program, whereby we expect to invest $4-5 billion, on top of our other
refinery investments of $1-2 billion per year. This investment program
is aimed at growing our U.S. refining capacity by about 11 percent and
improving our capability of handling lower quality crude oils in order
to make 15 percent more clean fuels such as gasoline, diesel and
heating oil by the year 2011. These expansions will add enough clean
fuels capacity to be the equivalent of adding one world-scale refinery
to our domestic refining system.
While the U.S. refining industry has the potential for making a
substantial amount of investment going forward in response to recent
increases in refining margins, substantial barriers remain for building
grassroots refineries. The biggest barrier is uncertainty about future
investment returns. Financial returns over the past three decades have
usually been very low. While returns in the last two years have greatly
improved, it takes about five years to build a refinery, increasing the
risk that future margins many not cover investment costs. The cost of
expanding existing capacity is a more viable option because expansions
cost about half that of adding grassroots capacity and they can be done
much more quickly.\8\ Additionally, there is still a strong need to
streamline the permitting process and to provide more certainty in the
future regulatory environment. The International Energy Agency
concluded in its latest World Energy Outlook that in OECD North America
it is ``virtually impossible to build a grassroots refinery,'' citing
``environmental restrictions and local resistance.'' \9\
---------------------------------------------------------------------------
\8\ Bear Steams, Not in My Backyard Report--The Prospects and
Pitfalls of a Grassroots Refinery, October 4, 2005.
\9\ International Energy Agency, World Energy Outlook 2005,
November 2005, page 97.
Question 8. The 2005 Energy Bill implemented a controlled phase-out
of MTBE. Many companies, however, are planning on completely halting
its use. How will a sudden halt of the use of MTBE affect the gasoline
market and refineries?
Answer. A refinery using MTBE today to produce RFG and
discontinuing its use will be impacted by the reduction of a high
octane/low RVP blendstock used for gasoline production. Should the U.S.
EPA remove the oxygen mandate in RFG, a refinery would have various
options in addressing this loss of blendstock, including the blending
of other hydrocarbon products and/or possibly the addition of ethanol,
reducing delivered pool octane by shifting product slates and/or
grades. How the market reacts to these changes remains indeterminate
and highly dependent upon other regulatory and/or market constraints on
the system as well as demand for the product types.
Question 9. I have noticed very large differences between the price
of gasoline in different areas of the country. For example, I recently
saw gasoline in northern Virginia that was much more expensive than
gasoline in northern Kentucky. Please explain why there can be such a
significant difference in gasoline prices in different areas of the
country.
Answer. Although price levels vary over time, U.S. Department of
Energy EIA data indicate that average retail gasoline prices tend to
typically be higher in certain states or regions than in others. DOE
attributes these differences to the following factors:
Proximity of supply--Areas farthest from the Gulf Coast (the source
of nearly half of the gasoline produced in the U.S. and, thus, a major
supplier to the rest of the country), tend to have higher prices. The
proximity of refineries to crude oil supplies can even be a factor, as
well as shipping costs (pipeline or waterborne) from refinery to
market.
Supply disruptions--Any event which slows or stops production of
gasoline for a short time, such as planned or unplanned refinery
maintenance can prompt bidding for available supplies. If the
transportation system cannot support the flow of surplus supplies from
one region to another, prices will remain comparatively high.
Competition in the local market--Competitive differences can be
substantial between a locality with only one or a few gasoline
suppliers versus one with a large number of competitors in close
proximity. Consumers in remote locations may face a trade-off between
higher local prices and the inconvenience of driving some distance to a
lower-priced alternative.
Environmental programs--Some areas of the country are required to
use special gasolines. Environmental programs, aimed at reducing carbon
monoxide, smog, and air toxics, include the federal and/or state-
required oxygenated, reformulated, and low-volatility (evaporates more
slowly) gasolines. Other environmental programs put restrictions on
transportation and storage. The reformulated gasolines required in some
urban areas and in California cost more to produce than conventional
gasoline served elsewhere, increasing the price paid at the pump.
State and local taxes--There are also substantial differences in
tax rates between states. For example, Rhode Island has a gasoline tax
of 30 cents per gallon, while the state of Georgia has a gasoline tax
of 7.5 cents per gallon.
The price differences between markets are normally a result of
differences in the balance of supply-demand and the cost of supply. An
area with restricted supply or higher cost supply will generally have
higher prices than an area with balanced supply-demand and/or lower
cost of supply.
The comparison between prices in northern Virginia and northern
Kentucky can be explained by the first two factors--proximity of supply
and supply disruptions. After the recent hurricanes, U.S. Gulf of
Mexico refining was significantly impacted and a very large percentage
of area refining capacity (close to 30 percent of U.S. capacity at
peak) shut down. In addition, major distribution and pipeline systems,
like the Colonial product pipeline, were also shut down as a result of
flooding and loss of power from the hurricanes. This situation
restricted gasoline production and supply from the Gulf Coast refining
center to the East Coast and parts of the Mid-continent. In the example
referenced of northern Virginia and northern Kentucky, the impact of
Gulf Coast refining and Colonial pipeline shutdowns created a
significant shift or difference of supply-demand balances between these
two areas. Northern Virginia, which derives its supply from the
Colonial pipeline, is at the end of the pipeline. Thus, this area lost
a significant volume of gasoline supplies due to the refinery and
pipeline outages caused by the hurricanes. This loss of supply, and the
fact the demand was not impacted by the hurricanes, created a shortage
of supply for the area, resulting in higher gasoline prices. In
contrast, northern Kentucky is supplied by local/regional refineries
and pipelines not directly impacted by the hurricanes. Thus, this area
did not experience the same degree of supply disruption. The net result
was greater spot and pump price increases in Virginia, due to more
direct impacts from the hurricanes and loss of normal supply.
Question 10. Below are several questions on oil and the commodities
futures market: When was oil first traded on the world-wide commodities
futures market?
Answer. The two major world-wide futures markets for trading crude
oil are the New York Mercantile Exchange (U.S.) and the
InterContinental Exchange (ICE--formerly known as the International
Petroleum Exchange in London). The International Petroleum Exchange was
founded in 1980 and the first futures contract on gas oil (heating oil)
was introduced the following year. The International Petroleum Exchange
launched Brent futures in June 1988.
The New York Mercantile Exchange (NYMEX) pioneered the development
of energy futures and options contracts. The heating oil contract
started trading in 1978, light sweet crude oil in 1983 and unleaded
gasoline in 1984.
Question 10a. Would the price of oil be affected if oil was taken
off the commodities futures market and no longer traded?
Answer. The futures market is helpful in having an efficient, low-
cost market. First, the futures market provides market liquidity and
price (discovery) transparency. Second, the futures market provides a
means to `hedge' physical market risk. And third, the futures market
provides a valuable means to manage `credit' risk. If the futures
market did not exist, all three of these benefits would be lost and the
price of oil could increase. Without the ability to hedge, the risk of
future physical price increases must be built into the current (prompt)
prices as insurance against these potential price increases. Without
the ability to manage counterparty (contract performance) `credit
risk,' the cost of this risk will likely be built into the current
physical prices as insurance against non-performance (bad debt). And
further, the lack of price discovery would make the market
inefficient--as it was in the past. The only available prices prior to
the futures market were company/producer postings. These postings were
set by a very few entities (i.e. lacked liquidity and price discovery)
and actual sales/purchases physical prices were commonly discounts or
premiums to published postings. (These transactions were often company
confidential and not transparent to the general market). This made it
extremely difficult for buyers and sells to know what `fair market
value' was at any point in time or at different locations. Also, this
gave considerable leverage (market knowledge) to a relatively few
companies who executed a sufficient number of transactions to
understand the market.
Question 10b. Would oil then be bought and sold as a true supply
and demand product?
Answer. The oil market today is highly liquid and efficient, with
prices normally set by supply and demand conditions, including seasonal
specification changes. The price is also impacted by factors that can
affect future supply and demand and cost (e.g., transportation,
storage, risk, etc.) Eliminating the connection to the futures market
will make the current markets less efficient and directionally increase
prices from today. First, the futures market provides market liquidity
and price (discovery) transparency.
Second, the futures market provides a means to `hedge' physical
market risk. And, third the futures market provides a valuable means to
manage `credit' risk. If the futures market did not exist, all three of
these benefits would be lost and the price of oil could increase.
Without the ability to hedge, the risk of future physical price
increases must be built into the current (prompt) prices as insurance
against these potential price increases. Without the ability to manage
counter party (contract performance) `credit risk', the cost of this
risk will likely be built into the current physical prices as insurance
against non-performance (bad debt).
______
Response to Written Questions Submitted by Hon. Pete V. Domenici to
James J. Mulva
Question 1. What are you doing to bring oil prices down?
Answer. Oil prices have already been reduced significantly since
Hurricanes Katrina and Rita made landfall as the temporary period of
higher prices attracted new supplies and brought the market back in
balance. According to U.S. Department of Energy data, the spot price of
WTI crude peaked at nearly $70 per barrel on August 30, 2005, after
Hurricane Katrina, but has since fallen below levels immediately
preceding the hurricane to $58 per barrel on November 22. Similarly,
U.S. average gasoline prices reached their peak at over $3.00 per
gallon during the week of September 5 following Hurricane Katrina.
Subsequently, the average gasoline price fell to $2.15 per gallon
during the week of November 28. This price was last observed in June
2005, well before the hurricanes.
The following are actions ConocoPhillips has or is taking to bring
additional supplies to the market, which should contribute to the
reduction of prices:
Increased West Coast, Gulf Coast and Mid-continent gasoline
and distillate (jet & diesel) products supplies by deferring
refinery turnarounds and re-directing supplies to impacted
areas
Increased gasoline and distillate imports where feasible to
re-supply short markets from what is normally brought in during
the September time period
Worked with the Federal Government on temporary waivers of
required product specifications to increase available supplies.
Diligently worked to quickly restore all ConocoPhillips shut
in natural gas and crude oil Gulf of Mexico production and
refining capacity immediately after the hurricanes
Affected ConocoPhillips plants worked diligently to restore
temporary power and operations that allowed rapid blending and
shipping of all available products stranded in storage just
prior to the hurricanes.
Held gasoline rack prices constant for a few days
immediately after the hurricanes and then lagged spot prices by
50 percent in the state of emergency areas.
Although constrained by anti-trust laws from giving them
specific direction on re-sale pricing, we encouraged customers
(independent marketers, dealers and resellers) to exhibit
restraint following the hurricanes.
Longer term we are:
Pursuing a very aggressive capital program to expand
domestic refining capacity and increase U.S. gasoline and
distillate domestic supply. This investment program is aimed at
growing our U.S. refining capacity by about 11 percent and
improving our capability of handling lower quality oils in
order to make 15 percent more clean fuels such as gasoline,
diesel and heating oil by the year 2011. Planned expansion is
the equivalent of adding the capacity of one world-class
refinery to the U.S.
Bolstering U.S. and global oil supplies by expanding
conventional crude production in Venezuela, Russia and the Far
East.
Producing unconventional heavy oil in Venezuela and Canada
and continuing to invest in unconventional heavy-oil production
in Canada. This crude is intended to come to our refineries in
the United States. Our company recently announced that we will
be partnering with a Canadian company to develop the $2.1
billion Keystone pipeline to bring over 400 thousand barrels
per day of much-needed Canadian heavy oil production to our
U.S. mid-continent refineries. We are also building additional
upgrading capacity in our refineries to process unconventional
heavy crude.
Developing technology for turning natural gas into a slate
of clean refined oil products, which will enhance clean diesel
supplies.
Conducting research and development on alternative energy
sources. We recently had a successful experiment with renewable
diesel, and we are conducting other tests to evaluate
technologies to produce gasoline and other liquid fuels from
non-petroleum feedstock.
Expanding the business of gasoline and blending stock
imports to the United States, which will increase gasoline
supplies, particularly in the Northeast region of the United
States.
Question 2. What is the relationship between the price of oil that
Americans are paying and the profits you are making?
Answer. As discussed in our testimony, there is a strong
relationship between the price of crude oil and gasoline prices. Our
industry is a commodity industry with associated high price volatility
driven by supply and demand. That also means that our earnings are
highly volatile. However, it is important to note that even though the
third quarter of 2005 was the highest price environment our industry
has experienced in 22 years, adjusted for inflation, our profit margin
of 7.7 cents per dollar of sales was near or below the average of all
industries. The petroleum industry for the last 20 years has had
returns on equity on average below the S&P industrials.
Question 3. The question I hear most from people is how is the
price of oil set? Many Americans think oil companies are rigging prices
to reap big profits. How would you respond to that?
Answer. Crude oil prices are set in the global market place where
thousands of buyers, sellers, traders and financial players come
together in both physical (spot) and futures markets to buy and sell
crude oil. Several crude oils with large traded volumes have become the
established regional markers for pricing all other crude. The major
marker crude oil in the United States is West Texas Intermediate (WTI)
in Cushing, Oklahoma, sold on a spot basis and on the New York
Mercantile Exchange. In Europe, the major marker crude oil is North Sea
Brent crude, which is sold in Sullom Voe, Scotland on a physical and
forward basis and on the Intercontinental Exchange (ICE) in London. In
the Middle East and Asia, the major marker crude oils are Dubai and
Oman. All other crude oils are priced in relation to these markers,
adjusting for quality and location differentials. Quality differentials
are determined by the refining value of that crude (e.g., priced below
WTI if it has higher sulfur content or if it produces less high value
clean products and more low-value heavy products). Location
differentials are determined by the shipping costs of the specific
crude to the major market for that crude oil.
Because of these highly transparent marker prices, it is highly
unlikely that crude oil will be traded at prices that vary
significantly from these markers, adjusting for quality and location
differences, because either the buyer or seller would not be willing to
pay or receive something above or below the ``marker'' price. If the
seller asks for too high a price, the buyer will purchase the crude
elsewhere. If the buyer offers too low a price, the seller will sell
elsewhere.
Collectively the international oil majors \10\ have only a 14.5
percent market share of global oil production. In addition, trade of
marker crude oils is many times greater than the physical volume
produced. For example, the 2005 year-to-date paper trade for WTI has
averaged 241 million barrels per day, which is substantially higher
than the approximately 450 thousand barrels per day of physical WTI
production. This large volume of trade provides a highly liquid and
very competitive market. Given this liquidity and transparency, oil
companies cannot exert significant influence on the price of crude oil.
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\10\ Total crude and NLG production, including syncrude, in 2004
for ConocoPhillips, Royal Dutch Shell, British Petroleum, ExxonMobil,
Chevron and Total.
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Spot \11\ prices for crude oil are determined by current short-term
and anticipated supply/demand conditions. In the last few years, prices
rose as a result of the global economic recovery and exceptionally
strong oil demand growth. This strong demand growth occurred at a time
when OPEC had little spare oil production capacity. The tight supply/
demand balance has been exacerbated by market concerns about increased
geopolitical risk in a number of oil-producing countries and hurricanes
shutting in U.S. crude production.
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\11\ Spot prices are wholesale prices for physical delivery of the
crude or product set at a number of industry transfer points, such as a
location on a pipeline or at a harbor.
---------------------------------------------------------------------------
Spot product (e.g., gasoline and diesel) prices tend to follow
crude oil prices since the cost of crude oil is a large part of the
cost of these products, and both crude oil and products prices are
driven by the same global market fundamentals. A recent report by the
U.S. Federal Trade Commission \12\ indicated that changes in crude oil
prices have accounted for approximately 85 percent of the increases and
decreases in motor gasoline prices over the last 20 years. Product
markets are becoming increasingly global because of increased trade to
rectify product supply/demand imbalances that may occur in any region.
As a result, supply and demand in one region can have an impact on
prices in another region. For example, as a result of the hurricanes in
the United States, gasoline prices went up in Europe and Singapore.
---------------------------------------------------------------------------
\12\ Gasoline Price Changes: The Dynamic of Supply, Demand, and
Competition: A Federal Trade Commission Report (2005).
---------------------------------------------------------------------------
There are a number of factors that may result in periodic
dislocations between crude oil and product prices, such as seasonal
demand, a tight product supply/demand balance, and product
specification changes. The recent hurricanes strengthened product
prices relative to crude because it was easier to replace lost crude
oil than refined products. This was particularly true for diesel fuel
due to strong European demand limiting their ability to export
additional diesel to the United States. The United States was able to
get substantial additional gasoline imports from Europe, and that is
why gasoline prices dropped swiftly to pre-hurricane levels.
Retail product prices lag spot prices in part because some product
goes through a succession of resales by any combination of traders,
jobbers, lessee dealers, or independent marketers. A U.S. Department of
Energy study \13\ on gasoline price pass-through from the spot to
retail level last year determined that significant changes in spot
prices appear to show up in retail prices with some time delay, and
somewhat dampened.
\13\ U.S. Department of Energy, Energy Information Administration,
Michael Burdette and John Zyren, ``Gasoline Price Pass-through,''
January 2003.
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Question 4. Americans are being burdened with high oil, natural
gas, and gasoline prices while you all are raking in record profits.
What do you say to those people that blame you for this and say that it
is unfair?
Answer. Our profits did increase as a result of higher energy
prices, but energy products are commodities with prices set in
international and regional markets by thousands of players based on
supply/demand conditions. Prices rose in response to the reduction in
supplies resulting from the hurricanes but these price increases
attracted gasoline supplies from all over the world, which swiftly
moved gasoline prices below pre-hurricane levels. The increase in
earnings has also led to increased investment in new supplies, which
should ultimately lower prices for the long-term.
ConocoPhillips has been reinvesting our earnings in developing new
supplies. We have had earnings of about $10 billion through the first
nine months of 2005--about $1 billion a month, but our capital
investments were also close to $1 billion a month. In fact, over a
three-year timeframe, using 2003-2004 reported results and 2005
annualized year-to-date third-quarter actual results, ConocoPhillips'
earnings are about $26 billion but investments are just over $26
billion. Mistaking the size of our earnings for a windfall fails to
realize the enormous levels of investment and risk required to achieve
those earnings and bring new energy supplies to the market.
Most people don't realize how volatile profits and returns are in
this industry due to significant swings in crude prices. A recent study
by PIRINC \14\ showed that returns on investment in domestic oil and
gas production averaged just under 8 percent between 1985 and 2003,
with individual years ranging from lows of near zero in 1986 and 1998
to 18 percent in 2000 due to energy price swings.
---------------------------------------------------------------------------
\14\ Petroleum Industry Research Foundation, ``Lessons From the
Hurricanes'', November 2005, page 7.
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Today we have the highest price environment our industry has
experienced in 22 years, adjusted for inflation. Yet despite being at
what some consider as the top of the cycle, ConocoPhillips' profit
margin of 7.7 cents per dollar of sales in the third quarter of 2005 is
near or below the average of all industries. On average, over the
course of the investment cycle, the petroleum industry has had sub-par
returns. Between 1990 and 2002, the average return on equity for the
petroleum industry was 11.3 percent, lower on average than the 12.6
percent return for the S&P industrial companies.\15\
\15\ U.S. Department of Energy, Energy Information Administration,
Financial Reporting System.
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Question 5. Americans want to know if it is not costing so much
more to produce a barrel of oil, why are prices rising so high?
Answer. Increases in the cost of finding, developing and producing
a barrel of oil are a large factor in the price increases we have seen
in recent years. Steel prices doubled between the end of 2002 and end
of 2004, and they are a large cost component for our industry. In the
last three years, onshore drilling costs in the U.S. rose 52 percent
and the cost of tubular goods rose by 125 percent. These components
represent about half the cost of onshore wells. Costs have been rising
in part because the oil services industry has not been able to keep
pace with the spending increases by the petroleum industry. However,
there is also a longer term trend of costs increasing because our
industry doesn't have access to the lowest cost reserves, including
reserves in the United States. Thus, our industry is going after more
remote, deeper water, more complex and lower quality reserves that
inherently cost more than what we were developing a decade ago. Both
Goldman Sachs and Sanford Bernstein recently estimated that oil
replacement costs are presently around $50 per barrel, when they were
closer to $20 per barrel in the 1990s.\16\ We believe that some of this
replacement cost is related to the high market price environment and
will come down as prices come down.
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\16\ Bernstein Research Call, November 4, 2005, page 2; Goldman
Sachs, Jeff Currie, ``The sustainability of higher energy prices, April
2005, page 21.
Question 6. What is your company's response to proposals for
enactment of a Windfall Profits Tax?
Answer. ConocoPhillips does not see a windfall. Our earnings, as
well as earnings from the rest of the petroleum industry, even in the
3rd quarter of 2005, were in line with other industries. In cents per
dollar of sales, ConocoPhillips made 7.7 cents similar to Caterpillar
(7.4 cents) and IBM (7.0 cents), and well below GE (11.2 cents),
McDonalds (13.8 cents), American Express (17.0 cents) Coca-Cola (21.2
cents), Eli Lilly (22.1 cents), Google (24.2 cents), Merck (26.2 cents)
and Citigroup (33.2 cents) in the third quarter of 2005.
In the case of ConocoPhillips, we have been reinvesting an amount
equal to all of our earnings, and any additional tax, would reduce our
ability to invest. Reducing industry investment would sow the seeds for
the next supply crunch. This tax would also reduce the competitiveness
of the U.S. oil and gas industry vis-a-vis foreign competitors.
Commodity prices are highly volatile, and the petroleum industry
won't be able to attract capital if governments shave off the top but
don't help on the bottom. As an example of this volatility, just seven
years ago, the price of WTI was $11/bbl.
Rather than impose a punitive tax that would discourage domestic
production, it makes more sense to encourage domestic investment by
opening up highly prospective areas for exploration and development,
such as the Eastern Gulf of Mexico, for natural gas drilling.
Question 7. Do you believe that Americans are dangerously dependent
on oil and its refined products?
Answer. The United States consumes 25 percent of the world's oil,
almost equal to consumption in all of Europe and Eurasia combined. In
the developing countries of the world, oil consumption is rising as
their per capita income rises and they can afford a better lifestyle.
The large demand in the United States, combined with rapid growth in
some developing countries, is tightening the supply/demand balance and
putting upwards pressure on prices. It is important that the United
States conserve oil and use it more efficiently to relieve some of the
supply/demand pressure.
The United States is part of a global energy market and should
continue to foster improving the development and transparency of energy
markets.
Question 8. The International Energy Agency's recent Global Outlook
report expresses concern about world energy supplies and reliance on
the Middle East for oil. Do you think the IEA's anxiety is justified?
Answer. This recently published study by the International Energy
Agency concluded that, ``the world's energy resources are adequate to
meet the projected growth in energy demand in the Reference Scenario.''
The study goes on to say that cumulative energy-sector investment needs
are estimated at about $17 trillion (2004 dollars) over 2004-2030,
about half in developing countries. The IEA stated that financing the
required investments in non-OECD countries is one of the biggest
challenges posed. Our perspective is that these investments can be
made, if 1) private industry is allowed access to resources and 2)
governments who own these resources and set the rules by which
infrastructure can be developed, maintain an attractive investment
climate (e.g., stability of fiscal regimes and terms, rules of law,
streamlined regulatory processes).
While it is not IEA's base or reference case, the agency's study
has a deferred investment scenario for Middle East and North African
producing nations, which results in lower supplies and higher prices.
However, IEA's analysis also indicates that these producing countries
would lose out financially were investment to be deferred because the
price increase would fail to compensate for lower export volumes
resulting from reduced demand.
In our view, the major reason that production capacity hasn't been
expanding faster in these countries is because the production wasn't
needed up until very recently. Few countries can afford to develop
capacity and have it sit idle. Looking forward, we are concerned that
there is a potential for misunderstanding between producing and
consuming nations. Producing countries become very concerned when they
hear consuming nations talk about drastically reducing the demand for
their product, and they will then likely hesitate to expand supplies
rapidly. They want to know that the demand will be there before they
make multi-billion dollar investments. Thus, we would underline the
importance of the IEA's recommendation to deepen the consumer-producer
dialogue to ``reconcile their interests and achieve mutually beneficial
outcomes.'' \17\
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\17\ International Energy Agency, World Energy Outlook 2005,
November 2005, page 51.
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______
Response to Written Questions Submitted by Hon. Lisa Murkowski to
James J. Mulva
Question 1. In your agreement on an Alaska natural gas pipeline
that you are negotiating with the State of Alaska under the state's
Stranded Gas Act, do you anticipate making a firm commitment to develop
the Alaska gas pipeline project or do you anticipate accepting an
agreement that will only involve a series of spending and work
commitments? If the latter is the case, how long will it be before a
binding construction commitment deadline is reached?
Answer. ConocoPhillips has been diligently pursuing the Alaska Gas
Pipeline Project for a number of years and is committed to continuing
this effort. We have reached an agreement in principle with the State
of Alaska on the base fiscal terms for the project, and this agreement
includes significant spending and work commitments. After the fiscal
contract is complete, we will initiate steps to secure the state and
federal permits necessary to begin construction. The actual date a
commitment to construct is made depends in large measure upon the date
these permits are issued, and whether there are any legal challenges to
these permits.
Question 2. If there is a concern about tying up your investment
capital in a single project, if a pipeline company presented you with a
proposal to take all of the risk of construction of the Alaska pipeline
project and to ship your gas at a reasonable tariff, would you commit
the gas you control to that pipeline within a reasonable time period?
If not, why?
Answer. ConocoPhillips is investing in many projects to bring
additional supplies of natural gas, LNG and refined products to United
States consumers. We are prepared to invest in the Alaska Natural Gas
Pipeline project. We are not limiting investment capital to any single
project.
Question 3. In your companies' view, is it less risky to invest
billions of dollars in new LNG facilities to import natural gas from
foreign sources, than to invest in the Alaska gas line project. If not,
why are you investing in LNG projects before making a firm commitment
to the Alaska project?
Answer. ConocoPhillips believes that many new sources of natural
gas will be necessary to meet future natural gas demand in the United
States. Consequently, in addition to the Alaska Natural Gas Pipeline
project, we are investing in the MacKenzie Delta gas pipeline and other
gas exploration and development projects in the United States and
Canada, as well as LNG opportunities around the world. None of these
investments are being made at the expense of the Alaska project.
Question 4. While all of your companies are global in scope, this
nation is concerned about its reliance on foreign sources of crude oil.
Does it make sense for the United States to increase its reliance on
foreign LNG while allowing Alaska's natural gas reserves to continue to
remain in the ground?
Answer. The United States needs to develop both a significant
number of LNG import projects and Alaskan natural gas reserves if U.S.
natural gas energy needs are to be met. Even successful development of
Alaskan natural gas will in no way eliminate the need for a significant
increase in LNG imports.
The United States currently consumes around 22 trillion cubic feet
(Tcf) of natural gas annually. The National Petroleum Council estimates
that, by 2025, U.S. natural gas consumption will have risen to about 28
Tcf. The U.S. Department of Energy's corresponding prediction is that
U.S. natural gas consumption will exceed 30 Tcf by 2025.
Where will the gas supply necessary to meet this demand come from?
Based on assumptions of sustained high natural gas prices, which would
continue to stimulate U.S. domestic drilling activity, the NPC and DOE
both estimate that, by 2025, U.S. domestic natural gas production will
still be maintained at around today's level of 19 Tcf. However, many
independent consultants estimate that domestic production is likely to
be considerably lower than this figure, especially if natural gas
prices fall and domestic drilling becomes less economic. Some industry
analysts believe that U.S. production may well fall below 16 Tcf by
2025.
Whichever predictions turn out to be correct, current forecasts
indicate that required imports (the gap between U.S. demand and U.S.
domestic production) are likely to be at least 9 Tcf annually by 2025.
If Alaska North Slope (ANS) gas reserves are developed, the massive
ANS pipeline will provide around 1.8 Tcf of additional gas annually. It
is hoped that the MacKenzie Delta pipeline proposed from northern
Canada will provide a further 0.6 Tcf annually. However, even if these
reserves are developed and current Canadian imports of around 3 Tcf are
maintained, the United States will still be facing an import deficit of
about 3.6 Tcf annually. Thus, even if all available sources of pipeline
gas are developed, including Alaskan reserves, a significant volume of
LNG imports will be required to ensure that U.S. consumer demand is
met.
In summary, it is not a question of `choosing' either Alaskan gas
or LNG. Both are required if U.S. consumer demand is to be met.
______
Response to Written Questions Submitted by Hon. Ron Wyden to
James J. Mulva
Question. All over America, the oil industry drives up the price at
our gas pumps by redlining and zone pricing. ``Redlining'' is when your
companies draw a phony line around a community to lock out competition
and raise prices for the consumers. ``Zone pricing'' is plain old
discrimination and it takes place when one oil company supplies gas to
several gas stations located near each other and one station is charged
much more than the others for the same type of gas. This drives
stations out of business, reducing choice and raising prices for
consumers. To help hurting consumers at our gas pumps, will your
company commit to stop redlining and zone pricing? Yes or no?
Answer.
Redlining--ConocoPhillips has not and does not engage in any
practice whereby its marketers are precluded from branding or reselling
ConocoPhillips motor fuels to retail outlets in any discreet geographic
area or region of the country. ConocoPhillips' marketers have non-
exclusive territories and can compete for the resale of motor fuels to
branded retail outlets anywhere marketers believe in their own business
judgment they can economically resell motor fuels.
Zone Pricing--Zone pricing is a methodology whereby competitive
discounts and allowances are given to individual service station
dealers in response to lower retail prices of competitors with whom the
service station dealer competes. This practice has repeatedly been
found to be consistent with relevant laws governing marketplace
competition. State and Federal Court opinions, and studies of zone
pricing practices by the Federal Trade Commission, have concluded that
appropriate use of zone pricing is pro-competitive, and that such
practices comport with the principles of the Robinson-Patman Act which
permits pricing differences that reflect a good faith effort to meet
competition. ConocoPhillips' use of zone pricing has comported, and
will comport, with applicable law.
Response to Written Questions Submitted by Hon. Maria Cantwell to
James J. Mulva
Question 1. I'm aware that the cost of crude oil is driven by the
world market and that its cost is currently significantly above
historic averages. But I'm not aware of any substantive increases in
the cost of producing crude oil, the cost of refining it into various
petroleum products such as gasoline and diesel, and the cost of
transportation of refined products to markets. Through the end of
September 2005, the price of crude had increased 40 percent in 2005
while gasoline prices increased almost 80 percent. If the percent
difference in the prices isn't pure profit, please explain to me how
you account for the difference in the substantially lower increase in
crude oil when compared to gasoline.
Answer. Increases in the cost of finding, developing and producing
a barrel of oil are a large factor in the price increases we have seen
in recent years. Steel prices doubled between the end of 2002 and end
of 2004, and they are a large cost component for our industry. In the
last three years, onshore drilling costs in the U.S. rose 52 percent
and the cost of tubular goods rose by 125 percent. These components
represent about half the cost of onshore wells. Costs have been rising
in part because the oil services industry has not been able to keep
pace with the rapid spending increases by our industry. Shipping rates
for large crude carriers (VLCCs) also tripled between 2002 and 2004,
raising the cost of imported crude. However, there is also a longer
term trend of costs increasing because our industry doesn't have access
to the lowest cost reserves, including in the United States. Thus, our
industry is going after more remote, deeper water, more complex and
lower quality reserves that inherently cost more than what we were
developing a decade ago. Both Goldman Sachs and Sanford Bernstein
recently estimated that oil replacement costs are presently around $50
per barrel, when they were closer to $35 per barrel in the early 2000s
and $20 per barrel in the 1990s.\18\ We believe that some of this
replacement cost is related to the high market price environment and
will come down as market prices come down. Costs have also been rising
for refining. According to the Nelson-Farrar Composite Refinery
Operating Index and Construction Cost Index, between 2001 and 2004,
operating costs have increased 14 percent and construction costs
increased 16 percent.
---------------------------------------------------------------------------
\18\ Bernstein Research Call, November 4, 2005, page 2; Goldman
Sachs, Jeff Currie, ``The sustainability of higher energy prices, April
2005, page 21.
---------------------------------------------------------------------------
Using data published by the U.S. Department of Energy, the spot
price of WTI crude rose by 41 percent from January-September 2004 to
January-September 2005 (from $39.25 to $55.52/barrel). During this same
time period, the U.S. Gulf Coast spot price for regular gasoline went
up by 38 percent (from $1.16 to $1.59 per gallon). The retail gasoline
price increase in the Gulf Coast went up by only 24 percent during the
same time period ($1.72 to $2.13 per gallon). It is also important to
remember that the hurricanes shut in nearly 30 percent of total U.S.
refining capacity at the peak, and that 10 percent of Gulf refining
capacity is still shut in (as of November 28). Despite this reduced
supply capability in the Gulf Coast, retail gasoline prices in the Gulf
fell by 18 percent since the end of September and are presently
significantly below pre-hurricane levels.
Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to
149. Further, no new refineries have been built in the U.S. since 1976.
In 1981, the 321 refineries had a capacity of 18.6 million barrels a
day. Today, the remaining 149 refineries produce 16.8 million barrels a
day. I recognize the difficult financial, environmental, and legal
considerations associated with the location and construction of new
refineries. But I fail to understand the closure of existing refineries
even if they required investment to enhance their efficiency and
production capability unless, of course, this mechanism is being used
to increase the price of gasoline and other refined products. Please
help me understand why you would shut down refineries in the face of
the supply and demand situation. What conditions would have to exist
for you to invest in new refining capacity? I have heard the industry
claim that up to $48 billion has been used on capital expenditures for
existing refineries. If those investments were not used for capacity
increases, what were they used for?
Answer. According to the Federal Trade Commission, between 1973 and
1981, government controls on the pricing and allocation of crude oil
favored small refineries and provided incentives to companies to own
and operate small, inefficient refineries. The elimination of these
government controls in 1981 spurred the eventual exit of many
inefficient refineries, which also faced high investment needs in order
to meet increasingly stringent emission and clean fuel requirements.
According to the FTC, refinery closures overwhelmingly have involved
small, relatively unsophisticated facilities.\19\ These refineries
probably could not compete in U.S. and global products market under
free market conditions.
---------------------------------------------------------------------------
\19\ U.S. Federal Trade Commission, Bureau of Economics, ``The
Petroleum Industry: Mergers, Structural Change, and Antitrust
Enforcement'', August 2004, page 7.
---------------------------------------------------------------------------
To consider investing in a grassroots refinery in the United
States, there would have to be substantial improvements in the
permitting process and we would have to be convinced that refinery
margins and returns would be significantly higher than they were
historically on a sustained basis.
Our company today is one of the largest refining companies in the
United States. Over the last ten years, we have made significant
investment in our refineries. Our capital programs have focused on the
business objectives stated below:
Improve mechanical integrity and utilization
Meet environmental and fuels standards while maintaining
capacity
Infrastructure improvements to ensure the long-term
viability of our assets
Modernization programs for instrumentation and controls
Updating technology of individual processes
Adding conversion capacity for lower quality crude
processing
Adding incremental throughput capacity.
The average annual capital spend for our U.S. refining system has
increased by roughly 50 percent when comparing the period of 1997-2001
versus 2002 through projected 2006.
1997-2001 (1) = $640MM/Year
2002-2006 Projected (2) = $965 MM/Year
Notes: (1) Approximate Capital Spend for Conoco, Phillips and
Tosco refineries. (2) ConocoPhillips Capital Spend excluding
the planned Strategic Investment Program to invest $4-5 billion
from 2006-2011 on top of other refinery investments of $1-2
billion per year.
In the period of 2002-projected 2006, the capital spend includes an
average of roughly $400 MM/Year for the $2 Billion Clean Fuels program.
This program builds extensive facilities to meet the EPA regulatory
requirements for Low Sulfur Gasoline (LSG) and On-Road Ultra Low Sulfur
Diesel (ULSD). Our program for Clean Fuels has focused on meeting the
new fuel regulatory requirements while maintaining our capacity of
clean product production.
Going forward, our company has announced a multi-billion dollar
program to be implemented over the next five years. While this
Strategic Investment Program is underway, our ongoing capital spending
will continue for infrastructure improvements, environmental and fuels
compliance, and modernization of our plants.
Question 3. The recent hurricanes resulted in the need to import
substantial refined products such as gasoline, diesel fuel and aviation
fuel to meet U.S. demand. The question has been raised as to whether
the country should develop a strategic reserve of finished petroleum
products. What would be your reaction if the Federal government either
directly or by way of contract with the private sector sought to create
a strategic reserve of finished petroleum products? Since these
products have a limited shelf-life, one proposal is to obtain and
operate a number of refineries and have the products be used by the
Federal government. Appreciate your comments on this proposal.
Answer. The holding and management of a strategic gasoline reserve
is complex and challenging, but deserves further study. Unlike the SPR
crude oil reserve that only needs to get crude to 140 refineries, half
of whose capacity are in three states, a strategic gasoline reserve or
reserves will have to supply more than 1,500 terminals across all
states. Also, unlike crude oil, it is difficult to store gasoline for
long periods of time as the inventory must by turned over seasonally to
match required products specifications and to avoid product (aging)
degradation. Location is very important as it must be away from areas
that are likely to experience frequent supply logistics disruptions
such as power outages and hurricanes to avoid the potential loss of
power and disruptions to the distribution systems. The reserve must be
distributed across the country since it is impossible to predict when
and where there will be outages. Additionally, the numerous regional
and local fuels specification requirements severely complicate design
of strategic reserves due to the very large number of different grades
required in different locations around the United States. In addition,
the cost of storage is high so it is important to do a cost-benefit
analysis to determine whether the costs of holding this inventory are
worth the benefits of avoided disruption costs.
It is also important that this reserve not be used for price
management purposes but rather be saved for use when there is a
physical disruption to supplies. It would not ultimately be beneficial
to consumers to have the government remove the price signals when there
is a supply disruption.
While the concept of adding refinery capacity to improve the U.S.
balance of domestic supply relative to total demand appears to be sound
public policy, getting the Federal government into the refining
business may not be the most efficient (cost effective) alternative.
Federal government products demand is fairly evenly distributed across
the U.S. To supply Federal government demand will require solving the
logistics and distribution issues inherent in this proposal. The U.S.
industry accomplishes this by `exchanging' products between refinery
supply locations and pipeline/terminal demand locations across the
country. Similar arrangements are possible between Federal government
and private enterprises. However, the most efficient (lower cost)
option remains the removing of current barriers to expansion
(permitting) and encouraging the continued growth of the existing
private U.S. refining industry.
The private sector expanded refining capacity modestly in recent
years because it wasn't needed given surplus global capacity and the
ready availability of low-cost product imports. With two years of
strong demand growth, particularly in Asia, the global refining balance
is now tight and new capacity is needed. The market is now providing
the appropriate signals for private investment to build more capacity.
As a consequence, there is no need for the government to own capacity.
Question 4. Given the recent profitability of the oil industry, I
am interested to learn more on the disposition of these profits,
particularly to enhance both production and refining capacity. Are any
of these profits being used to enhance production and refining capacity
for the benefit of other countries? What fraction of your profits is
being invested for production and for refining? What percentage of
profits has been used for stock buybacks and mergers and acquisitions?
Although ConocoPhillips' absolute dollar earnings for the first
nine months of 2005 appear large because of the size and scope of the
company's operations, the company's net income as a percentage of total
revenues earned was only 7.5 percent. (Over the last three years, the
company's net income as a percentage of total revenues averaged only
4.2 percent.)
With respect to how the company has reinvested its earnings, the
table below shows that we reinvested at a rate of 120 percent of
earnings in 2003, into our Exploration and Production (E&P) and
Refining and Marketing (R&M) segments. In 2004, we began investing in
LUKOIL, an international integrated oil and gas company headquartered
in Russia. Combining that investment with the investments in our R&M
and E&P segments, our reinvestment percentage was 114 percent of
earnings in 2004 and 77 percent of earnings through September 30, 2005.
We started a modest share repurchase program in early 2005 that has
resulted in stock repurchases of $1,165 million, equivalent to about 12
percent of earnings, through September 30, 2005.
CAPITAL EXPENDITURES AND INVESTMENTS IN E&P AND R&M AND LUKOIL STOCK PURCHASES AS A PERCENTAGE OF NET INCOME
2003 THROUGH YTD 2005
[Millions of Dollars]
----------------------------------------------------------------------------------------------------------------
% of net
Capital income used
Capital expenditures Purchases for E&P/R&M
expenditures & investment Purchases of LUKOIL capital
Year Net & investment in E&P and of shares shares as expenditures
income in E&P and R&M as a in LUKOIL a % of & investment
R&M percent of net and LUKOIL
net income income share
purchases
----------------------------------------------------------------------------------------------------------------
2003................................... $4,735 $(5,687) 120% ......... ......... 120%
2004................................... $8,129 $(6,593) 81% $(2,649) 33% 114%
2005................................... $9,850 $(6,093) 62% $(1,523) 15% 77%
----------------------------------------------------------------------------------------------------------------
Question 5. You've all said profits are cyclical, and that your
companies have also suffered from the volatility of the oil markets.
Would your stockholders be better served if domestically produced oil
was sold at a fixed rate that included a generous profit margin above
the production, refining, and distribution costs?
Answer. While reduced price volatility would make it a lot easier
to run a business, shareholders have invested in our stock because they
want to be exposed to energy price risk. Some of them may own our stock
and other commodity stocks in order to hedge stock and bond portfolios,
given that there has historically been a negative correlation between
stocks and bonds and commodity prices.
We would be uncomfortable making investments based on promises of
``guaranteed'' returns because our projects often have lives of 20
years or more, and we would not be certain that those fiscal terms
would be upheld in a different political climate.
Finally, this approach would not lower the average price of energy
for consumers unless additional lower-cost reserves were made
available.
The best, and most transparent, way to ensure that supply matches
demand is to let the market work.
Question 6. Do you believe that global warming is occurring? Do you
believe that man-made activities have a role in this phenomenon? How
will global warming impact your companies in term of added costs for
oil and gas development, or allow access to new areas for oil and gas
development?
Answer. ConocoPhillips recognizes that human activity, including
the burning of fossil fuels, is contributing to increased
concentrations of greenhouse gases (GHG) in the atmosphere, which can
lead to adverse changes in global climate. While the debate continues
over the extent of human contributions and the timing and magnitude of
future impacts, we are committed to taking action now to begin
addressing the issue.
In 1997, an international conference on global warming concluded an
agreement, known as the Kyoto Protocol, which called for reductions of
certain emissions that contribute to increases in atmospheric
greenhouse gas concentrations. The United States has not ratified the
treaty codifying the Kyoto Protocol but may in the future ratify,
support or sponsor either it or other climate change related emissions
reduction programs. Other countries where we have interests, or may
have interests in the future, have made commitments to the Kyoto
Protocol and are in various stages of formulating applicable
regulations. Because considerable uncertainty exists with respect to
the regulations that would ultimately govern implementation of the
Kyoto Protocol, it currently is not possible to accurately estimate our
future compliance costs under the Kyoto Protocol, but they could be
substantial.
ConocoPhillips' U.K. and Canadian businesses are actively preparing
for GHG regulations in those countries, beginning in 2005 and 2008,
respectively. Since the start of 2005, ConocoPhillips' facilities
across Europe have been subject to the European Union's emissions
trading program. Our commercial organization is preparing to trade
CO2 allowances in order to optimize ConocoPhillips' net
emissions position for businesses in Europe. The trading group will
focus on minimizing the cost of procuring any additional allowances
required to meet compliance and maximizing the value of any excess
allowances.
In addition to regulation, other potential long-term risks
associated with climate change include the impact of climate itself and
climate policy on energy demand and commodity prices, increased
operating expense due to rising fuel prices and a changing physical
operating environment. There are also potential reputation and informal
societal license-to-operate issues that could arise for businesses and
industries whose products or processes are associated with high levels
of greenhouse gas emissions.
ConocoPhillips is pursuing several innovative business
opportunities that could result in GHG emission reductions within the
company, industry or for our customers. These include CO2
sequestration, co-generation, coal/petroleum coke gasification, bio-
diesel manufacture and energy efficiency improvements.
Question 7. Is it accurate that United States LNG terminals in
Massachusetts and Maryland are only operating at half capacity? Do you
believe if these plants were operated at a higher capacity it would
change the market dynamics that determine the current price?
Answer. ConocoPhillips does not own or operate any existing
regasification terminals in the United States. However, it would not
surprise us if existing regasification terminals are operating at low
utilization rates. The reason lies in a combination of two factors.
First, global LNG supply is currently constrained, so there is
insufficient LNG supply available to meet potential worldwide demand.
Natural gas demand has risen rapidly during 2005 in countries such as
Spain, Italy, France, Korea and India. At the same time, LNG supplies
have not grown as quickly as expected. In particular, operational
problems at LNG supply projects in countries such as Nigeria, Egypt,
Trinidad and Australia have resulted in supply shortfalls.
Second, and more importantly, there is a world market for LNG
supplies, so of the limited volumes available worldwide, those volumes
that are not dedicated to a certain market under long term contract
will flow to the market that results in the highest netback pricing. So
far this year, we have seen a willingness of buyers in other countries
(Japan and Spain) to pay LNG prices that exceed equivalent U.S. netback
prices. As a consequence, owners and capacity holders of U.S.
regasification terminals have not been able to secure sufficient LNG
volumes to achieve high utilization. There are a number of projects
presently underway to bring dedicated LNG supplies to the U.S. market.
However, these projects will not be completed before the 2008-2009 time
period.
Question 8. Please state for the record your company position on
fuel economy standards. Are there other incentives that you support
that you feel are better for consumers than the Corporate Average Fuel
Economy paradigm?
Answer. When addressing what can be done to promote conservation
and efficiency, there are few solutions that would have as much impact
as higher fuel efficiency standards. This is an issue that should be
kept on the table to determine if it makes sense. We would suggest
prudence, and caution against overreaching, in view of the impact on
the automobile industry and possible adverse economic consequences.
Question 9. I understand that over the past 5 years companies in
your industry have downsized significantly. Now there is a shortage in
workers and equipment to increase drilling. Please explain that
dynamic.
Answer. The oil and gas industry has experienced significant price
volatility over the past decades, which has led to shrinkage of the
industry workforce. While the industry workforce today is smaller than
in the early '80s, much of this reduction in human resource and
equipment capacity has been offset with advances in technology.
Continued advancements in seismic technology, reservoir simulation and
drilling applications have not only made it possible to be more
efficient with exploration and development resources (human resources
and capital resources) but it has also enabled the opening of new areas
where production previously was not technically or economically
possible. Examples include deep water exploration and production,
unconventional reservoirs that are being tapped through multi-lateral
drilling and ``minimal footprint'' developments that have opened up
arctic exploration and production.
Increases in industry activity can, in the short term, strain the
supply of fully trained workers and equipment availability. But the oil
industry has previously demonstrated its ability to adapt to market
forces, mobilize workforces, and increase investment in technology to
access new oil and gas supplies. Opening up new resource-rich areas for
exploration and production in which new technology can be applied is
certainly an efficient action to help address U.S. supply concerns.
Additionally, altering some of the restrictive visa requirements in the
U.S. would help multinational companies mobilize trained human
resources to the United States to assist in the increasing exploration
and production activity.
Question 10. As you probably know, Congress is likely to open up
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas
exploration. Do you have plans to bid for leases in this area? What
does the price of oil have to be to make ANWR exploration and
extraction economically viable?
Answer. At any given time, ConocoPhillips is evaluating a number of
prospective projects around the world. If Congress were to make such a
decision, it would have to compete with other global opportunities that
we are evaluating at the time and would involve comparisons of risk,
potential reserve size, and development and operating costs. A decision
on whether to drill there could only occur after those determinations
are made.
Question 11. I understand that many of your resources and equipment
are working flat out to rebuild infrastructure in the Gulf of Mexico.
If there is no capacity to expand oil and gas exploration, what good is
opening up sensitive environmental areas to increased drilling going to
do for the consumer in the short run?
Answer. Opening up new areas for drilling will help the consumers
over the longer term (3+ years). It typically takes several years for a
new area in the Gulf of Mexico to be explored and, if commercial
hydrocarbon deposits found, developed. There are ample industry
resources (people and equipment) to pursue these opportunities now if
these areas were made available. New production reduces U.S. dependence
on imports, increases supply, and may moderate consumer prices,
particularly for natural gas.
Question 12. Given the growing demand for oil in Asia, do you
believe that oil derived from the Arctic National Wildlife Refuge could
be diverted to supply Asian markets? If drilling in the Arctic National
Wildlife Refuge is authorized this year, when will it begin to have an
impact on gasoline prices? What do you believe that effect will be?
Answer. The primary market for Alaskan crude is likely to be the
U.S. West Coast to replace declining supplies of Alaskan crude these
refineries are presently using.
Production from ANWR would likely come too late to relieve near-
term supply problems. Should leasing be permitted and subsequent
commercial discoveries made, it will be an estimated 7-8 years or more
before oil production from ANWR could reach the market. During this
timeframe, the world will become increasingly reliant on fewer and
fewer producing countries and having a secure domestic supply would
improve U.S. and global energy security.
We have not assessed in detail the impact of opening ANWR on the
price of crude oil or gasoline. Adding new crude supply sources would
directionally lower the world oil price. Directionally, it also makes
sense that by replacing declining supplies to U.S. West Coast
refineries, ANWR production would lower refiners' crude costs since
their alternative is to replace this crude with higher-cost shipments
from the Middle East and Asia. Likewise, reduced West Coast crude costs
would likely lower West Coast gasoline costs.
Question 13. Do you support more transparency in the oil and
natural gas markets, as would be provided in my bill S. 1735?
Answer. ConocoPhillips supports the concepts of transparency to the
extent it is compatible with freely functioning competitive markets. We
participate in providing data to generate natural gas price indices in
the United States and are active in the Committee of Chief Risk
Officers (a voluntary industry organization) working to develop
industry best practices in risk management, part of which addresses
market transparency.
Section 8 of S. 1735 purportedly seeks to enhance transparency of
crude, gasoline and petroleum distillates wholesale markets through
enforcement efforts focused on monitoring ``companies with total United
States wholesale or retail sales of crude oil, gasoline, and petroleum
distillates in excess of $500,000,000 per year.'' We do not believe
that there is cause to single out larger wholesale and retail
operations. They are already publicly traded, thus making their
earnings or losses a matter of public record vis-a-vis regular SEC
filings, plus they have the greatest downside risk were they to engage
in anti-competitive practices.
A second cause for reservation is that compliance with Section 8
could expose companies to increased antitrust risk and impede the
natural functioning of market operations. Although Section 8 allows the
FTC to refrain from publishing information that it thinks might harm
competition, we are skeptical of any effort to collect and publicize
transaction-level information that is currently confidential. Moreover,
such an effort would leave those companies subject to antitrust laws in
an awkward position not only with respect to compliance with
potentially conflicting rules, but also with respect to the conduct of
their competitive business operations. Finally, (aside from information
that is already publicly available and information that the FTC will
have to omit in order to avoid harm to competition), it is not clear
exactly what benefit the public would derive from having access to the
thousands of individual transactions done at the wholesale and retail
levels for crude oil, gasoline, and petroleum distillates.
Question 14. How have the last 3 years of escalating gasoline
prices affected demand by American drivers? Have we seen a correlation
between a certain level of price increase and less demand by American
drivers? What is the actual level of reduced demand today compared to 3
years ago (please respond in the context of a doubling of retail
gasoline prices)?
Answer. Year-to-date through August 2005, U.S. gasoline demand was
9.2 million barrels per day versus 8.9 million barrels per day in 2003,
representing a 2.9 percent increase. However, the adverse price effects
on demand were probably masked by rising employment during this period,
which increased driving. The consulting firm, PIRA Energy Group,
recently estimated that between 2003 and 2004, with a 17 percent real
increase of retail gasoline prices and an assumed marginal elasticity
of about -.10, gasoline demand would have been reduced by about 150
thousand barrels per day if it hadn't been for the growth in
employment.\20\ PIRA used a higher elasticity than historical to
reflect that in a high crude price environment, gasoline's share of the
consumer basket increases such that consumers are more likely to reduce
consumption than when it was a smaller share of the basket. Applying
this higher elasticity to a doubling of real prices, it would
theoretically shave 900 thousand barrels per day off demand if there
wasn't offsetting employment growth. It is important to keep in mind
that U.S. average retail gasoline prices year-to-date through October
2005 ($2.32 per gallon) were 44 percent higher (not 100 percent or
doubling) than the same period in 2003 ($1.61 per gallon). Thus, the
impact would have been 400 thousand barrels per day of reduced demand
if all else were equal. While the average retail gasoline price peaked
at over $3.00 per gallon in September 2005, the November 28, 2005 price
fell to $2.15 per gallon, well below pre-hurricane levels. This should
have restored nearly 250 thousand barrels per day of demand based on
PIRA's assumption about the price elasticity of demand. We believe
driving behavior and the elasticity or responsiveness to price is also
contingent on whether consumers perceive tighter market conditions are
temporary or are more permanent. All prices and demand numbers quoted
are from the U.S. Department of Energy.
\20\ PIRA Energy Group, U.S. Gasoline Demand Elasticities are
Higher at the Margin, July 2005.
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Question 15. What are the crude oil extraction costs for major oil
producing countries, including our own? How does that compare with oil
derived from shale or coal?
Answer. The cost to find, develop and produce oil varies greatly
both within and outside of the United States. Costs depend on the
scale, depth and complexity of underground reservoirs; the nature of
the oil in place; whether the oil fields are onshore or in shallow or
deep coastal shelf areas; royalties, taxes and other forms of
government take, among other factors.
Published estimates of exploration, development and extraction
costs show the cheapest oil is found in countries like Saudi Arabia,
Iran, Kuwait and Iraq, with costs of approx $7-$8/bbl. U.S. onshore
oil, Russia, U.S. deep water, Western Europe offshore and Canada
conventional oil are increasingly more expensive, on average. However,
companies make investment decisions based not on geographic averages,
but on the individual circumstances of each opportunity, knowing that
the actual price they will receive for the oil they extract will depend
on market conditions many years in the future.
Oil replacements costs are also deemed to be particularly high
today. Goldman Sachs and Sanford Bernstein believe they are about $50
per barrel per day, including host government take, which is a large
percentage of the cost. This is the price that is needed to justify new
investment today. We believe that some of that elevated cost is due to
high prices and spending levels outpacing the service industry's
capacity to supply rigs and services. Thus, costs will come down as
prices come down.
ConocoPhillips does not currently extract oil from shale or coal,
so we have no operating knowledge of the related costs. A 2005 report
(Oil Shale Development in the U.S.) by the Rand Corporation estimated
that commercial development of shale oil using the mining/retort
process will require prices of $70-90/barrel.
Question 16. Regarding foreign exporting, inventory maintenance,
and other practices of your company, please provide a response to each
of the following questions and information requests: For each and every
export shipment to a foreign country of gasoline, distillate fuel oil,
propane, or liquefied natural gas occurring from January 1, 2005 to
present, please provide the date, product type, volume, domestic port
of exit, foreign destination, transportation costs, and the sale price
or transfer value upon arrival at the foreign destination.
Answer. The United States is a net importer of clean products. For
example, in 2004, the United States exported 976 thousand barrels per
day of finished petroleum products and blending components (excluding
LPGs), but imported almost three times that amount or 2.8 million
barrels per day of finished petroleum products and blending components.
Thus, the U.S. is a net importer by 1.8 million barrels per day. The
North American market is also highly interconnected. There is a
significant volume of cross-border energy trade between the United
States, Mexico and Canada. Nearly 20 percent of U.S. finished products
and blending component imports are from these countries, and 32 percent
of U.S. product exports are to these countries. Canada and Latin
American sources also comprise half of U.S. crude imports, which
highlights the importance of continued trade.
Imports and exports play a very important role in balancing U.S.
and global supply and demand. If there is a disruption in one place,
prices rise and attract imports from other places. Similarly, exports
allow companies to move product when logistically or economically it
can't be moved to another domestic location, or if the product doesn't
meet domestic specifications. Logistical reasons for exports include an
inability to find Jones Act tankers and pipeline bottlenecks, which
force the product to be put on the water. In some cases, exports are
key to relieve containment issues and maintain refinery production
rates.
A recent example of a ConocoPhillips export due to a containment
issue is the sale of 280,000 barrels of No. 2 heating oil from our
Alliance, La. refinery. We originally contracted to sell this cargo FOB
to Projector (Ecuador) on August 16, 2005 with a loading date of August
27-29. Because of Hurricane Katrina, the ship couldn't load at
Alliance. To meet our commitment, we agreed on August 30 to load the
cargo at our Lake Charles, Louisiana refinery. If we didn't load this
cargo at Lake Charles, we would have shutdown the refinery due to
distillate containment since the main pipeline to move product to the
East Coast (Colonial) didn't start up for at least three days after
Hurricane Katrina.
Given pipeline bottlenecks and costs, it is also sometimes cheaper
(and more profitable) to export product. For example, on September 19,
2005 with pipeline capacity utilization at its maximum, we sold 50,000
barrels of diesel from our Ferndale, Washington refinery to Petro-
Canada that was exported to Vancouver. The profit on this sale exceeded
the profit that could have been obtained in the U.S. market.
ConocoPhillips wishes to provide the Committee with all information
that the Committee considers important to its current inquiry. The
nature and extent of the information requested regarding the sale price
of the exports, however, is highly confidential and competitively
sensitive. Disclosure of this data would reveal confidential marketing
and sales strategies which, in the hands of marketplace rivals, would
be harmful to the interests of both ConocoPhillips and consumers. In
addition, revelation of such confidential transactional information,
especially of relatively recent vintage, could be deemed
anticompetitive and invite antitrust scrutiny by state or federal
enforcement agencies and potential private plaintiffs.
APPENDIX A * summarizes information provided by ConocoPhillips to
the United States Census Bureau identifying certain product exports.
---------------------------------------------------------------------------
* Appendixes A-C have been retained in committee files.
---------------------------------------------------------------------------
In addition to this information, ConocoPhillips believes that there
may be additional transactions with respect to which ConocoPhillips
sold product to a buyer in the United States and the buyer then
exported the product. In the time available to ConocoPhillips to
prepare this response, it has not been possible to identify such
transactions. However, the Federal Trade Commission has requested
similar information, and ConocoPhillips expects to be able to review
available electronic records prior to its response to the Federal Trade
Commission and to identify additional transactions, if any, with
respect to which it is reasonable to believe product was exported from
the United States.
Question 16a. Since January 1, 2001 to present, please identify the
number of shipments wherein your company exported gasoline, distillate
fuel oil or jet fuel and the sales price or transfer value received at
the destination was less than the amount that would have been received
had the product been marketed by your firm in the United States.
Answer. ConocoPhillips' policy is to sell its refined products to
realize the best netback in the marketplace. Because exports are often
contracted in advance of loading, the product sold is often subject to
logistical constraints or the product is not marketable in the relevant
regional market, comparing the profitability of hypothetical
alternative transactions is not possible.
Question 16b. Since January 1, 2001 to present, please identify the
date, product, volume(s), foreign port of origin, expected U.S. port of
entry, and eventual port of final destination in each instance wherein
your company basically ``turned a ship away'' (whether proprietary
product or acquired from a third party) by changing the shipments
expected arrival in a U.S. port to a foreign port.
Answer. It is common industry practice to charter ships with a
destination indicating ``Any Safe U.S. or European port'', ``Any Safe
European or Mediterranean port'' or ``Any Safe European or Asian
port'', etc. Ships are loaded at origin without a final decision being
made as to the destination of the cargo. As the ship embarks, the only
decision made is the general direction the cargo will travel, with the
final destination designated only when a purchaser commits to the cargo
or when the greatest netback for that cargo has been identified. As a
result, the final destination is often one of many destinations which
may or may not have been previously designated for the cargo.
Answering this question requires the examination of thousands of
chartering agreements and Bills of Lading and making an attempt to draw
conclusions from the original entry in relation to the final port of
discharge. We were unable to conduct this examination in the short time
period set for response. However, the same information has been
requested by the FTC and we will be examining the relevant documents
over the next several weeks and providing the FTC with our analysis.
We were able to identify a transaction that, while not a diversion
of a cargo, represented the export of imported product. In August 2005
(prior to Hurricane Katrina), we had imported 100,000 barrels of
gasoline from Korea to the West Coast of the United States. The
gasoline was intended for the Arizona market, and did not meet
California's specifications. ConocoPhillips demand for gasoline in
Arizona was lower than anticipated. Had we imported the entire cargo of
300,000 barrels we would have tied up 500,000 barrels of storage that
we use to bring Carb Gasoline from San Francisco to L.A. potentially
jeopardizing the operating rates at our San Francisco refinery.
Consequently we sold 200,000 of that cargo to the Mexican national oil
company before it arrived in L.A., along with 100,000 barrels of
premium (would not meet California specifications) from our Northern
California refinery, which was the condition they placed on the deal.
On net, there was no impact on the market. We imported 100,000 barrels
of gasoline that met Arizona specifications and we exported 100,000
barrels of gasoline that did not meet U.S. specifications.
Question 16c. From 1995 until present, please identify by month the
inventory levels maintained by your company for gasoline and distillate
fuel oil in both barrels and converted to ``days of cover'' or ``days
of supply'' for your firm's distribution and sales volumes within each
of the Petroleum Allocation Defense Districts (PADDS) in the United
States.
Answer. ConocoPhillips reports its inventory levels on a weekly and
monthly basis to the Department of Energy. APPENDIX B represents the
data we had readily available from these reports. The same data have
been requested by the Federal Trade Commission and ConocoPhillips has
waived its confidentiality claim with the Department of Energy to
provide the FTC with the inventory data it is requesting.
APPENDIX B contains data from the period July 4, 2003 through April
9, 2004 (first tab) and data from April 16, 2004 through November 18,
2005 (second tab). The DOE changed its reporting format in April 2004,
so we started a new report at that time incorporating the new format.
Question 16d. From January 1, 2005 to present, provide the details
of each ``spot market'' (as commonly referred to in the industry for
bulk sales, in volumes exceeding 5,000 barrels per transaction)
including the date, identity of both the seller and purchaser, location
of the product being sold, and the selling price.
Answer. ConocoPhillips wishes to provide the Committee with all
information that the Committee considers important to its current
inquiry. The nature and extent of the information requested regarding
``spot market'' transactions, however, is highly confidential and
competitively sensitive. As drafted, this question would reach tens of
thousands of individual transactions and would require the
identification of detailed information respecting pricing,
participants, locations, and volumes. As such, it would reveal
confidential marketing and sales strategies which, in the hands of
marketplace rivals, would be harmful to the interests of both
ConocoPhillips and consumers in vigorous spot market competition. In
addition, revelation of such confidential transactional information,
especially of relatively recent vintage, could be deemed
anticompetitive and invite antitrust scrutiny by state or federal
enforcement agencies and potential private plaintiffs. Consequently, we
would hope to work with the Committee to explore an appropriate
mechanism and format by which this information may be provided in order
to accommodate the Committee's interest in obtaining the necessary
information for its purposes without unnecessarily compromising
ConocoPhillips' interest, or that of the consuming public, in
preserving the confidentiality of this strategically sensitive
competitive data. To that end, particularly in light of the Federal
Trade Commission's role in advising the Congress during the current
inquiry and the agency's familiarity with the underlying marketplace
issues respecting disclosure of sensitive competitive information,
ConocoPhillips would welcome the involvement of the Federal Trade
Commission in consultations directed at identifying an appropriate
mechanism and procedure by which the Committee may receive the
information it deems necessary.
Question 16e. Describe your company's use of ``in-house trading
platforms,'' and identify all individuals in your company by name,
address, email, and phone number that were authorized during 2005 to
either exchange, trade, sell or purchase gasoline or distillate fuel
oil on either the ``spot market'', NYMEX futures market, or via
``forward paper'' purchase rights.
Answer. ConocoPhillips does not use in-house trading platforms.
However we do own a small interest in the Houston Street Exchange, Inc.
trading platform. ConocoPhillips does a small volume of its trading via
Houston Street.
ConocoPhillips' Commercial group trades through the larger publicly
available platforms normally used by open market traders. These include
the NYMEX, Access, ICE (formerly known as IPE or International
Petroleum Exchange), etc. We are providing a list of ConocoPhillips
traders in the United States who are authorized to purchase or sell
physical and derivatives. However, we have omitted individual employee
contact information as part of the public record to protect their
privacy.
Clean (light) Products Traders (Gasoline & Distillate)
Argianas, Lynn
Chih, Patrick
Hooper, Maria
Kelley, Mark
Mandell, Brian
Smith, Paul
Sundberg, Katleen (Kat)
Bishop, Tracy
Handsborough, Sam
Horne, Tucker
Love, Chad
McHale, Chris
Sostek, Andrew
Chase, Christi
Hollerbach, Steve
Hunter, James
Mabey, Orson
Shingleton, Lox
Stuckey, Sam
Heavy Products Traders
Usatschew, Walt
Grimaldo, Carlos
Viens, Andrew
Love, Turkessa
Hayes, Patrick
Davis, Paul
Monsalve, Romulo
McIntyre, Kyle
Heskamp, Douglas
Crude Traders Authorized to Trade Product
Allen, Mike
Evans, Matt
Question 16f. Please identify all third party reporting services,
including but not limited to Oil Price Information Service (OPIS),
Lundberg Surveys, Platts, and Oil Intelligence that your company
regularly supplies transaction data or marketing information and all
individuals of the company by name, address, email, and phone number
that were authorized during 2005 to provide the information or data to
such third parties.
Answer. The third-party reporting services to which we supply spot
transaction data or marketing information in the United States are
listed below. However, we have omitted individual employee contact
information as part of the public record to protect their privacy.
Argus
Bloomberg
BTU
Natural Gas Intelligence
Platt's
IO Energy
OPIS
Reuters
Tellerate
ConocoPhillips Marketing does not report branded and unbranded rack
prices to any external services.
The following individuals in U.S. Commercial operations were
authorized during the referenced time period to report data to third
party services. Most of them were located in Houston at ConocoPhillips'
corporate headquarters.
600 N. Dairy Ashford
Houston, TX 77079
281-293-1000
Crude Oil
John W. Wright
Mike Allen
Matt Evans
Robb Thomas
Mike Zigich
Jeff Kopp
Scott Erni
Rupak Sinha
John Eidman
Cherie Hancock
Michael Thomas
Bobby Morehead
Jon Weichbrodt
Bill Van Dyke
Ed Missik
Ed Nadler
Glenn Simpson
lain Singer
Chris Breen
Doug Heinzer
William Brown
Tom Jones
Scott Loosely
Clean Products
Jim Hunter
Maria Hooper
Heidi Fitch
Sam Stuckey
Christi Chase
Mark Kelley
Steve Hollerbach
Orson Mabey
Kat Sundberg
Brian Mandell
Sam Handsborough
Tracy Bishop
Christine McHale
Patrick Chih
Chad Love
Ed Schopf
Lox Shingleton
Lynn Argianas
Andy Sostek
Tucker Horne
Sam Handsborough
Paul Smith
Heavy Products
Viens, Andy
Knut Torvik
Monsalve, Romulo
McIntyre, Kyle
Omar Suby
Grimaldo, Carlos
Patrick Hayes
Heskamp, Doug
Post, Denise
Stillings, Owen
Usatschew, Walter
Love, Turkessa
Davis, Paul
Natural Gas Liquids
United States
M.J. Morrison
J.C. Jewett
J.J. McLiverty
P.W. Burger
Kathy Watson
Cassidy Simmons
Adam Ellis
S. Weed
Cody Womack
J.S. Wilborn
R.E. Sommerstedt
M.W. Schwartje
S.R. Walton
R. Hahn
S. Stewart
H.J. Gump
D.G. Lipford
E.M. Lindsey
S.M. Merveldt
L.A. Bradshaw
E. Brandt
B. Oakes
Kent Nettleingham
Amanda Seaberg
Calgary
C. Gleave
K. Robertson
Natural gas and power prices were provided by only one individual:
James Allison--Regional Risk Manager, Gas & Power--North
America
Question 16g. Please identify the branded and unbranded ``rack
prices'' that were reported by your company to third party reporting
services such as OPIS and the branded and unbranded ``rack prices''
that were actually charged distributors or jobbers by your company each
day, from January 1, 2005 to present, at the truck loading terminal(s)
that typically supply gasoline stations in Houston, TX, Atlanta, GA,
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR, and Seattle,
WA.
Answer. We do not send branded and unbranded rack price information
to any third party service provider such as OPIS. OPIS gets
ConocoPhillips' rack price from our independent marketers (customers).
Attached hereto as APPENDIX C is the requested rack pricing data
for regular unleaded gasoline.
Question 16h. Will your company commit that it will take no efforts
to retaliate against any firm or individual that is a potential witness
before this Committee or cooperates with any investigation into the oil
industry by Congress or another governmental authority?
Answer. Yes.
Question 16i. From January 1, 2005 to present, for each instance
known to your company wherein a third party (not your company) exported
gasoline, distillate fuel oil, propane, or liquefied natural to a
foreign country, please provide any of the details known to your
company including the identity of the exporter, date, product type,
volume, domestic port of exit, foreign destination, transportation
costs, and the sale price or transfer value upon arrival at the foreign
destination.
Answer. ConocoPhillips generally does not have knowledge about
third-party activities except where we sold them the cargo and we were
exporter of record as noted in response to question 16A (Cantwell).
Question 16j. Since January 1, 2001 to present please identify the
identity, date, product, volume(s), foreign port of origin, expected
U.S. port of entry, and eventual port of final destination in each
instance wherein your company is aware a third party (not your company)
basically ``turned a ship away'' (whether proprietary product or
acquired from a third party) by changing the shipments expected arrival
in a U.S. port to a foreign port.
Answer. ConocoPhillips generally does not have knowledge about
third party activities except where we sold them the cargo and we were
exporter of record as noted in response to question 16A (Cantwell).
Question 16k. Please provide an itemized list of tax deductions and
credits taken under the U.S. tax code for 2004, by your parent company
and subsidiaries.
------------------------------------------------------------------------
U.S. tax code
section
------------------------------------------------------------------------
Deductions:
Bad Debts........................................... 166
Property Taxes...................................... 164
State and Local Income Taxes........................ 164
Franchise Tax Expense............................... 164
Sales and Use Taxes................................. 164
Payroll Taxes....................................... 164
Production Taxes.................................... 164
Environmental Taxes................................. 164
Other Taxes......................................... 164
Excise Taxes........................................ 164
Interest............................................ 163
Charitable Contributions............................ 170
Depreciation........................................ 167
Depletion........................................... 611
Expired and Surrendered Leases...................... 165
General and Administrative Expense.................. Various
Selling Expense..................................... 162
Financing Expense................................... 163
Geological and Geophysical Expense.................. 165
Dry Hole Expense.................................... 165
IDC Expense......................................... 263
Retirement of Assets................................ 165
Amortization........................................ Various
Cost of Retirements................................. 165
Exploration G&A Expense............................. 162
Partnership Losses.................................. Various
Miscellaneous....................................... Various
Lease Carrying Expense.............................. 162
ETI Exclusion....................................... 114
Net Operating Loss Deduction........................ 172
Dividends Received Deduction........................ 241
Credits:
Foreign Tax Credit.................................. 27
General Business Credit............................. 38
Credit for Prior Year Minimum Tax................... 53
------------------------------------------------------------------------
______
Response to Written Questions Submitted by Hon. Ken Salazar to
James J. Mulva
Question 1. The Agriculture Committee is looking at the impacts
these high energy prices are having on agricultural producers around
the country. To sum it up: they are hurting. It seems to me that there
is tremendous potential for our country to grow fuels such as ethanol
and bio-diesel. This approach offers many benefits to rural America as
well as to the country as a whole. What type of investments is your
company making (and planning to make) in these types of renewable fuels
in the United States?
Answer. We are currently investing in terminal tanks and equipment
to allow blending of biodiesel where mandated by state law.
Additionally we are conducting research in novel ways of using
agricultural feed stocks to manufacture gasoline and diesel directly,
as well as evaluating the methods of improving the economics of ethanol
and biodiesel manufacture and distribution.
ConocoPhillips was supportive of efforts to include a provision in
the Energy Bill that encourages the use of animal fats and waste as a
renewable feedstock to run our refineries. Our refining operations
believe these feedstocks have potential and are looking at how to
implement their use.
We do not believe that additional Congressional efforts to enact
mandates for biodiesel or other renewables are appropriate at this
time, given the negative effect that such costly mandates would have on
consumers who are already dealing with high energy costs.
Question 1a. Rural America is crying out for investment in
renewable fuels, and I encourage your companies to look at the
potential of renewable fuels. In terms of a percentage of your capital
expenditures, how much money did your company spend this year to
develop renewable fuel sources in the United States? What will that
percentage be going forward?
Answer. Our company will spend approximately 1-2 percent of our
research expenditures on renewable fuels this year, with approximately
half of that spent in the United States. Our planned expenditures are
similar until we identify an attractive technology, in which case we
will increase our spending as needed to commercialize the technology.
Question 1b. Will you also provide this committee with some
examples of renewable fuel projects that your company is pursuing
outside the United States?
Answer. We recently completed a commercial scale test demonstrating
a new technology for converting renewable feed into high quality diesel
fuel at our Whitegate Refinery in Ireland. We are in the process of
evaluating the data from this test, and modeling its applicability
across our worldwide refining network.
Question 2. As a few of you note in your testimony, diesel prices
have remained high while unleaded gasoline prices have come down. It
seems as if we are getting lower priced unleaded gas at the expense of
diesel. Since diesel is the fuel of choice in agriculture, it is a sort
of a double whammy on our producers. What is being done, or what can be
done, to get diesel prices back in line with the price of gasoline?
Answer. U.S. diesel prices are presently higher than gasoline
prices due to a tighter global diesel supply-demand balance, which
stems from the strong trend in Europe toward dieseling the passenger
car fleet and robust diesel demand in Asia. Global and U.S. diesel
demand have been and will likely continue to grow at a faster rate than
gasoline demand. Thus, the trend of global diesel prices moving above
gasoline prices is not likely to be reversed even when immediate supply
losses from the hurricanes are restored.
The longer-term trend of strengthening diesel prices was
exacerbated by the hurricanes, which temporarily shut down nearly 30
percent of U.S. refining capacity at the peak. While the United States
made up lost gasoline supplies through imports and specification
waivers, diesel fuel did not have the same options. Diesel demand and
price strength in Europe made it difficult for the United States to
attract as much diesel as gasoline supplies. European refineries have
excess gasoline production capacity due to dieselization since gasoline
demand is declining there. Thus, they were able to provide additional
gasoline supplies to the United States. Another factor buoying present
diesel prices is that they gain strength in the winter as diesel is
blended and/or re-graded into the heating oil market.
When the price of diesel for a given market location is
above cost of alternative sources of added supply, supplies
will flow into that market. This was the case immediately after
the hurricane, when the United States did attract additional
distillate imports. The diesel-gasoline price difference also
provided an economic incentive for refiners to change product
mixes towards maximum diesel production, although this switch
would likely have occurred anyway, since the fall season is the
normal period when refiners switch from maximum gasoline
(summer season) to maximum heating oil (winter season,
including diesel). However, there is only a limited ability for
refiners to switch between maximizing diesel vs. gasoline
production ( 10 percent). On average, refineries in the U.S.
have 46 percent gasoline yields (on total refined products
production) and 21 percent distillate yields (diesel and
heating oil).
ConocoPhillips increased diesel supply by maximizing diesel
production over gasoline when economic, moving/drawing
inventory, deferring refinery turnarounds (increased
production), maximizing imports where feasible, and working
diligently to re-start its Gulf of Mexico refining capacity
shut down by the hurricanes. All these actions, combined with
the rest of the industry efforts, have very effectively
restored diesel supply and brought the price down dramatically
since the hurricanes made landfall.
The temperature this winter will likely determine the degree
to which the spread between diesel and gasoline prices narrows.
In the short-term, if the cold winter forecast is incorrect,
this will tend to bring down all distillate prices, including
diesel. In the long-term, the solution is to encourage
increased domestic production of diesel through refinery
expansions. Looking ahead, the pending requirement to produce
ultra low sulfur diesel may adversely impact diesel supply
reliability next year. This could cause the diesel-gasoline
price inversion to widen for some period of time. The EPA
should adopt reasonable transition provisions and enforcement
protocols that enable the industry flexibility necessary to get
through U.S.-wide system conversion from low sulfur to ultra
low sulfur diesel without supply disruptions.
Question 2a. If demand for diesel is so high in Europe and high
prices don't attract the supplies necessary to lower prices, isn't that
a good indicator that we should work to produce more diesel in the
United States and look to biodiesel as an option?
Answer. The high price of diesel in Europe is due to the tax on the
fuel, which, depending on the country, varies from $1.50 to $3.50 a
gallon higher than the U.S. tax of 34 cents per gallon. The taxes on
gasoline in Europe are generally higher than those on diesel.
Therefore, the high European tax structure gives the illusion of high
diesel prices at $3.70 to $5.70 per gallon but makes diesel less
expensive than gasoline for the consumer. The wholesale price of diesel
fuel in Europe is similar to the U.S., which limits the ability for
Europe to export to the United States.
U.S. demand has historically been higher for gasoline; therefore
U.S. refineries are geared toward making more gasoline. Diesel engines
do offer some fuel efficiency benefits, but also have emissions and
consumer acceptance barriers to overcome. A large scale
``dieselization'' of the U.S. fleet would take broader consumer
acceptance of diesel engines and solutions to emissions concerns.
Refinery configurations would need to be altered in response to this
change in fuel demand, and the overall effect on consumers of such a
change is difficult to predict.
We do anticipate growth in U.S. diesel demand and expect renewable
diesel (biodiesel or other non-hydrocarbon diesel) to fulfill part of
that demand growth.
Question 3. For the record, will you tell me what your company has
spent on capital expenditures in cash, not including write offs such as
amortization or depreciation. Will you also provide the figures spent
on cash dividends and stock buyback for the same time period?
Answer. Since 2003, the company has spent about $24 billion in
capital expenditures and investments, has paid $3.5 billion in
dividends to shareholders and repurchased $1.2 billion in company
stock. At the same time, the company decreased its debt balance by $6.3
billion.
----------------------------------------------------------------------------------------------------------------
Dividends
Capital Net increase/ paid on Repurchases of
Year expenditures (decrease) company company stock
and investment in debt stock
----------------------------------------------------------------------------------------------------------------
2003................................................ (6,169) (1,986) (1,107)
2004................................................ (9,496) (2,778) (1,232)
2005 *.............................................. (8,573) (1,505) (1,210) (1,164)
-----------------------------------------------------------
Total............................................. (24,238) (6,269) (3,549) (1,164)
----------------------------------------------------------------------------------------------------------------
* 2005 Information is through September 30.
Question 4. On November 1st, Senator Grassley asked your companies
to contribute 10 percent of your record profits to supplement LIHEAP
funding for the less fortunate. Will your companies support Senator
Grassley's proposal?
Answer. ConocoPhillips is concerned about the impact of energy
prices on consumers, particularly our customers who can't afford higher
energy prices. LIHEAP has been in place since 1982 to help needy
families pay their home energy bills and the Federal Government has
traditionally had the primary responsibility of helping families in
need. This long-standing role of the government is appropriate and
should continue.
ConocoPhillips is concerned that any additional taxes, whether
mandated or requested, on the oil and gas industry will reduce
investment, and therefore reduce the expansion of supplies. This will
tend to extend the period of elevated prices.
Question 5. I'd like to encourage you to actively work with the
Department of Energy and any other relevant federal agency on
initiating a public/private education campaign focused on energy
education and conservation. In the meantime, will you tell me what your
company has done on its own initiative?
Answer. ConocoPhillips was a leader in helping API develop a $24
million outreach program, which is currently ongoing, to address the
pricing environment as well as provide education to lawmakers and the
public on our industry. That program, along with the Alliance to Save
Energy education effort (a broad energy industry effort) and individual
company efforts, devote significant attention to public education and
outreach. ConocoPhillips is very interested in discussing with DOE and
the Federal Government the development of a public/private education
campaign focusing on several areas, including conservation.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
James J. Mulva
Question 1. Did the existence of price gouging statutes in
Louisiana, Mississippi and Alabama play any role in your decision to
freeze prices after Hurricane Katrina?
Answer. The existence of state price gouging laws had no
substantial influence on our pricing decisions after the hurricanes.
Our guiding concern in our decision to freeze prices in impacted areas
after the hurricanes was concern for our reputation and our belief that
any increases would be temporary.
Question 2. In the last decade, has your company ever withheld
supply of crude oil or refined product from the market in order to
prevent prices from falling?
Answer. ConocoPhillips has no information that the company ever
withheld crude oil or refined products from the market in order to
prevent prices from falling. In the United States ConocoPhillips is a
significant net purchaser of crude oil for its refineries and has no
economic incentive to prevent crude prices from falling. Regarding
refined products, the company, like other U.S. refiners, has limited
storage for refined products, and requires contemporaneous marketing of
these products to maintain refinery operations. Thus, supplies must
enter the market quickly and cannot be withheld for any reason.
Question 3. Please describe any business relationship or
transaction your company or any of its subsidiaries, wherever located
and wherever incorporated, whether wholly owned or not, have had with
Iranian nationals (except employment of Iranian expatriates), the
Iranian government, individuals or corporations located or incorporated
in Iran, or any representative of these people or companies.
Answer. ConocoPhillips does not have any operations or investments
in Iran, either directly or indirectly through foreign subsidiaries,
nor is ConocoPhillips currently negotiating for business opportunities
in Iran.
In 1995, the National Iranian Oil Company (``NIOC'') awarded our
foreign subsidiary, Conoco Iran N.V., a service contract to develop the
Sirri Fields located offshore Iran adjacent to ConocoPhillips
operations in Dubai, but the subsequent imposition of U.S. sanctions
precluded our involvement in that project and we withdrew from that
project after consultation with the U.S. Government. The Sirri Fields
project was then awarded by NIOC to Total.
In a separate matter, ConocoPhillips received on April 8, 2004, a
pre-penalty notice from the Office of Foreign Assets Control (``OFAC'')
stating that OFAC had reasonable cause to believe that two U.S.
entities, Conoco Inc. and Conoco Middle East Ltd., had from March 1999
until September 2000 engaged in prohibited facilitation of trade with
Iran by Conoco (U.K.) Limited (``CUKL'', our primary U.K. operating
subsidiary). OFAC indicated that it believed that the two U.S. entities
had committed prohibited facilitation by: (1) providing CUKL with an
opportunity to obtain and analyze (without charge) data from the
Azadegan oil field in Iran and to share its interpretation of those
data with NIOC in what the company views as a typical pre-contractual
petroleum industry format for the purpose of furthering the possibility
of participating in the future development of that field; and (2)
providing CUKL with support and assistance in the performance of the
technical analysis.
In response to the pre-penalty notice, we informed OFAC that we
believed that these activities did not constitute prohibited
facilitation under the Iranian Transactions Regulations. First, we
submitted that the referral to CUKL of the opportunity to analyze
Azadegan data did not constitute or involve acts of ``facilitation''
within the meaning of the Iranian sanctions either as they existed at
the relevant time or as they were subsequently amended on April 26,
1999. Second, we argued that none of the activities performed by CUKL
would have been prohibited if performed by a U.S. person. While the
Iranian sanctions prohibit transactions by U.S. persons relating to
Iranian-origin goods and services as well as exports of technology,
goods and services to Iran by U.S. persons, unlike other OFAC
regulatory regimes such as the Sudanese Sanctions Regulations, U.S.
persons are not required to refrain from all ``transactions'' and
``dealings'' in Iranian Government ``property.'' Third, we noted that
OFAC has consistently stated that it cannot and does not regulate
speech and informational discussions, which were the essence of what
CUKL conveyed to NIOC in sharing its opinion of the NIOC data provided
to CUKL. Finally, we pointed out that ConocoPhillips had voluntarily
advised the U.S. Government as early as July 1999 of its interest in
the Azadegan field and its intention to seek an OFAC license to
negotiate an executory contract to develop the Azadegan field and had
voluntarily supplied OFAC in September 2000 the facts concerning the
NIOC discussions as soon as any public suggestion was made that there
was an economic sanctions issue. We also noted that, ultimately, given
OFAC's decision not to grant ConocoPhillips license request and
ConocoPhillips' inability to pursue negotiations, NIOC awarded Azadegan
field (which is potentially as large as the entire Alaskan North Slope)
contracts to Japanese and European companies.
Nevertheless, we determined that a settlement of the allegations in
the pre-penalty notice was appropriate in order to avoid the cost of a
protracted enforcement proceeding and potential litigation.
In March 1999, the Office of Foreign Assets Control (``OFAC'')
issued License No. IA-3706 (the ``License'') to ConocoPhillips
(formerly Conoco Inc.), authorizing the company to participate in a
joint venture with Petroleum Nasional Berhad (``Petronas'') to
construct and operate an oil refinery in Melaka, Malaysia (the
``Refinery'') pursuant to the joint venture contracts that were signed
prior to the promulgation of the U.S. economic sanctions against Iran.
While it was known that Petronas would process Iranian crude oil at the
Refinery, it was a condition of the License that the company would not
be involved in any way in the purchase, processing or refining of
Iranian crude oil. ConocoPhillips has successfully participated in the
operation of the Refinery within the scope of the License and has never
purchased Iranian crude oil or been involved in any of Petronas'
decision regarding its use.
______
Response to Written Questions Submitted by Hon. Olympia J. Snowe to
Lee R. Raymond
Question 1. I have introduced legislation that will offer an up to
$500 tax credit to working low and middle income individuals for the
cost of home heating expenses. According to the National Energy
Assistance Directors Association, heating costs for the average family
using heating oil are projected to hit $1,666 for the upcoming winter.
This represents an increase of $403 over last winter's prices and $714
over the winter heating season of 2003-2004. Meanwhile, profits of oil
and gas rose 62 percent in the third quarter for companies in the
Standard & Poor 500 index. I am proposing to offset the $500 tax credit
for home heating expenses by curtailing the benefit large oil companies
receive by using the LIFO accounting method. Do you think given budget
deficits and record profits for oil companies that it is appropriate to
divert tax benefits for large integrated oil companies such as yours to
pay for such a measure?
Answer. No. LIFO tax accounting is not a tax benefit. It is a
standard accounting method that has been in use and allowable to a
broad range of American businesses since the 1930s. It is poor tax
policy and shortsighted to impose a tax or deny an otherwise allowable
deduction or credit to one segment of industry simply because that
sector is large and profitable at the moment. While oil industry
profits are strong right now, when compared to sales, they are in line
with the average of other industries. In addition, a change in LIFO
would set a dangerous precedent by discouraging needed investment and
negatively impacting investor confidence in the U.S. economy.
Question 1a. Does this seem like an equitable approach given that
the high cost of oil enables you to not only bank large profits, but
also to use accounting methods to substantially reduce taxes? Is it
fair to report less taxes when you're profiting the most?
Answer. It would be inequitable to prohibit one segment of the oil
industry from using the existing LIFO inventory accounting method. The
LIFO method and rules are longstanding, well-accepted, SEC-sanctioned
and properly match current costs with current revenues, consistent with
generally accepted accounting principles. The LIFO method is available
to and used by many industries, and is certainly not unique to the oil
industry. It would be highly discriminatory to retroactively curtail a
segment of the oil industry, alone, from using the existing LIFO
accounting rules.
Question 2. Your third quarter profits have certainly been a
lightning rod that has riled consumers as they continue to pay 30
percent more in Maine for their home heating oil for the winter.
A. I realize that you reinvest some of these profits in exploration
for more product. In each quarter, have you reinvested the same
percentage of the profits to reinvestment? What have your reinvestment
percentages been to your total profits? Do they vary from quarter to
quarter or year to year?
Answer. Over the last ten years, ExxonMobil's cumulative capital
and exploration expenditures have exceeded our-cumulative annual
earnings. Our average annual capital expenditures have been
approximately $14.0 billion, while our average annual net income has
been approximately $13.8 billion. See, Attachment A,* ExxonMobil Long
Term Earnings and Investment History. Please refer to the table below
of quarterly data. On average, for the seven quarters from 1Q2004 to
3Q2005, ExxonMobil reinvested 66% of Upstream net income in Upstream
capital and exploration expenditures and 44% of total consolidated net
income. Comparing quarterly earnings to capex is not appropriate, since
our capital investments take years to plan and execute, while quarterly
earnings vary dramatically with current market conditions. If we varied
our capital spending with our earnings, our capital investment
implementation would be far less effective and would yield fewer
production benefits for consumers.
---------------------------------------------------------------------------
* Attachments A-K have been retained in committee files.
REINVESTMENT %'s TO TOTAL PROFITS
----------------------------------------------------------------------------------------------------------------
1Q 2Q 3Q 4Q 1Q 2Q 3Q Avg.
2004 2004 2004 2004 2005 2005 2005 1Q04-
$M $M $M $M $M $M $M 3Q05 %
----------------------------------------------------------------------------------------------------------------
Upstream capital & exploration expenditure 2,704 2,840 2,877 3,294 2,812 3,678 3,586
(capex)........................................
Upstream net income after tax................... 4,013 3,846 3,929 4,887 5,054 4,908 7,349
Total consolidated net income after tax......... 5,440 5,790 5,680 8,420 7,860 7,640 9,920
Upstream capex as a % of upstream net income.... 67% 74% 73% 67% 56% 75% 49% 66%
Upstream capex as a % of total consolidated net 50% 49% 51% 39% 36% 48% 36% 44%
income.........................................
----------------------------------------------------------------------------------------------------------------
Data Source & Notes: Quarterly ExxonMobil Press Releases and associated 8-K.
Question 3. To what non-profit organizations and academic research
that address global climate change does your company donate financial
support to and how much do you donate each year?
Answer. ExxonMobil has committed to provide up to $100 million over
a 10 year period to Stanford University's Global Climate and Energy
Project (GCEP), which is the largest-ever investment in independent
climate and energy research. GCEP is a major long-term research program
designed to accelerate the development of commercially viable
technologies that can meet global energy demand while dramatically
lowering GHG emissions.
GCEP is investigating a full spectrum of energy resources,
environmental technology, and end uses that can be adopted globally
for:
Advanced transportation options;
Improved electric power generation and transmission;
Expanded use of hydrogen and biomass fuels;
Next-generation coal, nuclear power, and renewable energy;
and
Carbon dioxide capture and storage.
GCEP projects initiated in 2003 and further developed in 2004
include an integrated assessment of technology options, studies of
hydrogen production and use, advanced combustion-system research, and
studies of geologic sequestration of carbon dioxide. More recently,
GCEP launched new research projects targeting fundamental breakthroughs
in technologies, including renewable biomass, fuel cells, and solar
cells.
More information on the GCEP is provided at http://
gcep.stanford.edu/.
Details of other individual ExxonMobil contributions are provided
in our annual Worldwide Giving Report that is posted on ExxonMobil's
website: http://www.exxonmobil.com/Corporate/Citizenship/gcr--
contributionsworldwide--report.asp.
In 2004, contributions that were identified as being targeted to
climate change research and education in the Giving Report totaled
$2,245,000.
Question 4. There has been much discussion about the skyrocketing
costs of gasoline, heating oil, and other petroleum products over the
past year, magnified by the three hurricanes which have hit the Gulf
Coast region this year. In response to these inquiries into the rising
prices and your soaring profits, you have asserted that these increases
are tied to market forces, particularly the rising prices of crude oil.
I've reviewed your financial filings from the Securities and
Exchange Commission, and they paint a very stark picture when compared
to the financial misery being experienced by millions of Americans.
ExxonMobil, for example, has realized a net income of $25.42 billion in
the first nine months of 2005, an increase of $8.5 billion over the
first nine months of 2004. Exxon's third quarter net income this year
was $9.92 billion, up a full 90%.
Similarly, ConocoPhillips' net income for the third quarter of 2005
was $3.8 billion, compared with $2.006 billion during the same time
period in 2004. Conoco's filing attributes this jump in profit to
``higher crude oil, natural gas and natural liquid gas prices,''
``improved refining margins,'' and ``equity earnings from our
investment in LUKOIL.''
In my State of Maine, the median state income is $17,044 per year.
A full 78 percent of Mainers use heating oil to warm their houses in
wintertime, and this, combined with gasoline prices of anywhere from
$2.50 to $3.00 per gallon paints a harsh picture for Maine and New
England this winter. Petroleum is not any run-of-the-mill commodity. It
is the lifeblood of commerce in this country, with fuel costs being
built into the price of every other good bought and sold on the market.
And in places like New England where petroleum heats most homes, it's
literally a life-and-death commodity. Your industry has taken the
position in its SEC filings and at yesterday's hearing that the
escalation of its fuel prices is the result of increases in crude oil
prices. However, if your retail gas prices were raised simply to cover
your increased costs in purchasing crude oil, your net profits would
remain the same. Everyone knows this is not happening. Can you identify
for this committee the reason that the rise in gasoline prices is far
out-pacing the rise in crude oil prices?
Answer. Generally, changes in the price of crude oil directly
effect the price of gasoline. See, Attachment B, Price Per Gallon.
Hurricanes Katrina and Rita created a highly unusual situation,
however, in which the gasoline markets were reacting not so much to
crude oil prices as to the hurricanes' unprecedented impact on gasoline
supply and distribution logistics. Prior to Katrina, U.S. refineries
were operating at 97.1% of capacity; just after Rita, U.S. refineries
operated at 69.8% of capacity due primarily to damage done to
refineries by the hurricanes, but also due to logistical problems
(crude supply to refineries and product movements out). Almost 29
percent of U.S. refining capacity was offline as a result of these
natural disasters. In addition, both the Colonial and Plantation
pipelines were non-operational for three days. In other words, although
demand remained unchanged, supply was dramatically reduced. In fact,
with decreased supply, the demand for gasoline actually increased
significantly following Hurricane Katrina, perhaps reflecting
consumers' fears that they would not be able to obtain gasoline at all,
given the supply disruptions. In response, gasoline prices rose. This
price increase had the affect of attracting sufficient additional
supplies from other sources, such as imports from Europe and Asia, to
meet demand.
Although U.S. refineries currently are still operating well below
historical levels--utilization is now about 86% of capacity--the
industry is supplying almost as much gasoline as it was prior to the
hurricanes. Capacity has been shifted from making other products to
supply gasoline demand, and imports from Europe have increased
substantially. As a result, gasoline prices are now below levels that
existed prior to Hurricane Katrina in nearly all parts of the U.S.
Gasoline prices have fallen further than have crude oil prices over the
past few weeks.
Question 4a. Even though crude oil prices have risen this year,
your companies aren't actually incurring those costs, are they? Isn't
the gasoline and heating oil that your firms are currently selling on
the market actually being produced from inventories that your companies
purchased when the price of crude oil was much lower?
Answer. ExxonMobil is a net buyer of crude oil--we refine nearly
three times as much crude as we produce. In 2004, we spent $139 billion
buying crude oil for our operations. We pay the prevailing market price
for crude to meet our refining needs. Our domestic crude inventories
represent only about two weeks supply for our refineries, and some of
this is used to fill equipment. We also purchase product at current
market prices to meet our customers' needs. ExxonMobil does not engage
in speculative activities.
Question 4b. If you're producing oil from crude that you bought at
$40 per barrel, but selling it at a price that is purportedly based
upon a $70 per barrel cost to you, wouldn't that account for the 90%
increase in profits we've seen?
Answer. No. See previous answer. ExxonMobil is a substantial net
buyer of crude oil and we pay the market price to meet our refining
needs. We also purchase product at current market prices to meet our
customers' needs.
Question 5. I've alluded to the vital role petroleum plays in our
economy and society, from the price of bread to the price of a plane
ticket to the price of heating one's home. While you're obviously in
the business for profit, there are other sectors of the economy where
we put a limit on selling commodities at unconscionable prices. One
example is usury law, where lenders are prohibited from charging
unconscionable rates for borrowing money--because we recognize that
access to cash is critical to enterprise. How much more of a toll do
these fuel prices have to take on our society before Congress steps in
and places similarly appropriate regulations on your industry?
Answer. We don't accept the premise of your question. While
Congress alone evaluates the factors impacting public policy options
and legislates according to its judgment, we urge you to recognize the
vital role petroleum plays in sustaining and expanding modern living
standards and economic prosperity. Any decisions made about near-term
action should properly consider the long term consequences on the
economy of those decisions.
Crude oil prices are established by a robust global market and
those prices largely influence the price of petroleum products sold
throughout the world. Historic market interventions by governments,
through price controls or otherwise, have proven to be self-defeating
and ineffective on many levels.
Question 5a. Many consumers would say that raising the price of gas
by $2 per gallon over the past 2 years, while reaping over $25 billion
in profits is price gouging. Many lawmakers would agree. What do you
say to them?
Answer. ExxonMobil condemns price gouging. In the immediate
aftermath of the storms, we acted responsibly in pricing at our company
operated service stations and we also encouraged our independent
retailers and distributors to do the same.
Competition for retail sales is broad. For example, only about 7%
of retail stores branded Exxon or Mobil are actually operated by
ExxonMobil--the remainder are dealers and distributors, or in some
cases resulting from FTC divestment requirements, other oil companies.
Many distributors operate under multiple brands and there is
significant competition to supply them. Retailers with no refining
capacity, such as Racetrac, QuickTrip, WaWa, Sheetz, 7-11, and Stop-n-
Go sell a significant percentage of domestic gasoline.
Gasoline prices in the U.S. are determined by supply and demand of
crude oil and refined products. Oil company earnings per dollar of
revenue from sales of these products are in line with other major
industries. The scale of our industry is so huge, however, that the
large total volume of sales results in a large total profit. Moreover,
the recent historic highs need to put into the context of the cyclical
nature of the oil business. For example, in 1998, crude prices were as
low as $10 a barrel, and our full year earnings were correspondingly
lower, at about $8 billion.
______
Response to Written Questions Submitted by Hon. Pete V. Domenici to
Lee R. Raymond
Question 1. What are you doing to bring oil prices down?
Answer. Oil is a globally traded commodity. See, Attachment C, Why
is Global Oil Demand Increasing? and Attachment D, How Much Spare Oil
Capacity Is There? Prices are established across a broad market, with
many participants. Although ExxonMobil is the second-largest non-
government oil producer (slightly behind BP), we produce only 3% of the
world's oil. In fact, we are a huge net purchaser of crude oil,
refining nearly three times as much crude as we produce. In recent
years, ExxonMobil is investing on average $15 billion per year to find
and produce new oil supplies and expand refining and distribution
capability. We are working to expand crude oil and gasoline refining
capacity in a cost effective manner and we always focus on extremely
efficient logistics. See e.g., Attachment E, ExxonMobil--What
Percentage of the World Energy Market?
Question 2. What is the relationship between the price of oil that
Americans are paying and the profits you are making?
Answer. In fact, the vast majority (approximately 70 percent) of
ExxonMobil sales and profits are made outside of the United States.
Because oil is a globally traded commodity, the absolute level of crude
oil price, established on a global basis, is a key factor impacting
American consumer costs and energy industry earnings. On a dollarfor-
dollar basis, our industry's profits are generally in line with the
average of all U.S. industry. For the second quarter of this year, the
oil and gas industry earned 7.7 cents for every dollar of sales
compared to an average of 7.9 cents for all U.S. industry. See,
Attachment F, How Do Oil Industry Earnings Compare to Other Industries?
Question 3. The question I hear most from people is how is the
price of oil set? Many Americans think oil companies are rigging prices
to reap big profits. How would you respond to that?
Answer. That perception is grossly incorrect and contradicted by
numerous government studies. For example, See, Federal Trade Commission
Report on The Petroleum Industry: Mergers, Structural Change, and
Antitrust Enforcement (August 2004) (``Private oil companies have small
shares of world crude oil production and reserves, limiting any
influence on world oil price''). http://www.ftc.gov/opa/2004/08/
oilmergersrpt.htm
Oil is a globally traded commodity. Prices are established across a
broad market with many participants, so the ability of a single company
to substantively impact prices is minimal. ExxonMobil produces less
than 2 percent of the world's daily energy and only 3 percent of the
world's oil.
Question 4. Americans are being burdened with high oil, natural
gas, and gasoline prices while you all are raking in record profits.
What do you say to those people that blame you for this and say that it
is unfair?
Answer. We recognize that the increases in energy prices following
Hurricanes Katrina and Rita put a strain on Americans' household
budgets. In recent weeks, gasoline prices have come down to below pre-
Katrina prices as shut-in energy supplies have returned and refinery
operations have been restored.
ExxonMobil engages in cyclical, global, commodities-based
businesses. Those cycles transcend the oil industry and are experienced
by all commodity-based businesses, from orange juice to corn, coffee to
gold. The high points of such market cycles are generally marked both
by high prices and profits. However, the oil industry has experienced
sustained periods of low prices and investment returns, throughout much
of the 1980s and 1990s, for example. As recently as 1998, global oil
prices hit $10 per barrel and gasoline sold in the United States for
under a dollar per gallon. ExxonMobil nevertheless invested more than
$15 billion in new capital expenditures and research in that year,
nearly twice our earnings.
Global crude oil markets largely determine petroleum product
prices, although events such as the recent hurricanes, which caused
outages at nearly one-third of our nation's refining capacity at one
point, can also significantly influence product markets and prices. Our
company is but a small part of the enormous global energy market,
producing only 3 percent of the world's daily crude oil needs. Every
day, our 85,000 employees work extremely hard to stay ahead of our
global competition and provide energy supplies to consumers at
competitive prices.
Question 5. Americans want to know if it is not costing so much
more to produce a barrel of oil, why are prices rising so high?
Answer. While crude oil costs are a critical component of gasoline
prices, other factors also affect the price of gasoline. See,
Attachment G, What Affects Gasoline Prices? Both crude oil and gasoline
are commodities that are traded globally in open and transparent
markets. See, Attachment H, U.S. Sources of Crude Oil.
Prices in these global markets reflect not only the cost of supply,
but speculation by global commodities traders regarding future prices
and competition among purchasers. For example, recent concerns about
relatively low levels of global spare crude oil production capacity
seem to be affecting the crude oil futures trading. ExxonMobil does not
engage in speculative commodity trading activities in energy
commodities.
Generally, changes in the price of crude oil directly affect the
price of gasoline. With regard to the post-hurricane increase in U.S.
gasoline prices, Hurricanes Katrina and Rita created a highly unusual
situation, however, in which the gasoline markets were reacting not so
much to crude oil prices as to the hurricanes' unprecedented impact on
gasoline supply and distribution logistics. Prior to Katrina, U.S.
refineries were operating at 97.1% of capacity; just after Rita, U.S.
refineries operated at 69.8% of capacity due primarily to damage done
to refineries by the hurricanes, but also due to logistical problems
(crude supply to refineries and product movements out). Almost 29
percent of U.S. refining capacity was offline as a result of these
natural disasters. In addition, both the Colonial and Plantation
pipelines were non-operational for three days. In other words, although
demand remained unchanged, supply was dramatically reduced. In fact,
with decreased supply, the demand for gasoline actually increased
significantly following Hurricane Katrina, perhaps reflecting
consumers' fears that they would not be able to obtain gasoline at all,
given the supply disruptions. In response, gasoline prices rose. This
price increase had the affect of attracting sufficient additional
supplies from other sources, such as imports from Europe and Asia, to
meet demand.
Question 6. What is your company's response to proposals for
enactment of a Windfall Profits Tax?
Answer. We strongly oppose it. The non-partisan Congressional
Research Service (CRS) concluded that the ``windfall profits'' tax of
the 1980s was harmful to the U.S. economy. According to the (CRS), the
tax drained $79 billion in industry revenues during the 1980s that
could have been used to invest in new oil production--leading to 1.6
billion fewer barrels of oil being produced in the United States from
1980-1988. The tax reduced domestic oil production as much as 6
percent, and increased oil imports as much as 16 percent.
It would be similarly counterproductive to impose such a tax today.
Increasing the costs of oil and gas production in this country would
undermine the urgent policy goal of expanding energy supplies to the
American economy and people. Such a tax would not be imposed on oil
production outside of the United States, significantly advantaging the
foreign national oil companies with which we must compete. In a global
marketplace, it would send capital investment for energy development,
and jobs, overseas. It would undermine the American companies within
the industry, making them less competitive, when political leaders and
the American people are looking to them to expand supplies, which would
tend to reduce long-term energy prices.
Our investment decisions to fund projects are made five to ten
years before they are realized, based upon assumptions about investment
returns in our cyclical commodities businesses. We go through peaks and
valleys, and our business plans assume that there will be peaks and
valleys, so that, over the cycle, our shareholders see an adequate
return on their investment. To lop off the peaks would undermine
investor confidence and capital formation. The industry would then have
more difficulty attracting and investing the amount of capital needed
to continue to supply the energy needs of societies around the globe.
Question 7. Do you believe that Americans are dangerously dependent
on oil and its refined products?
Answer. No. The emergence of abundant, affordable energy over a
century ago provided a key foundation for the tremendous gains in
living standards and quality of life achieved in the United States and
throughout the world. In addition, the more recent emergence of the
world's developing country economies has been based on vastly increased
energy use, and particularly the use of oil and its refined products.
Question 8. The International Energy Agency's recent Global Outlook
report expresses concern about world energy supplies and reliance on
the Middle East for oil. Do you think the IEA's anxiety is justified?
Answer. The IEA's overall numerical projections are very similar to
ExxonMobil's annual Energy Outlook. Much of the anticipated increases
in crude oil production is expected to come from the Middle East where
much of the global resource base is located. While the share of
production from the Middle East will grow, other regions will still
provide the majority of production. We do not view the projections for
increases in production from the Middle East as a significant concern.
ExxonMobil is working around the world to increase global hydrocarbon
production, including in Africa, Russia, Canada, and South America.
______
Response to Written Questions Submitted by Hon. Lisa Murkowski to
Lee R. Raymond
Question 1. In your agreement on an Alaska natural gas pipeline
that you are negotiating with the State of Alaska under the state's
Stranded Gas Act, do you anticipate making a firm commitment to develop
the Alaska gas pipeline project or do you anticipate accepting an
agreement that will only involve a series of spending and work
commitments? If the latter is the case, how long will it be before a
binding construction commitment deadline is reached?
Answer. The details of the contract are still being negotiated with
the State of Alaska. Discussions are well advanced. While significant
progress has been made, additional work remains (such as completing
fiscal negotiations, additional engineering, permitting, and other
activities) before a final construction decision can be made.
Question 2. If there is a concern about tying up your investment
capital in a single project, if a pipeline company presented you with a
proposal to take all of the risk of construction of the Alaska pipeline
project and to ship your gas at a reasonable tariff, would you commit
the gas you control to that pipeline within a reasonable time period?
If not, why?
Answer. ExxonMobil is involved in many capital intensive projects
in the U.S. and around the world, and is capable of handling them at
the same time. A pipeline, particularly of this scale, cannot be
financed without the underpinning of creditworthy shippers.
Consequently, a pipeline company would not be in a position to take all
of the risk of construction.
Question 3. In your companies' view, is it less risky to invest
billions of dollars in new LNG facilities to import natural gas from
foreign sources, than to invest in the Alaska gas line project? If not,
why are you investing in LNG projects before making a firm commitment
to the Alaska project?
Answer. There is risk in every project that ExxonMobil develops and
operates. ExxonMobil is very interested in and capable of developing
viable projects that will provide additional energy to meet U.S.
demand. Work remains to be done on an Alaska gas line (such as
completing fiscal negotiations, additional engineering, permitting)
before a final construction decision on that project can be made. The
fiscal negotiations are well advanced. We are investing in a broad
range of projects, including LNG, simultaneously and are capable of
handling them at the same time.
Question 4. While all of your companies are global in scope, this
nation is concerned about its reliance on foreign sources of crude oil.
Does it make sense for the United States to increase its reliance on
foreign LNG while allowing Alaska's natural gas reserves to continue to
remain in the ground?
Answer. To meet its energy demand, the U.S. needs natural gas
supplies from both domestic and international sources. It makes sense
to progress projects that can economically provide energy to the U.S.,
such as LNG and Arctic gas, in order to provide reliable and
competitive energy supplies to American consumers.
______
Response to Written Questions Submitted by Hon. James M. Talent to
Lee R. Raymond
Question 1. The recent hurricanes have highlighted the need for
increasing refinery capacity, which was already operating at a tight
margin of 97 percent. While that is laudible for efficiency purposes,
it allows no room for error in case of sudden outages or demand
increases. What is the optimal amount of spare refining capacity to
ensure a reliable supply of finished petroleum products at stable
prices?
Answer. Although hurricane and flooding damage, transportation
logistics, employee safety, and personnel dislocations contributed to
the supply shortage following Hurricanes Katrina and Rita, the most
critical contributing factor was the loss of electric power to run
pipelines and refineries. A more reliable power system would help
ensure that the product distribution infrastructure is sufficient to
deliver fuels to the market place.
Refinery capacity utilization reflects optimization of many
factors--for example, maintenance schedules, raw material availability
and cost, and product demand. Refining is a global business, and the
U.S. has routinely imported petroleum products for decades to balance
supply and demand. As a global integrated company, ExxonMobil uses its
worldwide resources to re-supply areas that experience shortages due to
local or regional supply problems. In response to the recent
hurricanes, the markets worked even under the most extraordinary
circumstances.
Question 2. How has industry consolidation impacted the amount of
spare production and refining capacity?
Answer. We believe that recent consolidations in the U.S. refining
sector have improved the efficiency and capacity of U.S. refining, thus
benefiting consumers. In our own merger, we have seen improvements from
sharing the best practices of each of the parent companies with the
refineries of the other. Several refineries have been sold to
independent/smaller refiners as part of FTC conditions for allowing
mergers to proceed. For example, independent refiner Valero is now the
largest U.S. refiner.
Question 3. Describe the degree of competition between refineries
for crude oil supplies and sales to retailers. What percentage of crude
oil processed in the U.S. is processed by integrated companies (i.e.,
those produce and refine) versus refined by independent refining
companies?
Answer. Domestic refineries must compete on the world market for
the majority of crude that they process--in 2004, per the EIA, U.S.
refiners processed 2 barrels of imported oil for every barrel of
domestically-produced oil.\1\ As of year-end 2004 per the Annual
Refining Survey in the Oil and Gas Journal, major international
integrated refiners operated 56% of the U.S. refining capacity, and
smaller integrated refiners operated an additional 13%. The remaining
31% is operated by independent refiners.
---------------------------------------------------------------------------
\1\ Per EIA, 15.4 MBD of total crude processed, 5.4 MBD of domestic
crude production, and 0.02 MBD of crude exports.
---------------------------------------------------------------------------
Competition for retail sales is much broader than it might appear.
For example, only about 7% of retail stores branded Exxon or Mobil are
actually operated by ExxonMobil--the remainder are dealers and
distributors, or in some cases resulting from FTC divestment
requirements, other oil companies. Many distributors operate under
multiple brands and there is significant competition to supply them.
Retailers with no refining capacity, such as Racetrac, QuickTrip, WaWa,
Sheetz, 7-11, and Stop-n-Go sell a significant percentage of domestic
gasoline. About 15% of ExxonMobil's U.S. gasoline sales are through the
unbranded wholesale market, generally to such retailers.
Question 4. How has the amount of refining capacity tracked changes
in demand for gasoline and diesel over the last 30 years?
Answer. Domestic production has supplied the vast majority of
gasoline and diesel demand growth over the last 30 years. U.S. refining
output has increased by 30 percent over the past 30 years.
Question 5. Explain to me your company's plan to increase refining
capacity in the U.S. to meet the need for new refinery capability.
Answer. ExxonMobil is studying expansions at some of its U.S.
refineries and we would like to continue to invest in the U.S. if there
are attractive economic opportunities to do so. Over the last decade
ExxonMobil has increased its U.S. refining capacity by the equivalent
of three average-sized refineries through expansions and efficiency
gains at existing U.S. refineries. Decisions on refinery investments
are based on long-term economics.
Question 6. EPAct 2005 removed the requirement to include
oxygenates from gasoline, largely because of concerns over the use of
MTBE. What is the impact on the price of removing oxygenates from
gasoline?
Answer. Ultimately, prices will be determined by the conditions in
the marketplace.
ExxonMobil used significant quantities of MTBE as the only
practical solution to the Federal Government's 2% oxygenate mandate.
Assuming EPA completes its rulemaking to remove the oxygenate
requirement, this mandate will be repealed effective May 2006.
ExxonMobil will be able to maintain current gasoline production
capability without the use of MTBE, but we cannot speak for others in
the industry. Since Congress eliminated the oxygenate mandate but
refused to provide limited liability protection from defective product
suits, there is a possibility that MTBE use might be reduced even at
the expense of gasoline production.
Question 7. Are there other oxygenates that can be used in place of
MTBE, such as using ethanol to make ETBE, and how does the cost of such
alternative additives compare to the cost of gasoline?
Answer. Many U.S. states have banned the use of MTBE, with some
states banning other ethers such as ETBE. ETBE has similar properties
to MTBE in terms of taste and smell thresholds. To replace MTBE with
ETBE would therefore not address the concerns that are associated with
MTBE.
Question 8. Have you studied the use of ETBE, the cost of
converting MTBE plants and how long it would take to do so, and whether
ETBE avoids the leakage/water contamination problems that were caused
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE
and use it to increase the volume of gasoline produced by a barrel of
oil compare to the cost of expanding existing or adding new refinery
capability?
Answer. ExxonMobil has no plans to use ETBE in the U.S. See
previous answer.
Question 9. What, if anything, is preventing your company from
using ETBE in place of MTBE?
Answer. See previous answer.
Response to Written Questions Submitted by Hon. Gordon H. Smith to
Lee R. Raymond
Question 1. I have a bill, S. 1743, to give the Federal Trade
Commission, additional authority to prevent and punish price gouging in
the aftermath of a major disaster. My bill provides effective authority
to the Federal Trade Commission to protect consumers from being
victimized in the wake of a disaster without hampering the normal
functioning of the free market. It even recognizes that there are
legitimate reasons why prices may increase.
Do you think that this consumer protection authority should be
available to the FTC?
Answer. Although the intentions of this legislation are
understandable, we believe that, if implemented, this type of
legislation could harm consumers. As FTC Chairman Majoras testified:
``Regardless of how repugnant price gouging is, a law that
prohibits it is a form of price control, which might seem
attractive . . . in the short run, but is likely to harm
consumers more in the long run. . . . We should not ignore what
we know. In the 1970's price controls that were established to
deal with the energy crunch resulted in massive shortages and
endless lines at the pump. . . . The choice during times of
emergency--high price gasoline or no gasoline at all--is not a
good one, but unfortunately, it's a choice that must be made.''
[Energy Pricing and Profits, Joint Hearing of the Senate
Commerce, Science, and Transportation Committee and the Senate
Energy and Natural Resources Committee, 109th Cong., 9 (Nov. 9,
2005) (Statement of Deborah Platt Majoras, Chairman, Federal
Trade Commission).]
We agree with Chairman Majoras.
Would this serve as a deterrent to price gouging by individual
retailers?
Answer. As noted in the question above.
Question 2. Can you tell me why diesel prices continue to remain
significantly higher than gasoline prices in Oregon?
Answer. Our market share in Oregon is very small and, therefore, we
cannot comment specifically on diesel versus gasoline prices in Oregon.
Response to Written Questions Submitted by Hon. Jim Bunning to
Lee R. Raymond
Question 1. Some analysts believe that OPEC is approaching its
current oil production capacity. Given this, are oil companies looking
at alternative sources of energy, such as liquid fuels made from coal,
in order to expand their business and maintain energy supplies for the
United States? Please include a review of the level of investment your
company is making this year and the projected investment over the next
three years in coal to liquid fuels initiatives.
Answer. ExxonMobil's long term Energy Outlook, which includes a
detailed assessment of global production through 2030, anticipates
increasing OPEC (and global) production over the next 25 years. While
alternative sources will grow, we believe they will continue to be a
small percentage of the world's total energy. See, www.exxonmobil.com/
corporate/Citizenship/Corp--citizenship--energy--outlook.asp, See also:
Attachment I, Will Energy Demand Continue to Increase?
ExxonMobil has a proprietary technology applicable to the
conversion of coal to liquids, and we continue significant research
expenditures to further advance this technology. Specifically, this
technology provides for the conversion of ``syngas'' to hydrocarbon
liquids, such as diesel. We envision employing this technology to
produce liquids from natural gas in Qatar around the end of this
decade.
Technology is commercially available today to convert coal to
``syngas.'' In fact, ExxonMobil operates a commercial unit today in
Texas producing syngas for chemical feedstocks from carbon sources. The
combination of coal-to-syngas technology with syngas-to-liquids
technology would allow the production of liquids from coal. However, we
do not foresee that coal to liquids will be cost-competitive with
conventional petroleum for many years to come.
Question 2. I have been concerned with the lag time between the
wholesale cost of a barrel of oil and the retail price of a gallon of
gasoline. As we saw following the hurricane, in an ascending market
where wholesale oil prices increase, there is a lag period of a few
days before retail gas prices reflect this change. Similarly one would
expect a lag in a descending market. My concern is that retail prices
are not dropping as quickly as they rose, relative to the change in oil
prices. Could you explain why price movements vary during a complete
market cycle and whether you believe any part of the energy industry is
unfairly profiting from this price lag?
Answer. We believe the gasoline markets following Hurricanes
Katrina and Rita were reacting not so much to crude oil prices as to
the hurricanes' unprecedented impact on gasoline supply and
distribution logistics. Prior to Katrina, U.S. refineries were
operating at 97.1% of capacity; just after Rita, U.S. refineries
operated at 69.8% of capacity due primarily to damage done to
refineries by the hurricanes, but also due to logistical problems
(crude supply to refineries and product movements out). Moreover, there
was an unprecedented reduction in our ability to transport gasoline
from the Gulf Coast to other parts of the country. For example, both
the Colonial and Plantation pipelines, which supply the East Coast and
Midwest, were non-operational for three days. In conjunction with
decreased supply, the demand for gasoline increased dramatically
following Katrina, perhaps reflecting consumers' fears that they would
be unable to obtain gasoline, given the supply disruptions. These
events occurred in a very short time, and prices thus rose very
quickly.
Because it has taken much more time for supply to increase than it
took for supply to decrease, prices fell more slowly than they rose.
Although U.S. refineries currently are still operating well below
historical levels--utilization is now about 86%--the industry is
supplying almost as much gasoline as it was prior to the hurricanes.
Almost 29 percent of U.S. refining capacity was offline as a result of
these natural disasters. Capacity has been shifted from other products
to supply gasoline demand, and imports from Europe have increased
substantially. As a result, gasoline prices are now at or below the
levels that existed prior to Hurricane Katrina.
Question 3. Boosting our domestic energy production is vitally
important not only to our economy but also to our national security.
Many of the countries we import oil from today are unstable,
jeopardizing the reliability of sustained production. Please provide a
chart for each of the last five years reflecting the percentage of your
exploration and production budget that invested in the United States
versus that invested overseas. Please also provide a chart reflecting
your current projections of the percentage of your exploration and
production budgets that will be allocated to projects in the United
States versus overseas for the next five years.
Answer. Please refer to the table below. Capital & Exploration
expenditures depend on the availability of opportunities and the timing
of many individual projects. We expect global Upstream expenditures to
average $14-15 billion per year in the coming years. The proportion
spent in the U.S. will depend on the availability of attractive options
in this country. Unlike almost all other countries in the world, the
U.S. puts much of its most promising hydrocarbon-bearing areas
currently out of bounds for development, as a matter of policy.
PERCENTAGE OF U.S. UPSTREAM CAPITAL & EXPLORATION EXPENDITURES
------------------------------------------------------------------------
2000 2001
$M $M 2002 $M 2003 $M 2004 $M
------------------------------------------------------------------------
Upstream Capital &
Exploration Expenditures
U.S...................... 1,865 2,423 2,357 2,125 1,922
Non-U.S.................. 5,068 6,393 8,037 9,863 9,793
------------------------------------------
Upstream Capital & 6,933 8,816 10,394 11,988 11,715
Exploration Expenditures....
U.S. Capital & Expl. Exp. As 27% 27% 23% 18% 16%
a % of Total Upstream.......
------------------------------------------------------------------------
Data Sources & Notes: Exxon Mobil Corporation Annual Report--Form 10-K
and Financial & Operating Review.
Question 4. The disruption caused by the recent hurricanes
displayed the United States' vulnerability when it comes to domestic
energy supply and production. What suggestions do you have to
strengthen our energy supply and production capability?
Answer. The hurricanes also displayed the resilience of our
domestic petroleum industry and the power of markets to respond
efficiently and effectively to major supply disruptions.
Part of meeting the challenge of our future energy needs should be
new policies authorizing exploration and production of abundant
domestic oil and gas resources that are now closed to development. This
is particularly true with respect to oil and gas deposits in the Outer
Continental Shelf, the Rocky Mountain region, and in Alaska. Another
part should be a streamlined process to permit and expedite the
construction of facilities to import liquefied natural gas (and not
exclusively on the Gulf Coast) that can be used to heat homes, generate
electricity and provide the essential feedstock for many American
manufacturing sectors, such as chemicals and fertilizer.
In addition, achieving recent production gains at our U.S.
refineries generally has not been facilitated by federal policies.
Specifically, federal laws and regulations could more efficiently
sustain the gains in environmental quality that we have achieved
historically than is now possible under several Clean Air Act programs.
ExxonMobil, and many others in industry, support reforms in the area of
permitting for more efficient refinery expansions and reductions in the
number of ``boutique fuels'' that hamper supply flexibility. Regulatory
constraints on supply flexibility can lead to greater market volatility
in emergency situations, and we therefore also support efforts to
strengthen the Federal Government's waiver authorities in such cases.
Question 5. It has been suggested that the United States consider
developing a strategic gasoline and natural gas reserve, similar to
Strategic Petroleum Reserve we currently have. Some analysts suggest
that such reserves may minimize price spikes in these commodities
during periods of market supply disruptions. What are your views on
whether a strategic natural gas or gasoline reserve would be feasible
and whether they might help minimize price increases during periods of
market uncertainty?
Answer. ExxonMobil agrees with both the California Energy
Commission and the National Petroleum Council (which advises the
Secretary of Energy), which have concluded in recent times that such
fuel reserves are not appropriate for the U.S. Product reserves are
costly and complex due to, among other factors, product degradation
from extended storage, many current fuel specifications, and logistical
challenges of maintaining storage in multiple locations. The fastest
and most efficient response to temporary supply imbalances is to let
markets function. Refiners have rapidly responded to temporary supply
challenges without the need for government intervention. Although
hurricane and flooding damage, transportation logistics, employee
safety, and personnel dislocations contributed to the supply shortage
following Hurricanes Katrina and Rita, the most critical contributing
factor was the loss of electric power to run pipelines and refineries.
Creating a strategic natural gas reserve could be
counterproductive, potentially interfering with and discouraging the
market's creation of important seasonal inventories. The U.S. currently
has the most robust system of natural gas inventories of any
industrialized nation. The system works to provide prompt supplies of
natural gas during the peak winter heating season and facilitates
maximum production of natural gas during the low demand months. The
purchasers of gas held in inventory take market risk on the interval
between purchases made during the spring and summer months (April thru
October) and the gas sold during the winter season (November thru
March). The normal build of inventory may be disrupted if it is
perceived that there is too much price risk due to the uncertainty of
how strategic inventories may be released.
Building strategic product or gas reserves when markets are tight
will put further upward price pressure on the market and remove
necessary operational supply from the market.
Question 6. China is becoming a bigger world oil player. This not
only has tightened the world oil market but also has produced national
security concerns for us. What concerns or problems do you see have
arisen since China became a bigger world energy player?
Answer. World energy demand has grown because of economic growth.
Demand has grown in the U.S., as well as China, India and the rest of
the developing world. This economic growth is necessary to improve the
standard of living in these areas. The oil market is global and
transparent. Supporting the efficient use of energy, not only in the
U.S. and other mature economies, but in growing economies as well will
allow for continued development while minimizing the demand on energy
sources.
Question 7. While there have been expansions and efficiency gains
at existing refineries, no refinery has been built in the United States
in 30 years. Since the oil companies are now making record earnings,
are there plans to build new refineries in the United States?
Answer. ExxonMobil is studying expansions at some of its U.S.
refineries and we would like to continue to invest in the U.S. if there
are attractive economic opportunities to do so. Over the last decade
ExxonMobil has increased its U.S. refining capacity by the equivalent
of three average-sized refineries through expansions and efficiency
gains at existing U.S. refineries. Decisions on refinery investments
are based on long-term economics. See, Attachment J, How Do Fewer
Refineries Affect Supply?
Question 8. The 2005 Energy Bill implemented a controlled phase-out
of MTBE. Many companies, however, are planning on completely halting
its use. How will a sudden halt of the use of MTBE affect the gasoline
market and refineries?
Answer. ExxonMobil used significant quantities of MTBE as the only
practical solution to the Federal Government's 2% oxygenate mandate.
Assuming EPA completes its rulemaking to remove the oxygenate
requirement, this mandate will be repealed effective May 2006.
ExxonMobil will be able to maintain current gasoline production
capability without the use of MTBE, but we cannot speak for others in
the industry. Since Congress eliminated the oxygenate mandate but
refused to provide limited liability protection from defective product
suits, there is a possibility that MTBE use might be reduced even at
the expense of gasoline production.
Question 9. I have noticed very large differences between the price
of gasoline in different areas of the country. For example, I recently
saw gasoline in northern Virginia that was much more expensive than
gasoline in northern Kentucky. Please explain why there can be such a
significant difference in gasoline prices in different areas of the
country.
Answer. ExxonMobil does not market directly in Kentucky and,
therefore, cannot comment specifically on the variances in retail
prices between Kentucky and Northern Virginia. However, generally
speaking, the disparity between prices of fuel in different parts of
the country is due to the differences in required gasoline
formulations, transportation costs, local competitive conditions, and
state taxes.
Question 10. Below are several questions on oil and the commodities
futures market:
When was oil first traded on the world-wide commodities
futures market?
Would the price of oil be affected if oil was taken off the
commodities futures market and no longer traded?
Would oil then be bought and sold as a true supply and
demand product?
Answer. The NYMEX website reports that their crude futures trading
began in 1983.
We do not participate in the petroleum futures market to any
significant extent. Conceptually, we would expect that futures trading
would increase the liquidity and therefore the efficiency of the market
for oil just as it does for many other commodities, including most
American agricultural production. Eliminating the futures markets for
petroleum would likely reduce the transparency of pricing. Thus, as
with the agricultural futures markets, the petroleum futures markets
should be beneficial overall to buyers and sellers.
______
Response to Written Questions Submitted by Hon. Jeff Bingaman to
Lee R. Raymond
Question 1. Section 392 of the Energy Bill, which was negotiated
with the involvement of the Chairman and Ranking Member of the Energy
and EPW Committees, contains permitting streamlining language. The
Energy Policy Act of 2005 permits the EPA Administrator to enter into a
refinery permitting cooperative agreement with a state. Under such an
agreement, each party identifies steps, including decision timelines,
it will take to streamline the consideration of federal and state
environmental permits for a new refinery. I want to ask you several
questions about that provision, since you have supported streamlining:
Have you requested that EPA issue any regulations or take any action to
implement these new provisions?
Answer. No.
If yes, when?
If no, when do you anticipate you will do so?
Answer. ExxonMobil is evaluating this provision and whether it can
be beneficial to our plans.
Question 1a. Have you worked with any state to encourage them to
enter into an agreement with EPA under Section 392 of EPAct?
Answer. No. ExxonMobil is evaluating this provision and whether it
can be beneficial to our plans.
Question 1b. Do you support the EPAct streamlining provisions?
Answer. Yes. There are, however, more effective steps that could be
taken to facilitate domestic fuel production. These include extending
the NAAQS ozone attainment deadlines for refining areas such as Houston
and Philadelphia; codifying comprehensive New Source Review reform;
reducing the number of state specific ``boutique'' fuels; and expanding
federal EPA fuel preemption authority to state fuel requirements.
All of these steps were emphasized in reports in 2000 and 2004 from
the National Petroleum Council to the Department of Energy.
Question 1c. Do you have any examples of where a state came to EPA
and said we want to work closely with you on permitting a new refinery
or refinery expansion and EPA refused to provide technical assistance
and even financial resources under existing law to that state?
Answer. No.
Question 2. In answer to several of the questions at today's
hearing (Nov. 9) the witnesses have noted that the market for petroleum
and petroleum products is a global one and should be viewed in that
context. Please list all planned refinery construction that your
company plans to undertake globally. Please list them by country and
include the projected size of the facility, including the projected
capacity for all units and their potential product yields in addition
to the project's total investment cost.
Answer. Refining is a global business, and the U.S. has routinely
imported petroleum products for decades to balance supply and demand.
ExxonMobil is studying expansions at some of its U.S. refineries.
Decisions on refinery investments are based on long-term economics.
ExxonMobil is currently participating in a joint venture to construct a
multi-billion dollar refining/chemical operation at Fujian, China to
meet anticipated demand for petroleum products in the region. When
completed, it will process 240 KBD of crude oil. Other expansion
projects are also under consideration but are confidential at this
point.
Question 3. The International Energy Agency (IEA) has just released
its World Energy Outlook 2005. It contains a piece on the global
refining picture. (Please see the summary below.) The study notes a
lack of investment in upstream and downstream capacity has contributed
to the extreme tightness in global oil markets. What are your thoughts
in response to this? What is your company doing in response (actions)?
What is your company doing (investments/analysis) in the ``MENA''
regions? Do you agree with the IEA's projections?
Answer. The IEA's global demand projections are similar to those
found in ExxonMobil's long term Energy Outlook. The Outlook envisions
growing demand for oil through 2030. The growth in supply will require
significant investment on a global basis.
ExxonMobil is pursuing opportunities where available globally. We
have brought on significant new crude oil production in Africa and we
have major LNG investments underway in the Middle East. However,
private (non-government owned) oil company investment opportunities in
crude oil production are limited in many areas of the world.
Question 4. World Energy Outlook 2005: IEA Projects Growth in
Middle East and North Africa Oil and Natural Gas Sectors through 2030
but a Lack of Investment would Push up Prices and Depress GDP Growth
11/7/2005 London--``The importance of the Middle East and North Africa
(MENA) to global oil and gas markets cannot be underestimated. These
countries have vast resources, but these resources must be further
developed. Investment should not be delayed,'' said Mr. William C.
Ramsay, Deputy Executive Director of the Paris-based International
Energy Agency, as he presented findings from the World Energy Outlook
2005: Middle East and North Africa Insights (WEO-2005) today in London.
Noting that a lack of investment in upstream and downstream capacity
has contributed to the extreme tightness in the global oil market in
recent months, Mr. Ramsay highlighted the critical role that this
region will play in meeting growth in global energy demand.
The WEO-2005 expects global energy markets to remain robust through
2030. If policies remain unchanged, world energy demand is projected to
increase by over 50% between now and 2030. World energy resources are
adequate to meet this demand, but investment of $17 trillion will be
needed to bring these resources to consumers. Oil and gas imports from
the Middle East and North Africa will rise, creating greater dependence
for IEA countries and large importers like China and India. Energy-
related CO2 emissions also climb--by 2030, they will be 52%
higher than today. ``These projected trends have important implications
and lead to a future that is not sustainable--from an energy-security
or environmental perspective. We must change these outcomes and get the
planet onto a sustainable energy path,'' added Mr. Ramsay.
WEO 2005 focuses on the energy prospects in the Middle East and
North Africa to 2030, covering in detail developments in Algeria,
Egypt, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United
Arab Emirates. Internal demand, resources, policies, investment,
production, exports, even energy use for water desalination, all are
examined. ``To our knowledge, this is the first time that any
publication with a focus on the Middle East and North Africa has
undertaken such an extensive, country-by-country review of the energy
sector of the region. At a time when experts debate whether the world
will run out of energy, these results are particularly relevant,'' Mr.
Ramsay said.
In the MENA region, domestic energy demand is driven by surging
populations, economic growth and heavy energy subsidies. Primary energy
demand more than doubles by 2030. At the same time, MENA oil production
will increase by 75% by 2030 and natural gas production will treble,
allowing more gas exports. The region's share in global oil production
will increase from 35% today to 44% in 2030. However, this means the
countries of the Middle East and North Africa would need to invest, on
average, $56 billion per year in energy infrastructure. The level of
upstream oil investment required will be more than twice that of the
last decade.
But what if adequate investment is not made or consuming countries'
policies change? To assess these risks, WEO 2005 develops two other
scenarios, each of them far from unlikely: a Deferred Investment
Scenario, in which investment in the producing countries is delayed,
whether deliberately or inadvertently; and a World Alternative Policy
Scenario, in which energy-importing countries take determined action to
cut demand and change the pattern of fuel use, driven by high prices,
environmental or security goals, or all three.
The two scenarios have significant implications for MENA countries.
In the Deferred Investment Scenario, energy prices rise sharply. Global
energy-demand growth falls, cutting the region's oil and gas export
revenues by more than $1 trillion from 2004-2030. World GDP growth
slows down. Deferred investment could be the result of many factors,
but whatever the cause, the results are higher prices, greater
uncertainty and market inefficiencies.
The WEO World Alternative Policy Scenario examines the consequences
of new policies under consideration in consuming countries. ``The G8
Plan of Action, agreed at the Gleneagles Summit in July 2005, launched
detailed initiatives to promote cleaner energy and combat the impact of
climate change. The IEA was asked to play an important role. This
strong global commitment indicates that governments are already
adopting alternative policies--such as those in the World Alternative
Policy Scenario--to achieve the G8 goals,'' explained Mr. Ramsay. Under
this Scenario, global oil and gas demand growth is lower, but the world
continues to rely heavily on MENA oil and gas. CO2 emissions
fall 16% below the level of the Reference Scenario--but still increase
around 30% by 2030.
Assumptions about international energy prices have been revised
significantly upwards in WEO-2005, as a result of changed market
expectations after years of underinvestment in oil production and the
refinery sector. The average IEA crude oil import price, a proxy for
international prices, averaged $36.33 per barrel in 2004 and peaked at
around $65 (in year-2004 dollars) in September 2005. In the Reference
Scenario, the price is assumed to ease to around $35 in 2010 (in year-
2004 dollars) as new crude oil production and refining capacity comes
on stream. It is then assumed to rise slowly, to near $39 in 2030. In
the Deferred Investment Scenario the oil price reaches $52 in 2030.
The World Energy Outlook 2005 contains over 600 pages of detailed
statistics and in-depth analysis. The study was produced by the IEA
with input from many international experts from producing countries,
industry and organizations including OPEC. The IEA's prestigious annual
WEO series has long been recognized as the authoritative source for
global long-term energy market analysis and has received honors for
analytical excellence including awards from the Russian Academy of
Sciences, the U.S. Department of Energy and numerous public and private
organizations.
Voluntary standards--Post hurricanes, what is the industry doing to
come up with voluntary standards/best practices for back-up power
supply to critical energy infrastructure (refineries, pipelines, etc.)
and natural disaster recovery? Will the API undertake such an effort?
If not, what is your company doing?
Answer. Commercial power availability is essential to pipeline
operation. The ability of emergency response officials at the federal,
state and local levels to facilitate, coordinate and prioritize the
response of the electric power utilities during outages is critical. A
more reliable power system would help ensure that the product
distribution infrastructure is sufficient to deliver fuels to the
marketplace. ExxonMobil is working closely with industry and government
to assess the impact of the hurricanes, as well as to identify
improvements for the future. Additionally, ExxonMobil is conducting a
review of learnings from Hurricanes Katrina and Rita events and will be
incorporating findings into future pre-hurricane season checklists and
business continuity plans.
Question 5. A number of witnesses testified that failure of the
electricity system resulting from hurricanes Rita and Katrina
contributed in great part to the inability to get refineries restarted,
or to get natural gas pipelines restarted. What are the arrangements
for backup power in case of such emergencies at your critical
facilities?
Answer. All ExxonMobil pipeline operations where power was
interrupted worked closely with electric power providers to restore
power as quickly as possible. Where a rapid restoration of power supply
by the provider was not possible, portable rental power generation
equipment was obtained with up to 2MW capacity being typical. This
easily-transportable power generation equipment is more flexible and
practical than permanent facilities for the size of the pump stations
in our pipeline system. A more reliable power system would help ensure
that the product distribution infrastructure is sufficient to deliver
fuels to the market place.
ExxonMobil self-generates approximately 50% of our total
electricity demand. This self-generation is located at our refineries,
chemical plants and production facilities around the world. Back-up
power is a commercial arrangement negotiated between ExxonMobil and a
third-party supplier. When required, back-up power is delivered over
the transmission grid. This commercial arrangement is meant to `back-
up' our self-generation capabilities in the event this generation is
unavailable. Because, at most of our facilities, cogeneration supplies
only part of a site's total demand, these facilities cannot operate at
or near full capacity without an operating transmission grid. A
dedicated power generation plant to supply emergency power to a
specific refinery in the event of an emergency is not practical since
it would require a dedicated transmission interconnection system.
Question 6. How many of your plants have on site cogeneration
facilities? Which plants have these facilities?
Answer. ExxonMobil has interests in 85 cogeneration facilities at
more than 30 locations around the world representing a capacity of
approximately 3,700 MW. Within the U.S., cogeneration facilities exist
at six U.S. locations including the Baytown Texas refinery and
petrochemical complex, Baton Rouge Louisiana refinery and petrochemical
complex, Beaumont Texas refinery and petrochemical complex, Billings
Montana refinery, Torrance California refinery and the Joliet Illinois
refinery. In addition we have cogeneration at three upstream production
facilities in Alabama and California.
Question 7. Are there regulatory barriers at either the state or
federal level that prevent the installation of cogeneration plants at
your facilities that do not have them?
Answer. There are a number of regulatory barriers impacting
cogeneration development, including multiple and overlapping permit
programs--federal and state New Source review, Title V (federal Clean
Air Act) operating permits, and stormwater pollution prevention and
discharge elimination permits. Permit applications may also require
Endangered Species Act reviews. Potentially, acid rain permits may be
needed also, depending on output to the grid. Governments wanting to
promote cogeneration investments, that benefit both industry and the
public alike, must also develop markets and market rules with several
characteristics, namely: 1) dispatch priority as electricity and steam
cannot be made independently and steam is integral to site operations;
2) non-discriminatory access to the transmission grid allowing
cogeneration investors access to markets and customers; 3) use-based
transmission / ancillary / back-up power charges--charges based on
actual use to support net internal load. Even in the United States, not
all markets possess these characteristics.
Question 8. Would the presence of cogeneration facilities at your
refineries reduce the recovery time during such emergencies?
Answer. The presence of cogeneration capability at our refineries
reduced some startup times in the aftermath of the hurricanes.
Cogeneration facilities provide for high efficiency electricity
supply that is controlled by the individual sites. Whether they
facilitate a reduced recovery time during these stated emergencies
depends upon the damage sustained at our own facility and whether that
damage could be evaluated / repaired sooner than the damage sustained
within the utility / grid operator's system or facility. Secondly, fuel
(i.e. from a natural gas pipeline system) would have to be available in
order to operate the cogeneration facility. Lastly, the cogeneration
facility must have been designed such that it can operate isolated from
the public transmission grid. Advanced turbine technology, when
combined with advanced NOX emissions control technology as
required in numerous locations, could prohibit operation in a ``stand
alone'' mode. Startup of these cogeneration facilities may require
electric power from the grid or generators.
Question 9. Witnesses at earlier hearings testified that there are
a number of modern natural gas generation facilities in the Louisiana/
Texas area that are not used to their full capacity. Are there natural
gas generation facilities in close proximity to your refinery
facilities that could be used for backup generation at the refineries?
Answer. Not to our knowledge, but this idea is likely not
practical. Many generators do not have ``black start'' capability and
thus require a functioning transmission grid in order to start their
generation facilities. Even if the generator has the ability to operate
isolated from the grid, extensive interconnection investments would be
required to connect the generation facility directly (and only) to an
individual refinery.
Question 10. Would use of generators that are in close proximity to
refineries to provide backup power during such emergencies mean that
recovery times might be shortened, since the restoration time for a
nearby facility might be less than the restoration time for the
transmission facilities for traditional utilities?
Answer. No, for the reasons outlined in the previous question. This
approach would require a dedicated transmission interconnection between
a specific generator(s) and a specific refinery (or other facility).
This would be neither practical nor cost effective. Generally,
generators are not sufficiently sized to supply the total power needed
to operate a refinery.
environment
Question 11. Please specify exactly which, if any, Federal or State
environmental regulations have prevented your company from expanding
refinery capacity or siting a new refinery, and documentation on the
exact details of the project prevented.
Answer. There are a number of federal, state and even local
regulations that impact or even restrict refinery expansion. A major
component of these is EPA's New Source Review (NSR). EPA's NSR program,
especially prior to the recent NSR reforms, created significant
impediments to expanding refinery capacity. As originally conceived,
facilities seeking to construct a new major source or make major
modifications were subject to this program. However, EPA significantly
expanded this program as it applies to small changes to existing
sources. For example, under EPA's ``past actual to future potential
emissions increase test'', many projects which did not increase actual
emissions still became subject to NSR. Given the costs associated with
NSR emission controls, unless the project had a very large return, the
project was often not progressed.
For example, recently one of our refineries had spare crude unit
capacity. A minor physical modification (a new section of piping) could
have been installed that would have allowed importation of an
additional 5,000 barrels per day of crude to help fill some of the
spare capacity. However, the refinery did not implement this project
because, under EPA's ``past actual to future potential test'', this
project would have required Prevention of Significant Deterioration/NSR
permitting. Permitting costs alone were estimated at twice the
expansion project cost and NSR permitting would likely cause a 1-2 year
delay and trigger emissions controls investment requirements on the
crude unit. Consequently the refinery was unable to capture this
opportunity to refine approximately 1.8 million barrels ( 75 million
gallons) of crude oil during the year into gasoline and other products.
How much have so-called ``boutique fuel'' requirements added to the
average retail price, where applicable, and the average wholesale price
per gallon of the gasoline sold by your company?
Answer. It is very difficult to quantify an exact impact of
boutique fuels on the average price per gallon of gasoline. States have
promulgated unique fuel specifications (``boutique fuels'') to meet
federal air quality standards, and the resulting proliferation of
differing fuel specifications increases costs. Further, these differing
fuel specifications complicate supplying fuel to the affected areas.
This tightened supply situation amplifies even minimal supply
disruptions. Ultimately, prices are determined by the market.
If the EPA or the Congress were to act to minimize the number of
``boutique fuel'' formulations required by the states to protect air
quality, how many should there be and what should the specifications of
each be in order to maintain air quality and improve fungibility?
Answer.
1. Existing gasoline boutique fuel designations should be
rationalized to five formulations: a. California RFG for California
only; b. Federal RFG; c. 7.8 RVP (Reid Vapor Pressure) volatility-
control gasoline for modest non-attainment areas; d. 7.0 RVP
volatility-control gasoline for areas with a more significant non-
attainment problem; and e. conventional gasoline.
2. Diesel fuel should be limited to two formulations: a. CARB
diesel for California only; and b. EPA diesel for the rest of the
country.
3. Home heating oil formulations should be limited to the grades
that are currently in the market place.
Question 12. Streamlining New Source Review (NSR) permitting
constraints was mentioned as an incentive that would encourage refiners
to supply more product to the U.S. market. How many air quality permit
applications for refinery expansions has your company submitted for NSR
over the last ten years? How long did it take the EPA, or the
applicable State, to approve or deny each permit application, after
receipt of a complete permit application? What was the expected
percentage increase in product output of the expansion?
Answer. All capital projects, including capacity expansions, are
evaluated for permitting requirements. The number of NSR air quality
permit applications is not readily available. However, the permit
applications have tended to be associated with relatively large
capacity increase projects on average every few years. They require, on
average, a year longer to obtain versus other permits. Although it is
possible under the NSR regulations to offset the increase in emissions
resulting from new construction, cost-effective emission offsets at
many sites are no longer available. Consequently, the restrictive
interpretation of NSR requirements has the potential to subject even
small debottlenecks to NSR permitting. Without the NSR reforms,
refineries will be limited in their ability to improve efficiency,
reliability, and production capability.
Question 12a. How would you propose to streamline NSR and still
maintain local air quality and prevent any increase in total annual
emissions from such expansions?
Answer.
1. Include the NSR reforms finalized in 2002 and 2003 (relating to
emission calculation methodology, changes that would not trigger NSR,
etc.) in legislation to provide certainty and flexibility for U.S.
manufacturing operations. NSR reforms were originally envisioned by the
Clinton Administration; implementation of reforms by the current
Administration has been held up by litigation.
2. Each state should incorporate federal NSR reforms into state
regulations. Such action would provide for a more rapid and certain
permitting of refinery expansions.
3. Establish an annual facility-wide or partial-facility allowable
emission limitation based on current permit limits. This would allow
facilities to make any changes necessary without going through
permitting, as long as the ``cap'' is not exceeded, thereby maintaining
local air quality and preventing any increases in total allowable
emissions.
4. Adopt an hourly rate of emissions increase as the first step in
determining whether or not NSR is triggered; include a significance
test.
Question 13. How much did the fuel specification waivers that have
been granted by EPA to date, due to the supply disruptions caused by
the hurricanes, reduce the average retail price of the gasoline or
other refined products made by your company?
Answer. Prices are determined by the market. The EPA waivers of
certain federal fuel requirements allowed prompt increases in fuel
supplies to areas that otherwise would have experienced product
shortages or run-outs.
Question 14. One witness indicated that ``getting two 100-year
hurricanes in four weeks'' caused a great deal of chaos and disruption
in the gasoline supply chain. The National Oceanic and Atmospheric
Administration has projected that the country and the Gulf of Mexico
have entered a cyclical period of 20-30 years during which the Gulf and
coastal areas are likely to experience a greater frequency of
hurricanes and higher odds of those hurricanes making landfall in the
U.S. What preparations has your company made to deal with a greater
hurricane frequency to decrease repetition of the supply disruption
that occurred this year?
Answer. Whether there will be a greater hurricane intensity or
frequency in the future remains unclear, with views differing among
experts. In any event, evaluating the future frequency and impact of
weather events is an imprecise and uncertain area of science.
ExxonMobil places a premium on safety and reliability, and has
comprehensive emergency-response and business-continuity plans in place
at all our facilities. Safety factors are incorporated over and above
the base platform design that results in structures designed for events
more severe than a 100 year event.
We are working closely with industry and government to assess the
impacts of the hurricanes, as well as to identify improvements for the
future.
Question 15. Over the last 50 years, average annual sea surface
temperatures have increased in the Gulf of Mexico and, according to the
National Academy of Sciences and other similar scientific expert
bodies, are expected to continue increasing as the oceans continue
warming due to accelerating global climate change. The Administration's
Climate Action Report (2002) stated ``model simulations indicate that,
in a warmer climate, hurricanes that do develop are likely to have
higher wind speeds and produce more rainfall.'' What preparations has
your company made to deal with a greater likelihood of greater
hurricane intensity so as to decrease repetition of the disruption that
occurred this year?
Answer. See previous answer.
Question 16. How has your company disclosed to shareholders and
investors the risks associated with the potential impacts on your
company's assets in the Gulf of Mexico or indirect impacts on its
assets elsewhere, of either the expected greater frequency of
hurricanes making landfall in the U.S. or the probable greater
intensity of hurricanes in the region?
Answer. While ExxonMobil may not agree with the premise of your
question, we do acknowledge that weather can impact our results.
ExxonMobil's disclosure of ``Factors Affecting Future Results'' notes
that the operations and earnings of the Corporation and its affiliates
throughout the world are affected by local, regional and global events
or conditions that affect supply and demand. These events or conditions
include weather, including severe weather events, that can disrupt
operations. We provide the information on ``Factors Affecting Future
Results'' to shareholders and investors both in our annual report on
Form 10-K and on our website.
finances, production, imports, etc.
Please provide for each of last ten years your company's--
Gross revenue of U.S. operations
Total capital expenditures in the U.S.
Net profit of U.S. operations
Total taxes paid to the Federal government
Total taxes paid to State governments
Answer. Please refer to the table below.
TEN YEAR U.S. SELECTED FINANCIAL DATA SUMMARY
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995 $M 1996 $M 1997 $M 1998 $M 1999 $M 2000 $M 2001 $M 2002 $M 2003 $M 2004 $M
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gross Revenue--U.S............................................ 51,013 55,103 55,665 45,783 53,214 70,036 63,603 59,675 70,128 88,382
Total capital & exploration expenditure-U.S................... 3,618 3,716 3,889 4,195 3,402 3,338 3,942 3,957 3,766 3,025
Net income after tax--U.S..................................... 3,134 3,951 4,523 2,841 3,157 6,750 6,255 3,601 5,634 8,154
Income, excise and other taxes
Total income taxes to Federal Government--U.S............... 1,294 1,729 1,840 1,040 608 3,132 2,532 1,048 2,589 3,353
Total income taxes to State governments--U.S................ 232 205 207 141 148 309 229 121 346 406
Excise taxes--U.S........................................... 6,328 6,701 7,063 7,459 7,795 6,997 7,030 7,174 6,323 6,833
All other taxes and duties--U.S............................. 1,297 1,238 1,163 967 1,021 1,253 1,177 1,120 1,209 1,223
-----------------------------------------------------------------------------------------
Total income, excise and other taxes.......................... 9,151 9,873 10,273 9,607 9,572 11,691 10,968 9,463 10,467 11,815
--------------------------------------------------------------------------------------------------------------------------------------------------------
Data Sources:
Exxon Corporation Annual Report--Form 10-K and Financial & Operating.
Review Mobil Corporation Annual Report--Form 10-K and Fact Book.
Exxon Mobil Corporation Annual Report--Form 10-K and Financial & Operating Review.
Question. Total donated to charity:
Answer.
EXXON MOBIL CORPORATION--CONTRIBUTIONS AND COMMUNITY DEVELOPMENT
EXPENDITURES--1995-2005
------------------------------------------------------------------------
Year $ millions
------------------------------------------------------------------------
1995..................................................... $79.5
1996..................................................... 85.9
1997..................................................... 90.3
1998..................................................... 104.0
1999..................................................... 97.6
2000..................................................... 97.1
2001..................................................... 125.9
2002..................................................... 98.5
2003..................................................... 103.0
2004..................................................... 106.5
2005 (estimate).......................................... 138.7
--------------
Total 1995-2005...................................... $1,130.0
------------------------------------------------------------------------
Question 17. How much additional petroleum refining capacity do you
expect your company to install in the United States over the next 10
years?
Answer. Refining is a global business, and the U.S. has routinely
imported petroleum products for decades to balance supply and demand.
Over the last decade ExxonMobil has increased its U.S. refining
capacity by the equivalent of three average-sized refineries through
expansions and efficiency gains at existing U.S. refineries. ExxonMobil
is studying expansions at some of its U.S. and international
refineries. Decisions on refinery investments are based on long-term
economics. It should be noted that U.S. refining output has increased
by 30 percent over the past 30 years.
Question 18. What percentage of profits over the last 10 years has
your company re-invested in capital, exploration, drilling, and
production in the United States? Please provide an annual total for
those U.S. expenditures and a clear breakdown.
Answer. Please refer to table 1 below which provides details of our
Upstream capital & exploration expenditure and Upstream net income. We
would emphasize that capital expenditures depend on the availability of
attractive opportunities, both in the United States and throughout the
world. Also, the amounts for capital investment among business lines
within the industry depend upon the relative opportunities they
present.
Question 19. What percentage of profits over the last 10 years has
your company re-invested in non-petroleum energy supply and production
in the United States? Please provide a total and the results of such
investment.
Answer. A negligible amount of ExxonMobil's company profits has
been re-invested in non-petroleum (non crude oil and natural gas)
energy supply and production.
Question 20. On average for the last ten years, please compare your
company's overall capital expenditures in the United States to its
expenditures elsewhere.
Answer. Please refer to the table 2 below.
Question 21. What percentage of your company's gross revenue was
collected in the United States in each of the last 10 years?
Answer. Please refer to the table 3 below.
Table 1.--% OF PROFITS REINVESTED IN U.S. UPSTREAM ACTIVITIES
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-yr.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Upstream--U.S. Only
Capital & exploration expenditure (capex)--$M................ 1,685 1,625 2,008 2,174 1,729 1,865 2,423 2,357 2,125 1,922 19,913
Total upstream--U.S. only
Net income after tax--$M..................................... 954 2,518 2,331 850 1,842 4,542 3,933 2,524 3,905 4,948 28,347
Upstream Capex
As % of Upstream U.S. Net Income After Tax................... 177% 65% 86% 256% 94% 41% 62% 93% 54% 39% 70%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Data Sources & Notes:
Exxon Corporation Annual Report--Form 10-K and Financial & Operating.
Review Mobil Corporation Annual Report--Form 10-K and Fact Book.
Exxon Mobil Corporation Annual Report--Form 10-K and Financial & Operating Review.
Table 2.--CAPITAL & EXPLORATION EXPENDITURE--LAST 10 YEARS
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-yr.
1995 $M 1996 $M 1997 $M 1998 $M 1999 $M 2000 $M 2001 $M 2002 $M 2003 $M 2004 $M total %
$M
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total capital & exploration expenditure
U.S........................................ 3,618 3,716 3,889 4,195 3,402 3,338 3,942 3,957 3,766 3,025 3,685 26%
Non-U.S.................................... 9,953 12,306 10,228 11,340 9,905 7,830 8,369 9,998 11,759 11,860 10,355 74%
----------------------------------------------------------------------------------------------------------
Total capital & exploration expenditure...... 13,571 16,022 14,117 15,535 13,307 11,168 12,311 13,955 15,525 14,885 14,040 100%
U.S. Capital & Expl. Exp. as a % of total.... 27% 23% 28% 27% 26% 30% 32% 28% 24% 20%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Data sources:
Exxon Corporation Annual Report--Form 10-K and Financial & Operating Review.
Mobil Corporation Annual Report--Form 10-K and Fact Book.
Exxon Mobil Corporation Annual Report--Form 10-K and Financial & Operating Review.
Table 3.--TOTAL GROSS REVENUE--LAST 10 YEARS
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-yr.
1995 $M 1996 $M 1997 $M 1998 $M 1999 $M 2000 $M 2001 $M 2002 $M 2003 $M 2004 $M ave $M %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total gross revenue
U.S............................. 51,013 55,103 55,665 45,783 53,214 70,036 63,603 59,675 70,128 88,382 61,260 29%
Non-U.S......................... 146,161 157,943 142,070 119,844 129,315 158,403 145,814 141,274 166,926 202,870 151,062 71%
---------------------------------------------------------------------------------------------------------------------
Total gross revenue............... 197,174 213,046 197,735 165,627 182,529 228,439 209,417 200,949 237,054 291,252 212,322 100%
U.S.% of total gross revenue...... 26% 26% 28% 28% 29% 31% 30% 30% 30% 30%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Data Sources
Exxon Corporation Annual Report--Form 10-K and Financial & Operating Review.
Mobil Corporation Annual Report--Form 10-K and Fact Book.
Exxon Mobil Corporation Annual Report--Form 10-K and Financial & Operating Review.
Question 22. How much of your company's revenue collected in the
United States was used to pay for purchasing crude oil from OPEC
countries?
Answer. ExxonMobil's 2004 purchases of crude oil from OPEC
countries into the U.S. were $8.8 billion.
Question 23. Do you support S. 1794 or something like it create
gasoline and jet fuel reserves to ensure stability of price and supply?
Should it be extended to diesel and other fuels like natural gas?
Answer. Product reserves are costly and complex due to, among other
factors, product degradation from extended storage, many current fuel
specifications, and logistical challenges of maintaining storage in
multiple locations. Both the California Energy Commission and the
National Petroleum Council (which advises the Secretary of Energy) have
concluded in recent times that such fuel reserves are not appropriate
for the U.S. The fastest and most efficient response to temporary
supply imbalances is to let markets function. Refiners have rapidly
responded to temporary supply challenges without the need for
government intervention. Although hurricane and flooding damage,
transportation logistics, employee safety, and personnel dislocations
contributed to the supply shortage following Hurricanes Katrina and
Rita, the most critical contributing factor was the loss of electric
power to run pipelines and refineries.
Creating a strategic natural gas reserve could be
counterproductive, potentially interfering with and discouraging the
market's creation of seasonal inventories. The U.S. currently has the
most robust system of natural gas inventories of any industrialized
nation. The system works to provide prompt supplies of natural gas
during the peak winter heating season and facilitates maximum
production of natural gas during the low demand months. The purchasers
of gas held in inventory take market risk on the interval between
purchases made during the spring and summer months (April thru October)
and the gas sold during the winter season (November thru March). The
normal build of inventory may be disrupted if it is perceived that
there is too much price risk due to the uncertainty of how strategic
inventories may be released.
Building strategic product or gas reserves when markets are tight
will put further upward price pressure on the market and remove
necessary operational supply from the market.
Question 24. On average for the last ten years, how much of what is
refined by your company in the U.S. stays in the U.S.?
Answer. ExxonMobil is typically a net seller of gasoline and
distillates since its refinery production exceeds its U.S. marketing
demand. Typically exports are less than 3% of total production and
volumes are about balanced with imports, but can vary for a variety of
market and supply/demand factors. ExxonMobil has imported products to
the U.S. and has exported products to longstanding customers in Mexico,
South/Central America and the Caribbean. This approach balances
refinery production in an efficient manner.
We do not have 10 years worth of data readily available. However,
ExxonMobil has exported YTD 2005 (mostly to Mexico) about 9 million
barrels of gasoline 3 million barrels distillates and 0.5 million
barrels of jet kerosene. We sold 97.8% of our domestic production
within the U.S. In 2004 97.6% of ExxonMobil's domestic production was
also sold in the U.S.
Question 24a. What amount of refined product did your company
import in 2004 and in 2005?
Answer. ExxonMobil has imported about 12.5 MB of gasoline and
blending components, 1.5MB of distillates and 0.5MB of jet kerosene
so far in 2005. Corresponding imports in 2004 were 1.5MB of gasoline,
and 0.1MB of jet kerosene. There were no imports of distillate in
2004.
Question 24b. What are your assumptions about demand growth in
India in China?
Answer. In ExxonMobil's Energy Outlook, Asia-Pacific total energy
demand is anticipated to grow in excess of 2% annually between today
and 2030.
Question 24c. How have your investments in the United States
increased the energy security of the country?
Answer. ExxonMobil's global investments, averaging $15 billion
annually in recent years, continue to increase the diversity and
reliability of supply. This diversity increases the energy security of
all importing nations, including the U.S. Recent projects have added
production not only in the U.S., but in Europe, Africa, Russia and the
Caspian region.
Question 25. What market signals will occur in advance of peaking
world oil production and what is the appropriate policy or set of
policies for the U.S. government to adopt when such signals occur?
Answer. ExxonMobil's detailed assessment of global energy supply
and demand through 2030 anticipates increasing global oil production
over the next 25 years. Advancements in technology, both anticipated
and unanticipated, would indicate that consideration of policy options
in response to peak oil is premature.
______
Response to Written Questions Submitted by Hon. Ron Wyden to
Lee R. Raymond
Question. All over America, the oil industry drives up the price at
our gas pumps by redlining and zone pricing. ``Redlining'' is when your
companies draw a phony line around a community to lock out competition
and raise prices for the consumers. ``Zone pricing'' is plain old
discrimination and it takes place when one oil company supplies gas to
several gas stations located near each other and one station is charged
much more than the others for the same type of gas. This drives
stations out of business, reducing choice and raising prices for
consumers. To help hurting consumers at our gas pumps, will you company
commit to stop redlining and zone pricing? Yes or no?
Answer. No. For a more detailed discussion of the pro-competitive
effects of territorial restraints, see ``The Economics of Price Zones
and Territorial Restraints in Gasoline Marketing,'' (Federal Trade
Commission, March 2004), at pp. 31-35.
______
Response to Written Questions Submitted by Hon. Maria Cantwell to
Lee R. Raymond
Question 1. I'm aware that the cost of crude oil is driven by the
world market and that its cost is currently significantly above
historic averages. But I'm not aware of any substantive increases in
the cost of producing crude oil, the cost of refining it into various
petroleum products such as gasoline and diesel, and the cost of
transportation of refined products to markets. Through the end of
September 2005, the price of crude had increased 40 percent in 2005
while gasoline prices increased almost 80 percent. If the percent
difference in the prices isn't pure profit, please explain to me how
you account for the difference in the substantially lower increase in
crude oil when compared to gasoline.
Answer. Crude oil and gasoline prices are determined by the actions
of willing buyers and willing sellers in the global, transparent market
place based on their outlook of various market factors. See, e.g.,
Attachment K, International Comparison of Gasoline Price. Compared to
the previous year, in 2005, crude prices are up, transportation costs
are up, refinery costs are up and various mandated product
specification changes continue to increase costs.
Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to
149. Further, no new refineries have been built in the U.S. since 1976.
In 1981, the 321 refineries had a capacity of 18.6 million barrels a
day. Today, the remaining 149 refineries produce 16.8 million barrels a
day. I recognize the difficult financial, environmental, and legal
considerations associated with the location and construction of new
refineries. But I fail to understand the closure of existing refineries
even if they required investment to enhance their efficiency and
production capability unless, of course, this mechanism is being used
to increase the price of gasoline and other refined products. Please
help me understand why you would shut down refineries in the face of
the supply and demand situation. What conditions would have to exist
for you to invest in new refining capacity? I have heard the industry
claim that up to $48 billion has been used on capital expenditures for
existing refineries. If those investments were not used for capacity
increases, what were they used for?
Answer. U.S. refining output has increased by 30 per cent over the
past 30 years. The number of refineries in the U.S. has fallen as
smaller or less efficient plants were closed. Over the last decade
ExxonMobil has increased its U.S. refining capacity by the equivalent
of three average-sized refineries through expansions and efficiency
gains at existing U.S. refineries.
ExxonMobil has invested $3.3 billion over the last five years in
its U.S. refining and supply system. A substantial portion of this
investment has been directed towards environmental improvement
projects.
Refining is a global business, and the U.S. has routinely imported
petroleum products for decades to balance supply and demand. ExxonMobil
is currently participating in a joint venture that is developing plans
to construct a multi-billion dollar refining/chemical operation at
Fujian, China to meet anticipated demand for petroleum products in the
region, and ExxonMobil is studying expansions at some of its U.S.
refineries. Decisions on refinery investments are based on long-term
economics.
Question 3. The recent hurricanes resulted in the need to import
substantial refined products such as gasoline, diesel fuel and aviation
fuel to meet U.S. demand. The question has been raised as to whether
the country should develop a strategic reserve of finished petroleum
products. What would be your reaction if the Federal government either
directly or by way of contract with the private sector sought to create
a strategic reserve of finished petroleum products? Since these
products have a limited shelf-life, one proposal is to obtain and
operate a number of refineries and have the products be used by the
Federal government. Appreciate your comments on this proposal.
Answer. The fastest and most efficient response to temporary supply
imbalances is to let markets function. Although hurricane and flooding
damage, transportation logistics, employee safety, and personnel
dislocations contributed to the supply shortage following Hurricanes
Katrina and Rita, the most critical contributing factor was the loss of
electric power to run pipelines and refineries. Both the California
Energy Commission and the National Petroleum Council (which advises the
Secretary of Energy) have concluded in recent times that such fuel
reserves are not appropriate for the U.S. ExxonMobil does not believe
that the entry of the government into the U.S. refining business would
be a sound strategy.
Question 4. Given the recent profitability of the oil industry, I
am interested to learn more on the disposition of these profits,
particularly to enhance both production and refining capacity. Are any
of these profits being used to enhance production and refining capacity
for the benefit of other countries? What fraction of your profits is
being invested for production and for refining? What percentage of
profits have been used for stock buybacks and mergers and acquisitions?
Answer. Yes, but the benefits of capital investment in one country
are not limited to that country, when you are dealing with global
commodities such as petroleum products. Approximately 70 percent of our
profits come from outside the U.S.
Please refer to the table below. Over the last ten years,
ExxonMobil's cumulative capital and exploration expenditures have
exceeded our cumulative annual earnings. Our average annual capital
expenditures have been approximately $14.0 billion, while our average
annual net income has been approximately $13.8 billion. See Attachment
A, ExxonMobil Long Term Earnings and Investment History.
PROFITS INVESTED FOR PRODUCTION & REFINING
------------------------------------------------------------------------
2004 2003
$M $M
------------------------------------------------------------------------
Capital & Exploration Expenditure Production &
Refining
Production
U.S............................................... 1,669 1,842
Non-U.S........................................... 8,629 8,758
-----------------
10,298 10,600
Refining
U.S............................................... 550 998
Non-U.S........................................... 774 768
-----------------
1,324 1,766
Capital & exploration expenditure--production & 11,622 12,366
refining.............................................
Total consolidated net income after tax............... 25,330 21,510
% net income invested in production & refining........ 46% 57%
------------------------------------------------------------------------
Data Sources:
Exxon Mobil Corporation 2004 Financial & Operating Review.
Answer. Please refer to the table below.
PROFITS USED FOR STOCK BUYBACKS, MERGERS & ACQUISITIONS
------------------------------------------------------------------------
2004 2003
$M $M
------------------------------------------------------------------------
Common stock acquired................................. 9,951 5,881
Mergers............................................... ....... .......
Acquisitions.......................................... ....... .......
-----------------
9,951 5,881
Total consolidated net income after tax............... 25,330 21,510
% net income used for stock buybacks, mergers & 39% 27%
acquisitions.........................................
------------------------------------------------------------------------
Data Sources:
Exxon Mobil Corporation 2004 Form 10K--Consolidated Cashflow
Statement & Consolidated Statement of Income.
Question 5. You've all said profits are cyclical, and that your
companies have also suffered from the volatility of the oil markets.
Would your stockholders be better served if domestically produced oil
was sold at a fixed rate that included a generous profit margin above
the production, refining, and distribution costs?
Answer. No. The oil market is global in nature. Price controls
introduce distortions and inefficiencies in the market. Stockholders,
like all energy consumers, are best served by a free and efficient
market. The U.S.'s previous experience with price controls resulted in
reduced domestic production and increased dependence on imports.\2\
---------------------------------------------------------------------------
\2\ Congressional Research Service Report 90-442 E, The Library of
Congress, The Windfall Profit tax on Crude Oil: Overview of the Issues,
September 12, 1990.
Question 6. Do you believe that global warming is occurring? Do you
believe that man-made activities have a role in this phenomenon? How
will global warming impact your companies in term of added costs for
oil and gas development, or allow access to new areas for oil and gas
development?
Answer. Attached as Appendix A is ExxonMobil's recent ``Report on
Energy Trends, Greenhouse Gas Emissions and Alternative Energy,'' *
which addresses our approach to the complex topic of global climate
change.
---------------------------------------------------------------------------
* Appendix A-C have been retained in Committee files.
Question 7. Is it accurate that United States LNG terminals in
Massachusetts and Maryland are only operating at half capacity? Do you
believe if these plants were operated at a higher capacity it would
have changes the market dynamics that determine the current price?
Answer. ExxonMobil does not have a financial or operating interest
in either terminal so we cannot comment on operational matters there.
If the facilities were at 100% of capacity there would likely be a
nominal market impact if any since the natural gas markets served by
these two facilities are very large relative to the capacity of both.
Question 8. Please state for the record your company position on
fuel economy standards. Are there other incentives that you support
that you feel are better for consumers then the Corporate Average Fuel
Economy paradigm?
Answer. Our position has been and continues to be in favor of
efficient use of our products, both internally and by our customers. We
have made substantial improvements in the energy efficiency of our
operations in the past and expect to continue to do so.
We have been and continue to be involved in joint research with
selected automakers on efficiency and emissions improvement. We expect
that the automakers will continue to seek efficiency improvements in
response to market forces. High fuel efficiency vehicles are available
to consumers today.
Question 9. I understand that over the past 5 years companies in
your industry have downsized significantly. Now there is a shortage in
workers and equipment to increase drilling. Please explain that
dynamic.
Answer. Demand for drilling equipment and crews fluctuates based on
the amount of drilling activity. There are continual improvements in
technology and other efficiencies that enhance the ability of industry
to effectively explore for, develop, and produce energy supplies.
Question 10. As you probably know, Congress is likely to open up
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas
exploration. Do you have plan to bid for leases in this area? What does
the price of oil have to be to make ANWR exploration and extraction be
economically viable?
Answer. If ANWR is ultimately opened for leasing, ExxonMobil would
look at potential opportunities there in the same manner we would look
at opportunities in the U.S. and elsewhere around the globe. We do not
have sufficient information or data needed to properly answer the
second question. In addition, given the scale and long-term nature of
the energy industry, there are no quick fixes or short-term solutions.
We have ongoing investment programs to develop future supply and to
advance energy-producing and energy-saving technologies. If we are to
continue to serve our customers and your constituents, corporate and
government leaders alike cannot afford to simply follow the ups and
downs of energy prices. We must take a longer-term view.
Question 11. I understand that many of your resources and equipment
are working flat out to rebuild infrastructure in the Gulf of Mexico.
If there is no capacity to expand oil and gas exploration, what good is
opening up sensitive environmental areas to increased drilling going to
do for the consumer in the short run?
Answer. The size, scale, and timeframe of the energy industry are
immense. It is not appropriate to compare the activities associated
with repairing Gulf of Mexico infrastructure with those required to
study, explore, develop, and produce oil and gas from a new geologic
basin. The time horizons are much different, and many of the
contracting companies involved are different as well. Access to new
energy supplies is needed to help meet projected U.S. energy demand. It
requires significant time, risk, and resources to develop energy
resources. Industry experience and proven technologies demonstrate that
these resources can be developed in an environmentally responsible
manner.
Question 12. Given the growing demand for oil in Asia, do you
believe that oil derived from the Arctic National Wildlife Refuge could
be diverted to supply Asian markets? If drilling in the Arctic National
Wildlife Refuge is authorized this year, when will it begin to have an
impact on gasoline prices? What do you believe that effect will be?
Answer. Oil is a globally traded commodity. It is our understanding
that proposed ANWR legislation would require that its oil production be
used in U.S. markets. Energy resources obtained from ANWR would
increase diversity of U.S. energy supplies, and would add to the
supplies needed to meet projected world energy demand. New supplies
assist in helping meet energy demand, and have a positive effect on
prices for the U.S. consumer. Given the scale and long-term nature of
the energy industry, there are no quick fixes or short-term solutions.
Question 13. Do you support more transparency in the oil and
natural gas markets, as would be provided in my bill S. 1735?
Answer. ExxonMobil supports open and liquid markets that are free
from government intervention. We are continuing to assess S. 1735 in
order to establish a company position.
Question 14. How has the last 3 years of escalating gasoline prices
affected demand by American drivers? Have we seen a correlation between
a certain level of price increase and less demand by American drivers?
What is the actual level of reduced demand today compared to 3 years
ago (please respond in the context of a doubling of retail gasoline
prices)?
Answer. The price effect on demand (``price elasticity'') is
notoriously difficult to assess reliably over short time periods, and
we are not able to respond quantitatively to the specific three year
time frame posed. We note that historically, elasticity is very low in
the short term--the ability of individuals to adjust their consumption
day-to-day is limited. Certainly, one can adjust the thermostat and
avoid unnecessary car trips, and this can have a real but limited
effect. Over a period of years, the effects of choices in new car
purchases, where to live versus work, and other lifestyle decisions can
have a larger effect on total energy demand.
Question 15. What is the crude oil extraction costs for major oil
producing countries, including our own? How does that compare with oil
derived from shale or coal?
Answer. The cost of extracting oil varies widely depending upon the
particular field in question and in some cases, the cost of energy
itself which can be a major component of production cost. Even with
this wide variation, we expect that the cost of producing oil from
shale or coal would be substantially higher still. ExxonMobil had a
shale oil venture in the 1980s that was determined to be non-economic
at the time when oil prices dropped significantly from prior levels.
Question 16. Regarding foreign exporting, inventory maintenance,
and other practices of your company, please provide a response to each
of the following questions and information requests: For each and every
export shipment to a foreign country of gasoline, distillate fuel oil,
propane, or liquefied natural gas occurring from January 1, 2005 to
present, please provide the date, product type, volume, domestic port
of exit, foreign destination, transportation costs, and the sale price
or transfer value upon arrival at the foreign destination.
Answer. ExxonMobil has exported YTD 2005 (mostly to Mexico) about
9MB of gasoline, approximately 3MB distillates and 0.5MB of jet
kerosene. We sold 97.8% of our domestic production within the United
States. We do not export LNG or propane.
All exports were essentially at market prices at the time of
delivery and were sold to achieve the highest value for the product.
Export sales prices exceed domestic prices, at the time of the deal
adjusted for quality and location difference. Cargo-specific pricing
and other data are proprietary.
Question 16a. Since January 1, 2001 to present, please identify the
number of shipments wherein your company exported gasoline, distillate
fuel oil or jet fuel and the sales price or transfer value received at
the destination was less than the amount that would have been received
had the product been marketed by your firm in the United States.
Answer. None at the time of the deal.
Question 16b. Since January 1, 2001 to present, please identify the
date, product, volume(s), foreign port of origin, expected U.S. port of
entry, and eventual port of final destination in each instance wherein
your company basically ``turned a ship away'' (whether proprietary
product or acquired from a third party) by changing the shipments
expected arrival in a U.S. port to a foreign port.
Answer. None.
Question 16c. From 1995 until present, please identify by month the
inventory levels maintained by your company for gasoline and distillate
fuel oil in both barrels and converted to ``days of cover'' or ``days
of supply'' for your firm's distribution and sales volumes within each
of the Petroleum Allocation Defense Districts (PADDS) in the United
States.
Answer. The ExxonMobil supply chain and inventories are managed on
a global, efficient basis to ensure reliable supplies for our
customers. Consistent data are readily available from 2003 on a U.S.
basis (we do not typically segregate by PADD) and is listed below for
each year. The annual average reflects operations and avoids the
volatility in monthly data caused by operating events such as
turnarounds, pipeline delivery timing and sales flucuations.
------------------------------------------------------------------------
2005
2003 2004 (YTD)
------------------------------------------------------------------------
Inventory, MB *.................................. 63.0 62.1 60.7
Days of sales **................................. 29 28 27
------------------------------------------------------------------------
* Includes finished plus intermediates.
** Sales based on finished.
Question 16d. From January 1, 2005 to present, provide the details
of each ``spot market'' (as commonly referred to in the industry for
bulk sales, in volumes exceeding 5,000 barrels per transaction)
including the date, identity of both the seller and purchaser, location
of the product being sold, and the selling price.
Answer. Details of spot market transactions are proprietary
information.
Question 16e. Describe your company's use of ``in-house trading
platforms,'' and identify all individuals in your company by name,
address, email, and phone number that were authorized during 2005 to
either exchange, trade, sell or purchase gasoline or distillate fuel
oil on either the ``spot market'', NYMEX futures market, or via
``forward paper'' purchase rights.
Answer. ExxonMobil does not use ``an in-house trading platform'' as
we understand the term. ExxonMobil does not engage in speculative
trading in the futures market. ExxonMobil uses derivatives for
transactions in the U.S. market to match the market price with the
timing of physical delivery. The use of derivatives represents less
than 2.5% of our total trading activity.
Question 16f. Please identify all third party reporting services,
including but not limited to Oil Price Information Service (OPIS),
Lundberg Surveys, Platts, and Oil Intelligence that your company
regularly supplies transaction data or marketing information and all
individuals of the company by name, address, email, and phone number
that were authorized during 2005 to provide the information or data to
such third parties.
Answer. ExxonMobil did not communicate transaction data, marketing
information, or any other related information to OPIS, Lundberg, Platts
or other third-party reporting services for U.S. gasoline, distillates
or jet kerosene in 2005.
Question 16g. Please identify the branded and unbranded ``rack
prices'' that were reported by your company to third party reporting
services such as OPIS and the branded and unbranded ``rack prices''
that were actually charged distributors or jobbers by your company each
day, from January 1, 2005 to present, at the truck loading terminal(s)
that typically supply gasoline stations in Houston, TX, Atlanta, GA,
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR, and Seattle,
WA.
Answer. ExxonMobil does not report prices to OPIS.
Question 16h. Will your company commit that it will take no efforts
to retaliate against any firm or individual that is a potential witness
before this Committee or cooperates with any investigation into the oil
industry by Congress or another governmental authority?
Answer. Yes. Exxon Mobil does not make business decisions based
upon anyone's testimony before Congress or cooperation with
Congressional or government agency investigations. That being said, the
Company cannot guarantee that no one who testifies or cooperates in an
investigation will be unhappy about a business decision the Company
makes and allege that the Company is retaliating against them.
Question 16i. From January 1, 2005 to present, for each instance
known to your company wherein a third party (not your company) exported
gasoline, distillate fuel oil, propane, or liquefied natural to a
foreign country, please provide any of the details known to your
company including the identity of the exporter, date, product type,
volume, domestic port of exit, foreign destination, transportation
costs, and the sale price or transfer value upon arrival at the foreign
destination.
Answer. ExxonMobil sold 0.5MB in 2005 to Defense Energy Support
Center which we understand was exported. We have no direct knowledge of
exports by third-parties.
Question 16j. Since January 1, 2001 to present please identify the
identity, date, product, volume(s), foreign port of origin, expected
U.S. port of entry, and eventual port of final destination in each
instance wherein your company is aware a third party (not your company)
basically ``turned a ship away'' (whether proprietary product or
acquired from a third party) by changing the shipments expected arrival
in a U.S. port to a foreign port.
Answer. We do not have knowledge about any third-party actions
regarding ``turning any ships away.''
Question 16k. Please provide an itemized list of tax deductions and
credits taken under the U.S. tax code for 2004, by your parent company
and subsidiaries.
Answer. Similar to all other industries, our parent company and
subsidiaries took the deductions and credits appropriate to our
business as provided for in the Internal Revenue Code. Information on
tax returns is confidential and we will not comment on the specifics of
our return. However, the following is a general listing of the
deductions and credits that we took on our 2004 U.S. Federal Income Tax
Return.
A. Deductions claimed on 2004 Federal income tax return:
1. Cost of Goods Sold
2. Salaries and Wages
3. Repairs and Maintenance
4. Bad Debts
5. Rents
6. Taxes and Licenses
7. Interest
8. Charitable Contributions
9. Depreciation
10. Cost Depletion
11. Advertising
12. Pensions, Profit-sharing, etc., plans
13. Employee Benefit Programs
14. Other allowable deductions including, but not
limited to:
--Amortization expenses
--Freight and delivery expenses
--Insurance expenses
--Office supplies expenses
--Relocation expenses
--Research and development expenses
--Utilities
B. Credits Claimed on the 2004 Federal Income Tax Return:
--Foreign Tax Credit
--General Business Credit
--Credit for Federal Tax on Fuels
______
Response to Written Questions Submitted by Hon. Ken Salazar to
Lee R. Raymond
Question 1. The Agriculture Committee is looking at the impacts
these high energy prices are having on agricultural producers around
the country. To sum it up: they are hurting. It seems to me that there
is tremendous potential for our country to grow fuels such as ethanol
and bio-diesel. This approach offers many benefits to rural America as
well as to the country as a whole. What type of investments is your
company making (and planning to make) in these types of renewable fuels
in the United States?
Answer. ExxonMobil's primary focus with regard to renewable fuels
is on research to identify options that are commercially viable, as for
example through the Global Climate and Energy Project (GCEP) and other
such initiatives, to which ExxonMobil plans to contribute over $100
million. ExxonMobil has an ambitious research program and we examine
renewable fuels as part of this effort. At present, ExxonMobil blends
almost a million gallons of ethanol into our gasoline products every
day in the U.S. This has required investment throughout our supply
system. Renewable fuels manufactured by today's technologies are
generally more costly than petroleum-derived fuels and require
government subsidies to be competitive.
Question 1a. Rural America is crying out for investment in
renewable fuels, and I encourage your companies to look at the
potential of renewable fuels. In terms of a percentage of your capital
expenditures, how much money did your company spend this year to
develop renewable fuel sources in the United States? What will that
percentage be going forward?
Answer. As a percentage of total investment, the amount currently
being invested is inconsequential at less than 0.1 percent of our total
capital spending. However, through our funding and participation in the
research partnership with Stanford University--the $100 million Global
Climate and Energy Project--we are supporting research into
breakthrough renewable energy sources.
We are investing in facilities to blend ethanol at selected
terminals in the U.S. in 2005, but the amount of this capital is very
small in relation to our total spending. We expect to continue to
invest in additional ethanol blending facilities in the coming years to
meet the expanded renewables requirements imposed by this year's energy
bill.
Question 1b. Will you also provide this committee with some
examples of renewable fuel projects that your company is pursuing
outside the United States?
Answer. Similar to our U.S. activity, we are making investments to
support blending of renewable fuels in other countries where renewable
fuel use is required.
Question 2. As a few of you note in your testimony, diesel prices
have remained high while unleaded gasoline prices have come down. It
seems as if we are getting lower priced unleaded gas at the expense of
diesel. Since diesel is the fuel of choice in agriculture, it is a sort
of a double whammy on our producers. What is being done, or what can be
done, to get diesel prices back in line with the price of gasoline?
Answer. Prices are determined by the market. From time to time
diesel prices have been higher than gasoline prices, depending on
market factors of supply and demand. New grades of diesel are being
required in the U.S. such as the introduction of low-emission diesel in
Texas in 2005 and the planned initial introduction of ultra-low sulfur
diesel nationwide in 2006. These changes affect the amount of motor
fuels that can be produced in the U.S. and potentially the availability
of refined product imports, adding further challenges to the supply
chain.
Question 2a. If demand for diesel is so high in Europe and high
prices don't attract the supplies necessary to lower prices, isn't that
a good indicator that we should work to produce more diesel in the
United States and look to biodiesel as an option?
Answer. Prices are determined by the market. Directionally higher
prices will attract increased supplies which may then moderate prices
compared to what the prices would have been without those increased
supplies. Biodiesel, however, is generally more costly to produce than
petroleum-derived diesel and requires subsidies to be competitive.
Question 3. For the record, will you tell me what your company has
spent on capital expenditures in cash, not including write offs such as
amortization or depreciation. Will you also provide the figures spent
on cash dividends and stock buyback for the same time period?
Answer. Please refer to the table below.
CAPITAL EXPENDITURES, CASH DIVIDENDS, STOCK BUYBACKS
------------------------------------------------------------------------
2004 2003
$M $M
------------------------------------------------------------------------
Total capital & exploration expenditures.............. 14,885 15,525
Cash dividends to ExxonMobil shareholders............. 6,896 6,515
Common stock acquired................................. 9,951 5,881
------------------------------------------------------------------------
Data sources:
Exxon Mobil Corporation 2004 Form 10-K.
Question 4. On November 1st, Senator Grassley asked your companies
to contribute 10% of your record profits to supplement LIHEAP funding
for the less fortunate. Will your companies support Senator Grassley's
proposal?
Answer. No. On November 7, 2005, the American Petroleum Institute
(API) responded formally to Senator Grassley's inquiry. API stated its
strong support for Congress to provide full funding for this important
program, which it established in 1982. API observed that higher oil and
natural gas prices have resulted in significantly increased royalty
payments and income taxes to the Federal Government.
Question 5. I'd like to encourage you to actively work with the
Department of Energy and any other relevant federal agency on
initiating a public/private education campaign focused on energy
education and conservation. In the meantime, will you tell me what your
company has done on its own initiative?
Answer. Through its membership in the American Petroleum Institute,
ExxonMobil has supported a major advertising campaign this Fall
emphasizing energy education and conservation as a major theme. This
continuing campaign has been implemented nationally in the print, radio
and television media. Enclosed as Appendix B are API's print media
advertisements.
Additionally, ExxonMobil has its own external communications
program, a substantial part of which is designed to communicate some of
the tough energy challenges facing the U.S and the rest of the world
and describing some of the company's actions to address those
challenges. We have used and continue to use a broad range of
communications channels (television, newspapers, magazines, on-line) to
reach people and energy efficiency has taken a high profile in the
content of these programs. For example, we run 26 opinion editorials
annually in the New York Times, Washington Post and other publications
and energy efficiency is widely covered in these, including several
specifically on the subject. In addition, a large portion of our U.S.
advertising in 2005 featured energy efficiency content. [Examples are
included in Appendix C.] Information on our website,
www.exxonmobil.com, provides more detail supporting the advertising.
Following Hurricanes Katrina and Rita, the company placed print
advertisements in newspapers across the country, describing
ExxonMobil's actions to maintain fuel supplies and asking Americans to
help by using fuel wisely; we also provided some energy saving tips.
We have a range of communications initiatives designed to help
people understand energy issues. For example, we prepare annually--and
have done so for decades--a detailed, long-range outlook of global
energy supply and demand trends. See, www.exxonmobil.com/corporate/
Citizenship/Corp--citizenship--energy--outlook.asp. These are
communicated widely through publications and presentations to
audiences, as well as posted on our website.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
Lee R. Raymond
Question 1. In the last decade, has your company ever withheld
supply of crude oil or refined product from the market in order to
prevent prices from falling?
Answer. No.
Question 2. Please describe any business relationship or
transaction your company or any of its subsidiaries, wherever located
and wherever incorporated, whether wholly owned or not, have had with
Iranian nationals (except employment of Iranian expatriates), the
Iranian government, individuals or corporations located or incorporated
in Iran, or any representative of these people or companies.
Answer. ExxonMobil believes it is in compliance with the laws and
executive order dealing with contacts with Iran and has in place
procedures to help ensure future compliance.
In addition to a copy of ExxonMobil's `Special Review Procedures
for Transactions Involving Sensitive Countries,' we have attached a
copy of a letter the company received this year from the Office of
Foreign Assets Control (``OFAC'') which we believe demonstrates the
care the company is taking to ensure compliance with the law.
[Attachment.]
Department of the Treasury,
Washington, DC, February 2, 2005.
Case No. IA-7041
Peter D. Trooboff, Esquire,
Covington & Burling, 1201 Pennsylvania Avenue, N.W., Washington, DC.
20004-2401
Dear Mr. Trooboff: This responds to your letters of December 21,
2004, and January 10, 2005, on behalf of Exxon Mobil Kazakhstan Inc.
and its affiliates (collectively, ``ExxonMobil''), requesting
confirmation that certain transactions by ExxonMobil in connection with
its participation in current and proposed activities relating to the
North Caspian Production Sharing Agreement are not prohibited by the
Iranian. Transactions Regulations, 31 C.F.R. Part 560 (the ``ITR'').
You explain that in November 1997, the Government of Kazakhstan entered
into a Production Sharing Agreement (``PSA'') with a consortium of
international petroleum companies (the ``Consortium''), which entitles
Consortium members to explore for oil, develop discovered reserves, and
produce oil from several blocks in the northern Caspian Sea. Agip KCO,
a subsidiary of ENI, a company based in Italy, is the Consortium
operator. ExxonMobil holds a 16.67 percent ownership interest in the
Consortium. The Government of Iran is not a shareholder or participant
in the Consortium. You further explain that pursuant to the PSA, each
member of the Consortium will take its equity share of oil production
in kind at the field's delivery point.
BACKGROUND
The ITR prohibit the exportation, reexportation, sale or supply,
directly or indirectly, from the United States or by a U.S. person,
wherever located, of any goods, technology or services to Iran or the
Government of Iran. This prohibition also applies to the exportation,
reexportation, sale or supply of goods, technology or services to a
person in a third country undertaken with knowledge or reason to know
that the goods are intended specifically for supply, transshipment or
reexportation, directly or indirectly, to Iran or the Government of
Iran, ITR, Sec. 560.204. ITR Sec. 560.410(a) makes clear that the
Sec. 560.204 prohibition on the exportation of services to Iran applies
to services performed by U.S. persons outside the United States on
behalf of the Government of Iran, or where the benefit of such services
is otherwise received in Iran.
As noted in your letter, the prohibition in ITR Sec. 560.204 on
exports to Iran or the Government of Iran does not apply to the
exportation to any country of information and informational materials,
ITR, Sec. 560.210(c). The term information and informational materials
is defined in ITR Sec. 560.315 to include publications, films, posters,
phonograph records, photographs, microfilm, microfiche, tapes, compact
disks, CD ROMs, artworks, and news wire feeds.
In addition, Sec. 560.210(c)(2) of the ITR provides that the
informational materials exemption does not apply to transactions
related to information and informational materials not fully created
and in existence at the date of the transactions, or to the substantive
or artistic alteration or enhancement of informational materials, or to
the provision of marketing and business consulting services.
The ITR also prohibit U.S. persons, wherever located, from engaging
in any unauthorized transactions or dealings in or related to (1) goods
or services of Iranian origin or owned or controlled by the Government
of Iran; or (2) goods, technology or services for exportation,
reexportation, sale or supply, directly or indirectly, to Iran or the
Government of Iran. ITR, Sec. 560.206. The term ``transaction or
dealing'' includes, without limitation, purchasing, selling,
transporting, swapping, brokering, approving, financing, facilitating,
or guaranteeing. ITR, Sec. 560.206(b). The prohibition against
facilitation in the ITR bars, without a license, a U.S. person,
wherever located, from approving, financing, facilitating, or
guaranteeing any transaction by a foreign person where the transaction
by that foreign person would be prohibited by the ITR if performed by a
U.S. person or within the United States. Additionally, a U.S.
corporation may not modify its policies or procedures or those of a
foreign affiliate or subsidiary to enable that entity to enter into a
transaction that would be prohibited if performed by a U.S. person or
within the United States. ITR, Sec. Sec. 560-208 and 560.417.
ISSUES
The first issue raised in your letter relates to ExxonMobil's
participation in studies and possible construction of a pipeline from
Atyrau, Kazakhstan, to the Aktau region of Kazakhstan in order to
transport the crude oil produced in the Kashagan field to market. We
understand that in January of 2003, ExxonMobil notified the non-U.S.
members of the Consortium that ExxonMobil would neither fund nor
participate in planning any study or portion of a study that analyzes
issues regarding the subsequent transportation of Kashagan crude oil to
or across Iran. You assert that the ITR do not prohibit ExxonMobil's
participation in studies of the proposed Atyrau-Aktau pipeline and
terminal or in the construction, partial ownership and operation of
such a new pipeline and terminal, as such activities would take place
in Kazakhstan and all of the pipeline and terminal construction
activities would be located and operated in Kazakhstan. Additionally,
you advise that ExxonMobil would not be involved in any shipments of
oil to or through Iran by non-U.S. Consortium members, although non-
U.S. Consortium members may independently decide to ship their portion
of the oil through Iran.
Based on the facts you have presented regarding the ownership
structure of the Consortium and the proposed activities to be engaged
in by ExxonMobil, and independent of the issues discussed below, we do
not regard ExxonMobil's participation in the Atyrau-Aktau pipeline
study and its participation in the ownership, construction and
operation of the pipeline and related facilities to be prohibited by
ITR Sec. Sec. 560.206 and 560.208 per se. However, this conclusion does
not relieve ExxonMobil from the responsibility of ensuring that it does
not engage in related activities that are prohibited by the ITR. In
particular, before engaging in transactions involving the PSA and the
Consortium, ExxonMobil must ascertain whether such transactions would
provide goods or services to the Government of Iran or a person in
Iran, or involve a dealing in or related to goods or services of
Iranian origin or owned or controlled by the Government of Iran. For
example, ExxonMobil would be prohibited from providing any consulting
or other services to the Consortium in connection with transportation
activities involving Iran. In addition, any activity by ExxonMobil
involving the Atyrau-Aktau pipeline, including among other activities
the development, construction and/or operation of the pipeline, that
would directly or indirectly benefit Iran or the Government of Iran or
promote the trading or dealing in Iranian-origin goods or services
would be prohibited by ITR Sec. 560.204 or Sec. 560.206.
Secondly, you raise the issue of ExxonMobil's proposed receipt of
Iranian transportation studies prepared for and funded by the non-U.S.
Consortium members for ExxonMobil's internal purposes. The studies are
described as pre-existing materials created by third parties that are
not publicly available. You explain that it is common practice in the
oil industry for members of a consortium to share with other consortium
members relevant studies they prepare, even though some consortium
members have not contributed to funding the studies or otherwise
participated in their preparation. In your letter of January 10, you
describe the accounting arrangement that was created to ensure that the
U.S. members of the Consortium are not funding or otherwise involved in
the Iran transportation studies. This arrangement provides that a
portion of Agip KCO's overhead will be allocated to such studies and
charged exclusively to the non-U.S. Consortium members.
You confirm that the U.S. Consortium members are not indirectly
funding such costs by disproportionately funding other work in return
for not paying for the Iran export option costs. You explain that
although ExxonMobil has not yet received any studies or reports from
the non-U.S. Consortium members concerning any specific study that may
have been undertaken regarding an Iranian export option, ExxonMobil
expects eventually to see high-level summaries of that data and
information included in the joint transportation studies and reports.
You further explain that ExxonMobil will not comment on or discuss the
studies with Agip KCO, or other non-U.S. Consortium members that funded
the studies. In addition, ExxonMobil will not enhance the quality or
usefulness of these studies for the non-U.S. Consortium members.
Rather, you expect that the studies may enable ExxonMobil to permit
better planning and support for the non-Iranian transportation option.
With regard to the receipt by ExxonMobil of pre-existing
transportation studies created and funded by the non-U.S. Consortium
members that are not publicly available, it appears from the
information you have provided that such materials would constitute
informational materials that are exempt under ITR Sec. 560.210(c).
Accordingly, ExxonMobil's receipt of such transportation studies would
not be prohibited by the ITR, provided that ExxonMobil does not
directly or indirectly provide any goods or services, including
marketing or consulting services, to the non-U.S. Consortium members in
connection with the creation or such studies and provided further that
such transactions do not involve either the development, production,
design, or marketing of technology specifically controlled by the
International Traffic in Arms Regulations, 22 C.F.R.. parts 120 through
130, the Export Administration Regulations, 15 C.F.R. parts 730 through
774, or the Department of Energy Regulations set forth at 10 C.F.R.
part 810, or exchanges of information that are subject to regulation by
other government agencies. We note that ExxonMobil's receipt of such
information will assist it in making further determinations as to
whether its participation in the development, construction, ownership
and/or operation of the Atyrau-Aktau pipeline may be prohibited by the
ITR unless authorized by OFAC.
Sincerely,
Robert W. Werner,
Director, Office of Foreign Assets Control.
June 24, 2004
Exxon Mobil Corporation
SPECIAL REVIEW PROCEDURES FOR TRANSACTIONS INVOLVING SENSITIVE
COUNTRIES
Introduction. Exxon Mobil Corporation generally seeks to pursue
promising business opportunities, regardless of location, as long as
all applicable legal requirements are met. Even when lawful, however, a
transaction may have public affairs sensitivities that warrant prior
review by the Public Affairs Department and, in some cases, endorsement
by the appropriate Corporate Contact Executive. These Special Review
Procedures cover selected transactions that require such reviews and
endorsements. These Special Review Procedures do not cover all proposed
transactions that should receive special review because of unusual
public affairs sensitivities. If a business unit is considering a
transaction that does not fall literally within the transactions
described below but that could involve similar sensitivities, the
business unit should obtain appropriate advice, reviews, and
endorsements.
Legal Compliance. In many countries, but particularly in the U.S.,
significant legal restrictions exist on transnational commercial
transactions. For example, currently more than seventy countries are
subject to some kind of U.S. economic sanctions. This statement of
Special Review Procedures is not intended to be a summary of applicable
legal requirements and prohibitions or a guide to determining whether a
proposed transaction is lawful. The Law Department is available to make
those determinations in all cases, including cases where the applicable
laws of different countries may conflict with respect to a proposed
transaction.
Definition of ``Transactions Involving a Country''. These Special
Review Procedures cover selected transactions with Category A or B
countries listed below. As used in this statement of Special Review
Procedures, ``transactions involving a country'' are defined broadly to
include any business dealing with the government or nationals of the
country; with any company or other entity in the country; or with any
entity anywhere directly or indirectly owned or controlled by, or
acting for, such government, nationals, company or other entity.
Transactions include activities such as exporting and delivering goods
to a country or its government, nationals, or other entities referred
to above; importing and procuring goods from them; providing services
to or accepting services from them; contracting with them; investing in
them; and transmitting funds to or receiving funds from them.
Implementation. The responsible business unit should carefully
consider all transactions that might involve a Category A or B country
and should follow these Special Review Procedures for all such
transactions. Questions regarding the interpretation or implementation
of these Special Review Procedures should be referred to the Public
Affairs Department.
Future Revisions. Revisions to the Special Review Procedures must
be endorsed by the Contact Executive for the Public Affairs Department
following review by the Vice President-Public Affairs and by the Vice
President and General Counsel.
CATEGORY A TRANSACTIONS
Transactions involving a Category A country would typically involve
a high degree of public affairs sensitivity. Trade between the United
States and these countries typically is subject to significant legal
and political restraints.
Procedure. Subject only to the following two exceptions, no
transaction involving a Category A country should be initiated,
committed to, or entered into until the responsible business unit has
obtained endorsement from its Corporate Contact Executive. Prior to any
review by a Corporate Contact Executive, Corporate Public Affairs, the
Law Department and the business unit's leadership should review the
proposed transaction.
The exceptions are the two types of transactions described below.
1. Lawful transactions involving informational materials,
patents, trademarks or copyrights, provided such transactions
are licensed, authorized, or exempt under U.S. law.
2. Lawful transactions for bunkering of Cuban non-military
vessels and fueling of Cuban non-military aircraft by non-U.S.
affiliates, provided such activities do not involve any
individual who is located in the U.S., or is a national or
permanent resident of the U.S.
The excepted transactions described above do not require Corporate
Contact Executive endorsement. The Law Department is available to
provide advice on whether a particular transaction that appears to meet
the conditions described above is lawful.
For all other transactions involving a Category A country, review
by the Corporate Public Affairs Department, the Law Department, and the
business unit's leadership, and endorsement by Corporate Contact
Executive are required. In some instances, that review and endorsement
may make the proposed transaction unlawful with the result that the
transaction should not be entered into. The Law Department can advise
on when such circumstances apply, and such proposed transactions should
be declined by the business unit without additional review.
CATEGORY B TRANSACTIONS
Transactions involving a Category B country would typically involve
heightened public affairs sensitivities, although the sensitivities
normally are not as great as those involving a Category A country.
Trade between the United States and these countries typically is
subject to legal restrictions, but certain types of commercial activity
are permitted. Alternatively, they are countries for which there are
special political sensitivities.
Procedure. Transactions involving a Category B country which
entail:
1. Commitments extending more than one year; or
2. A significant loan or unusual credit terms; or
3. Significant capital investment
should not be initiated, committed to, or entered into before the
responsible business unit has obtained endorsement from its Corporate
Contact Executive. Prior to any review by a Corporate Contact
Executive, the Corporate Public Affairs Department, the Law Department,
and the business unit's leadership should review the proposed
transaction. As with Category A transactions, in some instances that
review and endorsement may make a proposed transaction unlawful with
the result that the transaction should not be entered into. The Law
Department can advise on when such circumstances apply, and such
proposed transactions should be declined by the business unit without
additional review.
Exxon Mobil Corporation
ATTACHMENT TO STATEMENT OF SPECIAL REVIEW PROCEDURES APPLICABLE TO
TRANSACTIONS INVOLVING PUBLIC AFFAIRS SENSITIVITIES
Category A
Cuba
Iran
Iraq
Syria
North Korea
Sudan
Category B
Burma (Myanmar)
Libya
______
Response to Written Questions Submitted by Hon. Olympia J. Snowe to
Terry Goddard
Question 1. The Department of Energy established a 1-800 phone
number as well as web form for consumers to report possible instances
of price gouging. According to the DOE, the information they receive is
forwarded to the Department of Justice, the Federal Trade Commission,
and the affected States' Attorney General. Have you been receiving this
information? Is it helpful? What do your offices do with this
information once it is received?
Answer. The Department of Energy periodically sends my Office e-
mails containing summary information about complaints it receives from
Arizona consumers regarding high gasoline prices charged by gasoline
stations within the state. The information is helpful to the extent
that it provides price information for specific gasoline stations.
However, since the identity of the complainant is not disclosed and the
information arrives well after prices have changed, it is difficult for
us to corroborate the complaints. Additionally, because Arizona does
not have a price gouging statute, we cannot take legal action regarding
the reported high prices. Nonetheless, we monitor the Department of
Energy's summaries for evidence of severe price spikes, which may
indicate abnormal supply or demand issues and necessitate an antitrust
or consumer fraud investigation.
Question 2. As a former Attorney General, I recognize the enormity
of the job that you perform with limited resources. In September, I
wrote to Attorney General Gonzales and asked the Department of Justice
to provide technical and financial support to state Attorneys General
to investigate price gouging. What, if any, assistance have you
received from the DOJ? What, if any, additional assistance could the
Federal Government provide to your offices?
Answer. In May 2004, many other state Attorneys General and I asked
the President and several federal agencies to investigate the causes of
high gasoline prices. On June 2, 2004, R. Hewitt Pate of the Department
of Justice's Antitrust Division wrote us a letter stating that the
Department of Justice investigates and prosecutes criminal antitrust
activity. He made it clear that the Department of Justice does not
investigate ``price gouging''. Mr. Pate also clarified the Federal
Trade Commission's (``Commission'') role in investigating and
prosecuting civil antitrust activity in relation to gasoline pricing
issues, but not price gouging per se. Since receiving Mr. Pate's
correspondence, my Office has not attempted to contact the Department
of Justice regarding price gouging or gasoline issues, because we did
not have evidence of criminal antitrust activity.
It would be helpful for states to receive assistance from the
Federal Government in analyzing the economic conditions that affect
prices in local markets.
For example, in 2003, when Arizona experienced severe price spikes
resulting from a gasoline pipeline break between Tucson and Phoenix, my
Office contacted the Commission regarding gasoline pricing issues. The
Commission responded by providing my Office with helpful information
about gasoline industry market structure. In September 2004, my staff
and I also discussed Arizona gasoline pricing issues with Chairman
Majoras and Commissioner Jones Harbour. Chairman Majoras agreed to
investigate the reasons for Arizona price spikes that had been
attributed to the pipeline break. The Commission reported its findings
in its June 2005 report: Gasoline Price Changes: The Dynamic of Supply,
Demand and Competition.
On several occasions, my Office has provided the Commission with
information for its Gasoline Price Monitoring project.
Other than these contacts, my Office has not received any direct
support or involvement with federal agencies.
Question 3. Are you aware of price gouging for fuel or other
commodities in your state following Hurricane Katrina? Are there any
investigations underway? Do you have adequate state authority?
Answer. Although Arizona's gasoline supply is not directly
connected with the Gulf areas affected, in the days and weeks following
Hurricane Katrina, hundreds of Arizona consumers complained to my
Office about the significant price increases at Arizona gasoline
stations in advance of and following Hurricane Katrina. Simultaneously,
representatives of my Office found, through the course of our regular
gasoline price monitoring, that the average price of gasoline in
Arizona had actually climbed about 8 cents higher than California
during this period. This is an extremely unusual phenomenon. Though
Arizona receives much of its gasoline supply from California, our
prices are usually at least 10 cents less than California's, due to
California's higher gasoline taxes.
As a result of consumer complaints, the California price disparity,
and other credible information my Office received regarding the Arizona
gasoline market, I launched antitrust and consumer fraud investigations
to look for potential market manipulation and/or deceptive practices.
While the investigations are not complete, we have learned that some
Arizona gasoline retailers' and wholesalers' post-Katrina profit
margins were two to three times higher than they were before the
hurricane hit.
In Arizona, we do not have the authority to prosecute price
gouging, because Arizona does not have a price gouging law. If the
current investigations do not turn up illegal anticompetitive or
deceptive activity, my Office has no authority to take action against
the companies that increased their profits so greatly at consumers'
expense during the Hurricane Katrina disaster.
Question 4. State of Emergency as Trigger for Price Gouging--Most
state price gouging laws are applicable only in situations arising from
a declared emergency. My home state of Maine is different in that the
law applies in any instance where there is evidence of ``unjust and
unreasonable profits in the sale, exchange or handling or
necessities.'' Why did your state legislature choose to limit its law's
impact to declared states of emergency?
Answer. The Arizona Legislature has not passed an anti-price
gouging law, even though bills, which I supported, were introduced in
the 2004 and 2005 sessions.
However, I recommend to our Legislature that the trigger for a
price gouging law not be limited to declared states of emergency within
the state. At times, there may be a major supply disruption of an
essential good or service absent a disaster or emergency. I support
price gouging legislation that also includes, as triggers, declarations
of ``Abnormal Market Disruption'' or ``Supply Emergency.'' I believe
these additional triggers would have provided important consumer
protection against price gouging in states like Arizona that were
indirectly affected by Hurricane Katrina. If states are affected by
regional disasters, it is my opinion that the most effective anti-price
gouging laws would include the additional triggers.
Question 4a. How frequently do states declare a state of emergency?
Answer. According to Arizona's Department of Emergency and Military
Affairs, there have been 167 Gubernatorial Declarations of Emergency in
Arizona in the 40 years since 1966. A table listing the declared
emergencies is attached for your reference.
Question 4b. Has there ever been a situation where there is
evidence of unconscionable increase in price outside of a declared
emergency?
Answer. Since Arizona has no law defining ``unconscionable price
increase,'' it is difficult to answer this question. In the period
after Katrina, Arizonans saw profits of some suppliers and retailers
triple. The Governor did not declare an emergency in connection with
Hurricane Katrina.
Question 5. Have you ever uncovered any evidence that oil companies
deliberately kept their oil products off the market in order to raise
prices?
Answer. We received allegations of withholding gas in 2003, after
the Kinder Morgan pipeline from Texas to Arizona ruptured, and in
September 2005, after Hurricane Katrina. In both cases, my Office
issued Civil Investigative Demands to investigate the validity of these
allegations.
In 2003, my investigation shed light on the complexity of the
private and opaque gasoline supply and distribution system in Arizona,
particularly in the Phoenix metropolitan area. However, that
investigation was inconclusive due to uncontrolled variables, such as
the scarcity of tanker trucks, long lines at the racks, and elaborate
supply contracts. These variables made it impossible to determine
whether gasoline suppliers were deliberately withholding product. It is
possible that suppliers were unable to distribute product due to
blockages at the racks, or unavailability of tanker trucks. It is also
possible that suppliers were rationing supply in an uncertain market in
order to comply with their supply contracts. My Office simply did not
have enough information, nor the resources or jurisdiction to gather
all of the necessary information to make a final determination as to
causes of the shortages.
In 2005, my Office received allegations that a local retail chain
was withholding gasoline from the market for the purpose of driving up
prices. Because the investigation is ongoing, I cannot definitively
answer the question at this time.
______
Response to Written Questions Submitted by Hon. Ted Stevens to
Henry McMaster
Question 1. State of Emergency as Trigger for Price Gouging--South
Carolina's price gouging statute is triggered by a declaration of a
state of emergency by the Governor of South Carolina or the President
of the United States. After a declaration, it is unlawful to sell most
commodities for or to raise rental rates to an unconscionable price. An
unconscionable price is a price that (1) represents a gross disparity
over the average price received in the usual course of business for the
previous thirty days or (2) grossly exceeds the average price in the
trade area for the preceding thirty days.
Legislation has been proposed in South Carolina to make the price
gouging statute apply when the President or the governor of any other
state of the United States declares a state of emergency and the basis
for that declaration is causing an abnormal disruption of the market in
South Carolina. Why did your state legislatures choose to limit its
law's impact to declared states of emergency?
Answer. The market needs to be free to set prices and allocate
scarce resources as it does in the usual course of business in the
United States without merchants being afraid to make necessary pricing
decisions.
Question 1a. How frequently do states declare a state of emergency?
Answer. The Governor of South Carolina declared hurricane related
states of emergency for Hurricanes Hugo (1989), Fran (1996), Bonnie
(1998), Floyd (1999), and Charley (2004). A state of emergency was
declared for a winter storm in 2002.
Question 1b. Has there ever been a situation where there is
evidence of unconscionable increase in price outside of a declared
emergency?
Answer. South Carolina investigators interviewed employees in 100
plus gasoline retailers post-Hurricane Katrina. Follow-up
investigations are being conducted of four of these retailers. Though
final conclusions have not been reached, it appears that some of these
stations may have been susceptible to prosecution for price gouging if
South Carolina's price gouging statute had been activated by a declared
state of emergency.
Question 2. The Department of Energy established a 1-800 phone
number as well as a web form for consumers to report possible instances
of price gouging. According to the DOE, the information they receive is
forwarded to the Department of Justice, the Federal Trade Commission,
and the affected State's Attorney General. Have you been receiving this
information? Is it helpful?
Answer. Yes.
Question 2a. What do your offices do with this information once it
is received?
Answer. The information is used to identity potential problem
retailers for investigation.
Question 3. As a former Attorney General, I recognize the enormity
of the job that you perform with limited resources. In September, I
wrote to Attorney General Gonzales and asked the Department of Justice
to provide technical and financial support to state Attorneys General
to investigate price gouging. What, if any assistance have your
received from the DOJ?
Answer. South Carolina did not request assistance from DOJ.
Question 3a. What, if any additional assistance could the Federal
Government provide to your offices?
Answer. South Carolina's resources were sufficient to investigate
these issues at the retail level. We believe the appropriate federal
role is to investigate the producers and refiners for anti-trust and
unfair trade practices.
Question 3b. Are you aware of price gouging for fuel or other
commodities in your state following Hurricane Katrina?
Answer. Though final conclusions have not been reached, it appears
that a small number of gasoline retailers (four or less) may have been
susceptible to prosecution for price gouging if South Carolina's price
gouging statute had been activated by a declared state of emergency.
Question 4. Are there any investigations underway?
Answer. South Carolina investigators interviewed employees in 100
plus gasoline retailers post-Hurricane Katrina. Follow-up
investigations are being conducted of four of these retailers.
Question 4a. Do you have adequate state authority?
Answer. Legislation has been proposed in South Carolina to make the
price gouging statute apply when the President or the governor of any
other state of the United States declares a state of emergency and the
basis for that declaration is causing an abnormal disruption of the
market in South Carolina. If this legislation is adopted, we will have
adequate authority.
______
Prepared Statement of Hon. Bill Richardson, Governor, State of New
Mexico
Chairman Domenici, Chairman Stevens, Ranking Member Bingaman,
Ranking Member Inouye, and members of the committees, I appreciate the
opportunity to submit this written testimony on the subject of today's
joint committee hearing: energy pricing and corporate profits.
As you may know, several Democratic Governors sent the President
and Congressional leaders a letter on September 20, 2005 requesting an
investigation into possible price-gouging by oil companies. I commend
you for responding favorably to this request, as well as that of the
growing number of Americans who want answers to their questions about
record corporate profits at a time of exorbitant energy prices.
We stated in our letter, ``If gas prices remain at artificially and
unexplainably high levels, American families will see the effects not
only at the pump, but in their grocery bills and prescription drug
costs.'' \1\ Unfortunately, our concerns have been borne out. The
recent spike in gas prices has placed an extraordinary financial burden
on families, and there is no relief in sight. Although we have seen a
slight decrease recently in gasoline prices, home heating costs are
projected to increase dramatically this winter. According to an Energy
Information Administration (EIA) Short Term Energy Outlook report
released yesterday, American families who heat their homes with natural
gas are expected to spend 41% more for fuel this winter than they did
last winter.\2\ This is an increase of $306--a large burden for working
families.\3\ The EIA further projects that the utility bills for
families using heating oil will grow this winter by 27% ($325) and that
propane users will pay on average 21% ($230) more this winter than
last.\4\ If the weather is colder than expected, these costs will rise
even further.\5\
---------------------------------------------------------------------------
\1\ Letter from Democratic Governors to President Bush, Majority
Leader Frist, and Speaker Hastert (Sept. 20, 2005).
\2\ Energy Information Administration Short-Term Energy Outlook
(Nov. 8, 2005), at http://www.eia.doe.gov/emeulsteo/pub/contents.html.
\3\ Ibid.
\4\ Ibid.
\5\ Ibid.
---------------------------------------------------------------------------
As a Governor of a state with a diverse population, I have seen the
toll that high energy costs takes on working families. Americans don't
spend money on energy and fuel because they want to; they spend it
because they have to. Even worse, while high energy costs affect all
Americans, they disproportionately affect the neediest Americans, who
are often forced to choose among basic needs.
What's most troubling is that as our citizens are forced to bear
this financial burden, our nation's oil companies are turning out
record profits. Exxon Mobil recently posted a $9.9 billion quarterly
profit--the largest in U.S. corporate history.\6\ To put this number in
perspective, this one company's quarterly profit could pay for all
Social Security benefits for a three-month period, an Ivy League
education for 60,000 kids, or more than 160 Boeing 737s.\7\ Likewise,
Royal Dutch Shell reported third quarter profits of $9 billion and
ConocoPhillips earned $3.8 billion, roughly double its profits from a
year earlier.\8\ Overall, the industry is expected to post a record $96
billion in corporate profits for 2005.\9\
---------------------------------------------------------------------------
\6\ Terence O'Hara, Oil Industry Seeks to Cast Huge Profits as No
Big Deal, Wash. Post, Oct. 28, 2005, at D1.
\7\ Ibid.
\8\ H. Josef Hebert, Oil Execs to Be Asked to Justify Profits,
Wash. Post, Nov. 2, 2005, at http://www.washingtonpost.com/wp-dyn/
content/article/2005/11/01/AR2005110101432.html.
\9\ Ibid.
---------------------------------------------------------------------------
Corporate profitability should be encouraged--unless it is obtained
by illegal price gouging on the backs of working families. In our
September 20th letter, we cited a study published by Dr. Don Nichols,
economist and director of the Robert M. La Follette School of Public
Affairs at the University of Wisconsin Madison, showing that gas prices
outstripped crude oil prices.\10\ Dr. Nichols explained that gasoline
prices of $3.00 per gallon--which much of our country saw for months--
would only be expected if crude oil were costing $95.00 per barrel.\11\
At their peak, however, crude oil prices were in the range of $70.00
per barrel. Thus, the question for your committee is: where did the
additional money go? Many Americans suspect that it went right into
corporate pockets.
---------------------------------------------------------------------------
\10\ Donald A. Nichols, Professor of Economics and Public Affairs;
Director, The La Follette School of Public Affairs; Co-Director, the
Center for World Affairs and the Global Economy, The University of
Wisconsin-Madison, ECONOMIC OUTLOOK FOR LATE 2005 AND 2006: STRONG
GROWTH WITH A BIT OF INFLATION FED BY THE KATRINA BOOM (Sept. 16,
2005), http://www.lafollette.wisc.edu/calendar-news/2005/
outlooksepo5.pdf, at 5-7.
\11\ Ibid.
---------------------------------------------------------------------------
And if companies did price-gouge and profiteer illegally, then
commensurate fines and surrender of those ill-gotten gains should be
considered and those monies redirected to helping families with energy
costs.
I applaud you for following up on this matter. However, I encourage
you to consider this the beginning of a long process of finding ways to
help alleviate the burden of rising energy costs. As you investigate
the relationship between corporate profits and high energy prices, I
also encourage you to draw on Governors' first-hand knowledge and
experience. Across the country, Governors have shown leadership in
investigating price gouging and promoting energy efficiency. In
addition to launching our own investigations and lawsuits, we have
spearheaded multi-state cooperative efforts to reduce energy costs,
proposed utility sales tax holidays, initiated campaigns to weatherize
homes, and distributed tax rebate checks. New Mexico families are
receiving rebate checks ranging from $64 to $298 to help cover rising
energy costs. We have also expressed our strong support for additional
emergency LIHEAP funding, and we'll continue to fight for these
critical funds. Through these experiences, we have gained valuable
insight into how to best assist Americans in this time of need.
Again, on behalf of our nation's Democratic Governors, I urge you
to remain vigilant on this critical matter. The American people will
not tolerate being held hostage to corporate profit. They deserve
answers and they deserve economic relief. Democratic Governors stand
ready to assist in any effort aimed at protecting Americans from rising
energy costs. Thank you.
______
U.S. Senate,
Washington, DC, November 8, 2005.
Hon. Ted Stevens,
Chairman, Committee on Commerce, Science and Transportation, U.S.
Senate, Hart Building, Washington, DC.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Dirksen Building, Washington, DC.
Dear Chairmen Stevens and Domenici: Thank you for convening
tomorrow's joint hearing on energy prices and supply. As members of the
Senate Energy and Commerce Committees, we write to request that the
witnesses at tomorrow's hearing--specifically, the CEOs of the five
major oil companies expected to attend be sworn in, to offer testimony
under oath.
We are aware that Majority Leader Frist called for this hearing as
part of the effort ``to investigate high energy prices.'' Many of us
have previously called for similar investigations and believe such an
effort is long over due, given factors such as the oil companies'
record profits, complaints from across the nation about potential price
gouging in the wake of Hurricanes Katrina and Rita, and other long-
standing controversies about the pricing policies and business
practices of these corporations.
In order for the Senate to play its proper oversight role, we
believe it would be most appropriate for these witnesses to be
administered the oath. Not only will this give us and our constituents
the utmost confidence in the testimony that is offered, it will also
provide us a reasonable opportunity to request additional information
to aid in this investigation.
If the American people are to find this inquiry credible, it is
essential that the oil executives testify under oath. Anything less
would undermine the integrity of this Congress and these committees.
Thank you for your attention to this request.
Sincerely,
Maria Cantwell, Bill Nelson, Jay Rockefeller, Frank
R. Lautenberg, Ron Wyden, Barbara Boxer,
Byron L. Dorgan, Tim Johnson, Mark L. Pryor
______
Prepared Statement of Red Cavaney, President and CEO, American
Petroleum Institute
API is a national trade association representing more than 400
companies involved in all aspects of the oil and natural gas industry,
including exploration and production, refining, marketing and
transportation, as well as the service companies that support our
industry. Its mission is to advocate public policy in support of a
strong, viable U.S. oil and natural gas industry essential to meet the
energy needs of consumers in an efficient and environmentally
responsible manner. API advocacy efforts on positions are based on the
consensus of its members.
INTRODUCTION
The oil and natural gas industry recognizes the concerns across the
country over the higher energy costs American consumers and businesses
have been facing this year. Until recently, the focus has been on
gasoline and other motor fuels. As the colder weather approaches,
however, attention is shifting to the cost of heating fuels,
particularly natural gas and heating oil. This statement is intended to
address these concerns. The industry is also cognizant of the criticism
leveled at it for what may appear to others as unreasonable or
unjustified prices and high earnings. This statement will attempt to
address those concerns and to offer the proper context in which to view
both prices and earnings.
FACTORS IN THE COST OF GASOLINE
Hurricanes: The catastrophic impact of Hurricanes Katrina and Rita
on our industry cannot be overstated. Because the Gulf Coast is the
heartland of our industry--particularly the area between New Orleans
and Houston--the two storms challenged our industry as it has not been
challenged in decades. The men and women of the oil and natural gas
industry not only responded to Katrina and Rita, they lived it.
Thousands of our employees and their families and friends are also
suffering the hardships of living in New Orleans, Lake Charles,
Beaumont, Port Arthur and Pascagoula, and throughout this devastated
region they call home. Many were left homeless. In concert with fire
and police officials, neighbors, suppliers, and government authorities,
our companies worked to restore oil and natural gas production,
bringing the refineries back online, and restarting the pipelines--
while at the same time grieving over the loss of homes, neighborhoods,
and even loved ones.
The Gulf Coast region includes some 4,000 offshore platforms in
federal waters, dozens of refineries and natural gas processing plants,
and hundreds of transportation and marketing facilities. These federal
waters account for nearly 30 percent of the nation's crude oil
production and approximately 20 percent of the natural gas production.
Over the last two months, our companies have made much progress in
recovering from the hurricanes, but much remains to be done. Almost 67
percent of oil production in the Gulf of Mexico is shut down and 50
percent of natural gas production in the Gulf is shut down. While many
refineries, pipelines, and other facilities are back in operation, or
are about to be, some facilities remain damaged and out of service.
Fuels are flowing to consumers nationwide, but at reduced levels,
posing a more difficult challenge for our companies to keep up with
demand for gasoline and other products.
Imports of gasoline have helped ease the tightness of gasoline
supply, as has consumer response to calls for wiser use of energy.
Nevertheless, we continue to face tight supplies.
Wiser and more efficient use of energy in this time of tight supply
is crucial--as important as our efforts to bolster supply. Companies
are working night and day to get fuels to where they are needed in the
quantities they are needed. And they are supplementing domestic
production with increased imports of gasoline to help alleviate tight
supplies.
While we will attempt to provide you with the latest information we
have, we would caution you that the situation can change markedly from
day to day, from the standpoint of what we know and what actual
progress has been made.
We know that the effects of Hurricanes Katrina and Rita on our
industry are having a nationwide impact. We understand how Americans
throughout the country have faced increased prices for gasoline and
other fuels. However, we believe the market is working, as prices have
moderated in recent weeks and are now well under the post-Katrina
highs. What follows is background on two key components of the price of
gasoline: crude oil price and taxes.
Crude oil costs: Crude oil is the single largest component of the
price of a gallon of gasoline. Before Hurricanes Katrina and Rita
struck, the price of gasoline was rising primarily because U.S.
refiners have been paying more for crude oil. In fact, the Federal
Trade Commission noted this exact point in a report this July:
To understand U.S. gasoline prices over the past three
decades, including why gasoline prices rose so high and sharply
in 2004 and 2005, we must begin with crude oil. The world price
of crude oil is the most important factor in the price of
gasoline. Over the last 20 years, changes in crude oil prices
have explained 85 percent of the changes in the price of
gasoline in the U.S.
It is important to remember that oil companies do not set the price
of crude oil. Crude oil is bought and sold in international markets and
the price paid for a barrel of crude oil reflects the market conditions
of the day. There is a fragile balance between the world's supply and
demand for crude oil. Because of this tight market, any disruption of
oil supply--or even the threat of disruption--can push prices upward as
buyers and sellers in the worldwide marketplace look to secure supplies
for their customers. Obviously, the disruptions caused by the
hurricanes were significant, as were the effects of these disruptions
on fuel prices.
While more than half the cost of gasoline is for crude oil, every
time a motorist pulls up at the pump, he or she pays an average of 46
cents in federal and state taxes per gallon of gasoline. State taxes
range from 26 cents to 63 cents per gallon. The remainder is the cost
to refine, distribute and sell the gasoline, and profits.
Returning to normal operations: Our industry has never experienced
back-to-back events like Hurricanes Katrina and Rita and their brutal
aftermath. The hurricanes hit an industry that was already stretched to
its limit by an extraordinarily tight global supply and demand balance.
As EIA notes in its October Short-Term Energy Outlook, ``The impact of
the hurricanes on oil and natural gas production, oil refining, natural
gas processing, and pipeline systems has further strained already-tight
natural gas and petroleum product markets on the eve of the 2005-2006
winter heating season.'' EIA anticipates crude oil prices to average
about $64.50 per barrel though the end of 2006. And, EIA estimates that
natural gas heating costs will be about 50 percent higher this winter,
assuming the winter is not colder than normal. The damage wrought by
Katrina and Rita has clearly exacerbated the very market conditions
that have led to today's higher prices.
Oil and gasoline prices jumped immediately after Katrina due to the
widespread damage to energy infrastructure, but have moderated slightly
as the industry restores operations. Oil prices rose to nearly $70 per
barrel, but have moderated to around $60 per barrel. Similarly, the
average price for gasoline nationwide jumped 46 cents per gallon in the
week after Katrina hit, rising from $2.65 to $3.11 per gallon. However,
as companies restarted some affected refineries and pipelines and the
damage from Rita appeared less severe than expected, gasoline prices
moderated. As of November 7, nationwide gasoline prices (for all
grades) averaged $2.38 per gallon. Natural gas prices have declined,
closing at $11.4125 per million Btu (MMBtu) on November 4. That is
about a 20 percent decrease from the record of $14.338 per MMBtu set on
October 25. However, $11.4125 per MMBtu is 43.5 percent higher than
last year. And, it was only 4-5 years ago that natural gas prices
averaged in the $2-3 MMBtu range.
EIA now forecasts that typical per-household expenditures for home
heating oil will be significantly higher this winter when compared with
last year: $350 (48 percent) more for natural gas users; $378 (32
percent) more for heating oil users; and $325 (30 percent) more for
propane users. To help the most economically vulnerable cope with
higher bills during this time of crisis, we urge Congress to fully fund
the Low-Income Home Energy Assistance Program (LIHEAP).
ZERO TOLERANCE FOR PRICE GOUGING
In the aftermath of Hurricanes Katrina and Rita and their effects
on gasoline prices, we have seen repeated accusations that the oil and
natural gas industry is engaging price gouging. Nothing could be
further from the truth. In fact, API and its member companies condemn
price gouging. We have said so repeatedly, including in nationwide
advertising. There is zero tolerance for those who break the law.
History provides an important guide here. Our industry has been
repeatedly investigated over many decades by the Federal Trade
Commission, other federal agencies, and state attorneys general. Of the
more than 30 investigations, none has ever found evidence that our
companies have engaged in any anti-competitive behavior to drive up
fuel prices.
Marketing complexity: The gasoline marketing system has the
complexity and flexibility required to meet the varying needs of both
companies and consumers. Companies have three basic types of outlet
options and may employ any and all in their marketing strategies to
maximize efficiencies, compete in the marketplace and serve consumers.
First, they can own and operate the retail outlets themselves (company
owned and operated outlets). The second option is to franchise the
outlet to an independent dealer and directly supply it with gasoline.
This option may have three different forms of property ownership: The
operator can lease from the refiner, lease from a third party, or own
the outlet outright. The third option is to utilize a ``jobber,'' who
gains the right to franchise the brand in a particular area. Jobbers
can choose to operate some of their outlets with their own employees
and franchise other outlets to dealers. The mix of distribution methods
varies widely across firms. Different refiners, depending on which type
is perceived as most efficient, use different types of outlets.
Retailers are typically categorized as branded and unbranded
sellers of fuel. Those who are retailers of unbranded gasoline
generally pay lower wholesale prices for gasoline and they attract
customers with generally lower retail prices. These retailers price
gasoline at retail based on an unbranded ``rack'' price. They typically
shop around in the marketplace, without any binding long-term
contracts, in order to obtain the best price. Understanding up-front
that there is a certain degree of supply and price risk associated with
this method of petroleum retailing, gasoline purchased by an unbranded
retailer and priced off an unbranded rack price thus entails no long-
term relationship or security of supply between buyer and seller. Most
importantly, unbranded purchases do not typically allow the purchaser
the use of the supplier's brand name.
In contrast, a branded retailer is obligated by a contract to buy
branded gasoline and pay a ``dealer tank wagon'' (DTW) price, which is
generally higher than the rack price. Branded product is typically
priced somewhat higher because it offers the dealer greater security of
supply and the right to use the supplier's brand name. This makes sense
when one considers the investment in the brand name and the importance
to both the supplier and retailer of assuring reliable and
uninterrupted supply to customers.
In periods of market tightness, however, when a supplier may not
have enough product to supply all branded dealers plus the
unaffiliated, unbranded buyers, the unbranded retailers, without supply
contracts, may pay higher wholesale prices than name-brand retailers.
This typically occurs when there is a supply disruption caused by a
pipeline or refinery breakdown--such as was caused by the two recent
hurricanes.
GASOLINE PRICES AND THE WORLD OIL MARKET
As noted above, prices are rising because of the forces of supply
and demand in the global crude oil market. Supply and demand is in a
razor-thin balance in the global market. Small changes in this market
have a big impact.
World oil demand reached unprecedented levels in 2004 and continues
to grow. Strong economic growth, particularly in China and the United
States, has fueled a surge in oil demand. The U.S. Energy Information
Administration (EIA) reports that global oil demand in 2004 grew by 3.2
percent--the strongest growth since 1978--and projects growth to
average 1.8 percent this year and next. By comparison, world demand
between 1993 and 2003 grew at an average rate of 1.6 percent.
At the same time, world oil spare production capacity--crude that
can be brought online quickly during a supply emergency or during
surges in demand--is at its lowest level in 30 years. Current spare
capacity is equal to only about 1 percent of world demand. Thus, the
world's oil production has lagged, forcing suppliers to struggle to
keep up with the strong growth in demand.
The delicate supply/demand balance in the global crude oil market
makes this market extremely sensitive to political and economic
uncertainty, unusual weather conditions, and other factors. Over the
past several years, we have seen how the market has reacted to such
diverse developments as dollar depreciation, cold winters, the post-war
insurgency in Iraq, hurricanes in the Gulf of Mexico, the Venezuelan
oil workers' strike in 2002-2003, uncertainty in the Russian oil patch,
ongoing ethnic and civil strife in Nigeria's key oil producing region,
and decisions by OPEC.
While consumer concern about high gasoline prices is very
understandable, we must recognize that gasoline prices mirror crude oil
prices. Crude oil costs make up more than 50 percent of the cost of
gasoline. Retail gasoline prices and crude oil prices have historically
tracked, rising and falling together. When supply is abundant and
demand is low, we see the opposite of today's situation: in late 1998,
crude oil was selling under $11 per barrel--and gasoline was selling
for less than $1 a gallon.
We currently import more than 60 percent of the crude oil and
petroleum products we consume. American refiners pay the world price
for crude and distributors pay the world price for imported petroleum
products. U.S. oil companies don't set crude oil prices. The world
market does. Whether a barrel is produced in Texas or Saudi Arabia, it
is sold on the world market, which is comprised of hundreds of
thousands of buyers and sellers of crude oil from around the world.
NATURAL GAS
Natural gas fuels our economy--not only heating and cooling homes
and businesses but also generating electricity. It is used by a wide
array of industries--fertilizer and agriculture; food packaging; pulp
and paper; rubber; cement; glass; aluminum, iron and steel; and
chemicals and plastics. And, natural gas is an essential feedstock for
many of the products used in our daily lives--clothing, carpets, sports
equipment, pharmaceuticals and medical equipment, computers, and auto
parts. Only 4 to 5 years ago, natural gas prices were in the $2 to 3
per million Btu (MMBtu) range. Recently, prices have settled in the
$12-14 per MMBtu range, setting record levels in October. Higher
natural gas prices have taken their toll--more than 2.8 million U.S.
manufacturing jobs have been lost since 2000, and chemical companies
closed 70 facilities in the year 2004 alone and have tagged at least 40
more for shutdown.
Unlike oil, natural gas imports in the form of liquefied natural
gas (LNG) are limited by the lack of import terminals. There are only
five operating in the United States. A number of additional terminals
have been proposed but many have run into not-in-my-backyard opponents
and complex permitting requirements. While natural gas imports from
Canada have been important, Canada's own needs are growing. Expanding
our ability to tap into global natural gas supplies is essential.
The National Petroleum Council (NPC) study, ``Balancing Natural Gas
Policy: Fueling the Demands of A Growing Economy'' (2003) highlighted
the significant costs associated with current policies--such as access
restrictions on the OCS and process impediments to development in the
West--that do not support the development of America's abundant natural
gas resources. The NPC estimated that continuing on our current policy
path could result in $300 billion more in consumer costs over 20 years.
More than 60 million homes are heated by natural gas. A cold winter
will make already high costs even higher for consumers.
EARNINGS
There is considerable misunderstanding about the oil and natural
gas industry's earnings and how they compare with other industries. The
oil and natural gas industry is among the world's largest industries.
Its revenues are large, but so are its costs of providing consumers
with the energy they need. Included are the costs of finding and
producing oil and natural gas and the costs of refining, distributing
and marketing it.
It should not be forgotten that the energy Americans consume today
is brought to us by investments made years or even decades ago. Today's
oil and natural gas industry earnings are invested in new technology,
new production, and environmental and product quality improvements to
meet tomorrow's energy needs. Oil & Gas Journal estimates that the
industry's total U.S. reinvestment this year will be $85.7 billion,
compared with $80.7 billion in 2004 and $75.5 billion in 2003. It also
estimates that exploration and production spending in the U.S. will
grow 6 percent this year and that total upstream oil and gas spending
will reach nearly $66 billion. A single deepwater production platform
can cost in excess of $1 billion.
The industry's earnings are very much in line with other
industries--and often they are lower. This fact is not well understood,
in part, because the reports typically focus on only half the story--
the total earnings reported. Earnings reflect the size of an industry,
but they're not necessarily a good reflection of financial performance.
Earnings per dollar of sales (measured as net income divided by sales)
provide a more relevant and accurate measure of a company's or an
industry's health, and also provide a useful way of comparing financial
performance between industries, large and small.
For the second quarter of 2005, the oil and natural gas industry
earned 7.7 cents for every dollar of sales compared to an average of
7.9 cents for all U.S. industry.\1\ Many industries earned better
returns in the second quarter than the oil and natural gas industry.
For example, banks realized earnings of 19.6 cents on the dollar.
Pharmaceuticals reached 18.6 cents, software and services averaged 17
cents, consumer services earned 10.9 cents and insurance saw 10.7 cents
for every dollar of sales. (For the third quarter, the oil and natural
gas industry earned 7.4 cents for every dollar of sales. The average
figure for all U.S. industry is not yet available.) Last year, the oil
and natural gas industry realized earnings of 7 percent, compared to an
average of 7.2 percent for all U.S. industry. Over the last five years,
the oil and natural gas industry's earnings averaged 5.7 cents compared
to an average for all U.S. industry of 5.5 cents for every dollar of
sales.
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\1\ Earnings equal profits divided by sales calculated from
``Corporate Scorecard,'' Business Week, August 22/29, 2005; and from
company financial reports for oil and natural gas figures.
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WINDFALL PROFITS TAX
Along with the charges of unjustified high fuel prices we are also
hearing calls for reinstatement of a windfall profits tax (WPT) as a
response to the nation's energy challenges. Such demands ignore one
very basic fact: by any reasonable standard, our industry's earnings
cannot be categorized as ``windfall,'' as can be seen by the figures
above. To single out one industry for earnings that are in line with
other industries--or lower--would send a dangerous message to America's
business community and to the hundreds of thousands of individual and
institutional investors--including pension funds--who trust our
industry with a significant portion of their financial future.
Strong earnings enable our industry to remain competitive globally,
where they must compete with government-owned national oil companies,
and benefit millions of shareholders. These earnings enable the
industry to invest in innovative technologies that improve our
environment and increase energy production to provide for America's
future energy needs. Levying new taxes would likely end up harming
consumers. As The Wall Street Journal editorialized, (``China Does
Carternomics,'' August 19), ``A windfall profits tax only discourages
increases in supply by disincentivizing further production.''
Again, we should let history be our guide. The WPT was enacted in
1980 to raise revenue and to ensure that oil companies did not benefit
unduly as domestic price controls were removed in a period of
relatively high crude oil prices. While it failed to raise the revenues
predicted due to declining oil prices in the 1980s, the WPT did drain
$79 billion in industry revenues that could have been used to invest in
new oil and gas production, according to the Congressional Research
Service (CRS). In fact, as many as 1.6 billion fewer barrels of oil
were produced domestically due to the WPT, according to CRS. This
lesson is particularly important to remember as the nation continues to
experience very tight energy markets, combined with ever-rising demand
for petroleum products.
Clearly, a WPT was a bad idea in the 1980s, and it is an even worse
idea today in light of the tremendous capital investment that will be
needed in the nation's oil and natural gas sector to meet the
accelerating growth in U.S. energy demand.
The Windfall Profit Tax remains a bad idea for several reasons:
As stated above, the oil and natural gas industry is not
earning ``windfall profits.'' The reality is that the
industry's earnings have been very much in line with other
industries, and often they are lower. According to Business
Week and Oil Daily, the oil and natural gas industry earned 5.7
cents for every dollar of sales compared to an average of 5.5
cents for all U.S. industry over the past five years.
The oil industry uses its earnings to invest in new
technology, new production, refining and product distribution
infrastructure, and environmental and product quality
improvements. According to the Congressional Research Service
(CRS), before the WPT was repealed in 1988, it generated about
$79 billion in gross revenues--money that could have been used
by the oil industry to invest in new energy production and
infrastructure.
The National Petroleum Council projects that producers will
have to invest almost $1.2 trillion through 2025 to fund U.S.
and Canadian natural gas exploration and production activities
and $200 million for infrastructure. Investments of this
magnitude require long-term fiscal stability, while a WPT would
establish a precedent that could discourage investment in
domestic energy production.
Crude oil prices, which are set on the world market, and
natural gas prices fluctuate substantially and unpredictably.
The industry must manage its business in the face of these
severe price fluctuations, riding out the low prices in
anticipation of recovering during higher prices. In fact, as
recently as 1999, the petroleum industry was weathering
depressed oil prices of around $10 per barrel.
A WPT taxes away the benefits of better times and offers no
help to oil and gas companies during bad times. This
discourages investment in domestic production and increases
U.S. dependence on imported oil. The CRS concluded that between
1980 and 1986 the WPT reduced American oil production by as
much as 1.6 billion barrels.
The WPT is an overly complex tax. Administering the WPT cost
oil companies an estimated $100 million per year and the
government an additional $15 million per year. These costs
continued to be incurred even after the tax had ceased to
produce any meaningful revenues.
Proposals for energy industry funding of LIHEAP: In recent weeks,
we have heard numerous proposals that the oil and natural gas companies
be forced to turn over some of their earnings to fund low-income
heating assistance programs. The oil and natural gas industry
recognizes the hardship on families of high energy costs and has
consistently supported full funding of the Low Income Home Energy
Assistance Program (LIHEAP) program each year. Congress should continue
to provide full funding for the program.
LIHEAP is funded by Congress each year and those funds are then
provided as block grants to the states, U.S. territories, the District
of Columbia and recognized American Indian tribes and tribal
organizations for their use in assisting families. The Federal
Government traditionally has had the primary responsibility of helping
families needing energy assistance. In addition, LIHEAP provides
assistance for all types of home energy bills including electricity
(whether produced from natural gas, nuclear, coal, hydro, or renewable
fuels).
LIHEAP is a vital program that is designed to respond to problems
that result from a variety of market forces, including tight supplies.
Congress needs to address the supply problem directly by providing
access to the oil and natural gas reserves that are off limits in non-
park lands in the West and under the waters off our coasts. These
recoverable reserves would provide enough natural gas to heat 125
million homes for 120 years, and 131 billion barrels of recoverable
oil, enough to produce gasoline for 73 million cars and fuel oil for 30
million homes for 60 years.
As noted earlier, the hurricanes devastated the Gulf Coast states,
their communities, their farms and their businesses. The region's oil
and gas production and refining facilities were particularly hard hit,
cutting deeply into normal supplies of energy. The Congressional Budget
Office estimates the damage to the energy industry along the Gulf coast
to have been $18-$31 billion. API member companies continue to be
heavily engaged in efforts to get fuels flowing to consumers across the
country. The companies will continue to increase supply as they spend
billions of dollars to restore production and refining capacity in the
region. These companies have donated tens of millions of dollars to
charitable organizations working in the Gulf Coast recovery and
restoration effort, while joining hand-in-hand with those non-profit
organizations and government agencies to rebuild lives and communities.
For government to insist that one industry give extra funds to an
appropriately government sponsored program--above and beyond what it
has already contributed through its taxes, and through its private
charitable contributions--would set a dangerous precedent, allowing
government to shift its responsibilities to various segments of the
private sector, depending on the political winds of the day.
ENERGY PRICES: WHAT CAN BE DONE?
The solution to high prices is more supply of crude oil and
gasoline and natural gas, but there is no simple strategy to make that
happen. The United States is at a critical turning point in shaping its
future energy policy. The Energy Policy Act of 2005, signed by the
President in August, signals a first step in a much-needed effort to
enhance energy security and ensure the reliable delivery of affordable
energy to consumers. But much remains to be done.
The problems we face are very real: growing world demand for
energy; a lack of national commitment to develop our abundant domestic
energy resources and critical infrastructure; and scant attention to
energy efficiency. These factors have resulted in a tight supply/demand
balance for U.S. consumers, causing recurring price spikes, greater
market volatility, and overall strain on the nation's energy production
and delivery systems.
Energy demand continues to grow. The Energy Information
Administration (EIA) forecast that by 2025, U.S. energy consumption
will increase by 35 percent, with petroleum demand up by 39 percent and
natural gas up by 34 percent. These demand increases occur despite
expected energy efficiency improvements of 33 percent and renewable
energy supply increases of 41 percent.
Additional EIA forecasts point out our basic problem: Domestic
energy supplies are not keeping up with increased demand; and we are
relying more and more heavily on imports to meet our energy needs. EIA
projects that U.S. crude oil production will fall by 17 percent by 2025
(assuming no production from ANWR), while crude oil imports will
increase by 67 percent, and net petroleum product imports increase by
90 percent. Given these trends, it comes as no surprise that EIA
forecasts that our nation's dependency on foreign sources of petroleum
will rise from 59 percent today to 68 percent in 2025.
This increase, to the extent that it reflects import costs lower
than domestic supply costs, would represent a gain from trade which
should be encouraged. However, when we have resources that can be
developed at prices competitive to imports, and we choose not to do so,
we place a wasteful and unnecessary burden on our own consumers.
In fact, we do have an abundance of competitive domestic oil and
gas resources in the United States. According to the latest published
estimates, there are more than 131 billion barrels of oil and more than
1000 TCF of natural gas remaining to be discovered in the U.S.
However, 78 percent of this oil and 62 percent of this gas are
expected to be found beneath federal lands and coastal waters.
Federal restrictions on leasing put significant volumes of these
resources off limits, while post-lease restrictions on operations
effectively preclude development of both federal and non-federal
resources. The most comprehensive study of the effects of such
constraints was the 2003 National Petroleum Council study of natural
gas, which included an analysis of federal constraints on U.S. gas
supply in two key areas--the Outer Continental Shelf (OCS) and the
Rockies. The study found that in key areas of greatest supply
potential, federal policy precludes or seriously constrains
development. For instance, of the 209 TCF of estimated undiscovered gas
in the Rockies, 69 TCF is completely off limits, while another 56 TCF
is seriously constrained by federal policy. That is 125 Tcf that is
restricted--enough to heat 60 million homes for 30 years. On the OCS,
the Atlantic, Pacific and Alaskan offshore, and most of the Eastern
Gulf of Mexico are off limits to development.
The OCS resources off the lower 48 states alone are enough to
provide gasoline for 1116 million cars and heating oil for 47 million
homes for 47 years, plus enough natural gas to maintain current
production levels for almost 70 years. Furthermore, the study found
that sustaining these constraints over the next 20 years would cost
U.S. consumers more than $300 billion in increased energy costs.
We are aware that opponents of oil and natural gas development
still raise environmental concerns. However, history provides
overwhelming evidence that our industry can find and develop oil and
natural gas resources safely and with full protection of the
environment, both on land and offshore. For example, according to the
U.S. Coast Guard, from 1980 to1999, 7.4 billion barrels of oil were
produced in federal offshore waters, with less than 0.001 percent
spilled, less than the volumes of natural seeps that occur on the sea
floor. The industry's leak prevention performance in offshore
production during three major hurricanes (Ivan, Katrina and Rita)--two
of them back-to-back--within 12 months, featuring 170 miles-per-hour
winds and seas of up to 100 feet, continues this remarkable
environmental record.
Using advanced technology and sound operational practices, our
industry has steadily reduced the environmental impact of oil and gas
development, both onshore and offshore. The surface presence for
exploration and development wells has shrunk significantly. For
example, a drilling pad the size of the Capitol is all that would be
needed to access any oil reserves that might exist in the entire 68.2
square mile District of Columbia. Horizontal and directional drilling
now enables our industry to drill multiple underground wells from a
single pad, sometimes reaching sites as far away as 10 miles from the
drilling pad.
Additionally, the U.S. oil and natural gas industry is among the
most heavily regulated industries in our country. Every lease contains
a standard stipulation to protect air, water, wildlife and historic and
cultural resources, but leases may also include up to nearly 1,000
additional stipulations to further protect resources.
The recently enacted Energy Policy Act of 2005 takes a positive
step by requiring an inventory of OCS oil and natural gas resources. It
will not, by itself, result in new energy supplies.
We need to build on the energy legislation by opening offshore
areas, ANWR and resource-rich lands in the West to encourage the flow
of more American natural gas and oil to the marketplace. And, while we
must focus on producing more energy here at home, we do not have the
luxury of ignoring the global energy situation. In the world of energy,
the U.S. operates in a global marketplace. What others do in that
market matters greatly.
For the United States to secure energy for our economy, government
policies must create a level playing field for U.S. companies to ensure
international supply competitiveness. With the net effect of current
U.S. policy serving to decrease U.S. oil and gas production and to
increase our reliance on imports, this international competitiveness
point is vital. In fact, it is a matter of national security.
We can no longer wait 12 years, as we just did, to address our
nation's energy policy. The energy legislation is a foundation, but it
must be built upon. More needs to be done and more quickly,
particularly increasing access to offshore resources. We have the
ingenuity, the technology, and environmental protections. If enactment
of the energy legislation means we have a commitment to continued
action, then it will truly be a turning point in reshaping U.S. energy
policy.
REFINERIES
We cannot understand or deal with high gasoline prices if we do not
consider the state of refineries in the United States. During the
1980s-90s, the oil industry earned relatively poor rates of return on
their investments. This was especially true in the refining sector,
which was hard hit with the need for new investment in technology and
equipment to meet various environmental requirements and to produce
cleaner burning fuels.
Attracting capital for new refinery capacity has been difficult
with refining rates of return historically averaging well below the
average for S&P Industrials. Over the 10-year 1994-2003 period, the
return on investment for the refining and marketing sector was 6.2
percent or less than half as much as the 13.4 percent for S&P
Industrials. In only one year between 1977 and 2003 did the average
return of refiners exceed the average for the S&P Industrials.
Reflecting unprecedented infrastructure damage incurred by
Hurricane Katrina, refiner margins \2\ peaked on August 31st at levels
nearly 3 times higher than pre-hurricane margins. These margins peaked
again with the arrival of Hurricane Rita, this time at a lower level,
and then returned to pre-hurricane levels within a week or two.
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\2\ Refiner margins measured by the difference between the
wholesale price of gasoline and the price of light sweet crude oil
traded on the NYMEX.
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From 1994 to 2003, the industry spent $47.4 billion to bring
refineries into compliance with environmental regulations. That
included $15.9 billion in capital costs and $31.4 billion in operations
and maintenance costs to comply with regulations covering air, water
and waste rules. Moreover, by 2010, the U.S. refining industry will
have invested upwards of $20 billion to comply with new clean fuel
regulations. This is in addition to the cost of compliance with many
dozens of other environmental, health, safety and security regulations.
All this investment severely reduces the funds available for
discretionary capacity expansion projects.
Technological advancements have helped refineries produce more from
existing facilities than they did in the past. Refineries are doing a
better job of bringing product to market for less--and the consumer has
benefited. Even though a new refinery has not been built from scratch
in 30 years, existing refineries are continually being upgraded and
reworked to improve efficiency. Inefficient process units are replaced
and new units are built to provide more fuel processing flexibility.
U.S. refining capacity has expanded from 14.7 million barrels per day
in 1994 to 17.1 million barrels a day today, or 2.4 million barrels a
day. This expansion is the equivalent of about 12 new 200,000 a day
capacity refineries. Based on publicly available data on announced
refinery capacity expansion plans, at least 1 million barrels/day of
additional refinery capacity projects are either planned or under
strong consideration for the years 2005-2009.
We can see this in the decline in the refiner/marketer margin
(measured as the difference between the retail price of gasoline minus
taxes and minus the refiner's composite crude oil price). Back in 1980,
the cost to refine and market and distribute gasoline averaged about 95
cents per gallon (in inflation-adjusted terms). By 1990, it averaged
more than 61 cents per gallon, and, by 2000, it was 52 cents per
gallon, which is about where it has averaged over the last five years.
Multiplying these reductions by the 330 billion gallons of petroleum
products consumed translates into billions of dollars of savings for
consumers. All Americans benefit every day from these improvements and
efficiency gains.
Removing refinery capacity constraints: The record-high gasoline
prices, while primarily caused by increased crude oil prices and
exacerbated by Hurricanes Katrina and Rita, have underscored the fact
that U.S. demand for petroleum products has been growing faster than--
and even exceeds--domestic refining capacity. While refiners have
increased the efficiency, utilization and capacity of existing
refineries, these efforts have not enabled the U.S. refining industry
to keep up with growing demand.
The U.S. refining industry has been expanding a little more than 1
percent per year over the past decade--the equivalent of a mid-size
refinery being built each year. In order to create the opportunity for
increasing the growth of U.S. refinery capacity, government policies
are needed to create a climate conducive to investments to expand
domestic refining capacity.
In addition, many of the steps the Federal Government could take to
help the refinery capacity situation are covered in the December 2004
National Petroleum Council (NPC) study, Observations on Petroleum
Product Supply--A Supplement to the NPC Reports ``U. S. Petroleum
Product Supply--Inventory Dynamics, 1998'' and ``U.S. Petroleum
Refining--Assuring the Adequacy and Affordability of Cleaner Fuels,
2000.''
The NPC study suggested that the Federal Government should take
steps to streamline the permitting process to ensure the timely review
of federal, state and local permits to expand capacity at existing
refineries.
For example, new-source review (NSR) requirements of the Clean Air
Act need to be reformed to clarify what triggers these reviews. Some
refineries may be able to increase capacity with relatively minor
adjustments, but are unsure if the entire facility's permit review
would be triggered--a burdensome and time-consuming process.
In addition to the administrative issues deterring new refining
capacity investments, there are financial constraints as well.
Attracting capital for new refinery capacity has been difficult with
refining rates of return historically averaging well below the average
for S&P Industrials. Over the 10-year 1994-2003 period, the return on
investment for the refining and marketing sector was 6.2 percent or
less than half as much as the 13.5 percent for S&P Industrials. In only
one year between 1977 and 2003 did the average return of refiners
exceed the average for the S&P Industrials.
While taking these factors into account, it is important to
remember that the oil and natural gas industry operates in a global
marketplace. Many oil and gas companies are global companies, whose
U.S. investment decisions compete not only with decisions as to how to
allocate capital investments in the U.S. among various sectors of the
industry, but also with competing demands and investment needs
overseas. In a global marketplace, companies will make the best
economic investment decisions in order to bring affordable petroleum
products to consumers. Imports may be the more economical option than
new U.S. refineries, but that is a decision to be left to the global
marketplace. Government policies must encourage, not interfere with,
the global marketplace.
REFINERY AND PIPELINE INFRASTRUCTURE RECOMMENDATIONS
Assessing hurricane impacts: The Department of Energy, with
assistance from the National Petroleum Council, should conduct a
comprehensive study of the impact of the recent hurricanes and the
market response to determine whether there are measures that could be
put in place to lessen the impact of such events.
Streamline permitting process: Streamline the permitting process
for refineries, storage facilities, and pipelines so that new or
expanded capacity and repairs are not held up by regulatory
bottlenecks. A lead agency should be established for permit reviews--
DOE for refining and DOT for pipeline. Congress should consider actions
to facilitate expansion of oil pipeline capacity.
Lifting barriers to capacity expansion: Barriers need to be lifted
from existing refineries so that the outlook for domestic capacity
expansions and crude/product flexibility projects can improve where the
infrastructure is already in place.
It is important to reconsider NAAQS PM2.5 and ozone
attainment deadlines in major refining areas (Houston/
Philadelphia) which will act as a constraint to the growth of
such capacity.
Given that the current standards are being implemented now,
and the significant health science uncertainties, Congress
should defer the current standard review process until the next
statutory review cycle (2010-2012). The current ozone and PM2.5
quality standards should remain in effect for now.
New Source Review reforms should be codified to add
certainty around when the permit reviews are triggered.
Allow federal preemption in emergencies: The Federal Government
should be given absolute federal fuel preemption authority to waive
both federal and state environmental and product quality fuel
requirements. The period of waivers should be extended from 90 to 120
days.
Reduce number of state ``boutique fuels'' requirements: There are
many local fuel specifications that require special production and
handling, causing inefficiencies in the distribution system and
increased volatility when refining or supply interruptions occur.
Congress could improve this situation by reducing the number of
``boutique fuels.''
Establish emergency powers authorities: This would facilitate an
effective response to future emergencies. Give federal agencies
authority to grant short-term relaxation of federal and state
requirements in the event of emergencies to expedite bringing pipelines
and distribution facilities back on-line. Policymakers should consider
establishing emergency powers authorities for priority power
restoration for all components of the oil and natural gas
infrastructure to be used in emergency situations.
Improve electric system reliability: Improvements that enhance the
reliability of electric power supply will significantly enhance the
availability of petroleum products during periods of temporary
emergency, such as that which occurred in the Gulf Coast region post-
hurricane.
Reasonable pipeline operations: Support legislative and
administrative action by FERC that would facilitate emergency response
to disasters by pipeline operators and that would encourage expansion
of existing infrastructure and new service.
Reduce likelihood of imports bottlenecks: The Coast Guard and the
Minerals Management Service should assess the marine infrastructure and
identify current and potential future bottlenecks to imports,
particularly in emergency situations when above-normal import levels
may be desirable.
NATURAL GAS RECOMMENDATIONS
Given the importance of natural gas throughout the economy and the
approach of the winter heating season, attention has begun to focus not
only on ways to use natural gas more wisely, but also on how to enhance
future supplies. America's oil and natural gas industry supports the
following actions:
Low-Income energy assistance: Congress should fully fund the Low
Income Home Energy Assistance Program (LIHEAP), and it should release
LIHEAP funds early. Providing early funds to those in need can help
prevent defaults on home heating bills and service curtailments.
Offshore Development: The OCS inventory required by the Energy
Policy Act of 2005 should be promptly conducted to allow states and the
nation as a whole to fully appreciate the sizable resources off our
coasts that have been placed ``off limits'' to development. While
current estimates indicate substantial resources, these are based on
older data and are likely to be conservative. Using advanced computers
and programs to review the resource base will enable policymakers and
their constituents to more fully understand the true costs of OCS
moratoria.
Lifting moratoria. Restrictions on federal lands off the Atlantic
and Pacific coasts, Alaska and most of the Eastern Gulf of Mexico have
put 77 billion barrels of oil and 420 trillion cubic feet (Tcf) of
natural gas off limits. That is enough natural gas to heat more than
100 million homes for over 60 years. And, it is three times the natural
gas resources of Canada and Mexico combined.
Giving states greater authority: States deserve the right to opt
out of moratoria by choosing to develop resources off their coasts.
This could help supply additional, critically needed natural gas and
oil supplies to American consumers. Natural gas resources off the lower
48 states alone are estimated to be enough to maintain current natural
gas production for almost 70 years and could supply current industrial
and commercial needs for 29 years.
Adopting expansive 5-year lease sale program: The Minerals
Management Service (MMS) is in the process of preparing its next 5 year
plan. The first step in this process, its recent call for information,
drew record support for OCS development. To maximize future supplies of
natural gas, MMS should include all areas (not under moratoria) in
their leasing program; expand OCS acreage offered for sale in Alaska,
including the Beaufort and Chukchi seas and Bristol Bay; and schedule
an early sale for the remaining Sale 181 acreage. The Sale 181 area is
particularly important as it has substantial resource potential and
access to existing infrastructure that could speed delivery of its
resources to energy users. And, an early sale would send a powerful
signal to energy markets.
Streamlining Coastal Zone Management process: Uncertainties that
can impede/deter resource development can be reduced if: a deadline of
120 days (from filing of an appeal) is set for review and decisions on
state appeals of consistency findings; initial action is taken to reach
federal and state agreement on information needed for the decision-
making process; and a single consistency finding is allowed. The CZM
process has proved to be a major impediment, allowing states to
challenge oil and gas projects more than a hundred miles off their
shores and leaving some projects in limbo as approval decisions can
take years.
DEVELOPING ONSHORE RESOURCES RECOMMENDATIONS
Onshore lands in the Mountain West and Alaska hold great potential
for additional domestic supplies if access is allowed and permitting
and regulatory process impediments removed. Alaska has significant
resource potential--estimates of 69 Tcf of natural gas and 18 billion
barrels of oil. For example, the mean estimate of oil in the Arctic
National Wildlife Refuge (ANWR) is 10 billion barrels (EIA), enough to
replace current levels of imports from Saudi Arabia for 20 years.
Actions needed include:
Expanding access to Alaskan resource-rich areas: Congress should
open ANWR. In an area the size of South Carolina (19 million acres)
exploration and production activity would likely only affect an area
comparable to Dulles airport (2,000 acres). We should also expand
leasing in the National Petroleum Reserve-Alaska, and we should provide
support for the building of the necessary infrastructure to bring
Alaska natural gas supplies to consumers in the lower 48 states.
While Alaska's onshore resources will be critical to sustaining a
healthy energy future, it will take a while to develop them. In the
shorter term (2-5 years) the abundant natural gas resources in the
Mountain West can provide much needed domestic supplies. However, vast
areas of multiple-use federal lands have been withdrawn from
development directly or indirectly through restrictions and constraints
on operations. In assessing these non-park, non-wilderness federal
lands, the NPC concluded that 125 TCF of natural gas was effectively
off limits to development and/or significantly affected by access-
related regulatory requirements such as no surface occupancy and
prohibitions on drilling at certain times of the year. The regulatory
process is complicated and duplicative and constitutes an impediment to
production of the nation's energy resources. And, legal challenges by
antidevelopment groups are growing. In 1999, about 4.5 percent of the
leases offered were protested. By 2005, that had grown to 50 percent.
For example, in 2004 every lease sold in Utah was protested resulting
in delays of up to 18 months.
Improving regulatory process: Measures should, be taken to protect
the environment, wildlife and historical and cultural properties, but
the regulatory process can be improved by removing process impediments.
We should allow joint filing of right-of-way and drilling permits for
federal lands to expedite the permitting process. We should expand the
use of categorical exclusions or sundry notices for minimal disturbance
activities, including categorical exclusions for wells and rights of
way with minimal surface disturbance in existing fields and sundry
notices instead of Applications for Permit to Drill (APDs) for
successive wells on multi-well drill pads. Categorical exclusions do
not remove the required environmental protections but rather apply to
those minimal surface operations where an impact is negligible.
We should also implement Bureau of Land Management's (BLM's) 2003
Process Improvement Memoranda. We should conduct an independent review
of agency practices and interpretation of criteria for determining site
significance, including establishment of standards for cultural
resource reports and eliminating duplicate survey requirements. And we
should monitor BLM lease stipulations and conditions of approval to
determine their effectiveness and removing them as appropriate.
Providing adequate agency funding: We should have updated resource
management plans (RMPs). All activity on BLM lands is managed through
RMPs. New lease sales cannot be held without updated RMPs. Further,
activities not anticipated in an earlier RMP cannot occur until the
plan is updated or amended. Reasonably foreseeable development
scenarios should be used as planning tools, not to establish caps on
the number of wells or other limits on surface activities. We should
improve data sharing by federal and state land management agencies,
encourage the use of joint APD/Right-of-Way applications for wells and
ensure regulatory compliance through vigorous inspection and
enforcement programs. In addition, we should administer the National
Environmental Protection Act (NEPA) process effectively; and provide
timely resolution of appeals and protests.
Additional measures: If implemented, the above policy suggestions
can help result in additional future oil and natural gas supplies
essential to our energy security and economic growth. However, with
significant amounts of oil and gas production still shut down in the
Gulf of Mexico in the aftermath of the recent hurricanes, there are
additional measures that could be taken by BLM to expedite onshore
production now, including:
Exercising existing authority to allow year-round drilling
and completions to proceed;
Issuing permits immediately for all applications in areas
where existing NEPA requirements have been met;
Proposing new fast track, emergency response rules when
there is a national energy emergency in order to significantly
reduce permit review and approval times.
Additionally, the Endangered Species Act (ESA) and National
Environmental Policy Act (NEPA) impose an array of regulatory
requirements and have provided opportunities for antidevelopment groups
to litigate with the intention of delaying or preventing energy
projects.
Updating Endangered Species Act: Recent legislation reported out by
the House Resources Committee contains a number of process
improvements. Industry supports an ESA process that is based on sound
science using peer-reviewed data, includes an evaluation of the
economic and social impacts of threatened or endangered species
designation, encourages the use of voluntary agreements, and recognizes
that different levels of protection can be appropriate for different
species.
Reforming National Environmental Protection Act (NEPA): Duplicative
environmental documentation in the NEPA process should be eliminated,
the Environmental Assessment process should be strengthened to help
reduce the need for Environmental Impact Statements, and interagency
consultation and cooperation should be improved. The NEPA process
should be made more objective and timely through the use of best
available scientific evidence and clear definitions of information
needed for decision-making. In addition, agency monitoring and
enforcement should be enhanced.
Tapping global supplies through Liquefied Natural Gas: Despite the
growth of alternative fuels, oil and natural gas are expected to
provide nearly two-thirds of the energy America consumes in 2025. And,
natural gas demand is forecast to grow 34 percent by 2025, according to
Energy Information Administration. While additional domestic supplies
can and should be developed, the United States also needs to tap into
global supplies of natural gas through liquefied natural gas (LNG)
shipments. There are only five LNG receiving terminals currently in
operation. To support growth in LNG supplies, LNG project permit
applications should be processed within one year. This will require
coordinating and streamlining permitting--LNG project sponsors face
multiple, often-competing state and local reviews, as well as federal
reviews, which result in permit delays. It will also call for setting
clear review deadlines and conducting concurrent reviews also can
streamline the process. Adequate regulatory agency funding should be
provided. Additional funding and staff will be needed to promptly
process increased applications for LNG terminals and to administer
regulatory programs for these terminals once they are operational.
Finally, public education programs on the safety and security of LNG
operations should be conducted.
CONCLUSION
The U.S. oil and natural gas industry recognizes the catastrophic
impact that Hurricanes Katrina and Rita have had on millions of
Americans and our industry is working with government and others in the
private sector to do all we can to alleviate their suffering. The
industry also recognizes the frustration and hardship felt by consumers
as a result of higher prices and a basic misunderstanding of industry
earnings.
If we all do our part--industry providing supplies and repairs as
expeditiously as possible, government facilitating needed approvals,
and consumers adjusting their energy-use habits to consume less fuel--
Americans can overcome this challenge as we have others in our nation's
history.