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KEEPING THE FUEL FLOWING FROM THE GULF:

ARE WE PREPARED FOR THE HURRICANE SEASON?

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 7, 2006

Serial No. 109–213

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

LAWRENCE HALLORAN, Deputy Staff Director

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

DAVE SOLAN, Professional Staff Member

LORI GAVAGHAN, Clerk

RICHARD BUTCHER, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on June 7, 2006 ................................................................................. 1

Statement of:

Greco, Robert, group director of upstream and industry operations, American Petroleum Institute; and Tyson Slocum, energy program research

director, Public Citizen ................................................................................. 68

Greco, Robert ............................................................................................. 68

Slocum, Tyson ............................................................................................ 90

Johnson, General David L., Director, National Weather Service, NOAA;

Admiral Thomas Barrett, Administrator, Pipeline & Hazardous Materials Safety Administration, Department of Transportation; and Guy

Caruso, Administrator, Energy Information Administration .................... 11

Barrett, Thomas ........................................................................................ 21

Caruso, Guy ............................................................................................... 36

Johnson, David L. ...................................................................................... 11

Letters, statements, etc., submitted for the record by:

Barrett, Admiral Thomas, Administrator, Pipeline & Hazardous Materials Safety Administration, Department of Transportation, prepared

statement of ................................................................................................... 23

Caruso, Guy, Administrator, Energy Information Administration, prepared statement of ........................................................................................ 38

Greco, Robert, group director of upstream and industry operations, American Petroleum Institute, prepared statement of ....................................... 71

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Johnson, General David L., Director, National Weather Service, NOAA,

prepared statement of ................................................................................... 14

Slocum, Tyson, energy program research director, Public Citizen, prepared statement of ........................................................................................ 92

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 64

(1)

KEEPING THE FUEL FLOWING FROM THE

GULF: ARE WE PREPARED FOR THE HURRICANE SEASON?

WEDNESDAY, JUNE 7, 2006

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY AND RESOURCES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2203, Rayburn House Office Building, Hon. Darrell E. Issa (chairman of the subcommittee) presiding.

Present: Representatives Issa and Watson.

Staff present: Larry Brady, staff director; Lori Gavaghan, legislative clerk; Tom Alexander, counsel; Dave Solan, Ph.D. and Ray

Robbins, professional staff medmber; Richard Butcher, minority

professional staff member; and Jean Gosa, minority assistant clerk.

Mr. ISSA. The subcommittee will come to order, a presumed

quorum being present.

Last year’s Hurricanes Katrina and Rita provided the government and energy industry with a painful education. Emergency

communication systems were rendered inoperable. The electric

power on which refineries and pipelines depend was unavailable for

much longer than the baseline scenarios had predicted.

We were also made acutely aware that, although we have a strategic petroleum reserve of crude oil, we do not have a strategic reserve of refined fuels such as gasoline and diesel.

I remind everyone that, following Hurricane Katrina, I introduced a bill, H.R. 4043, to have the National Academy of Science

study the feasibility of creating a strategic gasoline reserve.

The lessons of 2005 go far beyond a wake-up call. Not only

should we expect the unexpected, but we should be prepared for

the unimaginable. Anything less could be catastrophic.

Besides the extraordinary and tragic loss of human life of two

100-year storms in the same season, we are left with almost $3-

per-gallon average gasoline prices entering the 2006 hurricane season. The production of petroleum and natural gas in the Gulf of

Mexico is just now getting back close to normal levels. Petroleum

refining capacity was already stretched to the limit before the 2005

hurricanes.

The importance of the Gulf to the United States cannot be overstated.

It is the energy breadbasket for our Nation.

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For the 2006 hurricane season—and I do not want to preempt

the testimony—but NOAA forecasts that we will have above-average activity.

One noted forecaster has calculated that there is almost a 40-percent chance of the area of Florida or the Florida panhandle, into

Brownsville, TX, being hit by a category three, four, or five hurricane in 2006, and I am sure we will hear much more detail as the

witnesses begin.

Bearing this in mind, it is critical that we assess government and

industry’s preparedness efforts to keep the critical fuels flowing

from the Gulf of Mexico to the rest of the country. Spiking fuel

prices are a grave concern, but even higher prices pale in comparison to the consequence of widespread fuel shortages. During the

crisis after Hurricane Katrina, parts of the country were within

hours of running short of critical fuels. It was only through the ingenuity and determination of government and industry personnel

that the fuel crisis was averted and the U.S. economy did not grind

to a halt.

Much was learned from the events of last year. It is imperative

that the lessons learned be applied in a systematic manner.

Government and energy industry must closely coordinate their

preparedness in response efforts.

In short, are the Federal Government and industries prepared to

keep the fuel flowing from the Gulf of Mexico this hurricane season? The answer to this question must be affirmative, and it must

be answered in actions, not only words.

Today, we have experts from government, industry, and the marketplace to help answer this over-arching question.

For our first panel of witnesses, we are privileged to have General David Johnson, director of the National Weather Service; Admiral Thomas Barrett, recently sworn in as Administrator of Pipeline & Hazardous Material Safety Administration, Department of

Transportation—congratulations, Admiral—and once again, we are

joined by the Honorable Guy Caruso, Administrator of the Energy

Information Administration.

[The prepared statement of Hon. Darrell E. Issa follows:]

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Mr. ISSA. I look forward to hearing from our distinguished panel

today. When our ranking member is able to join us, we will undoubtedly pause, if she would like, for her opening remarks. Since

we have no other requests for opening statements, I would ask that

each of the witnesses stand, along with anyone who is going to provide information, to take the oath, as is required by this committee.

[Witnesses sworn.]

Mr. ISSA. Let the record show that three witnesses and four in

the back row have all been sworn.

Before we begin, I would like to thank all who have attended.

This is a real showing of the level of interest to have this committee room filled to the brim when, often, subcommittee hearings

are echo chambers. I think that speaks well of the gravity of what

we are going to hear today. With that, I would like to begin with

Gen. Johnson.

STATEMENT OF GENERAL DAVID L. JOHNSON, DIRECTOR, NATIONAL WEATHER SERVICE, NOAA; ADMIRAL THOMAS BARRETT, ADMINISTRATOR, PIPELINE & HAZARDOUS MATERIALS SAFETY ADMINISTRATION, DEPARTMENT OF TRANSPORTATION; AND GUY CARUSO, ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION

STATEMENT OF DAVID L. JOHNSON

General JOHNSON. Good afternoon, Mr. Chairman and members

of the committee.

I am General David Johnson, Assistant Administrator for Weather Services and the director of the National Weather Service at the

National Oceanic and Atmospheric Administration [NOAA], in the

Department of Commerce. Thank you for inviting me here today to

discuss the outlook for the 2006 Atlantic hurricane season.

Last year’s hurricane season set records for the numbers of hurricanes and tropical storms. However, whether you are predicting

an above-average hurricane season like this year or even a belownormal season, such as in 1992, the crucial message is the same:

prepare, prepare, prepare. It only takes one powerful hurricane like

Andrew or Katrina to expose our vulnerabilities.

First, let me express my sincere gratitude to the members of

your committee. Your continued support of NOAA and our hurricane program enables us to make the best forecast possible in order

to help protect lives, property and livelihoods.

There is a great interest among the media and public in the research community about the upcoming hurricane season. People

want to know how many hurricanes there will be and the chances

of one hitting their area. This attention generates needed awareness about the potential effects of hurricanes and helps ensure people take the right actions at the right time.

The official hurricane season began just a week ago, on June 1st,

and runs officially through November 30th. The average peak activity occurs with the warmest water temperatures from the middle

of August to the end of October. NOAA’s official prediction for the

2006 Atlantic hurricane season is for 13 to 16 named tropical

storms, with 8 to 10 of those storms becoming hurricanes. Of those,

we predict four to six will be major hurricanes, or what we call a

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category three or higher, packing winds over 110 miles per hour.

It is these category three storms that are the ones likely to cause

the most extensive damage.

This hurricane season, we are predicting an 80-percent likelihood

of an above-average number of storms in the Atlantic basin, and

that is the highest probability we have ever predicted in a May outlook.

This high degree of confidence in our seasonal forecast comes

from many favorable conditions, including warmer sea surface temperatures in the Atlantic basin, combined with a lower wind shear,

low surface pressures, and an African easterly jet stream.

Many believe these favorable conditions, which started coming

together around 1995, are part of the multi-decadal climate pattern

which peaked in the 1950’s and 1960’s.

This multi-decadal signal could keep us in an active period for

major hurricanes for another 10 to 20 years or more.

One question that is raised frequently is the role of climate

change and how that affects hurricane frequency and intensity, and

this issue is important to NOAA. Our meteorologists and research

scientists are actively engaged in ongoing research to better understand how this climate variability and change may impact hurricane frequency and intensity.

Steering patterns for major hurricane landfalls can sometimes

persist over years. During the 1940’s, many major hurricanes hit

Florida. During the 1950’s, the focus of land-falling hurricanes

shifted to the U.S. east coast, and during the 1960’s, the central

and west Gulf States were again hit by hurricanes. This pattern

might lead one to assume that, given the recent major hurricanes

in 2004 and 2005, Florida and the Gulf coast are likely targets

again this season. However, in each of those decades, there were

exceptions, with some hurricanes impacting other areas of the

coast.

While it is possible to observe these trends and make generalizations, it is important to understand that, in any given year in the

Atlantic, a hurricane can impact any part of the U.S. coastline from

Texas up to Maine, and it only takes one hurricane over a given

community to make a bad year.

In 1983, there was only one land-falling hurricane in the United

States, but it was category three Alicia that hit the Houston and

Galveston area, and in 1992, we only had one hurricane make

landfall in the United States, but that was category five Hurricane

Andrew, which hit southern Miami and Dade County, FL.

The message from NOAA’s National Weather Service is very consistent.

We want every business, every family, every individual, and

every community or industry that operates on or near the coast to

have a hurricane preparedness plan and have it in place at the

start of the hurricane season.

I must emphasize that any city or community along the coast can

be devastated by a hurricane and that a hurricane is not just a

coastal event. The strong winds, heavy rains, flooding, and tornados from weakening tropical systems can spread well inland.

The damage created can hinder recovery or continued evacuation

efforts, and lead to increased loss of life and property.

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While NOAA has made great strides in the accuracy of our hurricane track forecasts, much more work needs to be done, especially

on intensity forecasts, and we have been very honest about that.

NOAA has asked outside experts to review our research and our

programs to improve our forecast intensity capabilities, and NOAA

also continues to test new products and models to improve our

overall hurricane forecast.

We do intend to introduce a new hurricane modeling system

called the Hurricane Weather Research and Forecasting Model, developed by the National Center for Environmental Prediction. We

appreciate the Congress’ support of this effort and its overall support for the satellites, the aircraft, the buoys, and most importantly

for the people who make these critical forecasts possible.

While NOAA will continue to do its best to provide accurate forecasts with as much warning as possible, it is my hope that each

family, each business, and each community on or near the coast

will develop and be able to execute a hurricane preparedness plan.

We must all be ready to protect lives and property from the power

of hurricanes.

I thank you for your time today, sir, and look forward to the

questions.

[The prepared statement of General Johnson follows:]

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Mr. ISSA. Thank you, General, and without objection, all of the

witnesses’ written and oral testimony will be in the record, and

without objection, we will also leave the record open for 5 days for

additional inclusions or answers that come from today’s panel.

Admiral Barrett.

STATEMENT OF THOMAS BARRETT

Admiral BARRETT. Good afternoon, Mr. Chairman. Thank you for

your leadership in scheduling this hearing and on this issue, and

the invitation to appear and discuss PHMSA’s response to last

year’s hurricanes and our preparedness for this year.

Secretary Mineta is keenly focused on the Department of Transportation’s crisis response responsibilities, as I am for Pipeline and

Hazardous Materials Safety Administration. In my view, PHMSA

personnel and the pipeline industry did a terrific job last year,

under very difficult conditions, to keep fuel flowing from the Gulf

following the storms. Lessons learned from that experience have

helped us prepare for the current season.

Secretary Mineta and PHMSA both understand the role our pipeline transportation systems play in the national energy supply, and

the risk of fuel shortages from mid-Atlantic States that could

followupon a major storm.

When Katrina and Rita hit last year, PHMSA moved quickly and

aggressively to help industry return transmission lines to full service.

As you may be aware, the hurricanes did not do extensive damage to the underground transmission pipelines, and historically,

above-ground pipeline facilities have performed well during hurricanes. However, the storms did cause extensive damage to the electric power transmission network that pump stations rely on for

power, and restoring power to those major pumps rapidly emerged

as the critical issue.

Immediately after landfall of Katrina, PHMSA personnel surveyed damage and monitored pipeline service restoration activities

throughout Louisiana, Mississippi, Alabama, and Texas.

Through contacts with pipeline operator and their customers,

PHMSA was able to forecast fuel shortages throughout the southeast and mid-Atlantic within 48 hours of landfall. If you will look

at the first chart, you can see the storm track up through central

Mississippi would have affected a number of major pump stations

on both Plantation and Colonial lines, which are major feedings to

the northeast.

PHMSA personnel from headquarters were dispatched by Secretary Mineta to provide onsite coordination with local emergency

response centers. They worked with the FAA to facilitate emergency fly overs for damage assessments and with the Federal

Motor Carrier Safety and Federal Highway Administrations to obtain police escorts and waivers of hours for service and weight restrictions to safely and rapidly move 19 large generators from

around the country, as far away as Washington State, to restore

pumping capability.

Dedicated PHMSA personnel traveled to remote storm-damaged

areas to help industry personnel assure manual pipeline startups

were safe. PHMSA issued special permits to Mississippi, Alabama,

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Louisiana, Florida, and later, Texas, for Rita, to accommodate

emergency transportation, and rescue and relief materials, and facilitate removal of debris.

The bottom line is potential fuel shortages that could have had

major impacts up to the mid-Atlanta were averted by rapid response and solid teamwork between industry, PHMSA, FERC, and

multiple other Federal, State, and local agencies, and if you look—

you can see the track on restoration and how it worked.

This is Katrina, but on the Plantation lines, you can see that,

within several days—August 30th would have been Tuesday, so it

is 2 days after the storm hit, a day after landfall there. Restoration

was crucial and moved rapidly.

On Colonial, you can see the same thing. It took a little longer.

It is a much larger line. This line is over a 2-million-barrel-a-day

capacity, and so, it took a little longer to restore, but it was

promptly brought back in service.

Following the experience of the 2005 season, we have looked at

lessons learned and steps we could take to prepare for future challenges. Our approach will be to analyze risk prior to an event,

bring rapid assessment of potential impacts, help mitigate releases,

facilitate safe restoration of fuel supply, and approve special permits as warranted to facilitate movement of supplies.

We have been meeting regularly with the pipeline industry,

FERC, DHS, DOE, and FEMA officials to execute responsibilities

under the national response plan. Our regional and headquarters

personnel have participated in numerous drills and training exercises to more effectively deal with potential emergencies.

In the office of our chief safety officer, we have established a new

focal point for security and emergency preparedness.

Last week, Secretary Mineta visited the Gulf coast to discuss

with State and local leaders ways to improve large-scale emergency

response plans. In addition, PHMSA staff met with Mississippi and

Louisiana officials, including the staffs of Governor Barbour and

Governor Blanco, to discuss emergency response actions, held discussions with the Mississippi Emergency Management Agency, the

Louisiana Department of Natural Resources, Louisiana Department of Homeland Security, on the best ways to resolve potential

pipeline and related transportation emergencies, and we intend to

continue those meetings with local officials in other States as we

move forward.

Mr. Chairman, like you, DOT and PHMSA are committed to safe

operation of our Nation’s pipeline transportation system under both

normal and emergent conditions. We understand how important

this is to our economy and to the safety and security of our citizens.

I will be glad to respond to questions, and I thank you and the

committee for your interest and attention on this issue.

[The prepared statement of Admiral Barrett follows:]

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Mr. ISSA. Thank you, Admiral.

Mr. Caruso.

STATEMENT OF GUY CARUSO

Mr. CARUSO. Thank you, Mr. Chairman, and I appreciate the opportunity to present the Energy Information Administration’s energy market outlook and discuss the potential effects of the hurricane season. As you know, EIA is the independent statistical and

analytical agency in the Department of Energy.

As of today, we released our Short-term Energy Outlook for

June, and we see crude oil prices continuing to rise this year and

into next year. As you know, they are set in international markets

based on world oil supply and demand, and recently, strong economic growth worldwide has accelerated the demand growth, while

global production capacity has struggled to keep pace. This is an

industry straining to meet the demand it is facing.

At the same time, the perceived risk to supply caused by political

instability and other factors, such as natural disasters, continually

affect the market.

In our current short-term outlook, the monthly average price of

crude oil is expected to average $68 per barrel in 2006 and 2007,

with retail gasoline prices projected to average $2.60 per gallon in

both years. Looking at the 2006 summer driving season, we expect

gasoline to average about $2.75 per gallon, nearly 40 cents higher

than last summer.

U.S. crude oil production should increase this year, recovering

from last year’s hurricane damage, but only moderate increases in

both OPEC and overall non-OPEC production are expected.

At the same time, world demand for oil is expected to increase

by 1.7 million barrels per day in 2006, and 1.9 million barrels per

day in 2007, with China accounting for about half-a-million barrels

a day of the growth in both years.

Limited surplus capacity and concerns about potential supply

problems, not only due to natural disasters but geo-political events,

continue to keep upward pressure on oil prices.

Turning to natural gas, total demand in 2006 is expected to be

slightly lower than last year, due mostly to the mild winter conditions that reduced heating needs earlier this year.

However, industrial demand is expected to increase with the recovery in the natural gas-intensive industries following last year’s

hurricanes.

It is important to note that our projections do not include any

production losses or outages from hurricanes this season.

However, significant amounts of U.S. oil and natural gas production and refining capacity are potentially vulnerable to hurricanerelated disruption. In 2004, the federally administered areas in the

Gulf of Mexico contributed 27 percent of the total U.S. crude oil

production and 20 percent of total natural gas.

There was also significant production in the off-shore and onshore of the State administered areas in Alabama, Louisiana, Mississippi, and Texas.

In addition, Gulf coast States account for more than 46 percent

of U.S. refinery capacity.

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Hurricanes Katrina and Rita passed through the heart of the

Gulf producing region.

According to the Minerals Management Service, as of June 1st

this year, total production of crude has been reduced by more than

160 million barrels, and production of gas by nearly 800 billion

cubic feet due to the effect of last year’s hurricanes. That amounts

to about 30 percent and 21 percent of a normal year’s oil and natural gas production from the Federal off-shore fields.

About 228,000 barrels a day of Gulf production and 1.1 billion

cubic feet per day of natural gas still remain off-line, some permanently.

At the height of the refinery outages in late September, nearly

30 percent of U.S. refinery capacity and over 60 percent of refinery

capacity in the Gulf coast region were shut down. From August

26th through the end of 2005, about 105 million barrels of refined

products were not produced as a result of refinery shutdowns. In

addition, some refinery maintenance that would normally have occurred last fall was deferred to this spring.

The effects of Katrina and Rita and, to a lesser extent, Hurricane

Ivan in 2004 were unusually severe compared to past experience.

As discussed in my written testimony, the impacts of Katrina

and Rita on refinery operations were even more exceptional, pushing the normalized index of refinery capacity utilization in the Gulf

coast during October and September far below levels experienced

at any time over the past 20 years.

As General Johnson has just detailed, NOAA has issued its preliminary outlook for this year’s hurricane season, with an 80-percent probability of above-average hurricane—number of hurricanes,

and particularly major hurricanes. There is considerable uncertainty, as General Johnson has indicated, in predicting disruptions

to oil and natural gas operations due to hurricanes, because it depends on the precise locations and intensities of the storm. However, based on our analysis of the last 45 years of production losses

and taking into account the current NOAA forecast, we expect the

total reduction in crude production from Federal off-shore to range

from zero to 35 million barrels during this hurricane season, with

a reduction in natural gas ranging from zero to 206 billion cubic

feet.

In addition to the potential damage from production—to production and refinery operations, hurricanes have other potential effects, such as disruptions in transportation, as Admiral Barrett has

just indicated, electric power supply, and other necessary infrastructure.

Last year, EIA assisted DOE’s Office of Energy Delivery and Energy Reliability, and the Office of Fossil Energy, in their emergency

response efforts during the hurricane season. We stand ready again

to support them and the agencies represented at this table, and

others, in responding to any potential disruptions this year.

Mr. Chairman, this completes my oral testimony, and I would be

happy to answer questions at the proper time.

[The prepared statement of Mr. Caruso follows:]

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Mr. ISSA. Thank you, and I will start off with 5 minutes of questioning.

Mr. Caruso, you know, I think facts and figures are great, and

I have a staff that goes through them and runs the numbers and

pours over them, but in layman’s terms, if we are to assume the

upper end of those shortages that you just described occur, and

since last year we came within, I believe it was hours, sometimes

adding up to a day, sometimes not, of running out of, for example,

jet fuel here in Washington, DC.

If we hit the upper end due to an outage, not similar to last year

but based on your forecast, do the pipelines go dry for a period of

time, and if so, what can we or are we likely to be able to do as

far as preventing aircraft trapped on the ground in airports and

unmanageable lines for other fuels?

Mr. CARUSO. Well, if the intensity is limited to those numbers

that I have just discussed—and we also know that there is certainly a potential for revisions upward—it would put upward pressure on price, but this level is so much less than last year, I do

not think there would be a issue of anywhere near the reduction

in supply or the potential disruptions that you indicated.

So, I would say it would probably be limited to price impacts, and

depending on how long the refineries or pipelines were off-line, I

do not see it approaching anywhere near the intensity or disruption

level of last year.

Mr. ISSA. I hope you are right. I guess I would followup with one

quick question, which is that, since inventories are generally—and

capacity is not as good as it was going into last year’s hurricane

season, and since jet fuel does not enjoy the elasticity of demand,

if prices go up, it does not change the amount of fuel necessary to

make the amount of flights that we have people demanding, and

even raising the cost of a ticket doesn’t reduce that many people

who physically use aircraft to travel, we can presume that aviation

fuel, particularly, is not going to go down over even days or weeks

of short supply. So, price is not going to change that.

If price does not change that, are we reasonably at risk that, as

close as we came last year, we could find ourselves unable to supply, if there is a refinery outage even close to last year, the aviation

fuel in the northeast?

Mr. CARUSO. I think the other element that you have to take into

account is inventories, and as of now, the starting of the season,

inventories of jet fuel and other—what we call middle distillates—

are in reasonable good shape. So, we do think that, again, based

on the assumption that we do not get above the numbers that I

have talked about, we should have adequate supply, but as I mentioned, there would be an impact on prices.

Mr. ISSA. General Johnson, as a southern Californian, I often ask

too many questions about the southwest part of the United States,

so please note that my biggest concern right now is: if a hurricane

were to hit the Washington to Maine coast, particularly along New

York and New Jersey, where we import fairly substantial amounts

of gasoline and distillates, what would be the effect?

General JOHNSON. Well, sir, any coastal community or port is

certainly at risk, and New York, for example, has had significant

hurricanes in 1985 with Gloria and with Bob in 1991.

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I think probably the most memorable one was 1938, where a category three came in with 10 to 12 foot surge going in.

That is a pretty significant surge. Katrina had doubled that in

the Gulf coast, and the Mississippi coast had about double that, but

that is a significant surge and could disrupt port operations; I defer

to the port experts on that.

Our job is to provide on accurate, timely forecast, and so, we will

be watching the east coast and the Gulf coast very carefully this

year.

Mr. ISSA. Would you say, based on your predictions that we have

a higher-than-normal opportunity to have that kind of hit to New

York and New Jersey this year versus previous years?

General JOHNSON. I have heard speculation on geographic proximity, and I believe that is exactly what that is.

That is speculation at this point in time. There are so many factors that go into where the hurricane will actually track.

I think there is, however, sir, a direct correlation with higherthan-average and an above-normal season and with a higher probability for land-falling hurricanes. However it is, in fact, scientifically less believable that we can associate with a geographic proximity at this point in time.

Mr. ISSA. Well, I do note that, yesterday, on June 6, 2006, with

the prime rate at 6.6, they said there was only a 1 in 100,000

chance that it would be the end of the world.

General JOHNSON. I will defer to you, sir.

Mr. ISSA. Those were odds I could live with, but obviously, the

odds are dramatically more likely than 1 in 100,000.

For all practical purposes, isn’t this, particularly at this high

level of activity—we are sort of in that it is going to happen once

in a 100 years and it is going to happen more likely at this point

in the 100 years than some other points, from a weather standpoint?

General JOHNSON. Sir, we do see that cyclical, multi-decadal signal, and since 1995, we have only had 2 years in the last 11 that

have been below normal, and those were both El Nino years.

So, at this point in time, I believe that we are in this above-normal decadal signal and we will remain there for the next decade

or so.

So, yes, sir, I think that this is something that all America needs

to pay attention to, especially those on the coast, but as you point

out, those effects can go inland through energy and other industries, as well.

Mr. ISSA. Thank you.

Mr. Caruso, did you have a partial answer to that first question?

Mr. CARUSO. Yeah. One point to keep in mind about New York

and the east coast——

Mr. ISSA. New York, New Jersey, Connecticut. Let’s not forget

Connecticut.

Mr. CARUSO. I could never forget my home State. The refining

concentration in the Gulf coast, 46 percent of the country’s refining

capacity, makes it obviously far more critical to the supply. For example, there are 1.5 million barrels a day of refining capacity in

the east coast, and 7 million in the Gulf coast, but as the General

just pointed out, the ports are critically important, because they

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import substantially more product into the east coast, as a share

of their final consumption, than any other region.

So, that is the area where I would be most concerned about in

terms of weather-related disruptions: port activity disruption, as

opposed to refineries themselves or even pipelines.

Mr. ISSA. Admiral, that probably brings us very logically to you.

All of you spoke a little bit about where we are this year versus

last year, but that is the short run. That is how much we could

patch together with string and a little glue.

What is left to be done for this year that you are in the last minutes of trying to figure out how to do it? Obviously, down in New

Orleans, we are very acutely aware that they are welding and

pushing to try to get things done, and they are past what was their

deadline. Admiral, what is it we have to do, perhaps with additional emphasis from the Congress, for the long run, for this entire

10-year period in which we are probably at triple or quadruple the

chances of a 100-year flood occurring or a 100-year hurricane cycle?

Admiral BARRETT. Sir, in terms of this year, and particularly in

light of your earlier question, I would point out, there is a little

more resiliency and flexibility once you get above Baltimore in

terms of—you have multiple modes, as Guy mentioned, you have

stuff coming in, in terms of restoring capacity or capability. You do

have pipelines coming up. You do have pipelines coming up to the

midwest and coming across, and you have barge and shipping

transportation.

So, there is a little more flexibility up there once you move up

into the Baltimore-Washington-New Jersey corridor. I think fundamentally, if I take your question, I think Secretary Mineta has

an initiative to reduce, over the long term, congestion on our Nation’s highways.

It is an impediment to economic growth and a national-level

issue that needs attention.

Well, in a similar sense, I think we need to be creative about

ways, with the industry and with the Congress and the administration, to reduce congestion on the energy highways, if you will, the

means by which we move energy around this country and provide

the reliability of those supplies to American citizens.

So, I think, long-term, we need to take a look at that issue: the

congestion of the energy highway, as well as the Secretary has

clearly stated the need to pay attention to our national highway

system. That is what I think needs attention.

Mr. ISSA. Obviously, we, as Californians, are acutely aware of

what happens when a highway becomes a parking lot, and that is

just every day, and that is without earthquakes or hurricanes. But

Admiral, following up, the pipelines that we depend on in the

northeast, the Colonial and Plantation, we depend on them operating at virtually peak level.

First of all, what happens if we have widespread flooding, we

lose electricity, they shut down? What are we doing to prevent

that, to really attack the fact that we are an electric economy, that

we depend on electricity to get petroleum, rather than we think

that petroleum creates electricity?

Admiral BARRETT. I think the industry, following, again, the lessons learned—and we certainly have been looking at this from last

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year—have been much more aggressive in positioning in place

emergency generators, food and water supplies. In addition, they

are paying more attention to how they can get their employees into

these sites, gaining appropriate access, and I do think it is going

to depend on what we encounter. Despite the increasingly accurate

predictions, it is a little hard to know exactly what will be hit, but

I know they have been moving aggressively, and we have been

monitoring their efforts to put more capability in place, to be more

immediately responsible to any outage that is caused by loss of

electrical grid.

Mr. ISSA. I am just going to ask one closing question, and you

have been a great panel, but last year, we discovered two things.

First of all, we did not know where a lot of the assets that we

needed were. We might not have known we needed them until the

incident occurred, but once we did, we did not know where they

were.

It took a while to find out where generators were. You included

the fact that some came from as far away as Washington State to

the Gulf.

Then, second, once we had located them, contracted them, crews

were driving them in, we discovered that they had been stopped by

the very people who were intending to provide relief.

One, what have we done about the first part, to your knowledge,

and this includes both liquid assets in the way of replacement fuels

and solid assets—for example, generators—and two, to the extent

that each of you has overseen this, what are we doing to guarantee

that if the asset is located and heads in, that it will arrive uninterrupted?

Admiral BARRETT. Thank you, sir.

In response to your first question, there has been a lot more

planning this year at multiple levels within the Federal Government, partnering with industry and at the State and local levels,

to make sure that the assets, to the extent they can be anticipated,

are identified, that mechanisms are in place to prioritize and assign them to where they are needed. I know for a fact that the industry has been very aggressive, at least the pipeline industry, in

making sure they have in their pocket, if you will, a little more

depth to deal with emergent conditions, and I think, two, the Federal Government, led by the Department of Homeland Security,

and from our perspective at Department of Energy, and FERC, specifically, have been paying much more attention to how, in an

emergency, at both the national level and down at the local level

at emergency operations centers and command centers, appropriate

prioritization, with law enforcement support, would be in place.

Last year, I know my deputy, Brigham McGown, was very heavily engaged in arranging escorts from law enforcement to move this

equipment onto the sites where it was needed. Our hazardous material folks worked with other agencies, Federal motor carriers, to

get the special permits we needed.

I believe, from what I know that those mechanisms will be much

more regular this year, and we are still working on that. We are

exercising regularly, and we will continue to do that, and pay attention to where we identify any risks.

Mr. ISSA. Thank you.

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I am going to break my own promise where I said this was the

last question.

There was one other piece of testimony that came out, and it was

maybe an offhand remark, but I do not know that most of us on

this side of the dais are used to the term ‘‘and some assets in the

Gulf are permanently off-line.’’

Mr. Caruso, that was in your opening testimony.

Can you provide the committee—because I do not think we are

aware of what and why assets—and I am basically talking about

wells—are abandoned as a result of last year and what the impact

of that is, to the extent that it can be quantified.

Mr. CARUSO. I would be happy to do that. Minerals Management

Services has made that estimate.

Mr. ISSA. I appreciate it.

All congressional committees pride themselves on knowing everything. I would appreciate it if you would help me in getting that.

Mr. CARUSO. I would be happy to do that, Mr. Chairman.

Mr. ISSA. In closing, I would like to thank all of you for excellent

testimony, excellent question and answers. We were very fortunate

to have you with us here today.

This is no surprise that, if all goes well, we will not have you

back, but if any concern develops I have no doubt that we will all

be together again.

Thank you again, and we will hold the record open for 5 days.

We will now hear from our second panel.

With us today, we have Mr. Robert Greco, group director of upstream and industry operations for the American Petroleum Institute, and Mr. Tyson Slocum, energy program research director of

Public Citizen.

Before we proceed with the second panel, I apologize, but I do not

believe you have been sworn in yet.

Mr. SLOCUM. No.

Mr. ISSA. Would you please rise to take the oath? Is there anyone

with you that is going to advise? It is harmless. It does not hurt

a bit.

Thank you.

[Witnesses sworn.]

Mr. ISSA. Let the record indicate all were in the affirmative and

smiling, and before we begin, I would like to recognize my ranking

member, Ms. Watson, for an opening statement.

Ms. WATSON. Mr. Chairman, I would like to apologize for being

so late to this meeting. It was unavoidable, but thank you for proceeding on, and I also want to thank you for convening this most

important hearing.

This subcommittee can play a vital role in examining the issues

regarding the availability of fuel supplies during this upcoming

hurricane season. Protecting the gas and oil infrastructure in the

Gulf of Mexico is essential to ensure that gas prices do not exceed

the record highs they are at this time.

The Gulf produces 20 percent of domestic natural gas production

and 28.7 percent of domestic off-shore crude oil production.

In the upcoming weeks, we must work diligently so we will not

be faced with the same fuel supply problems that we encountered

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during the 2005 hurricane season. A repeat of last year’s unpreparedness would be devastating to our Nation’s economy.

Mr. Chairman, gas prices rose above $3 a gallon in September

2005, creating record highs.

Constituents in my home State, and yours, of California experienced situations where gas stations did not have any oil to sell.

In northern California, along with a few other States in the

union, constituents faced jacked-up prices in excess of $6 per gallon

of unleaded gasoline.

We do not want America to experience this kind of financial

strain again.

The Gulf of Mexico also provides an estimated 47.4 percent of the

total U.S. domestic refining capability. A shutdown or even partial

shutdown of this region would have a disastrous effect on our Nation’s oil and gas processing.

The National Oceanic and Atmospheric Administration has predicted a very volatile hurricane season in this year, 2006.

In 2005, there were an unprecedented 28 storms and 15 hurricanes.

This season, scientists are predicting at least 13 to 16 named

storms, with 8 to 10 becoming hurricanes.

Powerful storms can and do cause tremendous damage; we witnessed that.

A destructive storm has a ripple effect on every citizen’s pocketbook, as well as on every citizen’s life.

Oil companies are in a very powerful position. The global thirst

for oil has placed American consumers in a very difficult situation.

An investigation by the Government Accountability Office finds

that recent mergers in the U.S. oil industry have dramatically increased concentration in the refining sector. In the last 30 years,

there have not been any new refineries built in the United States.

The increase in market concentration has allowed oil companies

to withhold supply, thereby increasing prices. This makes it easier

for companies to drive up gas prices while holding consumers hostage.

Mr. Chairman, we must look at ways to decrease demand, increase fossil fuel efficiency, and explore alternative fuel sources.

Couple those thoughts with the expanding refining capacity of

existing industry, and we will start to move down the right path.

So, thank you again for holding this hearing, and with the Gulf

region comprising almost half of this Nation’s domestic oil refining,

one-third of America’s domestic oil production, and one-fifth of the

natural gas production, the safety and the security of the Gulf of

Mexico should be at the forefront of our agenda.

I look forward to questions and dialog with our witnesses today,

and I hope we will not have to go through the travesty suffered last

August and September in New Orleans and the rest of the Gulf,

or at the pump, ever again.

I yield back my time.

[The prepared statement of Hon. Diane E. Watson follows:]

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Mr. ISSA. I thank the gentlelady, and I particularly thank you for

noting that our efforts to go toward bio-diesel and ethanol, including in California, where there are a number of new facilities under

construction, will take us away from a dependence on nearly half

of all our refined fuels coming out of the Gulf, but for today, I am

pleased to have a panel that can help talk about how we get

through this season.

I would ask that you bear in mind we have already received

unanimous consent that your written statements be put in the

record, and additionally, you will be allowed to augment with extraneous or pertinent information, as you see fit, and answers to

any questions you are unable to answer today.

So, I would encourage you very much to stay within the 5-minutes for your opening statements, and to use as much of the ideas

not already preprinted as you possibly can.

Mr. Greco.

STATEMENTS OF ROBERT GRECO, GROUP DIRECTOR OF UPSTREAM AND INDUSTRY OPERATIONS, AMERICAN PETROLEUM INSTITUTE; AND TYSON SLOCUM, ENERGY PROGRAM

RESEARCH DIRECTOR, PUBLIC CITIZEN

STATEMENT OF ROBERT GRECO

Mr. GRECO. Thank you, Mr. Chairman.

Good afternoon.

I am Bob Greco, group director of industry operations and upstream for API, the national trade association of the U.S. oil and

natural gas industry. We appreciate this opportunity to discuss the

oil and natural gas industry’s hurricane preparedness.

During and following last year’s hurricanes, API and the industry worked closely with Federal agencies, including the Departments of Energy, Transportation, Homeland Security, Minerals

Management Service, the EPA, the Coast Guard and others.

We want to thank these agencies for their cooperation and support as we work together to learn from last year’s experiences and

prepare for this year’s hurricane season. The suggestions which follow are meant to improve on an already positive and very successful working relationship between the government and the oil and

natural gas industry during this past hurricane season.

Our industry is proud of its hurricane record.

The off-shore infrastructure in the Gulf, which includes 4,000

platforms and 33,000 miles of pipeline, survived the hurricanes

well, with no loss of life and no significant off-shore exploration and

production releases.

Our industry’s on-shore operations were safely shut down as the

storms approached, and then safely restarted.

Finally, the industry worked with Federal and State authorities

and electric utilities to get pipelines moving product as quickly as

possible.

Improved operational coordination is now underway with government agencies at all levels.

In March, API held a 2-day hurricane conference to discuss lessons learned and identify areas for improvement. Government participation included DOE, DOT, MMS, DHS, EPA, the Coast Guard,

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and State and local agencies. Many industry participants also attended a DOE-sponsored meeting in Mississippi.

Last week, API joined with DOE and MMS at a joint press conference to discuss hurricane preparedness, and just this past Monday, API hosted a hurricane round-table of all sectors of the industry and relevant Federal agencies and trade associations.

As we enter the hurricane season, it is critically important that

agencies communicate and coordinate hurricane response efforts.

We need to work together to eliminate overlap or duplication of effort by multiple government agencies, which can result in duplicative requests for information from companies, misdirection of requests within companies, and other inefficiencies.

It is even more critical that government, to the extent possible,

helps to ensure that a high priority is given to facilitating a company’s transportation and use of emergency back-up generation and

restoration of commercial power to pipelines and refineries.

Companies also need to work closely with emergency responders

and local law enforcement to ensure that back-up electrical generators and other essential equipment are not commandeered for other

purposes, which was another concern last year.

In addition, government authorities need to ensure that company

personnel have access to refineries, pipeline facilities, and other infrastructure to assess damages and provide repair quickly. Denial

of such access was a problem in some cases during last year’s hurricanes and delayed restart of operations.

Our industry’s experience responding to Katrina and Rita underscored a fact that was already well known. Our employees are our

most important asset. In preparing for the upcoming hurricane season, API member companies have taken a number of activities to

ensure that their employees are, first and foremost, safe during

and after a hurricane, that they have the needed supplies and resources for survival, and ultimately can return to their jobs when

conditions permit.

Examples include coordination of personnel evacuation plans to

ensure that companies know where employees are and can communicate with them; establishment of distribution centers to provide

food, potable water, and other essential products to employees in

need; and identification of alternative housing arrangements for

employees who have lost their homes.

API and the industry will continue to work closely with government agencies, and continually reviews our industry standards and

operating practices.

The development of consensus industry standards is one of API’s

oldest and most successful programs, dating back to our first standards in 1924.

Today, API maintains some 500 standards that promote safety,

efficiency, and environmental protection for all segments of the oil

and natural gas industry, and over 100 of these standards are referenced in Federal regulations.

In recent weeks, API published the first two interim recommended practices, or RPs, to improve the performance of drilling

rigs, several of which drifted off location during that hurricane.

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These interim RPs can be downloaded free of charge at API’s

Web site, www.api.org, and MMS has already quickly incorporated

these guidelines into their regulations.

While the drifting of these rigs did not cause spills, both industry

and government were concerned and saw a need to improve rig

performance.

In conclusion, these interim RPs and our sponsorship of and participation in hurricane preparedness meetings and conferences are

just a few examples of how the industry is moving ahead rapidly

to be better prepared as the next hurricane season begins.

Working together, industry and government can meet the challenges we face.

Thank you again for this opportunity, and I look forward to answering your questions.

[The prepared statement of Mr. Greco follows:]

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Mr. ISSA. Thank you very much, and Mr. Slocum, very good to

have you back with us.

Please give us your best and—I always note that you work off

of a lot of personal notes and have done a lot of personal presentations, and I always appreciate that, as does, I think, the entire

committee.

STATEMENT OF TYSON SLOCUM

Mr. SLOCUM. Well, thank you, and thank you, Mr. Chairman and

Representative Watson, for the opportunity to be here today.

Again, my name is Tyson Slocum, and I’m the director of the energy program at Public Citizen. My organization is America’s largest consumer group. We represent over 100,000 people across the

United States.

We heard some excellent testimony earlier today from some of

the government witnesses, and I want to provide more of a bird’s

eye view of some of the challenges that we’re facing today. What

I see from my view is an oil industry that is not prepared to meet

America’s energy challenges, especially in the refining and other

downstream aspects of our sector.

What I see from the economic investment decisions by the oil industry, complemented with statements that they have made to the

media and to investigators at the Federal Trade Commission and

others, is that they will not make adequate investments in downstream, particularly in refining, because it is not in their financial

incentive to do so, from various statements that they have made

to the media and to Federal investigators. It is their personal financial self-interest to maintain as tight supplies as possible, because that guarantees larger profit margins for their operations.

Now, that is what they should be doing for their shareholders, and

I think what the job of Congress and Government is to do is to

make sure that citizens are represented well in this equation, and

that is why Public Citizen has a reform plan to address some of

these systemic problems that we see in America’s energy markets.

First, we agree with the chairman’s call for a strategic refining

reserve of some sort, because it was clear after Hurricane Katrina

that America’s strategic petroleum reserve worked wonderfully.

All of this oil production was knocked out of service, and we have

over 800 million barrels of crude oil in reserve that we were able

to immediately release and supply refineries.

I do not know why the market price of crude oil jumped the way

it did, because there was no justification for it from a market perspective, because there was never any threat to crude oil supplies.

Now, the same could not be said for refined products, because

America does not have a Federal refined product reserve.

Luckily, we were able to quickly import it from Europe, but I do

not think that we should rely on that to happen again.

So, we are definitely calling for a strategic refining reserve, and

having the oil industry help finance the establishment and maintenance of such a reserve through something like a windfall profits

tax, since the industry is clearly reaping huge financial windfalls

from their control over crude and refined product supplies that

they are selling to the American people.

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The last time I checked, the Federal budget is running annual

deficits of about a half-a-trillion dollars, whereas oil company profits are the largest in the U.S. economy. Clearly, they can afford to

help finance such an initiative.

Second, doing something about U.S. energy demand would also

help.

I know that, Mr. Chairman, you have discussed the need for improved fuel economy standards, and that is a major issue that Public Citizen also promotes. While we are the third largest crude oil

producer in the world—only the Saudis and the Russians produce

more oil every day than we do—we are far and away the largest

consumer. We use one out of every four barrels of oil consumed

every day, and we use oil very inefficiently. Our competitors in Europe and Asia use about half the oil per person that we do. Implementing strong fuel economy standards will make our use of oil

and gas far more efficient, and that will reduce some of the pressures that we are seeing.

Third, I think investing in alternatives to oil and gas is another

important strategy, but right now, it is going to take billions of dollars to do this.

For example, in promoting ethanol and bio-diesel, there are going

to be challenges to bring these products to the marketplace.

We currently do not have any ethanol pipelines in the United

States.

So, I think that government is going to have to take the lead on

that kind of investment, and again, I think a windfall profits tax

on the oil industry is an excellent and equitable means of financing

such an investment.

Last, I think that revisiting some of the deregulation legislation

over energy trading markets, where the prices of gasoline and

crude oil are set, are very important for this committee to investigate, because with under-regulated trading markets, you are removing transparency, and any time you do not have an adequately

transparent market, you increase the opportunity for nefarious activities to take place.

So, Mr. Chairman, thank you very much for your time, and I look

forward to your questions.

[The prepared statement of Mr. Slocum follows:]

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Mr. ISSA. Thank you.

I have a lot of questions for Mr. Greco, but I want to lead off

with one or two for you, Mr. Slocum.

First of all, I think we probably, from the citizen’s standpoint,

can agree that lower prices for citizens’ cost of energy is a goal but

that lower prices fly in the face of the incentive to save, that, unfortunately, we want one but the other causes us to consume less.

Would that be a fair statement?

Mr. SLOCUM. Yes, sir, that is definitely true. I also think that the

increased prices that we have seen have not necessarily been an incentive for consumers to use less, and I think that is because

economists call gasoline consumption inelastic. It is not a luxury

consumption but, rather, a necessary consumption. So, for example,

in the last year, you have seen gasoline prices go up almost 80

cents, but there has not been a corresponding significant impact on

consumption, and most economists say that, in order to see a real

impact on consumption, you would have to see prices rise to probably $5 or $6 a gallon, which I think would then be punitive, not

only for consumers but to the entire economy.

Mr. ISSA. I appreciate your saying that, because of course, we are

just about at that point in Europe.

So, I think I will buy off that perhaps we do not want to adopt

that portion of the European model, although we certainly have

prices that are closer to Europe than they were a decade ago. But

you know, concentrating on the windfall profits tax, I watched the

windfall profits tax implemented in the past, and of course, it was

a tax.

It may have affected where the money went, but it did not put

the money into the long-term investment that we had hoped for.

If I understood your testimony, I believe what I heard—and I am

very positively affected by it—that to the extent that a windfall is

declared by the Federal Government relative to earnings by petroleum companies, your goal would be to ensure that went into investment. So, if I understand correctly, what you are calling for

here today is perhaps not identical to the previous windfall profit

tax but, rather, a windfall investment funding or requirement.

Would that be fair as a very overview brief statement?

Mr. SLOCUM. Yes, sir, that would be correct, and it would not

necessarily be a mandate on the oil industry to make that investment.

You know, if they chose to do that, that would be fantastic, but

it would be also for the government to take the proceeds from that

new revenue source and make the necessary investments in our energy infrastructure that are required right now.

Mr. ISSA. I appreciate that, and you know, I was an observer of

that, and Mr. Greco, I am sure, will have an opinion on it, too, but

you know, one of my deep concerns is that we manage to get the

money, but government is funny about revenue.

We do put a lot of dollars, Federal dollars, into energy resources,

promoting infrastructure, and so on, but usually what happens, if

we get a new revenue source, we suddenly take money and put it

somewhere else.

So, the net effect often is there is no additional investment.

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Mr. Greco, I have given you some food for thought with my first

questions, but I want to get back to the hurricane, because in the

long run, we have a lot of things we can do; in the short run, we

have a matter of days before the first hurricane is going to be spotted or tropical storm is going to be spotted in the Atlantic.

Besides the action taken for the current hurricane season, what

measures are government and industry taking to address preparedness for the long term?

Mr. GRECO. First off, some of the short-term actions that we are

taking now do have long-term implications. When you are talking

about redundant communications, cell towers, prepositioning supplies, you are developing infrastructure needs and setting up systems that are good for business continuity and will be helpful in

the long term, as well, for future hurricane seasons, as well as

other potential disruptions.

Longer term, our refineries and our facilities are looking at their

systems to see what they can do to harden them.

For example, from a refining standpoint, you are seeing people

looking at installing additional co-generation, which basically allows you to generate electricity very cleanly, very efficiently, onsite.

That would certainly help in the instance of future power shutdowns.

Refiners are considering whether they need to raise the level of

some of their equipment, because there are tidal surges.

Again, those are longer-term issues that they are looking at.

Similarly, API, as I mentioned—we got two of our interim standards out very quickly, in record time. We are undergoing a comprehensive review of all of our standards to see if there gaps that

need to be addressed longer-term to make sure that we fully anticipate future events and are prepared for those.

Then, from a policy standpoint, you have a number of activities

that the Congress and the agencies can take a look at.

Clearly, diversifying our sources of supply is something we

should look at. Our resources are concentrated in the Gulf of Mexico, because that is where we are allowed to build, and we are not

allowed to build elsewhere. The ability to access oil reserves off our

Outer Continental Shelf elsewhere, in the mountain west, in Alaska, would certainly diversify sources of supply and allow us to

cushion any future disruptions that are concentrated in the Gulf,

as well as L&G terminal siting, where should those be, should

those be more diversified, as well as looking at research and development into alternatives, promoting conservation, streamlining

permitting processes.

Those are all longer-term activities that would certainly help us

diversify our supply and make the economy more resilient to these

disruptions.

Mr. ISSA. Excellent. I appreciate that.

This is probably a longer question than the answer, because I

think we have already touched on it, but I want to make sure it

gets in the record.

If a hurricane or hurricanes were to hit the Gulf of Mexico this

year, would the recovery time be greater or less than last year for

a given level of hurricane?

Mr. GRECO. That would be a very difficult question to answer.

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I think one of the challenges of last year was having——

Mr. ISSA. Generally, you know, if the word is good and we are

better off, it is not that hard to answer. So, would it be fair to say

that it is difficult because we may not be better off this year, we

may not actually be able to deal with it better than we could last

year?

Mr. GRECO. I think we have taken a number of steps to improve

our responsiveness, to harden our facilities and to make them more

resistant to future hurricanes. If you have two category five hurricanes spaced a couple of weeks apart, with the level of impact they

had on our off-shore and on-shore facilities, it is difficult to predict

what the impact would be of those. It is very hard for me to say

that, but I do think we are better prepared this year than last year

based on the lessons learned and the actions we have taken.

Mr. ISSA. Following up on that, as we enter the 2006 hurricane

season, the Federal Government’s coordination efforts, are we better prepared today, are we going to respond better, from your observations and your coordination and your training, than we were

last year?

Mr. GRECO. I think we are already at a very high level of coordination and cooperation with the industry, as I mentioned in my

comments.

For example, we had very good success working closely with the

EPA, DOT, and Coast Guard on various temporary waivers that we

needed to minimize the disruption and allow us to get our facilities

back up and running as quickly as possible. The system worked,

and we are justifiably proud of the government’s response, as well

as our employees’ response, in those situations.

So, what we are looking at is trying to improve the education,

and thereby better understand how the government is coordinating.

Much of this is done at the local level. Clearly, we need to continue to focus on what the people on the ground are doing to respond, and how can we work closely and educate them about the

importance of getting pipelines up and running; about restoring

electrical generation to pipelines and refineries to ensure supply in

the areas outside the Gulf of Mexico.

Clearly, that is the type of issue that we have been focusing on.

Mr. ISSA. I appreciate that.

My last question: I introduced a piece of legislation calling for a

study leading to a strategic refined fuels reserve, but in a sense,

there is a strategic reserve of fuel, which is every other refinery in

the world.

As Californians, both the ranking member and myself, we deal

with some 28 different blends just in California, depending on the

time of the year, as does the rest of the country.

In your opinion, would it be a worthwhile goal to have executive

authority in the case of an event like last year for a predetermined

fuel mixture or mixtures available around the world to be approved—in other words, the logical fuels that we could import in

order to not have shortages. That would not meet every possible

blend, but a blanket waiver for certain known mixtures available

at certain known refineries so that we could, by one Executive

order, whether it was in California or in the Gulf or in New York,

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have large amounts of refined fuels be able to be purchased and

brought in fairly seamlessly.

Today, we do not have that authority. There was controversy

about the President even allowing some purchases and what they

were.

Would that be helpful, both from an industry standpoint, to relieve temporary shortages, and just as important, from a standpoint of consumer benefit?

As you said, we had large spikes, unexplainable in the case of

crude but explainable in the case of refined distillates and gasoline.

Mr. GRECO. I think your first point was a valid one.

The fact that, despite a 30-percent drop in gasoline production in

the United States, suddenly and unexpectedly, the market adjusted, we were able to import fuel, and we were able to get

through it.

The price did come back down quickly, and there were only spot

shortages.

The market worked, and from our perspective, given the severity

of those two hurricanes, I think that supports the fact that the

market can work when it is allowed to and when we work closely

with government to take advantage of market mechanisms.

I think when you’re talking about product reserve, you get into

a whole host of issues that are completely separate from oil reserves, because products do vary by season, they do vary in different parts of the country. Refineries are optimized to make particular fuels.

So, when you talk about making a particular default fuel, for example, that may not work if your refinery is optimized to make

something else. It may not be quite as quick as you are suggesting

that it could be done, as well as storage issues you have with fuels.

Where are the tanks going to be to store these fuels? Who is

going to own the fuels? Who is going to make the decision when

you release those fuels, and what would those impacts be on the

market?

So, I think, when you look at the performance of last year, the

market worked very well and we should continue to utilize the

power of the market.

Mr. ISSA. I appreciate your belief that last year was an example

of industry’s performance, under the circumstances, at its best.

Mr. Slocum, how would you view this?

Mr. SLOCUM. I think it makes a lot of sense to try to have better

lines of communication and authority to work with other countries

and outside storage systems to try to import during times of emergency. I do not necessarily agree with trying to streamline domestic

so-called boutique fuel blends.

Mr. ISSA. That was not my suggestion. I am simply saying, in

case of an emergency, for example, having at least one single fuel

that could potentially be shipped to substantially all or major sections of the country, for only the emergency period, you know, recognizing that if, hypothetically, that were a California-approved

blend, one of the blends, it might not be perfectly ideal, but it

would be substantially up to or above Federal standards.

You know, one of the problems we as Californians—I want to

make sure I explain it—is that when we run out of fuel—when

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Long Beach’s refinery had a fire, there was nobody else that could

make the fuel, I think, except Norway.

So, we were in an odd situation of the market could not work because when one place was off-line, nobody could react in any reasonable time to prevent a shortage.

Looking at last year and making the assumption that the world

has enough gasoline, particularly gasoline refining capacity, and

they can refine at least one blend acceptable in the United States,

and yet they may not be able to send it to this State or that State

or this district—and I’m not talking about, at all, narrowing any

jurisdiction or any fuel that is determined.

I think dismissing this option is not appropriate to emergency response. During a bona fide emergency, do we want our hospitals’

generators running, do we want emergency vehicles to be able to

operate, or do we want to say not if it means that there is a slightly different blend of gasoline inside the tank that might have, you

know, two noxes different—and I am not trying to belittle those

two noxes—but for that short period of time, hypothetically, the

first 30 days after there has been a severe outage and not beyond.

Mr. SLOCUM. Yes, sir, Mr. Chairman, I think it makes a lot of

sense to give the President that authority or to investigate this further, to try to better coordinate, you know, transfers of—and you

know, negotiating with these other countries in order to have them

help us respond to any emergencies that we have here, and any

supply disruptions.

I think that would be extremely beneficial.

Mr. ISSA. Thank you, and I appreciate the gentlelady’s patience

on that question.

Thank you.

Ms. WATSON. This is a question to Mr. Greco.

Last August, during Katrina, we saw prices go up as high as $5

in some places. We saw those who had cars and could get them out

of the flooded areas lined up for miles to get the gasoline.

I hear the explanation about how we can get the resources we

need, but what were your feelings about the oil industry making

the largest profits ever? I guess you do the accounting per quarter,

and I understand billions of dollars were made, I would say at the

expense of the consumers during a time of crisis.

Now, how is that justified?

You know, you made profits for your stockholders. I heard discussions on TV and radio and saw all about the bottom line, but at

a time when our country is attacked by nature, people died and so

on, why would you look at the bottom line?

Can you explain that to me?

Mr. GRECO. During the hurricane, at its peak, nearly one-third

of our gasoline production was suddenly off-line. We lost that much

of our supply.

Nearly one-third of our oil production was suddenly off-line.

Twenty percent of our natural gas production was off-line.

That is a tremendous drop in a supply in any market, particularly one as tightly balanced as the U.S. market is.

Not surprisingly, given that huge drop in supply, there was upward pressure on prices. Just as quickly as imports came in from

Europe, from the gasoline side, we did see prices drop back down.

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Just recently, at the request of Congress, the FTC looked at this

issue and tried to assess what the impacts were of that price pattern. Was there anything else going on? According to the FTC, ‘‘the

post-hurricane gasoline price increases at the national and regional

levels were approximately what would be predicted by the standard

supply and demand model of a market performing competitively.

The conduct of firms in response to the supply shocks from the hurricanes was consistent with competition.’’

Ms. WATSON. Let me just say this. I understand very clearly

what you said, but you registered the largest profit margin ever,

billions of dollars.

So, it does not really compute to say you had to go and get petrol

from other sources, but you still made so much money off people

who had to escape, who probably did not have money, and you

ripped them off for the bottom line.

So, I just see a matter of the lack of social responsibility. I recognize all the other problems, but to register that kind of profit and

to say it is competition and we have stockholders does not compute

with the kind of emergency we were under.

Mr. GRECO. May I respond to that, please?

Ms. WATSON. Let me go with Mr. Slocum. I think I heard your

response.

Mr. GRECO. Well, no, I think the response—the other piece,

which I meant to say, would like to say, is that this was more than

just an industry impact. The men and women of our employees

were spread to the four winds as a result of this disruption.

We had immediate concerns that we needed to find our employees, get them back to a position where they could work in a safe

condition, while looking out for their families, where they lost loved

ones, as well, and family members in this disaster. So, this was a

body blow to our industry that our companies took very personally,

and was a significant hit on them, as well.

Regarding the profits, when you look at the size of our industry,

the profits are not out of line with the size of our companies.

Ms. WATSON. There is no way to socially justify that, at a time

that this Nation was paralyzed with this disaster—we could not

even get people in there for 3 days to remove the folks that were

there, but when people were able to get in their automobiles, you

just jacked those prices up as high as you could, and I do not think

you needed $400 billion just to take care of your people.

Let me go on to Mr. Slocum.

How do we plan and prepare for the future so that there is social

responsibility?

The consumers were suffering greatly. We are still suffering.

I saw where a man had to pawn his grandmother’s jewels in

order to fill up his truck, and so, how do we need to plan?

I am sorry. This might have been discussed before I got here, Mr.

Chairman.

Mr. ISSA. Not by you.

Ms. WATSON. Of course.

You know, I am from California. Everyone has not only one car

but two or three, you know.

Their cars are a status symbol.

Mr. SLOCUM. Not just a status symbol.

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I mean you have to have a car to——

Ms. WATSON. You have to have a car.

Mr. SLOCUM [continuing]. Sometimes to work.

Ms. WATSON. We are very sensitive to these issues. How do we

prepare so we do not rip off consumers, we take into consideration

that we do have to get alternative sources and we do have to go

maybe off-shore, other countries and all, to get the resources we

need?

How can we prepare so we do not have to have the same kind

of tragedy, and you know, the whole world was watching. The

greatest country in the world, and we could not even meet the

needs for our people for 3 days, and then when we did get gasoline,

the prices were so high, they could not even afford it.

Now, tell me what you would do in order to protect the consumers.

Mr. SLOCUM. Well, first, I think we need to aggressively start investing in alternatives——

Ms. WATSON. Absolutely.

Mr. SLOCUM [continuing]. To our high dependence on oil to fuel

our economy, and it is going to take billions and billions of dollars

to do that. Like I said earlier, the Federal Government is currently

in this fiscal year alone, set to run approximately a half-a-trilliondollar budget deficit, and we have almost $9 trillion of outstanding

debt. Our Federal Government spending is unsustainable, and we

simply do not even have enough money for our basic government

services, let alone for investments in energy I take a look at the

oil industry profits, which are huge not just in dollar terms but

also in profit margin terms.

Ms. WATSON. Staggering.

Mr. SLOCUM. When you look at their return on their capital investment, which is what the oil companies emphasize when they

are talking to Wall Street and to shareholders, they look at return

on capital investment, and Exxon-Mobil, for example, a 46-percent

rate of return on their oil production activities, a 59-percent profit

margin on their U.S. oil refining.

Those are huge levels of profit, and I think that justifies some

sort of new level of income taxation on the oil industry, dedicating

the proceeds to financing the investments that are necessary in alternative fuels and alternative fuel infrastructure, in energy efficiency, so we become more efficient at using energy, so we do not

use as much; in mass transit, which is desperately needed in places

like Los Angeles and elsewhere.

I am lucky that I can take the subway very easily to my office

here on Capitol Hill. Not every American can do that in every

American city.

Also, I think providing some financial protections to moderate

and low-income working families from the impact of these higher

prices is also required. As you emphasized, ma’am, higher prices

are having a huge negative impact on basic affordability issues for

working families.

So, in a nutshell, I think that is what we would emphasize first.

I think, second, we need to look at some of the systemic market

failures in U.S. energy markets, particularly in the refining and

downstream sectors.

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I think that we have allowed far too many mergers. For example,

Exxon and Mobil used to be two global competing oil companies.

Now they’re the same company. Same with Chevron-Texaco and

Conoco-Phillips.

Valero was allowed to acquire three different refining competitors.

All of that has resulted in a high level of concentration that has

really reduced competition. I think that is a huge reason why we

need a strategic refining reserve. As Rex Tillison told the Wall

Street Journal on May 1st of this year, they do not have any plans

whatsoever to build any new refineries, not because of our environmental laws, but because it is not in the financial interest of the

company and its shareholders.

They do not want to create huge surpluses of refining capacity,

because it is going to have a downward impact on prices to consumers, which would have a downward impact on profits to the company.

So, as long as it is not in their financial interest to make the necessary investments, we are going to have to take the lead.

Ms. WATSON. Well, let me just say this, and I will yield back to

you, Mr. Chairman.

I think this country will have to respond to what President Bush

said.

We are addicted to gasoline, and in responding, I foresee that it

is going to take us decades. We cannot convert our systems over.

In the meanwhile, I would like to know what the American Petroleum Institute would have in mind.

Are we going to see the same situation? I am sure we are going

to have a hurricane this year, probably at the level of what it was

last year because of climatic conditions, and I see those climatic

conditions only getting worse rather than any better, because we

are not attending to them.

So, is the institute looking at ways so that the burden will not

be on the consumer totally in another disastrous situation? I do not

think that levee that we just rebuilt at the 17th Street down in the

lower ninth ward of New Orleans is going to hold up under a level

four hurricane, three last time, four this time, and so, we are going

to have the same kind of crisis, I feel, that we had. It is just that

there are going to be fewer people to evacuate, because they never

have gone back.

So, I am looking at our globe and its atmosphere and the conditions—I am looking at that for the very near future as repeating

itself in terms of disaster.

What would you propose, and what do you see? I mean how can

you bring some relief to consumers for people who are suffering

greatly?

Mr. GRECO. Well, first off, thank you for the question, a number

of things I’d like to address to that one.

First, our industry is investing its profits back into finding new

sources of energy, alternative sources of energy.

For the past decade, our investments in new energy sources have

exceeded our earnings. Also, contrary to what Mr. Slocum might

have you believe, we have been investing in our refining capacity.

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We have added the equivalent of one new refinery every year for

the past 10 years.

There are announced plans to add another six new refinery—

equivalent, not new facilities, because we cannot get them sited either, but we have expanded the capacity to the equivalent of six

new ones over the next 5 years. Those are announced——

Ms. WATSON. Will you yield a minute? Can you give us that in

writing?

Mr. GRECO. Sure.

Ms. WATSON. Will you let us know where your new refineries are

going to be located, those you have not started yet?

Mr. GRECO. I am sorry. I was not clear. It is not new refineries.

It is expanded capacity.

Ms. WATSON. OK. Well, your expanded capacity——

Mr. GRECO. Yes.

Ms. WATSON. Would you let us know the geographical locations

where they are?

Mr. GRECO. Yes, we can do that.

Ms. WATSON. And those that you have expanded up to this date.

Mr. GRECO. I am not sure if I can give you all of the information

about past announcements, because I can show you the data that

shows that refining capacity—government data that shows the

amount of expansion.

Ms. WATSON. Mr. Greco, you are making a statement.

You said that Mr. Slocum was not correct.

Mr. GRECO. He was not.

Ms. WATSON. You are correcting him. So, I am asking, the corrected information that you are giving the committee now—you are

sworn in—that you give it to us in writing and state the geographical areas that you are extending and expanding.

Mr. GRECO. I will do the best I can.

Ms. WATSON. Please. Thank you.

Mr. ISSA. Actually, the committee has some of it, but we would

appreciate it included in this record. Both of us enjoy the fruits of

the expansions in Long Beach and other areas, but I think it is important, because both sides of the aisle here in Congress often talk

about the fact that we have had no new refineries built in ‘‘X’’ time.

That certainly has forced a concentration of refineries. A matter of

this hearing is our excess reliance on relatively few locations such

that, if a hurricane hits, we do not have 300 new refineries spread

around the United States, we have 46 percent of them coming from

the Gulf.

Mr. GRECO. Yeah. As we mentioned earlier, you are correct, the

concentration of the oil and gas resources are in the Gulf, refining

and upstream, primarily because that is where they have been allowed and invited and welcomed to be. We are looking and supportive of efforts to diversify sources, both supply and refining. Much

of that will be done, however, on existing refineries, whether in

California or in other States, but I would be happy to give you

some information about announced refinery expansion plans and

past expansions, as well.

Mr. ISSA. We will just take it for the record. Appreciate that.

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OK. I will just sum up very quickly. I thank our witnesses for

your testimony today, particularly your candid questions and answers.

I think I would like to close by finding some things that I believe

both the first and second panel exposed.

One is that we need to diversify our fuel sources, because diversifying our fuel sources helps diversify our fuel supply locations.

The gentlelady from California and the gentleman from California certainly agree that ethanol and bio-diesel, because of their

very nature, will be produced much closer to locations in which

they are consumed. That is a goal of not only this committee but

the Energy and Commerce Committee.

Last, I would like to share with the gentlelady my agreement on

an observation. Certainly, my background in business makes me an

appreciator of the elasticity of demand, of supply and demand, and

of opportunistic markets. It is interesting, however, for this committee to note that, during the crisis after Hurricanes Katrina and

Rita, a McDonald’s had dozens, hundreds, perhaps, but certainly

dozens of their McDonald’s facilities off-line and unable to supply

hamburgers, french fries, shakes, and the like, but it did not result

in an increased price in California for hamburgers, shakes, or

french fries. So, it is relatively unique to this particular industry

that, although they were consuming MREs in the Gulf, they were

consuming dramatically less petro-chemicals at the time, we in

California, from the refineries, which had imported oil into Long

Beach and refined them in Long Beach, found our prices spiking

just as much.

It is the difference between a commodity product, perhaps, and

my McDonald’s example, but I think that the gentlelady and I both

are sensitive, for good reason, to the fact that the consumer paid

throughout the Nation for a shortage which may, in many cases,

have had nothing to do with the cost and the normal elasticities,

since these were products that could not easily be shipped from

Long Beach to some other location, and with that comment and

agreement with the gentlelady, we stand adjourned.

[Whereupon, at 3:38 p.m., the subcommittee was adjourned.]

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