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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26–108 PDF 2006

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

(III)

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

TED STEVENS, Alaska, Chairman 

JOHN McCAIN, Arizona 

CONRAD BURNS, Montana 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

GEORGE ALLEN, Virginia 

JOHN E. SUNUNU, New Hampshire 

JIM DeMINT, South Carolina 

DAVID VITTER, Louisiana 

DANIEL K. INOUYE, Hawaii 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

E. BENJAMIN NELSON, Nebraska 

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 

CRAIG THOMAS, Wyoming 

LAMAR ALEXANDER, Tennessee 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

MEL MARTINEZ, Florida 

JAMES M. TALENT, Missouri 

CONRAD BURNS, Montana 

GEORGE ALLEN, Virginia 

GORDON SMITH, Oregon 

JIM BUNNING, Kentucky 

JEFF BINGAMAN, New Mexico 

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

DIANNE FEINSTEIN, California 

MARIA CANTWELL, Washington 

JON S. CORZINE, New Jersey 

KEN SALAZAR, Colorado 

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 

(V)

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

Page

VI

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

Page

VII

Response to written questions submitted to Ross J. Pillari by—Continued

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

(1)

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. 

2

Senator Cantwell. 

Senator CANTWELL. Mr. Chairman, I did send you a letter cosigned 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. 

3

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 

4

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 

5

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 cosponsor 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 wellknown 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 

6

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. 

7

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. 

8

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. 

9

1 ExxonMobil Energy Outlook. 

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. 

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. 

10

2See also: Appendixes A and B,* Price Increase of Consumer Goods, and Commodity Price Increases, respectively. 

* Appendixes A-F have been retained in committee files. 

3See, Appendix C, How Do Oil Industry Earnings Compare to Other Industries? 4See, Appendix D, ExxonMobil Long-Term Earnings and Investment History. 

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. 

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. 

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

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. 

11

5See, Appendix E, How Do Fewer U.S. Refineries Affect Supply? 6Statement 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). 7See, Appendix F, Will Energy Demand Continue to Increase? 8 International Energy Agency, World Energy Outlook (2005). 

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

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

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

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

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 

12

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 

13

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 

14

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 disrupVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
15

* Attachments A-D have been retained in committee files. 

tions, 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. 

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-intenVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
16

tioned 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 

17

$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. 

18

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. 

19

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 

20

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 

21

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 turnaround 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 companyowned 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 pricegouging. 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. 

22

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 enviVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
23

ronmental 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 

24

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-backyard) 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 

25

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. 

26

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 

27

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 yearto-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 

28

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 

29

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 badlyneeded 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 

30

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 badlyneeded 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 

31

. . . 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 longterm 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. 

32

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 stormdamaged areas, causing upward price movement in both the stormdamaged 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. 

33

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 

34

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. 

35

• 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 chalVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
36

lenges 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 

37

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, 

38

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. 

39

• 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. 

40

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 

41

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. 

42

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 highpressure 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 

43

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 

44

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? 

45

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. 

46

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. 

47

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 

48

* The letter can be found in the appendix. 

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 

49

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. 

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? 

50

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 companyoperated 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. 

51

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 

52

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. 

53

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 longlived 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——

54

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 

55

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. 

56

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. 

57

* The article has been retained in committee files. 

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.* 

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 busiVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
58

ness 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 supVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00068 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
59

plies 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 Ba- kersfield 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.

Location As of Margin 

Difference from plan 

Latest 7 day MTD Last 

month 

Last 

qtr 

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

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

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 

60

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 worldscale 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. 

61

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 

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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 

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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 

64

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? 

65

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. 

66

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 alVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00076 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
67

ready 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. 

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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. 

69

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 offmarket exchanges, the fact that we do not know what these records 

70

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. 

71

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. 

72

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 

73

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 

74

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 busiVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00084 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
75

ness. 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? 

76

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? 

77

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——

78

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 mid1960s 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 

79

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. 

80

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 

31⁄2 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? 

81

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. 

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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. 

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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 

84

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 

85

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. 

86

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 

87

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 

88

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 heavyduty 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 deVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
89

signed 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? 

90

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 

91

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. 

92

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 

93

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 streamVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00103 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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lined 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 

95

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 

96

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 

97

$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 pricegouging. 

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 

98

to prosecute, just as some of the States currently have statutes 

that contemplate prosecutions or authorize prosecutions for pricegouging. 

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. 

99

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 trustbusting 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 comVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00109 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
100

petitor’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 

101

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 

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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 trustbusting 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. 

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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 

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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 

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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 hap- pened. 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 unVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00115 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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derstand 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 legitiVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00116 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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* Attachments I-III have been retained in committee files. 

mate 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 runups 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 onsite 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 § 39-5-145, a copy of which is attached as Attachment 

I.* 

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 

108

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 § 39-5-20 and § 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 § 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. 

109

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 conVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00119 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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sumers. 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 nonredundant 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 

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1The Phoenix metropolitan area is Arizona’s largest population center. 

1a Attachments A-C have been retained in committee files. 2 Arizona Revised Statutes § 44-1401 et seq. 

3 Arizona Revised Statutes § 44-1521 et seq. 

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 antiprice-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.’’

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 misrepresentaVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00121 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
112

4Many other state and federal antitrust investigations failed to establish violations of antitrust law. 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). 6Peterson 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/. 

tion 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. 

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. 

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

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. 

113

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 faceto-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. 

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7Most 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 

§ 396. 8These 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 § 8-31-3) allows 

a 15 percent increase; New York (NY Gen Bus 396-R) prohibits an unconscionable or excessive 

increase. 10 A poll by the Arizona Republic newspaper in December of 2003 revealed that 85 percent 

of Arizonans believe price gouging should be illegal. 11One Arizona consumer wrote: 

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!

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. 

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

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 

115

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 

116

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 

117

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. 

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1This 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. 

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 pricegouging 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

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 

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2See 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. 3See 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. 4Since 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. 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. 6Federal 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. 

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

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 hurricanedamaged 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. 

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, 

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7See http://www.ftc.gov/ftc/oilgas/index.html. 

8See http://www.ftc.gov/bcp/conline/events/katrinalindex.html. 

9Previous 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). 10 Energy Policy Act of 2005, Pub. L. No. 109-58, § 1809, l Stat. l (2005). 

consumer, academic, and government participants held by the Commission over the 

past four years, and explains how gasoline prices are set. 

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

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. 

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 

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11Total 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/oillgas/petroleum/infolglance/

gasoline.html. 

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 shorterlived 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. 

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 

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12See 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. 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. 

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. 

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 businessrelated 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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15Section 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. § 18. 16Federal 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. 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. 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. 20 Aloha Petroleum Ltd., FTC File No. 051 0131 (July 27, 2005) (complaint), at http://

www.ftc.gov/os/caselist/1510131/050728comp 1510131.pdf . 21FTC Press Release, FTC Resolves Aloha Petroleum Litigation (Sept. 6, 2005), available at 

http://www.ftc.gov/opa/2005/09/alohapetrol.htm. 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. 24 Valero Energy Corp., FTC Docket No. C-4031 (Feb. 19, 2002) (consent order), at http://

www.ftc.gov/os/2002/02/valerodo.pdf 

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. 

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

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

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

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

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 

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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. 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. 28 Union Oil Co. of California, FTC Docket No. 9305 (Mar. 4, 2003) (complaint), at http://

www.ftc.gov/os/2003/03/unocalcmp.htm. 

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

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. 

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 CARBcompliant 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. 

The proposed merger between Chevron and Unocal raised additional concerns. Although Unocal had no horizontal refining or retailing overlaps with Chevron, it had 

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29 Chevron Corp., supra note 17. 30FTC 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. 31Midwest 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. 

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. 

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. 

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. 

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 

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32FTC 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. 33Gasoline Price Changes, supra note 6. 34 Id. at 19. 35This 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. 36 Id. at 48. 

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. 

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

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

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. 

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 postVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00136 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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37 EIA, DOE/EIA-0208(2005-34), Weekly Petroleum Status Report, Oct. 28, 2005, at 17, tbl.11, 

at http://www.eia.doe.gov/oillgas/petroleum/datalpublications/weeklylpetroleum sta- tuslreport/wpsrr.html. 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. 39See Gasoline Price Changes, supra note 6, at 43-47. 40The 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. 41Petroleum 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/oillgas/petroleum/datalpublications/petroleumlsupplylannual/psalvolume1/current/pdf/

volume1lall.pdf. EIA, DOE/EIA-0208(2005-33), Weekly Petroleum Status Report, August 24, 

2005, at http://www.eia.doe.gov/pub/oillgas/petroleum/datalpublications/weeklyl petroleumlstatuslreport/historical/2005/2005l08l24/pdf/wpsrall.pdf. 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. 

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

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

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. 

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. 

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 

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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). 44See EIA, 1995 Reformulated Gasoline Market Affected Refiners Differently, in DOE/EIA0380(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. 46See Gasoline Price Changes, supra note 6, at 61. 47 Id. 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. 50See, e.g., Oregon Rev. Stat., ch. 480, § 480.315. 51See 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). 52See Gasoline Price Changes, supra note 6, at 113. 

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

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. 

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

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. 

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-volVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00138 Fmt 6633 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
129

53Petroleum Merger Report, supra note 5, at 246 tbl.9-5. 54 Id. at 239. 

ume 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

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. 

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. 

130

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 pricegouging 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 

131

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 

132

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 

133

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. 

134

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 safetynet 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 longterm—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? 

135

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 pricegouging statute, which are different. I think those type laws, if 

136

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, pricegouging 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 pricegouging in our State under our price-gouging law. Our law is not 

limited just to gasoline. It also has a number of other emergencytype 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. 

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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? 

138

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 workVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00148 Fmt 6633 Sfmt 6602 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
139

* See appendix I for response. 

ing 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. 

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 

140

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 

141

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. 

142

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 

143

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 companyowned 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. 

144

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.] 

(145)

APPENDIX

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 

146

1Trustreet and Aloha jointly imported a cargo of gasoline in 2002. 

2The 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. 

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, 

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 imporVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00156 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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3Stillwater 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. 

4Federal 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 5The discussion in the text concerning regulatory impediments presents my views and should 

not be viewed as an official recommendation of the Commission. 6Stillwater 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.) 

tant to recognize that any benefits that such statutory or regulatory requirements 

may provide come at a cost to an efficient gasoline market.

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. 

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 ‘‘antiencroachment’’ 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.

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. 

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, 

148

* Figures 1-4 have been retained in committee files. 

8With the exception of a short period between Hurricanes Katrina and Rita, diesel prices rose 

steadily across the United States until mid-October. 

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

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 chalVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00158 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
149

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. 11The 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. 12See Figures 3 and 4. 

lenges 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

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. 

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/

150

13The Commission alleged that the Exxon/Mobil merger would increase the HerfindahlHirschman 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. 

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. 

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-DorganBoxer 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. 

151

1Final Report of the Federal Trade Commission, Midwest Gasoline Price Investigation (Mar. 

29, 2001), available at http://www.ftc.gov/os/2001/03/mwgasrpt.htm. 2Production 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. 3The 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. 4Gasoline 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. 

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. 

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

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 

152

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 

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5See 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. 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. 

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

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. 

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 

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2See Federal Trade Commission, Gasoline Price Changes: The Dynamic of Supply, Demand, 

and Competition (2005), available at http://www.ftc.gov/reports/gasprices05/

050705gaspricesrpt.pdf. 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’’). 4The 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. 5 Although GAO declined our invitation to participate formally in the conference, GAO’s thenchief economist was in the audience. 

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. 

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

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

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 TechVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00164 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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6FTC 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. 7There 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. 

nical 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. 

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. 

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 

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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. 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. 10The 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. 

urged consideration of new, alternative methodologies and called for additional studies of consummated mergers.8

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 preand 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

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. 

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 

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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. 2The 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’’) § 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 § 1.51. 3FTC 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. 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. 

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. 

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

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 MidAtlantic 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 marVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00167 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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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. 6GAO, 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. 8FTC Staff Technical Report (Dec. 21, 2004), available at http://www.ftc.gov/ftc/workshops/

oilmergers/ftcstafftechnicalreport122104.pdf. 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. 

kets 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. 

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. 

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. 

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. 

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 chalVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00168 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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10 I have enclosed copies of those Commission testimonies for your review. 11The Hawaii lawsuit was resolved with the execution of the 20-year throughput agreement 

described on page 2 of this letter. 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. 

lenges 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. 

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

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 

160

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 nonprofit 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 

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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.

162

1Dec. 2003 price per gallon on East Coast was $1.30; in August 2005 it was $3.25

2 Retained in Committee files. 

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? 

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. 

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.

163

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.

164

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 

165

* The information referred to has been retained in Committee files. 

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.

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 imVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00175 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
166

portant 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 

167

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 worldscale 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.

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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 reVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00178 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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quired 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.

170

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 

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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 

172

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:

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• 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 

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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 premerger combined data prior to 1998 for U.S. operations were required under the 

rules of accounting and SEC disclosure.

175

$ 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 miscellaneous ........................... 397 399 370 418 360 320 364

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CHEVRON CORPORATION—SUMMARY OF U.S. TAXES ACCRUED 1998–2004—

Continued

[$ Millions] 

1998 1999 2000 2001 2002 2003 2004 

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 premerger 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 

exploratory expenditures ..... $1.8 $1.6 $1.9 $2.4 $2.4 $1.8 $2.7

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 and production expense ..................................... 3.8 3.6 3.9 4.5 4.5 3.8 4.9

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 

capital, exploration, drilling 

and production ..................... 28% 50% 342% 136% 59% 116% 255%

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 

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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.

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$ 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, 

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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 

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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 

181

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.

182

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 polVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00192 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
183

icy. 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 nonfossil-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 longterm 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? 

184

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 shortterm 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. 

185

* Attachments 1–3 have been retained in committee files.

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. 

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 

186

* The information referred to has been retained in Committee files. 

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.

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.

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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 

188

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.

$ Billions 

Total for

the period

1/1/2000

through

9/30/2005 

Nine months 

ended

9/30/2005 

2004 2003 2002 2001 2000 

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 re- purchase 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 batVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00198 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
189

teries, 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. 

190

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 

191

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.’’

192

‘‘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 

193

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 highrisk, 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 lowercost 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 

194

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 

195

* The charts has been retained in committee files. 

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. 

• 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? 

196

* The charts have been retained in committee files. 

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).* 

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 

197

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.

198

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 

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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 capacVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00209 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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ity 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 

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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 enVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00211 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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hance 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. 

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• 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 

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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 

205

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? 

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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] 

2000 2001 2002 IFRS 

2003 

IFRS 

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.

2000 2001 2002 IFRS 

2003 

IFRS 

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

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TOTAL TAXES PAID IN THE U.S.—Continued

[$ millions] 

2000 2001 2002 2003 2004 

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.

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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] 

2000 2001 2002 IFRS 

2003 

IFRS 

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? 

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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, coalto-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? 

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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, 

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1The 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. 

* The graph has been retained in committee files. 

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). 

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 longterm 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 

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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 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 longterm 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. 

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• 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. 

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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.

215

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 

216

2Overview 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.

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

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.

217

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.

218

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 

219

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.

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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. 

221

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.

222

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 hurriVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00232 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
223

canes 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 bil- lion, 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-themill 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 

224

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 reinvest—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 

225

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? 

226

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 

Year % invested in 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 

227

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? 

228

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/

229

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.

230

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 rein- vested 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, gasto-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 

231

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 apVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00241 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
232

proximately 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 

233

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.

Year Gross

revenue 

Capital

expenditures 

U.S.

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.

Year Donations

(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 

234

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.

Year U.S.

earnings 

Capital 

exploration 

(CapEx) 

Exploration expense 

(Expl Exp) 

CapEx + 

Expl Exp 

% of U.S. 

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.

Year 

U.S. capital 

expenditures 

Total worldwide capital 

expenditures 

% U.S. capital 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?

Year % net proceeds 

collected in U.S. 

1995 ..................................................................................................... 22%

1996 ..................................................................................................... 22%

1997 ..................................................................................................... 22%

1998 ..................................................................................................... 18%

1999 ..................................................................................................... 16%

2000 ..................................................................................................... 19%

2001 ..................................................................................................... 17%

2002 ..................................................................................................... 33%

2003 ..................................................................................................... 38%

235

Year % net proceeds 

collected in U.S. 

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. 

236

• 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 

237

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 

238

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 longterm 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? 

239

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 

240

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. 

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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). 

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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?

Year Dividends Stock 

buyback 

Capital

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.

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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 

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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 

245

picture for Maine and New England this winter. Petroleum is not any run-of-themill 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 

246

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 

247

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 longterm 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.

248

CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER 2002) 

$MM Net income 1 Capital ex- penditures & investments 2 Reinvestment as % of net income U.S. net income 3 U.S. capital expenditures & invest- ments 4 Reinvestment as % of 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%

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). 

249

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 

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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-themill 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 

251

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 costbased 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 unVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00261 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
252

conscionable 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’ thirdquarter 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 

253

but will increase the facilities’ robustness in their flexibility to handle more difficultto-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.

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PROPOSED MAJOR CONOCOPHILLIPS U.S. REFINERY CAPACITY RELATED CONSTRUCTION 

Refinery Country Ownership interest 

Current facility crude 

capacity 

(MBPD)1

Projected 

crude capacity 

(MBPD)2

Estimated 

clean product increase 

(MBPD)3

Total investment 

cost ($MM) 

Major units being added 

or modified 

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. 4Major emphasis of project is to process heavier, higher sulfur crudes. 

255

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. 

256

1 International Energy Agency, World Energy Outlook 2005, November 2005, page 98. 

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 longterm 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

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. 

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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 

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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 prehurricane 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. 

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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 thirdparty 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. 

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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, 

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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 

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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, costeffective 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

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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 prehurricane 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? 

264

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) 

$MM Net income 1

Capital expenditures 

& investments 2

Reinvestment as % 

of net income 

U.S. net 

income 3

U.S. capital 

expenditures & investments 4

Reinvestment as % 

of U.S. 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). 

265

CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO 

SEPTEMBER 2002) 

$MM 

Sales & operating revenue 1U.S. sales & 

operating 

revenue 1

U.S. % 

sales & operating 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%

1Sales & 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 

$MM Federal tax 

provision 

State tax 

provision Total U.S. International 

Total

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

1Total 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. 

266

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] 

Year 

U.S. E&P 

capital expenditures 

and investments 

U.S. E&P 

net income 

U.S. E&P 

capital expenditures 

and investments 

as a % of 

U.S. E&P 

net income 

Total E&P 

capital expenditures 

and investments 

Total E&P 

net income 

Capital 

expenditures and 

investments as 

a % of 

U.S. E&P 

net 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). 

2The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this 

table. 3Through 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 coalto-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 

$MM 

Capital

expenditures &

investments 1

U.S. capital expenditures &

investments 2

U.S. % capital 

expenditures & 

investments 

1995 ............................................ (1,456) (923) 63%

1996 ............................................ (1,544) (841) 54%

267

CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO 

SEPTEMBER 2002)—CAPITAL EXPENDITURES AND INVESTMENTS—Continued

$MM 

Capital

expenditures &

investments 1

U.S. capital expenditures &

investments 2

U.S. % capital 

expenditures & 

investments 

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 

$MM 

Sales &

operating

revenue 1

U.S. sales & 

operating 

revenue 1

U.S. % 

sales &

operating

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: 

1Sales & 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.

268

CONOCOPHILLIPS U.S.—ANNUAL CRUDE OIL PURCHASES FROM

OPEC COUNTRIES 

[$ millions] 

Year 

Direct purchases from 

OPEC 

Purchases 

from OPEC 

countries 

via third 

parties 

Total crude 

oil purchases from 

OPEC countries 

U.S. sales 

and operating revenue 

OPEC 

purhcases 

as a percent of 

U.S. sales 

and 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

269

Imports in Bbls 2004 2005 

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, 

270

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 

271

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. 

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 shortterm 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

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 

272

4 U.S. Federal Trade Commission, Bureau of Economics, ‘‘The Petroleum Industry: Mergers, 

Structural Change, and Antitrust Enforcement’’, August 2004, page 7. 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. 6Lundberg Survey Incorporated, Share of Market Data, June 2004 (subscriber confidential).

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 lowpriced product imports. 

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. 

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. 

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.

273

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 

274

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 

275

• 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 

276

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).

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

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 

277

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] 

Year 

U.S. E&P 

capital expenditures 

and investments 

International 

E&P capital 

expenditures 

and investments 

Total E&P 

capital expenditures 

and investments 

U.S. E&P 

capital as 

% of total 

E&P 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%

1Phillips heritage only prior to merger as reported. 

2 COP after August 30, 2002. Phillips prior to that. 

3Through 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 promVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00287 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
278

ising 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 

279

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.

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

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: 

280

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 Midcontinent. 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 

281

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.

282

10Total crude and NLG production, including syncrude, in 2004 for ConocoPhillips, Royal 

Dutch Shell, British Petroleum, ExxonMobil, Chevron and Total. 

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 greatVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00292 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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11Spot 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. 12Gasoline Price Changes: The Dynamic of Supply, Demand, and Competition: A Federal 

Trade Commission Report (2005). 

13 U.S. Department of Energy, Energy Information Administration, Michael Burdette and 

John Zyren, ‘‘Gasoline Price Pass-through,’’ January 2003. 

er 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. 

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. 

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. 

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.

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. 

284

14Petroleum Industry Research Foundation, ‘‘Lessons From the Hurricanes’’, November 2005, 

page 7. 

15 U.S. Department of Energy, Energy Information Administration, Financial Reporting System. 16 Bernstein Research Call, November 4, 2005, page 2; Goldman Sachs, Jeff Currie, ‘‘The sustainability of higher energy prices, April 2005, page 21.

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. 

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

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. 

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 

285

17 International Energy Agency, World Energy Outlook 2005, November 2005, page 51. 

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

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 

286

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 

287

18 Bernstein Research Call, November 4, 2005, page 2; Goldman Sachs, Jeff Currie, ‘‘The sustainability of higher energy prices, April 2005, page 21. 

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. 

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 refinVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00297 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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19 U.S. Federal Trade Commission, Bureau of Economics, ‘‘The Petroleum Industry: Mergers, 

Structural Change, and Antitrust Enforcement’’, August 2004, page 7. 

eries 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. 

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. 

289

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] 

Year Net income 

Capital expenditures 

& investment in 

E&P and 

R&M 

Capital expenditures 

& investment in 

E&P and 

R&M as a 

percent of 

net income 

Purchases 

of shares 

in 

LUKOIL 

Purchases 

of 

LUKOIL 

shares 

as a % 

of net 

income 

% of net income used 

for E&P/

R&M capital 

expenditures 

& investment 

and LUKOIL 

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% 

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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 

291

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. deVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00301 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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20PIRA Energy Group, U.S. Gasoline Demand Elasticities are Higher at the Margin, July 

2005. 

pendence 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 highVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00302 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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er 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.

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 prodVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00303 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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* Appendixes A-C have been retained in committee files. 

uct 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. 

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 

295

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, AcVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00305 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
296

cess, 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 

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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.

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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 

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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.

300

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.

Year 

Capital expenditures and investment Net increase/

(decrease) in 

debt 

Dividends 

paid on company stock 

Repurchases of 

company 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. 

301

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 negotiaVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00311 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
302

* Attachments A-K have been retained in committee files.

tions, 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,* 

303

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. 

REINVESTMENT %’s TO TOTAL PROFITS 

1Q 

2004 

$M 

2Q 

2004 

$M 

3Q 

2004 

$M 

4Q 

2004 

$M 

1Q 

2005 

$M 

2Q 

2005 

$M 

3Q 

2005 

$M 

Avg. 

1Q04-

3Q05 

% 

Upstream capital 

& exploration 

expenditure 

(capex) ............... 2,704 2,840 2,877 3,294 2,812 3,678 3,586

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 income .................. 50% 49% 51% 39% 36% 48% 36% 44%

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 

304

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-themill 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? 

305

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 

306

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 inVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00316 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
307

crease 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 reasonVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00317 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
308

able 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 

309

1Per EIA, 15.4 MBD of total crude processed, 5.4 MBD of domestic crude production, and 0.02 

MBD of crude exports. 

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. 

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. 

310

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 exVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00320 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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plain 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 

$M 

2001 

$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 & Exploration Expenditures ............................................ 6,933 8,816 10,394 11,988 11,715

U.S. Capital & Expl. Exp. As a % of 

Total Upstream .................................... 27% 27% 23% 18% 16%

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 

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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 

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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 attainVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00323 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
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ment 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, 

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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 

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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. 

317

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 

318

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.

319

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.

320

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 88,382Total capital & exploration expenditure-U.S. ........ 3,618 3,716 3,889 4,195 3,402 3,338 3,942 3,957 3,766 3,025Net income after tax—U.S. ..................................... 3,134 3,951 4,523 2,841 3,157 6,750 6,255 3,601 5,634 8,154Income, 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 406Excise taxes—U.S. ................................................ 6,328 6,701 7,063 7,459 7,795 6,997 7,030 7,174 6,323 6,833All 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. 

321

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 longterm 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.

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Table 1.—% OF PROFITS REINVESTED IN U.S. UPSTREAM ACTIVITIES 

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 10-yr. 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 

1995 

$M 

1996 

$M 

1997 

$M 

1998 

$M 

1999 

$M 

2000 

$M 

2001 

$M 

2002 

$M 

2003 

$M 

2004 

$M 

10-yr. 

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. 

323

Table 3.—TOTAL GROSS REVENUE—LAST 10 YEARS 

1995

$M 

1996

$M 

1997

$M 

1998

$M 

1999

$M 

2000

$M 

2001

$M 

2002

$M 

2003

$M 

2004

$M 10-yr. 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. 

324

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.

325

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 

326

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

$M 

2003

$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 & refining ............ 11,622 12,366

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

$M 

2003

$M 

Common stock acquired ..................................................................... 9,951 5,881

Mergers ................................................................................................ ............ ............

327

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.

* Appendix A–C have been retained in Committee files.

PROFITS USED FOR STOCK BUYBACKS, MERGERS & ACQUISITIONS—

Continued

2004

$M 

2003

$M 

Acquisitions ......................................................................................... ............ ............

9,951 5,881 Total consolidated net income after tax ............................................ 25,330 21,510

% net income used for stock buybacks, mergers & acquisitions ..... 39% 27%

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

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. 

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? 

328

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 

329

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. Cargospecific 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.

2003 2004 2005 

(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.

330

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 

331

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.

332

CAPITAL EXPENDITURES, CASH DIVIDENDS, STOCK BUYBACKS 

2004

$M 

2003

$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, online) 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. 

333

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, § 560.204. ITR 

§ 560.410(a) makes clear that the § 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 § 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, § 560.210(c). The term information and informational materials is defined in ITR § 560.315 to include publications, films, posters, 

phonograph records, photographs, microfilm, microfiche, tapes, compact disks, CD 

ROMs, artworks, and news wire feeds. 

In addition, § 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, § 560.206. The term ‘‘transaction or dealing’’ includes, without limitation, purchasing, selling, transporting, swapping, brokering, 

approving, financing, facilitating, or guaranteeing. ITR, § 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, §§ 560-

208 and 560.417. 

334

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 

§§ 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 § 560.204 or 

§ 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 nonU.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 § 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. 

335

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 AfVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00345 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
336

fairs, 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 

337

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 

338

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 abnorVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00348 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
339

mal 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 

340

1Letter 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. 

6Terence 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. 

10Donald 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. 

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

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

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. 

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’ firsthand 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 coVerDate 0ct 09 2002 13:16 Mar 14, 2006 Jkt 026108 PO 00000 Frm 00350 Fmt 6601 Sfmt 6621 S:\WPSHR\GPO\DOCS\26108.TXT JACK PsN: JACKF
341

operative 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 

342

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 

343

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 

344

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. 

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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. 

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. 

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. 

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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 

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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 nonprofit 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, 

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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 

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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. 

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 prehurricane 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. 

From 1994 to 2003, the industry spent $47.4 billion to bring refineries into com- pliance 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 

350

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. 

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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/

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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 rightof-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 

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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.

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