U.S. GOVERNMENT PRINTING OFFICE

74–059 DTP WASHINGTON : 2001

S. HRG. 107–90 (Pt. 1)

U.S. ENERGY TRENDS

HEARINGS

BEFORE THE

COMMITTEE ON

ENERGY AND NATURAL RESOURCES

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

TO REVIEW CURRENT U.S. ENERGY TRENDS AND RECENT CHANGES

IN ENERGY MARKETS

MARCH 21, 2001

APRIL 3, 2001

APRIL 26, 2001

PART 1

(

Printed for the use of the

Committee on Energy and Natural Resources

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES

FRANK H. MURKOWSKI, Alaska, Chairman

PETE V. DOMENICI, New Mexico

DON NICKLES, Oklahoma

LARRY E. CRAIG, Idaho

BEN NIGHTHORSE CAMPBELL, Colorado

CRAIG THOMAS, Wyoming

RICHARD C. SHELBY, Alabama

CONRAD BURNS, Montana

JON KYL, Arizona

CHUCK HAGEL, Nebraska

GORDON SMITH, Oregon

JEFF BINGAMAN, New Mexico

DANIEL K. AKAKA, Hawaii

BYRON L. DORGAN, North Dakota

BOB GRAHAM, Florida

RON WYDEN, Oregon

TIM JOHNSON, South Dakota

MARY L. LANDRIEU, Louisiana

EVAN BAYH, Indiana

DIANNE FEINSTEIN, California

CHARLES E. SCHUMER, New York

MARIA CANTWELL, Washington

BRIAN P. MALNAK, Staff Director

DAVID G. DYE, Chief Counsel

JAMES P. BEIRNE, Deputy Chief Counsel

ROBERT M. SIMON, Democratic Staff Director

SAM E. FOWLER, Democratic Chief Counsel

BRYAN HANNIGAN, Staff Scientist

DAN KISH, Professional Staff Member

HOWARD USEEM, Senior Professional Staff Member

SHIRLEY NEFF, Staff Economist

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C O N T E N T S

Page Hearings:

March 21, 2001 ................................................................................................. 1

April 3, 2001 ..................................................................................................... 69

April 26, 2001 ................................................................................................... 133

STATEMENTS

MARCH 21, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 4

Burns, Hon. Conrad, U.S. Senator from Montana ................................................ 4

Caruso, Guy F., Executive Director, Strategic Energy Initiative, Center for

Strategic and International Studies ................................................................... 16

Craig, Hon. Larry E., U.S. Senator from Idaho .................................................... 6

Hoover, Frederick H., Jr., Director, Maryland Energy Administration, on behalf of National Association of State Energy Officials ...................................... 40

Hutzler, Mary, Director, Office of Integrated Analysis and Forecasting, Energy Information Administration ........................................................................ 9

Kyl, Hon. Jon, U.S. Senator from Arizona ............................................................ 7

Landrieu, Hon. Mary L., U.S. Senator from Louisiana ........................................ 6

Murkowski, Hon. Frank H., U.S. Senator from Alaska ....................................... 1

Nugent, William M., Commissioner, Maine Public Utilities Commission, on

behalf of National Association of Regulatory Utility Commissioners .............. 32

Placke, James A., Director, Middle East Research, on behalf of Cambridge

Energy Research Associates ................................................................................ 23

Thomas, Hon. Craig, U.S. Senator from Wyoming ............................................... 7

APRIL 3, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 73

Burns, Hon. Conrad, U.S. Senator from Montana ................................................ 74

Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado ............................ 71

Cantwell Hon. Maria, U.S. Senator from Washington ......................................... 76

Dorgan, Hon. Byron L., U.S. Senator from North Dakota ................................... 72

Hayes, David J., Former Deputy Secretary of the Interior .................................. 89

Landrieu, Hon. Mary L., U.S. Senator from Louisiana ........................................ 76

Leahy, Dr. P. Patrick, Associate Director for Geology, U.S. Geological Survey,

Department of the Interior .................................................................................. 79

Murkowski, Hon. Frank H., U.S. Senator from Alaska ....................................... 69

Rubin, Mark, General Manager, Upstream, American Petroleum Institute ...... 96

Simmons, Matthew R., President, Simmons & Company International ............. 84

Stanley, Neal A., Vice President, Western Region, Forest Oil Corporation,

on behalf of Independent Petroleum Association of Mountain States ............. 105

Thomas, Hon. Craig, U.S. Senator from Wyoming ............................................... 75

Page

IV

APRIL 26, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 135

Craig, Hon. Larry E., U.S. Senator from Idaho .................................................... 139

Daigle, D.H., Director of Americas Refining, ExxonMobile Refining and Supply Company

Statement of ...................................................................................................... 155

Letter from ........................................................................................................ 183

Dorgan, Hon. Byron L., U.S. Senator from North Dakota ................................... 137

Greenbaum, Daniel S., President, Health Effects Institute, Cambridge, MA .... 153

Heminger, Gary, Executive Vice President, Supply, Transportation and Marketing, Marathon Ashland Petroleum ................................................................ 142

Landrieu, Hon. Mary L., U.S. Senator from Louisiana ........................................ 140

Moyer, Craig, Executive Director, Western Independent Refiners Association . 160

Murkowski, Hon. Frank H., U.S. Senator from Alaska ....................................... 133

Robinson, Thomas L., Chief Executive Officer, Robinson Oil Corporation ......... 148

Schumer, Hon. Charles E., U.S. Senator from New York .................................... 140

Thomas, Hon. Craig, U.S. Senator from Wyoming ............................................... 137

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U.S. ENERGY TRENDS

WEDNESDAY, MARCH 21, 2001

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC.

The committee met, pursuant to notice, at 9:36 a.m., in room

SD–106, Dirksen Senate Office Building, Hon. Frank Murkowski,

chairman, presiding.

OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,

U.S. SENATOR FROM ALASKA

The CHAIRMAN. Good morning, ladies and gentlemen. We will

call the hearing to order.

The Committee on Energy and Natural Resources is here to review the current U.S. energy trends and recent changes in energy

markets. And we have a very distinguished group of witnesses

today, who I understand are willing to basically put their reputation behind their recommendations. So we ought to have something

substantive to reflect on the reality that we do have an energy crisis in this country.

We have one panel of witnesses. We would ask you to try and

keep your presentation to approximately 7 minutes. And we will refrain from asking questions—it will be difficult, but we will try

anyway—until all the panel has concluded its statement.

We have Ms. Mary Hutzler, Director of the Office of Integrated

Analysis and Forecasting, Energy Information Administration,

Washington. Mr. Guy Caruso is the executive director for the Strategic Energy Initiative, the Center for Strategic International Studies, a group that just completed, I believe, a three-volume study

that I would recommend reading not only for members of the committee, but those in the audience, with regard to the future forecasts and our future areas of dependence, particularly in the unstable areas of the world. Mr. James Placke is the director of the Middle East Research, Washington, D.C., on behalf of the Cambridge

Energy Research Associates.

And we have Mr. William Nugent. Mr. Nugent is the commissioner of the Maine Public Utilities Commission, Augusta, Maine,

on behalf of the National Association of Regulatory Utility Commissioners. Mr. Frederick Hoover, a director of the Maryland Energy

Administration, Annapolis, Maryland, on behalf of the National Association of State Energy Officials.

I hope, Mr. Placke, you could tell us a little bit about sanctions,

too, in your presentation today, because we have that as an issue

before the committee relative to U.S. interests overseas and the exVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 74-059 SENERGY2 PsN: SENERGY2
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isting sanctions and those companies that are looking for relief and

those that are also concerned about the human rights and proliferation issues.

As a consequence of the staffs of the professional minority and

majority working together, I think we have something from the

standpoint of meaningful testimony today on the current state of

our energy markets, international and national and regional, and

what current trends mean for the economic growth and ultimately

the American consumer, which, I might add, includes the American

taxpayer.

At least that is the way most of us view it, although there are

some exceptions, perhaps, in California, where they seem to distinguish between the taxpayer and the consumer. But I do not want

to get too far down that rabbit trail.

This is the first in a series of hearings that are intended to explore the need for a comprehensive national energy policy. And we

have bills that the minority is proceeding with. We have a bill, and

we intend to pursue the particulars of those bills later on before

this committee. So we will have plenty to do.

The panel of witnesses will explore energy trends and what we

can expect for the future, in particular what the future holds if we

do nothing. So do not eliminate that as a possibility. By the end

of this hearing I think it will be quite clear that we need to act.

But before we hear from witnesses, one of the opportunities you

have as chairman is to make your views known. And I think it is

fair to say that sometime ago we kind of lost direction in regard

to our obligation to look to the future requirements for energy in

this nation. And I think it is time we regain control of that.

We risk threatening our economic prosperity, our national security, and our very way of life. Now that was pretty much a quote

from the Secretary of Energy, but I think it is rather thought-provoking to again consider the merits of our economic prosperity at

stake, our national security, and our way of life.

We have kind of lost control, as a consequence, of a number of

things. Supply and demand, the demand is increasing, the supply

is decreasing. Infrastructure, we have suddenly found ourselves

victimized by our own shortsightedness. We do not have adequate

transmission facilities, pipelines.

We suddenly find ourselves with reduced refining capacity, insufficient to meet the growing needs. So we seem to have compounded,

if you will, from just a shortage to finding we do not have adequate

transmission, we do not have adequate refineries. As a result, at

no time in our history have we relied upon others for more of our

energy supplies, namely foreign countries.

Twenty years ago, the United States imported just over one-third

of our oil. Today, that has increased to about 57 percent. I think

the predictions in the CSIS report indicate that trend is going to

continue. By the year 2020, nearly half of the estimated global oil

demand will be supplied by countries with high risks of instability,

countries that are known to foster terrorism. We recognize the increased reliance of foreign oil and its effect on our foreign policy.

We fought a war over oil in 1991. We need only to look to California for an example what can happen when we become too reliant

on outside sources of energy. We have seen electricity being imVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 74-059 SENERGY2 PsN: SENERGY2
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ported into that State from outside, and the price spirals that result. The problems in California, of course, are spilling over to the

other States. Yet, we still do not seem to get the awareness of the

American people to the extent that we ought to.

It is understandable in California, because a consumer still has

not felt the effect of the increased price. It is not related in the

structure of what is loosely called deregulation, when you have a

cap on retail. And the utilities have basically come to the threshold

of bankruptcy, and the State is guaranteeing indebtedness. I do not

know what is going to happen to the teachers’ or the employees’ retirement program that have invested in those utilities. It goes on

and on and gets worse and worse.

What we need to have is a clear-cut recommendation of how to

systematically get out of this mess over a period of time. And I do

not think government is capable of coming up with those answers.

That is why it is so important that we have recommendations from

you folks, who are experts in this area.

New York is facing similar problems. I guess they are going to

have to increase their generating capacity by about 25 percent in

the next 5 years, or they are going to face blackouts.

We seem to have forgotten our conventional resources, our oil, in

the sense of just drifting along and increasing our dependence. Our

natural gas, nine out of ten new power plants, I am told, will use

gas. We need more gas, more pipelines for transportation. We seem

to have lost sight of coal. We know we have a lot of it. We have

no new coal fire plants since 1995.

Electricity demand has grown 43 percent. We are going to have

to have 1,300 to 1,900 new powerplants, I am told. It goes on and

on. We have not built a single refinery in 25 years. Refining capacity is a regional issue. We are looking at increased prices of gasoline this summer, $1.50, $2, whatever. And the question is: What

does the future hold?

We seem to be somewhat at the whims of the weather with regard to our energy capability, of meeting—if we have a warm winter, we might slip by. If we have a hot summer, we are going to

have problems. It is the first time, I think, that we have ever had

the weather as a main factor in determining just where we will be

in terms of an inadequate supply of energy. It is rather curious

that we passed that threshold.

As a consequence, we are seeing all kinds of things happen that

are irregular. We are seeing aluminum plants shut down. Instead

of producing aluminum, they are selling their electricity. We have

seen urea facilities that ordinarily would make fertilizer simply

selling their gas instead. They have a long-term contract. Things

are out of kilter.

We must use all our energy options for future needs. We simply

cannot produce or conserve our way out of this. We have to work

on a balance. And I think the bottom line is that we must act.

What will happen if we do not act? What are the international and

regional consequences?

Senator Bingaman.

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STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR

FROM NEW MEXICO

Senator BINGAMAN. Well, Mr. Chairman, thank you very much

for having the hearing.

This is the first of several hearings, and this one is to look at

the big picture issues, sort of where we are headed, how we got to

the place we are at today. Everyone seems to agree that we have

entered a period of relatively high and volatile energy prices. We

need to better understand how the changes in policy, the movement

toward market-oriented policies, have contributed to that volatility.

We also need to better understand how we got to the circumstance we are now in of shortage, at least with regard to some

of our energy needs in certain parts of the country. I do not think

the remedies are simple. You just indicated, and I totally agree

with you, that we cannot just produce our way out of this problem.

And at the same time, we cannot just conserve our way out of this.

We have to have a combination. We have to do what we can with

renewable energy but recognize that we will remain dependent

upon energy from fossil fuels, from nuclear power, from hydro, for

the indefinite future, and find ways to increase our supply from

those areas.

We also, I think, need to acknowledge and recognize that we cannot produce our way to independence from the world oil market.

We spend a lot of time around here talking about energy independence. That might have made some sense to talk about 20, 30, 40

years ago. Even then, it was questionable.

But whether we import 36 percent of our oil, as we did in 1973,

50 percent of our oil, as we did a few years ago, or it gets even to

a higher number. The price of that oil is going to be set by forces

outside our control.

We need to recognize that we are part of this global economy.

And particularly with regard to petroleum products and oil, we are

in many ways buffeted by what goes on around the world. So I believe we need to focus on short-term responses to the immediate

problems we have. But we also need to understand the long-term

framework that will help us avoid problems in the future.

We also need to understand how we can address these issues in

an environmentally responsible way. I am persuaded that whatever

we decide to do related to energy policy does impact on climate

change policy, does impact on what we will do in the environmental

arena in the future. We need to recognize that interaction.

So again, I thank the witnesses for being here and thank you for

having the hearing.

The CHAIRMAN. Thank you very much, Senator.

Senator Burns.

STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR

FROM MONTANA

Senator BURNS. Thank you, Mr. Chairman. I am just going to

have my statement put in the record.

The CHAIRMAN. Without objection.

Senator BURNS. And if you wanted to have a hearing to attract

a crowd, we should have been in California. You could probably attract a pretty good crowd out there. But, you know, as we look at

5

this situation, I am interested in hearing from the folks we have

here and their insight and some of their forecasts. So I am just

happy to be here and looking forward to their testimony.

[The prepared statement of Senator Burns follows:]

PREPARED STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR FROM MONTANA

Mr. Chairman, I want to thank you for this hearing. It is very important that we

understand the reasons for the price spikes in all energy commodities in the past

year. The energy crisis continues to dampen the economy of our nation, and we all

must work tirelessly until we find a way to help American energy consumers

through this time of crisis.

First, we need to understand that the prevailing mind-set must change in order

to solve this crisis. Don’t let anyone tell you different, we are in the midst of the

worst energy crisis since the 1970s. I remember the long gas lines and forced reductions in heating energy that we faced. Also, I remember the financial hurt it placed

on all Americans, but especially Montanans. Farmers, ranchers, over-the-road truck

drivers, manufacturing companies, loggers, and their families, were all hurt considerably. I do not want to see this happen again, but I am afraid it is too late. In

Montana we have already seen the impacts, Columbia Falls Aluminum Company

closed its doors for the year, Montana Resources in Butte closed its doors, and many

others may have to do the same if price signals do not change.

The first three things we need to start doing are the following:

CONSERVATION, CONSERVATION, CONSERVATION. The energy trade press

has made a lot of Republican and Democrat differences on energy related issues. I

want to make it clear that the press has a duty, along with each Senator here today,

to start pushing conservation. Instead of concentrating on our differences, let us all

here today make a pact that we are going to do everything we can to push conservation. This is something we all can do that won’t have a detrimental impact on our

economy and it will help us through this very tough time.

Next, we must take an intense look at the reasons we are in an energy crisis

today. It is not only electricity prices that are skyrocketing. We are seeing hurtful

gasoline prices, oil prices, natural gas prices, and heating oil prices as well. In fact,

the price per barrel of oil has gone from $15.99 in 1992 to well over $30.00 this

year. Natural gas prices have gone from $1.74 per thousand cubic feet at the wellhead to nearly $5.00 per thousand cubic feet today. Electricity prices in the Northwest have gone from roughly $20.00 per megawatt hour in 1992 to nearly $250.00

per megawatt hour right now. Gasoline prices were around 93 cents per gallon in

1992 and now sit at nearly $1.40 per gallon and these prices are before taxes are

added. Prices are up across the board, and we must figure out why. I don’t believe

you have to look very far.

I believe the policies, or lack of a clear national energy policy, by the previous Administration are an enormous part of the reason we are in this predicament today.

The Northwest region of the United States has seen a nearly 24% increase in electricity consumption since 1992, while only seeing an increase in generation of 4%.

If you add California into the mix, the discrepancy grows much larger. Further, the

Electric Power Research Institute recently found that there is going to be a 20-25%

growth in electricity demand in the next decade, but only a 4% increase in power

lines and electric-grid equipment. The statistics speak for themselves, if we do not

see more generation and transmission come on-line, high energy prices are here to

stay. We must lose the mentality that electricity comes from a switch.

Common-sense must return to our regulation policies so that supply can meet demand. The environmental agenda of the Clinton/Gore Administration strengthened

regulatory burdens to such a degree that siting new power generation and transmission is not even worth the effort. Simple economics tell potential investors that

you just can’t make it work. We must remove some of the regulatory burdens.

Next, we need to be able to access some of the vast resources that our public lands

contain. The federal government currently manages 650 million acres of land; more

than 90% of this land is west of the Mississippi River. In fact, 52% of the U.S. land

in the west is managed by federal and state governments. In Montana, nearly 50%

of our land is owned by the federal government. Folks, 95% of undiscovered oil and

40% of undiscovered gas is estimated to be located under these lands. Part of our

solution to energy dependence on foreign sources must come from a plan that finds

ways to develop our natural resources on public lands in an environmentally friendly manner.

We must be able to site generation facilities in a timely manner. We must be able

to site transmission lines in a timely manner. Finally, we must remove the barriers

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that stifle incentives for investment in our power markets, while at the same time

providing incentives to do the same. We have worked ourselves out of crisis situations in the past, and we will do it again now, through a bipartisan effort that uses

common sense and our shared American values.

Mr. Chairman, I ask that my comments be place in the record.

The CHAIRMAN. Senator Landrieu.

STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR

FROM LOUISIANA

Senator LANDRIEU. I am impressed with the chart that the staff

gave out that says the U.S. total production of oil is down in the

last 10 years by 17 percent. However, it is up 65 percent on offshore oil and gas.

I want to point out to the panelists, and of course the chairman

and ranking member know, probably 85 percent of that production

takes place off the shores of the State that I represent, Louisiana.

There are some tremendous, positive, as well as negative, impacts

associated with this activity.

So, I hope that this committee will continue, as they have, to remain sensitive that these communities that are serving as a platform for this oil and gas exploration, which is necessary to solve

the short-, medium- and long-term energy challenges that our Nation faces, are in need of proper compensation for this work that

is taking place.

The CHAIRMAN. Thank you very much, Senator Landrieu.

Senator Craig.

STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR

FROM IDAHO

Senator CRAIG. Well, once again, Mr. Chairman, thank you for

keeping our attention front and center on this energy crisis that

America has stumbled into.

I really do look at it as an opportunity for us to get smart again,

both in the sense of affordable and environmentally sound energy

sources. We have all of the talent and technology to do it. We simply have disallowed it to be applied or put to use over the last decade or so with the attitude that somehow we conserve our way out

of this and that new technologies would take us all the way out of

it. That is now clearly evident not to be the case.

At the same time, to build the new and safe and smaller nuclear

reactor makes awfully good sense to me. Finding a way to manage

that waste stream in a productive way makes awfully good sense.

Re-licensing hydro in a way that does not reduce its capacity by 20

percent and increase its cost by 30 percent seems to make pretty

good sense to me. How about clean coal technology that we have

denied ourselves or have not forced ourselves to look at? That

seems to make a lot of good sense.

What we are learning is that we do still need large sources of energy to apply to the economy of this country. The feds dropped

rates again yesterday. The stock market is stumbling around. Economic reports are probably going to show that these big companies

have had to downgrade their profits dramatically because of input

costs, dramatic increases in energy costs. Somehow we have kind

of quietly assumed the economy could just take care of that. Well,

it is taking care of it, taking care of it in the form of less profits

7

and layoffs and readjustments. That happens when you create

spikes in inputs in the cost of doing business.

So, Mr. Chairman, let us hear from this panel of experts and

folks who watch this energy economy very, very closely, building a

record for our Congress to look at and to react to as we shape new

policy as critical.

Thank you.

The CHAIRMAN. Thank you very much, Senator Craig.

We have been joined by Senator Thomas, the Senator from Wyoming, at least one of them. Oh, and there is one from Arizona down

at the end that snuck in. Well, for heaven’s sakes. We have them

outnumbered, so go ahead, fellows.

[Laughter.]

Senator LANDRIEU. It only takes one of me sometimes, though.

The CHAIRMAN. I know. I know.

[Laughter.]

STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR

FROM WYOMING

Senator THOMAS. Well, I, too, want to hear the testimony. And

I know that you have covered where we are and the fact that we

need more domestic production and so on. But we need to move on

access. We need to move on the opportunity to be able to move energy through rights of ways and easements, both for power lines

and for pipelines. We need diversity. We need to have conservation.

And we need to move.

I am anxious to hear from our panel. And as you know, for Wyoming this is a great issue we are very much interested in. With our

gas production going up substantially, we can produce more mine

mountain electricity. We need a way to get it where it needs to go

to the market.

We need access to public land so that we can do that. And we

can take care of the land at the same time. We do not need to have

this environment or use as being two opposite things. They do not

need to be.

And so I will stop there and look forward to your comments.

The CHAIRMAN. Yes. Thank you very much.

Senator Kyl.

STATEMENT OF HON. JON KYL, U.S. SENATOR FROM ARIZONA

Senator KYL. Thank you, Mr. Chairman. I know these witnesses

will help us in our job of helping to provide information to our public, which needs to be informed about the costs that the over-regulated energy sector has imposed upon us.

In my State of Arizona this summer, whereas we are an exporting State of energy and ordinarily would have no difficulty at all,

there could be some issues of brownouts or blackouts, simply because the power that ordinarily would be acquired on the margins

in the middle of the summer from the Northwest will probably

have to go to California. And as a result, Arizona, which, as I said,

has invested and has tried its best to meet its own needs, is going

to suffer right along with the people in California.

Until this country comes fully to appreciate the fact that there

is no free lunch, when it comes to energy, you cannot just consume,

8

you have to produce as well, we are going to continue to face this

problem. And I think our witnesses today can help provide that

base of information that will enable the public to judge what will

need to be done in order to solve this problem.

And I thank you, Mr. Chairman, for holding this hearing.

The CHAIRMAN. Thank you very much, Senator Kyl.

I would respectfully request that the panel consider three questions, in addition to your presentation. One is a concern brought up

by the ranking member, and that is the global warming issue. And

obviously, one answer to that clearly from the standpoint of generating more power is the role of nuclear energy. We do not seem to

be able to get over the threshold of what to do with the waste.

You know, there seems to be more of an awareness in the public,

at least to some extent, that, yes, maybe we should look at nuclear

again. But the question is, how do you unwind it? Nobody in their

right mind would finance a nuclear plant today. The permitting

time, the exposures associated with overruns, nobody would give

you a firm contract to build one. But nevertheless, we need to have

some input on that issue.

The other is the merits of trying to reduce our dependence on imported oil. There is no question that we cannot drill our way out,

but the merits of reducing our dependence from a positive point of

view of identifying areas in the domestic front, the United States,

where we can develop more oil and reduce that dependence, the

merits of that, how important it is, or is it okay to just drift on and

increase our dependence on imports from 56, 59, 60, 65. The Department of Energy says we are going to be at 65 percent by 2010.

The last one is, for those of us who feel that we are kind of identified as the answer, whether it be the State of Louisiana, the State

of Mississippi, Alabama. But, you know, we talk about energy, and

we suddenly find that the entire east coast from Maine to Florida

is off limits. It has moratoriums on it, different types, different

days that they come about.

The same is true on the west coast of the United States, from

the Canadian border north of Washington State through California,

moratoriums. Where is this energy going to come from, if we have

these moratoriums? I wonder if my friend for Louisiana and a couple of others would consider the merits of a bill that would open

up everything. Everything is closed. Open it up. And then reprioritize. Because, you know, can we address relief if we on one

hand say we are committed to producing more, and then suddenly

find that we have all these areas closed?

So if you can wander into those areas, that would be enlightening. Who wants to go first? Anybody catching an airplane today?

I guess we will let Mary—are you——

Mr. NUGENT. At 2:20.

The CHAIRMAN. Oh, well. You will make it.

Mr. NUGENT. I hope we’ll be through.

The CHAIRMAN. You only have 7 minutes. So——

[Laughter.]

The CHAIRMAN. Mary, go ahead.

9

STATEMENT OF MARY HUTZLER, DIRECTOR, OFFICE OF INTEGRATED ANALYSIS AND FORECASTING, ENERGY INFORMATION ADMINISTRATION

Ms. HUTZLER. Thank you, Mr. Chairman and members of the

committee. I appreciate the opportunity to appear before you today

to discuss current energy trends in the United States.

The Energy Information Administration is an autonomous, statistical, and analytical agency within the Department of Energy.

We are charged with providing objective, timely, and relevant data

analysis and projections for the use of the Department of Energy,

other government agencies, the U.S. Congress and the public.

The projections in this testimony are from the Short-term Energy

Outlook released this month and from the Annual Energy Outlook

2001 published in December. The Short-term Energy Outlook provides quarterly projections through 2002 on a national basis. And

the Annual Energy Outlook provides annual projections through

2020 on a national and regional basis. Our long-term projections

are based on technological and demographic trends, current laws

and regulations, and consumer behavior.

[Chart.]

Ms. HUTZLER. Energy markets in the United States today are

characterized by high prices for both petroleum and natural gas,

due in large part to tight supplies of both fuels. Reductions in oil

production by OPEC and several non-OPEC petroleum exporting

nations have contributed to the low stocks for the industrialized

nations.

The CHAIRMAN. Well, why do you not walk us through that

chart?

Ms. HUTZLER. The blue part of the chart shows the normal range

of where stocks are for the industrialized nations. These are the

OECD countries. The black shows where they were actually, and

then the red shows where we are projecting. And you can see that

the projection is below where the normal ranges are.

The CHAIRMAN. Yes. That means what?

Ms. HUTZLER. That means that markets are very tight. Therefore, they are going to be very volatile in that you can have high

prices as a result of that volatility.

Senator THOMAS. That is not production then.

Ms. HUTZLER. No. Those are stocks.

Senator THOMAS. Stocks.

The CHAIRMAN. Those are refined stocks.

Ms. HUTZLER. These are oil stocks.

The CHAIRMAN. Crude oil.

Ms. HUTZLER. Yes, crude.

The CHAIRMAN. And where are those stocks?

Ms. HUTZLER. They are in the OECD countries that we are talking about. And these are both crude and petroleum stocks, total

stocks.

The Chairman; Yes, but do they have to be pumped or are they

in transit or are they storage or——

Ms. HUTZLER. Storage.

The CHAIRMAN. They are in storage. So they have been pumped

out of the oil fields.

10

Ms. HUTZLER. Yes. You also have copies of these charts at hand

too, if you want to get a closer look at them.

[Chart.]

Ms. HUTZLER. Tight natural gas supplies are also contributing to

high electricity prices in California, along with high electricity demand relative to capacity, high generation outage rates, transmission bottlenecks, and low hydroelectric resources.

At its March 17 meeting, OPEC members agreed to reduce production quotas an additional 1 million barrels per day effective

April 1. This follows an earlier production quota cut of 1.5 million

barrels per day announced in January that was effective February

1.

Prior to the March 17 meeting, the average imported price of oil was projected to fall slightly from its 2000 value of $27.70 per barrel. Based on these imported crude prices, we projected an average

price for motor gasoline for this summer of $1.47 per gallon.

The CHAIRMAN. Where do you—does that include tax?

Ms. HUTZLER. Yes. It is an average including taxes.

These new production cuts by OPEC may result in higher price

projections, which will be incorporated in our next Short-term Energy Outlook to be released early next month. Warm spells in January and February and declining crude oil prices in December and

January helped to ease heating oil prices, which have been declining from their winter peak of $1.41 per gallon in December. Nevertheless, heating oil prices remain high compared to history.

Natural gas prices began increasing last summer primarily due

to high demand and low levels of natural gas storage, as you can

see in this chart.

The CHAIRMAN. Tell us what working gas in storage is.

Ms. HUTZLER. That is gas that is in storage that has already

been drilled and has been put in storage areas so that it can be

gotten to very quickly. And the blue on this graph also shows

where normal region levels were. The black is where we have seen

it over the past period on that chart, starting in April of 1998. And

you can see we are projecting also for it to be a problem in the future.

The CHAIRMAN. So it is the same as for OECD oil stocks, essentially.

Ms. HUTZLER. Yes. It is a similar concept for natural gas. Okay. So since late June, spot prices increased more than $4 per

thousand cubic feet. The wellhead price of natural gas is currently

estimated to have more than doubled this heating season from the

previous season’s price. Due to projected high levels of demand

growth for natural gas, particularly for electricity generation, the

average wellhead price is projected to be about $4.70 per thousand

cubic feet in 2001, compared to an annual average of about $3.60

per thousand cubic feet in 2000.

Electricity demand is expected to grow at a rate of about 2.2 percent in 2001 and in 2002, compared to an estimated growth rate

of 3.6 percent between 1999 and 2000. Slower growth is expected

in part due to slower projected economic growth. Electricity demand for this past winter is expected to be higher than the previous winter, due to higher residential and commercial demand and

the cold temperatures in November and December.

11

Today, petroleum, natural gas and coal make up about 85 percent of total energy consumed in the United States. And we project

that these fuels will increase their share slightly over the next 20

years. Petroleum represents 40 percent of today’s consumption and

is mainly used for transportation fuels and in the industrial sector,

for petrochemical feed stocks, plastics and asphalt, areas where little substitution potential exists.

Coal represents about one-quarter of our consumption, and 90

percent is used for electricity generation. We are expecting about

a 45-percent increase in electricity generation over the next 20

years, as all sectors increase their demand for electricity. While the

largest portion of the additional generation is expected to come

from natural gas, coal is expected to provide 44 percent of total

generation in 2020, a decrease from its current share of 52 percent.

Natural gas consumption for electricity generation is projected to

triple between now and 2020, resulting in a 62-percent increase in

its total consumption that you see on this chart.

[Chart.]

Ms. HUTZLER. The next chart shows our domestic supply of fuels.

Coal is our Nation’s most abundant fossil fuel resource, providing

31 percent of our current domestic production. We expect domestic

natural gas production to surpass coal by 2015, increasing its share

of production from 23 percent today to 35 percent in 2020. Our domestic petroleum supply is projected to remain roughly flat for the

next 20 years, resulting from decreasing domestic crude production

and increasing production from natural gas plant liquids and refinery gains. However, because of our increasing demand for petroleum, net imports will increase from its 52-percent share today to

64 percent in 2020.

The United States is and will remain one of the top oil producers

in the world. We are third in the world behind Saudi Arabia and

Russia. However, while we will be a significant oil producer, our

consumption will be outstripping our production.

[Chart.]

Ms. HUTZLER. My final chart highlights the regional projections

for electricity capacity additions. Our forecast calls for 413

gigawatts of additional capacity needed by 2020. That is almost

1,400 300-megawatt units. It will be needed to meet our projected

1.8-percent growth rate in electricity demand and projected capacity retirements of about 9 percent of our current capacity. You can

see that we are forecasting the need for large increases in capacity

additions for the Southeast, Texas, California, and parts of the

Midwest.

Thank you, Mr. Chairman and members of the committee, and

I will be happy to address the questions you have.

[The prepared statement of Ms. Hutzler follows:]

PREPARED STATEMENT OF MARY HUTZLER, DIRECTOR, OFFICE OF INTEGRATED

ANALYSIS AND FORECASTING, ENERGY INFORMATION ADMINISTRATION

Mr. Chairman and Members of the Committee:

I appreciate the opportunity to appear before you today to discuss the near- and

long-term outlook for energy markets in the United States.

The Energy Information Administration (EIA) is an autonomous statistical and

analytical agency within the Department of Energy. We are charged with providing

objective, timely, and relevant data, analysis, and projections for the use of the Department of Energy, other government agencies, the U.S. Congress and the public.

12

* The attachments have been retained in committee files.

We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy makers determine energy policy. Because we

have an element of statutory independence with respect to the analyses that we

publish, our views are strictly those of EIA. We do not speak for the Department,

nor for any particular point of view with respect to energy policy, and our views

should not be construed as representing those of the Department or the Administration. However, EIA’s baseline projections on energy trends are widely used by government agencies, the private sector, and academia for their own energy analyses.

Each month, EIA updates its Short-Term Energy Outlook, which contains quarterly projections through the next two calendar years, taking into account the latest

developments in energy markets. The Annual Energy Outlook provides projections

and analysis of domestic energy consumption, supply, prices, and energy-related carbon dioxide emissions through 2020. The projections in this testimony are from the

Short-Term Energy Outlook March 2001 (STEO) and from the Annual Energy Outlook 2001 (AEO2001), published by EIA in December 2000. These projections are not

meant to be exact predictions of the future, but represent a likely energy future,

given technological and demographic trends, current laws and regulations, and consumer behavior as derived from known data. EIA recognizes that projections of energy markets are highly uncertain, subject to many random events that cannot be

foreseen, such as weather, political disruptions, strikes, and technological breakthroughs. In addition to these short-term phenomena, long-term trends in technology development, demographics, economic growth, and energy resources may

evolve along a different path than assumed in the AEO2001 reference case. Many

of these uncertainties are explored through alternative cases in both the STEO and

AEO.

THE OUTLOOK TO 2002

Energy markets in the United States today are characterized by high prices for

both petroleum and natural gas, due in large part to tight supplies of both fuels.

Reductions in oil production by OPEC and several non-OPEC petroleum-exporting

nations have contributed to low oil stocks. Tight natural gas supplies are also contributing to high electricity prices in California, along with high electricity demand

relative to capacity, high generation outage rates, and low hydroelectric resources.

Crude Oil. At its March 17 meeting, OPEC members agreed to reduce production

quotas an additional 1 million barrels per day effective April 1, 2001. This follows

an earlier production quota cut of 1.5 million barrels per day announced in January

that was effective February 1, 2001. OPEC has scheduled an extraordinary meeting

for June 5-6, 2001 to review their production quotas. The monthly average U.S. imported crude oil price for February 2001 is estimated to be about $26.40 per barrel,

slightly higher than the estimate of $25.75 per barrel in January. EIA’s current

forecast reflects our belief that the January production cut by OPEC 10 (OPEC, excluding Iraq) would maintain the world oil price within and toward the high end

of OPEC’s target range of $22 to $28 per barrel in 2001 and 2002 (Figure 1).* Prior

to the March 17 meeting, average imported prices were projected to fall slightly

from the estimated value of $27.70 per barrel in 2000 to about $26.60 per barrel

in 2001 and about $25.40 in 2002, all prices being expressed in nominal dollars. EIA

expects that oil stocks in the OECD countries will continue to be tight compared

to normal levels, preventing prices from falling significantly (Figure 2). With the

new production cuts, further uncertainty has now been introduced.

Motor Gasoline. The retail price for regular unleaded motor gasoline has fallen

about 10 cents per gallon since September. However, with crude oil prices increasing

by about $1.20 per barrel from their December low of $25.19 per barrel combined

with lower than normal stock levels, EIA projects that prices will rise to about $1.49

per gallon during the peak months of the 2001 driving season. For the summer of

2001, we are projecting an average price of $1.47 per gallon, compared to $1.53 per

gallon in the previous driving season, in nominal dollars. Motor gasoline stocks are

expected to be slightly lower during this year’s driving season compared to last year;

however, crude oil prices are also expected to be lower. The annual average retail

price of regular unleaded motor gasoline is projected to decline from $1.49 per gallon

in 2000 to $1.46 per gallon in 2001 to $1.41 per gallon in 2002, with all prices being

in nominal dollars.

Heating Oil. The heating season of October through March is nearly over, so retail

heating oil prices have seen their seasonal peak. Warm spells in January and February and declining crude oil prices in December and January helped to ease heating oil prices, which have been declining from their winter peak of $1.41 per gallon

13

in December. Nevertheless, heating oil prices remain high compared to history. The

average price for October through December 2000 was almost 40 cents per gallon

higher than the same period in 1999. Due to the relatively warm weather in the

Northeast during the last half of January and parts of February and heating oil production that is several hundred thousand barrels per day more than last year’s

level, heating oil stock levels have remained fairly steady over the past two months.

For the first time since November 1999, U.S. distillate stocks are within the normal

range. With crude oil prices expected to be lower in 2001 than in 2000, lower heating oil prices are projected as well. Retail heating oil prices are expected to be $1.28

per gallon in October through December 2001 compared to $1.40 per gallon in the

same period for 2000, in nominal dollars. The annual average retail price of heating

oil is expected to decline slightly from $1.31 per gallon in 2000 to $1.28 per gallon

in 2001 to $1.22 per gallon in 2002, with all prices in nominal dollars.

Natural Gas. Natural gas prices began increasing last summer, primarily due to

low levels of natural gas storage (Figure 3), with spot prices increasing more than

$4 per thousand cubic feet since late June. During the heating season from October

2000 through March 2001, the wellhead price of natural gas is currently estimated

to have more than doubled from the price during the previous season, averaging

about $5.60 per thousand cubic feet, in nominal dollars (Figure 4). When the heating season ends, average wellhead prices are projected to decline, averaging about

$4.05 per thousand cubic feet for the spring and summer. Due to projected high levels of demand growth for natural gas, particularly for electricity generation but also

in the industrial sector, it is highly unlikely that wellhead prices will decline to the

level of $2 per thousand cubic feet of one year ago. In 2001, the average wellhead

price is projected to be about $4.70 per thousand cubic feet, compared to an annual

average of about $3.60 per thousand cubic feet in 2000, in nominal dollars. However,

hot summer weather in regions with high levels of natural gas-fired electricity generation could reduce storage injections for next year’s heating season and lead to

higher seasonal price increases. In 2002, we expect the storage situation to improve

somewhat with increases in production and imports, leading to a modest decrease

in the average annual wellhead price to about $4.30 per thousand cubic feet, in

nominal dollars. Domestic natural gas production for 2001 and 2002 is expected to

rise as production responds to the high rates of drilling experienced over the past

year. In 2000, drilling for natural gas in the United States increased by 45 percent

over the 1999 level of 10,500 wells, in response to a 66-percent increase in the average natural gas wellhead price from 1999 to 2000 (Figure 5). Production is estimated to have risen by 3.1 percent in 2000 and is projected to increase by rates of

3.3 percent in 2001 and 2.5 percent in 2002 as higher natural gas prices are expected to encourage a moderate growth in supply. In contrast, natural gas production declined slightly from 1997 to 1998 and from 1998 to 1999.

Electricity. Electricity demand is expected to grow at a rate of about 2.2 percent

in 2001 and 2.3 percent in 2002, compared to a estimated growth rate of 3.6 percent

between 1999 and 2000. Slower growth is expected in part due to slower projected

economic growth. Electricity demand for this winter is expected to be 4.6 percent

higher than the previous winter, due to higher residential and commercial demand

and the cold temperatures in November and December. Natural gas deliverability

problems in California have helped to increase natural gas prices and have frequently caused interruptible customers, including electricity generators, to be cut off

in that State. The current situation in California is characterized by low natural gas

storage, natural gas pipeline bottlenecks, high electricity demand, and low availability of hydropower resources, combined with no significant capacity additions in the

last ten years. In addition, the San Onofre 3 nuclear unit is currently offline due

to a fire in early February and may not return to service for several months. The

average residential price of electricity in the United States is projected to increase

from 8.2 cents per kilowatthour in 2000 to 8.3 and 8.4 cents per kilowatthour in

2001 and 2002, respectively, in nominal dollars, largely due to fuel costs.

THE OUTLOOK TO 2020

AEO2001 provides an integrated projection of U.S. energy market trends for the

next two decades on an annual basis. The following discussion highlights the major

categories of domestic energy demand and supply.

Consumption. Total energy consumption is projected to increase from 96.1 to

127.0 quadrillion British thermal units (Btu) between 1999 and 2020, an average

annual increase of 1.3 percent. Transportation energy demand is expected to increase at an average annual rate of 1.8 percent to 38.5 quadrillion Btu in 2020 and

is the fastest growing end-use sector. The growth in transportation use is driven by

3.6-percent growth in air travel, the most rapidly increasing transportation mode,

14

and 1.9-percent annual growth in light-duty vehicle travel, the largest component

of transportation energy demand, coupled with slow growth in vehicle efficiency.

Residential and commercial energy consumption is projected to increase at average annual rates of 1.2 and 1.4 percent, respectively, reaching 24.4 quadrillion Btu

in 2020 for residential demand and 20.8 quadrillion Btu for commercial demand. In

both sectors, the growth in demand is led by electricity consumption for a variety

of equipment—telecommunications, computers, office equipment, and other appliances. Electricity use is projected to increase at annual rates of 1.9 and 2.0 percent,

in the residential and commercial sectors, respectively. Industrial energy demand is

projected to increase at an average rate of 1.0 percent per year, reaching 43.4 quadrillion Btu in 2020, as efficiency improvements in the use of energy help to offset

growth in manufacturing output. The projections incorporate promulgated efficiency

standards for new energy-using equipment in buildings and for motors, as authorized by the National Appliance Energy Conservation Act of 1987 and the Energy

Policy Act of 1992. Since AEO2001 included only those laws, regulations, and standards in effect as of July 1, 2000, the new standards for residential clothes washers,

water heaters, and central air conditioners and heat pumps and commercial heating,

cooling, and water heating equipment issued in January 2001 are not included. In

addition to the impact of efficiency standards, improvements in efficiency are projected as a result of expected technological improvement and market forces.

Petroleum demand is projected to grow at an average rate of 1.4 percent per year

through 2020, led by the growth for transportation, which uses about 70 percent of

the total (Figure 6). Growth in travel more than offsets efficiency gains, and economic growth increases petroleum use for freight and shipping through 2020. Natural gas consumption is expected to increase at an average rate of 2.3 percent per

year. Increases are expected in all sectors, but the most rapid growth is for electricity generation, where natural gas use (excluding cogenerators) is projected to

grow from 3.8 to 11.3 trillion cubic feet between 1999 and 2020. Total coal consumption is expected to increase from 1,035 to 1,297 million tons per year between 1999

and 2020, an average annual increase of 1.1 percent. About 90 percent of the coal

is used for electricity generation. Coal remains the primary fuel for generation, although its share of generation is expected to decline from 51 to 44 percent between

1999 and 2020. Electricity consumption overall is projected to grow by 1.8 percent

per year through 2020. Efficiency gains in the use of electricity partially offset the

growth of new electricity-using equipment. Renewable fuel consumption, including

ethanol used in gasoline, is projected to increase at an average rate of 1.1 percent

per year through 2020. In 2020, about 55 percent of renewable energy is used for

electricity generation and the rest for dispersed heating and cooling, industrial uses,

and fuel blending.

Energy Intensity. Energy intensity, measured as energy use per dollar of gross

domestic product (GDP), has declined since 1970, most notably when energy prices

have increased rapidly (Figure 7). Between 1970 and 1986, energy intensity declined

at an average rate of 2.3 percent per year as the economy shifted to less energyintensive industries and more efficient technologies. Without significant price increases and with the growth of more energy-intensive industries, intensity declines

moderated to an average of 1.3 percent per year between 1986 and 1999. Through

2020, energy intensity is projected to decline at an average rate of 1.6 percent per

year as efficiency gains and structural shifts in the economy offset growth in demand for energy services. Energy use per person generally declined from 1970

through the mid-1980s, and then tended to increase as energy prices declined. Per

capita energy use is expected to increase slightly through 2020, as efficiency gains

only partly offset higher demand for energy services.

Electricity Generation. Generation from both natural gas and coal is projected to

increase through 2020 to meet growing demand for electricity and offset the decline

in nuclear power expected from retirements of some existing facilities (Figure 8). As

noted above, the share of coal generation is expected to decline through 2020 because assumptions about electricity industry restructuring, such as higher cost of

capital and shorter financial life of plants, favor the less capital-intensive and more

efficient natural gas generation technologies. The natural gas share of total generation is expected to increase from 16 to 36 percent between 1999 and 2020. The use

of renewable technologies for electricity generation, including cogeneration, is projected to increase slowly at an average rate of 0.7 percent per year, primarily due

to moderate fossil fuel prices. State renewable portfolio standards are the cause of

a significant amount of the expected penetration. Hydropower is expected to decline

slightly by 2020 as regulatory actions limit capacity at existing sites, and no large

new sites are expected to be available for development.

Supply. Total domestic petroleum supply, including refinery gain and natural gas

plant liquids, is projected to remain nearly flat through 2020 (Figure 9). Domestic

15

crude oil production is projected to decline at an average rate of 0.7 percent per

year, from 5.9 million barrels per day in 1999 to 5.1 million barrels per day in 2020.

As a result, net petroleum imports are expected to rise through 2020, to meet growing demand (Figure 10). Between 1999 and 2020, net imports of petroleum are projected to increase from 51 percent to 64 percent of domestic petroleum demand. In

2020, the United States is expected to require net imports of crude oil and petroleum products totaling 16.5 million barrels per day.

Unlike oil, domestic natural gas production, with its larger and more accessible

resource base, is expected to increase from 18.7 trillion cubic feet in 1999 to 29.0

trillion cubic feet in 2020. Increased production comes primarily from lower 48 onshore conventional nonassociated sources, although onshore unconventional production is expected to increase at a faster rate than other sources. In order to fill the

gap between domestic production and consumption, net natural gas imports are expected to increase from 3.4 trillion cubic feet in 1999 to 5.8 trillion cubic feet in

2020, mostly pipeline natural gas imports from Canada. Net liquefied natural gas

imports are projected to increase from 0.1 to 0.7 trillion cubic feet by 2020.

Coal production is expected to increase from 1,105 million tons in 1999 to 1,331

million tons in 2020, an average of 0.9 percent per year, to meet rising domestic

demand. From 1999 to 2020, low-sulfur coal production is expected to increase while

the production of high- and medium-sulfur coal declines, due to the need to reduce

sulfur dioxide emissions from coal-fired electricity plants. As a result, western coal

production the primary source of new low-sulfur coal is expected to continue its historic growth, reaching 787 million tons in 2020, an annual growth rate of 2.2 percent. Western coal is surface mined and less costly to produce than eastern coal.

Carbon Dioxide Emissions. Energy-related carbon dioxide emissions are projected

to increase at an average of 1.4 percent per year from 1999 to 2020, reaching 2,041

million metric tons of carbon equivalent, 35 percent higher than in 1999 and 51 percent higher than in 1990 (Figure 11). Projected increases in carbon dioxide emissions primarily result from continued reliance on coal for electricity generation and

on petroleum fuels in the transportation sector.

Alternative Cases. In order to show the impact of alternative assumptions concerning the key factors driving energy markets, we include a number of alternative

cases in AEO2001. Two sets of these cases illustrate the impacts of improved technology in energy-consuming equipment and in the production of oil and gas.

One alternative case assumes more rapid improvement in new technologies for

end-use demand, through lower costs, higher efficiencies, and earlier availability for

new technologies, relative to the reference case, as well as more rapid improvement

in the costs and efficiencies of advanced fossil-fired and new renewable generating

technologies. As a result, projected energy demand in 2020 is 8 quadrillion Btu

lower than in the reference case, reducing carbon dioxide emissions to 1,875 million

metric tons carbon equivalent in 2020, compared to 2,041 million metric tons carbon

equivalent in the reference case (Figure 12). Such technology improvements could

result from increased research and development, but should not be considered the

most optimistic improvements that could occur with a very aggressive program of

research and development. The AEO2001 reference case assumes continued improvements in technology for both energy consumption and production; however, it

is possible that technology could develop at a slower rate. In the 2001 technology

case, it is assumed that all future equipment choices will be made from the equipment and vehicles available in 2001, with new building shell and industrial plant

efficiencies frozen at 2001 levels. Also, new generating technologies are assumed not

to improve over time. In this case, efficiencies improve over the forecast period as

new equipment is chosen to replace older stock and the capital stock expands; however, projected energy demand in 2020 is 6 quadrillion Btu higher than in the reference case, increasing carbon dioxide emissions to 2,157 million metric tons carbon

equivalent.

Another alternative case assumes more rapid technological improvement in the

exploration and production of petroleum and natural gas. By 2020, these assumed

improvements are expected to raise natural gas production by 1.1 trillion cubic feet

and raise lower 48 crude oil production by nearly 300 thousand barrels per day compared to the reference case. The more rapid technology progress would also be expected to reduce the average wellhead price of natural gas in the United States from

$3.13 per thousand cubic feet (1999 dollars) in the reference case to $2.50 per thousand cubic feet in 2020 (Figure 13). Conversely, slower technological improvements

are assumed in another case, which reduce natural gas production by 1.9 trillion

cubic feet and reduce lower 48 crude oil production by nearly 400 thousand barrels

per day in 2020 relative to the reference case. In this slow technology case, the average wellhead price of natural gas in 2020 reaches $4.23 per thousand cubic feet.

16

Conclusion. In the near term, we expect crude oil and petroleum prices to decline

slightly from their current levels by the end of the year and to decline further next

year. Stock levels of both petroleum and natural gas remain tight. In the long term,

continuing growth in the U.S. economy is expected to stimulate more energy demand, with fossil fuels remaining the dominant source of energy. As a result, our

dependence on foreign sources of petroleum is expected to increase and domestic

natural gas production and natural gas imports are expected to grow significantly.

These forecasts incorporate an expectation of efficiency improvements in both demand and supply although different paths for technological development could lead

to slower or more rapid efficiency gains.

Thank you, Mr. Chairman and members of the Committee. I will be happy to answer any questions you may have.

The CHAIRMAN. Thank you very much, Ms. Hutzler. I appreciate

that excellent presentation.

Our next witness will be Mr. Guy Caruso, executive director of

Strategic Energy Initiative. I am going to have to step out for a moment, but please proceed.

And, Senator Bingaman, I will be back in just a moment. I have

a constituent that I have to shake hands with.

STATEMENT OF GUY F. CARUSO, EXECUTIVE DIRECTOR, STRATEGIC ENERGY INITIATIVE, CENTER FOR STRATEGIC AND

INTERNATIONAL STUDIES

Mr. CARUSO. Good morning, Mr. Chairman. Thank you very

much for this opportunity to present the results of the Center for

Strategic and International Studies report, the Geopolitics of Energy into the 21st Century.

The chairman was one of the congressional co-chairs on this report, along with his colleague across the aisle, Senator Lieberman.

And I will briefly summarize the key findings of the report in the

oral remarks. And the full statement will be submitted for submission into the record.

Our report examined the global energy trends projected to 2020

and analyzed the implications of those trends for geopolitical developments during that same time frame. Let me highlight just several of the most important energy trends, which were drawn very

heavily from the work of the EIA and Mrs. Hutzler’s office. So I

will not belabor them.

The robust economic growth and the population growth projections and expanded global trade are expected to lead to more than

a 50-percent increase in world energy demand by 2020. And the

most rapid growth in that demand will be in developing countries,

which we believe has important geopolitical implications.

In terms of supply, the Persian Gulf suppliers will become even

more dominant in world trade. According to some projections, Persian Gulf oil would represent as much as 60 percent of world oil

trade in 2020 with Saudi Arabia by far being the leading oil exporter, as it is today. And the reason for that concentration is the

rapid and steadily growing oil imports, not only in this country but

in Europe and, more importantly I think for this forecast, in the

developing countries of Asia.

The third trend which has important geopolitical implications is

the rapid growth in electricity demand and natural gas demand, as

Mary pointed out in her forecast, not only in the United States, but

globally. The global infrastructure of electricity and natural gas is

17

stretched thin. As well as we have witnessed in this country, it is

also true globally.

The study reaches three very broad conclusions. The first is that

the United States has and will continue to have a special responsibility for preserving worldwide energy supply, which will become

increasingly difficult if world oil developments play out as these

forecasts indicate.

Secondly, in order to develop an adequate and reliable energy

supply to meet the projected demands mentioned, we are going to

need massive investments in the global energy infrastructure, and

they must begin now. It is not just the United States. It is around

the world that some of these same constraints are beginning to be

felt.

And the third point is following up the points several of the Senators made in opening remarks, that we need to balance economic

growth with environmental concerns. And that presents a special

challenge in this geopolitical outlook. The integration of energy and

environment policy is essential in order to achieve a balanced and

diverse national and international energy policy.

And in the report we do list a number of policy issues for consideration. I will just mention a few of them in the oral remarks, but

they are listed in their complete recommendations and considerations in the written submission.

On energy availability, the United States will need to retain as

far as possible its ability to defend open access to energy supplies

and international ceilings. And this will become increasingly difficult. And we may have to seek some burden sharing from our allies to accomplish this, given this outlook.

Secondly on the availability issue, the report recommends that

we avoid indiscriminate use of sanctions. In particular, unilateral

sanctions have not been an effective policy tool and should be

dropped. They have not been effective, and they only harm U.S.

commercial interests abroad.

With respect to energy reliability, governments should maintain

and, where appropriate, expand government financed and controlled strategic petroleum reserves, reserving their use for supply

disruptions. And with respect to supply disruption mitigation,

international cooperation with organizations, such as the International Energy Agency, will continue to be essential in order to

mitigate those risks.

On the energy and environment issue, the report recognized this

is a long-term issue, particularly the global environmental concerns

with respect to greenhouse gas emissions, but also air and water

concerns as well. And that one way to begin dealing with this and

recognizing the long-term nature of it is the need to make economically and environmentally sound technologies available to developing countries in order to meet their increasing energy demands,

which, as I mentioned, are growing dramatically, and will also affect the environmental side of the issue.

In the report we specifically single out the possibility of nuclear

power being utilized in developing countries to deal with both the

environment issue and their increasing electricity needs.

On the question of what do we do about reducing our oil imports

and our dependence and the issue that several of you mentioned

18

earlier about dependence versus vulnerability, it is clear that we

will continue to be dependent. The real issue is, what can we do

about reducing our vulnerability. One way is with strong emergency preparedness procedures and having a strong strategic petroleum reserve.

But another way is taking care of our own business, because

OPEC is going to continue to take care of their business. And the

idea that we have a balanced access to our own energy resources

is certainly a step in the right direction. So I, again, agree with the

statements made that we need to diversify our fuel sources within

this country, as well as from abroad and have a balanced approach.

Let me conclude there my oral remarks, and I would offer to

make available the full three-volume study to any members who

would so desire. Thank you very much, Mr. Chairman.

[The prepared statement of Mr. Caruso follows:]

PREPARED STATEMENT OF GUY CARUSO, EXECUTIVE DIRECTOR, STRATEGIC ENERGY

INITIATIVE, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

Good morning, Mr. Chairman, members of the committee, thank you for this opportunity to testify today and to present the results of the Center for Strategic and

International Studies (CSIS) study ‘‘The Geopolitics of Energy into the 21st Century’’ which was released on 15 February 2001.

Today I want to share with you some of the more important findings of this study,

because these findings have policy implications not just for the United States but

for all energy producing and consuming countries.

Our Geopolitics study was cochaired by former Senator Sam Nunn, who also

chairs our Board of Trustees, and by Dr. James Schlesinger, former Secretary of Energy. For this project we had four Congressional cochairs: Senator Frank Murkowski

and Senator Joe Lieberman; and Representatives Benjamin Gilman and Ellen

Tauscher. We also formed a Senior Advisory Panel, supported by a number of special task forces, comprised of individuals drawn from both the public and private

sectors, approximately 100 experts contributed to the project.

We began work in July 1998 in response to concerns that a lengthy period of secure energy supplies had led U.S. policy makers to pay relatively little attention to

the changing relationship between geopolitics and energy at the turn of the century.

This changing relationship required a rethinking of U.S. foreign policies, environmental policies, and the broader national security strategy. Our completed report responds to these concerns.

The geopolitics of energy is rarely static. Events of the day carry implications for

energy supply consumption, and prices—sometimes immediate, sometimes delayed,

sometimes hidden. By attempting to define, in advance, the form these events may

take—and the resulting impact on energy—the report may remove some surprise

from the future and ease the way for decision makers in both the public and private

sectors.

THE MESSAGE

‘‘One of the ironies at the turn of the century is that, in an age when the pace

of technological change is almost overwhelming, the world will remain dependent,

out to the year 2020 at least, essentially on the same sources of energy—oil, natural

gas, coal—that prevailed in the twentieth century.’’

This message carries our assessment that for renewable and alternative forms of

energy, although increasing in absolute terms during the coming years, their relative contribution to total energy supply is not likely to increase substantially.

We came to three broad conclusions based on our analysis of the geopolitics of energy into the twenty-first century.

First, the United States, as the world’s only superpower, must accept its special

responsibilities for preserving worldwide energy supply.

Second, developing an adequate and reliable energy supply to realize the promise

of robust global economic growth early in the twenty-first century will require significant investments, and they must begin to be made immediately.

Third, decision makers, in both the public and private sectors, face the special

challenge of balancing the objectives of economic growth with concerns about the environment. This challenge is probably the most contentious of any of the challenges

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which lie ahead and it is going to be difficult to secure agreement by the protagonists on how to proceed.

WHAT’S NEW?

Let me begin my review of our findings by describing for you What’s New? For

those who closely follow the energy industry, these findings may not necessarily be

new. Rather, the real question is, how will energy producers and consumers alike

respond to each?

NGOS

First, we found that the influence of nongovernmental organizations or NGOs on

public and private energy-related policy decisions will considerably expand in the

coming years. Nongovernmental organizations are broad in definition, ranging from

terrorist groups to radical activists to well-intentioned environmentalists and

human rights monitors. By adroitly using new information technologies, opposition

to a particular project or idea can be mobilized quickly and effectively, backing

shareholder resolutions and disinvestment campaigns against offending oil companies, for example.

One recent example can be cited, and that is how widely separated NGOs came

together against the proposed Chad-Cameroon pipeline. This pipeline is the largest

infrastructure project underway in Africa today. What is interesting is this. For

three years, until construction began last October, NGOs set the agenda. First,

NGOs opposed the pipeline, then recognizing that the people wanted the pipeline,

began to set demands on the oil companies if the project were to move ahead. Probably the greatest victory for the NGOs was agreement that 80% of the oil revenue

be spent on education, health, infrastructure, and rural development. Whether that

turns out to be the case is questionable.

DEVELOPING COUNTRIES TAKE THE LEAD

At some point in time before the year 2020, the consumption of energy by the developing countries of the world is expected to exceed energy consumption by the developed world. Last year the developed world accounted for 53% of all energy consumed; the developing world for just 34%, economies in transition account for the

remainder. Twenty years later, the picture will change rather dramatically, as the

developed world share drops to 43%, while the developing world share rises to 46%.

This shift in consumption patterns carries tremendous political, economic, and environmental implications. Among other issues, what kinds of energy will the developing world be consuming? Will it be natural gas, or local coals? Where will the oil

and gas come from? The Persian Gulf, Russia? Closer energy ties will likely translate into closer political ties. As China, for example, relies increasingly on Persian

Gulf oil, would that country be willing to intervene to protect oil flows from disruption?

CYBERTERRORIST ATTACKS

The spread of information technology and use of the Internet drastically change

the way business is conducted, and this change carries with it a new set of

vulnerabilities. One such vulnerability is the prospect of cyberterrorist attacks on

energy infrastructure. These prospects are very real, and such attacks, in our estimation, may be one of the greatest threats to energy supply during the years under

review.

The U.S. Central Intelligence Agency, along with our Department of Defense, has

been working for years to perfect ways to electronically meddle with other countries’

banking systems and electricity grids. I think we can safely assume that others are

targeting our own electricity grids and banking systems.

No enemy would be foolish enough to engage the United States in a way that

would allow us to use our vastly superior military force. But a handful of computer

hackers, given the opportunity, could play havoc with our economy, at minimal cost

to the host country.

POLICY CONTRADICTIONS

While we may voice our strong opposition to the use of oil as a political weapon

by oil exporting countries, the United States, in its own way, uses oil as a political

weapon on a quite broad scale. How so? As an importing country, the United States

could refuse to buy crude oil originating from a particular country, but that clearly

would have no discernable impact. That embargoed oil would simply be directed to

20

another market, and would be replaced in the U.S. market by crude oil of a different

origin.

No, it is through our broad application of sanctions that we employ oil as a political tool. We have unilateral sanctions against Libya and Iran, and we join in the

multilateral sanctions against Iraq, with these three sanctions then encompassing

a total of 7 million barrels per day. Do these sanctions really work? Have they

caused the sanctioned countries to alter their behavior as originally intended? The

answer is no, and no.

The greater need for oil in the future is at odds with current sanctions on oil exporters Iran, Iraq, and Libya. If our estimates of world oil demand in the year 2020

are reasonably correct, then Iran, Iraq, and Libya will have to substantially expand

their current productive capacity and to produce at or very near full capacity if that

demand is to be satisfied.

GLOBALIZATION

There is another policy contradiction that I want to bring to your attention. The

United States deals with energy policy in domestic terms, not international terms.

The U.S. policy is therefore at odds with globalization. U.S. consumers have primarily one concern, and that is price. Our consumers do not care where our oil

comes from. That we are presently importing about 57% of the oil we consume is

of no concern at all. Although most certainly view Saddam Hussein as an enemy,

would they then reject Iraqi oil? They almost certainly would not. We import in excess of 700,000 b/d of Iraqi oil, to no one’s objection. Moreover, one of the great ironies of the day is that we refine this Iraqi crude, producing some volumes of jet fuel,

and presumably use some of that jet fuel in our military aircraft sent out to bomb

Iraq. The circle is closed; we are returning their oil to them, but in a slightly different form.

Some time ago, at a CSIS-sponsored conference, Mack McLarty, former White

House chief of staff under President Clinton, presented a very perceptive—and commonly-held view of how globalization will work.

‘‘When a Brazilian brews her morning coffee today, she is likely to use electricity

from a power plant in Uruguay that runs on natural gas provided by a Chilean company. She drives to work in a Ford fueled with Venezuelan gasoline, and her Canadian-owned factory may soon be powered by a 2,000 mile natural gas pipeline from

Bolivia.’’

But I would like to offer another view of globalization. There is a downside to

globalization that, at least in energy terms, affects all of us. For globalization makes

us vulnerable to events around the world, anywhere, anytime, over which we have

no control.

Indeed, one astute observer has written that globalization actually helps terrorists. The lowering of borders, the rise of a global economy, the revolution in information technology, all these great and wonderful things have enormous benefits for terrorists.

A major oil exporting country sneezes, so to speak, and the rest of the world

catches a cold. The so-called ‘‘Asian flu,’’ if you will recall, was one of the triggers

leading to the oil price collapse of several years ago. We can no longer hide behind

national boundaries.

SECURITY OF SUPPLY

Any energy importing country must concern itself with security of supply and, because we do, we seek security through diversity of supply. The energy policy of the

United States encourages the search for oil outside the country, but away from the

Persian Gulf. All in an effort to reduce our dependence on those exporting countries.

But as we work to reduce our reliance on Persian Gulf oil, others are raising theirs.

We have intervened militarily in the Persian Gulf in the past to protect oil supply

and likely would do so again. But if U.S. military power were committed to a limited

but extended protection effort in Northeast Asia, for example, the capacity to respond to a crisis like that of 1990 in the Persian Gulf would be severely limited.

As a result, the United States will need to rebalance its security relations and other

consuming countries will have to weigh in. The United States cannot go it alone.

ENERGY SUPPLY AND DEMAND INTO THE 21ST CENTURY

As we looked ahead in our study to the year 2020, in terms of proportional shifts

in energy supply, what did we find?

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• We found that the relative shares of crude oil, of coal, and of nuclear electric

power all will decline, compared with relative contributions made in the year

2000. • Indeed, nuclear electric power was seen as the only form of primary energy to

decline both in absolute and relative terms. • We found that renewables will hold their own, in relative terms. • Natural gas, to no one’s surprise today, was the only form of energy to demonstrate both absolute and relative gains.

Looking more closely at crude oil, would the geographic distribution of production

change much during the intervening 20 years?

• The Persian Gulf would substantially increase its dominance of global oil trade

by the year 2020. • The contributions from the former Soviet Union, particularly from Kazakhstan

and Russia, plus from Africa, would show considerable gain. • But for the United States and the North Sea, the future was one of continued

decline.

On an individual country basis, Saudi Arabia would maintain its leadership, at

about 17% of the world total, followed by the former Soviet Union, then Venezuela,

Iraq and Iran, all three at around 5 percent each. No real surprises here, although

for the former Soviet Union we need to separate out Russia, Kazakhstan, Azerbaijan, and Turkmenistan. These countries warrant individual attention.

The potential of the Caspian Sea is a subject of considerable attention and continues to attract heavy media coverage. Just what can we expect in the years ahead?

Looking just to the year 2010, and presuming that oil exploration and development

programs are successful and that pipeline carrying capacities are adequate, then the

new oil from the Caspian might represent as much as 3% of world oil supply that

year. Not pivotal, by any means, and certainly not a substitute for Persian Gulf oil,

but nevertheless important at the margin, and for adding to diversity of supply,

which is a main theme of U.S. foreign policy towards that region.

ELECTRICITY, NUCLEAR POWER, AND THE ENVIRONMENT

We found that electricity would be the most rapidly growing form of energy use

during the years 2000-2020. This growth will be concentrated in the developing

countries, where electricity use will more than double.

Clearly, access to adequate and reliable electricity supply is essential for modern

civilized life. But two concerns emerge. Substantial capital investments will be required to build power plants and grids, and will NIMBYism (Not in My Back Yard)

intrude in a way to interfere with the timely construction of power generators and

supporting grid?

Moreover, can adequate electricity supply be developed while protecting the environment? This question particularly pertains to developing countries.

Nuclear power currently accounts for 16% of worldwide electricity generation. But

by the year 2020 that contribution is expected to decline to just 10%. This decline

will lead to a commensurate increase in worldwide carbon emissions, at a time when

the world is increasingly aware of the need for emissions-free energy, and at a time

when the developing world is confronted with dramatically large future energy requirements. To protect the environment, do we provide the poorer coal-burning

countries with the latest in clean coal technology? Do we encourage them to take

up the nuclear electric power option? Perhaps both approaches are needed.

THE EXPORTING COUNTRIES

Volume 3 of our Geopolitics study deals in large part with the geopolitical situation in the key oil exporting countries. Unfortunately, pessimism prevails when

longtime observers consider the outlook for stable political systems in many of these

oil exporters.

Any geopolitical analysis of world oil inevitably begins with a survey of Saudi Arabia, and includes a scenario under which its oil exports are reduced or even eliminated. We began with Saudi Arabia because of its dominant role as an oil supplier

and in recognition that no other supplier can replace Saudi Arabia should the need

arise. Several sources of Saudi instability quickly come to mind: structural economic

problems; ethnic and social tensions; and problems of royal succession.

Russia is the number two oil exporter, at roughly 4 million b/d. Today, Russia is

weak, and a weak Russia is just as much concern to the world as was a strong Russia during the Cold War, in large part because of its large arsenal of weapons of

mass destruction. In 1998 Russia was producing more oil than anyone else—11.5

million b/d. Then a collapse in production set in, eventually to 6 million b/d, not beVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
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cause of war or developments in the market place, but because of field mismanagement and the lack of investment capital. Foreign oil companies are prepared to invest in Russia, but only if the investment climate is attractive and if the investment

is properly protected under the law. These two conditions have not yet been met.

The oil future of Venezuela is a bit uncertain because of uncertainty regarding

President Chavez. The uncertainty regarding the sanctioned states of Iran, Iraq,

and Libya has already been mentioned.

We want to be optimistic about Mexico as an oil supplier and potentially of natural gas, and there are signs of change and progress. But these come slowly. In western Africa, all the unwelcome attributes of a petro-state are to be found in oil-rich

Angola, where its natural resources are used to fund a civil war.

But there is good news out there. The U.S. neighbor to the north, Canada, is our

leading supplier of energy, surpassing all others. Last year our imports of Canadian

oil averaged 1.7 million b/d, accounting for 15.2% of all oil imports. Canada supplies

most of the natural gas imported by the United States a bit more than 97%, representing in turn some 15% of marketed U.S. natural gas production. The coincidence of U.S. and Canadian national interests protects these supplies.

POLICY CONSIDERATIONS

In order to assist decision makers in the public and private sectors the CSIS

study offers the following policy considerations:

Energy Availability

• Avoid the indiscriminate use of sanctions. The value of multilateral sanctions

should be weighed against the value of engagement and dialogue. When their

use is deemed admissible in the support of international interests, ensure that

the coverage of sanctions is as targeted as possible. Unilateral sanctions are not

an effective policy tool. • Do not obstruct the development of economic routes that would ultimately offer

Caspian and Central Asian exporters a diverse set of options for transporting

oil and gas to foreign markets. • Encourage energy-producing countries to ensure their energy sectors attract

and support greater foreign investment.

Energy Reliability

• The United States should retain as far as possible its ability to defend open access to energy supplies and to international sea-lanes. • U.S. allies in Europe and Asia should be prepared to shoulder a greater burden

of the financial cost of protecting energy supply, including sea-lane protection. • Governments must find ways to work with the private sector to minimize the

vulnerability of energy infrastructure to sabotage or terrorist attack, including

cyberterrorism. • Governments should maintain and, where appropriate, expand government-financed and controlled strategic petroleum reserves, reserving their use for supply interruptions.

Energy and the Environment

• Economically and environmentally sound technologies must be made available

to help developing countries meet increasing energy demands.

• Western nations should assess the conditions under which nuclear power could

make a significant contribution to electricity generation in the developing world.

• OECD governments should expand basic research on energy technologies while

concurrently policymakers should eliminate those environmental regulations

that inhibit bringing technological innovation to market. All governments

should review the extent to which domestic energy subsidies are inconsistent

with global energy policies.

A FINAL THOUGHT

Let me leave you with this final thought. There are troubles ahead. Where is the

growth in energy demand coming from? Unstable countries. Where is the growth in

energy supply coming from? Unstable countries. All this makes for a somewhat uncomfortable and unpredictable future. Moreover, the end of the Cold War discipline

has enhanced the prospects for increased volatility, which in turn may constrain investment levels, resulting in tight supplies.

In retrospect, our assessments stress prospects for instability and interference in

energy supplies during the coming years. But we did so only to alert policymakers

as to how fragile timely supplies really are. The larger task, however, will be to convince the consuming public that there is a cost to reliable supplies of energy and

23

to a protected environment, and that this cost must be reflected in the prices they

pay. But how to convince the consuming public that higher prices may be in their

longer-term interests? This is a critically important challenge before policy makers

and legislators at all levels.

The CHAIRMAN. Thank you very much.

Is the pronunciation ‘‘Placke’’?

Mr. PLACKE. Placke, sir.

The CHAIRMAN. Placke. Why do you not go right ahead, Mr.

Placke? Welcome.

STATEMENT OF JAMES A. PLACKE, DIRECTOR, MIDDLE EAST

RESEARCH, ON BEHALF OF CAMBRIDGE ENERGY RESEARCH

ASSOCIATES

Mr. PLACKE. Thank you very much, Mr. Chairman. And like the

other members of the panel, I appreciate the opportunity to be here

today.

I have submitted a statement to the members of the committee,

which I will simply draw on in a way that will highlight some of

the points made in that statement that I hope will be helpful to

the members of the committee.

Let me begin by painting a very general picture. We see sources

of primary energy supply around the world, that is, the natural resources themselves, the coal, the gas, the oil, as not only adequate

currently but adequate to support rising consumption into the indefinite future. The issue is not resource availability. The issue is

getting the energy to the consumer in the form at the time and the

place where it is needed. And that is part of the problem. It is really the heart of the problem that we confront today in the United

States. That is the issue in California. It is the issue in gas supply

this past winter.

I think we are not trying to be proscriptive, but in general the

things that need to be done are to maintain an investment climate

that will encourage development of the facilities necessary to delivery the energy in a timely manner. And that requires a regulatory

environment, and regulation continues to be necessary to protect

the public interest, clearly, but an environment that keeps in mind

as well the objective, which is to deliver the energy in an efficient

manner.

These are very general characteristics. Let me turn to a couple

of specifics in each of the areas that we have under review, oil,

electricity, and natural gas. The good news on oil is that, despite

rising oil consumption, world oil reserves have more than doubled

over the last 30 years. In the United States, as members of the

committee have already noted, as well as members of this panel,

U.S. production has continued to decline over a very long period of

time. We passed the point of self-sufficiency in 1973. And in general, with very few exceptions, the trend has been consistently

downward ever since.

The good news is we are about to turn around. For the first time

in nearly 30 years, we anticipate an actual increase in U.S. domestic crude oil production this year. We see that continuing through

the rest of this decade. And by the end of the decade, we anticipate

that U.S. crude oil production will be more than a million barrels

a day higher than it is now.

24

At the same time, of course, consumption continues to grow. And

indeed, consumption will grow faster than the increase in supply.

At the end of the decade, we think there will be a modest growth

in U.S. dependence on foreign oil sources, which for the past year,

the year 2000, we put at about 56 percent of consumption. And by

the year 2020 we see that rising to 57 percent. A modest increase,

but the trend, I think, is clear.

The question of security supply hinges on not only the amount

of oil produced in the United States, but where the imported oil is

coming from. And here again, the news is not all bad. Increasingly,

imports into the United States are coming from western hemisphere sources, Canada, Mexico, and Venezuela principally. They

are three of the top five suppliers to the U.S. market.

The largest supplier to the U.S. market is Saudi Arabia, with

which the United States has had a long and, I think, satisfactory

relationship in the energy area. And finally, the fifth supplier is Nigeria, which, in terms of transportation, is relatively well located

on the west coast of Africa.

In the end, however, it is really price that is the issue. It is not the resource itself. And if the price of oil is $50 in Tokyo Bay, it

will be $50 in New York Harbor. So the world oil market is unitized in a way that we cannot simply escape from.

Turning to electric power, a great deal of attention, of course, has

been focused in this area because of the events in California over

the last 6 months. Really, the origins, I think, of the issue nationally go back to the beginnings of the 1990’s when questions of deregulation and restructuring of the industry began to come onto the

public agenda.

This induced a good deal of caution into investors because the investment climate was uncertain. It was not certain what the rules

of the game were going to be. And as a consequence, very little new

capacity was built in the United States during the 1990’s.

That, however, began to turn around toward the end of the decade of the nineties, as the regulatory and restructuring environment and the directions in which the country was going became

clearer. We added 27 gigawatts of electric power generating capacity nationally last year. We anticipate that over the next 5 years,

we will add another 300 gigawatts, which is equal to 40 percent of

our total generating capacity currently.

On a national basis, the capacity is certainly adequate. That, of

course, does not deal with the issue of getting it, again, to the consumer when it is wanted. And that is really the problem. The

transmission system is not capable of shifting the power around

from where there is surplus supplies to where there are deficits.

Prices are also going to increase because increasingly, in part for

environmental reasons and in part simply because of economic efficiency, most of the new generating capacity is gas fired. Gas prices

are already high. And as power demand grows and new plants

come on, more gas will be required. So those higher gas prices will

be supported by generation demand. And, as far as electric power

is concerned, they will be passed through to the electric power consumer.

As has already been noted, the principal problems in the United

States are California in the first instance, and that is on

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everybody’s front page these days. So very little more needs to be

said about it, I think. It is a supply and demand issue. There simply was not adequate new capacity being built at a time when California was growing at an extraordinarily high rate. The consequence is the power now is not available.

We anticipate, as has already been noted as well, perhaps as

early as this summer, power shortages in downstate New York.

That is, New York City and immediate counties around the New

York area. Here again, the transmission system is inadequate to

transport power from New England, where we see a power supply,

into downstate New York, where we see a deficit.

The California problem will be with us. It is going to be a difficult year in California this year and probably next year. On the

basis of what we can see today, we would expect that the situation

may return to something like normal in about three years; that is,

about the year 2003.

On the natural gas side, the picture is perhaps even more mixed.

We have had an actual decline in gas produceability in the United

States. And that has been masked by three consecutively warm

winters beginning in 1997. The winter of 2000/2001, as we all

know, was one of the coldest on record. And it really pressed the

system very hard. So hard, in fact, that gas prices tripled at their

high point. They have now fallen into a range that has about double what had been the norm. And they are likely to stay there for

the foreseeable future.

The positive side of that is that this has created a climate in

which gas well drilling is at record levels, having fallen dramatically in 1997 and 1998 and 1999. The questions, however, many of

which this committee will need to deal with, of the permitting environment for construction of additional gas transmission capacity

and expansion of existing gas lines will be important to bring supply to where it is needed. Where the supply will come from is also

changing. It is not going to come, as it has, so much from the traditional producing areas, but rather areas that are only now beginning to appear on the horizon, such as arctic gas, for which there

is a growing supply. Then reinjection into the fields in Alaska is

approaching capacity. Something really needs to be done to facilitate transmitting that gas from where it is to where it is needed.

And this does not get into questions of ANWR. These are fields

that are already developed and are producing. A coordinated policy

involving our neighbor to the north, Canada, is likely to have to be

part of that solution, because a pipeline would have to cross Canadian territory.

As well, deep well drilling in the Gulf of Mexico is the primary

promising frontier for U.S. domestic gas production. And that increasingly will take, I think, our attention and absorb larger and

larger amounts of investment.

Finally, liquified natural gas imports, which were fashionable in

the 1970’s, are back on the agenda. There are four terminals in the

United States that are capable of loading liquified natural gas. And

at today’s price levels, which we expect to be with us for some time,

it has become economically feasible to import natural gas in

liquified form from supply points around the Atlantic basin.

26

Mr. Chairman, you asked in particular for a comment on sanctions, which I will be happy to do. It is something that I devote actually a good bit of attention to. Several points have already been

made, which I would endorse. And that is, that, in general, and

this is a generalization, multilateral sanctions are much more effective than unilateral sanctions. The General Accounting Office has

produced at least two studies on this issue, as have a number of

other institutes. And I think that is a generally accepted principle.

But unfortunately, it is not a guarantee. Multilateral sanctions

have been applied to Iraq for more than 10 years following Iraq’s

invasion of Kuwait in 1990. Saddam Hussein is still in office in

Baghdad and likely to remain there.

I think what the administration is doing to address that issue to

re-figure, reconfigure sanctions in a way to make them more effective, focusing on the arms issue and the control of the oil revenue,

which is a means of directing expenditure by the Iraqi government

and preventing them from doing as much as they might otherwise

do in the area of developing weapons of mass destruction. So it is

limited, but it does have its uses.

Perhaps the most dramatic case where sanctions have had an effect is Libya. We have had a serious tension in our relationships

with Libya going back to the early 1980’s. And we have virtually

totally sanctions on Libya by presidential executive order since

1986. But it was not until 1994, when the Security Council acted

to impose multilateral sanctions, that the pressure really began to

be felt by the Libyan authorities and ultimately resulted in the release of the two Libyans accused in the bombing of Pan Am 103

in 1988 last year. The trial, as we all know, concluded in January

with the conviction of one of the two accused and the release of the

other.

Those sanctions have been suspended, but not removed. And they

remain, I think, an issue in U.S.-Libyan relations that needs to be

dealt with in a way that takes into account Libya’s past record of

involvement with international terrorism, the legitimate and urgent claims of the families of the Pan Am 103 victims, and, finally,

some degree of acceptance of responsibility for the incident by the

Libyan authorities, which has yet to be forthcoming.

That is a subject, Mr. Chairman, that could absorb a lot of time.

I think I probably have said enough on it. If members of the committee wish to go into it further, I would be happy to answer questions. Thank you.

[The prepared statement of Mr. Placke follows:]

PREPARED STATEMENT OF JAMES A. PLACKE, DIRECTOR, MIDDLE EAST RESEARCH, ON

BEHALF OF CAMBRIDGE ENERGY RESEARCH ASSOCIATES

OVERVIEW

The world’s energy resources are sufficient to fuel a rising living standard for a

growing world population for the indefinite future. This view is based on what is

known about energy sources today, what is projected for future resource discovery

and development, and the additions to world energy supply that can reasonably be

expected from advancing technologies. Uncertainty about meeting energy demand at

specific places and times comes about because of the need for continued—even

rapid—development of the processing and delivery systems to make energy available in acceptable forms where and when it is wanted.

Meeting energy demand in the United States as well as globally involves more

than just identifying adequate primary fuel sources. Since a large and growing proVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
27

1See: 2020 Vision: Global Scenarios for the Future of the World Oil Industry (CERA, 2000)

portion of the world energy supply system is privately owned and operated, the investment climate must be attractive for rising demand to be met. Delivery means,

such as shipping terminals, oil and gas pipelines and power transmission lines need

to be regulated to protect the public interest, but in ways that do not inhibit responding to consumers’ needs. Finally, environmental standards need to promote

the public welfare, but in the context of enabling economic growth, including energy

consumption, to support rising standards of living.

Clearly, government has a role to play in reconciling these parallel and sometimes

competing interests. For the United States, in particular, there is a need for government to facilitate the further development and delivery to consumers of domestic energy as well as access to needed, and growing, amounts of imported energy resources. Both an informed vision and policy leadership are required.

OIL TRENDS

Over 30 years from 1970 through 1999, the world consumed approximately 657

billion barrels of oil. The world’s proved oil reserves stood at 470 billion barrels in

1970. Yet, despite consuming nearly half again this amount of reserves by 1999,

world proved oil reserves had grown to 1,038 billion barrels. Moreover, our research

indicates that oil will remain the world’s dominant source of primary energy to at

least 2020, although declining slightly in its share of primary energy demand from

41 percent in 2000 to 39 percent in 2020—with the difference largely taken up by

greater use of natural gas.1

Unites States’ oil production has trended steadily downward since 1973, except for

a few years in the late 1970s and mid-1980s reflecting Alaskan production peaks.

United States’ crude oil production averaged 5.8 million barrels per day in 2000—

a little less than two-thirds of the 1973 rate. However, primarily because of advances in deep-water production technology being applied to the Gulf of Mexico, we

estimate that the rate of U.S. crude oil production will rise by more than one million

barrels per day by 2010. This is apart from any new production that may come from

areas presently closed to oil operations.

Rising U.S. oil demand is, however, expected to exceed forecast production increases, and U.S. dependence on imported oil—although increasingly from sources

within the Western Hemisphere—is expected to continue to grow, but at a slower

rate. The United States imported a net 56 percent of its oil consumption in 2000.

Imports are estimated, on the basis of present trends, to grow slightly to 57 percent

of consumption by 2010.

Government and Industry Efficiency

In the oil arena, the role of government remains one of:

• being an arbiter among competing interests, such as environmental concerns

that restrict resource exploitation or impose standards on combustion emissions

that increase costs or limit the availability of fuels;

• providing a buffer against supply emergencies, such as through the strategic petroleum reserve;

• regulating the industry’s interstate operations as necessary, but in a manner

that does not detract from investment incentives and that is consistent with

competition.

Innovation has been, and remains, the key both to meeting rising U.S. and world

oil consumption while controlling, or even reducing, costs. For example, a rising proportion of additions to world oil reserves is from discoveries made in deep water

(below 2,500 feet) on the continental margins of North and South America, West Africa and the outer reaches of the North Sea where exploration and production was

not technically feasible only ten years ago. At the same time, the price of oil in constant dollars is now about the same as it was 15 years ago, while world oil consumption has grown by 16 million barrels per day since 1985, or about 1.6 percent per

year. For the oil industry to continue this performance, an open, competitive business environment is essential.

ELECTRIC POWER TRENDS

Little new generating capacity was added in the United States through most of

the 1990s because of investor uncertainty due to discussion of industry deregulation

and restructuring. Over the past few years, as U.S. restructuring plans and rules

began to take shape, many power plant developers shifted their development efforts

from Asia and Latin America to the United States. Now, a new wave of generating

28

2See Beyond California’s Power Crisis: Impact, Solutions, and Lessons, CERA 2001 (retained

in committee files)

supply has arrived. In 2000, about 27 gigawatts (GW) of new generating capacity

came on line. Another 300 GW of capacity is under development and is scheduled

to come on-line within the next five years. This represents about 40 percent of today’s total U.S. capacity of 770 GW, which is much more than forecast demand

growth.

About 80 of the projected 300 GW addition to capacity is already under construction and is scheduled to come on-line by the end of 2002. More than 90 percent of

the 300 GW total will be gas-fired. As these power plants come on-line, pressure

on natural gas supply will intensify. High gas prices over the past year have already

affected power prices, particularly in regions more dependent on natural gas for

power generation.

This large increase in power generating capacity, which is a virtual supply tsunami, is uneven—not enough in California and downstate New York and more than

sufficient in Texas and New England. We see Texas and New England having excess capacity as soon as this year. Transmission limitations, however, have prevented movement of electricity from regions with a surplus to regions with a shortage. A transmission system set up for one kind of electric power industry needs to

be adapted to a different, competitive industry. This structural transition will require at least another five years and probably much longer. This is because, after

more than a decade of low investment in transmission capacity, a great deal of uncertainty about transmission restructuring remains. Major physical upgrades will

likely not happen until institutional arrangements are settled.

The Special Case of California

The source of California’s power crisis is a shortage of supply.2 Over the past five

years, California’s economy grew 29%, driving electricity consumption up by 24%.

But no major power plant was built over the past decade. Flawed market design

turned a surplus at the beginning of deregulation in 1996 into a shortage now. The

shortage will likely get worse before it gets better. This summer will be very challenging. Given that hydroelectric capacity is about 80 percent of normal, Californians are fated to endure blackouts if summer weather is normal. The summer of

2002 will likely be difficult too. It took a long time to produce the current shortage—

ten years of inadequate additions to generating capacity—and it will take several

years to work out of it. California may not be back to normal before 2003.

Downstate New York is likely to see shortages beginning as early as this summer—

again because no major power plant has been built there recently, and transmission

limitations prevent tapping surplus capacity elsewhere.

California’s experience is affecting the speed of restructuring in other states. Already more than ten states have decided to review whether to delay planned restructuring, of which four have recently decided to delay.

Summary of the Near-term Outlook

• Except for California and downstate New York, we do not expect power shortages for the United States in the near term. Downstate New York is likely to

be the hot spot this summer along with California. Because of transmission limitations, it is not possible to move a significant amount of additional power into

downstate New York, despite present and projected capacity availability elsewhere.

• Most existing coal (330 GW) and nuclear plants (100 GW) can operate economically for at least the next five years, and most likely much longer. We expect

that these plants will remain the backbone of the generating fleet even though

some of them will need retrofits for environmental compliance with NOX, SOX,

Mercury and fine particles standards. Any C02 restrictions would add to these

requirements and pose a different challenge.

• Some have claimed that Internet-related electricity consumption represents

about 9-13 percent of total electricity consumption and argue that, since Internet use is still growing fast, we will see higher growth in electricity demand

than the historical trend would indicate. We take a different view. Over the

past five years, computers and Internet use have penetrated significantly into

U.S. businesses, households, and schools. But electricity intensity—measured by

kWh consumption per real dollar of GDP—has continued a decline that began

in the mid-1970s. This suggests that the new economy is less electricity intensive than the old economy, i.e., it is economically more efficient.

• Natural gas prices have been high over the past year (averaging $4.23 MMBtu

at Henry Hub), and we expect them to remain relatively high for at least the

29

next three years. Regions that rely heavily on gas-fired power plants, such as

New England, New York, Texas, and Florida will continue to see higher power

prices because of high natural gas prices.

NATURAL GAS TRENDS

The natural gas price shock is ongoing. Wholesale prices this past winter reached a peak of as much as $10.00 per million British thermal units (MMBtu) at the

Henry Hub—nearly four times the level of the previous winter. Prices have mod- erated to near $5.00 per MMBtu, but are still nearly double the price level of just

one year ago. While this rapid price jump has been shocking to customers and to

the economy as a whole, it is, in fact, the result of longer term forces that have

strained gas supply availability in North America. Tightening natural gas production capacity was masked by three warm winters beginning in 1997. At the same

time, lower cash flows—owing to the oil price collapse of 1998 and low gas prices

because of weaker demand—resulted in a fall-off of drilling activity and a decline

in U.S. production. In 2000, very cold early winter weather and growing demand

for gas use in power generation resulted in a sudden upsurge of demand and a

heavy draw-down of storage inventories. When combined, this was the perfect mix

for a dramatic price shock.

Deregulation of natural gas prices served consumers well—with a 30 percent decline in real prices from 1985 to 1999. Without a doubt the natural gas price shock

this past winter has caused intense pain for customers. Homeowners are facing

heating bills that have nearly doubled—costing the typical family $500-600 in disposable income. Businesses are also hard hit—often unable to pass their higher energy costs on to customers. Energy intensive industries, such as steel and fertilizer

manufacturers, are seeing higher energy costs devour their profit margins to the extent that some have curtailed production.

The good news is that the gas market worked this past winter:

• There is no threat to reliability. Customers faced sticker shock, but the reliability of gas service has been preserved despite the coldest November/December

period in the 106 years that this weather data has been tracked. • There is no financial crisis among gas utilities. By and large, rates are being

adjusted through cost pass-through mechanisms, preventing utilities from being

squeezed between high wholesale costs and low retail prices. Many utilities are

preparing ‘‘risk mitigation’’ proposals for the consideration of their state commissions in order to prepare for the 2001-2002 heating season.

• The market is pushing off demand. During the peak of the demand pressure

in December and early January, more than 7 percent of ‘‘base’’ gas consumption

was pushed off the market through a combination of switching to alternative

fuels, plant closures, and through processors and pipelines leaving certain gas

liquids in the gas stream to boost the Btu’s available for customers (‘‘ethane rejection.’’). While gas prices have moderated since the peak, much of the curtailed demand remains off, as gas prices remain at or above the equivalent level

of distillate oil prices, one of the principal alternative fuels.

The result is impressive. Despite fundamental market conditions (low storage,

record cold) that were more extreme than the ‘‘gas shortage’’ of the 1975-1977 period, the market managed the shock this winter without the extensive interruptions

of businesses and schools that occurred in the previous crisis. While prices are still

high, the market has worked to moderate the extremes that were experienced earlier this winter.

The Gas Market Pressure Continues

Despite moderating gas prices, pressure on the market continues and, with it, the

potential for additional price shocks in the year ahead. Spring has finally arrived

and the gas market has already shifted its focus to the daunting challenges that

lie ahead: specifically, the need to refill storage inventories for next winter while

at the same time meeting potentially higher demand for gas use in power generation this summer. At the same time, there is a need to store at least 400 billion

cubic feet (Bcf) more than was stored in each of the previous two summers—representing roughly 4 percent of total gas supply. With production only slowly increasing, storage demand will keep pressure on the gas market.

To provide an adequate supply for storage, gas prices need to remain high enough

to continue to suppress demand. Specifically, this means price levels above those of

residual fuel and distillate oil—the alternative boiler fuels. Given current oil prices,

this means a gas price above $4.50 per MMBtu. Prices must continue to discourage

demand, for if demand returns to gas from oil it will cut into storage injections, and

the risk of extreme price volatility next winter will increase. Indeed, reaching even

30

3See Towards New Frontiers: The Future of U.S. Natural Gas Supplies (CERA 2001)

last year’s low storage inventory level heading into next winter will prove challenging, and there is little margin for any interruption in what must be a consistent

and aggressive pace of injections into storage.

The beginning of the injection season will prove especially critical this year, because there is little prospect to make up later ground lost in April. Unless injections

start strongly this season, inventories next autumn are not likely to reach even last

year’s record low level, and the market could be exposed yet again to crisis pricing

in colder-than-normal circumstances. As a result, there will be little price relief for

customers until 2002 at the earliest.

Injections this spring will be closely watched for another reason as well: as an indicator of the health of U.S. wellhead supply. If injections are higher (or lower) than

demand and imports would appear to imply, the injection rate will be interpreted

as a leading indicator of the state of the long-awaited supply response in the United

States, just as last year’s low injections early in the season indicated a supply decline. This will only add to price volatility this spring and summer.

Longer-term

While the gas market has proven remarkably resilient in managing the price

shock, many of the underlying market pressures that caused the shock are not abating, principally because the underlying demand pressure in the market from power

generation continues to grow. While electric power and gas supply issues are largely

separate in terms of their underlying causes, but the solutions are interwoven. Specifically, the more that power generation needs are addressed by a wave of new gas

fired power generation capacity additions, the more pressure will be exerted on the

gas market. This means a growing probability that gas prices over the next several

years will remain in a high and broad price band—principally between $3.00 and

$6.00 per MMBtu.

Behind this is a longer term challenge that will test the ability of the gas industry

to draw forth new supply. Specifically:

• The power wave. There is a wave of new gas fired generation being built across

the nation, with the result that annual demand growth for gas is likely to average between 1.5 and 2.0 Bcf per day. This is more than double the pace of

growth in the 1990s.

• The supply challenge. Satisfying this demand pressure will require connecting

up to 20 Bcf per day of net new supply capacity during the course of this decade—more than a 30 percent increase in the size of the gas industry. We estimate that more than $400 billion of capital investment, nearly twice the level

of the 1990s, will be required for production development alone.

• Discouraging signs from traditional producing regions. Recent trends in production in several key regions point to how difficult meeting this growth imperative

will be. There is a gas well drilling boom, but this has occurred in previous

years. Typically such a boom increases production by 1.0 to 1.5 Bcf per day

within one year. When demand growth was lower, this was more than enough

to correct an imbalance and knock prices down, more will be needed this time.

At the same time, key regions, such as the Gulf of Mexico shallow water area

and the Western Canadian Sedimentary Basin, have experienced an increase in

decline rates. For instance, production in the shelf area of the Gulf of Mexico

has fallen more than 5 Bcf per day (30%) since the mid-1990s. In Canada, production growth has slowed dramatically despite record levels of drilling in the

last several years.

With current high prices and record drilling levels, overall U.S. production is

showing signs of a rebound in several promising developments in the Rocky Mountains and parts of East Texas. But this is unlikely to be enough to do more than

offset potential demand growth; it will not return the market to surplus. As a result,

prices are likely to remain abnormally high ($4-6 range) until there is a more significant addition to North American gas supply.

The Importance of New Supply Frontiers

With the limitations on production growth from traditional producing basins, we

must increasingly turn to the supply frontiers to bridge the gap. These tend to be

capital intensive projects with longer lead times and greater market risk. United

States’ energy policy needs to be directed toward facilitating the development of several of these ‘‘frontiers’’. The good news is that these regions are highly prospective

and potentially highly profitable to develop.3 Highlights of these alternatives include:

31

The deepwater Gulf of Mexico. The deepwater Gulf of Mexico is a preeminent exploration and production hot spot. It is already in active development—with exploration pushing the technological frontier associated with development in water

depths of more than 5,000 feet (and potentially as much as 10,000 feet). This area

already is producing more than 4 Bcf per day and has the potential to grow to over

10 Bcf per day—with annual growth exceeding 1 Bcf per day over the next several

years.

LNG imports. With recent or pending reactivation of the four existing LNG import

facilities in the United States, we expect a significant increase in imports, particularly after 2002. With expansions, these terminals could accommodate 3-4 Bcf per

day of total imports—principally from Atlantic Basin suppliers such as Trinidad, Nigeria, Algeria, and possibly Venezuela. Beyond this, several new ‘‘greenfield’’ LNG

facilities have recently been proposed—including projects on the west coast to serve

constrained gas and power markets in California. While these will be challenging

to site, they can provide a foundation for additional growth.

Atlantic Canada gas. Major discoveries in offshore Nova Scotia can add to the recently completed Sable Island/Maritimes and Northeast project—which is now delivering nearly 0.5 Bcf per day to New England. These supplies have the advantage

of being reasonably close to high value eastern U.S. gas markets. With additional

development and major pipeline expansions/looping, Atlantic Canada gas supplies

could climb to over 2.0 Bcf per day.

Arctic gas. The highly prospective regions of the northern frontier and arctic represent a tremendous long term resource for the North American market. In Prudhoe

Bay alone, more than 8 Bcf per day of gas is already being reinjected. Of course,

connecting these supplies will require a major and complex pipeline project—costing

at least $6-10 billion and taking more than five years to develop. Nevertheless, this

could provide a major new source of supply (2.5-4.0 Bcf per day) before the end of

the decade.

Collectively, these frontier sources can account for the majority of incremental gas

supplies in North America. Best of all, they are competitive at prices well below current levels, potentially as low as $3.00 to $3.50 per MMBtu, but they are highly

complicated and capital intensive projects. Timely implementation will require cooperation among industry members, local communities, and governments, but they

have the potential to bring what consumers really need: a low cost, reliable and environmentally attractive form of energy.

Policy Implications

Natural gas can and should become a vital part of the nation’s energy solution.

Long-term policies need to be developed to encourage the environmentally friendly

and balanced development of this resource. We, therefore, encourage consideration

of five long-term policy objectives pertaining to natural gas:

1. Streamline the infrastructure approval process. All of the new frontiers will require significant investment in gas transmission and handling infrastructure—such

as LNG terminals, pipelines and storage fields. Some of these, such as the Arctic

pipeline and LNG, have not been seriously examined for over 20 years—having been

last considered during the 1970s. But they are not totally new either. State and

Federal governments should take steps to ensure the balanced but expeditious consideration of these new facilities.

2. Add economics to the land access issue. Federal land access considerations have

become a polarizing issue in North America. Rather than treating this in black and

white terms, we need to move to a more deliberate case by case approach to land

access considerations—with more balanced consideration of the economic and environmental costs and benefits.

3. Promote environmental flexibility relative to fuels. One lesson of the California

power crisis is the growing importance of fuel flexibility during times of shortage

or constraints. Natural gas markets go through boom/bust cycles with periods of relatively constrained supply. During these periods there needs to be flexibility to ease

emissions restrictions and allow switching to alternative fuels, such as oil.

4. Develop an energy policy with a continental perspective. Many of the most

pressing energy issues for gas and power are not limited to the United States—they

play out against a continental backdrop. Therefore, U.S. energy policy must be developed in dialogue with Canada and Mexico.

5. Bring a portfolio strategy to energy. If we have learned anything from the energy cycles of the past several decades it is the need for diversity. Whether it is

through term contracting for gas and power, mixing new supply with conservation,

or in fuel choice, a comprehensive energy policy needs to promote and balance all

of the resources and options.

32

The CHAIRMAN. Thank you very much, Mr. Placke. I appreciate

that statement.

We will next move to Mr. William Nugent, commissioner of the

Maine Public Utilities Commission. Please proceed.

STATEMENT OF WILLIAM M. NUGENT, COMMISSIONER, MAINE

PUBLIC UTILITIES COMMISSION, ON BEHALF OF NATIONAL

ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

Mr. NUGENT. Thank you, Mr. Chairman. I have provided written

testimony that addresses the topics that my colleagues have already addressed here today. And I would like to take this opportunity to add a dimension to the testimony before the committee,

and would appreciate your including my written statement in today’s hearing record, as if I had read it.

The CHAIRMAN. Without objection.

Mr. NUGENT. What I would like to add to this is, the next thing

I would like to add is, the impact on consumers at the local level.

Maine restructured its electricity market a year ago.

On March 1, 2000, we opened to all customers the retail markets,

retail competition. To serve customers who chose not to choose a

supplier or could not find one, the Maine PUC arranges so-called

standard offer service. Our customers’ bills now show two separate

lines; one for generation service, the other for transmission and distribution service, T&D.

T&D prices have been constant. But as a direct consequence of

national energy price increases, the generation prices in our two

largest service territories rose sharply from March 2000 to March

2001. There is a table, which staff has put before you, which is titled Generation Prices. And it includes in the top left-hand corner

Central Maine Power Company. You will see three categories for

Central Maine and Bangor Hydro.

And with the exception of the residential and small business customers in Central Maine’s service territory, who have a 2-year contract arrived at prior to March 1, 2000, you can see the price increases for the remaining five customer classes whose contracts

were newly arranged to start March 1, 2001. And the price increases, as you can see in the right-hand column, range from 45.3

to 62.2 cents—or percent, I should say.

Generation prices may appear less dramatic when combined with

T&D rates to produce an all-inclusive bill, but there is no disguising for Bangor Hydro’s residential customers a 2.8-cent per kilowatt hour increase in the price in the past year. That is a 20-percent increase when you come down to even an all-in rate, a double

digit, big impact. People are not happy.

To match market circumstances, we let medium and large customer prices vary by season and time of use. CMP’s large industrial standard offer customers will see summer peak generation

prices this year of 14.6 cents per kilowatt hour plus T&D charges.

And a large paper mill can easily use 13 million kilowatt hours in

a month.

The story is similar for natural gas customers. The typical bill

of a customer who heats with natural gas has increased 85 percent

from the winter of 1998/1999 to this coming summer. And equally

important for many of them, the numbers do not stand still. The

33

cost of gas adjustments are coming twice as rapidly now as they

have in the recent past.

Maine restructured its electricity and gas industries because we

believe that in the long run competition will provide Maine consumers with lower prices than traditional cost of service regulation.

We could not responsibly promise lower prices, but we could, and

we did, promise that we would do everything to bring about a

healthy, vigorously competitive market.

And in choosing to restructure, the one clearly unacceptable outcome for Maine commissioners, as well as regulators across the

country, is the elimination of price regulation without competition

to take its place.

A fair, well-functioning, competitive wholesale market is a must.

No amount of brilliance in designing the retail market will correct

defects at the wholesale level.

And remember, these are regional wholesale markets. How much

consumers in any one State pay is driven not by supply and demand in that State alone, but by supply and demand throughout

the region and, to some extent, in adjacent regions. There is but

one hourly clearing price for an entire region.

State commissioners have no legal jurisdiction over retail markets. That authority and responsibility ultimately rests with the

Federal Energy Regulatory Commission, the FERC. Now having established the structure for the retail market, I suppose we State

commissioners could back away and say that whether or not restructuring works is out of our hands. But we cannot do that. We

have to make certain that truly competitive markets, free of market power and gaming, replace price regulation.

As a State regulator who spends, and as do my colleagues across

the country, a great deal of time trying to figure out regional energy markets and how to improve them, I cannot tell you today

that I believe that they are truly competitive, free of market power

and gaming, and that your consumers, as well as mine, are paying

just and reasonable prices.

Now do not get me wrong. Markets are functioning. Markets will

always function. The question is how stably and reasonably will

they operate. They are not yet, in my view, truly competitive and

free of that market power.

Now transforming the electricity markets, wholesale and retail,

is a difficult process. Each regional wholesale market is different.

The markets are still just forming. And the players in the markets

need to know the ground rules in order to make decisions that have

extraordinarily large financial consequences. You and the FERC,

pursuant to the authority you grant it, write the rules. Right now,

in my view, the FERC is overwhelmed by the task before it. The

regional markets need prompt, informed decision making, not

forced compromises among monied interests.

The issues before the FERC have major financial implications for

inadequately represented rate payers, typically residential and

small businesses. For example, the FERC must pay additional attention to the installed capability matter in New England, an issue

which could cost Maine rate payers as much as $90 million a year

and ten times that amount across the New England region.

34

I did a back-of-the-envelope calculation last night as to what that

would mean for households in Maine. My estimate comes up to

about $84 a year per household. And that is just the household impact, not the business impact.

New England continues to wait for the FERC’s decision on complaints regarding last May 8’s—this is 10 months ago now—$6,000

megawatt hour price spike. Some people estimate that the incorrect

pricing at that time resulted in a cumulative, an additional cumulative, $90 million overcharge to the spot market.

At last count, ISO-New England’s website revealed 20 market

rules filed with the FERC that are still pending decision. If we are

to have competitive wholesale markets, the FERC must give

prompt decisions to market participants.

Now let me tell you how fast that moves. When we were buying

supplies to start March 1, 2000, we set a 2-month process to evaluate the offerings and pick a winner. In the wake of that process,

the supplier said: Too slow; markets move faster.

We condensed it from 2 months to 2 weeks. And let me tell you,

that was too slow. And at one time trying to buy supply for this

year, we had suppliers offering to call us, in fact calling us, at

11:15 every day and telling us they had to have our yes or no on

the offer they made to us by 11:20. We had 5 minutes to examine

very complex offers that would commit Maine rate payers for a

year.

And if we have to make more rapid decisions, we need a market

rules, as determined by the FERC, that will do that.

The CHAIRMAN. Could you react that fast?

Mr. NUGENT. We did not to—to some extent, at first blush, when

those prices were instituted, they were not the best prices. But we

did arrange our procedures so that we met at 11 o’clock, were there

to receive the bid that came at 11:15, and had an official notice deliberations of our commission set immediately after we received

them. So we could have, had that been a competitive price.

It is not a usual position for someone that many people describe

as kind of a bureaucrat. Right? I mean, we do not normally move

like that. But we have to, and at least we are trying to do that.

But we also need market rules, which more clearly spell out the alternatives in advance and do so in a way that protects the rate

payer interest.

The CHAIRMAN. Now that worked because they knew that there

was a competitive market out there to bid that power in. If everybody had said no, obviously some people would have been without

energy, but the people that were promoting this would not have

been able to make their deals.

Mr. NUGENT. Yes. Their concern is that they get in in the morning and they scan the availabilities and then they fashion a bid.

I mean, they were acting very quickly, too. This is not a scheme

to squeeze us. Well, maybe it was. But in any event——

The CHAIRMAN. Well, the question is—what they are saying is

whatever the traffic will bear is the price.

Mr. NUGENT. That is right. And that is what we have stepped

up to, as you can see by the price increases.

The CHAIRMAN. That is called a free market.

Mr. NUGENT. I understand.

35

The CHAIRMAN. You know, you pay through the nose if you are

caught in a bind. And the idea is you are supposed to be smart

enough to make sure that does not happen.

Mr. NUGENT. Well, Mr. Chairman, a free market is one in which

people price uncertainty. And to the extent that one writes clear

rules on which suppliers, as well as consumers, can rely, you will

wring that uncertainty out of the market. And right now I think

what is happening in the market and the reason I can say that it

is not fully fair and competitive and the prices are not just unreasonable right now is that there is too much uncertainty.

And I think we, as government have to step up and form those

rules so as to give greater certainty to suppliers, as well as rate

payers. And I think that will lead to lower prices and greater confidence in the market.

The CHAIRMAN. Well, go ahead and tell us how to do it then.

Mr. NUGENT. Well, we are still working on that one, too. And we

hope we would have a continuing dialogue with you and your colleagues. And I think one thing that would help would be two members on the FERC.

The CHAIRMAN. I agree with you.

Mr. NUGENT. And we need a FERC that will also work closely

with State commissioners in addressing regional problems. We are

not special interest litigants pleading before the Federal commission. We are the only representatives appearing there, sworn to

pursue and exceed the public interest in these matters.

To that end, the New England utility commissioners have asked

the FERC to establish a regional market monitoring structure. The

Maine commission has proposed going even beyond that to establish a regional organization that could advise and comment to the

FERC on critical matters here.

We recognize that such an organization’s advice would be fully

subject to final determination by the FERC and might in fact be

rejected. But to the extent that we have an identity of interest, the

public interest, the efforts of an expert, informed, and independent

regional body could help ease the FERC’s burden and aid the development of those competitive markets.

The FERC must perform its role as a fact finder and decider of

these important and complex issues. Every day it does not, rate

payers are paying far more for power than even long-run marginal

costs would suggest they might.

Now finally, a word about the EIA, the Energy Information Administration. Recently it proposed to treat certain power generation

information as confidential and not release it in individually identifiable form. To the extent that State commissions must protect the

public interest and help develop markets, we must have access to

those data with appropriate safeguards. We deal all the time with

commercially sensitive information. And we grant legally binding

protective orders.

But today, when gaming and market power abuse are more possible than ever, to deny those charged with protecting the public

interest access to the information we need to protect that interest

makes no sense at all. That is not in the public interest.

I thank you, Mr. Chairman and members of the committee, for

giving me that extra minute or two past your red light.

36

[The prepared statement of Mr. Nugent follows:]

PREPARED STATEMENT OF WILLIAM M. NUGENT, COMMISSIONER, MAINE PUBLIC

UTILITIES COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF REGULATORY

UTILITY COMMISSIONERS

Mr. Chairman and members of the committee: Good morning. My name is Bill

Nugent. I am a Commissioner on the Maine Public Utilities Commission and First

Vice President of the National Association of Regulatory Utility Commissioners,

commonly known as NARUC. I greatly appreciate the opportunity to appear before

the Senate Energy and Natural Resources Committee on behalf of NARUC and I

respectfully request that NARUC’s written statement be included in today’s hearing

record as if fully read.

NARUC is a quasi-governmental, nonprofit organization founded in 1889. Its

membership includes the state public utility commissions for all states and territories. NARUC’s mission is to serve the public interest by improving the quality and

effectiveness of public utility regulation. NARUC’s members regulate the retail rates

and services of electric, gas, water and telephone utilities. We have the obligation

under State law to ensure the establishment and maintenance of such energy utility

services as may be required by the public convenience and necessity, and to ensure

that such services are provided at rates and conditions that are just, reasonable and

nondiscriminatory for all consumers.

NARUC’s membership has been and continues to be central to the development

and implementation of policy initiatives affecting the nation’s energy industry and

its consumers. For better or worse, the States are the proving grounds for innovations in energy policy. One observation that can be made regarding State energy

policy activities is that one size does not fit all. States and their energy industry

stakeholders are experimenting with many different solutions to the energy challenges that are confronting this Nation. These proposals range from retail competition implementation to demand side and renewable energy incentives to the use of

new technology applications. Clearly, in light of the difficulties being experienced

not only in the Western region, additional solutions are necessary.

As policy makers we all must be cognizant of the fact that, as we explore solutions

to the challenges before us, the main obstacle that the energy industry faces is a

paucity of predictability and certainty. When the right economic or market signals

are sent there is an appropriate corresponding response by the market participants.

If the market participants perceive that the rules are constantly changing and

therefore the market will never develop or mature, the participants will not invest

in development of the market or the production mechanisms to participate in that

market.

HISTORICAL PERSPECTIVE

As the electric power industry developed the technical generation and transmission capability in the early part of this century, the industry was transformed

from a local and urban industry into one capable of producing large amounts of

power at a central location and transmitting this power vast distances. As efficiencies improved prices declined. For most of the twentieth century States have

regulated all aspects of bundled retail electric service and rates.

The inability of the States to regulate prices and other aspects of electricity sold

in interstate commerce under the Constitution and the absence of Federal regulation of those activities created a vacuum of regulation over electricity flowing in

interstate commerce. The enactment of the Federal Power Act in 1935 constituted

the first comprehensive effort to bring interstate aspects of the electrical power industry under governmental regulation.

As a consequence of major power outages during the late 1960’s-early 1970’s and

the energy crisis of the 1970’s, Congress held extensive hearings looking into specific

electricity blackouts and capacity shortages. Much of this attention focused on the

matter of interconnection of utilities as a method of assuring greater reliability and

coordination among utilities. Out of these congressional reviews, more formalized

planning responsibilities and wheeling requirements were incorporated into the

Public Utility Regulatory Policies Act of 1978 (PURPA).

PURPA provided that State public utility commissions should consider and determine whether to adopt cost-of-service and other standards that were contained in

PURPA section 111 and 113. Section 201 and 210 of PURPA provided that certain

qualified facilities (QFs) could sell their power to their host utility at that utility’s

State-determined avoided cost. There are two categories of QFs: cogeneration facilities, and renewable facilities. The Federal Energy Regulatory Commission promulgated general rules in 1980 on avoided cost calculations, and by 1982 all the State

37

commissions had developed specific formulas and methods to administratively-determine and implement avoid costs. One State early on, New Jersey, set its avoided

costs at the Pennsylvania-New Jersey-Maryland (PJM) wholesale market rate.

While other PURPA provisions purported to encourage wheeling of electricity,

they were for the most part ineffective. Wheeling of electricity took place only voluntarily. Wholesale electricity markets were limited, except where State commissions

encouraged and utilities formed tight power pools, such as PJM and the New England Power Pool (NEPOOL). To break down the barriers to a more robust wholesale

power market, Congress enacted Title VII of the Energy Policy Act of 1992

(EPACT).

EPACT provided that FERC could mandate wheeling of electricity. This provided

generators with open transmission access to any wholesale buyer of electricity.

EPACT also created Exempt Wholesale Generators (EWGs). These EWGs could,

subject to State siting and environmental review, build power plants to sell electricity on the wholesale markets.

By 1994, the wholesale price of electricity fell dramatically because of the surplus

of generation capacity. Large industrial customers in high cost States asked their

State legislatures or State commissions to allow retail customers to have direct access to wholesale markets. Today, 25 States, plus the District of Columbia, are in

the process of implementing retail competition laws and/or regulations. These States

have also provided for recovery of stranded costs. Most of these States have also either allowed or required their host utilities to divest themselves of their generation

capacity, in order to break up vertical market power.

Independent System Operators (ISOs) were set up in PJM, California, and New

England to coordinated regional wholesale markets. After the initial success of these

ISOs, FERC required all jurisdictional utilities to organize themselves into Regional

Transmission Organizations (RTO) in FERC Order 2000. These RTOs will help to

coordinate regional transmission systems and regional power markets. They are also

intended to monitor regional markets and plan regional transmission expansion.

State commissions must have a greater role in RTO governance and oversight

than is now provided by FERC Order 2000. In particular, State commissions are the

entities most directly concerned with monitoring local and regional markets because

retail customers are most affected by market power abuses. In addition, the State

commissions typically are the entities that must coordinate and approve transmission expansion and siting consistent with regional plans. State commissions

have consistently expressed a willingness to work with FERC on such regional

issues, but thus far the FERC has taken a position that it can and should preempt

the field. Congress should provide an appropriate State role for regional oversight

of RTOs concerning market power monitoring and transmission expansion planning,

and for other areas where State commissions in a given region can cooperate and

have the distinct advantage of knowledge of the region and the workings of its energy industries.

On the gas side, in 1977 the nation had just suffered through natural gas shortages and curtailments that were caused by an imbalance of supply and demand in

the interstate gas market. This supply-demand imbalance can be traced to the 1954

Philips Supreme Court decision, which interpreted the Natural Gas Act of 1938 to

extend federal authority to regulate the wellhead gas price of gas sold in interstate

commerce.

Congress, as part of the Energy Policy Act of 1978, enacted the Natural Gas Policy Act of 1978 (NGPA) and the Fuel Use Act (FUA). The NGPA provided for phased

deregulation of wellhead gas. By 1985, the wellhead price of natural gas was effectively deregulated. The FUA provided that there would be no new gas-fired electric

generation after 1978. However in 1985 the FUA was repealed. Thus, for seven

years there was a federally mandated moratorium on new gas-fired electric generation.

As the phase-in for deregulation ended, wellhead prices dropped because the supply of gas was more than adequate for the demand and higher-cost gas wells were

shut down. To encourage further gas consumption, the FERC issued FERC Order

436 (in 1985) and Order 500 (in 1987). Specifically, with these two orders, the FERC

provided for voluntary open access to gas pipeline transportation, coupled with offering take-or-pay gas wellhead contract relief for high cost gas. This was the equivalent of allowing for a stranded cost recovery. It is worth noting that end use gas

customers only paid about 11 cents for each dollar of take-or-pay relief, contrasted

with the $1 for $1 stranded cost recovery for electric utilities in FERC Order 888.

During this period, gas supplies remained abundant when compared to gas demand; this was reflected in the continued low wellhead price of natural gas. In

1992, the FERC issued Order 636, which mandated unbundling of gas as a commodity for the transportation service provided by interstate pipelines. Order 636 also

38

provided for pipeline capacity release and a secondary market for released pipeline

capacity. In FERC Order 637, issued in 2000, FERC removed the rate cap on shortterm secondary pipeline capacity. This resulted in the development of a spot market

for natural gas, a secondary market for capacity, ancillary gas services (such as storage), and 40 gas transportation hubs that are market centers for gas.

Since the late 1980s, nearly all State commissions have allowed large industrial

and commercial customers to have unbundled gas service, through which they can

purchase gas transportation from their distribution company and directly purchase

wellhead gas. Currently (either as a pilot program or part of a broader customer

choice program), 23 states and the District of Columbia now allow retail residential

customers to purchase gas directly from the wellhead (typically through aggregators

or marketers).

ENERGY TRENDS AND MARKETS

The following observations are not listed in any particular order because many

build upon each other; they should be considered as a whole, not separately. While

these trends do not provide us easy answers to our Nation’s energy policy challenges, but these observations may help to identify the problems that we must soon

confront.

Natural Gas Trends

Trend 1—Gas demand has increased, production has not kept pace, and there

is no ‘‘quick fix’’

Natural gas wellhead prices more than doubled for the fourth quarter of 2000

compared to the fourth quarter of 1999, and working gas storage was down in 2000

compared to 1999. Additionally, from 1994 through 1997 while the growth in domestic gas reserves exceeded incremental gas production, domestic gas production was

projected to increase by only .05 percent in 2000 compared to 1999 (from 18.66 to

18.76 Tcf). At the same time, nearly all new electricity generation being is gas-fired.

Therefore, a principal reason for the increased gas prices is the increased demand

for gas caused by new gas-fired electric generation (gas peaking turbines and combined-cycle gas turbines). Domestic gas production is likely to increase in response

to higher gas prices, but in the short and mid-term most of the increased supply

is likely to come from existing gas fields in Canada. While it might take only six

months to explore and drill a gas well, it takes years to build a pipeline to transport

it, if the gas does not come from existing or nearby existing gas sources which have

pipelines in place.

These trends are well illustrated in Maine. In 1997 the closure of the Maine Yankee Nuclear Generating Station reduced Maine’s electric generating capacity from

3,100 megawatts (mW) to 2,200 mW. Over the last three years we have added more

than 1,600 mW of new, gas-fired generation, bringing our total to 3,800 mW, more

than double Maine’s peak demand.

This was made possible by the construction in 1999 and 2000 of two new gas pipelines, the Portland Natural Gas Transmission System, which brings western Canadian natural gas through Maine to the New England Market, and the Maritimes

and Northeast Pipeline, which transports gas from the Sable Islands gas fields, 150

miles off the coast of Nova Scotia. These pipes were planned, sited, and permitted

before today’s higher natural gas prices. There is reason to believe that, in response

to today’s market opportunities, M&NE will boost its capacity by more than 50 percent through higher compression. And further increases in production off the Canadian Maritimes may be in the offing.

Trend 2—Convergence

In 1998, over $30 billion in convergence mergers transpired as electric utilities

merged with gas pipelines, gas providers, and local gas utilities. These mergers provide the converged companies an opportunity to vertically integrate and also to market BTUs in the form of natural gas or electricity, whichever is more lucrative. This

allows the energy industry stakeholders to respond to market demand and preference, while providing them an opportunity to hedge against the uncertainty confronting this industry today.

Trend 3—Though the majority of natural gas is still being bought on the spot

market, market participants are increasing their use of risk management

tools

Retail gas customer choice programs have been established in nearly half of the

states, but nearly 60 percent of the natural gas consumed is still being bought on

the spot market. Without hedging, forwards, or futures contracts, most retail customer prices will continue to be volatile placing a heavy burden on many small cusVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
39

tomers. However, in response to this winter’s price increases, gas companies and

their affiliates, as well as gas marketers, are increasingly emphasizing hedging and

other risk management tools.

Trend 4—States have increased their assistance to residential ratepayers

Nationwide, as a result of increased gas prices, State commissions have redoubled

their efforts to inform consumers of the likelihood of increased prices and ways they

can lower their gas bills through more efficient usage. State commissions have also

been re-examining their disconnection policies for gas customers, provided information on the availability of levelized or budget billing, and energy weatherization and

conservation programs. State commissions have also informed customers of low-income energy assistance programs and in many instances have expanded those programs.

Electricity Trends

Trend 1—Customers are demanding increased reliability

Recently there have been an increased number of major utility interruptions as

a result of a lack of generation capacity or the result of problems with equipment

failures at the distribution system. Because of our increasing reliance on electrotechnologies, including the manufacture of solid state electronic silicon chips, there

is an increasing customer desire for fewer electricity interruptions and for higher

quality of power, that is, power without voltage sags, surges, spikes, interruptions,

or harmonics. Internet farms and informational services are particularly sensitive

to power disruptions. As our economy increasingly depends on technologies driven

by electricity, reliability becomes exceedingly important to our economic health.

Trend 2—Reserve Margins

Reserve margins are low in several regions in the country. They are particularly

low in California, where utilities are projected to not have enough capacity to serve

their customers at times if this summer is average or warmer than normal. And at

least according to one major electricity marketer (Dynegy), most regions of the country (the sole exceptions are Texas and New England) will be in a capacity deficit

situation through next year.

Trend 3—Gas fired generation

During 1999, about 80 percent (11,073 mW of the 13,763 mW) of new capacity

additions by utilities and non-utilities were gas-fired. Gas-fired units drew heavily

on gas supplies during the summer of 2000, the season when a time gas utilities

and pipelines traditionally put natural gas in storage. This led to higher gas prices

during the summer, lower inventories last fall, and even higher gas prices this winter. While gas prices have since moderated somewhat, this pattern is likely to repeat itself until increased gas supplies reach the market. While it might take as little as six months for gas production to increase, if new gas supplies are located such

that additional pipeline capacity is needed, the period for new gas supplies to reach

the market could be two years or more.

Nearly all of the additions of generation capacity that are planned for 2000

through 2004 are gas-fired electric generation. Of the 44,410 MW of planned generation capacity, 41,339 (93 percent) are gas-fired. This additional planned electricity

capacity, if completed, will provide upward pressure on natural gas prices. If the capacity fails to come on-line as scheduled, most electric reliability regions throughout

the country will face electricity capacity shortages, if not immediately, then within

the next few years. While it only takes two years for a gas-fired plant to be built

once sited, it takes coal plants several years. Petroleum-fired plants also have high

fuel prices, and currently no nuclear plants are planned. New hydro capacity is limited; and the amount of capacity from waste heat (cogeneration) and renewables is

also limited.

Trend 4—Generation jurisdiction shift from State to FERC

During 1999, three quarters (10,266 mW of the 13,763 mW) of new capacity added

was added by non-utilities. Most of this capacity is being sold on regional wholesale

electricity markets, which are regulated by the Federal Energy Regulatory Commission (FERC). As State commissions allow retail electricity competition, they often

also allow or require generation plant divestiture by the host utility. Most of these

generation assets are acquired by non-utilities and the power is sold on regional

wholesale markets, regulated by FERC.

This is, I believe, the right model. But it requires a clear vision on the part of

the FERC, consideration of the facts on the ground in each of the different regions

of the country, and prompt decisions by the Commission. Delay costs ratepayers—

the people you and we serve—a great deal of money. At stake right now before the

40

FERC in a current controversy over installed capability is $90 million for Maine

ratepayers alone, and perhaps ten times that amount across the six New England

states.

Trend 5—Competitive markets require States to have access to more information not less

State public utility commissions around the country, but particularly in the West,

increasingly are faced with refusals by utilities and non-utilities that own generation facilities to provide data. Without requested data, State regulators are severely

hampered in their efforts to determine whether there is gaming of the market,

through bids that are many multiples of production costs, by withholding of capacity

at or near peak, or withholding of available transmission capacity. State commissions need to know which units (not plants) are down and/or at what output in

megawatts are all units producing. This information needs to be given in a timely

manner as a useful average.

Additionally, the Energy Information Administration of the U.S. Department of

Energy is proposing to aggregate its data form reports and to withhold data that

might be confidential. Without such data, State commissions, State attorneys general, and the FERC will be unable to monitor the markets to ensure the market

is free of market power, and that market rates are just and reasonable.

Trend 6—Nuclear plants are being re-licensed

Ten years ago it seemed certain to many that the operating nuclear plants in this

country would be shut down rather than renew their licenses. But today, two have

been renewed, additional license renewals are pending, and generating companies

are purchasing nuclear units that could not be given away in the late 1980’s and

early 1990’s. Increasingly, nuclear units are seen as a cost effective way to produce

electricity in a competitive electricity market. This trend can continue only if the

Federal government meets it’s statutory obligation to begin excepting spent fuel for

disposal and if the Congress appropriates the necessary monies that America’s ratepayers have already paid into the U.S. Treasury for the purpose of building a nuclear waste disposal facility.

In conclusion, I would like to leave you with one last trend that I will call a ‘‘general energy trend,’’ which I believe is accurate regardless of the energy source. Demand for energy is at an all time high and, if current estimates are accurate, each

year this demand will continue to increase. Prices for energy have followed suit and

increased as well. This trend has placed a severe financial burden on many consumers across the nation.

NARUC believes that the impact of the current energy price increases can be

mitigated, in a number of ways. First, for our most vulnerable citizens, Congress

should provide substantial increases in funding for the Low Income Home Energy

Assistance Program (LIHEAP). We believe that LIHEAP should receive a ‘‘core’’ appropriation of at least $3.4 billion as is proposed in Senator Bingaman’s bill (S. 352)

plus emergency contingency funding of at least $1 billion as is proposed in Chairman Murkowski’s legislation (S. 388 and S. 389).

Second, Congress needs to take action to promote development and encourage the

production of renewable energy sources and technologies. Congress must also balance supply/production policies targeted at conventional energy sources (nuclear,

coal, gas, oil and hydroelectric) with meaningful incentives and policy to encourage

demand reduction and conservation.

Thank you for your attention and availing me the opportunity to testify today. I

look forward to your questions.

The CHAIRMAN. Thank you very much, Mr. Nugent.

Our last presentation will come from Mr. Frederick Hoover, director of the Maryland Energy Administration. Please proceed.

STATEMENT OF FREDERICK H. HOOVER, JR., DIRECTOR,

MARYLAND ENERGY ADMINISTRATION, ON BEHALF OF NATIONAL ASSOCIATION OF STATE ENERGY OFFICIALS

Mr. HOOVER. Mr. Chairman, members of the committee, I am

Frederick Hoover, Jr. I am pleased to testify on behalf of the National Association of State Energy Officials. I serve as an officer of

NASEO and a director of the Maryland Energy Administration, the

State energy office in Maryland.

41

We congratulate you for holding this hearing on energy trends.

As an initial matter, I want to emphasize that we did not get into

our energy problems overnight. And they will not be solved overnight. But as many of you have stated today, we must act.

We know that the general public and most of Congress and various administrations do not worry about energy prices until they go

up. At the State level, the energy offices attempt to keep the focus

on energy and support a balanced set of policies at the State, regional and national levels. The major trend we see, and what you

have heard stated today, is tighter supplies of natural gas, oil, and

other distillate fuels and propane.

Another major problem is price volatility, especially tied to extremely low inventory levels of these products. In addition, the

interrelationship between fuels has never been greater. For example, natural gas is dramatically expanding its use in electric generation. And interruptible contracts in this area put enormous

pressure on heating oil supplies during the winter season. We must

focus on fuel diversity.

Whatever action we take at the national and State levels must

expand our supply mix, increase inventory levels, and reduce price

volatility. Ultimately, extremely high or low prices hurt consumers,

business, and energy industry alike. Supply and demand side

measures should not be seen as conflicting. We need both.

There are certain actions we can take. Many of the elements in

both Chairman Murkowski’s and Senator Bingaman’s bills are positive and should move forward. For example, tax incentives for new

gas pipeline development and energy efficiency tax credits for new

and existing buildings, regional approaches of the type suggested

by Senator Bingaman. Expansion of funding for the low income

home energy assistance program, the State energy program, and

the low income weatherization assistance program are needed.

Creation of a new program for energy efficiency in schools is a

critical need and passage of reliability legislation, included in basic

form in both bills.

The CHAIRMAN. Are you talking about Price-Anderson liability

legislation?

Mr. HOOVER. No. I meant to say reliability legislation.

As Commissioner Nugent mentioned, FERC must take a more

aggressive role in market monitoring, and strong consideration

should be given to the cost of service pricing for wholesale sales in

the West. The market is broken, and insufficient supply is present

in the market.

If generators think that FERC is not serious, excess profits will

be made. The two refund orders and the market orders FERC just

issued head in the right direction but do not go far enough. There

are enough incentives to build powerplants in California and the

West now. It just cannot be ramped up quickly enough. With

wholesale price regulation at FERC, the States are put in a very

difficult position, if market participants do not take the commission

seriously.

The energy emergency function at the Department of Energy

needs to be revitalized and funded. We also support Commissioner

Nugent’s position reflecting the concern on the new EIA proposal

issued on March 13. It would make a great deal of powerplant data

42

confidential and make it more difficult to deal with market problems.

At the State level, NASEO is working with NARUC and our sister organizations representing State environmental commissioners

and State air directors and have begun the difficult process of attempting to integrate our energy and environmental policies, programs and regulations. Greater coordination at the Federal level is

warranted as well.

Finally, there is an enormous disconnect between authorizations

and appropriations. We must set priorities. In addition, information

on the preliminary budget numbers raises concerns on our part

that if we are in an energy crisis, why is the budget not being produced to reflect that? Cuts in fossil energy programs, other than

clean coal, and cuts in energy efficiency programs and renewable

energy programs are inconsistent with a smart, comprehensive energy policy.

We need both short- and long-term solutions to this problem. We

support the pipeline that was discussed by Mr. Placke earlier to

bring natural gas from existing resources in Alaska. And we are attempting to do things at the State level to try and increase the supply of energy.

In my own State, we have a proposal in front of the Federal Energy Regulatory Commission to reopen one of the liquified natural

gas terminals that was mentioned earlier as a way of bringing new

gas supply into the country. The States are doing their part to try

and step up to this. And we look forward to working with the Congress and the administration to solve this problem.

With that, I will conclude and answer any questions you may

have.

[The prepared statement of Mr. Hoover follows:]

PREPARED STATEMENT OF FREDERICK H. HOOVER, JR., DIRECTOR, MARYLAND ENERGY ADMINISTRATION, ON BEHALF OF NATIONAL ASSOCIATION OF STATE ENERGY

OFFICIALS

Mr. Chairman, members of the Committee, my name is Frederick H. Hoover, Jr.,

and I am pleased to testify before the Committee to discuss the views of the National Association of State Energy Officials (NASEO) on current energy trends and

changes in energy markets. I am Director of the Maryland Energy Administration.

I am also an officer of NASEO, which represents forty-nine of the state energy offices, as well as the territories and the District of Columbia. NASEO’s objective is

to support balanced national energy policies and to provide state perspectives on important energy issues.

INTERNATIONAL AND NATIONAL ENERGY TRENDS

Complete energy independence is not going to happen. As the Committee knows,

our energy markets are tied to the world markets, especially in the oil sector. That

is not to say we are helpless as a Nation. On the other hand, we must recognize

that we fought the Gulf War to protect our strategic interests, i.e., access to oil.

OPEC has now cut production by 2.5 million barrels/day this year, which should

push oil prices up this summer. The real cost of energy is much higher than most

of us would like to believe.

At a national level we have an energy infrastructure (e.g., production capacity, refinery utilization, pipeline capacity and terminal storage) that is stretched to its limits. We have seen historically low inventories of important energy products in the

past year, and we have seen tremendous price volatility for more than two years.

Consumers benefited from such downward price swings as $11/barrel oil in 1998,

only to face the reality of historically high heating fuel and gasoline prices a year

or more later. We would argue that energy price volatility, both up and down, hurts

consumers, businesses and the energy industry as each is forced to adjust to boom

43

and bust cycles. For example, when energy prices dropped to the very low levels of

1998, drilling stopped and supply began to tighten. Even with the high prices we

are seeing, new significant supply will take months to come on line.

We saw natural gas prices for the past few years slip to the $2-2.50/mcf range,

and this winter spike to $10/mcf, much higher in the West on the spot market, and

now hopefully settling down to a range of $4-6/mcf for the foreseeable future. This

means the average Midwest household saw yearly heating costs go from $540 to

$950. We are concerned that prices will go up much higher later this year.

Last year it was heating oil that spiked to over $2/gallon. While prices dropped

back, the average consumer in the Northeast is paying approximately $1,000, up

from $760 last year and $520 the year before.

Propane, a critical fuel in rural America for heating and in the agricultural sector

for crop drying, hit its highest levels of over $2/gallon in places like North Carolina.

While propane has fallen back, it is still high.

What does this tell us? Energy price volatility is the big problem for everyone.

Inventories are well below historic levels. Low inventories of a critical commodity,

a logical business response to avoid carrying charges with volatility in place, is not

acceptable for consumers and businesses alike. Many energy economists tell us that

is the way of the markets and is the right way to go. This is not acceptable. Low

inventories put consumers and businesses at risk.

As we look at comprehensive energy legislation, we must examine incentives, both

tax and direct financial incentives, to encourage inventory build-up for all these

fuels. Massachusetts instituted a state-based program this Winter to expand heating oil inventories. With only a few million dollars in state funds, this market-oriented program helped ensure a reasonable level of heating oil in storage so that all

consumers could purchase the product they needed. This program should be examined as a model.

Natural gas has experienced explosive growth as the fuel of choice for new electrical generation. Historically we saw inventory build-up in the summer months in

natural gas stocks so that the fuel could be used for heating in the winter. Now natural gas is running electrical generation to power air conditioning. We need expanded inventories and we need expanded gas infrastructure. This may require tax

incentives to install this infrastructure. Inventories of natural gas stand at 711 billion cubic feet, down by 37% from last year at this time, and 36% lower than the

five-year average.

For example, the construction of a gas pipeline from Prudhoe Bay (where gas production rivals that of the lower 48 states) through Canada is a necessity. Accelerated depreciation for this effort would be a good idea.

The tie between natural gas and heating oil/No.2 oil is also clear. As interruptible

customers shift from higher priced natural gas they shift to No.2 oil, driving up the

price of heating oil. New York established a program to require interruptible customers to hold 7-10 days of supply of alternative fuels in stocks to help protect consumers. This is a good idea. Other states are examining options in this area.

Refining capacity is down in this country. We are concerned with the closure of

a major refinery in Chicago and the impact that might have on higher reformulated

gasoline prices in the mid-west this summer. Incentives for refining capacity expansion is important.

With lower inventory levels across fuels, we are expecting more out of our transportation sector. This is not a perfect market. For example, the Coast Guard has

a reduced capacity to provide ice-breaking services in the Northeast due to budget

reductions. With lower inventory levels, ice breaking becomes a critical necessity.

As we look at Coast Guard appropriations, we need to examine energy infrastructure to ensure that sufficient funds are provided for ice breaking.

The Northeast Heating Oil Reserve should be helpful in ameliorating future supply problems. It is small, but it could help.

We cannot forget about the value of the Strategic Petroleum Reserve. The idea

of tapping the reserve to cover budget shortfalls should never happen again. We

should try to expand the reserve and obviously to buy low, not high. The royaltyin-kind effort for filling the reserve is an excellent idea and we applaud both Chairman Murkowski and Senator Bingaman for supporting it.

In FY ’96, the energy emergency function at the Department of Energy was

slashed. It was done on a bi-partisan basis, with the support of the last Administration. While we complained, energy didn’t seem like a big deal to people. We need

to focus on appropriations for a vibrant energy emergency function at the Department of Energy. We urge you to encourage your appropriations colleagues to support

this effort within the DOE, including regional and national emergency exercises.

These are very helpful. We had states, federal officials and industry in attendance

44

at emergency exercises in New Hampshire in December 2000 and in Nevada earlier

in 2000.

Finally, we cannot forget about the impact on consumers and businesses. Moratoriums on utility shut-offs are coming off in the next two months and individuals

homeowners will be shut-off. This will lead to consumer reaction and political problems. Low-Income Home Energy Assistance (LIHEAP) funds in FY 2001 are drained

in many of the states and the advance appropriations for FY 2002 were eliminated

this past year. Quick action on supplemental appropriations will be critical this

year. Inclusion of the expanded authorizations for LIHEAP, Weatherization and the

State Energy Program in the Chairman’s bill and Mr. Bingaman’s bill is very positive. Senator Bingaman’s amendment on the bankruptcy bill, supported by Senator

Murkowski and Senator Domenici, among others, should also be retained in conference. Now we must move to quick appropriations in this area.

ELECTRICITY MARKETS

You have had hearings on California and the House Energy and Air Quality Subcommittee is holding two hearings this week on the same subject. We need to look

at this situation and understand how it is both a symptom evidencing problems, but

also how it can instruct us how to act differently at the state and federal level, while

recognizing political realities.

We have heard much talk about the ‘‘failure of incomplete deregulation’’ in California. We all recognize problems in the California market, principally the failure

to permit utilities to enter into long-term contracts; but we must try to remember

the context of how we got to this position today. Can this type of problem occur in

other places: yes (but probably not exactly in the same way).

We will not provide comprehensive views on why California got to this point, but

suffice it to say, the twenty-five states that have moved on restructuring, including

my own, are being very careful to look again at our legislative and regulatory mix

to evaluate our risk factors. It should be noted, however, that the 1996 California

legislation (A.B. 1890), probably would not have passed without retail price caps in

place. That is political reality. In many states the trade of stranded cost recovery

for retail competition, required retail rate freezes to pass muster. This was driven

by the widely held view that residential consumers would be the last to see the benefits of competition.

At the state level we recognize that wholesale price regulation resides at FERC,

and that has caused enormous problems. If market participants do not believe that

FERC will examine market monitoring seriously, then a free-for-all of market manipulation may be the order of the day. While I am not here suggesting a definitive

conclusion, one must wonder how wholesale prices can be permitted to escalate

twenty times above the cost of production. While we have not had a full opportunity

to review FERC’s decisions of last week on refunds, we are concerned that California not be a precursor of what might happen in many other jurisdictions, especially

where generation has been divested from incumbent providers.

If the market is not working and prices are set in an un-capped way, consumers

and taxpayers are picking up the tab. The Federal Power Act has not been repealed;

just and reasonable prices, possible cost-of-service pricing and possibly regional rate

caps, should be considered. New generation takes time to bring on line—no amount

of price signals will make it happen in a big way by this summer. The state is moving aggressively to permit new generation and to impose new energy efficiency programs to reduce demand.

Certainly environmental rules should be examined, though it does not appear that

this was a significant part of the problem in terms of power plant development.

Power plants simply were not ordered in California very much during the past decade, because there was not a perceived need.

Whatever is done in California, the west, mid-west, northeast and mid-Atlantic,

must include demand responsiveness measures. These are being initiated by state

officials and Independent System Operators (ISOs), and should be encouraged.

We also must focus on fuel diversity in the generation mix. Over-reliance on natural gas is not healthy. Clean-coal technology is an important component of a national energy policy. We must promote new generation from a number of conventional and non-conventional sources, utilizing state-of-the-art environmental controls.

Another area which deserves attention is in the area of regional regulation. We

have read with interest Senator Bingaman’s promotion of regional approaches. We

understand that energy markets cross state lines. We must do a better job, both at

the federal and state levels, of encouraging regional efforts.

45

As you examine comprehensive energy legislation, at a minimum we would encourage support for the modified Gorton bill (S. 2071) from last year on electricity

reliability. This is basically contained in Chairman Murkowski’s bill. This approach,

with suggestions from the states and PJM, is necessary to establish uniform standards for reliability. This legislation should move. We would also suggest consideration of a public benefits program so that we can address demand responsiveness

issues in a more comprehensive way at the state and federal level. Overall, the electricity sector needs more state-federal and regional coordination and cooperation.

While not directly related to these electricity issues, we also cannot ignore the

transportation sector. With two-thirds of our oil use in this sector, we must act on

transportation. A simple action would be to allow hybrid vehicles (for purposes of

qualifying under EPACT) to clearly fit the definition of alternative fuels. NASEO

strongly supports ethanol production, but also supports hybrid gasoline-electric vehicles that are already available in the marketplace and achieving great than 50 miles

per gallon. These high-mileage, hybrids can significantly reduce our dependence on

imported oil. With the Committee’s assistance, the Department of Energy should

move to include hybrids as an option for meeting state fleet alternative fuel mandates. This no-cost action can deliver immediate and cost-effective reductions in oil

consumption.

The new proposal from the Energy Information Administration (EIA), issued in

the Federal Register on March 13, 2001, would provide confidential treatment for

power plants of data on fuel quantity, fuel quality, useful thermal output and financial data. This must be reversed. It would prevent the states and FERC from effectively evaluating whether market manipulation is occurring in the wholesale and retail electric markets. It is precisely this information that we need today in order for

regulators to monitor market activity.

ENERGY AND ENVIRONMENT CONNECTIONS

NASEO, along with the National Association of Regulatory Utility Commissioners

(NARUC), the Environmental Council of the States (ECOS—state environmental

commissioners) and the State and Territorial Air Pollution Program Administrators/

Association of Local Pollution Control Officials (STAPPA/ALAPCO), initiated an effort almost two years ago to begin coordinating programs, policies and regulations

in the energy and environment area. Just as the federal agencies involved have generally not coordinated well, so the state agencies have not necessarily coordinated.

We held a meeting in March 2000 and again in September 2000, to first understand

the ‘‘vocabulary’’ of the other officials and then to plan programs. This includes pilot

state efforts in a number of jurisdictions, including my own, Maryland.

The concept is that if energy and environmental policy is moved in concert then

better programs will be developed. With the U.S. Supreme Court’s recent decisions

regarding the State Implementation Plans for NOX and the eight hour rule for

ozone, this effort should have new immediacy. In my own state of Maryland, we

have been working closely with the Maryland Department of Environment to promote joint activities.

There are many areas where energy and environment meet: 1) new power plant

siting; 2) fuel sources for generation; 3) siting of gas and electric transmission and

distribution; 4) reliability requirements; 5) use of distributed generation (diesel versus other sources); 6) role of energy efficiency and renewable energy; 7) use of

tradeable credits, such as NOX; 8) environmental requirements for new generation;

9) transportation sector issues, etc. The states are interested in streamlining processes for moving forward in these areas, with an eye on efficiency and the cost-effectiveness of energy management, while recognizing the need for environmental protection. Individual states may have different priorities, but the need for coordination

is there for all. This coordination also extends to regional activities.

Another area where energy and environment meet is in efforts to expand

Brownfields development. This is generally positive. While we need to be mindful

of environmental justice requirements, these sites could be excellent for development of power plants.

We look forward to working with this Committee as well as the Environment and

Public Works Committee on developing rational programs and ensuring state-federal cooperation. We have received support from DOE and EPA in this area, and

we hope this will continue and expand.

AUTHORIZATIONS AND APPROPRIATIONS

As Congress and the Administration move forward in crafting comprehensive energy legislation, we have a few cautionary words. As this Committee knows, the enVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
46

ergy problems we are facing today were not created overnight and will not be solved

overnight. There is also a risk to promising too much.

As we review Chairman Murkowski’s legislation and the legislative proposals of

Senator Bingaman, we are pleased that there are many positive features in both

bills. However, simply authorizing important legislative initiatives does not produce,

in many cases, accompanying appropriations. It would be instructive for us to look

back on the Energy Policy Act of 1992 and review the programs that were authorized and then subsequently not funded.

Many of the tax provisions are positive and should be strongly considered. In addition to some of the elements noted above, we would suggest investment tax credits

for renewable resources.

On the other hand, we must examine budget and appropriations matters. On the

basis of what we are hearing with respect to the President’s budget, due to be submitted on April 3, 2001, we are seeing many troubling signs that those developing

a comprehensive energy policy are not talking with OMB. We hear of proposed cuts

in fossil energy budgets of 30%, with the exception of clean coal technology. We hear

of proposed cuts of 30% in energy efficiency funding, absent a very positive increase

of $120 million in Weatherization. We hear of proposed cuts of 40-50% in renewable

energy programs, absent biomass programs. These budgets should be increasing not

decreasing.

The major energy emergency response mechanism for the states involving federalstate cooperation is funded through the State Energy Program (SEP). In FY 2001

SEP received $38 million, down from $53 million in FY’95. The President during

the campaign proposed a doubling of the Weatherization Program from $153 million

to $306 million and a doubling of SEP from $38 million to $76 million. The President is proposing a $120 million increase in Weatherization, but apparently no increase in SEP. We assume this is either an oversight by OMB, and/or a lack of understanding of the important role of SEP. SEP is the vehicle not only for emergency

response, but for leveraging state and private funds to implement energy projects

in all sectors of the economy, including businesses, homeowners, industry, schools,

agricultural, etc. The failure to support this campaign promise would be a highly

unfortunate event. Senator Bingaman’s bill (S. 352), which increases funding for

LIHEAP, Weatherization and SEP, along with sound changes in the Federal Energy

Management Program and promotion of energy savings performance contracts is

sound legislation, and should also be passed. Chairman Murkowski’s legislation (S.

389) supports similar authorizations for these programs. We support funding of $3.4

billion for base LIHEAP funds and up to $1 billion in emergency funds. Under existing funding, without increases, LIHEAP only serves 20% of the eligible population.

Chairman Murkowski and Senator Bingaman also support a new program for addressing the energy problems of our nation’s schools. This should be authorized and

appropriations should be provided. We have seen dramatic cost increases for schools,

while we all recognize education as one of our highest priorities.

The Interior and Related Agencies and Energy and Water Development Appropriations Subcommittees are under a great deal of pressure. Without increases in

302b allocations and support for higher appropriations levels to accommodate energy needs this year, we will be stepping into even greater problems.

Many suggestions have been made for national energy policy development and a

national energy summit. These are good ideas, but a summit that needs to occur

is one between the energy committees and the appropriators, possibly in the form

of a joint hearing to discuss energy priorities. Otherwise, this national energy policy

effort will be a hollow exercise, in many ways.

We understand there is a proposal to cut the Energy Information Administration’s

budget at DOE, included among these cuts would be reductions in state level data

and cuts in the State Heating Oil and Propane Program (SHOPP). The so-called

‘‘SHOPP’’ allows approximately one-half of the states to cooperate with EIA to share

data and warn of upcoming problems so actions can be taken. This type of cut would

be ludicrous.

MARYLAND

Governor Glendening has taken a leadership role in ‘‘smart growth’’ efforts. This

is a specific area where the interface between energy and environment needs to be

promoted. As we expand our suburbs and outer suburbs we expand our use of single

occupancy vehicles. With two-thirds of our petroleum use in the transportation sector, we must focus nationally and in each of our states, on reducing the impacts of

unchecked growth. This is an energy issue.

The Governor, just this past week issued a ‘‘green’’ procurement, construction and

operating policy for state government. We are attempting to construct energy effiVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
47

cient buildings in Maryland and setting goals for solar and wind power. We are concerned about protecting the Chesapeake Bay and the development of on-site storm

water treatment, conservation infrastructure, natural lighting and the use of recycled materials are non-partisan ideas.

Last year Maryland passed the ‘‘Maryland Clean Energy Incentive Act, which provides tax credits for energy efficient appliances, promotes renewable energy generation and for the purchase of electric and hybrid vehicles. We will be working to push

those credits even harder this year.

CONCLUSION

Thank you for the opportunity to testify. I stand ready to answer any questions

you might have. We are also still reviewing the Chairman’s bill as well as Senator

Bingaman’s legislation. We hope to provide more comprehensive comments at a

later date.

The CHAIRMAN. Thank you very much, Mr. Hoover. I do not know

that I necessarily agree with your generalization on the budget

process.

The pass back has gone back from OMB, but it does not necessarily reflect the congressional budget, nor does it reflect what is

going to be in the energy bill when it is ultimately debated by the

House and Senate, because in both these bills there is significant

assistance for new technology, clean coal, and so forth and so on.

But your point is well made.

I am going to go through the questions briefly. We will allow

members 7 minutes.

But quickly, if we assume that we have an increase in demand

and a shortage of supply, and government ability to respond with

specifics is limited to a snail’s pace, depending on the involvement

of a lot of people in many areas of responsibility, in your opinion

what is the first thing that we should do, one thing that we should

immediately do to try and alleviate this crisis relative to relief?

And relief, to me, suggests that you make a drastic improvement

in your conservation or you do something immediate about supply.

Now, Mr. Hoover, you are talking about reopening that old Columbia gas facility on the Western Shore, which has been utilized

to store gas, but not bring gas in. And the question is, how long

is it going to take you to get permits? And you can answer that

when it comes down to you. But I think that is one of the problems.

But let us take the first question first. What would you suggest we

do right now to get relief?

Do you want a pass, Mary, for 30 seconds?

Ms. HUTZLER. Yes. We do not really deal with total policy issues.

We do analysis.

The CHAIRMAN. We do not either deal with policy issues. We

have to start somewhere.

Okay. Mr. Caruso?

Mr. CARUSO. I think immediately the problem is electricity and,

more specifically, California. But as Jim pointed out, it could be

New York this summer. So I think we need to do something to

stimulate the production of electricity and to remove obstacles and

bottlenecks to——

The CHAIRMAN. That may mean cutting temporarily some environmental oversights.

Mr. CARUSO. It may, yes.

The CHAIRMAN. Are people ready to support that, or do they have

to go in the dark for a while in order to accept it?

48

Mr. CARUSO. And the other side of that, of course, is the price

issue, that the price signals were not appropriate. And that is one

of the reasons we are facing the kind of demand situation that we

are. And whatever can be done to allow appropriate price signals

to be passed to the consumer, that would be another——

The CHAIRMAN. Well, the Governor of California said he could fix

this thing in, what, 3 minutes. He made a statement to that effect,

maybe it was 7 minutes—10 minutes or 12 minutes, by simply

passing through the price and done. Obviously, there is a political

consequence associated with that. But, I mean—go ahead, Mr.

Placke.

Mr. PLACKE. Well, I think in the first instance, Mr. Chairman,

to do something immediate about the only alternative is conservation.

The CHAIRMAN. Conservation.

Mr. PLACKE. In an immediate sense. In the sense of——

The CHAIRMAN. Now let us talk about that in the sense of California. Because what is the incentive for a Californian to go down

and buy a new energy-saving refrigerator when the other one is not

worn out yet? And the California consumer is paying a relatively

low rate that they have been paying for some time, because they

have not felt the price increase. So there is no incentive, is there?

So how are you going force—how do you force conservation under

that scenario?

Mr. PLACKE. Well, passing through the real cost of energy is obviously part of the solution. Without that market signal, consumers

simply will not respond. That is quite correct. Ultimately, industrial users, I think, probably are easier to influence and to monitor

than individual households. But it has to be a broad collective effort.

The CHAIRMAN. So if one were a real critic, and objective critic,

you are not going to force California to conserve unless there is an

incentive, is that right?

Mr. PLACKE. Certainly.

The CHAIRMAN. And the incentive is to pass on the true cost of

power, which California’s political structure refuses to do.

Mr. PLACKE. Then the problem is just going to drag out, sir.

The CHAIRMAN. The problem will drag out.

Mr. Nugent?

Mr. NUGENT. Mr. Chairman, I do not think there is any one single thing. You have to attack this on a number of fronts. This

is——

The CHAIRMAN. But we have to get started. We cannot even figure out how to get started.

Mr. NUGENT. This is too urgent a problem. Obviously, you need

some additions to supply, but they take time. I think passing

through the price signals, as Mr. Placke has indicated, is a very appropriate response. And you can look to Maine for having done

that. Fourteen cents for large industrial users on peak, 50, 60 percent increases in the price of generation.

We have no deferrals in the rates to be recovered, or the bills to

be recovered, to pay to generate it. So the signals are out there,

and I expect that we will see the public responding.

49

On the other hand, we, as regulators in government, must give

mechanisms to the public which enable them to have the information in real time and to be able to respond. Large users in Maine

are doing that. They have suspended operation at certain peak

hours, sold the obligations they had back into the market. They

have benefitted, and they have also eased the ultimate energy

clearing price spike in the region.

The CHAIRMAN. And you have no caps.

Mr. NUGENT. There is—we have no caps. New England has a $1,000 cap, which I think is not an unreasonable one. I mean, you

are not going to get hurt bumping your head too often on $1,000.

It happened on maybe one or two—— The CHAIRMAN. $1,000 per—— Mr. NUGENT. $1,000 per megawatt hour in the regional market

clearing price. It exists up till April 1. We are looking for it and

expect it to be extended. That—this is kind of reinsurance or catastrophic insurance. It keeps you from being really mortally wounded, but enables the market to function and to give the incentives

to producers to go out and build new supply. They apparently have

that inducement. Maine increased its generating capacity in the

last three years by 75 percent. And we are not big, but we built

twice as much as California did.

The CHAIRMAN. That is big in comparison. How close have you come to that $1,000 in bids?

Mr. NUGENT. I do not know that off the top of my head. I will

get the information for the committee, if you care. I will.

The CHAIRMAN. Now that is electricity, your capacity. Was it gas

fired or—— Mr. NUGENT. Yes. We have had the benefit in Maine, which has

been at the end of the road and down a little narrow path when

it comes to gas. We have two new pipelines, 22-inch, 24-inch pipelines, with Canadian supply. And we have put in five new generators of more than 1,600 megawatts within a two- or 3-year period.

The CHAIRMAN. I am not going to ask you whether you recommend $1,000 for California. But clearly, there are some things

that are working out there. We look at Pennsylvania sitting there

with both retail and wholesale caps. But they are so high that

there is enough flexibility, so that they have been able to attract

companies to come in and put in generation. And now they have

adequate generation, and it works.

Mr. Hoover, did you have——

Mr. HOOVER. The only addition I would make to the conservation

issue is, in my own State, as a way of trying to move the market,

the question you asked earlier about how do you get people to buy

these higher efficiency appliances, we eliminated the sales tax on

Energy Star appliances in the State of Maryland.

Retailers can now say to consumers, if you buy this appliance

and upgrade, not only will you save money over the long term in

the operation of it, but, you know, the State of Maryland is not

going to take their traditional cut from the price.

We have a number of programs to try and encourage people to

do that. We tie a lot of our energy efficiency situations to our environmental ethic with the Chesapeake Bay, because of our concern

about air pollution to the bay and the amount of money that ConVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
50

gress and the State of Maryland have spent in trying to restore the

Chesapeake Bay.

We use a combinational approach to try and give financial incentives for people to do the right thing, but also to appeal to their

better nature.

The CHAIRMAN. I think it was Mr. Caruso’s reference—and my

time is almost up. But the implication that people really do not

care where the oil comes from, as long as it comes.

You gentlemen, Mr. Nugent and Mr. Hoover, come from parts of

the United States that, from the standpoint of developing oil in my

State of Alaska for the most part are pretty much opposed. The environmental activism has been very prominent.

And as a consequence, those of us who produce the oil and feel

we can do it safely are rather provoked, if you will, by the observation that we have, that you really do not care where the oil comes

from as long as you can get it.

You just do not reflect on whether it is coming from the

rainforests of Colombia, where there is no environmental sensitivity, but since you are motivated by an environmental concern, you

do not question the legitimacy of that concern, you just say no.

So, you know, from the standpoint of the Northeast, you are very

dependent on heating oil. Where it comes from is incidental. Am

I missing something there, or is there an old adage that charity begins at home, if indeed you can keep your house clean?

Mr. NUGENT. No. I think you fairly characterize the problem. The

public and its views on things is not always consistent.

The CHAIRMAN. I would agree with you there. Well, if you can

enlighten me, you have more time. If not, I will go to Mr. Hoover.

Mr. HOOVER. Well, I know in my State, I mean, it is difficult to

site energy producing facilities. I mean, we have a relatively small

coal industry in the western part of my State. Now we have

brought on line a coal plant. The people in that part of the State

actually saw that as a great benefit because of the economic impact, and we were able to bring it on line and mitigate the environmental consequences of it.

I do not think that people are to the extent that they do not care,

because I think they understand the geopolitical concerns that we

have about energy production. I mean, a lot of American citizens

sent their sons and daughters to the Persian Gulf to defend those

supplies and understand the commitment we have to make there.

I think overall the American people feel that we need a balanced

approached to this and do not think that it is any one region’s responsibility to take care of our energy needs.

The CHAIRMAN. Senator Bingaman.

Senator BINGAMAN. Let me ask Mary Hutzler about the criticism

of EIA that we have heard here about your decision to keep data

on powerplants proprietary. I think most of the trend in government seems to be toward more transparency. This seems to be an

aberration from that.

Could you explain how that decision was made or whether that

is still subject to review or what your position is?

Ms. HUTZLER. In competitive markets it can be detrimental to

producers if certain statistics are published on an individual basis.

So what we do is we aggregate these statistics and release them

51

in an aggregated fashion. We do this in the oil and gas area, for

instance. And this would be following up in the electricity area in

the same way.

Now those forms are out for review. There was a public register

notice in March, earlier this month. And I do encourage people to

comment, and we could still discuss the issues. But we do have to

deal with the issue of confidentiality. Otherwise we do not get the

data, and without the data, we could not even provide aggregate

statistics.

Senator BINGAMAN. As I understand Commissioner Nugent’s

point, the State utility commissioners need that information. Even

if they have to obtain it on a confidential basis, it is useful for them

in making their decisions. Is that something that is being considered?

Ms. HUTZLER. That is something that we can look into. There

have been Federal Government agencies who have asked us for certain data, which we were allowed to release. So we will evaluate

that.

[The information follows:]

Over the past three years, the Energy Information Administration has been evaluating its data collection forms in light of the many changes occurring in the electric

power industry. It particular, EIA wanted to assess the impact of these changes on

its data confidentiality policy.

From our analysis of the industry, we have determined that the wholesale trade

of electricity and the retail sales in a number of States have become increasingly

competitive. Because of this, EIA is proposing to not disclose data that could result

in competitive harm to companies participating in competitive electricity markets.

This is consistent with the Trade Secrets Act and Exemption 4 of the Freedom of

Information Act. Therefore, EIA has proposed to hold the following types of information confidential: quality and quantity of fuel receipts and consumption, fuel stocks,

useful thermal output (i.e., heat or steam), plans (i.e., retirements, capacity additions), selected financial and cost data, heat rates, amount of purchased power,

amount of power exchanges between companies and information from energy service

providers who only provide electricity. While EIA is proposing to hold the individual

data confidential, we would still make aggregated data available to everyone.

Our proposal for changes to our data collection forms and confidentiality policy

was published in the Federal Register on March 13, 2001, for the express purpose

of soliciting comments from all concerned parties. The comment period lasts until

May 11, 2001. After that period closes, we will evaluate comments and determine

how to best address them. We will then submit our final proposal to the Office of

Management and Budget for its approval. If someone disagrees with our proposed

confidentiality policy, it is important that they tell us why a particular data element

is needed in the public domain, despite possible competitive harm, demonstrate that

public disclosure would not result in competitive harm, or suggest measures which

would permit release while mitigating competitive harm. We can then consider

those comments in our final evaluation.

It should be noted that over the past three years, EIA has met with a variety of

stakeholders to obtain their input to our evaluation process. This was done using

several methods. First, 11 focus groups met to discuss what information EIA should

provide in the future. These groups included State and Federal officials, investorowned utilities, publicly owned utilities, media, nonutilities and renewable energy

companies, investment bankers, consumer organizations, academic consultants, and

congressional staff. In addition, EIA staff has briefed over 20 organizations representing these types of groups on our project. In particular, the National Association of Regulatory Utility Commissioners and the National Association of State Energy Officials participated in the focus groups and were briefed on a variety of occasions on EIA’s work. While the proposal that EIA is now sharing with the public

was not made public prior to March 13, it was developed with input from all interested parties and we look forward to hearing their comments on it.

Subsequent to the hearing, Commissioner William Nugent of the Maine Public

Utility Commission was contacted by ETA. He explained that they are in the process of collecting comments from within his agency, from the other New England

public utility commissioners and from members of NARUC. In their reply, he plans

52

on explaining the needs of the States for the individual data elements that ETA proposes to hold confidential. ETA offered to give a technical briefing to a NARUC subcommittee on the ETA data collection forms to help them better understand how

to use ETA electric power data. Commissioner Nugent will investigate the need for

such a briefing and coordinate with ETA.

Senator BINGAMAN. Okay. I have sort of a printout of an article

in Megawatt Daily, dated March 14, entitled ‘‘Deutsch Bank Sees

Excess Capacity by 2005.’’ It goes on to say ‘‘Power generation capacity will be tight across the United States for the next few years,

but the Nation as a whole should be faced with a glut of power by

2005, according to this new analysis.’’ I just wondered, Mr. Placke or anybody else or Ms. Hutzler, any

of you, do you agree or disagree with this analysis? Are you familiar with it?

Mr. PLACKE. I am not familiar with that specific article, Senator.

But in general, it sounds like it is consistent with our analysis

that, as I indicated, we anticipate that 300 gigawatts, which is 40

percent of our capacity nationally, will be added over the next 5

years. In part, I suppose, as usual, it depends upon the definition

of excess or surplus.

I think California illustrates more than adequately the point that

you cannot program your generating capacity to equal exactly demand. There has to be a cushion in electric power, unlike other

forms of energy where you can gauge it more closely to the rate of

consumption. But power demand is a variable. It varies with season and other conditions. And there has to be a cushion.

Now I do not know whether that definition includes a cushion or

if it does not. But I do not think we would regard the additions to

generating capacity as excessive or likely to produce an unwanted

surplus. And I think one of the keys to gauging that is the reaction

of investors themselves. Investors do not have a habit of building

plants that are not going to produce a profit.

Senator BINGAMAN. Yes. This article does go on to say that by

2004 they project that the national average capacity reserve will be

about 15 percent.

Commissioner Nugent, let me ask you about—we have a bill that

was developed by two of our members here on the committee. Senator Feinstein and Senator Smith jointly have put together a bill

to try to deal with the situation in California. I did not know if you

have had a chance to look at that.

The bill directs FERC to control wholesale prices of power coming into the State contingent upon the State passing through a significant portion of that cost to the rate payers in the State. Have

you had a chance to look at that? Have you taken any position on

it?

Mr. NUGENT. No, sir. I have not seen it.

Senator BINGAMAN. That would be useful to the committee, I

think, if you do get a chance to look at that legislation.

Do any of the rest of you, who have looked at the bill, have a

comment on it? I would be anxious to get any expert advice we

could on that issue.

Let me also ask any of you to respond. I know several of you

criticized FERC. Is there something that we need to do with regard

to the Federal law governing FERC to allow them to consider demand responsiveness in their review and FERC’s review of wholeVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
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sale rates? Is there something that we should be doing to change

the law related to FERC? Or do you think that the law is not the

problem and that they have just not aggressively enforced or implemented the authority they have?

Mr. Nugent?

Mr. NUGENT. Mr. Bingaman, I am unaware of any shortcoming

in the Federal law with regard to demand responsiveness. New

England has mounted a demand responsive program for its wholesale markets. And I will go back and ask the people who know it

in greater detail if there are any points at which that was abrading

against Federal law limited in its effectiveness by that.

But as a matter of fact, we do have buy-backs that are possible

when one is able to forecast moments of peak demand coming. So

I think we are able to operate all right.

Senator BINGAMAN. Okay.

Mr. Hoover, I think you alluded to this perhaps. But we do have

some provisions in this bill that I have been working on with other

Senators that try to move us toward this region-wide coordination

and planning process. Any of you have thoughts as to changes we

need to make in Federal law to accomplish that more effectively?

Mr. HOOVER. The proposal that we have seen in your bill we

think goes in the right direction to do this. As these boundary lines

sort of disappear as electricity starts going across the country, I

mean, a regional approach to doing this is going to be the only way

to really figure this out. I mean, States cannot become islands in

and of themselves, either from an electricity supply standpoint or

the demand standpoint.

So the communication and coordination among State regulatory

commissions and the regional power authorities is going to be a necessity.

Senator BINGAMAN. Do you have any thoughts on this, Mr.

Nugent?

Mr. NUGENT. I think cross-regional effects are important as well,

because while we may be able to perfect the market within the

New England region, if market power is being demonstrated in adjacent areas, or dysfunctional elements are apparent in those adjacent areas, you can see suppliers flee our market, driving our price

up, to take advantage of even higher prices in adjacent regions.

We have to give some more attention and look forward to continuing our——

Senator BINGAMAN. Mr. Placke, you mentioned there are likely

to be power shortages in New York this summer, particularly in

the New York City area, not because there is inadequate power,

but because of transmission problems getting the power from New

England to New York. What, if anything, can the Congress do or

should FERC do to solve that problem? Is there anything?

Mr. PLACKE. Again, I am afraid there is probably not a very

short-term solution. But in the longer term, facilitating the construction of transmission facilities, which means expediting the

permitting process and perhaps dealing with the right of eminent

domain, I think, are the areas that I would point to.

Senator BINGAMAN. You believe those permitting problems and

the difficulty of getting eminent domain has been the major factor

that has kept that transmission capacity from being built.

54

Mr. PLACKE. I would say that—I would look to those prospectively. I think those are the areas that could expedite a solution to

the problem.

Senator BINGAMAN. Okay. Anyone else have a comment on that

point?

Mr. NUGENT. There are moves to meet that need. There are proposals for building generation, both within the New York City load

pocket and out on Long Island. And there is also a proposal for a

merchant transmission line to be built, my recollection is, between

New Haven and the central part of Long Island to bring power in

that way. And they are working through the siting problems, you

know, through the New Haven oyster beds, right now.

It is a value judgment as to whether you want to ride roughshod

over those interests or whether you want to give them a full hearing. I am not sure how I would suggest you intervene at this time.

I think the problem is being worked.

Senator BINGAMAN. Thank you very much, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Bingaman.

I believe, Senator Craig, you were next, and then Senator Thomas.

Senator CRAIG. Thank you, Mr. Chairman.

Let me thank all of you for your testimony. You have added a

great deal of information to and thought to our concerns and our

thought processes, and we appreciate it. A couple of questions and

appreciate your reactions. Mr. Nugent, you struck a sensitive positive chord with me when you talked about regional concerns. Everybody is focused on California at this moment. California is dragging the whole Pacific Northwest down with it. It is very much a

regional problem. California is not feeling the price shock, but California’s price shock is hitting the wholesale market in the Pacific

Northwest. And Oregon and Washington and Idaho’s prices are

going up dramatically.

The bill that Senator Bingaman mentioned and produced by Senator Feinstein and Senator Gorton is a regional bill, would have a

regional impact. I know he mentioned California. It is not just California that it would impact. It would be a regional hit or positive

or negative, I think. And so I would appreciate you looking at it.

I mean, obviously it is sensitive, it attempts to be sensitive, to the

short-term reality.

And, of course, in the Pacific Northwest we remain fairly heavily

hydro. We have something else going on out there this year. It is

called a drought. And our hydro capacities could be substantially

lessened, even with just a slight warming trend in the L.A. Basin

and a little pull-back by Pacific Northwest production in the last

week, we can see what happens. Wait until it gets hot this summer, if California does not get real.

And I agree. I do not know how we get California to conserve.

Finally, I heard someone out there talking about in the 24 hours,

but the marketplace is not reacting. Testimony from the investorowned utilities would demonstrate to us that quite the opposite has

happened.

As they have leveraged down their retail price and then capped

it, conservation went away. And it is not back yet in California,

and it will not be back until they begin to feel the bite of the marVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
55

ket in part, I would have to think. And of course, that is the reaction that that legislation deals with.

So I would appreciate your reaction to that. And as a State PUC

person, I think that would be extremely valuable for us.

Mr. NUGENT. Senator Craig, I am in touch from time to time

with my colleagues, Mr. Alan Becker in Wyoming, those in Montana, Idaho, and throughout the Pacific Northwest. But for me to

give testimony or to offer it would be really somewhat hearsay evidence. We will work to get their views and try to give you the comments you seek.

Senator CRAIG. Well, I think all of us—I have been somewhat resistant to restructuring. Coming from our least-cost state with a

hydro base, I did not see that our costs could go down much further. And now, of course, quite the opposite is happening. They

could go up pretty dramatically.

But in other words, my point is, and the point you have made,

is that regional realities are there. And something happening outside your State clearly has, could have, a substantial impact in

your State. And that is appreciated.

You mentioned in the State of Maine that you had new gas capacity, new gas pipelines, and therefore new gas generation. Do

you remember how long it took from the time the gas pipelines

were an idea until they were in place and functional?

Mr. NUGENT. Well, some of these ideas go back 15 years or more.

Senator CRAIG. But I mean—— Mr. NUGENT. But as a practical matter, I would say it was about

3 years.

Senator CRAIG. It took you only 3 years to site those and get it

out of the ground.

Mr. NUGENT. You are dealing here with—when you go back 15

or 20 years, you are dealing with Sable Island offshore production.

To some extent what happened was the economics of offshore production coming down because of experience gained in the North

Sea. So things became economically possible.

At some point, the energy companies pulled the trigger and said,

we can make a go of this. And it first appeared, really, with us in

1996 or 1997. And the lines were in place and operating by 2000.

Senator CRAIG. Because I know in an effort to bring gas into the

Northeast, especially in those areas where they are still dependent

upon oil for space heating, several of those gas pipeline companies

finally just walked away. They could not cost it out. It became so

economically unfeasible, based on environmental concerns and regulations and—— Mr. NUGENT. Well, actually here I think you have an illustrative

contrast between the siting, which is controlled by the FERC in the

gas area and what goes on in electricity. And my sense is that once

the decision was to go forward with that pipeline that those problems were worked through in fairly reasonable order. And we are

including in that 3-year period construction. That is a year and a

half.

Senator CRAIG. No, I am aware of that. That is why I asked you

the question. And that is why I thought 3 years is short term, really.

Mr. NUGENT. Yes.

56

Senator CRAIG. And you are right. The FERC, in fact, it appears

they were quite busy trying to front load some of these things. And

we think that could change a bit now. And certainly we are encouraging that the FERC get under way with full employment. And I

think it will get there fairly quickly.

Mary, a question of you, and it comes from—well, John Kane of

NEI sent a letter to Representative Boehlert on March 14 relative

to your testimony of February 28 before the House Science Committee. Mr. Kane suggests that EIA is modeling nuclear in such a

way that disadvantages nuclear with respect to coal and natural

gas. Are you familiar with the letter? And how do you respond to

Mr. Kane’s assertion?

Ms. HUTZLER. Yes, I am familiar with the letter. We do not believe that we are modeling nuclear to be in a negative situation

compared to gas and to coal. We looked at nuclear plants in terms

of what it would cost to keep the capacity operating. We cost that

out, and we take a look at it in terms of what the competition is,

that is building a new plant. Combined cycle plants today can be

built for $400 to $500 a kilowatt.

So when you look at the economics of it, we do retire some of the

existing nuclear plants. But we also retire some of the existing coal

and oil and gas steam plants as well. As a matter of fact, our forecast has about 70 gigawatts of retirements. And more of that is in

the fossil category than it is in the nuclear category.

Senator CRAIG. Obviously, your figures and your modeling is important to us. And all of us, not all of us, some of us are of the

belief that in the pursuit of clean energy that nuclear can play a

role, and an increasing role.

And as these costs go up, if we can do new generation nuclear

and license it, site it and license it, more expeditiously, then those

costs come down. In fact, there are some interesting models out

there now that can show that some of these current operating

plants are actually operating below costs of other types of energy.

And I think that is why we are concerned.

Kane asserts that you are not factoring in future clean air compliance costs. Is that true?

Ms. HUTZLER. In our Reference Case, we look at current laws

and regulations. We do look at the Clean Air Act Amendments.

Anything that has passed is included where the specifications are

such that we can represent them.

Senator CRAIG. Then you can factor them in.

Ms. HUTZLER. Right. Right.

Senator CRAIG. But any additional or any new plants would not

be a factor there yet.

Ms. HUTZLER. Not in our reference case. We have done other

studies at the request of House congressional committees. But in

those studies, they have asked us not to build new nuclear capacity.

Senator CRAIG. Mary and gentlemen, thank you very much.

The CHAIRMAN. Thank you, Senator Craig.

Senator Thomas.

Senator THOMAS. Thank you, Mr. Chairman.

Mr. Nugent, I do not quite understand your arrangement in

Maine. Have you re-regulated at all? What is your process?

57

Mr. NUGENT. Effective March 1, 2000, all or the two large investor-owned utilities had to divest themselves of their generating—— Senator THOMAS. Why? Why did they have to?

Mr. NUGENT. Because—and they would continue to operate as

transmission and distribution companies. And anyone, any licensed

seller of generation, could sell to any customer they chose.

Senator THOMAS. So that is your State regulation.

Mr. NUGENT. It is State regulation. And the attempt here was to

provide a level playing field for all sellers of generation. There was

a concern that a special relationship between one seller and the

transmission and distribution company would unfairly influence

that market and would inhibit the entrance of other players.

Senator THOMAS. Well, it has not been a market. It has been controlled, has it not, by your PUC?

Mr. NUGENT. I mean, it is fully open. And it—— Senator THOMAS. I mean, I am talking about where it was. You

had the distribution and generation were provided by the same

person, and they serve—— Mr. NUGENT. Transmission and distribution are provided by one

company. That is correct.

Senator THOMAS. And they—no, and generation.

Mr. NUGENT. Well, historically, prior to March 1, 2000.

Senator THOMAS. Okay. So then they serve their service area

under a price that you all establish.

Mr. NUGENT. That is correct.

Senator THOMAS. You separated it so you could have competition,

then, among the wholesale.

Mr. NUGENT. Correct.

Senator THOMAS. Then I do not understand your role in the pricing of it, if you wanted competition.

Mr. NUGENT. We have no role directly on the pricing between

customers and competitive energy supplies. But believing that

many customers, typically residential and small business customers, would either not choose or would be unable to find a

supplier——

Senator THOMAS. Well, it is not up to the customer, is it? It is

the distribution system, is it not?

Mr. NUGENT. No.

Senator THOMAS. You mean each customer gets to select his own

wholesale supplier.

Mr. NUGENT. Every customer in Maine has the right to go out

and find his own competitive energy——

Senator THOMAS. So you essentially have tried to deregulate it

and give choice.

Mr. NUGENT. That is correct. And we have a default category for

people who do not.

Senator THOMAS. But then you still have your position of controlling the wholesale price.

Mr. NUGENT. We do not control the wholesale price.

Senator THOMAS. Then why do you have to find out 11:20 and

do something by 11:50?

Mr. NUGENT. That is for the category of customers who make no

choice and still want to be served. I mean, there are a lot of people

out there who do not understand this and do not want to be in the

58

middle of it, others who cannot find a supplier. So to cover them,

we have a default category.

Senator THOMAS. I am sorry. I do not understand that. If they

cannot find a supplier—they have a supplier, do they not? If they

do not choose to do it differently, they have a supplier.

Mr. NUGENT. As selected by the State pursuant to

competitive——

Senator THOMAS. So you are halfway re-regulated.

Mr. NUGENT. It is not a regulated price. It is the market price

we find.

Senator THOMAS. Okay.

Mr. NUGENT. We go into the market, and we try to get the best

price. But it is the market that determines it.

Senator THOMAS. It does not sound like you are really into the

market business, but that is okay.

Mary, you are part of the Energy Department, correct?

Ms. HUTZLER. Yes.

Senator THOMAS. As you went through this and we are at $1,

$1.50 gas, was that a market message? Did they share that with

the department? Would you not imagine that production would go

down at $1.50 wellhead price?

Ms. HUTZLER. Yes, that is correct.

Senator THOMAS. What did they do about it?

Ms. HUTZLER. What did the Department of Energy do about it?

Senator THOMAS. Yes.

Ms. HUTZLER. I cannot speak for the Department of Energy.

Senator THOMAS. Are you not part of the Department of Energy?

Ms. HUTZLER. We are an independent agency within the Department of Energy. We supply data and forecasts, but we do not deal

with policy issues.

Senator THOMAS. I see. We have not had a policy on this then,

have we?

Ms. HUTZLER. On natural gas pricing?

Senator THOMAS. On energy.

Ms. HUTZLER. I believe the policy of the last administration was

competitive markets, and that is what they have indicated in their

testimony.

Senator THOMAS. Okay. I do not quite understand why you use

storage as the component, as opposed to production.

Ms. HUTZLER. Storage is an indicator of price volatility. If storage

levels are very low, then that means that to meet your demand;

you either have to produce or you have to take more from storage.

And as storage gets lower, your prices are going to go higher.

Senator THOMAS. You would not have storage if you did not have

production, would you?

Ms. HUTZLER. Well, that is correct. You do need to produce it.

But what is happening now is we are withdrawing from storage

faster than we are producing. Our production is not keeping up

with demand.

Senator THOMAS. So production is the key.

Ms. HUTZLER. All factors, all those factors, are keys.

Senator THOMAS. Okay.

Ms. HUTZLER. But if you want to look at pricing——

59

Senator THOMAS. It is interesting that you list storage all the

time, when there is relatively little storage available often in a gas

field. And indeed, if you do not have a place to go with it, you just

do not produce it. So storage is kind of iffy, is it not?

Ms. HUTZLER. It depends on what factor you are looking at. If

you want to look at price volatility, it is an extremely important

factor.

Senator THOMAS. Storage went down there, and the price stayed

the same for the last several years until recently.

Ms. HUTZLER. You are talking about natural gas markets?

Senator THOMAS. Right.

Ms. HUTZLER. Yes. We need to go back to the chart and look at

the precise timing. But I believe that storage was fairly high during the period when production was up. But then we had the severe weather patterns.

Senator THOMAS. Yes.

Ms. HUTZLER. And that weather pattern meant that demand was

higher than what was anticipated.

Senator THOMAS. Did you not mention 1,400 3-megawatt plants?

Ms. HUTZLER. Fourteen hundred 300-megawatt plants.

Senator THOMAS. Three hundred megawatt plants.

Ms. HUTZLER. Right.

Senator THOMAS. And so you are expecting that they will be gas

fired and relatively small.

Ms. HUTZLER. When I gave that statistic, it was an average statistic. These plants will vary in size over time. But it is one way

for me to show the magnitude. The total capacity that we are talking about is 413 gigawatts, 92 percent of which we think will be

gas fired.

Senator THOMAS. I guess, you know, what we really—certainly

we have an immediate problem. But it seems like what we ought

to be doing is looking at the future a little bit. And if the gas price

is what it is now, it is interesting to see. It seems coal is our best

opportunity over time, I think, for stationary generation. And yet

we seem to not be dealing with that at all. We just seem to think,

well, we are going to go for gas. And that was kind of the plan

when gas was $1.50 at the wellhead. It is not now. And it is interesting that that is your projection.

Ms. HUTZLER. When we did these forecasts, we did not anticipate

the very high natural gas prices that we are seeing right now in

2001. We were very close to the price that we anticipated in 2000.

We were about 20 cents from the actual price in that year.

The coal plants that we do build are built in the earlier time horizon of our forecast because of the higher gas prices right now. But

we do believe that the resources are there for the natural gas

prices to come down over time.

And because of the resources and because there are other benefits for natural gas, which include the lower capital cost, the friendlier environmental issues associated with natural gas, the shorter

lead times to construct and also to get permits, that natural gas

is going to be favored in markets that have deregulated electricity.

Senator THOMAS. Well, I think that is a great thing, but I do not

think that looks ahead. We really ought to be looking at our most— our greatest volume resource, which happens to be coal. We can do

60

some more research on the cleanliness part. I think if you talk

about a 2,000-megawatt plant, the idea that it is cheaper is probably not true.

If you want to build a small plant, then gas is probably easier.

If the idea is going to go to close to the market instead of having

a national transmission grid, then perhaps that is right. But we

ought to be talking a little bit about what we want, where we want

to be over time, do you not think?

Ms. HUTZLER. Our forecasts, as I mentioned, are based on current law and regulations and also based on current economics. So

based on those economics, as we see them, that is where the future

will be over the next several years.

Senator THOMAS. Well, I hope all of us will give some thought

to the future, as to how we see it in 15 years, what kind of energy

is going to be the most useful for us, and where can we do it, where

can use a flexible energy source like gas, as opposed to coal. Some

of these kinds of things, I think, are part of the mix, and we really

ought to be—and we need people like you in research to be able

to at least stimulate some thought in those kinds of directions, it

seems to me.

One more question. What about the Middle East? Did we work

as closely as we could? Do we not have any leverage with OPEC?

Mr. PLACKE. With OPEC as an organization, I do not think so,

Senator.

Senator THOMAS. Of all the things we do for the countries in

OPEC, and we do not have any leverage.

Mr. Placke. No. The rest of my statement was that within individual members of OPEC, indeed we do. And I would point in particular to Saudi Arabia, which continues to be the largest foreign

supplier of crude oil to the U.S. market.

And the relationship with Saudi Arabia that goes back, really, to

the end of the Second World War, the tradeoff between an implicit

and an increasingly explicit U.S. guarantee of Saudi Arabia’s external security, in exchange for a preferential treatment of American

companies in the early days of the oil development there, and increasingly Saudi commitment expressed through price to maintain

itself as the leading and reliable supplier of crude to the U.S. market.

When I say price, Saudi Arabia deliberately maintains its position as the number one supplier, when it could in fact get another

50 cents a barrel or so by sending that crude oil to Far Eastern

markets. So in that sense, there is even a subsidy built into it.

Senator THOMAS. A subsidy.

Mr. CARUSO. Senator, could I add to what Jim said?

Senator THOMAS. That is pretty hard to accept. But you can try

it, yes.

Mr. CARUSO. I agree that the best way to deal with OPEC is on

a bilateral country basis and certainly with the Saudis. But probably more importantly, since they are going to do what is in their

best interest, is for us to pursue what is in our best interest. And

that is diversifying our resources.

Senator THOMAS. Absolutely. But we have allowed ourselves— and we have all been involved in it, including you guys, for years

we have allowed ourselves to become dependent to almost 60 perVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
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cent on OPEC. And I have not heard a lot of complaining about it

before, and here we are.

I guess that is why I am saying, you know, it is pretty easy to

get up now and talk about where we are and how we got there, but

we ought to be thinking a little more about the future and see if

we want that. Do we? I do not think so.

And so we ought to be talking about what we are going to do in

terms of production and access and a few things here, which we

have not heard much about until very recently.

Anyway, yes, sir.

Mr. PLACKE. The United States is approximately 60 percent dependent upon foreign sources of crude. Actually, we estimated 56

percent for the last year. But that is all sources, OPEC and nonOPEC.

Senator THOMAS. I understand.

Mr. PLACKE. Two of the largest suppliers to the U.S. market are

Canada and Mexico, neither of which, of course, are members of

OPEC.

Senator THOMAS. No, that is true. But we also have friends like

Venezuela and others that it seems like maybe we could get a little

more pressure there somehow. At any rate, thank you, sir.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

Let me just bring out a couple of points, and I would ask if you

agree. If you agree, there is no necessity of commenting further.

But the statement was made by Mr. Caruso in his presentation

that the irony of the 21st century, with all our technological advantages, is that through the year 2020, at least, we will depend on

the same basic energy sources, namely coal, oil, natural gas, that

prevailed in the 20th century. Would you agree with that?

Well, since nobody is saying otherwise, I think it is important to

recognize that, because there is a significant portion of the public

that assumes that through technology alternatives, renewables, we

can substantially relieve ourselves of our conventional sources of

energy. Now you and I know that we have expended about $5 billion to $6 billion in grants, subsidies, to bring on and assist alternative renewables, but they are still less than four percent of the

market.

So if we can generally agree upon that, then I would hope that

we would establish that as a premise that we are going to continue

to develop alternatives and renewables, but they are not going to

replace for the next 20 years our conventional sources of energy.

Now, Mr. Nugent, you feel uncomfortable with that. If you have

something to say, please say it, because I want to try and move

through this in a way that at least draws some conclusions.

So if we have no objection to that, then—also, Mr. Caruso, you

indicated that developing an adequate and reliable energy supply

to realize the promise of robust global economic growth will require

significant investments that must be made immediately. Obviously

you are talking about domestic investments in power generating facilities, transmission and so forth.

Further, you state decision makers in both the public and private

sectors face the special challenge of balancing the objectives of economic growth and the legitimate concern about the environment.

62

Now, we have in the area of nuclear energy an environmental opposition, clearly. We cannot come to grips with what to do with the

waste. Yet obviously nuclear has something to offer, as far as emissions are concerned. Coal, we cannot come to grips with currently

the permitting process necessarily, so we are not building coal-fired

plants. We have the coal and environmental objection.

Again, certain areas, if you look at the Overthrust Belt, where

you have energy resources, a lot of it is withdrawn. The east coast

has been withdrawn from offshore production through moratoriums, also the west coast. These are environmental objections.

Is there a way to bring the environmental community into a realization that we are an electronic society, we use more energy in

spite of our efforts to conserve, and they are going to have to join

with us? Otherwise, we are going to continue to, you know, dance

the dance of the crab going down the beach sideways. We will not

achieve what our objective is, which is to clearly get some reasonable relief from the four conventional resources of energy that we

have had.

Am I missing something? How do we bring the environmental

community into an awareness that conservation is not going to do

it alone? Is there a way, or does the shoe have to pinch to the point

where the public is inconvenienced with gas lines around the block

or power outages or—anybody want to try that one? Yes, Mr.

Placke?

Mr. PLACKE. Well, being a research organization, Senator, that

is part of what we would suggest might contribute to the solution.

The U.S. Geological Survey could perhaps do a more complete

analysis of the Overthrust Belt that you mentioned, for example,

and come up with a more precise estimate of what the hydrocarbon

resources are in these environmentally sensitive areas, and I think

also contribute—and you might bring in the national laboratories

to analyze more fully the environmental impacts and how they

could be mitigated. That might begin to form the basis for a dialogue with the environmental organizations.

Ultimately, they are dependent upon public opinion. And I think

in the end it is public opinion that has to be persuaded.

The CHAIRMAN. But does public opinion have to be determined by

public inconvenience and public price increases?

Mr. PLACKE. Well, again, California provides a case where that

is exactly what has happened.

The CHAIRMAN. I mean, I do not know if you have seen this, but

I think this is food for thought. Okay? It says, ‘‘The last thing California needs is more powerplants.’’ Now somebody is either

misreading reality or knows something the rest of us do not know.

Mr. PLACKE. Well, as you had pointed out, Mr. Chairman, the

consumers in California and the voters, as well, they are the same,

have been protected from the impact of price. I think if there were

less of that, perhaps that ad would read differently.

The CHAIRMAN. I know, but these are well-meaning people. And

we assume that the people who, in the New York Times, take these

ads and read them before they allow them to be printed and that

they make some sense, even though I am sure the New York Times

is happy to get the revenue. Maybe this same thing is playing in

the State of California. I do not know. But it is inconceivable to me

63

that—this is called the Energy Foundation Towards a Sustainable

Energy Future, which is something we all want. But if California

has a supply problem, these people are not buying it. And these

people represent a portion of public opinion, which they are certainly entitled to do.

This is part of the problem, ladies and gentlemen. And I do not

know what we can do here, and we are supposed to be able to fix

things through changes in Federal law. But if the public is not inconvenienced or does not believe that they really need more supply,

I do not know.

Anyway, the last point I want to make—we have been joined by

Senator Dorgan. And we appreciate his participation—is, you say,

Mr. Caruso, on the issue of sanctions, which is a legitimate concern

relative to bilateral sanctions, Iran, Iran, Libya, if our estimates of

world oil demand in the year 2020 are reasonably correct, then

these countries will have to substantially expand their current production.

By the same token, they are members of OPEC now. Saudi Arabia has a tremendous capacity for increased production. Cannot

Saudi Arabia and the other OPEC countries, with the exception of

these two or three, meet the demand?

Mr. CARUSO. Not according to the projections we have reviewed,

including those of Mary Hutzler’s office and the International Energy Agency. CERA’s outlook, I think, indicates that Saudi Arabia

alone would not be able to meet the demand increase.

The CHAIRMAN. Now we have oil companies, American oil companies, we are going to lose a position over in Libya or some of these

countries relative to the sanction issue. And the question is, do we

take off the sanction law, which expires in, what, August? And is

called what, the law? Anybody know?

STAFF. The Iran/Libya Sanctions Act.

The CHAIRMAN. Yes, the Iran/Libya sanction law. Do you have

any opinion on whether we should continue the sanctions when

they expire or leave the matter of foreign policy up to the President?

Mr. CARUSO. It should be allowed to expire, in our view.

The CHAIRMAN. And leave it up to the President. Now Israel does

not like that.

Mr. PLACKE. Well, I would also, I think, Senator—it would be

worth looking into how effective the Iran/Libya Sanctions Act has

been. There has not been a single country, that is, a single company, foreign company, investing in either of those two countries

that has been sanctioned during the nearly 5 years that the law

has been in effect.

The CHAIRMAN. You are absolutely correct.

Mr. PLACKE. So it would not seem to me that the purpose of the

legislation has been served.

The CHAIRMAN. Well, you conclude with your statement, there

are troubles ahead. Where is the growth of energy demand coming

from? Unstable countries. Where is the growth in energy supply

coming from? Unstable countries.

I could not agree with you more. You indicate that people do not

care where the oil comes from in the United States, as long as it

comes. It can be coming from the scorched earth of a rainforest in

64

Colombia. They do not care. They are unconscious. They do not

care whether it comes in a foreign leaky tanker. As long as it does

not leak on our shores, they do not care who has it, as opposed to

the ability to develop oil domestically, keep it in U.S. tankers,

under U.S. flag, with U.S. jobs.

And I think it is a responsibility of the media, who are supposed

to tell the American people both sides of an issue relative to the

exposure of the continued increasing our dependence on foreign oil.

Senator Dorgan, you can wind up the hearing. You can have the

gavel. You can answer every question that ever came to mind.

Senator DORGAN. Mr. Chairman, let me just say that you are

sounding a little bit like a protectionist here.

The CHAIRMAN. I am.

Senator DORGAN. We have this debate on globalization, and anyone who says that the interests of this country somehow ought to

be considered is called a protectionist. And now I come here, and,

on this energy issue, you sound a little like I do on some of the

trade issues. So—— The CHAIRMAN. Well, like on the farm issues, we believe charity

begins at home.

[Laughter.]

The CHAIRMAN. Thank you.

Senator DORGAN [presiding]. I will only ask two brief questions.

I was at a committee hearing on defense appropriations this morning, and so I was unable to be here, but thank you for holding this

hearing.

I mentioned this issue of globalization. And there is an interesting tension here with respect to energy supply and energy demand

and to the robust discussion about globalization in other areas. All

of a sudden, we are very concerned about our interests, but there

is this tension now on the issue of globalization. And I think that

it is interesting for us.

Let me ask any one of you who is able to answer this—there is

a discussion among Middle Eastern OPEC countries about opening

opportunities for private capital investment in oil expiration in

those countries. If that were to happen, what impact would that

have on investment in the United States by the major oil companies? Anybody have any observation about that?

Mr. PLACKE. Well, Senator, the process that you referred to, the

so-called upstream opening in Iran, Kuwait, Saudi Arabia, has

been moving very slowly.

Given the growth that we anticipate in world demand for petroleum, which we see continuing to grow at about 1.6 to 1.8 percent

annually, from a base of now 76 million barrels a day of consumption worldwide, there is plenty of room for investment and development of resources around the world. Those areas attract investment because they are the low-cost producers.

Senator DORGAN. Money moves where it has its best return. So

the reason I am asking the question is, if that is open to private

investment in the future, that you make decisions about those investments based on return you expect. And better returns will exist

in areas where it is less expensive to explore and to find oil. Would

that not be the case?

Mr. PLACKE. That is certainly true.

65

Senator DORGAN. Would it not be the case, then, that there

would be a shift in investment potential from here to there?

Mr. PLACKE. If it were an uncontrolled market, but it is not really on either end. Foreign investment—this may sound bizarre—is

still regarded with some suspicion in each of those areas, or at

least it is regarded as something that needs to be controlled, so

that the national influence over the national resources is not lost.

So it is not likely that the investment opportunities are going to

be fully opened to the extent that the kinds of tradeoffs that you

describe will take place.

Also, there are advantages to investing in the United States, not

only locational, but the political risk factor in the United States is

as close to zero as it can get. That is not true anywhere outside

the United States. And as you get into riskier areas, I think companies simply would be careful about how much of that risk they

chose to absorb in all of their investment alternatives.

Senator DORGAN. Ms. Hutzler, your conclusion is fairly bleak on

page seven. You do, however, say that the forecasts, which you

have made here, incorporate an expectation of efficiency improvements in both demand and supply, although different paths for

technological development could lead to slower or more rapid efficiency gains.

What kinds of things do you think are on the horizon that could

lead to more rapid efficiency gains? And what kind of public policy

requirements would have to exist to make that happen?

Ms. HUTZLER. What we look at in those cases are different rates

of new technologies coming on line and different capital costs and

performance for them. In our Reference Case, which is based on

historical trends in technology development, we see that intensity

changes could decline by about 1.6 percent per year.

In the High Case that you are looking at, if we could develop

some of these technologies to come on at a lower cost and greater

performance, you could in fact improve that intensity to about a 1.9

percent decline rate. So it does deal with development of technologies.

Senator DORGAN. Let me make just a concluding comment. The

chairman held up, I believe it was, the Washington Post ad asking

a question about powerplants in California. Whether it is California or the general energy outlook for this country, I think we have

to do a lot of things and do them right. Frankly, this may well

come from one side of the debate that believes that we ought not

build more powerplants, we ought to do more in conservation, radically more in conservation.

On the other hand, there are those on the other side who could

probably just as easily put an ad in and probably say, no, no, what

we need to do is just build, build, build. I mean, that is the only

issue. Go find and produce.

Well, that is one side of the equation, but neither of these approaches provide an answer. If we do not do a lot of everything and

do it right, we are not going to begin to address this country’s energy issue.

I do not know whether you put up Senator Bingaman’s chart

today, the one that shows energy usage and shows the transportation line going up and shows production over a long period of

66

time and shows that either stable or going down. It seems to me

that you have to address all of these issues, such as transportation

usage.

Well, the next time you pull up to somebody that is driving a

huge gas hog full of chrome and weight, belching smoke and getting 8 miles to the gallon, and who is complaining because they

have to stop at the gas station every few miles, you know, we

might ask ourselves—does this contribute to the problem? Do we

have a right to drive these things? Yes. But should we complain

about them? If we drive them, probably not.

We need conservation. We need aggressive, robust conservation

efforts in this country. We need renewable resources. And frankly,

I am a little sick and tired of the energy companies telling us renewable energy sources are largely irrelevant. They have done

most of what they can to depress renewable energy sources for a

long while. We need to use them, and we need to encourage them.

And I think they will become commercially successful, viable, and

important.

And we also need to find more and to produce more energy, oil,

natural gas, and coal, using clean coal technology. We need to do

a lot of things. And I just think that the voices coming down in one

crevice or one corner saying ‘‘this is my position, this is what I am

going to sit on,’’ I am just telling you, is the wrong way to address

this issue.

Mr. Caruso, your statement, I thought, was very interesting, because you really talk about the tensions I tried to describe to the

Chairman with some mirth here about the global economy and domestic needs and our dependence and so on.

So this is a highly complicated issue. It is not going to be solved

any time soon. We can go back 10, 20 or 30 years, or perhaps 70

years, and find a similar debate that was held in this U.S. Senate

with just as distinguished folks testifying and folks at the dais

here. And we would all be talking about, yes, we need to cut this

cord, and we need to move in another direction. And perhaps 20

years from now, we will be having similar hearings.

But my hope is—I think, Mr. Caruso, you said it in your testimony. One of the ironies at the turn of the century is that, at an

age where the pace of change, technological change, is almost overwhelming, the world will remain dependent up to the year 2020.

And the same sources of energy, oil, natural gas, and coal, everything, virtually everything in our lives, has changed except most of

the engines in our vehicles. You have to drive up to a gas pump

and stick a hose in and pump some gas in. That has not changed

much at all. But everything else has changed.

And there ought to be ways for us, as a society, to think our way

through these problems to branch out, and give us ample opportunity to find new sources of energy and new approaches.

And even as we do that, reach agreement between the parties

and the philosophies about how to do a lot of things right in developing an energy strategy that is comprehensive, and do that soon.

Thank you all for being here. I regret the brevity of my appearance, but it was a necessity caused by another hearing.

This hearing is adjourned.

67

[Whereupon, at 11:52 a.m., the hearing was recessed, to be reconvened on April 3, 2001.]

(69)

U.S. ENERGY TRENDS

TUESDAY, APRIL 3, 2001

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC.

The committee met, pursuant to notice, at 9:43 a.m., in room

SD–628, Dirksen Senate Office Building, Hon. Frank Murkowski,

chairman, presiding.

OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,

U.S. SENATOR FROM ALASKA

The CHAIRMAN. Good morning, ladies and gentlemen. We will

call the hearing to order on the Energy and Natural Resources

Committee. I apologize for being tardy, and I have already been

taken to task by my colleagues, so we will start off even.

The purpose of the hearing today is to consider the role of our

domestic oil and natural gas resources that play such an important

part of our overall energy security. We want to talk about what impediments exist to domestic production. We are pleased to have, I

think, an outstanding panel of witnesses to provide expertise on

the topic and look forward to their testimony.

I would encourage you as you address energy and oil specifically

to address the issue of our continued dependence on oil for transportation. In spite of what you believe, even when we leave Washington, D.C., to go home, we do not go home on hot air. We have

to get some gasoline for that airplane, and it has to come from

some place. As we look at relief and relieving our dependence on

that fuel, we need to look at some specifics. What are the alternatives, or are there any in the foreseeable future? I would hope

that you can enlighten us.

The same is true as we become more dependent on natural gas

for our homes and for our power generation. We look forward to the

findings of a study currently be conducted by the Department of

the Interior under legislation which I authored that will further define the impediments to production, or limiting production.

This last week Secretary Gale Norton, as you know, Senator

Bingaman, Mary Matalin, representing the Vice President, and a

group of staff were part of a delegation that visited my State of

Alaska, visited the Arctic North Slope. It was a relatively quick

visit; we left Friday and came back Sunday. I think we had twelve

take-offs and landings, if I am not mistaken. You counted them,

Jeff, on Saturday, but we went from Fairbanks to Deadhorse to

Kaktovik to Nuigsut, to Alpine back to Nuigsut, to Barrow. It must

have been about sixty or seventy below in Barrow on Sunday, and

70

even for Alaska it was a little chilly. The ranking member here finally found a pair of gloves and got some relief, but it was like it

is. It is interesting to see a place like it is for most of time. There

has been some criticism we did not take the group up during the

summer, but I assure you there is going to be another group.

We have, as you know, considerable gas reserves in Alaska. I

think there’s about 12 billion barrels have been recovered from

Prudhoe Bay, and there were supposed to be 10 billion barrels in

the field. It is estimated by responsible geologists that about 35

trillion cubic feet of natural gas are associated with discoveries in

Prudhoe Bay, and the natural petroleum reserve in Alaska, 4.5 million acres have been opened for exploration. Of course, the 1002

area of ANWR is unknown, but it is clear if we look to reducing

our dependence on foreign oil, a good deal of the energy wealth of

North America lies above the Arctic Circle, and we also need to use

our petroleum products more efficiently to get greater conservation

and, of course, develop alternative fuels. Maybe you can enlighten

us on that.

There are other promising areas, of course, for development of

natural gas—OCS, overthrust belt—that are necessary given our

growing demand for gas, but it is interesting to look at some of the

charts and recognize that OCS availability offshore on the East

Coast from Maine to Florida is pretty well covered by moratoriums

that mandate that there shall be no development. The same is true

on the West Coast of the United States: Washington, Oregon, California. So the question is where are we going to find it?

So we have several barriers that prevent use of these resources

to meet our growing energy needs. Many areas, as I have indicated,

are under moratoria. Even when leases are granted, it gets hard

to get the permits through. We have got administrative inaction

and duplicate regulatory environment processes, disputes and legal

challenges by stakeholders, local communities, environmental

groups, regulatory structures not keeping pace with technology.

The reduced footprint is relatively dramatic, relative to the technology available. I am told that when two thousand acres was developed in 1973, today we do it in two hundred acres. We have 3D

seismic mapping, which we did not have a decade ago; horizontal

drilling allows one well to replace several.

We saw this this weekend in Alaska. We have seen wells that

reach out using directional drilling as much as 15 miles. So we

have a technology to find and develop our oil and gas reserves in

a way that minimizes impact on the environment, and we can respect the land that both people and animals depend on for their

welfare. So we have got the potential here to preserve and develop

at the same time, and we must preserve cultures and ecosystems

alike. Some would suggest that this particular issue has become so

politically polarized that it is very difficult to get people to objectively view it. It has been threatened with filibusters, and I would

hope that we would rise above that and use sound science and factual information to make our decisions.

I have said before we cannot produce and cannot drill our way

out of this. We need all the sources of energy to address the shortfalls, but we must look at the barriers, review them with the ways

71

to streamline leasing while encouraging stakeholders’ dialogue to

ensure safe environmental responsibility.

It is kind of interesting to see where we have been on this area.

Some say progress has been made, particularly in the deep waters

of the central and western Gulf of Mexico. Nearly 35 million offshore acres were leased from 1993 to 1998, representing over a 50

percent expansion in the cumulative leasing prior to that time.

However, this was not due to increased access to those areas, the

areas had been previously available. The increase was due to the

combined effects of major technological breakthroughs and deep

water royalty incentives passed by Congress in 1995 and passed,

I might add, by this committee. At that time, Senator Bennett

Johnson was chairman of this committee, and I supported him on

that effort. That was a considerable consequence, I think, for much

of the offshore development that we see today.

It is interesting to note that Western States contain 45 percent

of the proven oil reserves, 35 percent of the proven gas reserves,

and even a larger share of the estimated undiscovered oil and gas

in the lower 48 onshore. It is kind of interesting to reflect on the

reality that when we have seen moratoriums designed from time

to time to accommodate some of the special interests within those

States, while obviously there is a certain sensitivity, it simply takes

these promising areas and puts them off-limits and we do not go

back and prioritize them again.

Some of the problems that we have had continually that we are

going to have to overcome are the delays by BLM in processing applications for permits, expansive interpretations of The Endangered

Species Act by the BLM, Forest Service, U.S. Fish and Wildlife

Service which have led to the creation of de facto critical areas

which unreasonably restrict oil and gas activities by imposing dramatically reduced drilling windows. BLM’s designation of previously studied wilderness study areas have become again de facto.

We seem to be going through a de facto process without the Congress making the determination. The administrations and the

agencies have been doing it.

In the absence of cooperation and coordination between BLM,

Forest Service, EPA, FERC and other agencies in implementing national environmental policies or NEPA requirements, it has led to

tremendous interagency disputes, delays for permitting, leasing. I

could go on and on with what the problems are, but the problems

result in obviously it becoming more difficult, more time-consuming, and more expensive. The question is, is this done in the interest wholly of environmental sensitivity and compatibility, and is it

all necessary? Hopefully today we will find out a little bit more

about that process—what is holding up the development and why

we are becoming more and more dependent upon foreign sources

for energy.

Senator Bingaman, good morning.

[The prepared statements of Senators Campbell and Dorgan follow:]

PREPARED STATEMENT OF HON. BEN NIGHTHORSE CAMPBELL, U.S. SENATOR

FROM COLORADO

Thank you, Mr. Chairman. I would like to welcome all of the witnesses and my

colleagues for appearing before the committee today. I am looking forward to the

72

testimony that you all will be providing us shortly. I am delighted to see that so

many of you are here to address this critical problem.

In the past, public lands were locked up, and were prohibited from oil and gas

exploration and extraction, often without legislative oversight. Known resources are

sifting idly by when our nation is reeling from a dwindling supply of energy. And,

our crisis is only going to get worse this summer from our inadequate supply of energy.

Granted, some of the lands which are locked up are worthy of the protection, but

others were locked up for the sole purpose of prohibiting exploration and extraction

of oil and gas. These are the lands and regulations that need to be revisited. Since

1992, U.S. crude oil production is down while our consumption has substantially

climbed. We can help ourselves get out of this mess, but we have to be allowed to

do so, even if that means opening up more lands.

Don’t get me wrong, we have to have environmental safeguards so that we do not

do more harm than good. The technology is there to accomplish this goal. We just

have to be able to prove it. Many people think that mining operations are all big

open pit mines, which is not the case. There are mining operations that are environmentally sound and have minimal degradation to the surrounding areas.

Many are going to say that even this isn’t good enough, that any environmental

harm is unacceptable. But, we have to be realistic. Many want the cheapest and

cleanest form of energy, but they do not have any ‘‘real’’ solutions to replace our traditional types of power. Sure they claim that renewables are up-and-coming, but

they are not in full swing yet. We have to deal with what is in front of us.

We are a nation that could use our land to supply a majority of our power needs,

which would also help us to decrease our dependence on foreign oil. Our locked

lands have discouraged many from trying to do what is right and now our nation

is reaping the bitter fruits of this practice. I will have some questions for the witnesses that I would like them to address so that we can further explore this issue

during the time for questions.

Thank you Mr. Chairman.

PREPARED STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR

FROM NORTH DAKOTA

Mr. Chairman, I am concerned that we are having yet another hearing pertaining

to the supply side of energy policy.

While I believe that we do, in fact, need to examine oil and gas exploration and

development options, I also emphatically believe that we must have a balanced energy policy. That means we also need to focus on the demand side of the energy

equation. I am pleased that at least one of our witnesses, Mr. Hayes, agrees with

this policy approach.

We cannot drill our way out of our energy problems. Even my colleague, Chairman Murkowski, will agree with me in this regard. We must do more to promote

renewable energy and energy efficiency. Yet, the Administration is proposing to cut

renewable energy and energy efficiency research and development funding by approximately 30-50 percent.

Moreover, the Administration is considering delaying or doing away with proposed

efficiency standards, at this very moment. These standards would improve the efficiency of clothes washers, water heaters, air conditioners and commercial heating

and cooling systems. These standards, combined with others for refrigerators and

room air conditioners completed earlier, would cut residential energy use by about

13% by 2020. The air conditioner standard would be the single most effective standard in reducing residential energy use. Further, the new standard for washing machines is projected to save the equivalent of the annual energy use of 21 million

households, with water savings of as much as 11 trillion gallons. Not enacting these

standards during an energy crisis is incomprehensible to me.

Unfortunately, the Administration instead seems to want to open up public lands

and drill our way out of this problem. Opening up every last public land is not the

answer. In addition, one must only look at the facts to realize that there do not appear to be so many obstacles to drilling on public lands, either, as some would have

us believe.

Drilling on public lands actually increased during the past eight years, while having decreased on private lands. In fact, public lands provide a greater percentage

of oil and gas to meet U.S. energy needs today than at any time in the past two

decades. In 1992, during the first Bush administration and following eight years of

Reagan policies, oil and gas production from the Federal lands provided 13% of overall domestic oil and gas production. By 1999, the contribution of oil and gas producVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00076 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
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tion from the Federal lands as a percentage of overall domestic oil and gas production had risen to 25%. Moreover, the Bureau of Lands Management (BLM) is in the

process of granting more than a thousand permits to drill for oil and gas in the Powder River Basin in Wyoming, an extremely prospective area for western oil and gas

production. Again, one of our witnesses will testify to these facts.

Opening up the Arctic Refuge also is not the answer. Even President Bush is realizing this, as he stated last week. Drilling in the Arctic Refuge would take years

to access and would produce only a small amount of petroleum supply. What we

need instead is natural gas. I support exploring natural gas supplies in Alaska’s

North Slope. But this proposal, too, will take time to see to its fruition. We also need

to examine exploration and development on private lands.

In the interim, the most effective steps we can take to address our immediate

problems is to implement alternative conservation and renewable energy measures.

These measures can be put in place far more quickly than pipelines or power plants.

So, rather than exploring impediments to oil and gas exploration and development, which are limited, we should instead be exploring ways to expedite and facilitate means to improve efforts for energy efficiency and alternative energy resources.

Thank you, Mr. Chairman.

STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR

FROM NEW MEXICO

Senator BINGAMAN. Good morning, and thank you for having the

hearing, Mr. Chairman. I do think this is an important issue. I believe that there is a real need to inventory our public lands and our

private lands as well and look at where the opportunities are for

additional production of oil and gas in particular. I think we need

to look at the various moratoria, which you have alluded to, and

see whether there is any genuine prospect for relaxing any of them.

My sense is that there probably is not in most cases, at least the

offshore moratoria. Those are moratoria that the previous administration supported. I believe former President Bush supported those

when he was in office. I believe that current President Bush has

indicated his support for those moratoria, so I do not know how far

we get in trying to pursue relaxation of those moratoria. I do not

know if that would be wise or productive on the part of the committee.

I do think that we need to look at all opportunities for increasing

oil and gas production in an environmentally-sensitive way. I think

that in addition to looking at Federal lands, we need to look at private lands. My impression is that we have seen increases in production from Federal lands in the last decade. At the same time

we have seen decreases in production from State lands and private

lands, and we need to see if anything can be done about that.

I also agree with you that there are enormous resources on the

north slope of Alaska where we were this weekend and we need to

find ways to develop some of those resources. One specific that I

know the chairman is very interested in, and I also support, is to

try and find a way to bring that natural gas to the lower 48 as

quickly as possible and build a pipeline to accomplish that. Therefore, we have a provision in the energy bill that I introduced a

week or so ago that tries to provide an incentive for early construction and use of that pipeline. I would be interested in anyone’s reaction to that as to whether that is the correct direction to go in

or not, but I do think we should hear some good testimony and

hopefully understand the issue better when the hearing is over.

Thank you, Mr. Chairman.

74

The CHAIRMAN. Thank you, very much. In the order of Senator

Burns, Senator Thomas, Senator Cantwell, and Senator Landrieu.

STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR

FROM MONTANA

Senator BURNS. Thank you, Mr. Chairman, and I will just put

my statement to record.

The CHAIRMAN. Without objection.

Senator BURNS. I think that never at a time since I have been

around has there been so much interest in energy, and this shortage that we have this time covers all bases. Not only is it the production of electricity, our transportation fuel, and the overall

costs—and I come from the agricultural community, and right now

it has hit all segments of our ability to produce food for this nation.

We do not want to forget about that for the simple reason that I

do not know what the first thing you do when you get up every

morning, but I know what the second thing you do is, and that is

eat, and we must not forget about that. Our ability to produce a

food supply, fertilizers, transportation costs, processing, purveying

is all equally hit in this country, and that is going to start showing

up right away, so thank you for holding this hearing, and I am interested in listening to the witnesses today.

Thank you.

[The prepared statement of Senator Burns follows:]

PREPARED STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR FROM MONTANA

Mr. Chairman, I’d like to thank you for holding this hearing to look at impediments to domestic oil and gas development. We have been spending a lot of time

lately discussing this energy crisis and I appreciate that, but in my mind this hearing is different in one very significant way. Up to this point we have talked a lot

about the problem, and I see this hearing as focusing on potential solutions.

I know that Montana can be part of this solution, because we are fortunate to

possess great quantities of gas, oil, coal and coal bed methane reserves within our

state. In fact, I held a hearing in Montana on March 10 to investigate what coal

bed methane could mean in our State, and what we need to do before we proceed.

Coal bed methane is one promising possibility in the range of federal land use, but

that is what makes it rare. Unfortunately, most of our stories about energy development in Montana have had one common theme: lost opportunity at the hand of federal land use restrictions.

Today we have with us some folks who are very experienced in the gas and oil

business, and I am looking forward to what they have to say. I think they will tell

us we have the opportunity to make this country more energy independent by using

some of our vast energy reserves. I believe that these energy resources can be

tapped to help bring energy prices back down to a reasonable level. A great deal

of these reserves exist on public land, and we owe it to the public to use these lands

wisely. To me, it is only common sense that energy production should be seen as

a legitimate use for public lands where that is appropriate. We seem to have forgotten that part of the equation in the last few years.

I am glad the U.S. Geologic Survey has released its report on potential energy

reserves within recently declared monuments. From that report, you will see what

we have known in Montana for quite a while, which is that there are significant

energy reserves underlying the Upper Missouri River Monument. There is a great

deal of natural gas in that area, and considering that it is in high demand as a

clean-burning fuel and as an input into agricultural fertilizer, I believe we need to

do what we can to use it well. Prudent development is already taking place just

north of the Breaks and a reasonable boundary must be established for the Monument to allow access to this known resource and even natural gas development

within the Monument.

To further this access discussion there is already a gas pipeline crossing the Missouri. Expansion of the pipeline because of increased future volumes and routine

maintenance must be able to continue for both safety and continuing power generaVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00078 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
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tion and heating needs. This infrastructure consideration must be dealt with in any

document that is finalized on the Missouri Breaks.

The Upper Missouri River Monument is a good example of how the federal government has restricted oil and gas exploration on public lands. The declaration of

this monument in north central Montana was one of President Clinton’s last actions

in office. The monument is about 495,000 acres and includes BLM land, state land,

and private land, much of it along the Missouri River. It is beautiful, remote, remarkably well-preserved, and home to some of the most promising land for natural

gas in all of Montana.

Within the monument are thousands of acres of valid leases, mainly natural gas,

numerous producing wells, and gas pipelines. Under the current arrangement, these

have been tied up from any further development. Even though the draft management plan states that the ‘‘designation does not affect valid oil and gas leases’’ the

truth is that without access to pipelines, and reasonable turnaround time for permit

approval, leaseholders will not be able to pursue their rightful ownership to the gas

within monument boundaries. According to current leaseholders, the permit approval for these leases has averaged about 60 days, up until word leaked that the

Monument designation was being considered, and since then some have been waiting for a year or more.

When we look at States like Montana and others like it, the careful extraction

on natural gas and oil could contribute significantly to the tax base of the State and

local governments. When we tie that land up and bar development of the resource

base, we also limit the ability of state and local governments access this valuable

source of income. Instead, the federal government locks it up, and pays the counties

PILT money for the lost revenue. That just doesn’t make any sense. There is a very

real economic impact to the State treasury, and to the Federal tax rolls (the State

would receive one-half of Federal revenues from royalties and land sales).

Continued restriction on the Federal land base and the contribution it makes to

western States treasuries needs to end. The tax burden continues to shift back to

the State level without due compensation from the Federal government. The Federal

government cannot afford to take revenue sources off the table and continue writing

checks to cover bad policy decisions and extremely poor management. That just isn’t

right.

I support careful management, and that includes looking at all options for a piece

of land. The mindset that no management is good management does not sit well

with me, and that is the attitude I have seen in regard to energy resources on public

lands. I look forward to hearing the testimony of our witnesses today, and finding

out how we can improve the viability of energy development on public lands.

The CHAIRMAN. Thank you very much, Senator Burns.

Senator Thomas.

STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR

FROM WYOMING

Senator THOMAS. Thank you, sir, and I too appreciate this hearing. I am very much interested in today’s topic, of course, which is

how we improve and increase our domestic oil and gas production.

Obviously one of the things that has to be done is dispel this myth

that development versus environment is the key issue. I am persuaded we can do both; we have shown that we can do that, I

think, in Wyoming. There is substantially less of the mineral reserves that is leased now on Federal lands than there was. It has

declined by more than 65 percent since the early 1980’s, only about

17 percent of the total estate compared to 72 before. I am not suggesting it ought to be back where it was, but we have to take a

look at it.

I think the broader thing—and I have said this over and over

again, but I feel very strongly—if we are going to have a policy that

brings us in energy where we want to be, we have to improve domestic production, we have to have access to public lands, the same

time protect the environment. That’s our task. I think we have to

have diversity in the kinds of sources that we have. We have to

76

begin to use them in that way. We have produce renewables. They

are a very small factor now but can be larger. We have to have

some conservation as part of that policy. We have to do something

about rights of way so that we can move this energy from one place

to another so that it can be used. I think there is a possibility for

incentives when they have low production wells and things of that

kind. Regulations need to be reasonable, and we have to respond

as we go along to some of the market signals which we failed to

do in California.

In any event, there is a lot we can do. I look forward to it. I was

listening to the radio—something about his reaction was a little

less talk and a little more action. Maybe we need to do that.

The CHAIRMAN. Thank you very much.

Senator Cantwell, good morning.

Senator CANTWELL. Good morning, Mr. Chairman. Thank you.

And I too will submit my comments for the record.

The CHAIRMAN. Would you speak a little more in the microphone,

please? It doesn’t pick up very well.

STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR

FROM WASHINGTON

Senator CANTWELL. Thank you, Mr. Chairman. Please excuse the

fact that I will not be here for part of the hearing. I also have a

Judiciary hearing and I think some of our other members are doing

double duty too.

This is an important hearing, and I would like to associate myself with the comments of Senator Bingaman. We have to look at

this energy crisis that we are facing in the Northwest, not only on

the supply side but also making sure that we do not put undue

pressures, permanent strains, on our environment. This past weekend we just had a day-long conference of the entire delegation on

conservation. I was most impressed by a group of students from a

middle school in Seattle who said, ‘‘What have we learned from the

last energy crisis that we are going to apply today so as not to

make the same mistakes?’’

We also have a group of high school students from Port Townsend who are in the audience, and who will provide various members here with research that they have done on recyclable materials. While today we are going to hear about the supply side and

appreciate the chairman’s dedication to the supply side of this

issue, we need to remember that there is a delicate balance here

both in the short term and the long term.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Cantwell.

Senator Landrieu.

STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR

FROM LOUISIANA

Senator LANDRIEU. Mr. Chairman, I thank you and the ranking

member for holding this hearing, and I look forward to hearing

from our distinguished panelists and am hopeful they can shed

some additional light on this important issue for our nation. I am

going to submit my statement for the record.

The CHAIRMAN. Without objection.

77

Senator LANDRIEU. I would just like to make a couple of brief

comments. First, the chairman has held hours of hearings over the

last year and I am convinced that the most immediate problem is

the transmission grid. Before we even work on supply or demand,

the transmission grid, the transmission lines, the way that we

move from the production to the use, whether it is gas lines or electricity lines, is something that has to be a priority in any legislative initiative that we take up in this committee.

Secondly, I agree with our chairman and ranking member that

the diversity, quality and quantity of our supply are important, and

that one lesson we can learn from the last energy crisis is we have

to emphasize diversity of supply and cannot be over-reliant on one

source of energy. As a State that has been a proud producer of oil

and natural gas and continues to advocate for their use, I also support other sources of energy such as clean coal and nuclear.

In addition, I do think that we must focus our efforts on efficiency and conservation. However, we should continue to look at

opportunities to expand our supply. The question is should one or

two States stand in the way of a Nation that needs a steady supply

of energy to keep our economy moving?

I know these are tough issues, and there are some delegations

that feel very strongly about moratoria, but we must evaluate

whether these moratoria are serving our Nation’s best interest. I

believe we need to look at all opportunities for production whether

in the Rocky Mountains, the Gulf of Mexico, or even Alaska, while

still emphasizing energy efficiency and conservation.

Thank you, Mr. Chairman.

[The prepared statement of Senator Landrieu follows:]

PREPARED STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR

FROM LOUISIANA

Thank you, Mr. Chairman. I want to thank you for holding this hearing today on

the development of domestic oil and natural gas resources as part of a national energy policy.

We are well aware that the U.S. is currently experiencing unusually high and

volatile energy prices. Residents of my state of Louisiana as well as citizens across

the country faced abnormally high gas prices this past winter and often could not

pay their bills. Most of the forecasts for this summer are even more ominous. While

there are some steps we can take in the short run to help, the situation is complex

in nature and any attempt at an overall solution will require a number of different

remedies over the long run focusing on both the supply and demand side of the

equation. However, the need to increase our domestic supply of energy is apparent.

One of the great strengths of the electric supply system in this country is the contribution that comes from a variety of fuels such as coal, nuclear, natural gas, hydropower, oil and renewable energy. The diversity of available fuels we have at our

disposal should enable us to balance cost, availability and environmental impacts

to the best advantage. Unfortunately, we have not made adequate use of this supply. Today our focus is domestic oil and natural gas resources. In 1998, natural gas

and petroleum combined for approximately 65% of total energy consumption in the

U.S. I am hopeful that during today’s hearing we can explore any and all reasonable

opportunities for potential development of these respective resources.

We have available in this country plentiful natural gas and oil resources that can

be developed in an efficient and environmentally sensitive manner. One area with

great potential is the deep water of the Gulf of Mexico which has had an explosion

of development in recent years. The Mineral Management Service (MMS) is scheduled to hold a lease sale, Lease Sale 181, in December of 2001 for an area in the

Eastern planning area of the Gulf. The lease sale would cover a narrow strip of federal waters directly south of the Alabama coast line which expands into a broader

area a hundred miles out in the Gulf. Industry has developed oil and gas in this

huge expanse of federal waters for years in a safe and environmentally sound manVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00081 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
78

ner. The MMS estimates 240 million barrels of oil and 1.8 trillion cubic feet of natural gas will be developed from this area. Those figures could go as high as 370 million barrels of oil and 3.2 trillion cubic feet of natural gas. When the MMS prepared

the leasing plan for this five year period, extensive public meetings and consultations with states were conducted. This area is a huge expanse of federal waters

where industry has developed oil and gas for years in a safe and environmentally

sound manner. The Minerals Management Service (MMS) should proceed with

Lease Sale 181 in December of this year as planned.

The waters of the Gulf of Mexico have proven to be a plentiful source of oil and

natural gas and are predicted to remain so in the immediate future. Nearly 80%

of the Federal oil and gas that is produced annually from the Outer Continental

Shelf is produced from the waters adjacent to the State of Louisiana and I am

happy for this development to continue. However, the supply in the Gulf is not without limits. One day this supply will cease. We owe it to ourselves and future generations to at least consider other areas both on and offshore for prospective development. While we cannot recklessly cast aside any restrictions to development on certain lands and off certain shores that are in place out of concern for the environment, an analysis of the costs and benefits of such development which takes into

account advances in exploration and production technologies does not seem unreasonable.

One area in particular that I am interested in hearing about from the witnesses

is the Rocky Mountain region and its potential natural gas supply. The 1999 National Petroleum Council study on Natural Gas found that, in addition to the Gulf

of Mexico, the other most promising region for future gas production was the Rocky

Mountains. The report estimated that an estimated 40%—or 137 TCF—of potential

gas resource in the Rockies is on federal land that is either closed to exploration

or is open under restrictive provisions. To ignore the potential of this area does not

seem like good policy.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much. I appreciate your statement, and we will proceed with our witnesses now. Let me introduce them at this time. We have Panel One, Dr. Patrick Leahy, a

good Irishman, Associate Director of Geology, U.S. Geological Service from Reston, Virginia; Mr. Matt Simmons, president, Simmons

& Company International from the great State of Texas, downtown

Houston; the Honorable David Hayes, who is no stranger to us, although he is wearing a new badge—he has joined the fraternity of

lawyers which is expanding all the time in Washington—as a partner with Latham & Watkins here in Washington, D.C.; Mr. Mark

Rubin, who is general manager of Upstream. And do you want to

explain the difference between upstream and downstream?

Mr. RUBIN. Upstream is exploration and production.

The CHAIRMAN. And downstream is?

Mr. RUBIN. Refining, marketing, that kind of thing.

The CHAIRMAN. I wanted to make sure because some of our colleagues, including myself, have been both upstream and downstream, but not necessarily in the petroleum business.

Mr. RUBIN. It is up the creek.

The CHAIRMAN. It is up the creek? Okay. Well, I was maintaining

the metaphor here, and I thought it was appropriate for this distinguished group, but he comes to us as general manager, Upstream,

American Petroleum Institute in Washington, D.C. Mr. Neal Stanley—Mr. Stanley is vice president, Western Region, Forest Oil Corporation of Denver, on behalf of the Independent Petroleum Producers of America. If we have got that right, we will proceed and

would ask that you try to keep your statements to about seven

minutes, and then when we are all through, we will have some

questions for you. Is that fair enough? Thank you.

79

STATEMENT OF DR. P. PATRICK LEAHY, ASSOCIATE DIRECTOR

FOR GEOLOGY, U.S. GEOLOGICAL SURVEY, DEPARTMENT OF

THE INTERIOR

Dr. LEAHY. Mr. Chairman and distinguished members of the

committee, thank you for this opportunity to present on behalf of

the U.S. Geological Survey, testimony regarding our assessment of

oil and gas resources nationally, and our assessment strategy of

Federal lands as called for in the recently enacted Energy Act of

2000. I will summarize my written statement in the interest of

time.

The USGS is responsible for assessing undiscovered oil and gas

resources of all onshore and State offshore areas of the Nation. In

February 1995, the USGS released the National Assessment of the

U.S. Oil and Gas Resources. We are updating that assessment in

selected regions thought to have high potential for undiscovered

natural gas, including coal bed methane and gas hydrate. This update will be completed in 2004 with interim products available in

early 2002. The updated assessment will include allocations of undiscovered oil and gas resources to Federal lands. Additionally, the

USGS is completing a national coal resource assessment during

2001. Assessments of some areas have already been released relative to the coal.

The 1995 USGS assessment of the Nation’s undiscovered oil and

gas was conducted in collaboration with the State geological surveys, the Minerals Management Service, and other Federal agencies, and industry geologists under the auspices of the American

Association of Petroleum Geologists. Assuming existing technology,

there are approximately 113 billion barrels of technically recoverable oil on shore and in State waters. The technically recoverable

conventional natural gas equals approximately 716 trillion cubic

feet. When one includes unconventional gas resources, the total increases to 1,074 trillion cubic feet.

The total technically recoverable oil and gas resource base on

shore and in State waters of the United States is displayed in the

table on page two of my written statement.

In January 1998, the 1995 assessment was used and USGS published a report that provided estimates of the volumes of undiscovered oil and gas on Federal lands. Estimates of oil in undiscovered conventional fields ranged from 4.4 to 12.8 billion barrels,

with a mean value of 7.5 billion barrels. Estimates of technically

recoverable gas in undiscovered conventional fields ranged from 34

to 96 trillion cubic feet.

The CHAIRMAN. What is the difference between a conventional

field and a nonconventional field?

Dr. LEAHY. Nonconventional fields make our continuous gas resources. They are not in structural traps or sedimentary traps, so

things like coal bed methane would be considered unconventional.

The CHAIRMAN. What is conventional?

Dr. LEAHY. Conventional are those gases that are in stratigraphic traps so that you drill into the trap and structural traps,

so they are discrete resources.

As before when unconventional gas resources are included, the

volume increases. Estimated volumes of undiscovered oil and gas

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and natural gas liquids in onshore Federal lands of January 1994

are displayed in the table on page three of my statement.

[Chart.]

Dr. LEAHY. I would like to refer to this poster now. This shows

the 113 billion barrels of oil, as well as the 1,074 trillion cubic feet

of natural gas in onshore and State waters. It also shows the

breakdown as a percentage into four major categories: crude resources, reserve growth in known fields, and undiscovered resources on both Federal lands and non-Federal lands. And the colors that were used are identical in both graphs.

What I would like to do now is talk a little bit about the Energy

Act of 2000. Section 604 of that Act requires the Secretary of the

Interior to conduct an inventory of energy resources and the restrictions and impediments to their development on Federal lands.

It is our understanding that the role of the USGS will be to assess

the oil and gas resources of basins with Federal land ownership

using USGS assessment methodology. Then USGS geologists will

allocate resource estimates to those specific land parcels owned by

the Federal Government. USGS resource assessments will be combined with reserve volumes from the Department of Energy and

will be incorporated into a geographic information system which

shows the spatial distribution of potential resources as well as the

known reserves. The resource and reserve information will be integrated with geographic information on the restrictions and impediments constructed by BLM and the Forest Service, and the inventory will be provided to Congress within two years of the enactment of the legislation which was this past November.

I have also been asked as part of my testimony to talk a little

bit about the Minerals Management Service, and I will provide to

you the results of the Mineral Management Service 2000 assessment of the Federal Outer Continental Shelf undiscovered oil and

gas resources. The part I have not talked about are shown in these

graphs.

MMS estimates that the total mean undiscovered conventionallyrecoverable resources for the United States OCS are 75 billion barrels of oil and 362 trillion cubic feet of gas.

Mr. Chairman, thank you for the opportunity to testify, and I

will be happy to respond to any questions the committee has.

[The prepared statement of Mr. Leahy follows:]

PREPARED STATEMENT OF DR. P. PATRICK LEAHY, ASSOCIATE DIRECTOR FOR

GEOLOGY, U.S. GEOLOGICAL SURVEY, DEPARTMENT OF THE INTERIOR

Mr. Chairman and Members of the Committee, thank you for this opportunity to

present, on behalf of the U.S. Geological Survey (USGS), testimony regarding our

national assessment of onshore oil and natural gas resources. Additionally, the Committee has requested that we include information recently provided by the Minerals

Management Service (MMS) to the Congress concerning estimates of the undiscovered oil and natural gas resources of the Outer Continental Shelf (OCS).

Within the Federal Government, the USGS is responsible for assessing undiscovered oil and gas resources of all onshore and State offshore areas of the Nation.

In February 1995, the USGS released the National Assessment of United States Oil

and Gas Resources. Currently, we are updating that assessment in selected regions

thought to have high potential for undiscovered natural gas, including coal-bed

methane and gas hydrate. This update will be completed in 2004, with interim products available in early 2002. The updated assessment will include allocations of undiscovered oil and gas resources to Federal lands. Additionally, the USGS is completing a National Coal Resource Assessment during 2001. To date, coal resource

81

assessments of the Colorado Plateau and of the Northern Rocky Mountains and

Great Plains have been released, and coal resource assessments of the Appalachian

and Illinois Basins, and Gulf Coast Region will be available later in 2001. USGS

coal assessments also identify volumes of coal under Federally owned lands, and of

Federally owned coal under privately owned lands, where present.

MMS is responsible for developing estimates of Federal offshore crude oil and natural gas resources. The most recent MMS resource assessment was completed in

2000, and I will discuss some of the highlights of that assessment later in my testimony. I would also like to submit for the record a copy of the testimony MMS presented on its most recent resource assessment before the House Resources Subcommittee on Energy and Mineral Resources on March 22, 2001.

USGS 1995 NATIONAL ASSESSMENT OF UNITED STATES OIL AND GAS RESOURCES

The 1995 USGS assessment of the Nation’s onshore undiscovered oil and gas was

published in digital format on a CD-ROM (USGS Digital Data Series-30) and in a

non-technical summary, as USGS Circular 1118. The Assessment was conducted in

collaboration with State Geological Surveys, with MMS, and with industry geologists under the auspices of the American Association of Petroleum Geologists. Additional cooperation with the Bureau of Land Management, National Park Service,

U.S. Forest Service, and Bureau of Indian Affairs was essential for the USGS to

generate information regarding oil and gas resources on Federal lands. The current

update of the 1995 assessment is being conducted with many of the same partners.

Assuming existing technology, there are approximately 112 billion barrels of technically recoverable oil onshore and in State waters, according to the USGS’s most

recent assessment. Technically recoverable resources are those that may be recoverable using current technology without regard to cost. Economically recoverable resources are that part of the technically recoverable resource for which economic factors are included and which can be recovered at a given market price. This includes

measured (proved) reserves, future additions to reserves in existing fields (reserve

growth), and undiscovered resources. The technically recoverable conventional resources of natural gas in measured reserves, future additions to reserves in existing

fields, and undiscovered accumulations equal approximately 716 trillion cubic feet

of gas.

In addition to conventional gas resources, the USGS has made an assessment of

technically recoverable resources in continuous-type (largely unconventional) accumulations. We estimate about 308 TCFG (trillion cubic feet of gas) of technically recoverable natural gas in continuous-type deposits in sandstones, shales, and chalks,

and almost 50 TCFG of technically recoverable gas in coal beds. The total technically recoverable oil and gas resource base onshore and in State waters of the

United States is displayed in the table below.

RESULTS OF THE USGS 1995 NATIONAL OIL AND GAS ASSESSMENT

Resource category

Oil

(billion

barrels)

1995

Gas

(trillion

cu. ft.)

1995

Natural gas

liquids (billion

barrels)

1995

Undiscovered resources

Conventional Accumulations ....................... 30 259 7

Unconventional Accumulations.

Sedimentary reservoirs ............................. 2 308 2

Coal-bed methane ..................................... NA 50 NA

Anticipated Reserve Growth ........................... 60 322 13

Total ........................................................... 92 939 22

Proved Reserves (in 1994) ............................... 20 135 7

Total ........................................................... 112 1,074 29

The estimates presented in this testimony reflect USGS understanding as of January 1, 1994. They are intended to capture the range of uncertainty, to provide indicators of the relative potential of various petroleum provinces, and to provide a useful guide in considering possible effects of future oil- and gas-related activities within the United States.

The geographic information system (GIS) coverages contained in this assessment

and related databases provide the capability to estimate oil and gas resource potenVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
82

tial on specific tracts of land, including those owned and/or managed by the Federal

Government. This process is called allocation, based on expert opinion, and is accomplished using a methodology that takes into consideration all geologic information available about the basin.

1995 NATIONAL OIL AND GAS ASSESSMENT AND ONSHORE FEDERAL LANDS (1998)

In January 1998, the USGS published an Open-File Report (OFR 95-0075-N) that

reported estimates of volumes of undiscovered oil and gas on Federal lands. Estimates of oil in undiscovered conventional fields range from 4.4 to 12.8 billion barrels

(BBO), with a mean value of 7.5 BBO. Estimates of technically recoverable gas in

undiscovered conventional fields range from 34.0 to 96.8 trillion cubic feet (TCF),

with a mean value of 57.9 TCF. Almost 85 percent of the assessed natural gas in

undiscovered conventional accumulations was non-associated gas, that is, gas in gas

fields rather than gas in oil fields. Estimates of technically recoverable resources in

conventional (continuous type) accumulations for oil are from 0.2 to 0.6 BBO, with

a mean value of 0.3 BBO, and for gas, from 72.3 to 202.4 TCF, with a mean value

of 127.1 TCF. These ranges of estimates correspond to 95 percent probability (19

in 20 chance) and 5 percent probability (1 in 20 chance) respectively, of a least those

amounts occurring.

An economic evaluation was applied to these technically recoverable estimates.

Our study concluded that at $30 per barrel for oil and $3.34 per thousand cubic feet

of gas, 3.3 BBO oil and 13.6 TCF in undiscovered conventional fields can be found,

developed, and produced. In addition, at these estimated prices, 0.2 BBO oil and

11.4 TCF in continuous-type accumulations and 11.8 TCF of coalbed gas can be developed.

Estimated volumes of undiscovered oil, gas, and natural gas liquids in onshore

Federal lands, as of January 1994 are displayed in the table below.

Technically recoverable Economically

recoverable*

F95 Mean F05 $18/bbl

$2/mcf

$30/bbl

$3.34/mcf

Conventional

Oil (BBO) ** .................................. 4.4 7.5 12.8 1.6 3.3

Gas (TCF) ...................................... 34.0 57.9 96.8 9.7 13.6

NGL (BBL) .................................... 1.1 1.8 2.7 0.7 0.9

Unconventional

Oil (BBO) ....................................... 0.2 0.3 0.6 0.1 0.1

Gas (TCF) ...................................... 72.4 127.1 202.4 6.1 11.4

NGL (BBL) .................................... 0.1 1.5 2.6 0.0 0.1

Coalbed methane (TCF) ............... 13.0 16.1 19.6 7.0 11.8

* Includes cost of finding, developing, and producing the resource. Based on mean values of

technically recoverable estimate.

** BBO=billion barrels oil; TCF=trillion cubic feet; BBL=billion barrels liquid, mcf=thousand

cubic feet.

APPLICATIONS OF THE USGS 1995 NATIONAL OIL AND GAS RESOURCE ASSESSMENT

The results of the USGS National Oil and Gas Resource Assessment have been

used by the Energy Information Administration for its Annual Energy Outlook, by

the California Energy Commission and Canadian Energy Board to model inter-regional natural gas supply and demand and the resulting economic impacts, and by

numerous petroleum companies as a basis for evaluating risk associated with exploration and development of domestic oil and gas resources.

Many Federal agencies use the information in the USGS National Oil and Gas

Assessment for land-use planning, energy policy formulation, and economic forecasting. Customers include the Department of the Interior, Bureau of Land Management, National Park Service, U.S. Forest Service, Bureau of Indian Affairs, Energy

Information Administration, and the Department of Energy, among others. In addition, most State Geological Surveys and/or State Divisions of Oil and Gas use the

USGS assessment for regional and local resource evaluation and lease planning purposes. Many private sector organizations also use the digital oil and gas assessment

results, including environmental protection advocacy groups, petroleum exploration

companies, and utility companies (including natural gas and electricity utilities).

83

SEC. 604 ENERGY ACT OF 2000

The Secretary of the Interior is charged with conducting an inventory of energy

resources and the restrictions and impediments to their development on Federal

Lands in Section 604 of the Energy Act of 2000, signed into law on November 9,

2000. The exact text is given below:

SEC. 604. SCIENTIFIC INVENTORY OF OIL AND GAS RESERVES.

IN GENERAL.—The Secretary of the Interior, in consultation with the Secretaries of Agriculture and Energy, shall conduct an inventory of all onshore Federal

lands. The inventory shall identify— (1) the United States Geological Survey reserve estimates of the oil and gas

resources underlying these lands; and

(2) the extent and nature of any restrictions or impediments to the development of such resources.

(b) REGULAR UPDATE.—Once completed the USGS reserve estimates and the

surface availability data as provided in subsection (a)(2) shall be regularly updated

and made publicly available.

(c) INVENTORY.—The inventory shall be provided to the Committee on Resources of the House of Representatives and to the Committee on Energy and Natural Resources of the Senate within 2 years after the date of the enactment of this

section.

(d) AUTHORIZATION OF APPROPRIATIONS.—There are authorized to be appropriated such sums as may be necessary to implement this section.

It is our understanding that the role of the USGS will be to assess the oil and

gas resources of oil and gas-bearing basins with Federal land ownership, consistent

with the USGS assessment and allocation methodology. Then, USGS geologists will

allocate resource estimates to those specific land parcels owned by the Federal government. The USGS resource estimates will be combined with reserve volumes from

the DOE/EIA, and will be incorporated into a geographic information system (GIS)

that shows the spatial distribution of those potential resources and known reserves.

The resource and reserve GIS will be integrated with a GIS of restrictions and impediments constructed by BLM and USFS. The USGS has met several times with

representatives of the Bureau of Land Management (BLM), the US Forest Service,

the US Department of Energy and their Energy Information Administration and the

staff of this committee to discuss plans to produce this inventory.

The USGS intends to use some of the resource estimates from the 1995 National

Oil and Gas Assessment, for which there are not significant new data, and will update resource estimates for the gas-prone areas of the country for which we have

new data and are developing improved assessment methods.

THE MINERALS MANAGEMENT SERVICE’S 2000 OCS RESOURCE ASSESSMENT

As background, MMS’s mission consists of two major programs: Offshore Minerals

Management and Minerals Revenue Management. The leasing and oversight of mineral operations on the Outer Continental Shelf (OCS) and all mineral revenue management functions for Federal (onshore and offshore) and American Indian lands are

centralized within the bureau. In 2000, OCS oil and natural gas production accounted for roughly 25 and 26 percent, respectively, or our nation’s domestic energy

production—oil production was over 500 million barrels and natural gas production

was over 5 trillion cubic feet. The amount of oil and natural gas production in 2000

was the most ever produced on the OCS. In addition, in fiscal year 2000, MMS collected and distributed about $7.8 billion in mineral leasing revenues from Federal

and American Indian lands.

In its role as manager of the Nation’s OCS energy and non-energy mineral resources, MMS is responsible for assessing those resources; determining if they can

be developed in an environmentally sound manner; and if leased, regulating activities to ensure safety and environmental protection. An integral element in that mission is to identify the most promising areas of the OCS for the occurrence of crude

oil and natural gas accumulations and to quantify the amounts of oil and natural

gas that may exist in these areas.

Since its creation in 1982, MMS has completed four systematic assessments of

Federal OCS undiscovered oil and natural gas resources, including its most recent

assessment. The 2000 resource assessment was done to support staff work and analysis needed in formulating the next 5-Year Oil and Gas Leasing Program covering

the timeframe 2002-2007. It should be noted that the methodology for the 2000 assessment has not changed significantly from that used in the previous 1995 assessment.

The 2000 assessment presents the updated assessment results since the 1995 assessment for the Alaska, Atlantic, and Gulf of Mexico OCS Regions. In the Alaska

84

Region only the Beaufort and Chukchi Seas, Hope Basin, and Cook Inlet areas were

updated, as other planning areas lacked new data and changes since the last assessment. The Pacific OCS Region was not updated for the same reasons. The Atlantic

OCS Region was re-evaluated to reflect recent exploration results offshore Nova Scotia, current exploration and production technologies, and to make the water depth

divisions compatible with the ones now being used in the Gulf of Mexico.

The MMS has recently made public the 2000 assessment, and I have included a

copy of the assessment with my written testimony for the hearing record. MMS estimates that the total mean undiscovered, conventionally recoverable resources for

the United States OCS are 75.0 billion barrels of oil and 362.2 trillion cubic feet

of natural gas. Within that total, MMS determined that the undiscovered conventionally recoverable resources foregone by the 1998 moratoria (i.e., the President’s June 1998 OCS decision) would be approximately 16 billion barrels of oil and 62

trillion cubic feet of gas.

The total mean undiscovered economically recoverable resources for the United

States OCS are 26.6 billion barrels of oil and 116.8 trillion cubic feet of gas at prices

of $18 per barrel and $2.11 per thousand cubic feet, respectively, and 46.7 billion

barrels of oil and 168.1 trillion cubic feet of gas at prices of $30 barrel and $3.52

per thousand cubic feet, respectively.

Mr. Chairman, this concludes my remarks. However, I would be happy to respond

to any questions members of the committee may have.

The CHAIRMAN. I think when we get to your questions, we will

probably get some questions relative to how much of this OCS is

off-limits because of moratoria, and how much is actually available.

Mr. Matt Simmons.

STATEMENT OF MATTHEW R. SIMMONS, PRESIDENT,

SIMMONS & COMPANY INTERNATIONAL

Mr. SIMMONS. Chairman Murkowski and Senators, I first of all

commend this important committee for conducting hearings on the

impediments to developing added oil and gas supplies. For far too

long this topic lingered on the sidelines of America’s critical issues.

America no longer has the luxury of debating whether domestic energy is important or not because we are now in the early stages

of, in my opinion, the most serious energy crisis this country has

ever faced. It will become more serious over time, and if we do not

correct the severe energy problems we now face, America’s economic future is grim.

As our energy crisis unfolds, it could become the most critical

threat to our economy since World War II. The energy crisis is very

real, as we have run out of virtually all spare energy capacity in

all three basic forms of energy: oil, natural gas, and electricity. And

we have run out of all three almost simultaneously. We accidentally created a perfect energy storm.

There are still many skeptics—most well-intended but simply

misinformed—who say the energy crisis is not real. Other skeptics

argue that even if the problem is real, the solution is not on the

supply end. This is merely a bad policy of draining America first.

Instead they would argue that we should either conserve our way

out of this problem or finally embrace renewable energy which has

been ignored for too long. These concepts would be worthy topics

to debate had we not allowed a true crisis to arise. It is now time

to buckle down to the real energy issues we face, to roll up our

sleeves and finally solve our current energy mess.

Winter is finally coming to an end, and it became a true energy

winter of discontent, causing the most prosperous State in the most

affluent country on earth to suffer through frequent energy blackouts. The Northeast got through the winter without running out of

85

heating oil but had Europe’s winter been colder, the record levels

of Russian and European heating oil we imported would not have

spared yet another energy crisis on our east coast, too. With winter

ending, America now needs to shift its focus to the threat of a potentially hot and humid summer. If this summer’s weather is as

hot as the summer of 1999, peak electricity demand will be far

higher than last year and we could get ultimately get a wake up

call with blackouts that potentially stretching on both of our coasts

at the same time.

To make matters worse, our gasoline stocks are lower than the

low levels of a year ago, and reformulated additives are at far

lower levels. The grim reality is that we are now in the early

stages of a very serious energy crisis. For years America had a

comfortable cushion of spare energy capacity. In the petroleum

market, this was a combination of commercial petroleum stocks

with days or even weeks of extra supplies, but we’ve whittled this

down to less than a day, or even a few hours, in too many aspects

of our petroleum system. In natural gas, our spare margin was a

massive underground system of natural gas storage. Today, natural

gas storage levels are also at historic lows.

In electricity margins, the reserve margins are now gone in most

States whenever weather reaches hot or cold extremes. These energy problems cannot be ignored. I certainly do not need to remind

this committee that the U.S. economy has never grown when energy consumption has declined. There are only two ways to solve

this problem. The easy way is to merely use a lot less energy. On

the surface, this sounds like a plea for energy conservation, but

anyone doing any hard analysis of the real numbers will see the

numbers do not work.

Let me give just two examples to illustrate this point. If we suddenly had a fleet of one million 80-mile-per-gallon vehicles on our

roads taking the place of one million average automobiles, this

would only save 50 thousand barrels of oil use each day. Ten wells

or less in the deep water Gulf of Mexico produces an equivalent energy amount. Refrigerator——

The CHAIRMAN. Could you repeat that?

Mr. SIMMONS. If we created a fleet of one million 80-mile-per-gallon cars and they replaced one million conventional cars, that

would save 50 thousand barrels a day. Not much.

Refrigerators are the single biggest energy consumption unit in

all of our homes. If a new generation of refrigerators using 50 percent less electricity suddenly took the place of all 100 million refrigerators in all of our homes, this would save 2.5 percent of the

electricity use we use each day, or 1 percent of America’s daily energy use.

Conservation is extremely important for America to embrace, but

it does not provide a silver bullet to solve our energy crisis. Renewable energy sources are an important ingredient of our long-term

energy mix, but we need to be extremely realistic about how tiny

these future energy sources are. Less than one-tenth of 1 percent

of the electricity we use this year came from wind, solar, and biomass. Take away biomass, and the balance provides only one-thousandth of 1 percent of our electricity use.

86

There is only one way to solve our energy problems, and the solution involves increasing our energy supplies in all forms of energy,

including an ultimate return to more nuclear power in the United

States, and major increases in coal use, hopefully accompanied by

startling breakthroughs in clean coal technology.

We can also never wean the country from imported oil and imported natural gas, but it is a dangerous assumption to believe that

foreign imports of oil and gas will always solve our severe energy

crunch. Our infrastructure is simply not plumbed for any additional foreign supplies, and the foreign oil and gas markets are also

getting very tight. No country is ever going to supply our needs before taking care of their own energy demands first. At the end of

the day, we have to increase our domestic supply of oil and natural

gas, but getting this done requires fast action by both public and

private sectors to begin eliminating all of the obstacles that now

make it so hard to make real gains in the supply of either domestic

gas or oil.

Access to where these reserves reside is obviously extremely important. While it is politically popular to attack the need to open

up a few thousand acres of ANWR, this important area could create several hundred thousand barrels a day of extra oil and natural

gas, and possibly even far more. So it is too important to abandon.

It is time for ANWR’s opponents to stop broadcasting photographs

of pristine alpine mountain meadows of areas within the 19 million

acre reserve which happen to be hundreds of miles away from

where any oil and gas development would ever take place.

Lease Sale 181 in the eastern portion of the Gulf of Mexico is

just as vital as ANWR, perhaps even more so. This highly gasprone area is over 100 miles west of Florida at its closest point, but

it is right next to the most efficient infrastructure to bring these

reserves to where they can be consumed.

The Department of the Interior is just beginning a critically important survey or inventory of all of the reserve prospects to the

lower 48 States. I would highly encourage expanding this inventory

assessment to the entire Outer Continental Shelf of the United

States, including the waters offshore of California. This exercise

does not commit any area to development, it would merely help

identify where emergency relief might be found.

How tragic it would be to see the economy of a State like California destroyed through a lack of natural gas and electricity, all because natural gas lying just off its coast was never developed. Access is not the only impediment to increasing domestic supplies.

The list of other barriers is very lengthy. Many of these obstacles

involve a fragile capacity throughout most of the private sector.

Few of the various parts of the energy business have any near-term

ability to respond in any quick matter to creating more domestic

supply if all the access issues were resolved, but no private sector

participant is likely to begin a costly and complex expansion of its

capacity on the mere hope that access will someday be granted.

Solving our energy crisis will take a long time. The quicker our

country gets started on this task, the sooner the first signs of relief

will occur.

Mr. Chairman, thank you for the opportunity to address this

hearing.

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[The prepared statement of Mr. Simmons follows:]

PREPARED STATEMENT OF MATTHEW R. SIMMONS, PRESIDENT,

SIMMONS & COMPANY INTERNATIONAL

Chairman Murkowski and members of the Senate Energy and Natural Resources

Committee, I am Matthew Simmons, president of Simmons & Company International, a specialized energy investment bank. I have spent the past 28 years focusing exclusively on energy related investment banking and energy research. I am

a member of the National Petroleum Council and was a member of the Bush-Cheney Energy Transition Advisory Committee. I also am a past Chairman of the National Ocean Industry Association. I served as the Demand Task Force Chairman

on the National Petroleum Council’s extremely important review of natural gas and

the challenges we face in addressing a future market likely to exceed 30 tcf per

year.

I commend this important Senate Committee for conducting these hearings today

on the impediments to developing added domestic oil and natural gas supplies. For

far too long this topic lingered on the sidelines of America’s critical issues. While

some would occasionally warn that the country was taking its energy issues far too

casually, as long as cheap energy prices persisted and no energy shortages occurred,

it was hard for most Americans to focus on energy issues, particularly if a serious

review implied the need to ultimately pay higher prices for a key resource that had

become virtually free.

America no longer has the luxury of debating whether domestic energy is important or not. We are now in the early stages of the most serious energy crisis this

country has ever faced. It will become more serious over time and if we do not correct the severe energy problems we now face, America’s economic future is grim. As

the energy crisis unfolds, it could become the most critical threat to our economy

since World War II.

Many are still skeptical about the actual severity of this crisis. Some think all of

our energy problems are contained within the state of California. But the problem

is now not only nationwide, it is spreading to most other parts of the globe. So, the

USA makes a critical mistake by assuming we can solve our nation’s energy problem by simply consuming more foreign energy supplies. This was one of the classic

energy mistakes California made. It assumed states like Arizona, Nevada, Utah,

Idaho, Oregon and Washington would always have ample spare energy supply, on

the slight chance California’s internal supplies ran out.

Our Energy Crisis is very real. We have run out of virtually all spare energy capacity in all three basic forms of energy: oil, natural gas and electricity and we ran

out of all three almost simultaneously. We accidentally created a perfect ‘‘Energy

Storm.’’

America must take the lead in solving this crisis. There is no other country with

the resources, or the likely intent, to bail us out. The idea of America continuing

its economic expansion without being able to expand its energy use is a true

oxymoron. For the U.S. to remain the leader of the world and also struggle with

a chronic energy shortage is just as far fetched. So we have now created a true crisis. But true crises are when American ingenuity has historically been at its best.

There are still many skeptics, most well intended but simply misinformed, who

say that the energy crisis is not real. Time Magazine took a savage poke at the

Bush Administration on this thesis just last week. Other skeptics argue that even

if the problem is real, the solution is not on the supply end. This is merely a bad

policy of ‘‘Draining America First.’’ Instead, we should either ‘‘conserve’’ our way out

of this problem or finally embrace renewable energy which has been ignored for too

long. Some argue that we need to do both and then all our energy woes will be

solved.

These concepts would also be worthy topics to debate, had we not allowed a true

crisis to arise. But, we failed to postpone this event so the debate would be fruitless

effort. It is now time to buckle down to the real energy issues we face, to roll up

our sleeves and finally solve our current energy mess. After we solve the energy crisis, we can return to a polite and gentlemanly debate on theoretical issues.

Winter is coming to an end. It became a true ‘‘Energy Winter of Discontent,’’ causing the most prosperous state in the most affluent country on earth to suffer

through frequent energy blackouts. This caused billions of dollars of lost productivity and took two first rate triple A electric utilities to a point of insolvency. This

should have been a classic wake-up call for all Americans that something had gone

very wrong on our energy front. But too many viewed these problems as a unique

situation in California.

88

The Northeast got through the winter without running out of heating oil, but had

Europe’s winter been colder, the record levels of Russian and European heating oil

we imported would not have spared yet another energy crisis on the east coast too.

With winter ending, America needs to shift its focus to the threat of a potentially

hot and humid summer. If this summer’s weather is as hot as the summer of 1999,

peak electricity demand will be far higher than last year and we could get the ultimate wake-up call with blackouts that potentially stretch from coast to coast.

To make matters worse, our gasoline stocks are lower than the low levels of a

year ago and reformulated additives are at far lower levels. Unless a poor economy

begins to slow America’s driving habits way down, we could face gasoline shortages,

or at least high price spikes at the same time as electricity problems envelope the

country.

The grim reality is that we are now in the early stages of a very serious energy

crisis. It was no single entity’s fault. Rather, it is the cumulative effect of multiple

energy mistakes stretching over the past two or three decades. At the heart of the

problem is that we all consumed more energy than anyone planned to produce. So,

energy demand is constantly bumping against the daily ability to create energy supply. There is only one irrefutable physical law about energy demand. It cannot exceed supply without triggering shortages.

For years, America had a comfortable cushion of spare energy capacity. In the petroleum markets, this spare capacity was a combination of commercial petroleum

stocks with days or even weeks of extra supply. But, we whittled this down to less

than a day, or even a few hours in too many aspects of our petroleum supply. In

natural gas, our spare margin was in the massive underground system of natural

gas storage that gets built-up during the 7 months when heating needs are minimal

or non-existent. Today, natural gas storage levels are also at historic lows, running

a third less than last year’s levels. In the electricity market, various regional regulatory commissions mandated stiff ‘‘reserve margins’’ of spare power generating capacity. Through bad supply estimates and ultra-strong demand growth, these reserves are now gone in most states whenever the weather reaches hot or cold extremes.

These energy problems cannot be ignored or they will severely harm our economy

and cause pain and hardship to virtually every American. I do not need to remind

any of this committee that the U.S. economy has never grown when energy consumption has declined. There are only two ways to solve this problem. The easy way

is to merely use a lot less energy. On the surface, this sounds like a plea for energy

conservation. But if anyone does hard analysis of the real numbers, no technology

available within the next ten years eliminates enough energy demand to make a

dent on the severity and magnitude of the problem.

Let me give just two examples to illustrate this point. If we suddenly had a fleet

of 1 million 80-mile per gallon vehicles on our roads, taking the place of 1 million

average automobiles, this would only save 50,000 barrels of oil use each day. Ten

wells in the deepwater Gulf of Mexico produces an equivalent energy amount. Refrigerators are still the single biggest energy consumption unit in many homes. If

a new generation of refrigerators using 50% less electricity suddenly took the place

of all 100 million refrigerators in all of our homes, this would only save 2.5% of the

electricity we use each day or only 1% of America’s total daily energy use.

Conservation is important for America to embrace. But it does not provide a ‘‘silver bullet’’ to solve our energy crisis. The only available conservation measure that

really works would be a major shrinkage of our economy, possibly including cutting

demand through energy rationing and blackouts. Not a single American would wish

this on our country.

Renewable energy sources are an important ingredient of our long-term energy

mix but we need to be extremely realistic about how tiny these future energy

sources are. Less than 1/10th of 1% of the electricity we used this year came from

wind, solar, and biomass burning. Take away biomass burning and the balance provides only one-thousandth of 1% of our electricity use.

While some well-intentioned Americans would like to argue otherwise, there is

only one real way to solve these problems and the solution involves increasing our

energy supplies in ALL forms of energy, including an ultimate return to more nuclear power in the USA and major increases in coal use, hopefully accompanied by

startling breakthroughs in clean coal technology.

We can also never wean the country from imported oil and imported natural gas

but it is a dangerous assumption to believe that foreign imports of oil and gas will

always solve our severe energy crunch. Our infrastructure is not ‘‘plumbed’’ for any

additional foreign supplies and the foreign oil and gas markets are also getting very

tight. No country is ever going to supply our needs before taking care of their own

energy demands first.

89

At the end of the day, we have to increase our domestic supply of oil and natural

gas as long as there is any reasonable prospect of being able to do so.

But getting this done requires fast action by both public and private sectors to

begin eliminating all the obstacles that now make it so hard to make real gains in

the supply of either domestic oil or natural gas.

Access to where these resources reside is obviously extremely important. While it

is politically popular to attack the need to open up a few thousand acres of ANWR,

the prospect that this important area could create several hundred thousand barrels

a day of extra oil and possibly even far more, is too important to our economic future to abandon this key resource because it is not politically popular to do so. It

is also important to realize that extra natural gas from ANWR could help make one

or even two pipelines economic, bringing additional supplies to the gas-starved lower

48 states.

It is time for ANWR’s opponents to stop broadcasting the photographs of pristine

alpine mountain meadows of areas within the 19 million acre wildlife reserve which

happens to be hundreds of miles away from where any oil and gas development

would ever take place and seriously examine the importance of these valuable reserves to our country. Prudhoe Bay has demonstrated for over 30 years that oil developments, the environment and ecology can live in harmony.

Lease Sale 161 in the Eastern portion of our Gulf of Mexico is just as vital as

ANWR, or even more so. This highly gas-prone area is over 100 miles west of Florida at its closest point. But, it is right next to the most efficient infrastructure to

bring these reserves to where the will be consumed by all of America. If our natural

gas supply turns out to be as fragile as I worry it will be, the reserves lying beneath

Lease Sale 181 just might prevent Florida and Georgia from becoming the next California.

The Department of the Interior is just beginning a critically important survey or

inventory of all the reserve prospects throughout the lower 48 states. I applaud this

effort but would highly encourage expanding this inventory assessment to the entire

Outer Continental Shelf of the USA, including the waters offshore California. This

exercise does not commit any area to development. It would merely help identify

where emergency relief might be found. How tragic it would be to see the economy

of a state like California destroyed through a lack of natural gas and electricity: all

because natural gas, lying just off its coast, was never developed.

Access is not the only impediment to increasing domestic supplies. The list of

other barriers is lengthy. Many of these obstacles involve the fragile capacity

through most of the private sector. Few of the various parts of the energy business

have any near term ability to respond, in any quick manner, to creating more domestic supply if all access issues were resolved.

But no private sector participant is likely to begin a costly and complex expansion

of its capacity on the mere hope that access will someday be granted.

Solving our energy crisis will take a long time. The quicker our country gets started on this task, the sooner the first signs of relief will occur.

I applaud this committee for the comprehensive energy bills that both sides of the

aisle have tabled. In my opinion, energy is as just as bipartisan an issue as our foreign policy. It is one of the few issues that literally impact every single American.

When we have plentiful energy, everyone benefits. When we do not, we all suffer.

Mr. Chairman, thank you for the opportunity of addressing this hearing.

The CHAIRMAN. Thank you very much, Mr. Simmons. I appreciate that statement.

David Hayes, please proceed.

STATEMENT OF DAVID J. HAYES, FORMER DEPUTY

SECRETARY OF THE INTERIOR

Mr. HAYES. Thank you, Mr. Chairman. It is a pleasure to be here

back again. Thank you. I am the former Deputy Secretary of Interior now, and on the private side I have submitted a written statement for the record, Mr. Chairman.

The CHAIRMAN. It will be included in the record.

Mr. HAYES. Thank you.

I will make a few points orally. My focus will be on the Federal

lands piece this morning, Senators. I am not qualified to speak on

the general issue of what is obviously a very serious energy situaVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00093 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
90

tion, and there is obviously a need for comprehensive policy. I know

that Senators Bingaman, Daschle and others have submitted a bill,

and that the chairman and others also have done so, and that the

President will.

What I would like to talk about is give a little perspective on the

Federal lands piece, because I think there are some great expectations about the potential for new energy development on the Federal lands, and I would like to talk about some of the realities of

it, and also some of the potential constraints per the subject of today’s hearing.

First, a bit of history. There is a sense that oil and gas development on Federal lands has been in decline. That is, in fact, not the

case. While there has been a long-term decline in domestic oil production across the board since 1970, the high water mark, and in

fact the low point came in 1992 when oil prices were extremely low,

and then oil and gas drilling activity in the United States was at

its lowest level since 1942—since then on the Federal lands there

have been significant increases in oil and gas production.

Those statistics are laid out in our written statement, and let me

give a few examples. Chairman Murkowski, you mentioned an important aspect of the increase has been in the deep water Gulf

where, in 1995, supported by this committee and signed by President Clinton, deep water royalty relief led to very significant increases in both oil and gas production in the Gulf. In the last 2

years alone, gas production in deep Gulf of Mexico waters increased

by 80 percent. And overall in addition to the Gulf increases, there

have been significant oil and gas drilling on both on-shore lands

and in Alaska leading to, over the 8 years of 1992 to 1980, an actual increase in the contribution of energy from the Federal lands

for the total domestic energy picture.

In 1992, 13 percent of domestic oil and gas production came from

the Federal lands; last year, it was up to 25 percent. So the contention that the Federal lands are essentially closed for business is

simply not correct. And, in fact, I would like to talk about that a

little bit more, if I can. There have been efforts in the last few

years that I think we should build on to continue to open up some

public lands for energy production. One, in addition to the Gulf of

Mexico example, where seven thousand new leases were issued on

the Outer Continental Shelf. The National Petroleum Reserve in

Alaska was opened up in 1998, and up to 4 million new acres area

available for oil and gas production. A lease sale was held that netted 100 million dollars in terms of bonus bids for those leases. Exploration is only now beginning, but there should be great productivity from that very large oil field.

Also in the Powder River basin there has been significant new

oil activity. BLM has issued over one thousand new permits in Senator Thomas’ backyard and is geared up to issue several thousand

more if we can get BLM the funding and the wherewithal to help

them proceed in that manner. They certainly have the willingness,

and had a green light from our administration, and I am sure do

from Secretary Norton as well. Also, the Clinton administration in

front of this committee agreed with Senator Bingaman and the

chairman that there should be a natural gas pipeline from Alaska,

91

and suggested that the Joint Pipeline Office in Alaska would be a

good forum for helping to expedite permitting for such a pipeline.

As you know, there are 25 trillion cubic feet of natural gas in the

current Prudhoe Bay fields that are simply being wasted, and it is

appropriate to get a pipeline to bring those—— The CHAIRMAN. Did you say wasted?

Mr. HAYES. Well, not utilized by Alaskans or for the lower 48.

The CHAIRMAN. Are they utilized for the recovery of oil?

Mr. HAYES. Yes, there is some reinjection. Wasted is too strong

a term.

The CHAIRMAN. I think you are right. I think it is too strong a

term.

Mr. HAYES. Let me amend my statement by saying that there’s

25 trillion cubic feet of natural gas that could be productively utilized by consumers in the lower 48 at Fairbanks and in Alaska— I think there is strong bipartisan support for that.

Now with regard to the issue of lands that are unavailable for

oil and gas drilling in the Federal domain—I would like to talk

about some of the areas. There is a potential here to issue sweeping statements about unavailability of lands. It is true that there

are significant potential reserves that are currently unavailable,

but it’s not helpful I do not think to talk about large numbers.

Instead it is more helpful to look in breakdowns where those

lands are located. Perhaps the most significant lands that are not

available for oil and gas drilling are the offshore resources that Dr.

Leahy discussed—offshore California, Washington and Oregon, also

the east coast and down into Florida. Most of that area was established as a moratorium in 1990 by then-President George Bush and

confirmed in an Executive Order in 1992 which was reconfirmed by

President Clinton. The issue of opening up that moratorium is obviously an important public policy issue, but to suggest that it can

easily be opened up as Senator Bingaman questioned is an issue

that will involve the public policy interests of all of the members

of those delegations in those States. I know that Governor Jeb

Bush and Governor Davis and many others feel very strongly about

the importance of maintaining those moratoria.

Let me close by mentioning the national monuments. This is another area where there has been criticism of President Clinton’s

naming of national monuments and a suggestion that very large reserves of oil and gas were thereby put aside from potential development. The Interior Department recently reconfirmed a survey of oil

and gas prospects in the 21 national monuments that were named

during the Clinton administration, and it confirmed that of those

21, only five had potential oil and gas reserves.

One of the five are the offshore rocks in California which are already subject to a moratorium; another of the five was in the Canyon of the Ancients, southwest Colorado, where in fact the monument designation allows continued leasing. The other three, there

were moderate oil and gas capabilities there—Hanford Reach,

Corizo Plain, and the upper Missouri River Breaks, but the Interior

Department analysis that was just reached last month demonstrates that the quantities involved are quite insignificant, particularly when compared with the environmental values that are

incorporated in those monuments.

92

So again, my main message here is that it’s not helpful, I do not

think, to the debate to make sweeping statements about lands that

have been withdrawn from potential oil and gas development. The

facts show that concerted good policy can lead to significant increases in oil and gas development on the Federal lands, and on

appropriate offshore areas. That is what the track record has been

in the 8 years of the Clinton administration, and I am convinced

that with your guidance it can continue in that way.

I know the MMS has continued to promote the deep water Gulf

activity with new regulations that it came out with in working with

industry last fall, and I think it will be very helpful to have the

inventory that is now being conducted by the Department of the Interior to see if there are further administrative changes that can

be done to help streamline the permitting process to make sure

that oil and gas reserves are, and can be, productively produced

with environmental sensitivity, that those opportunities in fact do

come on line, because energy needs in the United States certainly

are acute, and the Federal lands have to play their part, but we

need to be realistic about what that part is.

Thank you very much.

[The prepared statement of Mr. Hayes follows:]

PREPARED STATEMENT OF DAVID J. HAYES, FORMER DEPUTY SECRETARY

OF THE INTERIOR

My name is David J. Hayes. I am the former Deputy Secretary of the Department

of the Interior. I currently am practicing law in Washington, D.C., as a partner at

Latham & Watkins. I am appearing today in my personal capacity, at the request

of the Committee.

I appreciate the opportunity to testify on the important subject of the development

of domestic oil and gas resources in the United States. My expertise on this issue

relates to oil and gas development on the public lands in the U.S., and I will focus

my testimony on that subject.

I would like to address four primary points in my testimony today:

1. Significant efforts have been made over the past few years to enhance, where

appropriate, oil and gas production from our public lands. Even though energy

prices remained very low throughout the 1990s, the pace of oil and gas production

on federal lands increased during the Clinton Administration, rising from 13% of

total domestic production in 1992 to approximately 25% of total domestic production

in 1999.

2. Important new areas have been opened up for oil and gas exploration in recent

years and additional opportunities are available for development including, in particular, 4 million acres in the National Petroleum Reserve in Alaska that are newly

available for oil and gas production. Also, more than 25 trillion cubic feet of existing

natural gas supplies currently are available for export from Alaska’’s North Slope

without any additional exploration or production activities.

3. Although significant oil and gas opportunities continue to exist on federal

lands, some sensitive public lands are, and should be, off limits for oil and gas production, in accordance with our nation’s longstanding recognition that some public

lands and offshore resources are inappropriate for oil and gas drilling. In addition,

even if we were to reverse course and impose a new federal mandate to engage in

new oil and gas drilling in, for example, the offshore waters of California and Florida (to name two protected areas that have the most significant potential reserves),

opening up these protected areas for new oil and gas production would not ‘‘make

the difference’’ and lead to energy independence for the United States.

4. A balanced energy policy is needed—one that continues to address supply side

needs by promoting responsible oil and gas development on public and private lands

in the United States and encouraging the development of renewable energy sources,

and a policy that gives equal weight to demand side issues by addressing energy

efficiency and energy conservation. Our nation cannot and should not expect new

drilling activities on our federal lands to address and resolve long-term supply and

demand imbalances that have been in place for several decades.

93

OIL AND GAS PRODUCTION ON PUBLIC LANDS: THE TRACK RECORD

There is a significant amount of revisionist history that is being written regarding

oil and gas production on our public lands. A myth is being perpetuated that oil and

gas development activities on federal lands have been shut down in recent years,

with the shut-down occurring based on one-sided environmental concerns.

I would like to address the history as it stands, and take on the myths that are

being conjured up on this important issue.

First, for the history.

Domestic oil production in the United States has been declining for several decades, after peaking in 1970 at 9.6 million barrels per day. During the prior Bush

Administration, domestic oil production decreased by an average of 250,000 barrels

per day each year. During the last year alone (1992), domestic gas and oil drilling

activity decreased by nearly 17%, and was at its lowest level since 1942.

The causes for these declines are varied including, in particular, plentiful global

oil supplies, including significant new sources of supplies from non-OPEC nations,

and correspondingly depressed prices. Except for the oil price spike associated with

the Gulf war, the average price of crude oil during the 1990s approximated $15 per

barrel. The price of natural gas, while less volatile, also was quite low at $1.83 per

million cubic feet (mcf) due to a ‘‘gas bubble’’ of excess supply following restructuring in the natural gas markets. Indeed, the Asian recession which began in late

1997, coupled with an increase in OPEC production, caused the world oil price to

fall to $10 per barrel by the end of 1998.

Despite these severe price pressures, several steps were taken in the Clinton Administration to maintain healthy levels of oil and gas production on federal lands.

Deep water royalty incentives, proposed by former Senator Johnston and supported

by the Clinton Administration, contributed to a 65% increase in offshore oil production over the last eight years. This new incentive system also boosted natural gas

production dramatically, with gas production in deep Gulf of Mexico waters increasing by 80% in the past two years alone. The previous administration also implemented royalty reductions on marginal oil wells and heavy oil on federal lands to

maintain production and ensure maximum recovery. (Other proposals, including

President Clinton’s request for nearly $1 billion in tax incentives for the oil and gas

industry unfortunately were not implemented by Congress.)

I have attached an exhibit that was prepared by career staff at the Department

of the Interior which tracks overall oil and gas production, and outer-continental

shelf leasing activity, during the past twenty years. The data confirm that oil and

gas production on federal lands have continued at a robust pace, despite unfavorable

world prices, throughout the past decade. Indeed, as I summarized in testimony that

I presented to this Committee on July 26 of last year, the contribution of oil and

gas production from the federal lands, as a percentage of overall domestic oil and

gas production, increased from 13% in 1992, to 25% of total domestic production in

1999.

‘‘CLOSING OFF’’ FEDERAL LANDS FOR OIL AND GAS PRODUCTION:

SOME ADDITIONAL FACTS

In addition to the myth that oil and gas production declined unacceptably during

the Clinton Administration, a corollary myth has developed: namely, that the Clinton Administration inappropriately and without balanced decisionmaking—closed off

large areas of productive lands from oil and gas production due to one-sided environmental concerns.

At the outset, it is important to note that the previous Administration took significant steps to open up significant new areas of federal lands for exploration and production. The vast expansion of deep water natural gas production in the Gulf of

Mexico is one notable example. From 1992 to 2000, 7,091 new leases were issued

on the Outer Continental shelf, covering approximately 38 million acres.

Of equal note is the opening up of nearly 4 million acres of the National Petroleum Reserve in Alaska for oil and gas exploration and production in 1998. Exploration of these vast new lands, adjacent to the existing Prudhoe Bay fields, is now

underway, following an initial lease sale that netted more than $100 million dollars

for the U.S. treasury.

Likewise, when it appeared that the Powder River Basin could become a productive oil producing region, the Bureau of Land Management geared up its permitting

effort in the area. BLM is in the process of granting more than a thousand permits

to drill in that Basin, with many more expected to follow.

Finally, the Clinton Administration indicated its willingness last year to help facilitate the construction of a new natural gas pipeline from the North Slope of Alaska that would bring to market the more than 25 trillion cubic feet (tcf) of known

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1 In previous testimony before this Committee, on April 5, 2000, I outlined the reasons why

it is appropriate to continue to honor the long-standing restriction on exploration and production

activities in the Arctic Refuge. The area proposed for drilling is the coastal plain that has been

called the ‘‘biological heart’’ of the Refuge because it is the primary calving grounds for the Porcupine Caribou Herd. Unlike the Prudhoe Bay area, the coastal plain narrows significantly in

the Arctic Refuge, inviting a direct conflict between the untouched wilderness and proposed oil

and gas drilling, pipeline infrastructure, and related industrial activities. In addition, because

it appears that oil and gas reserves in the Arctic Refuge are spread out in several pools, rather

in one large formation like Prudhoe Bay, additional ‘‘footprints’’ and pipeline connections may

be required to develop oil and gas resources in the area. Finally, water resources are much more

limited in the coastal plain area of the Arctic Refuge, as compared with the Prudhoe Bay region.

Substantial water consumption is required for oil and gas activities; utilizing the limited available water supplies would likely negatively impact the existing ecosystem. (The construction of

ice roads requires approximately 1.35 million gallons of water per mile and 30,000 gallons of

water per day is necessary to support a drilling rig. Exploratory wells require approximately

15 million gallons of water per well.)

natural gas reserves that currently are available at Prudhoe Bay. These unutilized

natural gas supplies can, and should, be made available to Alaskans, and to Americans in the lower 48.

With regard to potentially productive public lands that are closed to development,

many of these lands have been unavailable to oil and gas development for many

years, based on a recognition that not all of the nation’’s shared landscapes are appropriate for oil and gas drilling activity. The National Arctic Wildlife Refuge illustrates this point. In 1980, Congress explicitly stated that ‘‘production of oil and gas

from the Arctic National Wildlife Refuge is prohibited and no leasing or other development leading to production of oil and gas from the range shall be undertaken

until authorized by an Act of Congress.’’ (See Section 1003 of ANILCA; 16 U.S.C.

3143.) In accordance with Congress’ explicit instruction, the Arctic Refuge has been,

and continues to be, unavailable for oil and gas production activity.1

Likewise, long-standing concerns have led to the imposition of a moratorium on

additional oil and gas production off of the California coast, and in the offshore waters of Florida, and other East Coast states. These moratoria are not new, and they

do not represent ill-considered policy choices that can or should simply be reversed.

The moratorium on oil and gas leasing activity in offshore California, for example,

was initiated by President Bush in 1990, and reaffirmed in a 1992 presidential directive. (President Bush’s presidential directive also covered waters offshore of

Washington, Oregon, Florida, and New England (George’s Bank)). When campaigning, now-President Bush indicated that he intends to continue to honor his father’s

actions, at least as they relate to the continued ban on new drilling in California’s

offshore waters.

Limitations on drilling offshore of the Eastern States likewise has a bipartisan

history. The current dispute regarding potential lease sale 181 in the eastern Gulf

of Mexico illustrates the point. The USGS and MMS have indicated that a very

large reservoir of natural gas is available at this lease location, but Governor Jeb

Bush of Florida has objected to moving forward with proposed development of that

site. I assume that President Bush will honor Governor Bush’s wishes and decline

to proceed with drilling in this gas-rich area.

As these examples demonstrate, important facts lie behind the ‘‘restrictions’’ on

oil and gas development on federal lands that typically are presented in sweeping,

unqualified terms (as, for example, in the National Petroleum Council’s recent report). No one should assume that lease restrictions reflect arbitrary decisionmaking

that can or should be easily undone or reversed through broad policy pronouncements.

Finally, of course, our nation has a long history of restricting oil and gas leasing

activity on sensitive landscapes. We would not accept drilling for oil or gas in our

National Parks, or in many other treasured public lands. Because we have made

this policy choice, our nation loses the potential energy potential associated with the

extraordinary geothermal resources in Yellowstone Park, the potential hydropower

available if we were to flood the Grand Canyon, or potential oil or gas production

from the red rock canyons of Bryce or Zion, or from the Indian ruins at Mesa Verde.

But in all of these cases we have recognized, and are honoring, competing values

associated with conserving these lands in their natural state.

Against this historic backdrop, President Clinton set aside approximately 5 million acres of public lands as national monuments that should be protected from further development. The United States Geological Survey recently confirmed that only

5 out of the 21 national monuments had moderate to high probability for the occurrence of oil and gas resources. Of these five, one of the monuments (California

Coastal National Monument) is covered by the existing moratorium on off-shore

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2One of the witnesses testifying today alleges that the designation of the Grand StaircaseEscalante Monument in Utah in 1996 withdrew promising valid oil and gas leases on state

lands. A recent USGS report confirms that oil and gas reserves in Grand Staircase-Escalante

are not significant. Recent history confirms this observation. Pursuant to the Utah Schools and

Land Exchange Act of 1998, state leases in the monument were converted into federal leases,

and were allowed to be developed. Conoco subsequently drilled wells in the monument, but it

is my understanding that none of the wells produced viable quantities of oil or gas, and that

leaseholders are allowing existing leases in the monument to expire.

California lease sales, three of the others allow continued oil and gas development

under existing leases (Carrizo Plain National Monument; Hanford Reach National

Monument; Upper Missouri River Breaks National Monument), and the fifth monument, Canyons of the Ancients, is open to further leasing.

While new exploration and production activities will not be allowed in most of

these special places, this limitation is fitting, and consistent with long-standing

American values, given the unique treasures that these lands hold. In any event,

the total acreage covered by these four national monument is less than one million

acres—far less than 1 percent of the Bureau of Land Management’s land base.2

The story is the same for other areas that are being protected for environmental

purposes. In connection with the limitations on development in the roadless areas

of our National Forests, for example, it is my understanding that the oil and gas

industry historically has demonstrated limited interest, over the years, in pursuing

these remote areas for oil and gas production. (In those limited areas in which the

oil and gas industry has shown interest, and where they have leased federal lands

for oil and gas exploration or production purposes, such activities will remain unaffected by the roadless rule.) I understand that additional studies of these areas are

now underway, and I will defer further discussion of these points to those who are

more knowledgeable than I am about these National Forest lands.

CONSTRUCTING A BALANCED ENERGY POLICY

As the testimony indicates, reversing public policy decisions and seeking to open

up protected lands for new oil and gas production—be they in offshore waters, in

the Arctic Refuge, or in national monuments—would raise fundamental public policy

issues. While it certainly is appropriate to discuss these policy issues, it would not

be responsible, in my view, to assert that there are economically and politically realistic opportunities to increase oil and gas production on our public lands so as to

achieve domestic ‘‘energy independence.’’ Our nation is consuming 9.6 million barrels of oil per day. While domestic production on public lands has held its own in

recent years (see Attachment A), we have been importing more than 50% of our nation’’s oil needs for many years. Even if we were able to reverse the long-term declining trend of domestic oil production, and greatly increase our oil production on

federal lands, there is no plausible scenario by which new oil production from our

federal lands (which supplies approximately 10% of our total oil needs) could enable

the United States to become independent of the foreign oil markets, or even to reduce our oil imports to less than 50% of our total needs.

A balanced energy policy is needed—one that continues to address supply side

needs by promoting responsible oil and gas development on public and private lands

in the United States, and provides incentives for the development of renewable energy sources, and a policy that gives equal weight to demand side issues by addressing energy efficiency issues, and energy conservation needs.

Thank you for the invitation to present testimony on this important topic.

ATTACHMENT A

PRODUCTION OF OIL, GAS, AND COAL FROM OFFSHORE AND ONSHORE

FEDERAL & INDIAN LANDS—1981 TO 2000

Oil

(Barrels

x 106)

Gas

(BCF)

Coal

(short tons

x 106)

Clinton Administration (1993-2000 *) ................... 18,615 156,705 8,477

Bush Administration (1989-1992) ......................... 10,788 73,933 4,004

Reagan Administration (1981-1988) ..................... 25,154 142,674 6,983

* (CY2000 data is preliminary)

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OUTER CONTINENTAL SHELF LEASING

Reagan

administration

1981-1988

(8 years)

Bush

administration

1989-1992

(4 years)

Clinton

administration

1993-2000

(8 years)

Total

OCS

Gulf of

Mexico

Total

OCS

Gulf of

Mexico

Total

OCS

Gulf of

Mexico

Tracts Leased ................................. 6,509 4,948 2,754 2,669 7,091 7,032

Million Acres Leased ..................... 34.7 26.0 14.2 13.8 37.7 37.5

The CHAIRMAN. Mr. Mark Rubin. Mr. Rubin is upstream manager, American Petroleum Institute.

STATEMENT OF MARK RUBIN, GENERAL MANAGER,

UPSTREAM, AMERICAN PETROLEUM INSTITUTE

Mr. RUBIN. Thank you. I appreciate this opportunity to discuss

oil and natural gas issues on behalf of API’s over 400 member companies. We are very appreciative of the efforts by the chairman and

ranking member of the committee to forge energy legislation and

are encouraged by much of what we see in the two bills that have

already been introduced.

Federal offshore production now supplies 24 percent of the oil

and 27 percent of the gas produced in the United States, and DOE

forecasts that offshore production will rise to nearly a third of our

domestic oil and gas supply within a decade. Clearly we must

maintain access to those areas currently open to development in

the Gulf of Mexico and elsewhere, including that small portion of

the eastern Gulf included in Federal OCS Sale 181 scheduled for

December.

We are encouraged that Senator Bingaman’s legislation S. 596

endorses this lease sale. We continue to believe, however, that the

sale should include all of the tracts planned for the sale volume in

this. To do otherwise would significantly reduce the amount of energy, natural gas in particular, that Sale 181 is expected to provide.

The 3,900 oil and gas platforms operating offshore have an outstanding safety environmental record. U.S. offshore exploration

production are among the most heavily-regulated activities in this

country and meet the world’s most stringent government regulations and industry standards. Protecting the environment is a national imperative, and our operations have an impressive record of

protecting coastal waters.

Moving to onshore, last fall this committee directed the Departments of the Interior and Energy and the Forest Service to conduct

an inventory of oil and natural gas resources on onshore government lands and identify the restrictions limiting access as part of

the reauthorization of the Energy Policy and Conservation Act.

This inventory is critical to creating a more informed decision-making process that will allow Congress and the agencies to focus attention on providing access to the areas with the greatest potential

for oil and natural gas production.

Over the last several years, we have seen numerous decisions

that have eliminated access to millions of acres with high potential

for oil and natural gas exploration. DOE studied the recentlyVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00100 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
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adopted Forest Service roadless moratorium and identified significant oil and natural gas resource potential. What is more, the vast

majority of these resources could have been developed if the Forest

Service had merely withheld a small amount of the roadless area

from the final rule. In the Rocky Mountains, for instance, access to

83 percent of the total gas resources in the roadless areas could

have been preserved with a less than 5 percent reduction in the

acreage included nationwide.

Recently, as Mr. Hayes mentioned, the USGS conducted an assessment of the new national monuments designated since 1996

and found that five of these monuments had moderate to high potential for oil and gas resources. We believe that these actions underscore the importance of understanding the resource potential of

government lands before such far-reaching decisions are made, not

afterwards. And although, as Mr. Hayes mentioned, production

from Western U.S. lands has actually increased over the last several years, the actual amount of producing acreage in the West on

Federal lands has actually declined since 1990.

Alaska still holds much promise for new energy development, not

only in ANWR, but in also in the National Petroleum Reserve in

Alaska west of Prudhoe Bay. These are areas where advanced technology has allowed us to make great strides in developing fields

with little impact to the environment.

For example, in Phillips’ Alpine field, only 97 acres are needed

on the surface to produce from 40 thousand sub-surface acres.

North Slope exploration takes place during the winter using ice

roads and ice pads that melt in the spring, leaving no trace of exploration activities.

These technological advances would allow us to limit our impact

in the coastal plain of ANWR, should Congress decide to allow development. In spite of the claims to the contrary by those who oppose opening ANWR, the resource potential in ANWR is enormous.

The EIA predicted that if oil is found in ANWR, the area could

produce well over 1 million barrels per day for over 20 years. Anyone who doubts the positive impact this could have for consumers

should consider the fact that when OPEC recently decided to reduce production to affect the price of oil, they cut their production

by 1 million barrels per day.

If our industry is given the opportunity to explore for and

produce our country’s oil and natural gas resources, it is the U.S.

consumer who will derive the greatest benefit. We are willing to

make enormous investments to increase domestic production of

both oil and gas, and to do so in a manner that minimizes environmental impacts, but we must have access to our national resources

for exploration and production. Thank you.

[The prepared statement of Mr. Rubin follows:]

PREPARED STATEMENT OF MARK RUBIN, GENERAL MANAGER, UPSTREAM, AMERICAN PETROLEUM INSTITUTE

The American Petroleum Institute (API) welcomes this opportunity to present the

views of its member companies on the question access to government lands for the

United States. API is a national trade association representing over more than 400

companies engaged in all sectors of the U.S. oil and natural gas industry, including

exploration, production, refining, distribution, and marketing.

We are gratified that this committee is working towards a national energy policy.

For too long, energy has been an afterthought, rather than a key component of govVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
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ernment decision-making. This has to change. The events of the past year—heating

oil problems in New England, gasoline shortfalls in the Midwest, and the California

electric power disruptions—have forced us to start thinking comprehensively about

the energy issues facing our country. The only way we can deal with these issues

is by forging an effective national energy policy. Fundamentally, a sound national

energy policy will be market-based, rely on all forms of energy, encourage technological advancement, improve energy efficiency and conservation, and ensure environmental quality.

We applaud the Bush Administration for creating a cabinet-level task force on the

subject, and we are encouraged that you and other members of Congress of both

parties are putting energy policy at the top of your agenda.

It is important to emphasize one point: Americans can be provided with reliable

and affordable energy supplies and a clean environment. This is not an either-or situation. We are confident that, with the proper changes in the policy arena, we can

help keep the nation supplied with fuel while at the same time continuing to improve our technology for the future—technology that will also enable further extraordinary environmental gains.

That is the encouraging news. The sobering news is that there are no quick fixes

to a serious situation that has developed over the last 25 years. It will take some

years to rectify our energy problems.

Our nation is going through a period of economic uncertainty. We do not know

whether this will turn out to be a bump in the road or the beginning of an economic

downturn. What we do know is that every 2-percent growth in Gross Domestic Product requires an almost 1-percent growth in energy usage. If we are to continue

America’s economic prosperity, creating jobs and wealth for our growing population,

we must have the affordable, reliable energy that fuels our economy and supports

our way of life.

We must face the fact, though, that our energy infrastructure is straining at the

seams and barely keeping up. Let me cite some examples:

• U.S. crude oil production peaked in 1970 at 9.6 million barrels per day (B/D).

During 2000, it averaged 5.8 million B/D, some 40 percent less than 30 years

earlier;

• U.S. oil imports are meeting 57 percent of U.S. needs, compared to 47 percent

10 years ago and 35.7 percent 20 years ago;

• In the face of tremendous demand, U.S. production of natural gas declined 14

percent between 1973 and 1999;

• Half the nation’s refineries closed their doors over the past 20 years, and not

a single new major refinery has been built in the U.S. in more than 20 years.

The refineries we do have operate at well more than 90 percent capacity on average, at times exceeding 95 percent.

• The continuing California crisis underscores the serious electric supply problems we face; and

• No orders for new nuclear units have been placed since 1978, and no construction permits have been granted since 1979.

Today I will focus on the two energy sources provided by my industry: oil and natural gas—and what we see ahead.

CRUDE OIL

The petroleum industry is vertically integrated. That is, we finds, produces, and

transports crude oil, and then refines it into a wide variety of products that we deliver to the retail level. A comprehensive national energy policy requires that we address both our capacity to produce crude oil and natural gas as well as our capacity

to refine and distribute petroleum products.

Chart No. 1 shows how the Department of Energy forecasts U.S. energy consumption by fuel between 1999 and 2020. Natural gas rises from 23 percent of consumption in 1999 to 28 percent in 2020, while oil maintains its current share. This reflects the reality that 70 percent of petroleum consumed in the United States is for

transportation. Most recent energy studies agree that this share is likely to continue

well into this century—even with strong increases in energy efficiency and a rapid

infusion of new technology. Thus, we need to focus on our future needs for reasonably priced petroleum products and not be misled by the false hope that new and

dramatically cheaper sources of renewable fuels are available just around the corner. Such hopes have led us in the past to waste billions of dollars on government

efforts to develop and promote so-called renewable and alternative fuels that turned

out to be expensive and unavailable. However, renewables used in gasoline—ethanol—play an important role and will continue growing well into the future.

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Chart No. 2 shows how we are becoming more and more dependent on oil imports.

This dependency now amounts to about 57 percent of U.S. oil demand. DOE projects

that 64 percent of oil demand will be met by imports in 2020.

In order to ensure reliable and secure sources of oil, we have no choice but to diversify the sources of our supplies, both domestic and foreign, and to increase both.

To do this, we must remove the barriers that currently impede the U.S. oil and natural gas industry’s ability to compete both domestically and abroad.

THE NEED FOR ACCESS

What is access to government lands? The U.S. oil and gas industry does not ask

to drill on parklands or in wilderness areas set aside by acts of Congress. Rather,

we seek access to areas offshore, in Alaska and in the American West that have

been designated as ‘‘multiple-use’’ by Congress so that numerous activities can take

place there.

Most of these multiple-use areas are simply vast expanses of nondescript federal

lands. However, because they lack the beauty and grandeur of the Grand Canyon

or the Grand Tetons does not mean that we treat them with less respect than we

do any other lands entrusted to us by the government, or by private landowners.

Most people driving near or hiking in one of these areas would be hard-pressed to

locate one of our facilities once the drilling rig is removed. Safety and environmental

protection are critical concerns, regardless of the location of drilling, and where our

contractual obligations with the government require us to, we return the land to its

original condition once drilling and production cease.

Yet, despite our record of sound stewardship, President Clinton used his executive

powers under the Antiquities Act to bar oil and gas exploration and other activities

on vast regions of government lands.

For example, the designation of the Grand Staircase-Escalante Monument in

Utah in 1996 summarily withdrew promising valid oil and gas leases on state lands

without even notice to or consultation with state and local authorities, or affected

communities. Likewise, the U.S. Forest Service recently banned our companies from

exploring for oil and natural gas on promising government lands when it published

rules to bar road building on nearly 60 million acres in the Forest System that, according to a Department of Energy study, could hold 11 trillion cubic feet of natural

gas.

In the lower-48 states, a study by the Cooperating Associations Forum found that

federal lease acreage available for oil and gas exploration and production in eight

Western states (California, Colorado, Montana, Nevada, New Mexico, North Dakota,

Utah and Wyoming) decreased by more than 60 percent between 1983 and 1997—

and that does not count the major land withdrawals, such as Monument designations, since 1997.

Approximately 205 million acres of federal lands in these states are under the

control of two federal agencies with broad discretionary powers. The Bureau of Land

Management (BLM), whose land management planning authority is derived from

the FLPMA of 1976, and the U.S. Forest Service (USFS), whose jurisdiction is derived from the National Forest Management Act, administer these federal, non-park

lands. (Chart #3 shows the extent of government lands.)

Both agencies are required to manage lands they administer under the congressionally mandated concept of multiple use. Yet, BLM and USFS discretionary actions have withdrawn federal lands from leasing, and long delayed other leasing decisions and project permitting.

Congress has directed the BLM and Forest Service to allocate non-wilderness

lands for resource use, identify areas that are available for oil and gas leasing, identify important wildlife habitat areas, and inventory wilderness candidate lands

among other uses. Each agency has completed land resource management plans for

the lands they administer, including lands that are candidates for wilderness designation. Yet, some lands found unsuitable for wilderness designation are, however,

managed as ‘‘wilderness study areas,’’ effectively removing approximately 28 million

acres inappropriately from consideration for resource development. Further, these

agencies often dictate extraordinary lease stipulations as conditions of approval for

exploration and production. Stipulations are intended to protect resource values in

conjunction with proposed projects, such as exploratory wells, yet many conditions

required, such as ‘‘no surface occupancy,’’ essentially preclude exploration and production from occurring.

Moreover, Congress has refused to authorize exploration on the small section of

the Arctic National Wildlife Refuge (ANWR) that was specifically set aside by law

for exploration in 1980. DOE’s Energy Information Administration estimates that

the ANWR coastal plain contains between 5.7 billion and 16 billion barrels of techVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00103 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
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nically recoverable oil. The coastal plain provides the best prospect in North America for a new giant, Prudhoe Bay-sized oil field.

As a result of the enormous technological advances of recent years, only an estimated 2,000 acres would be affected by ANWR development—out of the 1.5 millionacre coastal plain and the total ANWR area of 19.8 million acres. Moreover,

Prudhoe Bay oil operations, located 60 miles to the west of ANWR, have been underway for nearly a quarter century and have produced more than 10 billion barrels

of oil during that time. Prudhoe Bay is among the most environmentally sensitive

oil operations in the world. For example, the Central Arctic caribou herd at Prudhoe

Bay has grown from 5,000 to 27,000 over the last 25 years. The industry’s North

Slope record provides overwhelming evidence that ANWR coastal plain development

would not be harmful to the Arctic ecology and wildlife.

We have heard, repeatedly, the charge that ANWR represents only 6 months (or

some finite amount) of U.S. consumption. There are several analyses that put this

erroneous charge in perspective.

The United States consumes 20 million barrels of oil a day. Today, no source supplies more than 8.4 percent (Canada’s share in 2000) of U.S. consumption. Prudhoe

Bay, which was estimated to hold 9.6 billion barrels when discovered, represented

only 261 days supply. But, in reality, it has supplied an average of 9 percent, and

as much as 12 percent, of our daily consumption for the last 24 years. ANWR reserves may be in the same ballpark.

If all the oil in Prudhoe were delivered at once, we would have consumed it in

9 months. That, of course, is a physical impossibility and distorts the true value of

oil discoveries.

Prudhoe production, though representing only 9 percent of consumption, has al- lowed the U.S. to avoid importation of 1.6 million barrels per day, keeping $289 billion from flowing out of the United States.

And we know that small changes in supply can have dramatic impacts on price.

For example, in March 2000, OPEC increased production by 1.7 million barrels per

day (2 percent of world supply) and crude oil prices dropped by $10 a barrel. Thus,

a permanent increase in world supply because of ANWR is likely to have a significant impact on world crude oil prices. This price impact is important since for every

dollar decline in world prices, the U.S. import bill declines by $4 billion per year.

Offshore, the OCS has assumed increasing importance to U.S. energy supply over

the past half century. The federal portion of the OCS now supplies 24 percent and

27 percent of the gas produced in the United States. Offshore production promises

to play an even more significant role in the future. The Department of Energy forecasts that offshore production will rise to nearly a third of our domestic oil and gas

supply within a decade.

Technological revolutions, such as 3-D seismic profiling of promising structures,

coupled with astounding computer power and directional drilling techniques which

allow numerous reservoirs to be accessed from one drill site have driven down the

costs of finding oil and gas. And at the same time these technologies allow development with much less disturbance to the environment. Tremendous advances in our

ability to drill and produce in the deep waters of the Gulf have also resulted in vast

new reserves being added to our resource base. The Deepwater Royalty Relief Act

developed by this Committee, and passed by Congress in 1995, has significantly

aided that endeavor. Those in the federal government who are most familiar with

our industry have lauded our technological advances.

A 1999 DOE report, Environmental Benefits of Advanced Oil and Gas Exploration

and Production Technology, stated that, ‘‘. . . innovative E&P approaches are making a difference to the environment. With advanced technologies, the oil and gas industry can pinpoint resources more accurately, extract them more efficiently and

with less surface disturbance, minimize associated wastes, and, ultimately, restore

sites to original or better condition. . . . [The industry] has integrated an environmental ethic into its business and culture and operations . . . [and] has come to

recognize that high environmental standards and responsible development are good

business....’’

However, there is now accumulating evidence that resource depletion is overtaking the effects of technical advances on the cost structure of OCS development. The

volume of reserves added per dollar of capital spent in the OCS has been falling

steadily since the early 1990s. Because of increased demand, reserves are being depleted at an ever-increasing rate. Because of more efficient extraction technologies,

the decline from new gas wells is now estimated to be as high as 40 percent per

year.

This does not suggest the imminent collapse of OCS production, but it does suggest that the drilling and capital expenditures required to replace and augment reserves will become increasingly important. We must increase deepwater developVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00104 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
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ment, and provide access to areas presently restricted. Currently, presidential moratoria, and annual Interior appropriations bill riders preclude leasing in most of the

Eastern Gulf of Mexico, the entire Atlantic and Pacific federal OCS, and portions

of offshore Alaska.

Moreover, the ‘‘consistency’’ provisions of the Coastal Zone Management Act

(CZMA), under the guise of due process and consultation, have caused serious duplicative and incredibly costly delays to federal OCS leasing and production activities

that would have no adverse environmental impacts on states’ coastal zones. And

regulations issued by the National Oceanic and Atmospheric Administration

(NOAA) in the last days of the Clinton Administration appear to add impediments

to environmentally compatible energy development in the OCS, contrary to the balancing of competing interests directed by Congress when it enacted the CZMA. Both

the summary withdrawal of multiple use government lands without stakeholder

consultation under the Antiquities Act, and the endless due process used by opponents to block federal offshore production that does not affect a state’s coastal zone

are extreme, and must be moderated.

The nation will soon have a great opportunity to augment its reserves. Federal

OCS Lease Sale 181 represents a plan for leasing by the Department of the Interior

in the Eastern Gulf of Mexico Planning Area. Scheduled since the mid-1990s, Sale

181 is slated to be conducted in December 2001. The sale area is based on comprehensive environmental reviews, and consultations between former Secretary of

the Interior Bruce Babbitt and then-Governors Lawton Chiles of Florida and Fob

James of Alabama. We are encouraged that Senator Bingaman and the other sponsors of S. 596 have endorsed the lease. We continue to believe, however, that the

sale As such it is already a middle-ground agreement and the deletion of 120 blocks,

as has been proposed in S. 596, would seriously undermine the spirit of the goodfaith negotiations that led to it. More important, it would significantly reduce of the

amount of energy—natural gas in particular—that Sale 181 is expected to provide.

Congress in the past several appropriations bills understood the importance of

Sale 181 going forward and did not include it in the areas placed off-limits by moratoria. The area available in Sale 181 is estimated by the National Petroleum Council

to contain 7.8 trillion cubic feet of natural gas and 1.9 billion barrels of oil. This

means that natural gas from the Sale 181 area could satisfy the current electricity

needs of Florida’s 5.9 million households for the next 13 years. Lastly, the crude oil

from the Sale 181 area (most of which is expected to come from the deepwater

areas, far removed from the coastline) could fuel 74,000 cars for 20 years.

These resources can be produced cleanly, for advances in technology have made

offshore oil and natural gas exploration and production safer than ever. For the

1980-1999 period, 7.4 billion barrels of oil have been produced in the OCS with less

than 0.001 percent spilled—a 99.999 percent near perfect record.

We applaud the action taken in the last Congress when it reauthorized the Energy Policy and Conservation Act (EPCA) (Section 604) directing the Departments

of the Interior and Energy and the Forest Service to conduct an inventory of the

oil and gas resources on federal lands and the restrictions that prevent access to

these critical resources. We urge Congress to fully fund this inventory in the FY

2002 appropriations bill so that adequate information will be available on resource

availability. This is an important step in bringing about increased development of

U.S. oil and gas resources and an important component in any effective national energy policy.

NATURAL GAS

The petroleum industry finds and produces the natural gas, moves it through the

nation’s pipelines, processes it, and delivers it to the distributors. The attached

Chart No. 4 illustrates the basic problem we face on natural gas. The middle line

shows how U.S. production has been virtually flat for more than a decade, while

demand (the top line) has steadily grown. The bottom line shows how imports have

also continued to grow to help meet demand.

If we are to have an effective national energy policy, we must recognize the steadily growing role of natural gas in meeting our energy needs. Natural gas is a clean,

safe, efficient and reliable fuel. Consequently, demand from all customer segments

is rising, particularly as the fuel of choice for new power plants.

Since natural gas markets are regional, rather than global, 86 percent of the natural gas consumed in the United States is produced domestically. Most of the remainder comes from Canada. Although our domestic gas supplies are adequate for

the near-term, significant challenges will have to be overcome to meet the increasing demand. The landmark natural gas study issued over a year ago by the National

Petroleum Council—a DOE advisory committee—projected that producers would

102

have to invest about $658 billion in upstream capital between 1999 and 2015 to

meet the growth in gas demand.

The growing demand for natural gas underscore the urgent need for increased access to potentially gas-rich government lands.

However, many government lands with the best prospects for new gas discoveries

are off limits to development: 100 percent of resources offshore on both coasts; 56

percent of the eastern Gulf of Mexico resources; and 40 percent of the Rocky Mountain region resources. As Chart 5 shows, 21 trillion cubic feet (Tcf) are estimated

to lie in the federal waters beneath the Pacific, 346 Tcf in the Western states, 43

Tcf in the Eastern Gulf of Mexico, and 31 Tcf beneath the Atlantic OCS. Clearly,

we cannot increase our reliance on natural gas, while continuing to prevent development of these potentially vast gas resources within our borders.

Often, getting a lease is not the most significant problem for producers. Difficulties in acquiring permits to drill wells on onshore government lands and overly restrictive lease stipulations are responsible for limiting natural gas production. These

are restrictions, such as ‘‘no surface occupancy’’ or seasonal stipulations, that go

above and beyond the normal environmental stipulations and can prevent economic

development of the lease without commensurate environmental benefit.

Almost half of the untapped natural gas on multiple-use government lands in the

Rockies is in areas either off limits or restricted by this type of stipulation laid down

by one federal agency or another.

This information is important because the facts are often ignored and often distorted by those who do not believe greater access to government is needed by our

industry. In recent testimony before the House Commerce Committee’s Subcommittee on Energy and Mineral Resources, for instance, we heard material distortions

by witnesses for the Natural Resources Defense Council (NRDC) and for the Wilderness Society.

In particular, the NRDC witness, in her testimony and in the study submitted by

the Wilderness Society witness for the record, concluded that only a small percentage of BLM lands in five western states is off limits to leasing and development.

Those conclusions gloss over the most significant point: the percentage of government lands available for leasing is a meaningless figure without knowing whether

the leases can be developed.

In many instances, lessees cannot obtain the permits needed to develop leases. In

others, development is rendered uneconomic by unnecessarily restrictive operating

stipulations. An appropriate analogy would be leasing a car without a starter motor

or keys. Or renting a house and being allowed to use only the roof. Would a person

really have a car if he or she cannot drive it? And what good would it do anyone

to rent a house if it can’t be lived in? Similarly, a lease that cannot be developed

is a lease in name only.

The NRDC and Wilderness Society witnesses surgically selected certain data, and

omitted other significant data to attempt to prove their inaccurate assertions. For

example, while the numbers presented by the Wilderness Society do show that only

about 3.5 percent of the BLM lands in Wyoming, Utah, New Mexico, Montana, and

Colorado is strictly off limits to development, oil and gas resources in those states

are not distributed uniformly across BLM lands. Specifically, while the Wilderness

Society says only 3.5 percent of BLM lands are off-limits, the Wilderness Society

identifies another 3.2 percent that are subject to No Surface Occupancy. The NPC

study indicates that this 6.7 percent of BLM lands represents 15 percent of the BLM

natural gas resources, which are either off-limits or significantly impinged.

More important, however, is the role of non-standard lease stipulations. The Wilderness Society’s data show that seasonal and other non-standard stipulations restrict access to an additional 32 percent of BLM lands. However, this impacts access

to 47 percent of the natural gas resources estimated to exist on BLM lands in the

Rockies. When all of these restricted and off-limit BLM lands are combined they

total 38.7 percent, affecting 62 percent of the natural gas resources.

Further, BLM is not the only federal land management agency making such restrictions. These witnesses have omitted the U.S. Forest Service, the Bureau of Indian Affairs and the departments of Defense and Energy in their computation of

federal multiple-use lands that are restricted to oil and gas development. In total,

the National Petroleum Council estimates that some 137 Tcf of natural gas resources lie beneath Federal land in the Rockies that is either off limits to exploration, or heavily restricted. This is 48 percent of the natural gas on Federal land

in the region.

In addition to this total, a recent Department of Energy study concluded that

more than 11 trillion cubic feet (Tcf) of natural gas was summarily placed off limits

late last year alone by the USFS ‘‘Roadless’’ rule.

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But stipulations are not the only impediments to bringing the oil and natural gas

to America’s consumers. Inadequate agency resources in many BLM offices and required but outdated resource management plans often make it difficult to get drilling permits, seriously delaying viable projects for up to 100 days, or sometimes

years. In the Rawlins, Wyoming BLM office, for example, thousands of Applications

for Permits to Drill are awaiting action because of manpower shortages. In the Buffalo, Wyoming office, thousands more are not being accepted by BLM because of limitations of the resource management plans (RMP) for the area. This is because the

‘‘Reasonable Foreseeable Development’’ (RFD) figures, estimates of future development, failed to recognize the interest in developing coal bed methane. Updating

these RMPs and RFDs takes the BLM two or more years to complete thus preventing any further oil and gas activity in that area until the plans are finished.

With natural gas in short supply, it is essential that industry and government

work together to increase production from all areas, including multiple-use government lands. Ultimately, it is the American consumer who is likely to suffer from

a failure to address this critical situation.

The NPC study on natural gas referred to earlier also points out that vast reserves of natural gas in the form of coal bed methane (CBM) lie beneath federal

lands, especially in Wyoming and Montana. However, BLM’s inability to grant permits in a timely manner has greatly hindered CBM development, and may contribute to further shortfalls in necessary future gas production. In some instances, we

recognize that individual BLM offices may be understaffed and therefore are simply

unable to efficiently process permitting requests. We therefore support increased

funding for BLM to adequately address these critical permitting backlogs.

As supply adjusts to greater demand, liquefied natural gas looks to become a more

significant source of natural gas. Liquefied natural gas, largely imported from outside North America, requires a complex infrastructure, including specialized terminals and additional pipelines. If this source of supply is to be relied on more heavily,

policy-makers will need to ensure that necessary regulatory and permitting decisions are expedited.

ROYALTY-IN-KIND

Royalty-in-kind is another important component for an effective national energy

policy. The Department of the Interior, working with the states and other federal

agencies, should pursue the most efficient means at its disposal to use the United

States’ energy resources for the good of the American people. One way to do this

is for the Department’s Minerals Management Service (MMS) to expand its use of

royalty-in-kind (RIK) as its standard method for collecting royalties.

Existing mineral leasing statutes already allow the government to take its royalties for natural gas or oil produced from government lands either in value (cash)

or in kind, actual barrels of oil or cubic feet of natural gas. Until now the government has favored taking its royalty in value, even where complex and controversial

valuation procedures must be used. However, over the last few years a number of

pilot (trial) RIK programs have been conducted with considerable success. A robust

RIK program would short-circuit these contentious valuation procedures and provide

simplicity, greater certainty, efficiency and transparency in the collection of federal

royalties.

RIK results in major cost savings to the government by streamlining the administrative process and avoiding many costly and time-consuming audits, agency appeals and court litigation. With the simplicity and finality it offers, RIK also makes

drilling on federal lands more attractive for producers, especially small producers,

at a time when the nation needs to encourage stable and adequate sources of domestic energy.

LESSONS LEARNED

We are encouraged about the possibilities for a new era of cooperation between

industry, government and consumers to align our nation on a path toward energy

stability. However, we cannot be successful at forging a workable energy policy if

we do not learn from the mistakes we have made in the past.

Price controls, allocation schemes, limitations on natural gas use, and massive

subsidies to synthetic fuels are all measures that were tried at one time or another

because it was believed that they were sure-fire answers to our problems. All of

them failed. They failed because the key premise on which these programs were

based—namely that oil and gas were nearing exhaustion and that government

‘‘guidance’’ was desirable to safely transition to new energy sources—is now recognized as having been clearly wrong and to have resulted in enormously expensive

mistakes.

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The wrong energy choices made by government intervention in energy markets increase costs, hurt the nation in terms of lost economic growth, stifled innovation,

limited consumer choice and slowed progress in achieving other societal objectives.

Over the past two decades, we have, fortunately, come to rely increasingly on

markets to sort out technologies and fuel choices—and markets have moved us impressively forward. Technology has led us to find more oil and gas in more places

and in larger quantities than was ever dreamed imaginable 50 years ago. It has led

to increased use of natural gas in a wide variety of ways.

We can continue to prosper and grow in this new century, but only if government

follows a positive and cooperative approach. Government should recognize the vital

role that markets play and avoid the intrusiveness that has proven so damaging in

the past. It should provide a level playing field on which fuels can compete—and

recognize the cost trade-offs that are so essential in a global economy.

A NATIONAL ENERGY POLICY

What is needed from government decision-makers is a serious effort to address

these problems and shape a fair and effective national energy policy. That’s why we

at API welcome the energy policy initiatives now underway in both Congress and

the Administration.

A successful national energy policy must be comprehensive in order to be effective.

It must seek to ensure enough energy to support economic growth by promoting responsible development of both domestic and foreign resources. It should recognize

that sophisticated new technology developed by the oil and natural gas industry

greatly reduces adverse impacts on the environment by exploration and production,

both onshore and offshore.

A successful national energy policy will recognize that there is no quick fix to our

energy problems. It must reflect the reality that we need to increase supplies of all

forms of energy to fully support our growing economy. It is important to encourage

responsible use of energy and increase supplies of all fuels, including both fossil

fuels and alternative fuels.

A successful national energy policy must be flexible to allow companies to adapt

to new energy and environmental challenges. It should recognize that our refinery

and delivery infrastructure continues to be stretched to its limit, restraining the industry’s capability to meet new energy demands. It should remove unreasonable and

complex regulations on cleaner energy production and transportation to accommodate growth and the continued high demand for energy—and to meet seasonal or

unexpected requirements.

A successful national energy policy must rely primarily on the private sector

working through free markets, and it must recognize the value of diversified energy

sources. To that end, it should encourage competitive trade practices and international investment.

Finally, a successful national energy policy must create a predictable operating

and investment environment for energy suppliers. Government must work to create

a more stable regulatory environment so that producers can invest with the confidence that they will be able to get a fair return on their investment.

CONCLUSION

Having said that, we should understand that it took some 25 years to get into

today’s energy situation—and the problems will not be solved overnight. Moreover,

supply cannot be matched to demand without massive capital investment, construction and turnover in equipment and this requires long lead times. In order to ensure

that these adjustments are made as soon as possible with the least amount of disruption, we must start making the necessary policy decisions now. So it is absolutely critical that energy be fully represented at the government decision-making

table and that the energy impact of environmental and other decisions be fully considered.

After more than two decades of inaction, the American public can no longer afford

the luxury of not coming to grips with U.S. energy needs while maintaining a clean

environment. We can, as a nation, do both—and we cannot afford to heed those negativists who tell us otherwise. Meeting U.S. energy needs and protecting the environment are both critical to our nation’s continued economic growth—and critical to

achieving the future prosperity and wellbeing we all seek.

API and its members look forward to working with you in the coming months.

The CHAIRMAN. Thank you very much, Mr. Rubin.

Mr. Neal Stanley.

Mr. STANLEY. Thank you, Mr. Chairman.

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The CHAIRMAN. On behalf of the Forest Oil Corporation, please

proceed.

STATEMENT OF NEAL A. STANLEY, VICE PRESIDENT, WESTERN REGION, FOREST OIL CORPORATION, ON BEHALF OF

INDEPENDENT PETROLEUM ASSOCIATION OF MOUNTAIN

STATES

Mr. STANLEY. For the record, I did submit a written testimony,

but I have some oral testimony also. I am senior vice president of

Forest Oil and President of the Independent Petroleum Association

of Mountain States, both based in Denver, Colorado. Forest Oil is

a producer of oil and gas from the offshore Gulf coast, Louisiana,

Oklahoma, Texas, New Mexico, Rocky Mountain States, Canada,

and in the Alaskan Cook Inlet. I would like to thank this committee for focusing its attention on the impediments to the development of our domestic oil and natural gas resources.

Policies that either limit or encourage energy development on

government land have very real consequences. As such, I imagine

we all desire land policies that will provide for human needs, contribute to the sustainability of our nation’s economic vitality, and

concurrently help secure the health of the land for the benefit of

current and future generations.

The United States’ economic expansion over the past 15 years

has been fueled by low energy prices. Since there was sufficient energy supply during this time, no real attention was paid to the

problems that face the oil and gas industry. In 1981, 89 thousand

wells were drilled in the United States. This declined to 19 thousand wells in 1999. So there is no wonder that our oil and gas production decreased significantly during this time. With these declines in production and with our expanding economy, it should

also be no surprise that we consumed our surplus energy capacity,

and prices have dramatically increased as a result.

I believe the oil and gas industry can meet the Nation’s growing

demand for natural gas, but the price of natural gas will be dependent upon a number of factors, most notably having adequate

access to the resources in a timely manner. Policies that promote

reasonable access to the Nation’s abundant supplies of natural gas

will bring gas to market more quickly and also lower the price of

this energy. It is important to understand that increased drilling

will result in an increased supply of oil and gas. However, this increased supply will be added one well at a time.

Some critics that say that areas that only supply 5, 10 or 15 percent of our oil or gas are not significant enough to pursue. This is

erroneous logic. It will require the sum of all of these areas to supply our energy needs.

[Handout.]

Exhibit One in my handout shows a map of the United States

that 52 percent of the land in the West is government land.

Exhibit Two shows the estimated percentage of those resources

that are subject to severe, if not outright, prohibitions on access.

In the Rocky Mountains where abundant supplies of natural gas

exist, Federal policies prohibit access to an estimated 137 trillion

cubic feet of natural gas. Without access to such areas, the gas inVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00109 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
106

dustry will not be able to keep pace with steeper decline rates in

the mature basins.

Impediments to gaining that access for natural gas development

come in many forms. Recent monument designations, new policies

prohibiting road construction, and continuous wilderness reviews

prohibit access to some areas. Outdated resource management

plans and overly-restricted surface use requirements also prevent

access.

Exhibit Three in my handout shows surface use restrictions. A

natural starting point for looking at limits on access is with the restrictions and effectively reduced access where oil and gas leasing

has already occurred. Please notice in Exhibit Three the length of

time associated with each restriction shown in the red bars, and

also that the time required to drill a well is 20-30 days.

Companies exploring for natural gas have a very short window

to build their wells when all these restrictions are in place. We

should be able to obtain a balance between development of the resource and conservation. Look at the common restriction on drilling

during winter months to protect the big game winter range. We do

support the protection of big game. However, we should seek to

strike a balance that will protect game and also allow drilling during the winter months. This effort to find a way to meet both needs

has been missing, but it does not have to be.

If a balance between both resources could be found, hundreds of

wells could be drilled in the winter months to help meet natural

gas demand pressures that we will have each summer. Examples

like this point out an important shortfall in land management policy. There has been no clear direction for land managers with respect to energy development on government land.

In conclusion, I would remind the committee that natural gas resources are not uniformly distributed across the landscape. Even

so, natural gas development can co-exist with the other values. We

do not need to choose between this or that use of public land. Responsible management can allow for this and that use. Responsible

management can provide a low-cost, reliable and sustainable energy supply to fuel our economy for many years and concurrently

help secure the health of the land for the benefit of current and future generations.

Mr. Chairman, I view the balance between energy supply and its

price and access to government land as somewhat of a teeter-totter.

If the energy industry is shut out from government land, then the

price will be much higher. If we have access to more land, then the

price will be much lower. It is really up to the American people and

this Congress to establish that balance of the trade-offs of allowing

reasonable access to government land with the tangible benefits of

securing an adequate supply of natural gas to meet the nation’s

growing energy needs.

Mr. Chairman, members of the committee, I thank you for hearing me today.

[The prepared statement of Mr. Stanley follows:]

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* The exhibits have been retained in committee files.

PREPARED STATEMENT OF NEAL A. STANLEY, VICE PRESIDENT, WESTERN REGION,

FOREST OIL CORPORATION, ON BEHALF OF THE INDEPENDENT PETROLEUM ASSOCIATION OF MOUNTAIN STATES

Mr. Chairman, members of the committee, I am Neal Stanley, Senior Vice President of Forest Oil Corporation, and President of the Independent Petroleum Association of Mountain States (IPAMS). Both Forest Oil and IPAMS are based in Denver,

Colorado. Today, I am testifying on behalf of the Independent Petroleum Association

of America (IPAA), and IPAMS. IPAA and IPAMS represent thousands of independent oil and natural gas producers across the nation. Independents drill 85 percent

of the wells in the U.S., and produce 40 percent of the oil and two-thirds of the natural gas.

I would like to thank this committee for focusing its attention on the impediments

to the development of our domestic oil and natural gas resources. Policies that either limit or encourage energy development on government land have very real consequences. As such, I imagine that we all desire land policies that will provide for

human needs, contribute to the sustainability of our nation’s economic vitality, and

concurrently help secure the health of the land for the benefit of current and future

generations.

Despite our best conservation efforts, electricity demand in the United States will

continue to increase as a function of our growing population and the role of computers in our new economy. The role of natural gas in meeting this new demand cannot

be understated. Ninety-five percent of all the new power plants now scheduled to

be built will run on natural gas. Electricity produced from natural gas fired generation will increase from 15 percent to 40 percent by the year 2020. In 1999, the National Petroleum Council forecast natural gas consumption increasing from 22 trillion cubic feet (TCF) this year to 35 trillion cubic feet (TCF) in 2020.

In the United States, the economic expansion over the past fifteen years has been

fueled by low energy prices. These low prices have been good for everyone, except

for the 400,000 American oil and gas company workers that have lost their jobs.

Since 1981, exploration and production employment has decreased from 700,000 to

300,000, a decrease of 57%. Since the oil price collapse of 1986, the domestic oil and

gas business has been in a severe depression. In most areas, wells could not be

drilled economically due to the low oil and gas prices. Many companies went broke

by drilling wells with the hope that higher prices would appear in the near term.

In short, the oil and gas industry is a small shadow of its former self.

Since there was sufficient energy supply during the past fifteen years, no attention was paid to the problems that faced the oil and gas industry. Rules and regulations that further restricted the industry were applied with vigor. In 1981, 89,000

wells were drilled in the U.S. This declined to 19,000 wells in 1999. It is no wonder

that our oil production decreased from 8.6 million to 5.8 million barrels a day and

our gas production decreased from 19.2 to 18.7 trillion cubic feet per year over this

time frame. With these declines in production, and with our expanding economy, it

should be no surprise that we consumed our surplus energy capacity, and prices

have dramatically increased as a result. This is basic Economics 101, supply and

demand.

The oil and gas industry can meet the nation’s growing demand for natural gas,

but the price of natural gas will be dependent upon a number of factors, most notably, having adequate access to the resource in a timely manner. Policies that promote reasonable access to the nation’s abundant supplies of natural gas will bring

gas to market more quickly and also lower the price of this energy. It is important

to understand that increased drilling will result in an increased supply of oil and

gas. However, this increased supply will be added one well at a time. Some critics

say that areas that only supply five, ten, or fifteen percent of our oil and gas are

not significant enough to pursue. This is erroneous logic. It will require the sum of

all of these areas to supply our energy needs.

Exhibit #1 * is a map showing government lands. The various colors represent the

different agencies with surface management responsibility. A map showing the federal government’s mineral interest in the western United States would encompass

an even larger portion of the West than is depicted on this map. Fifty-two percent

of the land in the western United States is managed by federal and state governments.

Exhibit #2 shows the total estimated natural gas resources in the lower 48 states,

with the corresponding percentage of those resources that are subject to severe, if

not outright, prohibitions on access.

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Developing the substantial domestic natural gas reserves in offshore areas of the

Eastern Gulf of Mexico, Atlantic Ocean, and California is prohibited by moratoria.

President Clinton extended these moratoria for another ten years in 1998 saying,

‘‘First, it is clear we must save these shores from oil drilling.’’ This is a flawed argument ignoring the state of current technology. It results in these moratoria preventing natural gas development as well as oil. In fact, both the Eastern Gulf and the

Atlantic reserves are viewed as primarily gas reserve areas, not oil. Those coasts

are not at risk. Too often, these policies seem to be predicated on the events that

occurred 30 years ago. Federal moratoria policy needs to be reviewed and new policies need to be based on a sound understanding of today’s technology.

Offshore Lease Sale 181 is scheduled for December 2001 and is outside the areas

covered by moratoria. The resources contained in this sale area, approximately 7.8

TCF of gas and 1.9 billion barrels of oil, are important to the nation and surrounding coastal states. We strongly recommend the sale stay on schedule. This sale includes much needed gas resources for the Gulf of Mexico to even partially meet this

country’s natural gas needs.

In the Rocky Mountains, where abundant supplies of natural gas exist, federal

policies prohibit access to an estimated 137 trillion cubic feet of natural gas. Longterm sustainable gas production will be achievable only through the development of

frontier areas such as the Rockies. Without access to such areas, industry will not

be able to keep pace with steeper decline rates in the mature basins.

Impediments to gaining access for natural gas development come in many forms.

Recent monument designations, new policies prohibiting road construction, and continuous wilderness reviews prohibit access to some areas. Administrative withdrawals, inaction, and extensive delays work similarly to restrict access. Outdated resource management plans and overly restrictive surface-use requirements also prevent access. The constraints differ in severity, but in each case, these impediments

work individually and cumulatively to prevent the development of natural gas.

A natural starting point for looking at limits on access is with the restrictions

that effectively reduce access where oil and gas leasing has already occurred. We

should be able to obtain a balance between development of the resource and conservation. Take for example a common restriction on drilling during winter months

to protect Big Game Winter Range. We support the protection of big game. However,

we should seek to strike a balance that will protect game and allow drilling during

winter months. This effort to find a way to meet both needs has been missing, but

it does not have to be. My personal experience of sitting on many drilling rigs

throughout the Rockies over the past 20 years has been that these animals are not

the least bit bothered by our activity and we can easily coexist. If a balance between

both resources could be found, hundreds of wells could be drilled in the winter

months to help meet natural gas demand pressures that we will have each summer.

Examples like this point out an important shortfall in land management policy.

There has been no clear direction for land managers with respect to energy development on government land. Accordingly, each land manager assigns a relative value

to the development of energy with no sense of how his or her actions contribute to

or detract from the nation’s energy sustainability. Mixed messages and a lack of accountability have led to a situation where land managers focus entirely on process

with no apparent regard for the outcome. If left unattended, this lack of direction

will become even more disastrous.

Another example that illustrates the BLM’s failure to recognize the urgency to develop natural gas can be seen in a recent wildcat well Forest Oil drilled in southwest Wyoming. In this case, the BLM’s interpretation of field rules ended up costing

Forest Oil $120,000, and even more when you consider the opportunity costs associated with delays. The well site was six miles from an improved road with an existing two-track road that went directly to the location. The BLM required Forest Oil

to design and construct an improved road to the location at a cost of $90,000, even

though the well was only going to take 20 days to drill. If drilling proved it to be

a dry hole, we would not need to continue to go to that location. Indeed, the well

was a dry hole that cost the company $800,000 to drill. After we plugged the well,

the BLM required Forest to either maintain the road forever, or reclaim the road

to its previous two-track status. It will cost Forest another $30,000 to reclaim the

road. The money wasted, $120,000, could have been spent drilling more wells and

hopefully supplying more energy.

Natural gas companies rely on federal land managers to process their permit requests in a timely manner. Without the necessary environmental studies, permits,

and authorizations, access to drill on federal lands is prohibited. Throughout the

gas-rich basins of the Rocky Mountain Region, backlogs for issuing permits to drill

and rights-of-way for roads and pipelines continue to grow. Many resource manageVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00112 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
109

ment plans are outdated and revisions are being required before any leasing and

development can occur.

Staffing is short in many offices and the problem seems to get worse with time.

The use of sophisticated mapping tools and other technologies could ameliorate some

of these problems but, as with many other issues, addressing agency priorities and

goals is a necessary first step.

Exhibit #3 shows the surface use restrictions and seasonal restrictions on a southwestern Wyoming federal lease. Please notice the length of time associated with

each restriction and also note the amount of time required to drill a typical 8,000-

foot well and a horizontal well. Companies exploring for natural gas have a very

short window to drill wells. If the BLM has not processed the permits in time to

meet that window of opportunity, the company will have to release the drilling rig

they have contracted and wait another year before drilling.

Exhibit #4 demonstrates the time requirements associated with operating on private land and federal land. The table shows the timeframe to get a well permitted

and drilled. The difference between developing energy on private land and federal

lands is 3 months versus 1-5 years.

To further illustrate the pervasiveness of land access problems throughout the

Rocky Mountain Region, the following four examples are provided.

Exhibit #5 is a map of the newly designated Canyons of the Ancients National

Monument in southwestern Colorado. Canyons of the Ancients encompasses

McElmo Dome, one of the Rocky Mountain region’s most significant sources of natural gas used for advanced oil and gas recovery in Colorado, New Mexico and Texas.

On the map, of the 183,000 acres within the Monument’s boundary, there are nearly

155,000 acres of active federal oil and gas leases, 141,000 acres of which are held

by oil and gas production or are included in four federal oil and gas production

units.

When the monument was designated, the BLM proposed stringent surface use restrictions on 79,000 acres, including a No Surface Occupancy stipulation. Given the

BLM’s predilection for restricting access, the Resource Management Plan that will

be developed for the monument creates even more uncertainty for producers.

Exhibit #6 is a map of Jack Morrow Hills Resource Area in southwestern Wyoming. The Environmental Impact Statement for the Green River Resource Management Plan, which includes the Jack Morrow Hills area, was started in 1989, with

the Record of Decision finally issued eight years later, in October 1997. The decision

of whether to lease for oil and gas exploration and development in Jack Morrow

Hills area was deferred in the ROD until a Coordinated Activity Plan for the area

could be completed, which took another four years. When the Draft EIS for the CAP

was issued, the preferred alternative was for ‘‘staged leasing,’’ effectively postponing

leasing decisions indefinitely. On the map, areas designated as potential Wilderness

Study Areas (WSA) are shown in light blue stippling. Note that there are active

leases and leases held by production within the new WSAs.

The attached map of the Jack Morrow Hills area shows the BLM-managed mineral estate with active oil and gas leases in yellow. Of the 623,000 acres within the

red boundary of the Jack Morrow Hills area, there are 239,000 acres of active federal leases, 36,000 acres that are productive. Also note that within the CAP area,

there are 137,890 acres recommended as Wilderness Study Areas.

Exhibit #7 is a map showing the entire state of Utah. Current leases are shown

in yellow, a total of 3,567 active federal leases. Also shown on the map are the

BLM’s 1990 recommendations for three million acres of new Wilderness Study

Areas, as well as former Interior Secretary Babbitt’s reinventory of an additional

three million acres, described in the map’s legend as ‘‘HR1500 Boundaries’’. Note

that the proposed Wilderness Study Areas include lands that are already leased,

making development as difficult as the examples of Jack Morrow Hills and Canyons

of the Ancients. Not shown on the Utah map are the nearly 29,000 leases that were

previously leased in the past but were not renewed as a direct result of administrative direction from Washington.

Exhibit #8 is a map of the Upper Missouri Breaks National Monument. On January 17, 2001, President Clinton signed a proclamation establishing the Upper Missouri River Breaks National Monument for the primary purpose of protecting the

corridor along the Missouri River traveled by Merriwether Lewis and William Clark

nearly 200 years ago. The Monument was formed under the authority of Section 2

of the Antiquities Act of June 8, 1906. This Act states that lands reserved shall be

‘‘in all cases be confined to the smallest compatible with the proper care and management of the objects to be protected.’’ Although the members of the expedition

rarely explored more than two miles away from the river through this region, the

new Monument encompasses over 495,000 acres of federal, state and private land

and extends, in some instances, more than fifteen miles on either side of the river.

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This new Monument is located in the most prolific natural gas producing province

in the State of Montana. Within the Monument are thousands of acres of valid private, state and federal oil and gas leases, numerous producing and shut-in wells and

several natural gas pipelines. In a recent Bureau of Land Management publication,

the promise is made that the Monument designation does not apply to ‘‘private or

state land, inside the boundary’’ and that ‘‘the designation does not affect valid oil

and gas leases.’’ Despite this rhetoric, the reality is that applications for permits to

drill within and adjacent to the Monument have sat in limbo, without any action

by the Federal regulators for over a year. Development of the natural gas resources

on private and state lands within the monument is impossible because pipelines to

transport the gas will not be allowed to cross the surrounding federal lands.

These examples are only a few of many examples of the overzealous application

of singular surface uses that preclude other resource development. Some even more

egregious examples would include 1) the backlog of drilling permits and rights of

way applications in northeastern Wyoming, 2) de facto wilderness management of

Wyoming’s Bridger/Teton National Forest and Montana’s Rocky Mountain Front,

and 3) excessively stringent applications of NEPA planning documents and subsequent delays in Utah, Colorado, Montana, and the Dakotas.

My final point is that the employment of advanced technology for both land managers and industry must occur if we are to reach our goals. Research and development spending by the oil and gas industry has decreased from $10 billion to $2 billion per year over the past twenty years as the large integrated companies have

shrunk in size. Yet we know that past innovations from this R&D, such as horizontal drilling and 3-D and 4-D seismic, have provided significant increases in the

recovery of oil and gas. Frontier areas like the Rocky Mountain region will require

new and sophisticated technologies to develop a large portion of the unconventional

gas resources found in the region. Federal efforts to aid the R&D effort by directing

a portion of federal oil and gas royalties to a research fund would be a significant

win-win program. Increased R&D spending will increase oil and gas production, resulting in a commensurate increase in federal royalties.

In conclusion, I would remind the committee that natural gas resources are not

uniformly distributed across the landscape. Even so, natural gas development can

coexist with other values. We do not need to choose between ‘‘this or that’’ use of

public land. Responsible management can allow for ‘‘this and that’’ use. Responsible

management can provide a low cost, reliable, and sustainable energy supply to fuel

our economy for many years and concurrently help secure the health of the land

for the benefit of current and future generations.

I view the balance between energy supply, and hence, price and access to government land as a teeter-totter. If the energy industry is shut out from government

lands, then the price of energy will obviously be much higher. If we have access to

more land where the resource exists, then the price of energy will be much lower.

The American people and this Congress must balance the perceived trade-offs of allowing reasonable access to government land with the tangible benefits of securing

an adequate supply of natural gas to meet the nation’s energy needs.

Mr. Chairman and members of the committee, thank you for the opportunity to

appear before you today.

The CHAIRMAN. Thank you, Mr. Stanley. I noted on page seven

of your testimony you have this exhibit, and I would like the young

lady to hold this up, because I think it represents to some extent

the reality. Here is the east coast which you indicate is 100 percent

restricted, and that goes from Maine to Florida. And then we have

the west coast, which you have 100 percent restricted, which goes

from Washington to the end of California—the Mexican border.

There is kind of the over-thrust belt that we refer to that has been

substantially restricted as a consequence of withdrawals, and then

we have this area off Florida that currently is under debate. It is

Lease Sale 181 that is discussed. So as we look at what we have

done with moratoriums, we have pretty much excluded a significant amount of area that would otherwise have the potential of energy-bearing oil and gas. Is that right?

Mr. STANLEY. Yes, sir.

The CHAIRMAN. And a lot of this has to do with the attitudes associated with the risk of OCS drilling. Is that correct?

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Mr. Stanley. Yes.

The CHAIRMAN. This area here—Texas, Louisiana, Alabama, Mississippi—that is where most of our activity is coming from as far

as OCS. How do you as a professional manager of oil and gas relate

to the fact that it is okay here—or seems to be okay here, and we

are out in three thousand feet of water now, and we are selling

leases at six thousand feet, when it is not okay here and it is not

okay there.

Mr. STANLEY. I do not have a good answer for that. Certainly the

oil and gas industry has operated in the Gulf of Mexico for many

years, and without very many problems. Forest Oil has been an

operator——

The CHAIRMAN. Is it local support? Why should this area have to

carry the burden for the United States when this area and this

area benefit but do not have to put up with any oil and gas activity?

Mr. STANLEY. I agree.

The CHAIRMAN. I do not know that equity has anything to do

with the argument.

Mr. STANLEY. I agree.

The CHAIRMAN. In my State of Alaska, for that matter.

Mr. STANLEY. In my opinion, we need to go after all of the resources that are available. It would help to supply more energy——

The CHAIRMAN. Would it help to reprioritize these areas off either coast and say now we have them all closed, could you

reprioritize them and say some have a higher environmental value

than others, therefore they should be closed and other areas should

be opened? Is that a reasonable approach? I mean, it is going to

have to come from somewhere. If it does not come from here, it is

going to come from overseas. We are going to import it, right?

Mr. STANLEY. That is correct.

The CHAIRMAN. We are importing 56 percent of oil now, 57, we

are going to be up to 60. I mean, I do not know what the American

people want to believe, but there is a certain reality to this, is there

not? Where is it going to come from? Well, thank you.

Mr. Leahy, you indicated—that is fine, thank you—an issue of

CAFE standards and, in your professional opinion, while we have

got to conserve more, there is a certain impracticality associated

with that being the answer. Would you enlighten us a little bit

more? You used some rather startling figures here, and I do not

know whether we could all turn our cars in and get 56 or 86 mile

per gallon cars. Many people say production is not the answer; it

is CAFE standards.

Dr. LEAHY. Basically the numbers I quoted were the technically

recoverable volumes of oil and gas. Let me explain what technically

recoverable means. Basically, technically recoverable is the amount

of oil and gas that can be extracted using current technology—current drilling techniques and so forth. There is obviously an economic piece that influences the volume of oil and gas that is practical, and that changes with the economy. Essentially what we are

doing is defining the resource base, and actually we have done

some economic analyses to put those numbers in a little better

practical context for the decision-makers.

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The CHAIRMAN. I am sorry. Mr. Simmons, you were pretty much

highlighting CAFE, too.

Mr. SIMMONS. The 80-miles-per-gallon car.

The CHAIRMAN. Go ahead.

Mr. SIMMONS. You know, first of all I did that analysis myself,

so I know the number is right. It is actually 49,600 barrels per day.

The CHAIRMAN. Just give us—slow us down again so we pick it

up.

Mr. SIMMONS. You take an 80-mile-per-gallon car—— The CHAIRMAN. An 80-mile-per-gallon car. Do we have any of

those now?

Mr. SIMMONS. No, we have a prototype that will be out in 2004.

It is an imaginary—— The CHAIRMAN. We have got a 56-mile-per-gallon car if you want

to buy one. Toyota makes one, Nissan makes one.

Mr. SIMMONS. And what we do is we replace that car with a car

that gets an average of 17 miles a gallon, because if you take the

vehicle fleet, that is our average today, and the delta is the savings. So a million 80-mile-per-gallon cars is a phenomenal concept,

but it does not make a dent, a single dent.

The CHAIRMAN. A million 80-gallon cars would save us how much

oil?

Mr. SIMMONS. 50 thousand barrels a day.

The CHAIRMAN. 50 thousand barrels a day, and we consume

19——

Mr. SIMMONS. Well, we are getting up a little over 20 million

during the seasonal peaks, so it has absolutely no relevance. It is

a great concept.

The CHAIRMAN. Okay, well—50 thousand barrels a day is what

you would save if you had one million cars that go to 80. And how

many cars do we have in this country? Somebody figured it out.

Mr. SIMMONS. 220 million vehicles.

The CHAIRMAN. 220 million. Well, I do not know if you could

stretch the car buyers to that point. Mr. Hayes, you indicated that

you—would you hold this up here, please? You indicated that significant portion under your direction of the Naval Petroleum Reserve had been opened for oil and gas leasing. Would you care to

indicate the percentage that had been opened?

Mr. HAYES. Yes, I believe that the environmental impact statement was done on 3.9 million acres of the 25 million acres of the

National Petroleum Reserve. That was the area that is the closest

to Prudhoe Bay.

The CHAIRMAN. This is the area here?

Mr. HAYES. Yes, yes. Well, I am not sure that is correct. That

looks like it is offshore or just barely onshore.

The CHAIRMAN. It is onshore. There is nothing out there.

Mr. HAYES. Okay. The area that is opened—now, that may be

the area that is currently—there are about six wells in the last 2

years that have been put in. That may be where the wells have

been put in but, in fact, 3.9 million acres are open now for leasing

under that 1998 Environmental Impact Statement.

The CHAIRMAN. Well, the record will indicate that there were 4.3

million acres that were studied. Would you agree with that?

Mr. HAYES. That sounds right.

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The CHAIRMAN. Okay. Good. And only 861,318 acres were actually leased.

Mr. HAYES. So far. We just had the first lease sale in 1999 that netted over 100 million, presumably with prices now at $28 a barrel, there will continue to be more interest.

The CHAIRMAN. Yes, but I do not want to mislead people, and I

think there is a certain assumption out there that this area is open

for leasing when, in reality, less than 25 percent of the four million

acres has been leased and there is only 4.3 million that has been

studied. Factually, much of the area that industry asked to be

leased was taken out of the proposed lease sale because of environmental objection. So I want the record to note the reality that this

area is not all open for oil and gas. Much of this coastline here, as

you know, has been excluded because of environmental objections.

The point is 14 percent of Alaska’s Arctic shoreline is actually

open for exploration. Obviously ANWR is closed. This white area

is open here. That happens to be State land. This little spot here

which represents 861,000 acres is the only area that has been open

for competitive bids that have been leased, and that is all. And

then obviously we have got this huge area. This is about 1200

miles from here to here, so I do not want to have any more misunderstandings, particularly from the media, that suggest that

only—95 percent of the coastal plain is open. It is not.

Now let me ask you, Mr. Hayes—if you were approached by the

Governor of the Virgin Islands, Governor Turnbull, and asked to

explain why under your stewardship the Department of the Interior withdrew 12,700 acres of the Virgin Islands National Park and

18,000 acres in the Buck Island National Monument without any

consultation to the Governor or the Delegate, Donna Christianson,

how would you explain that action? When the Governor comes into

this committee and says, Senator, my entire commercial fisheries

have been eliminated by this action in the closing days of the Clinton administration with no consultation with me, no consultation

with the Delegate. What am I supposed to do? What would you tell

him, Mr. Hayes?

Mr. HAYES. Well, I would have to check the record on that. I

know that after the—— The CHAIRMAN. That is the record.

Mr. HAYES. Well, after the Grand Escalante issue, a new approach was taken to national monuments because of the concerns

about the way that the Grand Escalante Monument was created.

In each of the monuments, there were trips to the areas, stakeholder discussions. Senator Burns will remember up in Missouri

Breaks there were several meetings.

The CHAIRMAN. We are talking about this area specifically.

Mr. HAYES. Well, I will check the record on this.

The CHAIRMAN. This Governor specifically, this Delegate who

was elected and the attitude of your administration, and particularly the Department of the Interior—— Mr. HAYES. I know that Bruce Babbitt went to the Virgin Islands

at least three or four times and had discussions on this point.

The CHAIRMAN. They have got great beaches down there.

Mr. HAYES. Well——

The CHAIRMAN. I mean, what did you tell this Governor?

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Mr. HAYES. I cannot help you on that one, Chairman.

The CHAIRMAN. Well, you were there.

Mr. HAYES. No, I did not go to any of those meetings.

The CHAIRMAN. Well, I know, but it was under your stewardship.

You were in a responsible position.

Mr. HAYES. I would be happy to supplement the record, look into

it, and provide the facts as I can reconstruct them.

The CHAIRMAN. Well, I am going to go for a second round. Excuse

me.

Senator BINGAMAN. Thank you very much, all of you, for being

here to testify. Let me see that chart again that we had of the

North Slope. Since we were just up there, it is sort of on my mind.

Still thawing out.

My impression, and tell me if I am wrong about this—maybe Mr.

Hayes could respond, or any of the rest of you—my impression is

that administratively the Department of the Interior now has

about 95 percent of the North Slope available to it, which can be

made available for lease if it determines to do so. The only part

that is off-limits for leasing is this 1002 area over here in the

ANWR. Is that correct?

Mr. HAYES. Right.

Senator BINGAMAN. On the coastal plain. Is that right?

Mr. HAYES. That is correct, Senator, and I appreciate the question because I would like to clarify this. The vast majority of the

Federal lands there are open and potentially available for leasing.

In order to lease, there has to be an Environmental Impact Statement that will be done to evaluate the area to essentially provide

the basis for opening it up for leasing, and then there has to be

a lease sale, and then production can happen.

What happened on the National Petroleum Reserve in Alaska is

Governor Knowles approached the President and asked that this

area begin to be opened up because of the downsizing of the

Prudhoe Bay field. The administration responded, scoped NEIS,

and the chairman’s numbers sound right—I think it was about 4.25

million acres which is what industry wanted and the Governor

wanted the initial leasing to look at. As a result of the EIS, 85 percent of that 4.25 million was opened up for potential lease sales.

Only 15 percent of that approximately four million acres was set

aside because of environmental concerns.

Then the first lease sale occurred, and over eight hundred thousand acres already have been leased, but there are still available—

and I am sure BLM is willing to schedule if it has not already

scheduled—additional lease sales. And if there is industry interest,

there can be further Environmental Impact Statements done, and

other areas of the National Petroleum Reserve—the balance of the

25 million—can also be potentially opened up.

Senator BINGAMAN. My impression is that there have been leases

in the National Petroleum Reserve previously that expired because

the drilling did not indicate that those were promising areas with

the technology they had, and then all that you described is recent.

Mr. HAYES. Right.

Senator BINGAMAN. It is a new effort to go back in and say, let

us lease again, because we now think new technology has perVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00118 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
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suaded us that maybe we can do better with 3D, seismic and all

of those kinds of technology. Is that your thought?

Mr. HAYES. That is right. In fact, I think we are going to get

some important feedback. The first exploratory wells were just put

in the winter before this, and I believe a couple more are coming

in this winter. We are going to have the results of six to eight exploratory wells based on the new areas just west of Prudhoe Bay

that were opened up.

Senator BINGAMAN. Let me ask Mr. Stanley. You had some interesting testimony where you basically pointed to some of the deficiencies in staffing, as I understand it, in getting some of these permits approved. You cited the backlog in drilling permits and rightsof-way applications in northeastern Wyoming, for example, and indicated that you think we need additional staffing. Is that within

BLM land about which you are talking?

Mr. STANLEY. Yes, sir, in the BLM regional offices.

Senator BINGAMAN. Could you elaborate a little bit on that point?

Am I understanding your point correctly that there is this backlog

there and in other places, particularly in the Rocky Mountain region?

Mr. STANLEY. Yes, sir. The overall permitting process is quite

cumbersome and quite slow, which—— Senator BINGAMAN. So that needs to be streamlined.

Mr. STANLEY. Yes, sir, it does.

Senator BINGAMAN. But you also believe that additional staff

would help get those permits processed?

Mr. STANLEY. Yes. In the Powder River basin, the coal bed methane activity has been a wonderful happening for increased energy,

but it has put a real burden on the existing BLM infrastructure

and, frankly, the oil and gas industry to try to ramp up and handle

that activity.

Senator BINGAMAN. You also referred to the importance of maintaining research and development funding for increased supply.

Mr. STANLEY. That is correct. Over the last 20 years as the major

oil companies have shrunk in size, their research and development

programs have also shrunk in size, so I think it would be really a

win/win process to take some of the royalty money and fund research and development which should, therefore, create more production and therefore more royalty. So it should be a self-fulfilling

type of an endeavor.

Senator BINGAMAN. All right. Let me stop with that, Mr. Chairman.

The CHAIRMAN. Thank you, Senator. I believe Senator Burns is

next.

Senator BURNS. I just have a couple of questions. We have more

people working for BLM in Montana than ever before in the history

of it, and we are still not getting anything done? I think the same

thing is happening, not just in—I had a hearing in Montana to explore the possibilities of coal bed methane and it was a very big

finding down there and it will be part of the energy mix in that

basin, as soon as we figure out how to handle the water. What are

we going to do? Are we going to go back in the ground with the

water, or are we going to handle it? Right now it does contain a

lot of salt, but most of it is potable and can be used.

116

Mr. Hayes, I want to straighten out one thing. The USGS report

in the upper Missouri tells us that gas reserves are higher than

you would indicate in your testimony today. Do you take issue with

that? With the USGS folks?

Mr. HAYES. No, no. I do not take issue with their report. I was

saying that those three monuments, including the one in your

State, their reserves when compared against the energy needs of

the country are not significant. The USGS did say in their study

that those five monuments had moderate to high potential reserves, and the numbers are in the report and they speak for themselves.

Senator BURNS. The thing about it is that in the upper Missouri—and I am pretty familiar with that country—I think Secretary Babbitt flew across that pipeline where it crosses the river

three or four times and never could find it. So the way we move

our supply and the way we lift supply, and even the way we discover or hunt for it is a lot different now than it ever has been in

the history of the business. Even though you say there are inside

these monuments there are inholders and leases, and they are

going to be allowed to proceed, I would caution you to say that for

the simple reason that that has not been the case when these

monuments have been established.

In other words, we get some land manager who has no interest

in energy production or even grazing for that matter and has for

the first time in his whole life a fiefdom, and he is going to prevent

this from happening, and they do it. That is what concerns me

about the staffing as far as getting out—we had to change the law

in order for the BLM to get their work done on our grazing permits, and we finally got that done. I do not know whether they are

catching up or not, and I would imagine that the same thing is

happening in the oil and gas. But I am concerned that there is a

lot of misinformation floating out here, and one sort of contradicts

the other.

I can remember going through the years of Gloria Flora. She was

in Montana and worked with the Forest Service on the withdrawal

of the eastern front, of which we have some production up there

now and you cannot find it, but yet in that overthrust belt contains

great reserves and should be—if nothing else, like Mr. Simmons

says, it should be at least inventoried and we know that it is there,

and we have got a pretty good shot.

I wish I had gotten Dr. Bill Ballard from Billings on this panel

today, and I know most of you know Bill, and I do not know that

there is anybody who is as knowledgeable about the West and oil

and gas supplies as Dr. Ballard is, so I am concerned about this

information. But I know up there that they are causing a lot of

heartburn in our State. I think coal bed methane and our ability

to produce gas is very important, and I am not going to say it just

for electricity.

Folks, I am going to tell you—fertilizer is going to cost 30-40 percent more this year than it did a year ago, and the urea—in other

words, the nitrogen that we take all comes from natural gas. We

cannot afford that in agriculture and still be a viable producing industry like we have been in the past. So I am still concerned about

117

that, and I was very interested in your testimony today. Thank

you, Mr. Chairman.

The CHAIRMAN. Senator Thomas.

Senator THOMAS. Thank you. Dr. Leahy, what involvement do

you have in the decision-making process with respect to the Department of the Interior and the Energy Department, and so on?

Dr. LEAHY. Basically the U.S. Geological Survey is a scientific

and information organization. Our role is to provide the resource

estimates.

Senator THOMAS. I understand that, but do you have a part— your information in their decision-making?

Dr. LEAHY. Our information is used by many different groups in

terms of their role in decision-making, so I think we are viewed as

unbiased provider of information.

Senator THOMAS. I think one of the problems—and I am delighted that Vice President Cheney is on a work group that brings

together some of these agencies. We have had Energy up here for

all 8 years, and Interior has more to do often with energy than Energy does, and we need to get some coordination so that there is

some work there, I think.

Dr. LEAHY. I will say that we are providing information to those

groups that you mentioned.

Senator THOMAS. I am urging you to participate in some of the

decision-making, as well. Mr. Simmons, you are pretty down on

conservation, then, are you not?

Mr. SIMMONS. No, I think conservation is a terrific concept. I

think the proponents of the conservation issue, though, are suggesting that it is a solution as opposed to supply, and they literally

must have never done any numbers. I am a numbers person, you

cannot be in investment banking and not do numbers.

I think that if we had vast energy capacity, it would not really

even matter, but I literally think that the conservation argument

is equivalent to snake oil sales back in the days before Rockefeller.

What is disturbing to me is every time I do some analysis like the

refrigerator numbers—first of all, who will create a 50 percent

more efficient refrigerator. It is just a dream. But if you did, to

save 1 percent of daily energy, or 2.5 percent of electricity is stunning. I would have actually thought it would have been a lot more

than that.

Senator THOMAS. Many people would think it would be more

than that, but in any event, it seems to me from a political standpoint of getting some of the things done we need to do, conservation has to be something we are for, as well as the environment.

Mr. SIMMONS. Absolutely.

Senator THOMAS. This idea that all you do is production is not

going to work in terms of the politics of this issue. You talked

about production, which obviously we are for. What about refining

and transportation? We can produce all of the electricity or coal in

Wyoming that you can handle, but if you cannot get it to where the

market is, you did not mention that.

Mr. SIMMONS. Well, in 7 minutes it is hard to—we are out of capacity right across the face of energy. There is almost no data on

what transmission capacity is in electricity, for instance. In Houston we added our last transmission lines of any significance in

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1983. We are out of refining capacity. Virtually every finished product pipeline in the United States operates at virtually 100 percent

all of the time. We must be bumping up against the literal logistics

to bring any more foreign imports into the United States, so right

across the face of energy we are out of capacity.

Senator THOMAS. We talk a lot about production, but you cannot

put oil in your 80-mile-a-gallon car.

Mr. SIMMONS. Absolutely not.

Senator THOMAS. Mr. Hayes, you obviously are sensitive about

the last 8 years in which we have not had an energy policy, but

don’t you think that the increase in production on Federal land has

been more a function of the price than it has been on any change

that was made in the last administration?

Mr. HAYES. Well, the price increases, as you know, did not really

kick in—as late as 1988, oil was still $18 a barrel.

Senator THOMAS. True, but most of the changes you are talking

about in production are a result of the price.

Mr. HAYES. Certainly. I agree with your proposition that the

market is a huge driver in all of this and is probably the reason

why the overall production has declined in the United States pretty

steadily since 1972, plus a lot of the fields are mature.

One of the reasons why there have been increases on the Federal

side are the incentive side. This committee and the Congress and

the President put in place a deep royalty incentive, and there are

other incentives that where put in place over the last eight years.

Of course, that is an important part of your consideration of an

overall energy policy.

Senator THOMAS. It is pretty tough, and I understand your defense of Babbitt, but someone mentioned Jack Morrow Hills. Well,

we went through a whole EIS—Secretary Babbitt came out and

said, we want you to change your results. Now, you cannot do that.

Mr. Stanley, yours and Mr. Rubin’s comments were not consistent with Mr. Hayes’. Would you like to comment on that?

Mr. STANLEY. Well, I think there is some confusion over the accessibility of land. As I stated, many lands have been leased but,

in effect, but are almost off-limits because of all the severe restrictions.

Senator THOMAS. Roadless.

Mr. STANLEY. Roadless. Even all the various surface use restrictions, and no surface occupancy. Some of those restrictions make

drilling wells uneconomic, so you may have a lease but then you

decide it really does not make economic sense to do it because of

the severe restrictions. The timing of the restrictions where we

only have a small window in the year to drill many leases plays

real havoc with the drilling contractors. They cannot hire a crew

that only wants to work two months out of the year, and so there

is a tremendous run on the drilling contractors in the late summer

to drill wells, and then—— Senator THOMAS. We ran into that just recently in western Wyoming. Jonathan Field, isn’t it? At any rate, it might be Piney where

the contracts—they cannot do it at certain times of the year.

Mr. STANLEY. Right. Exactly.

Senator THOMAS. Mr. Rubin, do you have any reaction to Mr.

Hayes’ comments?

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Mr. RUBIN. Yes. I think it is really critical to advance this inventory of western lands as quickly as we can so that we can sort of

end some of the debate and get something on paper that everybody

can look at and agree on.

The CHAIRMAN. Can you pull your microphone closer?

Mr. RUBIN. Yes, sir.

Senator THOMAS. Will we be confused about the availability to

lease against the practicality of leasing?

Mr. RUBIN. Right. The fact that you have got a lease does not

mean that you can actually develop that lease in a lot of cases.

Even more subtle problems compared to no surface occupancy or

something like that are the difficulties in getting permits. We

would be pleased if the BLM could do as good a job of getting permits out as quickly as the States do. We would like to see their performance improve, and whether that takes more resources or a

reprioritization of resources—whatever it takes, it is important to

do that if we are going to increase gas production.

I understand that at least the initial part of this lands inventory

has started, and preliminarily from what I understand they are

looking at the Green River basin right now. They are actually finding leasing or resource restrictions significantly greater than what

we found in the NPC report, so we are looking forward to seeing

more of that information.

Senator THOMAS. We have been working on that for about 4

years, as I recall, or more. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. We have been joined by Senator

Craig. Senator Craig is one of the senior members of this committee from the State of Idaho, another Western State with a lot of

public land.

Senator CRAIG. Mr. Chairman, a lot of public lands, but we became volcanically too active about 11 million years ago, so we do

not have many hydrocarbons left under our structures. Just a little

lip of the overthrust over in southeastern Idaho, but it apparently

does not hold a great deal of potential.

David, 17 percent of the National Petroleum Reserve in Alaska

is in itself valuable, but that is not to suggest that the world is now

open to exploration, and I believe that 3.9 million acres that did receive recognition in your tenure represents 17 percent. Is that correct?

Mr. HAYES. That sounds about right, because that was the request of the Governor and the industry in terms of the first bite

of analysis to open it up. The assumption was that the industry

would prefer to have the access close to the current infrastructure

of Prudhoe Bay, and obviously as you move further west, the production costs go up higher. I am sure that Secretary Norton would

be happy to, and we would have been happy to, to start an EIS

process to open up additional areas in the National Petroleum Reserve. That is really what the reserve is for.

Senator CRAIG. And therefore you would advise her to do so?

Mr. HAYES. She is not asking for my opinion, Senator, any more.

Senator CRAIG. I would have a comment to that, but it would

probably be less than honorable.

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Mr. HAYES. No, no, I do not feel it is appropriate for me to advise

her, but obviously if there is—I do not think there is any question

that the National Petroleum Reserve is a very important piece of

our energy future, and that if there are potential additional reserves that industry is interested in developing, it certainly should

be explored.

Senator CRAIG. Well, we can all debate on what is or is not available. I do not know a great deal about the agencies functioning in

oil and gas because it is of direct interest to me, but it is not of

direct impact to my State. But I do watch very closely a strategy

that was employed over the last eight years that dramatically declined the ability to offer up timber sales.

About an 89 percent decline in timber production on public lands

occurred in an 8-year period. One of the ways of doing that is to

basically disallow and/or diminish the ability of the on-ground staff

to put up, or make available, or to review, and that is exactly what

happened. In fact today, as a result of the last 8 years, it is almost

impossible for some of my force in Idaho to muster people of any

talent that would put up a timber sale, or could, that would have

the basic knowledge to do so. So it is one thing to suggest there

is a green sale program; it is another thing to suggest that we have

the staff to do it.

It was an interesting strategy, but it worked. I am not sure that

is true in oil and gas, because I do not know, but I know that Senator Burns is suggesting that in Billings there are, I believe, 557

BLM employees, and yet they are incapable of or less than capable

of, or less than timely, in their ability to deal with the applications

in a way that is meaningful. So there are a lot of ways of dealing

with this, and certainly all of the environmental standards must be

met.

In the mid-1980’s while we were still active in the overthrust

belt, I was serving in the House, and I felt it was important that

my colleagues from Eastern States go West and look at the oil production that was going on in the overthrust belt. I had people like

the late John Siberling—certainly a devout environmentalist—and

others who traveled with us. I wish my colleague from Wyoming

was still here, because I will never forget the morning that we lifted off from Jackson Hole, and we all know about Jackson Hole,

Wyoming, a beautiful, pristine valley up against the backdrop of

the Tetons. And we were flying south of Jackson Hole and slightly

west, still in the State of Wyoming, looking for a drill site in which

drilling had gone on but nothing had been discovered.

So the drill rig had been pulled, the reclamation had gone forward about 2 years before that, and the road had been obliterated,

seeded in, and we overflew the area a couple of times. The pilot

and the Federal person could not find the site. So we finally circled

a clearing, and as we dropped down, we lost sight of Jackson Hole

which was in the distance. We could still see the city, and we landed in a clearing and scared out a cow, a elk and her calf and found

the drill site.

My point is simply this: The technology and the ability we have

today to recover and reclaim and make safe is so real compared to

where we were decades ago—and this was still nearly 2 decades

ago, 15 years ago, I would guess—that the tragedy of an unwillingVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00124 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
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ness to look at reality today is that the American consuming public

and the economy often times gets put through what they should

not have to be put through. I am often times interested when people say, Mr. Chairman, will we develop an energy policy if the Senate cannot support ANWR? And why should ANWR be a part of an

overall energy strategy?

Why should any of us as public policy makers debate energy

without laying all of our potential energy cards on the table? I

think that is what my colleagues were talking about when they

talked about areas offshore that are restricted today. That is not

to suggest that we would not restrict them in the future, but if we

are really going to be honest with the American public, then we

ought to lay all of the cards on the table and once again decide

based on our ability and technology, and not emotion and not politics, what is or is not doable, what is right or wrong in the current

economy, and in the current environmental technology that is

available. Hopefully someday we will get there; I would hope that

it is not driven by $3 or $4-a-gallon gas, but it may well be in time.

So we have got a job to do, and Mr. Chairman, thank you for

your willingness to pursue it in a very direct way. But to be dishonest with the American people at this time, and to suggest to them

that they spend ever-increasing amounts of their income for their

energy needs in an absence of a responsible and honest dialogue is

in fact false policy, and I hope that we can adjust that.

The CHAIRMAN. Thank you very much, Senator Craig.

Mr. Hayes, relative to your comments with regard to what action

your administration under your stewardship took—I think we have

a few differences of opinion. I would ask you a specific question

whether the Department of the Interior—the Department responsible for OCS leasing—supported deep water royalty relief within

the Clinton administration initially.

Mr. HAYES. I cannot speak to initially. I know the President

signed the bill and supported it. Of course, Senator Johnston is the

key to that.

The CHAIRMAN. I was ranking member then and worked with

Senator Johnston. The fact is—and perhaps we ought to ask Senator Johnston, but the Department of the Interior fought this issue,

and it was the Department of Energy that prevailed.

Mr. HAYES. Yes.

The CHAIRMAN. So, to suggest that it is appropriate that the Department of the Interior take credit for this I think is a bit misleading, and we would be happy to have any comments that Senator Johnston might care to make as to the concentration of efforts

to prevail during the Clinton administration. You know, it is kind

of interesting between monument designation withdrawals and a

last-minute 60 million acre roadless policy, the amount of lands

closed to energy exploration and development almost doubles—almost doubles the total OCS acreage leased during the past 8 years.

There were approximately 38 million acres of OCS area land

leased, and there were about 65 million acres that were closed in

the monuments and roadless on shore. So while you point out with

some pride what you accomplished, I do not think you are giving

the American people a fair evaluation of what you closed in the

process of accomplishing it. Your role in this probably was not of

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significance, but nevertheless I think it reflects a reality that clearly the Department of the Interior was opposed to OCS royalty relief, and the Department of Energy was the one that prevailed as

a consequence of the good works of Senator Bennett Johnston. If

you care to dispute that, please proceed.

Mr. HAYES. Mr. Chairman, it is rare that I would dispute anything you say. I respect you very much, but let me just say, if I

can—my statement was that the administration supported the Royalty Relief Act, and the President signed the bill and the Interior

Department moved out very quickly and aggressively in implementing it, and the leasing numbers show the result.

If I could comment very briefly on the amount of land designated

in national monument status. As I said in my testimony, prior to

the designation of national monuments, we obtained oil and gas

survey and mineral survey information from the USGS. That information has recently been confirmed in another U.S. report that

was done in March of this year by the new administration, and

they confirm that less than one million acres of the monument-designated areas have any significant potential for oil and gas, and I

have laid that out.

With regard to the roadless rule, I would just like to point out

that that is now underway—the analysis of how much potential oil

and gas there might be. The Department of Energy study suggests

about 11 TCF of natural gas. I would just like to point out that

that is less than 1 percent of the total reserves as identified in the

National Petroleum Council report.

The CHAIRMAN. Do you recall the figures that were given to this

committee in the overthrust area, Rocky Mountain West, that there

was probably somewhere in the area of 21 trillion cubic feet of recoverable gas reserves that were eliminated by the roadless withdrawal, and did you have any role in that, or did you have any

knowledge of it?

Mr. HAYES. No. My knowledge of this is based on the record. Of

course, it was the Forest Service that did that rule. My understanding is that the record includes the study the Department of

Energy commissioned which indicates that the potential loss—and

this was disputed by the Forest Service—is 11.3 trillion cubic feet

of natural gas, which would be less than 1 percent of the potential

available gas according to the National Petroleum Council report.

The CHAIRMAN. Well, I think there is some reasonable dispute on

that, and obviously that withdrawal had a dramatic affect on the

domestic prospects for gas, particularly to discoveries in the overthrust belt. The fact that it was made roadless put it off-limits, and

I think it is fair to say that there was very little consideration

given from the standpoint of—I do not know. Mr. Rubin, can you

comment on that at all?

Mr. RUBIN. Yes. I think that part of what Mr. Hayes is saying

makes our case in that it would have been fairly easy to consider

the impacts on energy from these decisions, and just to have modified their decisions a little bit, and we could have captured most

of the natural gas, for example, that was in the roadless moratoria

by just modifying the moratoria a little bit in the Rockies by limiting the moratoria by about 5 percent, and by taking a look at the

few monuments that had significant resource potential, and actuVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00126 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
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ally modifying what they did beforehand rather than having to get

information after the decisions are made to indicate what the resource potential was.

The CHAIRMAN. I am looking, Mr. Hayes, at the study of Advanced Resources International, and the conclusions. And it says

the vast majority of natural gas resources in IRAs—IRAs—are

found in the Rocky Mountain region. These resources, 11.3 trillion

cubic feet, are mostly contained in the largest nine plays in the

Rocky Mountain region.

Implementation of the roadless policy will close to development

9.4 trillion of natural gas, increasing the total estimate by the 1999

NPC study from 29 to 38 trillion cubic feet, a significant 32 percent

increase. Now, to me the only way I can read this is that areas of

potential oil and gas have been taken out of development by this

roadless action, and it was under your watch.

Mr. HAYES. That’s correct. Those are the same figures, and just

to put that into perspective, if you add those two figures together

plus the west coast and the Gulf and the east coast, the offshore

resources together, it is about 100 trillion cubic feet of gas that

largely because of the offshore moratorium, is unavailable for drilling. And that total is about 7.5 percent of the Natural Petroleum

Council’s estimate of the reserves. I should mention that the USGS

apparently is potentially upping that estimate.

The CHAIRMAN. Well, to a large degree I do not think you can

dodge the reality that our energy crisis is due, in some portion, to

the idea of a death of thousand cuts. Whether it is what is done

in the overthrust belt, what has been done with the moratoriums,

what has been done, and done, and done, and yet we are crying for

energy. Mr. Leahy, I was hoping that one of you would give us a

little information on when we could expect to relieve our dependence on oil for transportation. Well, look at conservation—it is important. We look at alternative energy and it is important. But oil

flies the airplanes, the ships, the trains, the automobiles, the

trucks. When are we going to get some relief?

Dr. LEAHY. I guess the way I would answer that question, Senator is, as you know, we are dependent on foreign sources for more

than or about 50 percent of our consumption.

The CHAIRMAN. And we are just going to import it?

Dr. LEAHY. Well, the point is it will require, I believe, all of the

issues in terms of conservation and development that this group

has talked about.

The CHAIRMAN. Well, I know what Mr. Simmons just told us of

50 thousand barrels that we could save if we put a million cars in

there. Do we have an answer? Are we going to continue to depend

on fossil fuels, particularly oil, for transportation in the foreseeable

future?

Dr. LEAHY. I do not see our dependence on oil disappearing

quickly.

The CHAIRMAN. Well, that is supported. I assume some of you

have seen the CSIS study that came out here a short time ago. It

said for the next 20 years just not the United States—and I think

that is part of our problem, we think of ourselves as a little island,

that everything circulates around us—but there are developing

countries, and then there is China, and the demand for oil is going

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to increase, and we are either going to produce more and relieve

our dependence, or we are going to import more in spite of the efforts and the necessity of conservation.

I wish these people that say conservation is the answer would

give us a formula for achieving it. Indeed the answer is we can do

more, but we use more. We have more airplanes flying, whatever.

Now a couple more questions and I think we can break this up

because it has been valuable. I think we have had some conversation about leasing lands, and that does not necessarily make then

suitable for exploration and production. Permitting time and development time are significant, and we have had problems in this

area where we try and balance legitimate environmental consequences, but is there in your collective opinions—and maybe Mr.

Stanley, you are in the oil business—can we take steps, still protect

the environment and the legitimate concerns and still expedite the

process that you would specifically recommend?

Mr. STANLEY. Yes, sir, I think we can. The footprint is so much

smaller today than it ever has been, and drilling gas wells in the

Rocky Mountain region where you usually have one gas well per

every 160 acres, the size of the drill site is only two to three acres,

so it is a very small part of the land that is used to drill a well.

And then after we finish drilling, most of that two to three acres

is reclaimed, and the resulting producing pad is maybe only a half

an acre or a third of an acre, so it is a very small imprint on the

land.

The CHAIRMAN. Has government made it easier or more difficult

as time has gone on? In other words, you have had experience in

this for some time. Is it getting easier, or is it getting tougher?

Mr. STANLEY. It is getting much tougher. An example is I guess

I keep talking about the big game winter range, but that is a significant problem. In the old days—5, 10, 15 years ago—we were

only precluded from drilling if the animals were actually in the

area and then moving in, and then only on part of a lease. More

recently, that restriction has been much more widespread, so that

stops a lot of wells from being drilled in the winter time.

The CHAIRMAN. Mr. Leahy, the proven reserves of oil for the

United States—did you include—I think you used something like

23 or 24 billion barrels of proven reserves?

Dr. LEAHY. Let me go back to my notes. Based on our 1995 assessment for onshore and State waters, our proven reserves were

20 billion barrels.

The CHAIRMAN. 20 billion. And that is onshore?

Dr. LEAHY. And State waters.

The CHAIRMAN. And State waters. Can you differentiate onshore

and State waters of your 20 or so?

Dr. LEAHY. We should probably answer that for the record, Senator. I cannot——

The CHAIRMAN. Most of it is onshore?

Dr. LEAHY. Yes. I would say so.

The CHAIRMAN. Did you include any estimate for ANWR in

there? In that figure? The ANWR figure being a low of 5.6 and high

of 16, maybe a mean of ten?

Dr. LEAHY. Okay, the ANWR figures are basically undiscovered

resource base, not proven reserves.

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The CHAIRMAN. Right.

Dr. LEAHY. So it would be—— The CHAIRMAN. So you are only using proven reserves?

Dr. LEAHY. Yes.

The CHAIRMAN. Are you using the ANWR figures in your

unproven reserves?

Dr. LEAHY. Not in 1995. The 1995 numbers that I quoted did not

include the more recent estimates of ANWR that were done in

1998.

The CHAIRMAN. Now would you explain—there were three estimates on ANWR over the last decade.

Dr. LEAHY. Uh-hm.

The CHAIRMAN. And one of them was done in less than a week?

Dr. LEAHY. Yes.

The CHAIRMAN. To accommodate the Department of the Interior

at a time when they wanted a different figure. Is that about right?

Dr. LEAHY. That is correct. Well—— The CHAIRMAN. Well, whatever. And can you elaborate for us the

different figures that were used and how long it took roughly for

each estimate to be developed?

Dr. LEAHY. I can provide some insights but, again, probably not

figures. Basically the national assessment was done in 1994. The

numbers used in that were based on a 1987, I believe, assessment

of ANWR. But clearly in the 1994 assessment, they ranked the

Alaska north shore as having high potential, but there was not

much known about ANWR at that point in time.

The CHAIRMAN. Well, there has not been any more known about

it since then.

Dr. LEAHY. Well, there was geophysical data that was available

and was basically used in the 1998 assessment, so we were

able——

The CHAIRMAN. Well, you are not——

Dr. LEAHY. There was more geological information than there

was——

The CHAIRMAN. Well, there was not any exploration that went

on.

Dr. LEAHY. No, no, but there were some geophysical lines that

we were able to take a look at, and there were some wells drilled.

The CHAIRMAN. So what did you come up with in 1987 on the

1987 figure which came out in 1994?

Dr. LEAHY. I do not have that—I would have to answer it for the

record, but clearly in the 1998 assessment in terms of technically

recoverable resources, if we look at the entire assessment area——

The CHAIRMAN. 1002 area is what we are talking about.

Dr. LEAHY. You want the 1002 area?

The CHAIRMAN. Well, that is——

Dr. LEAHY. Well, let me do the entire assessment area. At the

95 percent probability——

The CHAIRMAN. When you say the entire assessment area, are

you telling me that consists of all of the million-and-a-half acres?

Dr. LEAHY. It is all of ANWR, yes.

The CHAIRMAN. Okay. So it is all of the 1002 area.

Dr. LEAHY. Well, yes. 1002 was——

The CHAIRMAN. And this was in 1998?

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Dr. LEAHY. This is the 1998 number. At the 95 percent probability, 5.7 billion barrels of oil, at the mean 50 percent probability,

10.36, and at the 5 percent probability, about 16 billion barrels of

oil.

The CHAIRMAN. Okay, now for the record, if it were 10.36, where

would that ranking in size in the standpoint of oil fields found?

Dr. LEAHY. It would be—this is multiple fields, keep in mind.

The CHAIRMAN. I am saying a million-and-a-half were 1002 area,

if you say it is 10.36, what would it rank with?

Dr. LEAHY. Well, just to give you some perspective, Saudia Arabia—the giant oil fields—— The CHAIRMAN. I am talking about the United States.

Dr. LEAHY. I believe the east Texas field is about five billion.

The CHAIRMAN. Well, obviously this 10.36 is bigger than five, so

it is bigger than the east Texas field. Is it bigger—— Dr. LEAHY. That is one of the larger ones.

The CHAIRMAN. Are you suggesting it is the largest if it is 10.36?

Dr. LEAHY. Yes.

The CHAIRMAN. I have to deduce that unless you come up with

something else.

Dr. LEAHY. Keep in mind that the number I quoted you was basically for multiple fields; it is the volume of the undiscovered resource.

The CHAIRMAN. It is in—I know. The issue before the Congress

is whether to open the 1002 area, the million-and-a-half acres or

not.

Dr. LEAHY. Okay.

The CHAIRMAN. And I assume you have given us a mean of

10.36.

Dr. LEAHY. For the entire assessment area. For the ANWR area

which is smaller, as you know—— The CHAIRMAN. Now, just a minute. You just told me the assessment area was a million-and-a-half acres, which is the question

here. It is not the 19 million acres that are in ANWR.

Dr. LEAHY. Okay. Let me just quote the 1002 area, which is the

smaller area. That would be 7.7 billion barrels of oil at the 50 percent probability. I believe the Prudhoe Bay field is something on

the order of 13 billion barrels.

The CHAIRMAN. It was 10 originally; it has produced 12.

Dr. LEAHY. And there are some estimates that there are three

left.

The CHAIRMAN. So you are taking in 19 million acres of ANWR

in your mean of 10.36? Is that correct?

Dr. LEAHY. Yes, that is for the 19 million.

The CHAIRMAN. So you are picking up roughly 3 million acres

outside the 1002 area in your calculation?

Dr. LEAHY. Correct.

The CHAIRMAN. Okay. And what would be the high then for just

ANWR?

Dr. LEAHY. 11.8 at the 5 percent probability level.

The CHAIRMAN. So if you took the mean it would be 7.7?

Dr. LEAHY. Correct.

The CHAIRMAN. And if you took the high it would be 11.8. And

the largest field in North America is——

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Dr. LEAHY. Prudhoe Bay.

The CHAIRMAN [continuing]. Prudhoe Bay, and that was 10 initially, and it has produced 12. So what I am attempting to draw

from you—and I am having some difficulty in doing it—even if it

were the mean of 7.7, it would be the largest field found in the

United States in the last three or four decades?

Dr. LEAHY. It is not a field; it is multiple fields. But certainly the

volume of oil——

The CHAIRMAN. It is in the 1002 area, and the only thing Congress can address is whether to open the 1002 area or leave it

closed. The question I continually ask is how much oil is there, and

obviously we do not know and we have to depend on you and you

are telling me that there is a mean of 7.7 and a high of 11.8.

Dr. LEAHY. That is correct. Senator, I think a way to appropriately look at the relative size is that in 1989 in Colombia, the

Cuciana Field turned out to be the second largest field discovered

in all of the western hemisphere. They thought it was going to be

about the size of Prudhoe Bay, and it turned out to be half that

size, so I would guess that this area would rank number two.

The CHAIRMAN. Okay, well, it is hard to get a guess out of the

professionals, but we have a guess out of the financiers, which are

the ones that have to finance this development.

How important is the energy problem to our economy, Mr. Simmons, and relate to the fact that we are now looking at natural gas

as our savior.

Mr. SIMMONS. I do not think you can have any form of economy

that makes any sense——

The CHAIRMAN. What kind of an economy?

Mr. SIMMONS. Any form of an economy that makes any sense at

all without reliable and dependable energy. When Henry Kissinger

wrote his last book, when he reflected back on the 1970’s, with the

benefit of 25 years of hindsight, he described the 1973 oil shock as

the second worst threat to the economies of the world since World

War II. I think what we are in now is significantly worse than the

1973 oil shock once it plays out.

The CHAIRMAN. Why do you say it is worse now than the 1973

oil shock? We had lines around the block in 1973. The public was

outraged.

Mr. SIMMONS. Yes.

The CHAIRMAN. They were pointing their fingers at everybody

and government was ducking. Why is it worse now?

Mr. SIMMONS. The 1973 oil shock lasted 65 days. It was consumers panicking, topping off their tanks, and it was strictly related

to oil. We had ample supplies of natural gas and electricity. By the

time this plays out, I am afraid we will look back and say this was

far worse, because it is all three forms of energy at the same time.

The CHAIRMAN. Well, how is this going to play out in your vision?

You made a broad statement there that we will look back on this

and it could be worse than 1973.

Mr. SIMMONS. When we have hot weather this summer—if we

have hot weather this summer—we are going to find the electricity

problems in California are going to spread to many other parts of

the country. I am afraid that we are not likely to see any supply

128

response from natural gas, despite the high prices, for quite some

period of time.

The CHAIRMAN. No supply response?

Mr. SIMMONS. To natural gas.

The CHAIRMAN. Why do you say that?

Mr. SIMMONS. Because we have basically had a rig count drilling

for natural gas that exceeded 600 rigs 16 months ago, and it has

now hit a 20 year high, and so far we have had absolutely no supply response to the increased drilling. Canada is a year ahead of

us——

The CHAIRMAN. You say that we are drilling more, we are putting more in, but we are using more?

Mr. SIMMONS. We are drilling—we are finding smaller prospects,

and the decline curves in almost all the basins of North America

are now so high that we created a treadmill that created a need

for an exponential amount of wells to be drilled, and we are now

just about out of drilling rigs.

The CHAIRMAN. Do you gentlemen agree with this statement that

we are going to look back at this time—weather patterns obviously,

we are now dependent for our energy policy on the uniqueness of

weather patterns—are we going to look back at this time and say

it is worse than it was in 1973? Mr. Leahy, do you agree with that?

Dr. LEAHY. I do not know.

The CHAIRMAN. Mr. Hayes?

Mr. HAYES. I do not know.

The CHAIRMAN. Mr. Rubin?

Mr. RUBIN. I think we do have the unique situation in that we

do have tight supplies of a number of forms of energy. I am not

capable of predicting the future, but I am certainly concerned about

what is going to happen over the next several months.

The CHAIRMAN. Mr. Stanley.

Mr. STANLEY. Yes, sir, I agree with Mr. Simmons that we have

a shortage of oil, we have a shortage of gas supply, and we have

a shortage of electricity, and it is going to take a tremendous effort

to increase that supply. We are going as fast as we can trying to

drill more wells wherever we can, and as Mr. Simmons said, we are

just really holding our production flat. We are not increasing it.

The CHAIRMAN. Well, Mr. Simmons, you predict a very bleak picture. We have got a few people in this room that are students of

energy or are associated with energy, and a few that are associated

with the environmental community. We have a few press that are

left, and we have some television stations, but this message is not

getting across to the American people. Why, Mr. Simmons, is it not

getting across?

Mr. SIMMONS. I think there is embedded in too many energy

economists, and a lot of industry executives, a denial of the fact

that we are out of capacity. I think there is some confusion about

the difference between being out of energy capacity and people

think you are saying that we have run out of energy.

A week from this coming Thursday, the Council of Foreign Relations and the Baker Institute will be releasing an energy White

Paper, and there was a lot of debate among the forty or fifty of us

in what the energy issues were, but within about 12 hours I was

incredibly pleased with the clarity that came out of this group. I

129

think that basically over the next few months America will be

starting to open its eyes more to the problems, but they are very

real, and as the months progress, they are not going to get any better. They are just going to continue to get worse.

The CHAIRMAN. You know, I am at a loss to know how to communicate the likelihood of this problem occurring and affecting our

economy, our standard of living, our vulnerability from the standpoint of our national security. When I say that, I mean that we import 56 percent. In 1973 we were at 37 percent. We created SPRO.

We were concerned enough to do something; we said we would

never, ever allow ourselves to be over 50 percent. Now we have

lulled ourselves into a complacency; we are at 56, 57. The Department of Energy is saying we are going to be 60. We have seen

OPEC develop a discipline that they had not had before where

when they want to constrict the supply, they do, and the price goes

up as we have seen—it is $22 to $28, floor and ceiling? We still

don’t get the message.

And as we look at our transportation system where I can see relief potentially if we can develop more natural gas, recognizing that

we are now having a transmission problem, and you heard the lady

from Louisiana, distinguished Senator Landrieu, say that she feels

strongly that before we go off and increase the supply, we better

go off increasing delivery, and she is right in that sense. We are

constricted by transmission adequacy in both pipeline and electric

transmission.

So we are heading for this inevitable clash, and we are not addressing it. They are going to blame government—they are going

to blame you and I as to how this could happen, and they are going

to blame our new President. We cannot seem to wake anybody up.

It is absolutely incredible, but I guess until the squeaky wheel really squeaks or there are gas lines around the block, or there are

blackouts and there is no air conditioning in certain parts of the

country, they are going to get the message.

If you look at the economy and the threat to the economy, you

look to the threat to our national security—we are importing oil

from Saddam Hussein. I keep telling you as a general rule, what

do we do? We take the oil from him, put it in our airplanes and

enforce the no-fly zone. We have flown 234,000 individual sorties

over Iraq, endangered our men and women. We have been very

lucky.

Sometimes we bomb targets over there. He takes our money, develops a missile capability, delivery capability, and aims it at

Israel, and the American people say, oh, gee, he shouldn’t do that.

Where is it going to end? I do not know. Does anyone want to add

anything?

Mr. SIMMONS. I commend you for your speaking out very loudly

on this, and I share your frustration at the inability to have people

hear. A lot of denial going on.

The CHAIRMAN. For the record, Mr. Hayes, I did a little checking

so that we can work off the same song sheet, and with regard to

the Naval Petroleum Reserve in Alaska—you can put up that chart

while I speak—the record will note that 4.6 million acres are available in the sense of leasing; 2.3 million acres were set aside with

the explicit provision of no leasing would occur, and those are priVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00133 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
130

marily in this area right here—on the coastal area because of concern over our fish and wildlife. There is a significant wildlife—particularly bird population—over here. There is not much in this

area. Three hundred thousand acres of no surface occupancy,

220,000 acres available, but with strict stipulations. 1.8 million

acres available with no restrictions, and 861,000 acres that were

ultimately leased.

The factual reality is that only 12 percent were leased, or

861,000 acres. One of the things that a lot of people forget is they

see this whole land mass here and assume there is oil on all parts

of it, and therefore if this is closed, NPR ought to be able to supplant the idea that it would offset what potentially might be in

ANWR.

As Mr. Hayes knows, Husky drilling under a contract with the

Federal Government did extensive oil and gas exploration without

3D seismic in the 1960’s, and it was not very promising. A geologist

will tell you where you look for oil based on rock formations and

the likelihood. This is a hot prospect but, nevertheless, I do not

want to disclaim the value of NPRA because clearly there is a potential.

One of the interesting things from the standpoint of Alaskans is

this used to be called Naval Petroleum Reserve Number Four when

we were a territory. This was set aside by Congress with great wisdom back around the turn of the century. Of course, you can have

a Naval Petroleum Reserve at the top of the world for our Navy

that was sailing around the world at that time on oil, but (a) they

didn’t know what was there, and (b) they had no capacity to deliver

it. Now we still do not know what is there, and we do not have the

capacity to deliver it.

I would hope that this hearing had some value in the relationship to communicating to the American people the inevitability of

what is going to occur, and I just hope that somehow this message

is going to get through, but so far we have not had much luck.

Hopefully your contribution is like adding one more weight to the

camel, and maybe we are going to have to keep doing this until the

camel collapses. I just hope that the American economy and our national security interest is not under the camel when the camel

comes down. I wish you well. Thank you.

[Whereupon, at 11:52 p.m., the hearing was recessed, to be reconvened on April 26, 2001.]

[Subsequent to the hearing, the following was received for the

record:]

AMERICAN GAS ASSOCIATION,

Washington, DC, April 4, 2001.

Hon. FRANK MURKOWSKI,

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington,

DC.

DEAR CHAIRMAN MURKOWSKI: The American Gas Association requests that the attached portions of the Potential Gas Committee’s (PGC) biennial report on longrange supplies of natural gas, which was released today, be included in the record

of the Senate Energy Committee’s hearings on domestic oil and natural gas resources, which was held on Tuesday, April 3rd, 2001.

The PGC’s report shows that the U.S. natural gas resource base is estimated to

be even larger than previously thought, but that the size of the resource base is immaterial unless the nation can access supplies and can build the infrastructure

needed to deliver it. The committee’s report showed 1,258 trillion cubic feet (Tcf) in

131

total natural gas resources in the United States at the end of 2000. That is the

equivalent of a 63-year supply of natural gas at current rates of production.

The size of the resource base actually increased since the committee’s last report

in 1998, even though, since that time, 38 Tcf of natural gas have been drawn down.

During the past 10 years the PGC has increased its estimate of the U.S. natural

gas resource base with each successive report. This year’s increase is attributable

to 4 percent growth in traditional reserves and 10 percent growth in coal bed methane resources.

The Potential Gas Committee consists of more than 170 volunteer members from

the natural gas industry, government agencies and academic institutions. It functions independently, but with the guidance and technical assistance of the Potential

Gas Agency of the Colorado School of Mines. The committee receives financial support from AGA, the Gas Technology Institute and other companies, organizations

and individuals.

Thank you for your consideration of this matter.

Sincerely,

RICHARD D. SHELBY,

Executive Vice President,

Public Affairs.

Attachments:

Overview of Potential Gas Supply in the United States and Limitations on Access

to Public Lands have been retained in committee files.

(133)

U.S. ENERGY TRENDS

THURSDAY, APRIL 26, 2001

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC.

The committee met, pursuant to notice, at 9:38 a.m., in room

SD–366, Dirksen Senate Office Building, Hon. Frank Murkowski,

chairman, presiding.

OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,

U.S. SENATOR FROM ALASKA

The CHAIRMAN. Good morning, ladies and gentlemen. I would

urge the witnesses to come together with us. And I wish you all

a good morning. Let me introduce the one panel that Senator

Bingaman, through our collective staff efforts, has extended invitations to, and we appreciate your attendance.

Mr. Gary Heminger, executive vice president, Supply, Transportation and Market, Marathon Ashland Petroleum, Findlay, Ohio.

Our next witness is Mr. Thomas Robinson. Mr. Robinson is the

CEO of Robinson Oil Company, San Jose, California. Good morning.

I went to Bellarmine and Santa Clara. So I know something

about your prune orchards, or at least the prune orchards you use

to have. And I understand you are going to testify on behalf of the

Society of Independent Gasoline Marketers and National Convenience Stores. You do not sell cigarettes to minors, is that right?

Mr. ROBINSON. Absolutely not.

The CHAIRMAN. And Mr. Daniel Greenbaum, president of the

Health Effects Institute, Cambridge, Maryland. That is a rather interesting title, ‘‘health effects.’’ I have a pollen problem. So if you

can address that in your testimony, provide some relief, it would

be most appreciated.

[Laughter.]

The CHAIRMAN. And it will take some pressure off the Senate

physician.

[Laughter.]

The CHAIRMAN. Mr. Don Daigle, director of Americas Refining,

ExxonMobil Refining and Supply Company, Fairfax, Virginia,

joined by Mr. Craig Moyer, executive director of the Western Independent Refiners Association, Los Angeles, California.

Good morning, gentlemen.

Today is a hearing, which is a part of a series of hearings which

Senator Bingaman and I have agreed to. And for those of you who

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mittee, Senator Wyden, both of whom are on this committee, held

a rather interesting hearing on why gasoline prices were so high

on the west coast. I think Senator Boxer showed a picture of one

of the stations in San Francisco with prices up to, what was it,

$2.35, which is rather startling. I happened to mention on the side that if they got up to $3,

would she support opening up ANWR. And she ducked that issues.

But nevertheless, it was a good opportunity.

[Laughter.]

The CHAIRMAN. In any event, out of that hearing there was a

good deal of finger pointing. But there was some substantive discussions on the reality of supply and demand. And the demand has

increased, and the supply has shortened as a consequence of some

of the things that hopefully you will bring about today.

We talked about reformulating gasoline, the duplications in various areas of the country and the cost associated with transporting

and refining and batching. We talked about the tax issues relative

to various States.

We talked about the lack of refining facilities, which I think to

some extent came about publicly as a consequence of the previous

administration when they called down 30 million barrels from SPR

and found that, as we took that 30 million barrels and sent it to

the refiners, we found we did not have any excess capacity. So really all we did with that was offset what we are importing and did

not get any net new supply.

I hope some of you will be able to amplify that, because I am not

sure the media and the public really understand the severity of the

issue with regard to the adequacy of our refining capacity in this

country.

We also touched a little bit about not in my backyard. The entire

east coast offshore of the United States is off limits to OCS drilling.

The entire west coast, with the exception of Alaska, is off limits.

So the question is: Where is this magic going to come from?

We are going to look at fuel specifications infrastructure and

their impacts on the energy supply and the price. I hope we will

get a better understanding that gasoline is no longer just gasoline,

as a result of the State, local and Federal regulations. I am told

there are now 34 different types of gasoline. I am surprised that

the standard car can take them all.

But nevertheless, we have this situation. And the legitimate

question is: Is this all necessary? Is there some average witches

brew that could be concocted that would lessen the amount of reformulated gasolines we have? For example, fuel made for consumption in Oregon is not suitable for California. I know in Chicago,

they have to use a different fuel than they use in Springfield, Illinois.

The EIA reports that one Eastern U.S. pipeline operator handles

38 different grades of gasoline, 7 grades of kerosene, 16 grades of

home heating and diesel fuel, and 1 grade of trans-mix. Maybe that

is—well, we will not ask what that is. But in any event, I think

it is startling to recognize the complexities that have occurred over

an extended period of time and the rationale behind those.

Refiners do not have the flexibility to move supplies around the

country to respond to local or regional shortages. We have the issue

135

of MTBE on one hand and then the throwing it out and going to

Iowa for ethanol, which makes Senator Grassley very happy.

Now refining capacity we have talked a little bit about. But the

last significant refinery of any consequence, with the exception of

one that was built in my State, which is not as big as the marathon

refinery in Louisiana, which was built in 1976, was the refinery

that Williams Brothers has in Fairbanks, but it is a smaller refinery. So it is not in the same class.

In any event, we have not built any refineries for a long time.

Between 1990 and 1999 refining capacity actually increased in the

United States from 15 million barrels to 16 million barrels a day,

but during the same time that consumption went from 17 to almost

20. As a result, in 1990, U.S. refineries could supply 94 percent of

our needs, and in 1999 it is about 84 percent.

Now over the next 8 years, I am told the situation, unless we do

something about it, is obviously going to get worse. The refining industry will be asked to comply with over, I gather, dozens of new

regulatory programs that will impact both the cost to the consumer

and the supply of fuels to the motoring public.

Some of the regulatory programs directly impact manufactured

fuels, while others require new standards for operation of refineries. As a consequence, refiners around the country, already unable

to keep up with the demand for product, are being asked to make

significant investments to supply seasonal product for specific markets. And the cost of this is added to the complexities and supply

restrictions and is passed on to the consumer.

Now we have not had the input from the administration yet on

their task force report. And so we are looking forward, because we

understand that some of the things we will be discussing today will

be addressed by the administration and what they are for and

what they are basically opposed to.

I want to thank my colleague, Senator Bingaman, for the concern

he shares in this hearing. I know there has been concern about the

state of our fuel delivery and our refining system for a long time.

We have watched the impacts on the Nation’s energy supplies, as

Federal laws were passed and implementation by administrations

of both parties, in ways that obviously added to the burden of

American taxpayers.

But if the United States is to have an energy policy that gives

the American people some degree of certainty, the least the American public should expect from its leaders. And I think it is time

to look at the impacts of all our decisions that have been made on

our fuel delivery system and determine where the priorities are. So

I look forward to hearing more from our witnesses today.

Senator Bingaman.

STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR

FROM NEW MEXICO

Senator BINGAMAN. Well, Mr. Chairman, thank you very much

for scheduling the hearing. And I also believe it is very timely and

very important. And when we scheduled it, we did not realize how

timely it would be, at least as far as the news is concerned. But

there are a combination of factors that I think have a part in creating this tight inflexible market we are in.

136

[Chart.]

Senator BINGAMAN. I have a few charts I wanted to just briefly

go through here. The first of them shows the problem we have

talked before, and that is the escalating consumption of petroleum

by gas, by light duty passenger vehicles. Of course, this is led by

the growth in the sports utility vehicles, which the EIA projects to

increase over two million barrels a day within the next ten years.

So that chart, I think, is one we have shown before here. And I

think it reminds us of a lot of where the problem is.

[Chart.]

Senator BINGAMAN. A second chart relates to the number of different fuel specifications that need to be produced and distributed

around the country. I think this is an instructive chart that just

shows at least part of the problem that we have to try to deal with

and legislation that I hope we can move through this committee

here in the next month or so.

[Chart.]

Senator BINGAMAN. A third deals with the difficulty of siting new

facilities, whether—I guess we do not have a chart on that. But we

do have a chart that shows the different regions, called the PADDs.

That is a—it is interesting that we still use that phrase, ‘‘petroleum administration for defense districts.’’ The map identifies the

different PADDs that we have in the country.

[Chart.]

Senator BINGAMAN. The other chart shows how reliant some regions are on other regions for their refined products. I think this

chart here makes the case pretty dramatically that the Gulf Coast

region is providing by far the largest portion of our refining product. And that, of course, creates the need to transport those fuels

hundreds of miles. That increases the opportunity for something to

go wrong somewhere in the system.

If we cannot produce enough gasoline, then we need to obviously

rely on greater imports. It is my understanding that, given the

number of different fuel formulations in this country, it is very difficult for us to import gasoline from anyplace but Europe.

Another complication, which you mentioned, Mr. Chairman, is

the concern about MTBE as an oxygenate, as required for reformulated gasoline. California has banned MTBE beginning in 2003.

Other States are seeking to do the same because of concerns about

groundwater contamination. I appreciate Dr. Greenbaum being

here to give us his views as to the science related to that issue.

In the energy bill that I introduced with many of the members

as cosponsors here, we did propose streamlining the number of fuel

specifications around the country. And I hope we can hear from the

witnesses as to their views on that proposal and whether it is appropriate or needs to be changed.

We also proposed increasing fuel efficiency for passenger vehicles. I have serious concerns that without action to deal with that

demand growth, that soon we are going to see even higher and

more volatile gasoline prices. The public does expect us to take

some action to prevent that from happening. I am sure the industry would also like to see that prevented.

And I look forward to hearing the testimony from the witnesses

on these very important issues.

137

The CHAIRMAN. Thank you, Senator Bingaman.

I think Senator Dorgan—were you next? I am sorry. Senator

Thomas.

STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR

FROM WYOMING

Senator THOMAS. Thank you, Mr. Chairman. I appreciate the

hearing. I am going to have to leave. We are having one on the assistant secretary in Foreign Relations. So I have a statement that

I will submit.

But I just, I guess, wanted to say that we have talked a lot about

the problems. We have spent a lot of time trying to identify what

the problems are, and I think we know those pretty well. I think

it is time we found some solutions. And we are going to have to

do it in a short time. We are going to be really pressed this summer; we already are.

We see the gas prices going up. It has an impact, not only on

tourism and all those things. But I just had some contractors in my

office. You can imagine the impact on contractors.

As a matter of fact, the State is beginning to change their contracts a little to reflect the prices. There is an electric shortage. We

know that that is going to happen. What are we going to do in the

short time? Those are hard questions. And I think most of us have

a pretty good grasp on what we want to do over time, more production, more drilling, more movement, transmission grid, all those

things. That is not going to happen right away.

So when people start banging on our doors more than they are

now and on yours, what are we going to do in the short time? Heating fuel, very high. We have a lot of impacts. And, of course, as I

said, the impact on the economy may be more severe than interest

rates have been.

So I think we really—and I hope that you all will today. What

are your solutions? What are we going to do? Let us not talk all

about the problem, but let us start talking about some of the solutions. Talk about the high prices, what is the high profit that is

being reported on the big companies? How does that relate? What

can we do on that?

So that is pretty tough stuff. I understand. And I am a big supporter of energy and energy production. But I can tell you, we have

talked enough about the problems. We need to spend a little time

on the solutions. So as someone said, my reaction is, a little less

talk and a little more action.

Thank you, sir.

The CHAIRMAN. Thank you very much, Senator Thomas.

Senator Dorgan.

STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR

FROM NORTH DAKOTA

Senator DORGAN. Mr. Chairman, thank you very much.

I think we are all for less talk and more action. The question is:

What action? And I must say that I think our energy policy, to the

extent we have one, is a colossal mess in this country. I think all

of us understand that.

138

This hearing is on the issue of fuel specifications and infrastructure constraints and so on. You know, it is interesting. We come

here now short of breath about this problem, and we should be.

But, you know, we were pretty apathetic when oil went to $10 a

barrel and people stopped looking for oil and natural gas.

You know, we probably ought to understand in the future, when oil goes to $10 a barrel, well, it might feel good in the short run,

but is it going to mean you are going to dry up the funds and the

incentive to search for oil and natural gas?

We sat around and yawned while people started buying gas hogs

that looked like armored cars in this country. And, you know, the

fact is that has a profound impact. People have a right to do that,

but that has a profound impact on consumption.

Mr. Bingaman put up the transportation chart up there, or the

usage chart, that showed transportation on the top line growing

rather substantially. It has a significant impact. And we have

largely sat on our hands in this country and in this Congress while

the largest oil companies in the world decided that they wanted to

fall in love and get merged and get together and pervert the marketplace. And if anybody does not think that the larger and larger

enterprises are not perverting the marketplace, I say just take a

look behind the headlines and see what is happening.

On a related energy issue, I might note, yesterday I received

some information about the California situation. Admittedly this is

electricity, but it relates back to natural gas. Californians paid $7

billion for power in 1999, $28 billion in the year 2000, and it is estimated to run as high as $70 billion in 2001. Let me say that

again. In 2 years $7 billion to $70 billion. Somewhere behind these

figures is something called grand theft. And as we evaluate what

kind of a policy and strategy we should develop, we ought to understand where that comes from as well.

But we need to do a lot of things. We need to do a lot of things

right in order to address these issues. The absolute number of refineries in this country has declined. We have expanded capacity

to existing refineries and facilities to help them meet growing demand. And one of the questions is: What kind of expansion can be

expected with existing refineries?

The import of refined products has been relatively flat. We have

the flexibility to import more refined product or not. The array of

fuel specifications, as the chairman and the ranking member have

described, has reduced the flexibility in these markets. I think that

is a serious problem and one that we have to address.

Are there alternative fuels that we could use as well to address

some of these issues? There are a whole series of things that we

need to deal with with respect to these energy issues. And I think

someone mentioned the issue of price gouging and profits and so

on. We ought to take a look at that as well in a significant way.

Mr. Chairman, you and Senator Bingaman have done a great job

in trying to put together a series of hearings on all of these issues.

And I appreciate it. I am on the appropriations subcommittee that

is holding a hearing at 10 o’clock. And I am the ranking member

and have to be there. I regret I cannot be at this entire hearing,

but I want to thank you for these hearings and am happy to play

a role in them.

139

The CHAIRMAN. Thank you, Senator Dorgan.

Senator Craig.

STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR

FROM IDAHO

Senator CRAIG. Well, Mr. Chairman, I, too, join with you in obviously having tremendous interest about this hearing. I thought it

was fascinating yesterday morning. I was listening to Matt Lauer

interview our new President. And the question of $3 gas in California this summer came up, recognizing that it is already over $2 for

premium. And the immediate response of Matt Lauer was open up

the Strategic Petroleum Reserve. And the President tried to suggest to him that that was not the problem, that it was much more

involved, much more in detail.

And I think we are going to hear from some of our witnesses

today that that is absolutely the case. America will want a very

quick, short remedy to a problem that has been building now, in

part by some of our own doing, for a good long while. And the question is: Can we move quickly to get out of what we have seen as

a kind of balkanization of the gas markets and do a variety of

things?

I am pleased that Thomas Robinson is back with us. I am reading his testimony. I see that in 1996 he sat before this very committee and suggested exactly what would happen, if we did not respond, and it has happened. And somehow we have not been willing to recognize the impact of our decisions or our failure to make

decisions on the impacts of those.

The ITCs looked at price gouging in California and would suggest

that that is not the case. While those tremendous run-ups in energy costs were going on out in California, the Federal Energy Regulatory Commission under the last administration failed to respond. We have a new Chairman. He is responding. And we are

going to have to determine whether we can give them the just and

reasonable language within the wholesale deregulation law to move

in phase three and possibly phase two without deterring investment into a market that dramatically needs investment and new

supplies.

There is a great deal out there to be dealt with. But in the short

run, turning on the spigot of the SPR is not the answer. Recognizing that we have had a deteriorating infrastructure and a rapidly

increasing demand, or at least a modified infrastructure, is a part

of what we ought to be about. And I think that is what we are

going to hear from our witnesses today.

Thank you.

The CHAIRMAN. Thank you very much, Senator Craig.

Senator Hagel.

Senator HAGEL. No statement.

The CHAIRMAN. Obviously you are anxious to hear the witnesses.

Senator HAGEL. Let us get at it.

The CHAIRMAN. All right. We will move over Senator Bayh, who

has left us briefly. So we are down to Senator Schumer, followed

by Senator Landrieu. And we would appreciate brevity, if it is possible.

Senator LANDRIEU. Down to us?

140

Senator SCHUMER. We do not think it was down to us.

Senator LANDRIEU. It is just including us.

Senator SCHUMER. It is over to us.

The CHAIRMAN. To the left of me.

[Laughter.]

Senator SCHUMER. Anyway, thank you, Mr. Chairman. I appreciate it. I will be brief.

The CHAIRMAN. Good.

STATEMENT OF HON. CHARLES E. SCHUMER, U.S. SENATOR

FROM NEW YORK

Senator SCHUMER. This is a very important hearing. And it is

important for a whole lot of reasons. It is important in the short

term because, for the second summer in a row, Americans are

going to face the prospect of paying record high prices for gasoline

at the pump.

We have called a whole bunch of experts. Very few think it is going to be less than $2 a gallon for high test. That is 20 cents

higher than last year. And then each winter home heating oil is

higher than it was the year before, as well. So these are very, very

serious, serious problem.

And, frankly, Washington has been deadlocked for the last several years on the energy crisis. Republicans talk about drilling and

increasing supply. Democrats talk about conservation. We talk past

each other, and nothing much is done. And it is about time that

we came together. Each of us is going to have to give some. Democrats are going to have to be willing to increase supplies in ways

that they were not before, environmentally friendly, if you will, but

still more supply.

Republicans are going to have to be talking more about conservation than before. Because in my judgment we are on the edge of

a crisis. We are not there yet, but if we twiddle our thumbs a little

longer, it will be upon us. And then we will have to do all sorts

of things that nobody wants to do.

So I just hope that this hearing, which talks about our gasoline

markets, is not the end-all and be-all, important as it is. We have

a serious problem that affects every faction and every part of the

energy equation, whether it be oil products, natural gas, or electricity. And until we come up with some kind of policy that both

deals with supply and demand, we are not going to succeed.

And I have a feeling each side would be willing to move a little

in the other direction, if they thought the other side was moving

a little in their direction. And that will be the job of this committee, in my judgment, under your leadership, Mr. Chairman, over

the next several years.

Thank you.

The CHAIRMAN. Thank you very much, Senator.

Senator Landrieu, good morning.

STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR

FROM LOUISIANA

Senator LANDRIEU. Good morning. And thank you, Mr. Chairman

and our ranking member, for calling this important hearing. And

141

I would like unanimous consent to submit my written remarks for

the record.

The CHAIRMAN. Without objection.

Senator LANDRIEU. And just to add a brief comment, to agree actually, with Senator Schumer, a new member of our committee, but

one that is well-versed in this area, that we are going to have to

really compromise and be more vigorous in our compromise, both

sides moving to the middle, so that we can increase production, increase exploration, increase refining capacity, and transporting the

fuel and the energy from one part of the country to the next, as

well as on the conservation side.

But I would, as I do regularly, just note what a contribution that

the gulf coast is making overall, and that we need help and support

and reinvestment in the gulf coast region of this Nation, so that we

can continue to produce oil, to produce gas, minimize the environmental footprint, do it in a way that conserves, also, but how the

contribution in this chart, which will be part of the hearing this

morning, shows how much moves from the gulf coast area, primarily from Louisiana and Texas, to supply the east coast and to

the Midwest.

So I thank the panel for being here and just would hope that we

would continue to be sensitive how important it is to reinvest some

of these tax dollars from the oil and gas industry back to the gulf

coast area to help us with our environmental challenges that are

presented, as well as environmental infrastructure necessary to

supply this Nation in this way.

Thank you, Mr. Chairman.

[The prepared statement of Senator Landrieu follows:]

PREPARED STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR

FROM LOUISIANA

Today’s hearing on the present and future state of our country’s motor fuel market provides an excellent forum for us to focus some much needed attention on the

crucial role infrastructure plays and will continue to play in energy policy. Without

pipelines and refineries we are simply unable to distribute necessary energy to consumers.

Most, if not all, of us are anticipating high and volatile gas prices at pumps across

the country this summer. Not only does the evidence before us support this less

than promising outlook for the short term but it also extends to the long term. The

Energy Information Association expects demand for transportation fuel in the

United States to increase by almost 1.5% a year through 2020. To keep pace with

this growth our refineries will have to increase their production. However, while the

number of refineries in the U.S. has fallen sharply from 320 in 1980 to 150 in 2001,

the ones that remain are operating at almost full capacity.

This balance between supply and demand is fragile at best. The probability of

even the slightest problem causing supply shortages and a sharp increase in price

is too real to ignore any longer. It is unacceptable for us to expect this system to

continue to operate at a level where there is no room for error. We are placing too

much strain on too few refineries. Without increased refinery capacity through new

construction or expansion of existing capacity, problems seem unavoidable. In fact,

in a recent report, the Federal Trade Commission predicted price spikes for consumers unless refining capacity is increased substantially. I am hopeful that today’s

hearing will stress this point but also provide other options.

I also look forward to examining the other equally important component of the

process, distribution. Three of the country’s top ten gasoline consuming states are

in the Midwest. The Midwest imports 25% of its total demand from the Gulf Coast.

While the Gulf Coast refining centers handle half of the total barrels processed in

the U.S. today, there are only two pipeline systems in place to move the product

from the South to the Midwest. This is a tremendous amount of pressure on Gulf

Coast refining to meet demand in the Midwest. What happens if one or both of these

142

systems experiences problems? We must take the appropriate steps to ensure that

adequate infrastructure is in place in order to guarantee the delivery of fuels to

wherever they are needed. Siting new pipelines can and should be efficient yet provide whatever information is necessary so that proper consideration is given to any

potential environmental implications as well as the interests of the community.

The CHAIRMAN. Thank you very much.

Before we bring on our witnesses, I would encourage people who

are interested in energy conservation go down on The Mall at Seventh and Madison. There is a home built there, 3,000 square feet,

by an outfit called Solar Strategies. And the interesting part of this

home is it is constructed in such a way as to produce the energy

is consumes.

Now that is done through solar panels and storage and batteries

and so forth, but it is a relatively interesting advancement in technology. And it also has a capability, through the switch gear, that

at a time when the home is not consuming energy through the utilization of the various washer, dryer and so forth appliances, it has

a switch gear capability to kick back, if you will, onto the power

source that comes into the house, so it can be a net contributor to

energy. It is rather interesting. It is going to be down there for the

balance of this week. It is on the mall at Seventh and Madison.

I was caught by Senator Bingaman’s reference to the larger vehicles, the Suburbans and so forth. And it reminds me of something

that I picked up along the way. It says to the effect that sometimes

public policy has to reach a point of high comedy or satire before

this Nation can regain any sense of respective to make intelligent

decisions.

The national energy issue has reached that point, perhaps, because last week the comedian Dennis Miller commented that ‘‘every

other vehicle in this country is a Lincoln Navigator. And on that

Lincoln Navigator’s bumper is an Earth First sticker.’’

[Laughter.]

The CHAIRMAN. So I do not know whether you can blame our

new President George W. Bush for not being able to let you have

it both ways.

With that profound observation, I would encourage our witnesses

to come up with a solution.

Please, Mr. Heminger.

STATEMENT OF GARY HEMINGER, EXECUTIVE VICE PRESIDENT, SUPPLY, TRANSPORTATION AND MARKETING, MARATHON ASHLAND PETROLEUM

Mr. HEMINGER. Good morning, Mr. Chairman and members of

the committee.

My name is Gary Heminger. I am the executive vice president

of Supply, Transportation and Marketing for Marathon Ashland

Petroleum, which we refer to as MAP. MAP was formed in 1998

by combining the refining, marketing and transportation assets of

Marathon Oil Company and Ashland, Inc., to make the Nation’s

fifth largest refiner.

We sell our products at all marketing levels through our Marathon and Speedway stores, as well as to other retailers and spot

markets mainly in the Midwest. We are also the Nation’s largest

blender of ethanol in motor fuel.

143

First, I would like to thank the committee for scheduling today’s

hearing. Often we speak of energy issues. There is a tendency to

think only in terms of the upstream part of the petroleum business.

I am very pleased to have this opportunity to present an overview

of key aspects of the so-called downstream part of our business.

We believe that these factors must be taken into account in any

discussion of national energy issues. We believe that we can best

serve the Nation’s need for fuel delivery with minimal interruption

or inconvenience to the consumer by improving and expanding our

existing supply and distribution network. This system is called

upon to work flawlessly each day and every day, despite ever

changing market conditions.

The key point I would like to make today is that current U.S.

supply and demand is at a delicate balance. And any type of disruption can cause local supply shortages and resulting price spikes.

EPA’s recent tier two gasoline and highway diesel regulations are

a perfect example of rules that we believe will increase the likelihood and duration of these supply disruptions and move the entire

U.S. gasoline and diesel markets into the mode that California has

experienced during the last four years, one of volatility and high

prices.

What the entire refining marketing and transportation industry

needs instead is a regulatory approach that will lead to investment

certainty, a fair and responsive permitting system, and market sensitivity on the part of government agencies.

Every day more than 60 million barrels of crude oil are produced

and shipped around the world with approximately 8 million barrels

landing in the United States, which depends on imports for nearly

60 percent of crude oil needs. At 18 miles an hour, the trip from

the Persian Gulf takes 45 days. That is only the first step of a very

long journey.

Pipelines transport crude oil to refineries, refineries manufacture

gasoline, diesel and other products, and the liquid refined products

then move to market over more than 70,000 miles of pipeline. All

in all, it takes between 11⁄2 and 2 months of detailed planning and

adjustments to put the end product where it needs to be when the

consumers pull into our service stations to fill their tanks.

Because today’s available crude is high in sulfur and heavy in

gravity, the ever-increasing requirements for cleaner fuels force us

to make very large capital investments just to stay in business. It

is important to understand that the Midwest, where my company

is centered, is chronically short of product. This area imports as

much as 1 million barrels a day or 25 percent of its total demand

from the gulf coast.

Twenty-five Midwest refineries have been idled during the last

20 years, the most recent closing, Premcor’s Blue Island refinery in

Illinois.

The CHAIRMAN. Would you tell us why?

Mr. HEMINGER. Most of them were smaller refineries that cannot

hurdle the investment, the new EPA investment, for new fuels and

lower sulfur diesel, lower sulfur gasoline.

Senator BINGAMAN. Could I also ask a question there? Has the

actual output of refiners in your region decreased during that same

time, or has the output increased?

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Mr. HEMINGER. Other refineries, the larger refineries, some of

those have increased.

Senator BINGAMAN. Overall has it increased or decreased?

Mr. HEMINGER. Overall it would have decreased marginally.

Senator BINGAMAN. In your region.

Mr. HEMINGER. In what I call PAD 2.

Senator BINGAMAN. Right. Thank you.

Mr. HEMINGER. Getting product from the gulf coast to needy

Midwest markets in the spring and summer is an obvious priority.

Yet there are only two major pipeline systems handling this south

to north traffic today. If one of these lines is shut down during this

critical time of the year for damage repair, as was the case with

Explorer pipeline last year, the disruption is likely to be critical.

Even after the disruption, when the line is again fully operational, the replacement volumes will only move to market at about

four miles per hour. And there is no pipeline capacity or excess refining capacity to make up for that last volume.

Ethanol shipments by pipeline is not possible because of contamination problems resulting from alcohol’s affinity for bonding with

water. Ethanol, therefore, is blended mainly in areas close to corn

stills, most of which are in the Midwest. Where RFG areas are far

from the corn belt, ethanol transportation costs increased significantly.

Within the pipeline industry, products move in batches. That is,

we operate somewhat like freight train. A batch of unleaded gasoline may be followed by diesel and then maybe jet fuel and back

to gasoline. Because some products may contained elevated sulfur

levels, the ultra-low sulfur fuel requirements will likely be difficult

to meet due to product contamination.

Our company is planning two important projects. One is the construction of a products pipeline from our Catlettsburg, Kentucky

refinery into the Columbus, Ohio market. And the other is the conversion of a natural gas pipeline to liquid products use. This

project, dubbed Centennial Pipeline, will add another vital link between the Midwest and gulf coast refining centers.

Major investment will be required to upgrade and enhance our

Nation’s supply and distribution system. We want to provide clean,

cost-effective fuels for our customers. And we are willing to do our

part. But in order to make the necessary investment, we need an

improved regulatory climate. We need an end to unreasonable permitting delays and final rules that are unambiguous. Regulations

must also provide adequate lead time and an appropriate phase-in

period, as well as sufficient time to recover the investments required.

Finally, the Government should refrain from interference in the

marketplace. Our industry has traditionally opposed mandates,

such as the requirement for oxygenates in RFG, because such requirements only add inefficiencies to an already complex system

designed to supply America’s fuels needs.

I appreciate the opportunity to appear before you today, and I

look forward to answering any further questions. Thank you.

[The prepared statement of Mr. Heminger follows:]

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PREPARED STATEMENT OF GARY HEMINGER, EXECUTIVE VICE PRESIDENT, SUPPLY,

TRANSPORTATION AND MARKETING, MARATHON ASHLAND PETROLEUM

Good morning. My name is Gary Heminger. I am the Executive Vice President

of Supply, Transportation & Marketing for Marathon Ashland Petroleum LLC.

MAP Statistics

My company, which we refer to as MAP, was formed in 1998 by the combination

of the refining, marketing and transportation assets of Marathon Oil Company and

Ashland Inc. Marathon Ashland Petroleum is the nation’s fifth largest refiner. We

operate seven petroleum refineries in the U.S. with a combined throughput capacity

of 935,000 barrels of oil a day. In addition we operate 93 marketing terminals in

the Midwest and Southeast U.S. which distribute gasoline, diesel and asphalt, and

we operate over 5,400 retail outlets in 20 states. We are also the nation’s largest

blender of ethanol in motor fuel.

The Need to Improve Transportation Systems

I appreciate the opportunity to discuss motor fuel market conditions and logistical

challenges with you. It is our view that we can best serve the nation’s need for fuel

delivery—with minimal interruption or inconvenience to the consumer—by improving and expanding our existing supply and distribution network. The supply and

distribution system is called upon to work flawlessly, each day, every day, though

the context of market conditions changes constantly. The key point that you should

take away from my testimony is that current U.S. supply/demand is at a delicate

balance, and any type of major disruption can cause local supply shortages with

their resultant price spikes.

EPA’s recent Tier 2 gasoline and highway diesel regulations, plus their non-road

diesel rule under development, will increase the likelihood and duration of these

supply disruptions and move the entire U.S. gasoline and diesel markets into the

mode that California has experienced during the last four years—one of volatility

and high prices.

What MAP and the whole refining, marketing and transportation industry need

to minimize these potential disruptions is: Regulatory Certainty, a Fair and Responsive Permitting System, and Market Sensitivity on the part of government agencies.

I will elaborate on these later in my testimony.

Major Tanker Movements Around the World

Every day more than 60 million barrels of crude oil are produced and shipped

around the world, with approximately eight million barrels landing in the U.S.,

which depends on imports for nearly 60 percent of its crude oil needs. At 18 miles

an hour, the trip from the Persian Gulf takes 45 days.

Value Chain

Pipelines transport crude oil to refineries, a process that takes ten days on average. Refineries then manufacture gasoline, diesel, asphalt, petrochemicals and other

products.

Refined Products

The refining process takes roughly five days on average. During this time, for example, federally mandated reformulated gasoline (RFG) goes through up to ten processing steps at temperatures and pressures as high as 1000 degrees and 2000

pounds per square inch.

U.S. Products Pipeline & Barge System

The liquid refined products, such as gasoline and diesel, move to market over

more than 70,000 miles of pipeline, accounting for approximately two trillion barrel

miles of product movement at roughly four miles per hour . . . that’s right, four

miles per hour. Products also move along the nation’s inland waterways. This step

alone, including the hauling by transport truck to service stations, adds 10 to 15

days to the entire process.

Time From Oil Well to Gas Pump

This means that about 11⁄2 to 21⁄2 months of detailed planning and adjustments

are required so that our customers have the fuel to fill their vehicles when they pull

into our service stations.

As a major petroleum refiner, Marathon Ashland refines nearly one million barrels of crude oil per day, including a significant portion from the national oil companies of Saudi Arabia, Kuwait and Mexico. With the available crude being higher in

sulfur and heavier in gravity, the ever-increasing requirements for cleaner and

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cleaner fuels force refiners to make very large capital investments just to stay in

business.

We buy additional intermediate feedstocks so that our refined product yield increases to about 1 million barrels per day. We also buy products from other refiners

so that our total products-for-sale equals 1.25 million barrels per day, or 19 billion

gallons annually. We sell our products at all marketing levels; through our Marathon brand and Speedway brand stores, as well as to other retailers and spot markets.

Midwest Material Balance

Please note that the Midwest—which includes three of the nation’s top ten gasoline consuming states—is chronically short of product. The Midwest imports as

much as 1 million barrels a day or 25 percent of its total demand from the Gulf

Coast. This volume will increase as fuel needs in the Midwest return to historic

norms: 2% growth or 280,000 new barrels per day.

Midwest Refineries Idled

Twenty-five Midwest refineries have been idled during the last 20 years—the

most recent closing—Premcor’s Blue Island refinery in Illinois—came in February

of this year. These smaller plants could not perform in an environment of increasingly costly regulation. Gulf Coast refineries fared better. America’s Gulf Coast refining center now handles one out of two barrels processed in the U.S., thanks to

the area’s economies of scale, lower labor costs and access to crude oil.

Teppco, Explorer Proration Days

Getting product from the Gulf Coast to needy Midwest markets in the spring and

summer is an obvious priority. Yet there are only two major pipeline systems handling this south to north traffic today. They are full during the nine months of the

year that surround the peak summer gasoline demand, and routinely turn down

nominations for additional shipments. If one of these lines is shutdown during this

critical time of the year for damage repair, as was the case with Explorer last year,

the disruption is likely to be critical. Even after the disruption, when the line is

again fully operational, the replacement volumes will only move to market at about

four miles per hour, and there is no pipeline capacity or excess refining capacity to

make up for the lost volume.

The Inland Waterway

Movement on the inland waterway is similarly constrained. The waterway system

includes 25,000 miles of navigable rivers and canals, but only 12,000 miles are commercially and actively maintained. Despite technological innovations, system utilization is restricted due to weather, outmoded locks, dams, low bridges, and waterway

deposits. Over 50 percent of the locks and dams created by the Corps of Engineers

are over 50 years old. Many built in the 20’s and 30’s are at the end of their design

lives. In fact, 8 of 20 locks and dams on the Ohio River are scheduled for repair.

Because Corps of Engineers funding for lock and dam maintenance and dredging

operations has been cut for 2001, it is doubtful the Ohio River maintenance program

can be completed in a timely fashion. We believe it is imperative to ‘‘catch up’’ and

increase investment in waterway infrastructure because this mode of transportation

moves commodities valued at $33 billion to the Midwest’s Ohio River basin, $3.3 billion in petroleum alone.

No Ethanol Movements With Pipeline Sign

Ethanol movements by barge are limited by waterway, weather, and infrastructure problems. In addition to physical infrastructure problems, chemistry can frustrate our operations. Ethanol shipment by pipeline is impossible because of contamination problems resulting from alcohol’s affinity for bonding with water. Water is

present in all pipelines. Without low cost pipeline movement, ethanol proves expensive to transport, and it is blended mainly in areas close to corn stills, a majority

of which are in the Midwest. Where reformulated gasoline markets are far from the

corn belt, ethanol trucking costs increase significantly.

Cumulative Regulatory Impacts on Refineries, 2000-2008

Regulatory restrictions ranging from oxygenate requirements in RFG to urban air

toxics requirements have imposed additional burdens on our business in terms of

cost and infrastructure. Of immediate concern are EPA’s requirements for dramatically lowering the sulfur content in gasoline—30 ppm by 2006 for highway diesel—

15 ppm in the same timeframe, while off-highway diesel regulations are still under

development. To date, only the refinery process has been studied. Just as important

is the transportation process. Within the pipeline industry, products move in

147

batches; that is, we operate somewhat like a freight train. A batch of unleaded gasoline is followed by diesel fuel and then maybe jet fuel and back to gasoline. Because

some products may contain elevated sulfur levels, there is a high probability the

ultra low-sulfur fuel requirements will be difficult to meet, due to product contamination in pipeline or tankage.

We are in the process of evaluating what additional investments will be needed

for our pipeline and terminal systems to avoid contaminating these ultra clean fuels

as they move through a distribution system not designed to maintain this low level

of sulfur.

High Consequence Area Testing

At the same time that we are dealing with pipeline investment related to new

fuels, we are required to establish new and more frequent testing programs for environmental risks associated with pipelines moving through what the Office of Pipeline Safety calls High Consequence Areas. What worries some of us in the industry

is whether there are enough resources available to test, interpret, and analyze the

data generated by the line tests. By implementing a date certain timetable, rather

than phasing in the testing, regulators have assured a ‘‘gold rush’’ for scarce and

expensive testing equipment. Costs will skyrocket and deadlines will be missed.

Cardinal and Centennial Projects

Our company is planning two projects that will address some of the problems I

have reviewed with you this morning. One is a products pipeline from our large

Catlettsburg Kentucky Refinery into the Columbus, Ohio area—the fastest growing

fuels market in the state. The second is the conversion of a natural gas pipeline to

liquid products use, a project—dubbed Centennial Pipeline—that will add another

vital link between the Midwest and the Gulf Coast refining centers. We are grateful

for government assistance on both projects—we particularly appreciate being commended for site surveys and environmental care in the case of Cardinal and the

rapid approval for abandonment that is allowing us to move forward with the conversion of the Centennial Pipeline to refined products use.

How Can the Government Help?

As I stated earlier, the current supply/demand equation in the U.S. is balanced

on a knife’s-edge. Any type of disruption can push this delicate balance off center,

and price spikes may result. What can the government do to minimize these problems and help us to continue to meet the needs of our customers?

Major investment will be required to upgrade and enhance our nation’s supply

and distribution system. Companies like Marathon Ashland want to provide clean,

cost effective fuels and are willing to do our part, but in order to make the hundreds

of millions of dollars of investment, we need:

1. Regulatory Certainty

2. Fair and Responsive Permitting

3. Market Sensitivity

By regulatory certainty we mean that rules should be unambiguous and not subject to revision simply to serve a new regulatory agenda. For example, our Cardinal

Pipeline project was stymied while parties argued over whether the term ‘‘petroleum’’ included gasoline. A similar ambiguity significantly affects expenditures involving control of refinery fuel gas, a term that customarily has been used to indicate natural gas burned for fuel, but which is now being interpreted to mean vapors

combusted for any purpose on refinery grounds.

By fair and responsive permitting, we mean there must be an end to unreasonable

delays. For example, we currently face a potential air quality permit application period of one and a half years to install a new gasoline loading rack at one of our

refineries. This type of delay is clearly unreasonable.

By market sensitivity we mean new regulations must provide adequate lead time

and an appropriate phase-in period, as well as sufficient time to recover the investments required. Market sensitivity would also encourage examining regulatory effects on an entire system—refining and distribution—rather than only one portion

of one process component, as was the case in regulating highway diesel formulations.

Finally, market sensitivity means discouraging any interventions, such as fuel

subsidies, that frustrate free market dynamics. Mandates and subsidies only add inefficiencies to the process of supplying America’s fuel. Renewable and alternative

fuels need to be economically competitive. It is appropriate for the federal government to support research into these fuels, but it is inappropriate for the government

to intervene in the marketplace. This intervention places government in the position

of picking market winners and losers. Not only does this repress industry investment in the most efficient technologies, but history has shown that governments do

148

not do a particularly good job in picking the best technologies because politics rather

than technology tend to drive the process.

The current MTBE situation is a prime example of this problem. MTBE is added

to RFG because of a politically driven RFG oxygen mandate. Now with public concern over MTBE in groundwater, the U.S. Congress appears to be unable to provide

a simple, direct resolution of the problem. Every time a bill proposing a solution to

the MTBE issue emerges, a myriad of alternative fuels, renewable fuels, and new

fuel specification requirements get added. These provisions do not resolve the MTBE

situation, they compound the original problem.

I appreciate the opportunity to appear before this committee and I look forward

to answering any questions the committee may have either now or at a later date.

The CHAIRMAN. Thank you very much, Mr. Heminger.

Mr. Robinson, please proceed.

We have a time light on here. And you notice Mr. Heminger

stayed within the limits. And we would encourage the rest of you

to do the same thing.

Mr. ROBINSON. I will try to be quick.

STATEMENT OF THOMAS L. ROBINSON, CHIEF EXECUTIVE

OFFICER, ROBINSON OIL CORPORATION

Mr. ROBINSON. Good morning, Mr. Chairman and members of

the committee. Mr. Chairman, I was not a Bell, but I am a graduate of Santa Clara.

My name is Tom Robinson. I am CEO of Robinson Oil of San

Jose, California. Our company owns and operates 28 Rotten Robbie

retail gasoline outlets located in the San Francisco Bay area of

California.

I appear before this committee today as a representative of the

National Association of Convenience Stores, NACS, and the Society

of Independent Gasoline Marketers of America, SIGMA. Collectively NACS and SIGMA members sell more than 65 percent of the

gasoline and diesel fuel purchased by American consumers each

year. The companies I represent today are different from the other

witnesses. For all practical purposes, we are a surrogate for the

Nation’s gasoline and diesel fuel consumers.

My company is not involved in the exploration or production of

oil, nor does it refine oil. Instead, we are an independent marketer.

If independent marketers of motor fuels, like my company, are unable to secure adequate supply, then we cease to be a competent

force in the marketplace. And if independent marketers cease to be

an effective, competitive force in the marketplace, then consumers

lose as retail gasoline and diesel fuel prices rise to unnecessary

high levels in response to the supply shortage.

NACS and SIGMA have two primary messages for this committee today. First, we must collectively and aggressively address the

motor fuels supply problems that are facing this Nation. Otherwise

the fuel price spikes we have witnessed for the past decade in California and for the past 2 years in other parts of the Nation will become worse and more frequent. Our failure to act has, is, and increasingly will cost consumers more at the pump.

Second, the debate over the future of the Nation’s energy policy

need not be confrontational. Our Nation can have both a clean environment and affordable, plentiful supplies of gasoline and diesel

fuel.

However, in order to achieve these twin goals, all sides of the

current debate, industry, government, consumers and environVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00152 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
149

mentalists, must approach this debate in the spirit of cooperation,

compromise, but not confrontation. This includes a reasonable attitude and an understanding of the tradeoffs.

These are not new points for the associations I represent or for

me. In fact, I have had the opportunity to present these points to

Congress in the past. Five years ago, I was invited to appear before

this committee in the wake of the gasoline price increases in the

spring of 1996. At that time, I stated, ‘‘The Federal and State governments regulate the gasoline refining and marketing industry

with little or no thought given to costs, distribution difficulties, or

market efficiencies. Congress must acknowledge that future EPA

and State actions, if the present course is followed, will lead to further market disruptions and higher gasoline prices at the pump.’’

My prediction in 1996 was pretty accurate. It is my personal

hope that the renewed attention to the need of a national energy

policy will produce the results NACS and SIGMA have been calling

for for years. The challenge facing this committee and your colleagues in Congress today is straightforward.

We must preserve current and future improvements in air quality while at the same time maintaining and expanding supplies of

motor fuels. Otherwise our Nation’s consumer will pay an exorbitant price when supply shortages occur and retail prices at the

pump spike, as they have done repeatedly over the past few years.

As a Californian, I have become only too familiar with this routine.

It should not surprise policy makers that after tens of billions of

dollars in environmental compliance costs borne by refiners and

marketers, after the complete fragmentation of the motor fuels distribution system, and after the politically motivated diverse gasoline formulations adopted by various States that there is a price to

pay, a price that ultimately must be paid by consumers of gasoline

and diesel fuel.

As long as the motor fuels refining and distribution systems

works perfectly, supply and demand stay roughly in balance and

retail prices remain relatively stable. However, if a pipeline or refinery goes down, overseas crude oil production is reduced, the

weather disrupts smooth product deliveries, or a new regulatory

curve ball is thrown at the motor fuels refining and marketing industries, we do not have the flexibility to react and counterbalance

these forces.

The public policy solution to the current motor fuels supply crisis

will not be simple, but it must be addressed. NACS and SIGMA

submit that the solution is not a rollback of environmental protections. That proposal is a non-starter and should be discarded. Alternatively, NACS and SIGMA encourage Congress to consider restoring fungibility to the Nation’s distribution system and an effective plan to assist our Nation’s domestic refining industry to meet

the challenges posed by ever more stringent environmental mandates. This will increase gasoline and diesel fuel supplies and keep

retail prices down.

NACS and SIGMA do not have a specific legislative proposal to

put forward at this time. Instead we offer the following principles,

which we are convinced must be part of any legislative initiative.

One, greater fungibility in motor fuels and a stop to the balkaniVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00153 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
150

zation of our Nation’s gasoline and diesel fuel markets. I cannot

overemphasize the importance of this point.

Two, fuel requirements that recognize the limitations and the

strengths of the motor fuel distribution system in the United

States. Three, reasonable implementation plans for new environmental initiatives. Four, fuels programs that set performance goals,

rather than specific formulas or mandates. And five, it must be economically feasible to upgrade the Nation’s refining capacity to

make these clean fuels.

NACS and SIGMA commend Chairman Murkowski and Senator

Bingaman and their colleagues for introducing comprehensive national energy policy legislation that includes many of the legislative

principles outlined above. Such legislation, however, needs to give

increased attention to the downstream portion of our Nation’s petroleum supply and distribution industry. Without such attention,

a national energy policy will not succeed.

We look forward to working with this committee and other in

Congress. We certainly offer assistance to this committee. Thank

you for allowing me to present this testimony.

[The prepared statement of Mr. Robinson follows:]

PREPARED STATEMENT OF THOMAS L. ROBINSON, CHIEF EXECUTIVE OFFICER,

ROBINSON OIL CORPORATION

Good morning, Mr. Chairman and members of the committee. My name is Tom

Robinson. I am Chief Executive Officer of Robinson Oil Corporation of San Jose,

California. Our company owns and operates 28 ‘‘Rotten Robbie’’ retail gasoline outlets located in the San Francisco Bay Area of California.

I appear before this committee today as a representative of the National Association of Convenience Stores (‘‘NACS’’) and the Society of Independent Gasoline Marketers of America (‘‘SIGMA’’). NACS represents an industry of more than 120,000

retail outlets, 75 percent of which sell motor fuels. In 1999, convenience stores sold

more than 117 billion gallons of motor fuels, which accounts for more than 60 percent of American consumption.

SIGMA is an association of approximately 260 motor fuels marketers operating

in all 50 states. Together, SIGMA members supply over 28,000 motor fuel outlets

and sell over 48 billion gallons of gasoline and diesel fuel annually—or approximately 30 percent of all motor fuels sold in the nation last year.

Collectively, NACS and SIGMA members sell more than 65 percent of the gasoline and diesel fuel purchased by American consumers each year.

I appreciate the invitation to appear at this hearing to present testimony on our

nation’s energy policy and the role that diverse gasoline and diesel fuel specifications have on motor fuel supplies and prices. The companies I represent today are

different from all of the other witnesses at today’s hearing. For all practical purposes, we are a surrogate for the nation’s gasoline and diesel fuel consumers. Our

primary mission is to secure adequate supplies of gasoline to sell to consumers at

a competitive price. My company is not involved in exploring for oil or in the production of oil. Nor does it refine oil. Instead, we are an independent gasoline marketer.

If independent marketers of motor fuels, like my company, are unable to secure this

adequate supply, then we cease to be a competitive force in the marketplace. And

if independent marketers cease to be an effective competitive force in the marketplace, then consumers lose as retail gasoline and diesel fuel prices rise to unnecessarily high levels in response to the supply shortage.

NACS and SIGMA have two primary messages for this committee today. First,

we must collectively and aggressively address the motor fuels supply programs that

are facing this nation. Otherwise, the fuel price spikes we have witnessed for the

past decade in California and for the past two years in other parts of the nation

will become worse and more frequent. Our failure to act has, is, and increasingly

will, cost consumers more at the pump.

Second, the debate over the future of our nation’s energy policy need not be

confrontational. Our nation can have both a clean environment and affordable, plentiful supplies of gasoline and diesel fuel. However, in order to achieve these twin

goals, all sides of the current debate—industry, government, consumers, and enviVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00154 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
151

1Testimony of Thomas L. Robinson before the Senate Committee on Energy and Natural Resources, May 9, 1996.

ronmentalists—must approach this debate in a spirit of cooperation, not confrontation. This includes a reasonable attitude and an understanding of the trade-offs.

These are not new points for either the associations I represent or for me. As a

California marketer I personally have witnessed these events happening over and

over again. In fact, I have had the opportunity to present these points to Congress

in the past. Five years ago, I was invited to appear before this committee in the

wake of gasoline price increases in the Spring of 1996. At that time, I stated: ‘‘The

federal and state governments regulate the gasoline refining and marketing industry with little or no thought given to costs, distribution difficulties, or market efficiencies. Congress must acknowledge that future EPA and state actions, if the

present course is followed, will lead to further market disruptions and higher gasoline prices at the pump.’’ 1

My prediction in 1996 could not have been more accurate. Unfortunately, our

warnings were ignored in 1996 and continue to be ignored today. However, it is my

personal hope that the renewed attention to the need for a national energy policy

will produce the results NACS and SIGMA have been calling for over the years.

The challenge facing this committee and your colleagues in Congress today is

straightforward. We must preserve current and future improvements in air quality

while at the same time maintaining and expanding supplies of motor fuels. Otherwise, our nation’s consumers will pay an exorbitant price when supply shortages

occur and retail prices at the pump spike, as they have done repeatedly over the

past few years. As a Californian, I have become only too familiar with this routine.

The prices facing consumers during these spikes will not be limited to the additional expense of producing the new cleaner fuels. Rather, they will be multiples of

this amount when, in times of short supply, the market drives prices far above the

additional cost of manufacture.

I firmly believe that our nation is facing a serious energy situation in the motor

fuels refining and marketing industry. Dozens of petroleum refineries have closed

over the past two decades and new environmental protection mandates, such as low

sulfur gasoline and diesel fuel, are likely to exacerbate this trend. Operating inventories of diesel fuel and gasoline are at historically low levels and the nation’s refineries are operating at or near maximum capacity. Gasoline and diesel fuel demand

is increasing by between one and two percent each year, and yet the number of refineries operating to meet this ever increasing demand is decreasing. In 1990, there

were essentially six different types of gasoline being sold nationwide. Now, there are

more than 25 different gasoline formulations, all being transported and distributed

through the nation’s motor fuel infrastructure. The pressure of overlapping federal,

state and local regulations has crippled what was previously one of the most efficient commodity distribution systems in the world—the United States’ fungible

grade motor fuels distribution system.

As the saying goes, there is no free lunch. It should not surprise policy makers

that after tens of billions of dollars in environmental compliance costs borne by refiners and marketers, after the complete fragmentation of the motor fuels distribution system, and after the politically-motivated diverse gasoline formulations adopted by various states, there is a price to pay. A price that ultimately must be paid

by consumers of gasoline and diesel fuel. As long as the motor fuels refining and

distribution system works perfectly, supply and demand stay roughly in balance and

retail prices remain relatively stable. However, if a pipeline or refinery goes down,

overseas crude oil production is reduced, the weather disrupts smooth product deliveries, or a new regulatory curve ball is thrown at the motor fuels refining and marketing industries, we do not have the flexibility to react and counterbalance these

forces.

If there is one point that I really want to emphasize it is the point of ‘‘no free

lunch’’. Our country can have clean and environmentally friendly fuels and it can

have plentiful supplies—there will be a cost and it will be borne by the consumer

(that is a given)—our job is to make the lunch, if not free, at least as inexpensive

as possible.

Californians have become somewhat accustomed to motor fuels price volatility

over the past five years because California is, in fact, the laboratory for the fuels

programs that EPA currently is imposing on the rest of the country. When a refinery in California goes down, or a pipeline breaks, the impact on prices is almost immediate. In California, gasoline prices can increase by 40 cents per gallon within

two to three weeks. When prices get high enough to attract supply from other markets, then eventually the supply shortage is alleviated and prices start to fall.

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This is the reason I am appearing before you today. The motor fuels supply problems we have witnessed in California over the past decade are now being visited

on the rest of the nation. If we do not act, independent motor fuels marketers (about

whom I am very concerned), and gasoline consumers (about whom we all should be

very concerned), will suffer in the near future.

The public policy solution to the current motor fuels supply crisis will not be simple, but it must be addressed. NACS and SIGMA posit that the solution is not the

rollback of environmental protections. That proposal is a non-starter and should be

discarded. Alternatively, NACS and SIGMA encourage Congress to consider restoring fungibility to the nation’s distribution system and an effective plan to assist our

nation’s domestic refining industry to meet the challenges posed by ever more stringent environmental mandates. This will increase gasoline and diesel fuel supplies

and keep retail prices down.

We must collectively arrive at a public policy that assures that our nation’s refineries, both large and small, stay in business, expand to meet increases in demand,

and produce clean, affordable motor fuels. But this policy cannot be achieved without enlightened government policies and programs. The capital expenditures that

refineries must make over the next six years in order to meet new environmental

mandates are huge. And many refineries, particularly small, regional refineries, will

be unable to justify those expenditures and will cease operation—further straining

motor fuels supplies. Already, this year, Premcor announced that it would close its

Blue Island refinery rather than undertake the upgrades necessary to make low sulfur gasoline and diesel fuel. Other refineries, owned by both large and small companies, will follow suit in the next few years.

NACS and SIGMA urge Congress to work to streamline the permitting process

for refinery upgrades and to assist these refineries in making these upgrades. This

assistance will be particularly important to small- and medium-size ‘‘regional’’ refineries. Environmental upgrade costs fall more heavily on these smaller refineries because they do not enjoy the economies of scale that some larger refineries possess

to make these upgrades. In many cases, these smaller refineries represent the ‘‘mar- ginal’’ gallon of gasoline and diesel fuel in many marketplaces—the gallon that is

the difference between adequate supplies and supply shortages.

Motor fuels marketers and refiners are not always on good terms. We compete

daily in the marketplace for customers and market share. So it may seem odd to

have motor fuels marketers recommend to Congress that assistance must be given

to our nation’s domestic refining industry. However, without adequate and diverse

sources of gasoline and diesel fuel supply, independent marketers cannot exist.

Thus, the solution we are proposing to Congress is the only way our segment of the

marketing industry can survive and can continue to provide consumers—your constituents—with the most affordable, clean gasoline and diesel fuel in the world.

NACS and SIGMA do not have a specific legislative proposal to put forward at

this time. Instead, we offer the following principles which we are convinced must

be a part of any legislative initiative: (1) greater fungibility in motor fuels and a

stop to the balkanization of our nation’s gasoline and diesel fuel markets (I cannot

over-emphasize the importance of this point); (2) fuel requirements that recognize

the limitations and strengths of the motor fuel distribution system in the United

States; (3) reasonable implementation plans for new environmental initiatives; (4)

fuels programs that set performance goals, rather than specific formulas; and (5) it

must be economically feasible to upgrade the nation’s refining capacity to make

these clean fuels.

NACS and SIGMA commend Chairman Murkowski and Senator Bingaman and

their colleagues for introducing comprehensive national energy policy legislation

that includes many of the legislative principles outlined above. Such legislation,

however, needs to give increased attention to the ‘‘downstream’’ portion of our nation’s petroleum supply and distribution industry. Without such attention, a national energy policy will not succeed. It will be irrelevant that domestic crude oil

production increases by 50 percent if our nation does not have the refining capacity

to convert that additional crude into gasoline and diesel fuel or if our nation’s motor

fuel distribution system, already stressed to the breaking point, cannot handle additional volumes of finished products.

We look forward to working with this committee and others in Congress to explore

legislative options in the months ahead. We certainly offer our assistance to this

committee in this exploration.

As a final note, NACS and SIGMA encourage this committee to embrace longterm solutions to our nation’s current motor fuels supply crisis. While it may be

tempting or politically expedient to seek a quick, short-term solution to this crisis,

such quick fixes are only rarely effective. Our current situation stems from over two

decades of decline in the motor fuels manufacturing and distribution industries. The

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twin goals of ample gasoline and diesel fuel supplies and affordable retail motor

fuels prices will not be reached in 2001, but rather over a period of years. Just as

the damage did not happen overnight, the cure will not happen overnight.

The debate over our nation’s energy policy is just starting. But the crisis has been

on the horizon for some time. We can either discuss potential solutions collectively

now, or we can wait until the next price spike, and the outraged response of consumers. We encourage all parties to this debate to adopt fresh approaches to the

problems our nation is facing. Both the environment and our nation’s motor fuel

consumers can be the winners in this debate, but only if all sides agree with the

premise that environmental protection and affordable energy are not inherently contradictory goals. NACS and SIGMA assert that these goals need not be irreconcilable.

Thank you for inviting me to present this testimony. I would be pleased to answer

any questions my testimony may have raised.

The CHAIRMAN. Thank you very much, Mr. Robinson.

Our next speaker, Mr. Greenbaum.

STATEMENT OF DANIEL S. GREENBAUM, PRESIDENT,

HEALTH EFFECTS INSTITUTE, CAMBRIDGE, MA

Mr. GREENBAUM. Thank you, Mr. Chairman. I am pleased to

have the chance to appear before you today.

I will say, Mr. Chairman, that I cannot guarantee that I can find

you a total solution for the pollen problem, but I wish I could, because I, too, am a sufferer. Although if we had to do without

springtime, it may be a little harder.

The CHAIRMAN. Well, you know, we have spring in Alaska, and

we do not have pollen.

[Laughter.]

Mr. GREENBAUM. Well, I do not think you would like us all to

move up there either.

The CHAIRMAN. No, that is for sure.

Mr. GREENBAUM. I speak today both as the president of the

Health Effects Institute, which is an independent scientific institute funded jointly and equally by government and industry, to provide impartial health effects science on air pollution, and also as

the chair of the Blue Ribbon Panel on Oxygenates in Gasoline, with

which you may be familiar. The panel consisted of experts in air

and water quality, as well as representatives of the oil, ethanol and

MTBE industry, and the environmental community, and presented

our report in 1999.

I am here today to speak of both the good news from the last decade about fuel specifications and clear air and about the opportunities and challenges that lie ahead. First the good news.

The Clean Air Act Amendments of 1990 passed by Congress and

signed into law by President Bush required the introduction of

new, cleaner burning fuels, reformulated gasoline, in all areas of

the country facing serious ozone problems. That fuel containing by

law at least two percent by weight of oxygenates was introduced

in 1995 and resulted in a clear and measurable air quality benefit.

Among other pollutants that were reduced, levels of benzene in

ambient air, a known human carcinogen, were reduced almost immediately by 39 percent. At the same time, because in that case

of adequate lead time for refineries to plan for and implement

these fuels, they were introduced in some of the largest markets in

the United States with relatively little or no impact on cost or supply of fuel.

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Looking ahead, we have the opportunity to continue this good

news. Tier two RFG, also envisioned in the Clear Air Act and being

implemented in this decade, has the potential, when coupled with

continued improvement in motor vehicle emissions technology, to

provide air quality and public health benefits well into this century.

Also, although these fuels needed oxygenates to replace octane

when RFG was first introduced in the 1990’s, the Blue Ribbon

Panel found that today’s refinery technology has been improved to

enable the production of these clean fuels in a variety of ways, with

oxygenates, such as ethers and ethanol, but also without

oxygenates altogether. This offers the opportunity to take a much

more market-based approach to providing clean fuels, continuing

the strong clean air performance standards, but giving the market

much more flexibility to choose, based on efficiency and cost, the

best way to ensure a low-cost abundant fuel supply.

This good news, however, does not come without its challenges.

First and foremost, there is the challenge of MTBE. Although

MTBE has shown itself to be a cost-effective and clean fuel burning

component with relatively low potential for health effects, its relatively rapid transport through groundwater and its distinctive

odor and taste have caused a number of drinking water wells to be

shut down.

As a result, the Blue Ribbon Panel recommended strongly a substantial reduction in its use. A number of States, including California, Connecticut and New York, have gone further and legislated

bans on its use to take effect in 2003 and 2004.

Second, this pressure to reduce use of MTBE, which makes up

11 percent by volume of RFG, comes at a time when consumer demand for fuels has grown, when supplies are tight, when refiners,

as we have already heard, are beginning to gear up to produce even

cleaner burning fuel for tier two. The Blue Ribbon Panel clearly

saw the opportunity for a portion of MTBE demand to be met by

increased use of ethanol.

But it was concerned that at this stage in clean fuel development, when refiners need maximum flexibility and a range of alternative ways to make clean fuels, it was neither appropriate nor

necessary to maintain the strict oxygenate content rules of the

1990 Clean Air Act Amendments. Thus, the panel recommended

that the clean air performance requirements of RFG be maintained

and continued, but that the oxygenate mandate be removed.

In conclusion, where do these opportunities and challenges leave

us today? We have two paths we can follow for clean fuels, to continue clean-burning fuels with legislatively mandated fuel additive

requirements and risk potential market dislocations and increases

in price or to keep the strong clean air performance requirements

for these fuels but to free the market to make them in the most

cost-effective way possible with a minimum of specific fuel additive

requirements.

In the view of the Blue Ribbon Panel, this market-driven path

is clearly preferable. It will result in continued clean air benefits,

but also in a substantial increase in the use of ethanol but without

risking the higher prices and market shortages that could result

from continued fuel additive mandates. With this path, we have

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the chance to see clean air improvements and stable fuel markets

well into the 21st century.

Thank you for the opportunity.

The CHAIRMAN. Thank you very much, Mr. Greenbaum.

Mr. Daigle.

STATEMENT OF D.H. DAIGLE, DIRECTOR OF AMERICAS

REFINING, EXXONMOBIL REFINING AND SUPPLY COMPANY

Mr. DAIGLE. Chairman Murkowski, members of the committee, I

am Don Daigle, director of Americas Refining in the ExxonMobil

Refining and Supply Company. In the interest of your time, I will

summarize my remarks and ask that my written testimony be submitted for the record.

My expertise is in the refining and supply of petroleum products.

I also chaired the group that prepared the National Petroleum

Council’s June 2000 report on U.S. refining. Much of my testimony

today is underpinned by the council’s conclusions.

Due to antitrust and competitive concerns, please understand

that I cannot discuss company-specifics regarding inventory, supplies, pricing, and plans for operations and investments.

ExxonMobile believes that it is critically important to develop a

national energy policy which will allow us to continue to supply

quality products to consumers. The committee’s interest in this aspect of energy policy, along with that of the new administration, is

most welcomed and encouraging. There are important decisions to

be made in the relatively near term, which will significantly affect

industry’s ability to meet future consumer demands.

To set the stage briefly, refining is economically risky and volatile and not one of the more profitable segments of the petroleum

business. Industry downstream financial returns have historically

run about 5 percent, just a little more than a 3-month T-bill. Even

so, industry has expanded domestic capacity to meet growing demand.

The key energy policy question is: How to ensure that the refining industry is allowed to continue expanding capacity. The National Petroleum Council identified a number of obstacles that the

industry skill and technology may not be able to overcome without

changes in policy. While I want to focus on these policy solutions

in this summary, it is vitally important to understand just how serious the current situation is.

To summarize the key National Petroleum Council findings, the

changes mandated in gasoline and diesel quality, coupled with the

potential for removing MTBE from gasoline, will be very expensive,

perhaps beyond the bounds of affordability for some refiners. These

requirements will make the U.S. supply and logistics system much

more rigid.

The new source review enforcement initiative launched several

years ago by the Environmental Protection Agency poses very significant further challenges. The industry will have a very hard

time implementing all these changes in a compressed time frame.

The refining system is tight, creating a very real risk of increased

supply disruptions and price volatility.

I would like to discuss how we see resolving these challenges beginning with new source review, or NSR for short. My written tesVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00159 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
156

timony covers in some detail the very serious problems we face

under this program. To address these concerns, we urge this committee and the new administration to take a fresh look at the

EPA’s entire NSR enforcement program. Specifically, we recommend that new source review enforcement activities be suspended until there has been a thorough review of the program and

its implications.

We encourage this committee and the administration to examine

the implications for consistency with a balanced energy policy.

Guidelines should be established to assure that EPA’s application

and enforcement of its new source review requirements are compatible with that policy.

Finally, clear new source review regulations, consistent with responsible implementation of the statutory framework, should be developed through an open administrative process.

The second difficult legacy policy is the Federal oxygen mandate.

New scientific data and technological advancements obviate the

earlier environmental basis for mandating oxygenates in gasoline.

While the environmental objective is laudable, this out-dated mandate is vulcanizing fuel supplies and hamstringing our ability to

provide gasoline to the motoring public.

Congress can be a part of the solution. We support repeal of the

oxygen mandate or, at a minimum, an amendment that grants governors authority to waive this mandate on a regional basis. In the

meantime, Congress should encourage the EPA to grant State requests for waivers. Granting California’s request is a good place to

start.

A third area that warrants a fresh look is the EPA’s recent ultra

low sulfur diesel rule promulgated late last year. We accept the

need to provide lower sulfur fuel to enable new cleaner vehicle

technology. However, only brand new diesel vehicles will need this

ultra low sulfur fuel. There is virtually no environmental benefit in

requiring it for the existing fleet, as the rule now does.

Coupled with other fuel changes, such as low sulfur gasoline in

2004, the refining industry’s resources will be stretched to the

limit. A mandate to manufacture large volumes, especially diesel,

ahead of the time that it is needed is likely to cause significant diesel supply disruptions.

We recommend that the low sulfur diesel rule be adjusted to

phase in volumes on a time frame that is much more consistent

with the actual vehicle needs. This will provide the same environmental benefits as the current rule while decreasing the risk of diesel fuel shortages.

In conclusion, we look forward to working with this committee

and with the administration to develop a cohesive energy policy

based on free markets and open competition. Improving the environment is an important goal, but basic reliability and availability

of fuel supplies and consumer costs are equally so.

Energy and environmental objectives can be addressed, but they

must be considered together. A good scientific base, clear-headed

cost benefit analysis, and consistent and responsible application of

rules are also key. Change should proceed at a pace that allows investments to be made in an orderly manner, so as not to threaten

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the supply of fuels to U.S. consumers. We look forward to working

with the committee towards these ends.

I will be happy to take questions from the committee.

The CHAIRMAN. Thank you, Mr. Daigle.

[The prepared statement of Mr. Daigle follows:]

PREPARED STATEMENT OF D.H. DAIGLE, DIRECTOR OF AMERICAS REFINING, EXXONMOBIL REFINING AND SUPPLY COMPANY

INTRODUCTION

Chairman Murkowski and members of the committee, I am Don Daigle, Director

of Americas Refining in ExxonMobil Refining & Supply Company. The divisions and

affiliated companies of ExxonMobil operate or market products in the United States

and nearly 200 other countries. Our principal business is energy, involving exploration, production, refining, transportation and sale of petroleum products.

My area of expertise is in the refining and supply of petroleum products. I also

was Chair of the Coordinating Subcommittee for preparing the National Petroleum

Council’s (NPC) June 2000 report on U.S. Refining. Much of my testimony today is

underpinned by the conclusions reached by the NPC. I welcome the opportunity to

outline some of the important proactive steps which can and should be taken to ensure a reliable supply of petroleum products for American consumers.

Due to antitrust and competitive concerns, I hope you will understand that I’ll not

be able to discuss company specifics regarding inventory, supplies, pricing, and

plans for operations and investment. Within the bounds of that caveat, however, I’ll

be as responsive as possible to the committee’s questions.

We believe that it is critically important to develop a national energy policy which

will allow the industry to continue to refine quality products and distribute them

efficiently to consumers. The committee’s interest in this aspect of energy policy,

along with that of the new Administration, is most welcome and encouraging. There

are important decisions to be made in the relatively near term which will significantly affect industry’s ability to meet future consumer demand.

For at least the next several decades, and likely beyond, fossil fuels, particularly

oil and gas, will be required to meet the vast majority of our U.S. energy needs.

The refining business has a critical role to play in meeting that demand, both now

and in the future.

To set the background, it should be recognized that refining is an economically

risky and volatile venture. Historically, it has not been one of the more profitable

areas of our business. In fact, industry downstream financial returns have averaged

about 5% over the last 2 decades—just a little more than a 3-month T-bill. This reality is reflected in the fact that during the 1990s, the number of operating U.S.

refineries decreased from 194 to 155. Many of those which shut down were too small

to be economically viable. Notwithstanding this trend, however, total U.S. refining

capacity increased through expansions and efficiencies at existing refineries. Industry has been able to meet growing consumer demand with essentially no change in

refined product imports.

A key question for this committee is how to ensure that the refining industry can

continue this trend. As we see it now, there are a number of obstacles which the

industry’s skill and technology may not be able to overcome without changes in policy. Refineries are currently running at essentially maximum capacity to meet the

increased demand. Building new domestic refineries is unlikely to be a practical option given siting and permitting issues and fundamental economics of the business.

As a result, we will need to took to capacity expansions at existing refining locations

to meet the bulk of our future demand growth. At the same time as the industry

is challenged to add capacity, there are a number of competing environmental regulations that push us in a different direction—adding cost and complexity to our

plants without capacity benefits, and sometimes, with a capacity debit. As capable

as our industry is from a technical perspective, we cannot always serve both of these

masters simultaneously.

At the request of former Energy Secretary Richardson, the NPC assessed the impact of proposed and potential government policies and actions on refinery operations and petroleum product supply over the 1999 to 2005 time frame. The NPC

assessment, entitled ‘‘U.S. Petroleum Refining—Assuring the Adequacy and

Affordabiliiy of Cleaner Fuel,’’ is a blunt call to action. Let me paraphrase its key

findings. The changes we face in gasoline and diesel quality coupled with the potential for MTBE removal from gasoline will be very expensive, and significantly

stretch capital resources, potentially beyond the bounds of affordability for some reVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00161 Fmt 6601 Sfmt 6621 74-059 SENERGY2 PsN: SENERGY2
158

finers. They will also make our supply and logistics system more rigid. The New

Source Review (NSR) enforcement initiative launched several years ago by the Environmental Protection Agency poses further permitting and investment obstacles to

necessary capacity expansion. The industry faces very significant challenges in implementing all these changes in the time frame which current regulations require.

The tightness of the system creates a very real risk of increased supply disruptions

and price volatility.

The main refining and supply areas which we believe need attention from this

committee and the administration are: the reinterpretation of the NSR regulations;

elimination of the oxygenate mandate contained in the 1990 Clean Air Act Amendments as part of an overall MTBE removal strategy; and phasing in the volume requirements for the new ultra low sulfur diesel regulations. I will comment on each

of these in order.

NEW SOURCE REVIEW

The New Source Review program was originally intended to improve air quality

through a permit review of new sources and major modifications to existing facilities. Over time, however, the NSR program has evolved from a 20-page rule into

4,000 pages of confusing, often contradictory and continually changing ‘‘interpretative guidance.’’

Several years ago, EPA began an aggressive initiative attempting to enforce retroactively new and more stringent interpretations of NSR requirements. In a stroke,

it has attempted to undo years of Federal and state agency and industry interpretation and understanding and created conflicts with existing regulations, past actions,

and state permitting decisions. This enforcement initiative occurred after EPA largely abandoned efforts to change NSR regulations through the normal rulemaking

process.

Under EPA’s reinterpretation, the number of projects that would require intrusive, costly and time consuming NSR review and permitting would increase substantially. Left to stand this will significantly increase the cost and difficulty of implementing improvements at refineries, and result in a significant permitting backlog

for both state and federal officials. A company’s ability to make even the most minor

changes to improve refining capacity, energy efficiency and environmental performance can be compromised.

These legacy NSR enforcement actions were premised heavily on what we believe

are erroneous reinterpretations of two elements of its permitting requirements.

First, EPA asserted that numerous previously permitted projects resulted in ‘‘potential’’ emission increases when in reality they had no effect on actual emissions or

were followed by emission decreases. In fact, overall, refinery emissions have actually decreased while production of fuel products increased. Second, that routine

maintenance, repair and replacement at refineries—activities that were previously

exempt from NSR—are now required to obtain permits. Such a strategy of ‘‘regulation by enforcement’’ puts industry in a difficult position. If unchecked, it will require refineries to seek permits for many more activities including many with little

or no environmental benefit. This activity would divert resources that could have

been used to expand and improve existing refinery capacity.

We believe this committee and the new administration should take a fresh look

at the entire NSR enforcement program. Without revision to this program, the refining industry (and others) faces the threat of penalties and additional unnecessary

investments for emission reductions above and beyond those currently required by

regulation. A similar enforcement initiative imposed on the power generation sector

has the potential to affect the ability of the electric utility industry to meet electricity requirements.

We offer the following recommendations as a means to prevent NSR enforcement

policies from interfering without tangible benefit to industry’s ability to meet our

energy and fuel supply needs:

First, we recommend that NSR enforcement activities be suspended until such

time as there has been a thorough review of both the program itself and its implications.

Second, we encourage this committee, and others involved in establishing new directions for national energy policy, to factor the implications of NSR interpretations

into the policy making equation. Guidelines should be established to assure that

EPA’s application and enforcement of its NSR requirements are compatible with the

nation’s energy and fuel supply policy. Attention from the White House Office of Energy Policy, and from the Secretary of Energy will also be helpful. Finally, clear

NSR regulations should be developed through an open administrative process, which

are consistent with responsible implementation of the statutory NSR framework.

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FEDERAL OXYGENATE MANDATE

Another legacy of past policy making that poses hurdles for the refining industry

is the federal oxygenate mandate. The Clean Air Act Amendments of 1990 required

the use of oxygenates in reformulated gasoline for nine areas of the nation with the

most severe air quality problems. While the intention is laudable, this requirement

is outmoded, fails to deliver promised benefits, and exacerbates the risk that supply

issues will affect consumers.

EPA’s own MTBE ‘‘Blue Ribbon’’ Panel concluded that the current Clean Air Act’s mandate ‘‘to require oxygenates in RFG must be removed in order to provide flexibility to blend adequate fuel supplies in a cost-effective manner while quickly reducing usage of MTBE and maintaining air quality benefits.’’ Additionally, new scientific data that became available after the 1990 Clean Air Act amendments demonstrate that oxygenates are not needed to provide the requisite environmental benefits of reformulated gasoline. Further, technological advancements in newer vehicles obviate any earlier justification for mandating oxygenates in RFG in order to

address environmental concerns.

The oxygenate mandate is causing further balkanization of fuel supplies and is

hindering the supply system and refineries’ ability to get product to markets where

and when needed. For example, Alabama and Georgia have chosen to require a

unique fuel within their borders rather than adopt reformulated gasoline (RFG) and

the costs and issues associated with oxygenates such as MTBE. As another example,

Maine has opted out of the RFG program, choosing instead to require a lower volatility fuel. New Hampshire is requesting the same. Chicago and Milwaukee have

their own brand of unique fuels because ethanol is the oxygenate used in those

areas. The solution? First, Congress should repeal the oxygenate mandate or, at a minimum, amend the law to grant authority to governors to waive the oxygenate mandate on a regional basis. In the meantime, Congress should encourage the EPA to

grant state waivers from the oxygenate mandate. Granting California’s request is

a good place to start.

We are aware that some of the committee members are concerned about the continued market for ethanol. We expect that even without mandates there will likely

continue to be additional opportunities for ethanol use as long as it is economically

viable.

ULTRA LOW SULFUR DIESEL RULE

Another area which we believe deserves a fresh look is the ultra low sulfur diesel

(ULSD) rule promulgated late last year. We accept the need to provide new lower

sulfur fuel to enable new cleaner vehicle technology, but believe the regulations

should recognize that only new diesel vehicles will need this ultra low sulfur fuel.

There is little environmental benefit in requiring it for the existing fleet as the regulation now does. Coupled with the requirement to produce lower sulfur gasoline in

2004 and the need to address the oxygenate issue, the refining industry’s resources

will be stretched to the limit in order to manufacture large volumes of a fuel that

will benefit only a few vehicles initially. In fact, there is reason for concern that

there will not be sufficient on-road diesel to meet demand.

We are concerned that a supply disruption could result that would be more serious than the one that occurred in 1993 during the introduction of new California

diesel fuel. We recommend that the ULSD rule be phased in with volumes more consistent with actual new vehicle needs, specifically, refiners would produce ULSD beginning June 1, 2006, in volumes needed to meet new on-road vehicle and retail

availability requirements. Production volumes would increase as vehicle turnover

occurs and market demands increase. Additionally, refiners would produce current

low sulfur diesel (LSD; current 500 ppm sulfur cap highway diesel) to meet older

on-road vehicle diesel demands. As ULSD demands grow, production would increase

and LSD production would decline.

The advantages of implementing these recommendations are numerous.

(1) Essentially the same vehicle emission benefits and timing as the final EPA

highway diesel rule would be maintained; (2) the potential for diesel fuel supply disruptions is reduced; (3) greater refinery energy efficiency and lower refinery CO2

emissions are achieved by avoiding overproduction of ULSD in the early demand

years; (4) by avoiding overproduction, ULSD is cost effectively provided to consumers who own new vehicles that benefit from the new fuel; (5) this approach stages

investment and spreads out permitting, financing, investment, engineering and construction activity for refinery modifications, freeing critical resources to help implement other key fuel requirements; and (6) it provides an opportunity for further

technological development to reduce the ultimate cost of sulfur removal.

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CONCLUSION

ExxonMobil encourages members of this committee to help clarify where we, as

a nation, are going in the energy policy area and what is needed to get there. We

look for ways to work with you and other branches of government to develop a cohesive energy policy. In our view, that policy needs to be based on free markets and

open competition if it is to be effective. It should also take an integrated approach

to energy and environmental regulation. We urge you to ensure that industry is

given the flexibility to provide new fuels that will support new engine emission control technology in the most cost-effective and environmentally sound manner. New

pipelines and refinery upgrades needed to meet growing product demands and more

stringent specifications, as well as new electricity generating capacity, will all be

benefited by improvements in the regulatory review process.

In conclusion, I’d like to reiterate a core belief at ExxonMobil: in all the energy

sectors, the market must be allowed to work. Improving the environment is a fundamentally important goal, but so are basic reliability and availability of fuel supplies, at reasonable costs to the consumers. All these objectives can be addressed,

but they must be considered together. We believe that policy making must be based

on sound science coupled with rigorous cost-benefit analysis and we urge that it proceed at a pace that allows investments to be made in an orderly manner. We look

forward to working with you toward those ends.

I will be happy to answer any questions the committee may have.

The CHAIRMAN. Mr. Moyer, please proceed.

STATEMENT OF CRAIG MOYER, EXECUTIVE DIRECTOR,

WESTERN INDEPENDENT REFINERS ASSOCIATION

Mr. MOYER. Thank you. Yes, I am Craig Moyer. I am the executive director of the Western Independent Refiners Association,

WIRA. I want to thank this committee for the opportunity to speak

this morning, but more importantly for your leadership in developing a national energy policy.

WIRA represents small business refiners, which are defined as

small businesses pursuant to the Small Business Administration,

fewer than 1,500 employees, and less than 155,000 barrels per day

total capacity. WIRA members produce a full slate of petroleum

products, including everything from gasoline, diesel, jet fuel to asphalt, lube oil and specialty petroleum products.

From the ground to the pump, there are three phases of the process: Exploration and production, refining, and marketing. members

of WIRA are involved only in refining crude oil into products. No

members of WIRA drills for oil or operates service stations.

WIRA is also part of a larger group of small business refiners

that produce diesel fuel throughout the United States. Among the

constituents of Senators on this panel include PetroStar in Alaska

represented by Senator Murkowski; Calcasieu Refining, Placid Refining in Louisiana represented by Senator Landrieu;

Countrymark, a farm cooperative in Indiana represented by Senator Bayh; Frontier in Wyoming, a refinery both in the State of

Wyoming represented by Senator Thomas; Golden Bear, Kern Oil,

Paramount, San Joaquin Refining represented by Senator Feinstein of California; and U.S. Oil and Refining in Washington represented by Senator Cantwell; Montana Refining represented by

Senator Burns; and of course, Navajo Refining in New Mexico represented by Senator Domenici and Senator Bingaman.

I would like to make three brief points today. First, small refiners are important, both regionally and nationally. Two, EPA’s low

sulfur diesel regulations poses a challenge to the continuing viability of small business refiners. And three, Congress should act to

161

mitigate the potentially harmful effect that this regulation is going

to have on small business refiners and, as a result, the effects on

the Nation’s refining capacity.

Individually, small business refiners may be a small part of the

market, but cumulatively their impact is substantial and historically and decidedly pro-competitive. Small business refiners are

also very important to the regions they are in. For example, just

in California, small business refiners represent 100 percent of California’s grade 80-aviation fuel, aliphatic solvents, and JP-4 jet fuel.

Small refiners also manufacture 100 percent of the asphalt that is

produced in southern California and most of the off-road diesel

fuel. Half of the diesel fuel produced in the San Joaquin Valley,

California’s farm belt, is refined by small business refiners.

I am from California. But if we are reviewing the statistics from

other States, such as Wyoming or Louisiana, I believe other similar

references could be made to the regional and product manufacturing importance of these small business refiners.

Your former colleague, the Secretary of Energy Spencer Abraham, recently commented that the number of American refineries

has been cut in half since 1980. Many of these were small businesses unable to meet the challenges of poor refining margins and

expensive regulations. Meanwhile, as noted in your opening comments, Mr. Chairman, not one refinery has been built in the

United States in over 25 years except for your plant in Alaska.

Small business refiners cumulatively account for a substantial

part of the Nation’s refining capacity; for example, 5 to 6 percent

of the U.S. supply of on-road diesel fuel and 20 percent of the military jet fuel supplied to our bases. Experience confirms that when

small business refiners leave the market, prices go up and consumers suffer.

I would like to turn, then, to the ultra low sulfur diesel fuel regulation quickly. You are familiar with the rule. It requires 15 parts

per million sulfur limit for most on-road diesel beginning in June

2006. Some of the associations of large refiners are appealing this

regulation in court. WIRA has not joined that effort. Instead our

members are making good faith efforts to comply with the regulation.

In the final rule, EPA stated that, and I quote, ‘‘small business

refiners would likely experience a significant and disproportionate

financial hardship in reaching the objectives of our diesel fuel sulfur program.’’

However, EPA made no provision to assist small business refiners in financing the mandated capital expenditures. The Energy Information Agency forecasts a 6.5-percent increase in diesel demand,

while other studies almost universally anticipate that that rule will

result in a decline in diesel production nationally.

Meanwhile, ongoing challenges face the industry, as discussed by

others on this panel and by the members of this committee. Existing refineries are operating at capacity resulting in more frequent

unplanned shutdowns. And every small refiner forced from the

marketplace increases our vulnerability.

Given the foregoing, we must agree with now-Secretary Abraham

that we have a refining industry strained to capacity, leaving us

dangerously vulnerable to regional supply disruptions and price

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spikes. The new EPA regulation adds one more financial and regulatory burden on an already at-capacity industry.

Small business refiners want to be a part of the solution. Without assistance to make the capital investment, however, small refiners may be forced to shut down. EPA has estimated that small

business refiners will incur on average capital costs of $14 million

per facility to meet the new diesel regulations.

For some facilities, that cost will be substantially more. And

some small business refiners are considering going out of business

rather than expend the capital necessary to comply this and other

regulations.

Unmitigated, the new regulations will make it even less likely

that new refineries will ever be built. Therefore, it is important to

seek methods to reimburse small business refiners for their costs

in meeting these new government-imposed mandates, which endanger their long-term economic viability.

On behalf of the Western Independent Refiners Association and

the rest of the small business refiners in the United States, I ask

that this committee, while considering legislation to implement a

national energy policy, work with small business refiners to find

some way to mitigate the disproportionate impact this regulation

will have on them. Senator Murkowski’s bill, S. 389, includes provisions providing tax relief for petroleum refiners. A similar incentive

for compliance with this regulation would be an appropriate method to help offset the hardship this regulation will place on small

business refiners.

I thank you for your attention this morning. I look forward to

discussing this matter with you all further.

[The prepared statement of Mr. Moyer follows:]

PREPARED STATEMENT OF CRAIG MOYER, EXECUTIVE DIRECTOR,

WESTERN INDEPENDENT REFINERS ASSOCIATION

On behalf of the Western Independent Refiners Association (WIRA), in my capacity as Executive Director for WIRA, I am pleased to have the opportunity to testify

before this committee and to provide this statement for the record addressing national energy policy with respect to fuel specifications and their infrastructure constraints.

BACKGROUND ON WIRA

WIRA is a trade association of small and independent refineries on the West

Coast. At this time, ten small independent refineries continue to operate on the

West Coast, nine in California and one in Tacoma, Washington. In California, these

refineries are located in each of the three refining areas within California. One is

located in the San Francisco Bay area. One is located in the Bakersfield area of the

Southern San Joaquin Valley and the remaining facilities operate in the Los Angeles Basin. Small independent refineries employ thousands of people and each company pays millions of dollars in taxes, even after excluding income taxes. WIRA

members produce a full slate of petroleum products including gasoline, diesel fuel,

jet fuel, asphalt, lube oil and specialty petroleum products.

While I am here on behalf of WIRA, we are also part of a larger ad hoc committee

representing small refiners throughout United States. There are small refiners located from as far North as PetroStar Inc. in Alaska and Holly Corporation in Great

Falls, Montana to Placid Refining Co. in Port Allen, Louisiana. Other small refiners

included are American Refining Inc. in Pennsylvania, Gary-Williams Energy Corp.

in Oklahoma, and Navajo Refining in New Mexico. (See attachment A for a complete

list of small refiners in the United States.)

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SUMMARY OF ISSUE

Small and independent refiners (refiners with fewer than 1,500 employees and

less than 155,000 barrels per day total capacity) have long been recognized as an

important competitive force in the refining sector. Individually, each small refiner

represents a relatively small share of the petroleum product marketplace. Cumulatively, however, their impact is substantial. In some regions, small refiners represent 50 percent or more of the market for certain products. Their pricing competition pressures the larger integrated companies to lower prices to the consuming

public. Without that competitive pressure, consumers will pay more. Small refiners

also are key suppliers to the Department of Defense and other niche markets such

as diesel fuel, asphalt and jet fuel. Loss of supply in these products will not easily

be filled by the major refineries.

Under new Environmental Protection Agency (EPA) regulations, coming into effect in 2006, refiners must meet a stringent new standard of 15 parts per million

sulfur limit for most on-road diesel volume. EPA estimates that small business refiners will incur average capital costs of $14 million per facility to meet the new

diesel regulations. Our projections indicate that the initial cost to meet these new

standards will be approximately $300 million for the whole industry. Regarding

these standards, EPA stated that: ‘‘small business refiners would likely experience

a significant and disproportionate financial hardship in reaching the objectives of

our diesel fuel sulfur program.’’ U.S. consumer demand for diesel fuel, as forecast by the Energy Information Administration, is expected to grow by 6.5 percent between now and 2007. It is important to seek methods to ensure small business refiners are able to meet these new

government imposed mandates, which endanger their long-term economic viability.

Some 25 U.S. refineries have shut down over the last decade and virtually no new

refinery has been built in the United States for over 20 years.

NEW FUEL SPECIFICATION REGULATIONS

On January 18, 2001, the EPA published new regulations, which create new

standards for levels of sulfur in highway diesel fuel beginning in June, 2006. Under

the new regulations, refiners must meet a stringent new standard of 15 parts per

million sulfur limit for most on-road diesel volume (‘‘Ultra Low Sulfur Diesel Fuel’’).

Small refiners produce about four percent of the Nation’s diesel fuel and in some

regions produce over half of the diesel fuel. In the final rule, EPA stated regarding

the diesel sulfur standards ‘‘that small business refiners would likely experience a

significant and disproportionate financial hardship in reaching the objectives of our

diesel fuel sulfur program.’’ In the final rule, EPA agreed with the final Small Business Administration report regarding the diesel sulfur standards ‘‘that small business refiners would likely experience a significant and disproportionate financial

hardship in reaching the objectives of our diesel fuel sulfur program.’’ However, EPA

has made no provision to assist small business refiners in financing the mandated

capital expenditures.

The new regulations also will make it even less likely that new refineries will ever

be built. With the exception of one small topping facility in Alaska, no new refinery

has been built in the United States for almost 20 years. Existing facilities are operating at full sustainable capacity. Operational demands imposed by the new regulations will result in a reduction of on-road diesel production. At the same time, U.S.

consumer demand for diesel fuel, as forecast by the Energy Information Administration, is expected to grow by 6.5 percent between now and 2007. If small business

refiners are eliminated from diesel production, supply shortages will become even

more likely. Therefore, it is important to seek methods to reimburse small business

refiners for their costs in meeting these new government imposed mandates, which

endanger their long-term economic viability.

EPA estimates that small business refiners will incur average capital costs of $14

million per facility to meet the new diesel regulations. For some facilities, the cost

will be substantially more.

In addition, costs to produce low-sulfur diesel fuel and to comply with other regulations will add significantly to capital requirements in approximately the same

time frame. Such capital investments are significantly beyond the financial capability of facilities operated by small business refiners, whose total investment is

dwarfed by these requirements. On top of the initial required capital expenditures,

the related increases in operating costs could equal or exceed the refineries’ historical annual profits, and thus, imperil the viability of these important U.S. businesses.

While WIRA does not oppose the regulation, and is fully committed to compliance,

we believe that national energy policy should take into account the importance of

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the small refiners and should include proposals for mitigating the impact of this regulation. Without such provisions, some small business refiners will shut down and

all will struggle to meet the mandated expenditures. Such a policy ignores the important role of the small business refiner in the U.S. energy market. The result of

such a policy will have serious consequences for our country.

NATIONAL ENERGY POLICY: THE PRO-COMPETITIVE ROLE OF THE SMALL REFINERS

Small and independent refiners have long been recognized as an important competitive force in the refining sector. Individually, each small refiner represents a relatively small share of the petroleum product marketplace. Cumulatively, however,

their impact is substantial. Their pricing competition pressures the larger integrated companies to lower prices to the consuming public. Without that competition

pressure, consumers will pay more. For example, in early 1991, Amoco shut down

a 40,000 barrels per day refinery in Casper, Wyoming, and gasoline prices jumped

almost 10 cents per gallon. In California, the Attorney General concluded that after

five small refiners shut down because they could not manufacture California’s cleaner burning gasoline, the loss of competition cost consumers hundreds of millions of

dollars. Through experience, we know that when small refiners leave the marketplace, prices go up and consumers suffer.

Congress and many agencies, including the Environmental Protection Agency

(‘‘EPA’’) and the California Air Resources Board (‘‘CARB’’), have long recognized the

importance of the independent refining sector to maintaining a competitive market

for petroleum products. For example, after EPA promulgated rules limiting the sulfur content of diesel fuel to 500 parts per million effective October 1, 1993, Congress

recognized the implications of this rule on small diesel refiners and authorized the

issuance of acid rain credits to small diesel refiners pursuant to Section 410 (h) of

the 1990 Clear Air Act amendments. Because of the important pro-competitive impact of small refiners, CARB, an agency that has promulgated perhaps the most

stringent fuels regulations in the country, has provided separate treatment for small

refiners in virtually every fuels regulation it has passed since 1988. In its two most

recent fuels rule makings, EPA has authorized separate treatment for small business refiners, as well. Even the South Coast Air Quality Management District, an

agency leading the nation and perhaps the world, in stringent air quality regulations, authorized separate treatment for small refiners in its recently promulgated

Rule 431.1 regulating diesel fuel.

In addition to maintaining competition, small and independent refiners often supply other petroleum products not otherwise available in certain areas. For example,

small refiners manufacture 100 percent of California’s grade 80-aviation fuel, aliphatic solvents, and JP-4 jet fuel. Small refiners also manufacture 100 percent of

the asphalt produced in southern California and much of the off-road diesel fuel.

Half of the diesel fuel produced in the San Joaquin Valley, California’s farm belt,

is refined by small refiners.

Small business refiners also fill a critical national security function. For example,

in 1998 and 1999, small business refiners provided almost 20 percent of the jet fuel

used by U.S. military bases. This adds up to almost 500 million gallons of jet fuel

supplied each year under defense contracts between the government and small business refiners.

CHALLENGES FACING THE INDUSTRY

Today, approximately 124 refineries are operating in this country. About 25 percent are small, independent refiners. Small business refiners are primarily owned

by U.S. citizens including privately held businesses and one farmer cooperative.

As Secretary of Energy Spencer Abraham noted in recent comments to the United

States Chamber of Commerce, the number of American refineries has been cut in

half since 1980. Many of these were small business refiners unable to meet the challenges of poor refining margins and expensive regulations. Meanwhile, no new refinery has been built in the United States in over 25 years and regulatory requirements limit the ability of existing refineries to expand capacity. Government regulations require the production of more than 15 types of gasoline. Existing refineries

are operating at capacity resulting in more frequent unplanned shutdowns. Every

small refiner forced from the marketplace increases our vulnerability. Given the

foregoing, one must agree with Secretary Abraham that we ‘‘have a refining industry strained to capacity, leaving us dangerously vulnerable to regional supply disruptions and price spikes.’’

Additional challenges facing small refiners include the following:

• Small refiners are large users of electricity and natural gas. The remarkably

high prices of these inputs are affecting the small refiners.

165

• The phase out of MTBE as an oxygenate has led to increased costs as replacements are found.

• Access to crude oil is not reliable, as the larger companies are not consistently

willing to supply small refiners.

• Wastewater treatment controls and stationary source controls have become increasingly stringent, thus raising costs for small refiners.

CONCLUSION: U.S. GOVERNMENT ENERGY POLICY SHOULD RECOGNIZE AND TAKE STEPS

TO MITIGATE THE IMPACT OF NEW FUEL SPECIFICATIONS

New fuel specifications will adversely impact the financial viability of small refiners producing diesel fuel. Because of the importance of these refiners to the competitive structure of the fuel market, Congress should consider mitigation, including tax

measures, for this important segment of the energy market.

ATTACHMENT A

Co.

No.

Parent

company

Ref.

No. Refinery Refinery location Refinery capacity crude bpd Pare

cap

crud

1 Age Refining Inc. ................................... 1 Age Refining Inc. ................................... San Antonio, TX ... 5,000 52 American Refining Inc. ......................... 2 American Refining Inc. ......................... Bradford, PA ......... 10,000 103 Countrymark Co.operative, Inc. ........... 3 Countrymark Co.operative, Inc. ........... Mt. Vernon, IN ...... 22,000 224 Cross Oil & Refining ............................. 4 Cross Oil & Refining ............................. Smackover, AR ...... 6,000 65 Foreland Inc. .......................................... 5 Foreland Corp. ....................................... Eagle Springs, NV 5,000 56 Frontier Oil Corp. .................................. 6 Frontier Refining & Marketing Co. ..... Cheyenne, WY ....... 41,000 1516 Frontier Oil Corp. .................................. 7 Frontier Refining & Marketing Co. ..... El Dorado, KS ....... 110,0007 Gary-Williams Energy Corp. ................ 8 Wynnewood Refining Co. ...................... Wynnewood, OK ... 50,000 508 Golden Bear Oil Specialties .................. 9 Golden Bear Oil Specialties .................. Bakersfield, CA ..... 12,500 129 Holly Corp. ............................................. 10 Montana Refining Co. ........................... Great Falls, MT .... 7,000 699 Holly Corp. ............................................. 11 Navajo Refining Co. .............................. Artesia, NM ........... 62,000

10 Kern Oil & Refining Co. ....................... 12 Kern Oil & Refining Co. ....................... Bakersfield, CA ..... 25,000 2511 Paramount Petroleum ........................... 13 Paramount Petroleum Corp. ................. Paramount, CA ..... 43,000 4312 PetroStar Inc. ........................................ 14 PetroStar Inc. (Topping only) ............... North Pole, AK ..... 15,000 5712 PetroStar Inc. ........................................ 15 PetroStar Inc. (Topping only) ............... Valdez, AK ............ 42,00013 Placid Refining Co. ................................ 16 Placid Refining Co. ................................ Port Allen, LA ....... 48,000 4814 San Joaquin Refining Co. ..................... 16 San Joaquin Refining Co. ..................... Bakersfield, CA ..... 24,300 2415 Somerset Refining, Inc. ......................... 18 Somerset Refining Co. ........................... Somerset, KY ........ 5,500 516 U.S. Oil & Refining Co. ......................... 19 U.S. Oil & Refining Co. ......................... Tacoma, WA .......... 46,000 4617 Transworld Oil USA .............................. 20 Calcasieu Refining Co. .......................... Lake Charles, LA .. 22,000 2218 Wyoming Refining Co. .......................... 21 Wyoming Refining Co. .......................... Newcastle, WY ...... 12,500 12

613,800

167

The CHAIRMAN. Thank you very much. I appreciate the testimony

collectively.

Let me focus on Dr. Daniel Greenbaum. And it is my understanding that your blue ribbon panel on oxygenates on gasoline recommended doing away with the additive requirement to comply

with EPA. Is that basically correct?

Mr. GREENBAUM. That is correct, that you could—— The CHAIRMAN. That is a pretty profound statement. Okay. And

I hope we take note of it, a recommendation to do away with the

additive requirement. Now many of our current gasoline balkanization, so to speak, problems appear to be directly related to that

requirement. Is that not correct?

Mr. GREENBAUM. I am not an expert in the refining industry, but

that is a significant component of that.

The CHAIRMAN. All right. Now is this a case, in your opinion, of

Congress writing fuel standards?

Mr. GREENBAUM. Well, it certainly—— The CHAIRMAN. The EPA has to adhere to the law? What in the

hell does Congress know about writing fuel standards? I do not

know anything about it. I can tell you a little bit about banking.

Mr. GREENBAUM. I am assuming that was not a question.

The CHAIRMAN. I do not know. Maybe Senator Nickles can tell

us something about our qualifications to write fuel standards.

Senator BINGAMAN. Mr. Chairman, I thought we all voted for

that Clean Air Act.

The CHAIRMAN. Well, did we know what we were voting for?

Senator BINGAMAN. I am not sure.

The CHAIRMAN. I am not either. Now there may be some folks

out there that will take issue with your rather profound statement,

but I certainly admire your willingness to evaluate this based on

your background and expertise and your blue ribbon panel on

oxygenates that suggests that this is not necessary. And we look

at EPA with forked tongue and say, how could they do this, when

they are enforcing a law that we passed.

And I would suggest, if you feel strongly enough, you blame the

Congress.

Mr. GREENBAUM. We recommend to Congress that Congress take

action, because only Congress can address the issue. I think it is

fair to say that in the very early stages of the RFG program, the

oxygenates were a relatively quickly available way to move to get

the clean fuels. What we found, though, is that the refining industry responded and was able, and is definitely able today, to make

clean fuels with far less reliance on the oxygenates. And we argue

strongly that, therefore, the mandate was counterproductive at this

point, particularly in light of the problems with MTBE.

The CHAIRMAN. If the science supports removing the oxygenate

standard, then why has it not been done? America, in your opinion,

could enjoy cleaner fuels at less price. So are you waiting for Congress in its wisdom to do it for you?

Mr. GREENBAUM. I think Congress has to do it because of the— because this is a mandate that was put into the law very specifically. And I think it is an interesting lesson in actually when the

mandates get that specific, how had it is to then be flexible in the

face of changing technology, changing market conditions. And that

168

is why the panel really thought that performance standards—and

several of us have spoken to this—were the way to go.

The CHAIRMAN. Well, we have committees, committee jurisdiction. This case, I assume, was the Environment and Public Works

Committee on the Senate side and the Commerce Committee on

the House side. And the professional staff or experts or whomever

put this together, and now we are hearing it is unnecessary and

adds additional price to the consumer, and that the industry can

meet requirements, ultimately ‘‘cleaner fuel’’ at less price, if we do

away with this.

Is that—do the witnesses generally agree with that statement?

Mr. DAIGLE. Senator, may I comment on that?

The CHAIRMAN. Please.

Mr. DAIGLE. We firmly support removal of the oxygen mandate.

New scientific data, technological advancements clearly indicate

that clean fuels can be made, maintaining all the benefits of the

Clean Air Act, without the use of oxygen mandates. Imposing a

mandate reducing flexibility on the part of the refiners and, as a

result of that, ultimately decreases flexibility in the system and increases cost.

The oxygen mandate is clearly one of the major causes of the balkanization in the various regional fuel supplies, fuel requirements,

that was shown on one of the charts earlier.

I think if the oxygen mandate were removed, a lot of the areas

that have selected these regional specifications, because they do not

want to deal with the potential problems associated with the oxygen mandates, then could very much move back to the RFG standard and get rid of a number of these specific standards that are

causing a lot of the rigidity in the system and reducing the flexibility in the system, to move supplies around to where there are regional shortages for every reason.

The CHAIRMAN. And do you generally agree with that statement?

Mr. MOYER. Senator Murkowski, could I add to this? Expanding—I not only agree with that, I would expand upon it, that as

one of these oxygenates, MTBE, is looked at as a bad actor now in

California, as you all know.

The CHAIRMAN. It supposedly gets in the water table. I do not

know.

Mr. MOYER. It moves very quickly and gets into the water and

moves much faster than gasoline.

The CHAIRMAN. Right.

Mr. MOYER. The elimination of MTBE exacerbates the problems

associated with the oxygenate mandate.

Mr. DAIGLE. I would add to that that clearly Congress has a role

in setting the specifications that are required to balance between

environmental demands and supply demands. But Congress

should——

The CHAIRMAN. Yes, but when Congress begins to write specifics

relative to fuel standards, you know, I question Congress’s collective wisdom. It is torn between environmental concerns that may

have some validity or not. And what I am getting at here is, is

there general agreement with this statement that has been made

relative to the recommendations that doing away with the additive

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requirements, because it really—there is a simpler and better way

to achieve the objective of enjoying cleaner fuels.

Mr. ROBINSON. Absolutely.

The CHAIRMAN. All right. Now, would you gentlemen be willing

to draft collectively some legislation in a draft form to submit to

this committee that would propose how you bring about this

change and still have the reasonable safeguards? And I do not

want to go down a million rabbit trails here.

But you know your business, and we do not. But we would be

willing to take this, review it, and see if we can address in reality

what you have suggested here, which is clearly a relief from duplicity, clearly offers more simplicity to achieve a better standard,

which is what you are telling me you can do. Would you be willing

to do that?

Mr. DAIGLE. I think we clearly would be willing to do it. And I

think there are activities underway along those regards with organizations, such as API and NPRA.

The CHAIRMAN. Okay.

Senator NICKLES. Would the Senator yield to this—— The CHAIRMAN. Yes. Just one more question, though.

We are going to get some of this from the administration’s task

force. But how long is it going to take you to submit something to

the committee?

Mr. DAIGLE. I would think something could be submitted in a

very short period of time.

Mr. ROBINSON. Mr. Chairman, I think it is much, much easier.

Basically you maintain all your performance standards. No one is

complaining about a performance standard whatsoever. You just

delete the oxygenate mandate. That is your legislation. That is all

it is.

The CHAIRMAN. All right. What I want you to do is submit this

and give us the counter argument that is going to come up as a

consequence of deleting the oxygenate mandate.

Senator NICKLES. I was going to say, I think that is the—that

was my suggestion. We just go back and eliminate the additive

mandate language, the challenge being that I see—and maybe I am

incorrect—is that the ethanol crowd will come unglued.

[Laughter.]

Senator NICKLES. That would be more political than—that argument will not be based purely on economics. It would be—that

would be our challenge. But clearly, MTBE has not proven to be

effective. The mandate was a mistake. It was in the bill. Some of

us opposed us back in 1990, thinking we should not be doing that.

You might remember the terminology, government gas, when we

were involved in writing this legislation. And a lot of us were opposed to the mandate.

Anyway, it was put in. And it was put in—correct me, if I am

wrong. And this is stretching my memory—but it was put in coupled with ethanol as one solution. And the ethanol lobby is very

strong, and it has a lot of votes in the Congress. And that is our

real challenge. I do not think the challenge is going to be on removing the mandate, except for the fact that it pulls ethanol.

The CHAIRMAN. Well, misery loves company, Senator Nickles.

And I would like to have something from this collective group, beVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00173 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
170

cause I think it represents a balance, if you will, and a point of

view that should be considered. And clearly, there is potential relief

for consumers, achieving the same objective. My time is—— Senator NICKLES. Tell Grassley you are thinking about this.

The CHAIRMAN. No, I am not going to tell him, either.

[Laughter.]

Mr. GREENBAUM. Mr. Chairman, if I might just add something

to Senator Nickles’s comments. One of the things we found in the

blue ribbon panel was that removing the oxygenate mandate does

not mean less use of ethanol. It undoubtedly, if you keep the performance standards, it undoubtedly means you will see increased

use of ethanol.

The CHAIRMAN. That would be good news for Senator Grassley.

Mr. GREENBAUM. Right. And I think the question, because in fact

the mandate has largely been met by MTBE, ethanol is a relatively

clean additive. It has some limitations, as we have heard today.

But you would see increased use of it. And I think everybody would

agree on that. I think the question is how much and do you need

a guarantee. I think the panel felt you did not. In fact, it was better to have a mix of solutions, not just rely on ethanol.

But the data was there to suggest that you would see an increase

in ethanol under any circumstance.

Senator NICKLES. Help me a little bit, because I thought we were

saying we wanted to eliminate the additive mandate, which would

also eliminate the mandate—well, it is either going to be supplied

by MTBE or ethanol, by and large.

Mr. GREENBAUM. Right. What we said, and what I think everybody here has said, is that there are RFG specifications, which are

performance based. You need to have a certain level of clean emissions from the fuel. They do not tell you how to mix it or what has

to be in it. Those should stay in place.

What should be moved was the mandate, which only said you

had to use oxygenates to get to that. If you do that and you keep

those standards, you will still need to have something to make sure

the fuel is clean. You will have to have lower benzene, so you will

need a source of octane to replace it. You need some other things,

and ethanol is one of the sources for that.

So you will still have use of that, and you will see at least the

same level and undoubtedly an increase in the use of ethanol.

Senator NICKLES. Your statement is very helpful in the success

of this endeavor.

The CHAIRMAN. Mr. Heminger, you are a large blender of ethanol. Would you care to comment relative to the concern that has

been expressed on the politics associated with ethanol?

Mr. HEMINGER. Yes, Mr. Chairman. We are the Nation’s largest

blender of ethanol. I would provide caution, though, to this discussion. In order to take MTBE out and bring ethanol in as a replacement, we are talking about 1.6 billion gallons in volume to replace.

We believe just ethanol alone, that is about a 4-year minimum

project. So I provide caution. We cannot snap our fingers and correct that today. It is going to take at least four years to be able

to have the ethanol plants to supply that.

But beyond that, the problems, as I had in my testimony, of

transporting ethanol, you cannot ethanol refined products with ethVerDate 11-MAY-2000 14:23 Jul 24, 2001 Jkt 000000 PO 00000 Frm 00174 Fmt 6601 Sfmt 6602 74-059 SENERGY2 PsN: SENERGY2
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anol through the pipeline system. It just does not work because of

the affinity ethanol has for water. So we have to look beyond just

ethanol corrects the problem. We have to look at how we transport,

how we get the product eventually to market. It is a partial solution, but there are many other things we have to consider as well.

Mr. DAIGLE. Mr. Chairman, may I clarify something?

What we are suggesting is not the replacement of one mandate

with another mandate. We are not asking to remove MTBE and

then mandate to meet an oxygenate level of ethanol. We are asking

to remove the mandate, put the performance specs out there, leave

them in place as they are now, and then allow the industry to use

its skill and its know-how to come up with the optimum blend and

the optimum set of components to meet the gasoline supply.

And I think what is being suggested is that if that is done, there

will be a continued use for ethanol, particularly where it is economically attractive to use ethanol. And it may well grow above

and beyond the current level. But we are not asking, clearly, to remove MTBE and replace with ethanol. I think—— The CHAIRMAN. I appreciate your clarification of that. And my

time is up. But before I quit, I want to know which one of you is

going to volunteer to coordinate the effort of the five panelists to

get something to us.

[Laughter.]

Mr. DAIGLE. Why do I not take that on, Senator, working with

appropriate industry groups to get that done?

The CHAIRMAN. All right. And what I also want you to address

here is the concern that Mr. Moyer raised, where he indicated that

the smaller refiners are working to try and comply with the mandate to reduce from, what, 500 to 15.

Mr. MOYER. Exactly.

The CHAIRMAN. But I am concerned about the ability of the small

refiners to be able to bite financially that bullet, because we have

seen the small refiners close down because the economics just

would not address significant changes to meet various new requirements. Now it is one thing to be committed to try and achieve it.

I do not want to see you folks going out of business.

Now Exxon and the rest of them with their larger refineries can

afford the retrofit. So I would like you to—you know, it is fine to

pursue something, but if you do not achieve it, you go out of business.

Mr. MOYER. That is exactly right, Senator. And indeed, in California one of the reasons that, according to the attorney general’s

task force, we have such volatility is the loss of five small and independent refiners that were not able to achieve the California RFG

specification.

The CHAIRMAN. Well, you tell me what you are going to have to

have to stay alive.

Senator Bingaman.

Mr. DAIGLE. Mr. Chairman, with all due respect, there are two

different issues. One is the oxygen mandate, and we will get you

what you have asked for on the oxygen mandate.

A completely different issue is the low sulfur diesel rule and

what is the appropriate response on the part of the EPA, on the

part of the industry to that.

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Mr. MOYER. I will be happy to take the lead on——

The CHAIRMAN. That is fair enough. Okay. And remember, what

we are looking at is, we recognize that the bigger oil companies,

the bigger refineries, can do it. But we do not want to drive you

folks out of business. And if the technology is there and achievable,

that is one thing. If it is not or it is simply unavailable to the

standpoint of your financial capacity, then what do you suggest?

Senator Bingaman.

Senator BINGAMAN. Well, thank you very much. I want to just

underscore the point that Senator Nickles made. As I recall, this

oxygenate mandate is in the law because the ethanol industry

wanted it in the law. And as you pointed out, several of us opposed

adding it as a mandate.

I believe the Environment and Public Works Committee this last

year proposed an additional mandate for the use of ethanol. I think

that came out of that committee. So I think there is a strong level

of support here in the Senate for maintaining some mandate. I

think clearly I agree with the policy of eliminating the mandate

and keeping the standards, and I hope we can do that.

We have a provision in the bill that we introduced, S. 597. It is

section 306 of that bill, which is entitled streamlining fuel specifications not later than 9 months after the date of enactment. The

administrator of EPA and the Secretary of Energy shall join the report to Congress on the technical and economic feasibility of developing national or regional vehicle fuel specifications for the contiguous United States that would enhance flexibility in the distribution of fuels, reduce price volatility and costs to consumers, and

meet local, regional and national air quality standards.

Have any of you had a chance to look at that? Would you have

a comment as to whether this kind of a provision is adequate or

something different should be done on this problem of fuel specifications? We are anxious to get input from any of you as to how

to address this problem in a constructive way.

Mr. DAIGLE. Senator, if I may comment?

Senator BINGAMAN. Yes, please.

Mr. DAIGLE. In our view, it is really not practical to have one single national fuel. Different areas of the country have different

needs, particularly from a volatility requirement standard, to assure proper operation of vehicles. What refiners really need is the

flexibility of producing the needed fuels. So any fuels requirements

that get put in place need to recognize the physical realities of the

fuel supply system, the distribution system, and the current refining capacity.

So mandates, quotes, rigid specifications, I think, are really not

the way to go. The industry needs to know what specifications are

required and then have the latitude and the flexibility to go out

and use its know-how and its capability and its technology to provide that fuel in the most economic fashion.

There are areas of the countries that need cleaner burning fuels

because of particular problems with overall levels of contaminants

in the air in those areas. There are other areas of the country that

really do not need those. To the extent we pick one single fuel supply and impose that nationwide, there will be a number of areas

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in the Nation that will be incurring a lot higher fuel costs with

really no net economic benefit.

Senator BINGAMAN. Well, I can certainly understand that, and I

agree with it. What about the idea, though, of having regional vehicle fuel specifications? Does that make sense to you or not?

Mr. HEMINGER. Senator, if I can answer that? I agree with what

Mr. Daigle said. And if you go to a regional mandate, the regional,

looking at the west coast, you would have carb gasoline. Looking

at the Midwest, RFG in Chicago is the most stringent. So if we

were to use that fuel for the balance of the Midwest, that is the

most difficult, however, the most stringent gasoline to make.

In doing so, you are going to take volume out of the system,

when volume is required. And also doing that, you are going to put

further difficult reasons on the infrastructure or requiring additional infrastructure to be able to design and make this fuel. And

again, it is just for a region.

We do not believe that it is right today to change to where we

have possibly three, four, six, who knows how many different regional fuel components. The system has been designed today to

make these individual fuels. The system is getting much better at

being efficient in transporting those fuels. But we do not believe it

is right to mandate, to go to the strictest sense for a given region.

Senator BINGAMAN. So my understanding is that both of you

then take the view that we should do nothing at the Federal level

to deal with the problem that is reflected in this map over here.

Mr. HEMINGER. That is not what—— Mr. DAIGLE. That is really not what I am saying, Senator.

Senator BINGAMAN. What are you saying that we should do? I

guess that is my question.

Mr. DAIGLE. What I am saying is a lot of the balkanization and

a lot of the regional specs now are the result of the oxygen mandate.

Senator BINGAMAN. So if we eliminate that—— Mr. DAIGLE. If the oxygen mandate is removed, I think you will

see the removal of a lot of the impediments that caused areas to

go to regional and specific fuel supplies and move back toward RFG

in the areas where the cleaner burning fuel is needed and the——

Senator BINGAMAN. So you say if we eliminate that oxygenate

mandate, that will solve the problem to the extent that we ought

to solve the problem.

Mr. DAIGLE. That is my view, Senator. It will——

Senator BINGAMAN. And is that your view, too, Mr. Heminger?

Mr. HEMINGER. Yes, sir. It will start to solve part of the problem.

Senator BINGAMAN. Mr. Robinson, did you agree with that?

Mr. ROBINSON. Not entirely. I would probably take a little bit

more aggressive position on that, in the sense that I think what

this is saying is, look at the technical and economic feasibility of

developing national or regional fuel specifications. I do not know at

this point whether it really makes sense to go to a national specification.

I certainly think that we need to move away from making more

and more different specifications. I think moving in the direction

of less specifications is going to make a significant—will significantly assist the distribution system.

174

You know, whether we move all the way to a single or not, that

is a pretty large step. But we have continued to make it more difficult. We need to start shrinking it back the other direction, at

least.

Senator BINGAMAN. So you think just eliminating the oxygenate

requirement or mandate does not necessarily get us where we need

to go.

Mr. ROBINSON. Probably not, although that would be a huge,

very, very important first step.

Senator BINGAMAN. Okay.

Mr. DAIGLE. I think, Senator, one thing to keep in mind is moving to one size fits all around the Nation on fuel specs, or regional

even, again, that is putting in arbitrary regulations, arbitrary requirements, not necessarily required by a given region, and has the

potential to create supply problems, supply reduction, and more

cost to the consumer.

Senator BINGAMAN. Well, what I was trying to deal with is, some

of your testimony talks about the problems and the increased cost

that has resulted from balkanization. And it seemed to me that one

way—maybe I am not defining that word the way you folks are.

But I thought that the way to deal with that is to go to more uniformity and less balkanization.

Yes.

Mr. MOYER. Senator Bingaman, could I address this? First of all,

I think we all agree that the elimination of the oxygenate mandate

would be a good thing. But the question is, do we go further than

that? Let me—there is a bit of a tension here.

On the one hand—and we can take California as an example. On

the one hand, all of California has California reformulated gasoline, even though clearly in the high Sierras, which has some of the

pristine air in the country, do not really need that fuel. Yet the

State of California chose to have one fuel to make it easier to distribute that fuel throughout the State.

However, that also has eliminated, because we went to that lowest common denominator fuel, eliminated the ability of some folks

to be able to actually supply that. That is the small refiners, for

example, that went out of business, that cold not make that change

to get to that lowest common denominator.

And I believe that is the point being emphasized by Mr. Daigle,

that if you go to that lowest common denominator, that will reduce

the supply. It will certainly improve distribution, but it will reduce

the amount of supply. And that is the tension that I was mentioning.

Mr. HEMINGER. Senator, along the same lines, if you look at Chicago being the strictest, the additional cost to make the RFG for

Chicago, if that was a regional fuel, we do not believe the consumer

needs to pay in southern Illinois, in southern Indiana, midwest

Ohio, that they need that strict fuel blend. So to have——

Senator BINGAMAN. But you are assuming that if we went to a

regional specification, it would be the most stringent. It would be

Chicago’s.

Mr. HEMINGER. That is what we are assuming, if the same regulations are going to apply for emissions today. Now if we are going

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to change those, then you could come off of the strict compliance

of Chicago. So you are right, that is the assumption we are making.

Senator BINGAMAN. All right. I think it is you and me here,

Chuck. Why do you not go ahead with any questions you have?

Senator SCHUMER. Thank you, Mr. Chairman. And I appreciated

the testimony of all the witnesses. As I have mentioned, I think we

are on the precipice of a very large energy crisis, gasoline, home

heating oil, gas for heating your home, electricity. And I have also

said that Democrats talk about conservation, decreased demand;

Republicans talk about new exploration, increased supply. The

twain never meet, and nothing gets done.

So your testimony is good, is one aspect of that, the gasoline

market. We are going to have all sorts of problems down the road,

if we do nothing. But I am delighted that we talked about this subject.

Now, I would like—my first question is for Mr. Greenbaum, because we in New York are very concerned about the oxygenate

issue. And you made reference to the problems brought about by

the use of MTBE. In fact, my State, New York, is seeking to phase

out MTBE by 2004. But the $64,000 question is: What can the

Northeast put in gasoline to replace MTBE? Ethanol is not economically feasible. What is?

And if you are faced with the choice of knocking out MTBE and

putting nothing in its place or keeping it, what do you do? Not easy

questions that we are all grappling with.

Mr. GREENBAUM. I entirely understand that. And the blue ribbon

panel saw that in New York, in a number of States. And California

is also wrestling with that, as well. I think that there are—we

spent a fair amount of time a few minutes ago talking about one

solution to that.

And that is, if one could remove the oxygenate mandate, keep the

standards, the specifications, for the clean fuels, the performance

standards, that would not only allow places like New York to continue to have the clean fuels and avoid the MTBE, but it would,

on that map, for example, allow Maine to come back into the RFG

program and not require a separate little fuel in Maine and another one in some of these other areas. So it would have that dual

advantage.

I think short of that, the other route that is available——

Senator SCHUMER. What is the major problem with doing that?

Mr. GREENBAUM. Well, I think—it would appear to all of us that

the major problem with doing that is that, thus far, Congress,

which would need to remove the oxygenate mandate, has not done

it, largely because the ethanol industry would be concerned that it

would somehow lose market or would—it would prefer to have

more sale.

Senator SCHUMER. Even if we did it—now, I do not know. Maybe

this is not possible. But what if we did it just in areas where ethanol, you know, in the Northeast, where ethanol is not around. So

they would not have a disadvantage, they would just forego a potential advantage, which is not going to happen.

Mr. GREENBAUM. Well, the second alternative, which I think Mr.

Daigle also mentioned, is the one that California is pursuing, which

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is to seek a waiver from the EPA of the oxygenate mandate in its

area, because of the need to deal with this problem.

And that is—as long as that is done consistently in whatever

area does it—I mean, I would guess that my colleagues on the

panel would be concerned if only New York got a waiver, and Connecticut and New Jersey did not get a waiver, because then they

would have yet another sort of funny color on that map.

Senator SCHUMER. Right.

Mr. GREENBAUM. But that is the other mechanism. I know the

regional—for example, in your region, that the Northeast States for

coordinated air use management is attempting to come up with

that kind of proposal as a fallback, because I think everybody understands that if we are going to get MTBE out of the fuel supply,

there has to be a way to come up with a reasonable, consistent,

uniform fuel supply to replace it.

Senator SCHUMER. If we did your preferred choice, would it make

either the supply less or the cost greater?

Mr. GREENBAUM. Well, the others on the panel could speak to it,

but I think our experience was that as long as you give time for

people to make the adjustments, and particularly in that case, it

would certainly not increase cost. And it might have the potential,

because it would not require the additive, to decrease it.

Senator SCHUMER. Does everyone agree with that? Mr. Daigle?

Mr. DAIGLE. Yes, if I may comment. I think if the oxygen mandate is removed, quality specs stay the same as they are now, there

will be incentives in certain areas of the country to continue to use

ethanol and possibly increase ethanol use. The key is going to be

the distance from the supply to the needed source.

So I think removing the oxygen mandate will not necessarily reduce ethanol use, could potentially increase ethanol use. And it will

unshackle the rest of the industry to use its capability and its

know-how to blend fuels in an optimum manner. To the extent you

remove those arbitrary restrictions, directly that reduces the cost,

directly it increases the supply.

So if you do not tell the industry what spec to make, but do not

tell the industry the recipe, allow the industry to use its know-how

to come up with the optimum recipe and keep the cost down——

Senator SCHUMER. Would the ethanol industry agree with your

analysis?

[Laughter.]

Mr. DAIGLE. I do not know what the ethanol industry would

agree to. Up to now, they seem to have seen it a different way, Senator.

Senator SCHUMER. All right. Does anyone else have anything to

say about that question that I asked, in terms of whether this

would increase cost, decrease supply?

Mr. MOYER. Nothing really. But——

Senator SCHUMER. Go ahead.

Mr. MOYER. I guess I would—no one here on this panel, I do not

think, would have the right to speak for the ethanol industry. But

I can speak for our members in California that will continue to—

that would use some ethanol, even if there were no such mandate.

And in fact, I believe that that flexibility—performance-based specs

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is clearly the way to go. Why should government demonstrate how

to do the fuel?

Senator SCHUMER. Yes, sir.

Mr. ROBINSON. Senator, in California we will have MTBE—the

ban will go into effect in less than 2 years. At that point, we will

effectively have a mandate for ethanol, effectively a monopoly. It

will not be a $64,000 question.

Mr. MOYER. Agree.

Senator SCHUMER. You agree with that. Okay.

My next—just another question. We talked a little bit about

the—well, we talked about gasoline inventories being lower than

they were a year ago. And it was reported in yesterday’s New York

Times that some refiners have been slow to convert from a focus

on heating oil production to gasoline production in order to maximum profits created by rising prices.

Do you agree with this analysis? And what is the best way to

make refineries more sensitive to decreasing supply conditions that

might get dangerous? Mr. Heminger?

Mr. HEMINGER. Yes. If you look back at the year 2000, as we

were coming off of the summer problems of lower gasoline inventories, the industry was called upon for excess heating oil going

into the winter because of the serious concern of the Northeast, the

lack of heating oil availability in the Upper Midwest.

The industry responded and made large amounts of heating oil

throughout the winter and, in fact, early into February and March.

When you are running at a full slate, or as much as you can, of

heating oil and then you turn to a full slate of gasoline, you are

going to have an imbalance in the system. What we have seen,

then, is that due to last summer’s and winter’s requirements of the

industry to make the given products, is that maintenance and large

repair orders—we call them turnarounds—within the refineries

were delayed in order to be able to make the fuels that were required.

Here in the January/February time frame, it appears that about

three times more plants were down for heavy maintenance and

turnaround because they delayed from last year. We are seeing

those plants come on—and in fact, the run time capacity that the

industry forecasts has come back to where we are running again

today at full capacity. But we did have in the first part of the year,

plants just had to take the turnarounds to be prepared to make

gasoline for the coming——

Senator SCHUMER. You think they all did it as quickly as they

possibly could.

Mr. HEMINGER. Yes, Senator.

Senator SCHUMER. There was not a view of, well, let us wait a

little bit and the price will get higher and all of that.

Mr. HEMINGER. No. In fact, if you go back and look at the January/February time frame, generally when you are starting to turn

to gasolines, we call those the collar months in the business, collar

meaning outside of the main transportation months. The refiners

had every incentive to make every gallon of gasoline they could at

that time.

Senator SCHUMER. Everyone agree with that?

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Mr. DAIGLE. Very much so, Senator. I guess the other point I

would make is, number one, our customers are every bit as important to us as your constituents are to you. Refining is a very capital-intensive industry. About the worst thing a refiner can do from

a profitability standpoint is hold his equipment off the line or run

his equipment spare.

So I think you will see refineries typically motivated to run all

out and make the product that is in demand at the time. That is

the way you get the maximum utilization of your capital, and that

is the way the industry always operates.

Senator SCHUMER. All right. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Schumer. I know

that we all share in the responsibility to address this with action,

as opposed to extended words. They are awfully cheap around here.

And we have heard some witnesses say that we are on the verge

of a crisis. I would differ with that. I think the crisis is here.

And, you know, we can talk a lot about what we can do before

the crisis occurs. But if you believe the crisis is here, you are already too late. And with what Senator Boxer showed us yesterday

relative to gasoline prices in San Francisco at $2.35 a gallon—this

was a poster that she had, so it was obviously accurate—suggests

that reality is here.

I am going to look forward to receiving collectively from your

group your specific recommendations relative to our ability to

achieve the objective, which is obviously cleaner air as a consequence of your specific recommendations on oxygenates and additives and what the industry can do. But I think it points out a terrible inconsistency when government committees set fuel standards

and do not really understand the implications.

And here we have clear evidence of what has been the result.

And while we can blame EPA, EPA is only enforcing the law. So

I think that if anything has come out of this hearing, it has been

that specific realization.

And I want to thank you particularly, Mr. Greenbaum, for your

willingness to come before this committee with a specific recommendation, based on your blue ribbon committee that has evaluated this for an extended period of time.

One last question, gentlemen. I am a businessman, and I want

to make some money. And I look at the refining industry and say,

gee, there has not been a new refinery built in 25 years. Now you

are small—Mr. Craig Moyer, you are familiar with the difficulties

of the small refiner. Mr. Daigle, representing Exxon, you are—obviously, capital is not necessarily a problem for Exxon, if Exxon

wants to build a new refinery. Why do you not build a new refinery?

Mr. DAIGLE. Several reasons, Senator. As I mentioned earlier——

The CHAIRMAN. Well, just give me a couple of good ones.

[Laughter.]

Mr. DAIGLE. Okay. Two real good ones is permitting and siting.

The CHAIRMAN. Okay. Permitting. The Nation obviously needs

more refining capacity, as evidenced by previous administration’s

SPR, when they went out and took 30 million barrels and said, let

us refine it so we can increase supply of heating oil. And then we

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found out that the refiners did not have the capacity. And we simply replaced what we were importing.

Mr. DAIGLE. Senator, if I could get back, permitting and siting

is one problem. Another problem—— The CHAIRMAN. Okay. But tell us permitting. Okay. Why can you

not get a permit? The need is there.

Mr. DAIGLE. The ability to be able to get the permit from the Environmental Protection Agency—— The CHAIRMAN. What do they require you to do that is unreasonable or uneconomic?

Mr. DAIGLE. You need to link permitting and siting along with

the overall basic economics of the refining industry. In the United

States over the last 10 years, the U.S. industry has earned around

5 percent return on capital employed.

The CHAIRMAN. Five percent?

Mr. DAIGLE. About 5 percent return on capital employed. So I

think the way to go in expanding refining capacity is not necessarily grassroots refining. The industry over the last 10 years has

basically increased capacity by expanding at existing sites. Efficiency improvements, incremental capacity improvements, there is

still the potential to do a lot of that.

Getting back to my testimony, though, a very real impediment to

that is the current initiative by the EPA on new source review enforcement, where they are going in and retroactively reinterpreting

a bunch of regulations, putting a new spin on it, looking at what

the industry has done over the past 20 years, and now, with the

new interpretations, concluding that those refineries or those expansions were not permitted correctly and threatening large penalties and fines and very much undermining the industry’s capability to continue to have this ongoing capacity expansion at existing

locations.

So I think that is a very significant problem that needs to be addressed.

The CHAIRMAN. So, sir, what you are telling me is there is simply

no economic incentive for investment to go into a refinery with the

requirements currently for siting, as well as EPA requirements.

Mr. DAIGLE. Grassroots refineries definitely are not attractive in

the United States at this time frame. However, there is the potential to continue to expand, as the industry has been expanding. The

impediment now is the new initiative by the EPA. And unless that

is addressed, as I recommended in my testimony, I think that will

seriously undermine the industry’s ability to continue to bring on

stream that incremental capacity to allow the capacity to meet the

demand.

The CHAIRMAN. So we are right back with supply and demand.

And as a consequence, the demand is going to be there, but the

supply is going to be tight, simply because you can do better with

a passbook savings account than invest in a refinery. You can get

5 percent almost on a CD, at least.

Anyway, Mr. Heminger?

Mr. HEMINGER. We recognize the same permit problems that Mr.

Daigle is talking about. And it even goes into a number of the pipeline of industries, in being able to get permits to lay new pipelines,

to convert pipelines. It is very time consuming, very long lead

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times. And many times, you just walk away from the project because there are roadblocks that stop you from getting it accomplished.

Now, you know, Congress has a way about kicking big oil. And

I guess there is some difference of opinion on where they kick

them. But in any event, the reality suggests that you are not making any money in the refining business, you are making a little better than a return on investment.

On the other hand, when oil was selling for $10 a barrel, a lot

of production was below your basic costs. But you had to produce.

So theoretically, your profits were less.

Recent reports from several of the major oil companies indicate

near record profits as the price of oil has risen dramatically. Some

of that is supply. Obviously, we are dependent 56 percent on imports. So we have seen OPEC explain an extraordinary discipline

on supply. And when the supply is tight, the price goes up.

But in this current market with a tight supply, where, Mr.

Daigle, are the major profits coming from? They are not coming

from the refining. Yet, you know, the American public is confronted

with refined product, and they pay an increasing price for refined

product. So if you are not making it in the refineries, where are

you making it?

Mr. DAIGLE. Well, Senator, from an Exxon Corporation standpoint, a very large portion of Exxon Corporation’s profits, as reported in our earnings statements, comes from overseas operations.

A very large portion of that—— The CHAIRMAN. So that is the efficiencies you get from having oil

overseas and producing it and transferring it over to the United

States and refining it. So it is really on the fields that you have

found, the development that you have made.

Mr. DAIGLE. Yes. Earnings and returns typically are very much

higher in the up-frame portion of the business. That is not to say

that we are not in the down-frame portion of the business long

range. As I mentioned in my testimony, returns for the industry

have been in the 5-percent league. But if you look at the last decades, you will see that the refining industry has incrementally

brought on capacity needed to meet demand.

Demand has increased over the last 20 years. Imports have not

increased. So demand has been met by refinery capacity. The industry has been doing that, even at the low returns. The industry

will continue to meet its customers’ needs, if impediments that are

being put in place are removed and the industry is allowed to continue to operate.

I keep getting back to this new source review. That is very significant. And again in my written testimony, I have specific recommendations for the committee to consider there. They are retroactively reinterpreting regulations, applying those to the industry,

causing very long delays in permits.

And they have the potential to do that even more in the future,

and also causing significant increases in investments to bring on

capacity and trying to require the industry to reduce emissions by

having to install equipment that is not required by the regulations.

And that is going to be a big impediment on the industry’s ability

to continue to bring on the——

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The CHAIRMAN. Many of my colleagues are not here, but several

of them, I think, have some misconception on justifiable return on

investment that efficient companies that apply Americans deploy in

their operations. I think your explanation that if you are lucky

enough to own an oil field over in Saudi Arabia and you are producing and selling at $10 a barrel and then the price goes up to

$28 a barrel, you are going to start making some money.

Are you not entitled to that? Certainly you are.

Mr. DAIGLE. Certainly.

The CHAIRMAN. Who sets the price of oil? It is not set by an

Exxon or a BP. It is set by world market. And that world market

is not controlled by the United States. It is controlled by Saudi

Arabia and several of the OPEC nations that have put together

something that we could not do in the United States, because antitrust laws prohibit it.

They put together a cartel. So the producing nations have got us.

As long as they hold their discipline and hold the supply, they are

going to dictate the price. Is that not generally correct?

Mr. DAIGLE. I think that is generally correct, Senator.

The CHAIRMAN. And we are exposed to that. So, you know, this

business of kicking big oil for making a return or having higher

profits for a period of time is directly related to the reality that

they made investments on oil production.

And somebody else controls the supply. And the price is relative,

obviously, to the demand and the discipline of who—I mean, it is

like the old golden rule. What was it? He who has the gold rules,

as far as oil is concerned, it is OPEC.

So I hope some of my colleagues can understand that. And some

of the press people have a little problem with that as well.

But in any event, I am going to give you one more opportunity

to conclude. If you do not have anything to say, that is fine. I do

not either. But I want to thank you for your contribution today.

And I do look forward to the coordinated effort collectively through

Mr. Daigle. And Mr. Moyer, you are going to cover what the small

refiners are going to have to do to stay alive.

Mr. DAIGLE. Senator, the only comment I would add to the comment that you just made is the situation you described is real. And

again, it clearly spells out the need for more access on the part of

the industry to areas that have the potential to allow more production in the United States.

If there were more access, I think there are funds that the industry would put into exploring and developing. And I think the industry has clearly demonstrated that it has the know-how and the

technology to do this in an environmentally sound manner and balance energy needs for the Nation versus environmental considerations.

So access is a very clear need, if we are going to really reduce

or reduce the increase in dependence on foreign oil for this nation.

The CHAIRMAN. Yes. I cannot help but refer to the Wall Street

Journal today, April 26. I would encourage all participants to—if

you are too tight to buy it, I will give you a copy. But in any event,

they make a suggestion that the energy task force is reflecting on

what the priorities and objectives are. And they indicate in the article that the media debate has focused on whether the task force

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will suggest opening up that sliver of ANWR and reviving the nuclear power industry.

The Wall Street Journal happens to suggest both. And then they

go on to hope that the green lobby will blow a gasket. And then

we hope the liberal Congress and the liberal Democrats go berserk.

But they say they are getting ahead of themselves. So if you want

the rest of the story, go buy a paper.

Mr. HEMINGER. Yes, Mr. Chairman, just one last comment. We

spoke today about oxygenates and the delicate balance of supply

and demand on the downstream. And as we see refineries running

at full capacity, that is today. In 4 years, I guess it is 5 years, we

are required to meet low sulfur diesel and low sulfur gasoline

specs. We did not discuss those issues today.

I just want to provide additional caution that what we are talking about today will help us in the near term. We need to look way

beyond at those requirements coming down at us in 5 or 6 years,

the hundreds of millions of dollars of investment that we are going

to have to put in to meet these low sulfur specs and, again, the

delicate balance.

If small refineries cannot make that investment, they are going

to close. And it is going to continue to multiply and accelerate the

problems that we have in this industry.

And lastly, the waterway systems are very important infrastructure transportation needs to us as well. And again, the budget this

year, we have noticed that 8 out of 20 locks within the Midwest require repair. That has been stricken from the budget. $3 billion per

year of energy moves across the Ohio region and the upper Mississippi waterways. Again, here we have taken funding away to be

able to support an infrastructure system that is very, very important to the livelihood of the entire Midwest.

Thank you.

Mr. ROBINSON. Mr. Chairman, I am a Californian. What is going

on in California is replicating itself across the Nation. Crude oil is

not the problem in California. Crude oil is important. I am not trying to minimize that. But what is going on in California and across

the Nation is we have a very severely stressed refining and distribution system. And as long as you have a stressed system, you

are going to have volatility.

It is incredibly important that we make it possible for refineries

to make the upgrades necessary to reduce that stress. And certainly two really key areas to help that distribution system is moving away from mandates, moving strictly to performance standards,

and also a more fungible type of a standard.

The CHAIRMAN. Thank you.

Mr. Greenbaum.

Mr. GREENBAUM. Well, Mr. Chairman, thank you very much for

having this hearing and giving me the opportunity to bring forward

the blue ribbon panel comments. I might say that when that panel

issued its report, we had a rare occurrence in Washington.

We actually agree from a very wide range of interests, including

both the oil industry and the environmental community, as well as

State regulators and a number of experts on the kinds of things we

have talked about today.

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And I look forward to working with you and the committee staff

as you move forward to see if we can get some of the recommendations of that broad group implemented.

The CHAIRMAN. We look forward to that.

Mr. Daigle.

Mr. DAIGLE. Thank you, Mr. Chairman. I would only conclude by

saying that we certainly look forward to working with this committee and with the administration to develop a cohesive energy policy

based on free markets and open competition.

The CHAIRMAN. Thank you. Well, clearly, Senator Bingaman and

I feel an obligation to address the crisis with what appropriate action should be taken by the Congress.

Mr. Moyer.

Mr. MOYER. Thank you. I really just want to thank you and this

committee for your leadership in addressing the national energy

policy. It is clear it is time, and I do appreciate that you and Senator Bingaman are working very closely together. And I cannot tell

you, both as a citizen and as a member of the small refinery industry, I really want to thank you for your leadership in that regard.

The CHAIRMAN. Thank you, gentlemen. We conclude the hearing

and wish you all a good day. And when might I get this material?

Mr. MOYER. Soon, within 30 days.

The CHAIRMAN. No, no. I have to have it within 10 days.

Mr. MOYER. You will have it.

The CHAIRMAN. Thank you.

[Whereupon, at 11:36 a.m., the hearing was recessed, to be reconvened on May 15, 2001.]

[The following additional comments of Mr. Daigle follow:]

EXXONMOBIL REFINING & SUPPLY CO.,

Fairfax, VA, May 8, 2001.

Hon. FRANK MURKOWSKI,

Chairman, Energy and Natural Resources Committee, U.S. Senate, Hart Senate Office Building, Washington, DC.

DEAR MR. CHAIRMAN: Thank you very much for the opportunity to testify before

the Senate Energy and Natural Resources Committee on April 26, 2001.

Per my commitment to respond to your request for legislative language to repeal

the federal oxygenate mandate, attached is an industry letter which provides such

language.

I’d be happy to answer any questions you may have regarding the attached. Amy

Hammer in our Washington, D.C., office also is available to answer questions. She

can be reached at 202-862-0216. Again, thank you for the opportunity to address

your committee.

Sincerely,

D.H. DAIGLE,

Director, Americas Region.

[Attachment]

May 7, 2001.

Hon. FRANK MURKOWSKI,

Hart Senate Office Building, Washington, DC.

DEAR MR. CHAIRMAN: At the April 26, 2001 hearing on national energy policy, fuel

specifications and infrastructure constraints, you asked that all the witnesses provide additional information on the oxygen requirement for reformulated gasoline

(RFG). In particular, you asked whether we agree that removal of the oxygen requirement would enhance refiners’ supply flexibility and, if so, whether we could

provide legislative language to accomplish that goal.

As you noted during the hearing, refiners’ flexibility is enhanced when they are

allowed to meet emission reduction goals in the form of performance standards rather than product specifications. When the Clean Air Act Amendments of 1990 were

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enacted, none of us recommended that Congress attempt to prescribe a ‘‘recipe’’ for

gasoline in the statute.

Perhaps Daniel Greenbaum’s testimony summarized todays situation best by indicating:

‘‘We have two paths we can follow for clean fuels: to continue clean-burning

fuels with legislatively-mandated fuel additive requirements, and risk potential

market dislocations and increases in price; or to keep the strong clean air performance requirements for these fuels, but to free the market to make them in

the most cost-effective way possible, with a minimum of specific fuel additive

requirements.’’

The most straightforward approach to removing any constraints associated with

the oxygen requirement in RFG is to simply delete those sections of the Act that

impose the requirement. The language in option 1 in the attachment to this letter

does just that.

Should you want an alternative approach that could enhance state flexibility in

choosing whether to require oxygenates in RFG, you might consider the approach

outlined in option 2 of the attachment. It provides states with the right to waive

the oxygen requirement. Of course, this approach would need approval and coordination at the federal level to ensure that such waivers do not impose additional constraints on the fuel distribution system.

We would be happy to answer any questions you may have or provide further information. Please do not hesitate to contact us.

Sincerely,

AMERICAN PETROLEUM INSTITUTE

NATIONAL ASSOCIATION OF CONVENIENCE STORES

SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA

WESTERN INDEPENDENT REFINERS ASSOCIATION

Option 1. Elimination of Reformulated Gasoline Oxygen Mandate

Section 211(k) of the Clean Air Act (42 U.S.C. 7545(k)) is amended—

(1) by striking 211(k)(2)(B) and 211(k)(3)(A)(v);

(2) by renumbering 211(k)(2)(C) and (D);

(3) by striking 211(k)(7)(A)(i) and 211(k)(7)(C)(ii);

(4) by renumbering 211(k)(7)(A)(ii) and (iii); and

(5) by renumbering 211(k)(7)(C)(iii).

Option 2. Waiver of Reformulated Gasoline Oxygen Mandate

Section 211(k) of the Clean Air Act (42 U.S.C. 7545(k)) is amended by adding the

following new paragraph at the end:

(11) WAIVER OF OXYGEN CONTENT REQUIREMENT—

(A) IN GENERAL—Upon petition to the Administrator by the Governor

of a State, the Administrator shall waive any oxygen content requirement

in effect under this subsection for that State.

(B) ACTION BY ENVIRONMENTAL PROTECTION AGENCY—Not later

than 270 days after the date of receipt of a petition submitted under subparagraph (A), the Administrator shall grant the waiver of the oxygen content requirement requested in the petition. If, by the date that is 270 days

after the date of receipt of such a petition, the Administrator has not granted the petition, the petition shall be deemed to be granted. The waiver

under this subparagraph shall take effect on the date 90 days after the petition is granted or deemed granted unless the Administrator establishes an

earlier effective date.

(C) SPECIAL RULE—The oxygen content requirement in effect under

this subsection shall not apply to a State referred to in subsection (c)(4)(B).

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