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[Senate Hearing 107-90]
[From the U.S. Government Publishing Office]

                                                 S. Hrg. 107-90 (Pt. 1)

                           U.S. ENERGY TRENDS

=======================================================================

                                HEARINGS

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

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

                               __________

                             MARCH 21, 2001
                             APRIL 3, 2001
                             APRIL 26, 2001

                               __________

                                 PART 1

                       Printed for the use of the
               Committee on Energy and Natural Resources

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
74-059 DTP                  WASHINGTON : 2001
_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  FRANK H. MURKOWSKI, Alaska, Chairman
PETE V. DOMENICI, New Mexico         JEFF BINGAMAN, New Mexico
DON NICKLES, Oklahoma                DANIEL K. AKAKA, Hawaii
LARRY E. CRAIG, Idaho                BYRON L. DORGAN, North Dakota
BEN NIGHTHORSE CAMPBELL, Colorado    BOB GRAHAM, Florida
CRAIG THOMAS, Wyoming                RON WYDEN, Oregon
RICHARD C. SHELBY, Alabama           TIM JOHNSON, South Dakota
CONRAD BURNS, Montana                MARY L. LANDRIEU, Louisiana
JON KYL, Arizona                     EVAN BAYH, Indiana
CHUCK HAGEL, Nebraska                DIANNE FEINSTEIN, California
GORDON SMITH, Oregon                 CHARLES E. SCHUMER, New York
                                     MARIA CANTWELL, Washington

                    Brian P. Malnak, Staff Director
                      David G. Dye, Chief Counsel
                 James P. Beirne, Deputy Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                    Bryan Hannigan, Staff Scientist
                  Dan Kish, Professional Staff Member
             Howard Useem, Senior Professional Staff Member
                     Shirley Neff, Staff Economist

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearings:
    March 21, 2001...............................................     1
    April 3, 2001................................................    69
    April 26, 2001...............................................   133

                               STATEMENTS
                             March 21, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     4
Burns, Hon. Conrad, U.S. Senator from Montana....................     4
Caruso, Guy F., Executive Director, Strategic Energy Initiative, 
  Center for Strategic and International Studies.................    16
Craig, Hon. Larry E., U.S. Senator from Idaho....................     6
Hoover, Frederick H., Jr., Director, Maryland Energy 
  Administration, on behalf of National Association of State 
  Energy Officials...............................................    40
Hutzler, Mary, Director, Office of Integrated Analysis and 
  Forecasting, Energy Information Administration.................     9
Kyl, Hon. Jon, U.S. Senator from Arizona.........................     7
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............     6
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............     1
Nugent, William M., Commissioner, Maine Public Utilities 
  Commission, on behalf of National Association of Regulatory 
  Utility Commissioners..........................................    32
Placke, James A., Director, Middle East Research, on behalf of 
  Cambridge Energy Research Associates...........................    23
Thomas, Hon. Craig, U.S. Senator from Wyoming....................     7

                             April 3, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................    73
Burns, Hon. Conrad, U.S. Senator from Montana....................    74
Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado........    71
Cantwell Hon. Maria, U.S. Senator from Washington................    76
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............    72
Hayes, David J., Former Deputy Secretary of the Interior.........    89
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............    76
Leahy, Dr. P. Patrick, Associate Director for Geology, U.S. 
  Geological Survey, Department of the Interior..................    79
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............    69
Rubin, Mark, General Manager, Upstream, American Petroleum 
  Institute......................................................    96
Simmons, Matthew R., President, Simmons & Company International..    84
Stanley, Neal A., Vice President, Western Region, Forest Oil 
  Corporation, on behalf of Independent Petroleum Association of 
  Mountain States................................................   105
Thomas, Hon. Craig, U.S. Senator from Wyoming....................    75

                             April 26, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico................   135
Craig, Hon. Larry E., U.S. Senator from Idaho....................   139
Daigle, D.H., Director of Americas Refining, ExxonMobile Refining 
  and Supply Company
    Statement of.................................................   155
    Letter from..................................................   183
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............   137
Greenbaum, Daniel S., President, Health Effects Institute, 
  Cambridge, MA..................................................   153
Heminger, Gary, Executive Vice President, Supply, Transportation 
  and Marketing, Marathon Ashland Petroleum......................   142
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............   140
Moyer, Craig, Executive Director, Western Independent Refiners 
  Association....................................................   160
Murkowski, Hon. Frank H., U.S. Senator from Alaska...............   133
Robinson, Thomas L., Chief Executive Officer, Robinson Oil 
  Corporation....................................................   148
Schumer, Hon. Charles E., U.S. Senator from New York.............   140
Thomas, Hon. Craig, U.S. Senator from Wyoming....................   137

 
                           U.S. ENERGY TRENDS

                              ----------                              

                       WEDNESDAY, MARCH 21, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:36 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Frank 
Murkowski, chairman, presiding.

         OPENING STATEMENT OF HON. FRANK H. MURKOWSKI, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. Good morning, ladies and gentlemen. We will 
call the hearing to order.
    The Committee on Energy and Natural Resources is here to 
review the current U.S. energy trends and recent changes in 
energy markets. And we have a very distinguished group of 
witnesses today, who I understand are willing to basically put 
their reputation behind their recommendations. So we ought to 
have something substantive to reflect on the reality that we do 
have an energy crisis in this country.
    We have one panel of witnesses. We would ask you to try and 
keep your presentation to approximately 7 minutes. And we will 
refrain from asking questions--it will be difficult, but we 
will try anyway--until all the panel has concluded its 
statement.
    We have Ms. Mary Hutzler, Director of the Office of 
Integrated Analysis and Forecasting, Energy Information 
Administration, Washington. Mr. Guy Caruso is the executive 
director for the Strategic Energy Initiative, the Center for 
Strategic International Studies, a group that just completed, I 
believe, a three-volume study that I would recommend reading 
not only for members of the committee, but those in the 
audience, with regard to the future forecasts and our future 
areas of dependence, particularly in the unstable areas of the 
world. Mr. James Placke is the director of the Middle East 
Research, Washington, D.C., on behalf of the Cambridge Energy 
Research Associates.
    And we have Mr. William Nugent. Mr. Nugent is the 
commissioner of the Maine Public Utilities Commission, Augusta, 
Maine, on behalf of the National Association of Regulatory 
Utility Commissioners. Mr. Frederick Hoover, a director of the 
Maryland Energy Administration, Annapolis, Maryland, on behalf 
of the National Association of State Energy Officials.
    I hope, Mr. Placke, you could tell us a little bit about 
sanctions, too, in your presentation today, because we have 
that as an issue before the committee relative to U.S. 
interests overseas and the existing sanctions and those 
companies that are looking for relief and those that are also 
concerned about the human rights and proliferation issues.
    As a consequence of the staffs of the professional minority 
and majority working together, I think we have something from 
the standpoint of meaningful testimony today on the current 
state of our energy markets, international and national and 
regional, and what current trends mean for the economic growth 
and ultimately the American consumer, which, I might add, 
includes the American taxpayer.
    At least that is the way most of us view it, although there 
are some exceptions, perhaps, in California, where they seem to 
distinguish between the taxpayer and the consumer. But I do not 
want to get too far down that rabbit trail.
    This is the first in a series of hearings that are intended 
to explore the need for a comprehensive national energy policy. 
And we have bills that the minority is proceeding with. We have 
a bill, and we intend to pursue the particulars of those bills 
later on before this committee. So we will have plenty to do.
    The panel of witnesses will explore energy trends and what 
we can expect for the future, in particular what the future 
holds if we do nothing. So do not eliminate that as a 
possibility. By the end of this hearing I think it will be 
quite clear that we need to act.
    But before we hear from witnesses, one of the opportunities 
you have as chairman is to make your views known. And I think 
it is fair to say that sometime ago we kind of lost direction 
in regard to our obligation to look to the future requirements 
for energy in this nation. And I think it is time we regain 
control of that.
    We risk threatening our economic prosperity, our national 
security, and our very way of life. Now that was pretty much a 
quote from the Secretary of Energy, but I think it is rather 
thought-provoking to again consider the merits of our economic 
prosperity at stake, our national security, and our way of 
life.
    We have kind of lost control, as a consequence, of a number 
of things. Supply and demand, the demand is increasing, the 
supply is decreasing. Infrastructure, we have suddenly found 
ourselves victimized by our own shortsightedness. We do not 
have adequate transmission facilities, pipelines.
    We suddenly find ourselves with reduced refining capacity, 
insufficient to meet the growing needs. So we seem to have 
compounded, if you will, from just a shortage to finding we do 
not have adequate transmission, we do not have adequate 
refineries. As a result, at no time in our history have we 
relied upon others for more of our energy supplies, namely 
foreign countries.
    Twenty years ago, the United States imported just over one-
third of our oil. Today, that has increased to about 57 
percent. I think the predictions in the CSIS report indicate 
that trend is going to continue. By the year 2020, nearly half 
of the estimated global oil demand will be supplied by 
countries with high risks of instability, countries that are 
known to foster terrorism. We recognize the increased reliance 
of foreign oil and its effect on our foreign policy.
    We fought a war over oil in 1991. We need only to look to 
California for an example what can happen when we become too 
reliant on outside sources of energy. We have seen electricity 
being imported into that State from outside, and the price 
spirals that result. The problems in California, of course, are 
spilling over to the other States. Yet, we still do not seem to 
get the awareness of the American people to the extent that we 
ought to.
    It is understandable in California, because a consumer 
still has not felt the effect of the increased price. It is not 
related in the structure of what is loosely called 
deregulation, when you have a cap on retail. And the utilities 
have basically come to the threshold of bankruptcy, and the 
State is guaranteeing indebtedness. I do not know what is going 
to happen to the teachers' or the employees' retirement program 
that have invested in those utilities. It goes on and on and 
gets worse and worse.
    What we need to have is a clear-cut recommendation of how 
to systematically get out of this mess over a period of time. 
And I do not think government is capable of coming up with 
those answers. That is why it is so important that we have 
recommendations from you folks, who are experts in this area.
    New York is facing similar problems. I guess they are going 
to have to increase their generating capacity by about 25 
percent in the next 5 years, or they are going to face 
blackouts.
    We seem to have forgotten our conventional resources, our 
oil, in the sense of just drifting along and increasing our 
dependence. Our natural gas, nine out of ten new power plants, 
I am told, will use gas. We need more gas, more pipelines for 
transportation. We seem to have lost sight of coal. We know we 
have a lot of it. We have no new coal fire plants since 1995.
    Electricity demand has grown 43 percent. We are going to 
have to have 1,300 to 1,900 new powerplants, I am told. It goes 
on and on. We have not built a single refinery in 25 years. 
Refining capacity is a regional issue. We are looking at 
increased prices of gasoline this summer, $1.50, $2, whatever. 
And the question is: What does the future hold?
    We seem to be somewhat at the whims of the weather with 
regard to our energy capability, of meeting--if we have a warm 
winter, we might slip by. If we have a hot summer, we are going 
to have problems. It is the first time, I think, that we have 
ever had the weather as a main factor in determining just where 
we will be in terms of an inadequate supply of energy. It is 
rather curious that we passed that threshold.
    As a consequence, we are seeing all kinds of things happen 
that are irregular. We are seeing aluminum plants shut down. 
Instead of producing aluminum, they are selling their 
electricity. We have seen urea facilities that ordinarily would 
make fertilizer simply selling their gas instead. They have a 
long-term contract. Things are out of kilter.
    We must use all our energy options for future needs. We 
simply cannot produce or conserve our way out of this. We have 
to work on a balance. And I think the bottom line is that we 
must act. What will happen if we do not act? What are the 
international and regional consequences?
    Senator Bingaman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Well, Mr. Chairman, thank you very much 
for having the hearing.
    This is the first of several hearings, and this one is to 
look at the big picture issues, sort of where we are headed, 
how we got to the place we are at today. Everyone seems to 
agree that we have entered a period of relatively high and 
volatile energy prices. We need to better understand how the 
changes in policy, the movement toward market-oriented 
policies, have contributed to that volatility.
    We also need to better understand how we got to the 
circumstance we are now in of shortage, at least with regard to 
some of our energy needs in certain parts of the country. I do 
not think the remedies are simple. You just indicated, and I 
totally agree with you, that we cannot just produce our way out 
of this problem. And at the same time, we cannot just conserve 
our way out of this.
    We have to have a combination. We have to do what we can 
with renewable energy but recognize that we will remain 
dependent upon energy from fossil fuels, from nuclear power, 
from hydro, for the indefinite future, and find ways to 
increase our supply from those areas.
    We also, I think, need to acknowledge and recognize that we 
cannot produce our way to independence from the world oil 
market. We spend a lot of time around here talking about energy 
independence. That might have made some sense to talk about 20, 
30, 40 years ago. Even then, it was questionable.
    But whether we import 36 percent of our oil, as we did in 
1973, 50 percent of our oil, as we did a few years ago, or it 
gets even to a higher number. The price of that oil is going to 
be set by forces outside our control.
    We need to recognize that we are part of this global 
economy. And particularly with regard to petroleum products and 
oil, we are in many ways buffeted by what goes on around the 
world. So I believe we need to focus on short-term responses to 
the immediate problems we have. But we also need to understand 
the long-term framework that will help us avoid problems in the 
future.
    We also need to understand how we can address these issues 
in an environmentally responsible way. I am persuaded that 
whatever we decide to do related to energy policy does impact 
on climate change policy, does impact on what we will do in the 
environmental arena in the future. We need to recognize that 
interaction.
    So again, I thank the witnesses for being here and thank 
you for having the hearing.
    The Chairman. Thank you very much, Senator.
    Senator Burns.

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

    Senator Burns. Thank you, Mr. Chairman. I am just going to 
have my statement put in the record.
    The Chairman. Without objection.
    Senator Burns. And if you wanted to have a hearing to 
attract a crowd, we should have been in California. You could 
probably attract a pretty good crowd out there. But, you know, 
as we look at this situation, I am interested in hearing from 
the folks we have here and their insight and some of their 
forecasts. So I am just happy to be here and looking forward to 
their testimony.
    [The prepared statement of Senator Burns follows:]
   Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
    Mr. Chairman, I want to thank you for this hearing. It is very 
important that we understand the reasons for the price spikes in all 
energy commodities in the past year. The energy crisis continues to 
dampen the economy of our nation, and we all must work tirelessly until 
we find a way to help American energy consumers through this time of 
crisis.
    First, we need to understand that the prevailing mind-set must 
change in order to solve this crisis. Don't let anyone tell you 
different, we are in the midst of the worst energy crisis since the 
1970s. I remember the long gas lines and forced reductions in heating 
energy that we faced. Also, I remember the financial hurt it placed on 
all Americans, but especially Montanans. Farmers, ranchers, over-the-
road truck drivers, manufacturing companies, loggers, and their 
families, were all hurt considerably. I do not want to see this happen 
again, but I am afraid it is too late. In Montana we have already seen 
the impacts, Columbia Falls Aluminum Company closed its doors for the 
year, Montana Resources in Butte closed its doors, and many others may 
have to do the same if price signals do not change.
    The first three things we need to start doing are the following:
    CONSERVATION, CONSERVATION, CONSERVATION. The energy trade press 
has made a lot of Republican and Democrat differences on energy related 
issues. I want to make it clear that the press has a duty, along with 
each Senator here today, to start pushing conservation. Instead of 
concentrating on our differences, let us all here today make a pact 
that we are going to do everything we can to push conservation. This is 
something we all can do that won't have a detrimental impact on our 
economy and it will help us through this very tough time.
    Next, we must take an intense look at the reasons we are in an 
energy crisis today. It is not only electricity prices that are 
skyrocketing. We are seeing hurtful gasoline prices, oil prices, 
natural gas prices, and heating oil prices as well. In fact, the price 
per barrel of oil has gone from $15.99 in 1992 to well over $30.00 this 
year. Natural gas prices have gone from $1.74 per thousand cubic feet 
at the wellhead to nearly $5.00 per thousand cubic feet today. 
Electricity prices in the Northwest have gone from roughly $20.00 per 
megawatt hour in 1992 to nearly $250.00 per megawatt hour right now. 
Gasoline prices were around 93 cents per gallon in 1992 and now sit at 
nearly $1.40 per gallon and these prices are before taxes are added. 
Prices are up across the board, and we must figure out why. I don't 
believe you have to look very far.
    I believe the policies, or lack of a clear national energy policy, 
by the previous Administration are an enormous part of the reason we 
are in this predicament today. The Northwest region of the United 
States has seen a nearly 24% increase in electricity consumption since 
1992, while only seeing an increase in generation of 4%. If you add 
California into the mix, the discrepancy grows much larger. Further, 
the Electric Power Research Institute recently found that there is 
going to be a 20-25% growth in electricity demand in the next decade, 
but only a 4% increase in power lines and electric-grid equipment. The 
statistics speak for themselves, if we do not see more generation and 
transmission come on-line, high energy prices are here to stay. We must 
lose the mentality that electricity comes from a switch.
    Common-sense must return to our regulation policies so that supply 
can meet demand. The environmental agenda of the Clinton/Gore 
Administration strengthened regulatory burdens to such a degree that 
siting new power generation and transmission is not even worth the 
effort. Simple economics tell potential investors that you just can't 
make it work. We must remove some of the regulatory burdens.
    Next, we need to be able to access some of the vast resources that 
our public lands contain. The federal government currently manages 650 
million acres of land; more than 90% of this land is west of the 
Mississippi River. In fact, 52% of the U.S. land in the west is managed 
by federal and state governments. In Montana, nearly 50% of our land is 
owned by the federal government. Folks, 95% of undiscovered oil and 40% 
of undiscovered gas is estimated to be located under these lands. Part 
of our solution to energy dependence on foreign sources must come from 
a plan that finds ways to develop our natural resources on public lands 
in an environmentally friendly manner.
    We must be able to site generation facilities in a timely manner. 
We must be able to site transmission lines in a timely manner. Finally, 
we must remove the barriers that stifle incentives for investment in 
our power markets, while at the same time providing incentives to do 
the same. We have worked ourselves out of crisis situations in the 
past, and we will do it again now, through a bipartisan effort that 
uses common sense and our shared American values.
    Mr. Chairman, I ask that my comments be place in the record.

    The Chairman. Senator Landrieu.

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

    Senator Landrieu. I am impressed with the chart that the 
staff gave out that says the U.S. total production of oil is 
down in the last 10 years by 17 percent. However, it is up 65 
percent on offshore oil and gas.
    I want to point out to the panelists, and of course the 
chairman and ranking member know, probably 85 percent of that 
production takes place off the shores of the State that I 
represent, Louisiana. There are some tremendous, positive, as 
well as negative, impacts associated with this activity.
    So, I hope that this committee will continue, as they have, 
to remain sensitive that these communities that are serving as 
a platform for this oil and gas exploration, which is necessary 
to solve the short-, medium- and long-term energy challenges 
that our Nation faces, are in need of proper compensation for 
this work that is taking place.
    The Chairman. Thank you very much, Senator Landrieu.
    Senator Craig.

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

    Senator Craig. Well, once again, Mr. Chairman, thank you 
for keeping our attention front and center on this energy 
crisis that America has stumbled into.
    I really do look at it as an opportunity for us to get 
smart again, both in the sense of affordable and 
environmentally sound energy sources. We have all of the talent 
and technology to do it. We simply have disallowed it to be 
applied or put to use over the last decade or so with the 
attitude that somehow we conserve our way out of this and that 
new technologies would take us all the way out of it. That is 
now clearly evident not to be the case.
    At the same time, to build the new and safe and smaller 
nuclear reactor makes awfully good sense to me. Finding a way 
to manage that waste stream in a productive way makes awfully 
good sense. Re-licensing hydro in a way that does not reduce 
its capacity by 20 percent and increase its cost by 30 percent 
seems to make pretty good sense to me. How about clean coal 
technology that we have denied ourselves or have not forced 
ourselves to look at? That seems to make a lot of good sense.
    What we are learning is that we do still need large sources 
of energy to apply to the economy of this country. The feds 
dropped rates again yesterday. The stock market is stumbling 
around. Economic reports are probably going to show that these 
big companies have had to downgrade their profits dramatically 
because of input costs, dramatic increases in energy costs. 
Somehow we have kind of quietly assumed the economy could just 
take care of that. Well, it is taking care of it, taking care 
of it in the form of less profits and layoffs and 
readjustments. That happens when you create spikes in inputs in 
the cost of doing business.
    So, Mr. Chairman, let us hear from this panel of experts 
and folks who watch this energy economy very, very closely, 
building a record for our Congress to look at and to react to 
as we shape new policy as critical.
    Thank you.
    The Chairman. Thank you very much, Senator Craig.
    We have been joined by Senator Thomas, the Senator from 
Wyoming, at least one of them. Oh, and there is one from 
Arizona down at the end that snuck in. Well, for heaven's 
sakes. We have them outnumbered, so go ahead, fellows.
    [Laughter.]
    Senator Landrieu. It only takes one of me sometimes, 
though.
    The Chairman. I know. I know.
    [Laughter.]

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

    Senator Thomas. Well, I, too, want to hear the testimony. 
And I know that you have covered where we are and the fact that 
we need more domestic production and so on. But we need to move 
on access. We need to move on the opportunity to be able to 
move energy through rights of ways and easements, both for 
power lines and for pipelines. We need diversity. We need to 
have conservation. And we need to move.
    I am anxious to hear from our panel. And as you know, for 
Wyoming this is a great issue we are very much interested in. 
With our gas production going up substantially, we can produce 
more mine mountain electricity. We need a way to get it where 
it needs to go to the market.
    We need access to public land so that we can do that. And 
we can take care of the land at the same time. We do not need 
to have this environment or use as being two opposite things. 
They do not need to be.
    And so I will stop there and look forward to your comments.
    The Chairman. Yes. Thank you very much.
    Senator Kyl.

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

    Senator Kyl. Thank you, Mr. Chairman. I know these 
witnesses will help us in our job of helping to provide 
information to our public, which needs to be informed about the 
costs that the over-regulated energy sector has imposed upon 
us.
    In my State of Arizona this summer, whereas we are an 
exporting State of energy and ordinarily would have no 
difficulty at all, there could be some issues of brownouts or 
blackouts, simply because the power that ordinarily would be 
acquired on the margins in the middle of the summer from the 
Northwest will probably have to go to California. And as a 
result, Arizona, which, as I said, has invested and has tried 
its best to meet its own needs, is going to suffer right along 
with the people in California.
    Until this country comes fully to appreciate the fact that 
there is no free lunch, when it comes to energy, you cannot 
just consume, you have to produce as well, we are going to 
continue to face this problem. And I think our witnesses today 
can help provide that base of information that will enable the 
public to judge what will need to be done in order to solve 
this problem.
    And I thank you, Mr. Chairman, for holding this hearing.
    The Chairman. Thank you very much, Senator Kyl.
    I would respectfully request that the panel consider three 
questions, in addition to your presentation. One is a concern 
brought up by the ranking member, and that is the global 
warming issue. And obviously, one answer to that clearly from 
the standpoint of generating more power is the role of nuclear 
energy. We do not seem to be able to get over the threshold of 
what to do with the waste.
    You know, there seems to be more of an awareness in the 
public, at least to some extent, that, yes, maybe we should 
look at nuclear again. But the question is, how do you unwind 
it? Nobody in their right mind would finance a nuclear plant 
today. The permitting time, the exposures associated with 
overruns, nobody would give you a firm contract to build one. 
But nevertheless, we need to have some input on that issue.
    The other is the merits of trying to reduce our dependence 
on imported oil. There is no question that we cannot drill our 
way out, but the merits of reducing our dependence from a 
positive point of view of identifying areas in the domestic 
front, the United States, where we can develop more oil and 
reduce that dependence, the merits of that, how important it 
is, or is it okay to just drift on and increase our dependence 
on imports from 56, 59, 60, 65. The Department of Energy says 
we are going to be at 65 percent by 2010.
    The last one is, for those of us who feel that we are kind 
of identified as the answer, whether it be the State of 
Louisiana, the State of Mississippi, Alabama. But, you know, we 
talk about energy, and we suddenly find that the entire east 
coast from Maine to Florida is off limits. It has moratoriums 
on it, different types, different days that they come about.
    The same is true on the west coast of the United States, 
from the Canadian border north of Washington State through 
California, moratoriums. Where is this energy going to come 
from, if we have these moratoriums? I wonder if my friend for 
Louisiana and a couple of others would consider the merits of a 
bill that would open up everything. Everything is closed. Open 
it up. And then re-prioritize. Because, you know, can we 
address relief if we on one hand say we are committed to 
producing more, and then suddenly find that we have all these 
areas closed?
    So if you can wander into those areas, that would be 
enlightening. Who wants to go first? Anybody catching an 
airplane today?
    I guess we will let Mary--are you----
    Mr. Nugent. At 2:20.
    The Chairman. Oh, well. You will make it.
    Mr. Nugent. I hope we'll be through.
    The Chairman. You only have 7 minutes. So----
    [Laughter.]
    The Chairman. Mary, go ahead.

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

    Ms. Hutzler. Thank you, Mr. Chairman and members of the 
committee. I appreciate the opportunity to appear before you 
today to discuss current energy trends in the United States.
    The Energy Information Administration is an autonomous, 
statistical, and analytical agency within the Department of 
Energy. We are charged with providing objective, timely, and 
relevant data analysis and projections for the use of the 
Department of Energy, other government agencies, the U.S. 
Congress and the public.
    The projections in this testimony are from the Short-term 
Energy Outlook released this month and from the Annual Energy 
Outlook 2001 published in December. The Short-term Energy 
Outlook provides quarterly projections through 2002 on a 
national basis. And the Annual Energy Outlook provides annual 
projections through 2020 on a national and regional basis. Our 
long-term projections are based on technological and 
demographic trends, current laws and regulations, and consumer 
behavior.
    [Chart.]
    Ms. Hutzler. Energy markets in the United States today are 
characterized by high prices for both petroleum and natural 
gas, due in large part to tight supplies of both fuels. 
Reductions in oil production by OPEC and several non-OPEC 
petroleum exporting nations have contributed to the low stocks 
for the industrialized nations.
    The Chairman. Well, why do you not walk us through that 
chart?
    Ms. Hutzler. The blue part of the chart shows the normal 
range of where stocks are for the industrialized nations. These 
are the OECD countries. The black shows where they were 
actually, and then the red shows where we are projecting. And 
you can see that the projection is below where the normal 
ranges are.
    The Chairman. Yes. That means what?
    Ms. Hutzler. That means that markets are very tight. 
Therefore, they are going to be very volatile in that you can 
have high prices as a result of that volatility.
    Senator Thomas. That is not production then.
    Ms. Hutzler. No. Those are stocks.
    Senator Thomas. Stocks.
    The Chairman. Those are refined stocks.
    Ms. Hutzler. These are oil stocks.
    The Chairman. Crude oil.
    Ms. Hutzler. Yes, crude.
    The Chairman. And where are those stocks?
    Ms. Hutzler. They are in the OECD countries that we are 
talking about. And these are both crude and petroleum stocks, 
total stocks.
    The Chairman; Yes, but do they have to be pumped or are 
they in transit or are they storage or----
    Ms. Hutzler. Storage.
    The Chairman. They are in storage. So they have been pumped 
out of the oil fields.
    Ms. Hutzler. Yes. You also have copies of these charts at 
hand too, if you want to get a closer look at them.
    [Chart.]
    Ms. Hutzler. Tight natural gas supplies are also 
contributing to high electricity prices in California, along 
with high electricity demand relative to capacity, high 
generation outage rates, transmission bottlenecks, and low 
hydroelectric resources.
    At its March 17 meeting, OPEC members agreed to reduce 
production quotas an additional 1 million barrels per day 
effective April 1. This follows an earlier production quota cut 
of 1.5 million barrels per day announced in January that was 
effective February 1.
    Prior to the March 17 meeting, the average imported price 
of oil was projected to fall slightly from its 2000 value of 
$27.70 per barrel. Based on these imported crude prices, we 
projected an average price for motor gasoline for this summer 
of $1.47 per gallon.
    The Chairman. Where do you--does that include tax?
    Ms. Hutzler. Yes. It is an average including taxes.
    These new production cuts by OPEC may result in higher 
price projections, which will be incorporated in our next 
Short-term Energy Outlook to be released early next month. Warm 
spells in January and February and declining crude oil prices 
in December and January helped to ease heating oil prices, 
which have been declining from their winter peak of $1.41 per 
gallon in December. Nevertheless, heating oil prices remain 
high compared to history.
    Natural gas prices began increasing last summer primarily 
due to high demand and low levels of natural gas storage, as 
you can see in this chart.
    The Chairman. Tell us what working gas in storage is.
    Ms. Hutzler. That is gas that is in storage that has 
already been drilled and has been put in storage areas so that 
it can be gotten to very quickly. And the blue on this graph 
also shows where normal region levels were. The black is where 
we have seen it over the past period on that chart, starting in 
April of 1998. And you can see we are projecting also for it to 
be a problem in the future.
    The Chairman. So it is the same as for OECD oil stocks, 
essentially.
    Ms. Hutzler. Yes. It is a similar concept for natural gas.
    Okay. So since late June, spot prices increased more than 
$4 per thousand cubic feet. The wellhead price of natural gas 
is currently estimated to have more than doubled this heating 
season from the previous season's price. Due to projected high 
levels of demand growth for natural gas, particularly for 
electricity generation, the average wellhead price is projected 
to be about $4.70 per thousand cubic feet in 2001, compared to 
an annual average of about $3.60 per thousand cubic feet in 
2000.
    Electricity demand is expected to grow at a rate of about 
2.2 percent in 2001 and in 2002, compared to an estimated 
growth rate of 3.6 percent between 1999 and 2000. Slower growth 
is expected in part due to slower projected economic growth. 
Electricity demand for this past winter is expected to be 
higher than the previous winter, due to higher residential and 
commercial demand and the cold temperatures in November and 
December.
    Today, petroleum, natural gas and coal make up about 85 
percent of total energy consumed in the United States. And we 
project that these fuels will increase their share slightly 
over the next 20 years. Petroleum represents 40 percent of 
today's consumption and is mainly used for transportation fuels 
and in the industrial sector, for petrochemical feed stocks, 
plastics and asphalt, areas where little substitution potential 
exists.
    Coal represents about one-quarter of our consumption, and 
90 percent is used for electricity generation. We are expecting 
about a 45-percent increase in electricity generation over the 
next 20 years, as all sectors increase their demand for 
electricity. While the largest portion of the additional 
generation is expected to come from natural gas, coal is 
expected to provide 44 percent of total generation in 2020, a 
decrease from its current share of 52 percent.
    Natural gas consumption for electricity generation is 
projected to triple between now and 2020, resulting in a 62-
percent increase in its total consumption that you see on this 
chart.
    [Chart.]
    Ms. Hutzler. The next chart shows our domestic supply of 
fuels. Coal is our Nation's most abundant fossil fuel resource, 
providing 31 percent of our current domestic production. We 
expect domestic natural gas production to surpass coal by 2015, 
increasing its share of production from 23 percent today to 35 
percent in 2020. Our domestic petroleum supply is projected to 
remain roughly flat for the next 20 years, resulting from 
decreasing domestic crude production and increasing production 
from natural gas plant liquids and refinery gains. However, 
because of our increasing demand for petroleum, net imports 
will increase from its 52-percent share today to 64 percent in 
2020.
    The United States is and will remain one of the top oil 
producers in the world. We are third in the world behind Saudi 
Arabia and Russia. However, while we will be a significant oil 
producer, our consumption will be outstripping our production.
    [Chart.]
    Ms. Hutzler. My final chart highlights the regional 
projections for electricity capacity additions. Our forecast 
calls for 413 gigawatts of additional capacity needed by 2020. 
That is almost 1,400 300-megawatt units. It will be needed to 
meet our projected 1.8-percent growth rate in electricity 
demand and projected capacity retirements of about 9 percent of 
our current capacity. You can see that we are forecasting the 
need for large increases in capacity additions for the 
Southeast, Texas, California, and parts of the Midwest.
    Thank you, Mr. Chairman and members of the committee, and I 
will be happy to address the questions you have.
    [The prepared statement of Ms. Hutzler follows:]
  Prepared Statement of Mary Hutzler, Director, Office of Integrated 
      Analysis and Forecasting, Energy Information Administration
    Mr. Chairman and Members of the Committee:
    I appreciate the opportunity to appear before you today to discuss 
the near- and long-term outlook for energy markets in the United 
States.
    The Energy Information Administration (EIA) is an autonomous 
statistical and analytical agency within the Department of Energy. We 
are charged with providing objective, timely, and relevant data, 
analysis, and projections for the use of the Department of Energy, 
other government agencies, the U.S. Congress and the public. We do not 
take positions on policy issues, but we do produce data and analysis 
reports that are meant to help policy makers determine energy policy. 
Because we have an element of statutory independence with respect to 
the analyses that we publish, our views are strictly those of EIA. We 
do not speak for the Department, nor for any particular point of view 
with respect to energy policy, and our views should not be construed as 
representing those of the Department or the Administration. However, 
EIA's baseline projections on energy trends are widely used by 
government agencies, the private sector, and academia for their own 
energy analyses.
    Each month, EIA updates its Short-Term Energy Outlook, which 
contains quarterly projections through the next two calendar years, 
taking into account the latest developments in energy markets. The 
Annual Energy Outlook provides projections and analysis of domestic 
energy consumption, supply, prices, and energy-related carbon dioxide 
emissions through 2020. The projections in this testimony are from the 
Short-Term Energy Outlook March 2001 (STEO) and from the Annual Energy 
Outlook 2001 (AEO2001), published by EIA in December 2000. These 
projections are not meant to be exact predictions of the future, but 
represent a likely energy future, given technological and demographic 
trends, current laws and regulations, and consumer behavior as derived 
from known data. EIA recognizes that projections of energy markets are 
highly uncertain, subject to many random events that cannot be 
foreseen, such as weather, political disruptions, strikes, and 
technological breakthroughs. In addition to these short-term phenomena, 
long-term trends in technology development, demographics, economic 
growth, and energy resources may evolve along a different path than 
assumed in the AEO2001 reference case. Many of these uncertainties are 
explored through alternative cases in both the STEO and AEO.

                          THE OUTLOOK TO 2002
    Energy markets in the United States today are characterized by high 
prices for both petroleum and natural gas, due in large part to tight 
supplies of both fuels. Reductions in oil production by OPEC and 
several non-OPEC petroleum-exporting nations have contributed to low 
oil stocks. Tight natural gas supplies are also contributing to high 
electricity prices in California, along with high electricity demand 
relative to capacity, high generation outage rates, and low 
hydroelectric resources.
    Crude Oil. At its March 17 meeting, OPEC members agreed to reduce 
production quotas an additional 1 million barrels per day effective 
April 1, 2001. This follows an earlier production quota cut of 1.5 
million barrels per day announced in January that was effective 
February 1, 2001. OPEC has scheduled an extraordinary meeting for June 
5-6, 2001 to review their production quotas. The monthly average U.S. 
imported crude oil price for February 2001 is estimated to be about 
$26.40 per barrel, slightly higher than the estimate of $25.75 per 
barrel in January. EIA's current forecast reflects our belief that the 
January production cut by OPEC 10 (OPEC, excluding Iraq) would maintain 
the world oil price within and toward the high end of OPEC's target 
range of $22 to $28 per barrel in 2001 and 2002 (Figure 1).* Prior to 
the March 17 meeting, average imported prices were projected to fall 
slightly from the estimated value of $27.70 per barrel in 2000 to about 
$26.60 per barrel in 2001 and about $25.40 in 2002, all prices being 
expressed in nominal dollars. EIA expects that oil stocks in the OECD 
countries will continue to be tight compared to normal levels, 
preventing prices from falling significantly (Figure 2). With the new 
production cuts, further uncertainty has now been introduced.
---------------------------------------------------------------------------
    * The attachments have been retained in committee files.
---------------------------------------------------------------------------
    Motor Gasoline. The retail price for regular unleaded motor 
gasoline has fallen about 10 cents per gallon since September. However, 
with crude oil prices increasing by about $1.20 per barrel from their 
December low of $25.19 per barrel combined with lower than normal stock 
levels, EIA projects that prices will rise to about $1.49 per gallon 
during the peak months of the 2001 driving season. For the summer of 
2001, we are projecting an average price of $1.47 per gallon, compared 
to $1.53 per gallon in the previous driving season, in nominal dollars. 
Motor gasoline stocks are expected to be slightly lower during this 
year's driving season compared to last year; however, crude oil prices 
are also expected to be lower. The annual average retail price of 
regular unleaded motor gasoline is projected to decline from $1.49 per 
gallon in 2000 to $1.46 per gallon in 2001 to $1.41 per gallon in 2002, 
with all prices being in nominal dollars.
    Heating Oil. The heating season of October through March is nearly 
over, so retail heating oil prices have seen their seasonal peak. Warm 
spells in January and February and declining crude oil prices in 
December and January helped to ease heating oil prices, which have been 
declining from their winter peak of $1.41 per gallon in December. 
Nevertheless, heating oil prices remain high compared to history. The 
average price for October through December 2000 was almost 40 cents per 
gallon higher than the same period in 1999. Due to the relatively warm 
weather in the Northeast during the last half of January and parts of 
February and heating oil production that is several hundred thousand 
barrels per day more than last year's level, heating oil stock levels 
have remained fairly steady over the past two months. For the first 
time since November 1999, U.S. distillate stocks are within the normal 
range. With crude oil prices expected to be lower in 2001 than in 2000, 
lower heating oil prices are projected as well. Retail heating oil 
prices are expected to be $1.28 per gallon in October through December 
2001 compared to $1.40 per gallon in the same period for 2000, in 
nominal dollars. The annual average retail price of heating oil is 
expected to decline slightly from $1.31 per gallon in 2000 to $1.28 per 
gallon in 2001 to $1.22 per gallon in 2002, with all prices in nominal 
dollars.
    Natural Gas. Natural gas prices began increasing last summer, 
primarily due to low levels of natural gas storage (Figure 3), with 
spot prices increasing more than $4 per thousand cubic feet since late 
June. During the heating season from October 2000 through March 2001, 
the wellhead price of natural gas is currently estimated to have more 
than doubled from the price during the previous season, averaging about 
$5.60 per thousand cubic feet, in nominal dollars (Figure 4). When the 
heating season ends, average wellhead prices are projected to decline, 
averaging about $4.05 per thousand cubic feet for the spring and 
summer. Due to projected high levels of demand growth for natural gas, 
particularly for electricity generation but also in the industrial 
sector, it is highly unlikely that wellhead prices will decline to the 
level of $2 per thousand cubic feet of one year ago. In 2001, the 
average wellhead price is projected to be about $4.70 per thousand 
cubic feet, compared to an annual average of about $3.60 per thousand 
cubic feet in 2000, in nominal dollars. However, hot summer weather in 
regions with high levels of natural gas-fired electricity generation 
could reduce storage injections for next year's heating season and lead 
to higher seasonal price increases. In 2002, we expect the storage 
situation to improve somewhat with increases in production and imports, 
leading to a modest decrease in the average annual wellhead price to 
about $4.30 per thousand cubic feet, in nominal dollars. Domestic 
natural gas production for 2001 and 2002 is expected to rise as 
production responds to the high rates of drilling experienced over the 
past year. In 2000, drilling for natural gas in the United States 
increased by 45 percent over the 1999 level of 10,500 wells, in 
response to a 66-percent increase in the average natural gas wellhead 
price from 1999 to 2000 (Figure 5). Production is estimated to have 
risen by 3.1 percent in 2000 and is projected to increase by rates of 
3.3 percent in 2001 and 2.5 percent in 2002 as higher natural gas 
prices are expected to encourage a moderate growth in supply. In 
contrast, natural gas production declined slightly from 1997 to 1998 
and from 1998 to 1999.
    Electricity. Electricity demand is expected to grow at a rate of 
about 2.2 percent in 2001 and 2.3 percent in 2002, compared to a 
estimated growth rate of 3.6 percent between 1999 and 2000. Slower 
growth is expected in part due to slower projected economic growth. 
Electricity demand for this winter is expected to be 4.6 percent higher 
than the previous winter, due to higher residential and commercial 
demand and the cold temperatures in November and December. Natural gas 
deliverability problems in California have helped to increase natural 
gas prices and have frequently caused interruptible customers, 
including electricity generators, to be cut off in that State. The 
current situation in California is characterized by low natural gas 
storage, natural gas pipeline bottlenecks, high electricity demand, and 
low availability of hydropower resources, combined with no significant 
capacity additions in the last ten years. In addition, the San Onofre 3 
nuclear unit is currently offline due to a fire in early February and 
may not return to service for several months. The average residential 
price of electricity in the United States is projected to increase from 
8.2 cents per kilowatthour in 2000 to 8.3 and 8.4 cents per 
kilowatthour in 2001 and 2002, respectively, in nominal dollars, 
largely due to fuel costs.

                          THE OUTLOOK TO 2020
    AEO2001 provides an integrated projection of U.S. energy market 
trends for the next two decades on an annual basis. The following 
discussion highlights the major categories of domestic energy demand 
and supply.
    Consumption. Total energy consumption is projected to increase from 
96.1 to 127.0 quadrillion British thermal units (Btu) between 1999 and 
2020, an average annual increase of 1.3 percent. Transportation energy 
demand is expected to increase at an average annual rate of 1.8 percent 
to 38.5 quadrillion Btu in 2020 and is the fastest growing end-use 
sector. The growth in transportation use is driven by 3.6-percent 
growth in air travel, the most rapidly increasing transportation mode, 
and 1.9-percent annual growth in light-duty vehicle travel, the largest 
component of transportation energy demand, coupled with slow growth in 
vehicle efficiency.
    Residential and commercial energy consumption is projected to 
increase at average annual rates of 1.2 and 1.4 percent, respectively, 
reaching 24.4 quadrillion Btu in 2020 for residential demand and 20.8 
quadrillion Btu for commercial demand. In both sectors, the growth in 
demand is led by electricity consumption for a variety of equipment--
telecommunications, computers, office equipment, and other appliances. 
Electricity use is projected to increase at annual rates of 1.9 and 2.0 
percent, in the residential and commercial sectors, respectively. 
Industrial energy demand is projected to increase at an average rate of 
1.0 percent per year, reaching 43.4 quadrillion Btu in 2020, as 
efficiency improvements in the use of energy help to offset growth in 
manufacturing output. The projections incorporate promulgated 
efficiency standards for new energy-using equipment in buildings and 
for motors, as authorized by the National Appliance Energy Conservation 
Act of 1987 and the Energy Policy Act of 1992. Since AEO2001 included 
only those laws, regulations, and standards in effect as of July 1, 
2000, the new standards for residential clothes washers, water heaters, 
and central air conditioners and heat pumps and commercial heating, 
cooling, and water heating equipment issued in January 2001 are not 
included. In addition to the impact of efficiency standards, 
improvements in efficiency are projected as a result of expected 
technological improvement and market forces.
    Petroleum demand is projected to grow at an average rate of 1.4 
percent per year through 2020, led by the growth for transportation, 
which uses about 70 percent of the total (Figure 6). Growth in travel 
more than offsets efficiency gains, and economic growth increases 
petroleum use for freight and shipping through 2020. Natural gas 
consumption is expected to increase at an average rate of 2.3 percent 
per year. Increases are expected in all sectors, but the most rapid 
growth is for electricity generation, where natural gas use (excluding 
cogenerators) is projected to grow from 3.8 to 11.3 trillion cubic feet 
between 1999 and 2020. Total coal consumption is expected to increase 
from 1,035 to 1,297 million tons per year between 1999 and 2020, an 
average annual increase of 1.1 percent. About 90 percent of the coal is 
used for electricity generation. Coal remains the primary fuel for 
generation, although its share of generation is expected to decline 
from 51 to 44 percent between 1999 and 2020. Electricity consumption 
overall is projected to grow by 1.8 percent per year through 2020. 
Efficiency gains in the use of electricity partially offset the growth 
of new electricity-using equipment. Renewable fuel consumption, 
including ethanol used in gasoline, is projected to increase at an 
average rate of 1.1 percent per year through 2020. In 2020, about 55 
percent of renewable energy is used for electricity generation and the 
rest for dispersed heating and cooling, industrial uses, and fuel 
blending.
    Energy Intensity. Energy intensity, measured as energy use per 
dollar of gross domestic product (GDP), has declined since 1970, most 
notably when energy prices have increased rapidly (Figure 7). Between 
1970 and 1986, energy intensity declined at an average rate of 2.3 
percent per year as the economy shifted to less energy-intensive 
industries and more efficient technologies. Without significant price 
increases and with the growth of more energy-intensive industries, 
intensity declines moderated to an average of 1.3 percent per year 
between 1986 and 1999. Through 2020, energy intensity is projected to 
decline at an average rate of 1.6 percent per year as efficiency gains 
and structural shifts in the economy offset growth in demand for energy 
services. Energy use per person generally declined from 1970 through 
the mid-1980s, and then tended to increase as energy prices declined. 
Per capita energy use is expected to increase slightly through 2020, as 
efficiency gains only partly offset higher demand for energy services.
    Electricity Generation. Generation from both natural gas and coal 
is projected to increase through 2020 to meet growing demand for 
electricity and offset the decline in nuclear power expected from 
retirements of some existing facilities (Figure 8). As noted above, the 
share of coal generation is expected to decline through 2020 because 
assumptions about electricity industry restructuring, such as higher 
cost of capital and shorter financial life of plants, favor the less 
capital-intensive and more efficient natural gas generation 
technologies. The natural gas share of total generation is expected to 
increase from 16 to 36 percent between 1999 and 2020. The use of 
renewable technologies for electricity generation, including 
cogeneration, is projected to increase slowly at an average rate of 0.7 
percent per year, primarily due to moderate fossil fuel prices. State 
renewable portfolio standards are the cause of a significant amount of 
the expected penetration. Hydropower is expected to decline slightly by 
2020 as regulatory actions limit capacity at existing sites, and no 
large new sites are expected to be available for development.
    Supply. Total domestic petroleum supply, including refinery gain 
and natural gas plant liquids, is projected to remain nearly flat 
through 2020 (Figure 9). Domestic crude oil production is projected to 
decline at an average rate of 0.7 percent per year, from 5.9 million 
barrels per day in 1999 to 5.1 million barrels per day in 2020. As a 
result, net petroleum imports are expected to rise through 2020, to 
meet growing demand (Figure 10). Between 1999 and 2020, net imports of 
petroleum are projected to increase from 51 percent to 64 percent of 
domestic petroleum demand. In 2020, the United States is expected to 
require net imports of crude oil and petroleum products totaling 16.5 
million barrels per day.
    Unlike oil, domestic natural gas production, with its larger and 
more accessible resource base, is expected to increase from 18.7 
trillion cubic feet in 1999 to 29.0 trillion cubic feet in 2020. 
Increased production comes primarily from lower 48 onshore conventional 
nonassociated sources, although onshore unconventional production is 
expected to increase at a faster rate than other sources. In order to 
fill the gap between domestic production and consumption, net natural 
gas imports are expected to increase from 3.4 trillion cubic feet in 
1999 to 5.8 trillion cubic feet in 2020, mostly pipeline natural gas 
imports from Canada. Net liquefied natural gas imports are projected to 
increase from 0.1 to 0.7 trillion cubic feet by 2020.
    Coal production is expected to increase from 1,105 million tons in 
1999 to 1,331 million tons in 2020, an average of 0.9 percent per year, 
to meet rising domestic demand. From 1999 to 2020, low-sulfur coal 
production is expected to increase while the production of high- and 
medium-sulfur coal declines, due to the need to reduce sulfur dioxide 
emissions from coal-fired electricity plants. As a result, western coal 
production the primary source of new low-sulfur coal is expected to 
continue its historic growth, reaching 787 million tons in 2020, an 
annual growth rate of 2.2 percent. Western coal is surface mined and 
less costly to produce than eastern coal.
    Carbon Dioxide Emissions. Energy-related carbon dioxide emissions 
are projected to increase at an average of 1.4 percent per year from 
1999 to 2020, reaching 2,041 million metric tons of carbon equivalent, 
35 percent higher than in 1999 and 51 percent higher than in 1990 
(Figure 11). Projected increases in carbon dioxide emissions primarily 
result from continued reliance on coal for electricity generation and 
on petroleum fuels in the transportation sector.
    Alternative Cases. In order to show the impact of alternative 
assumptions concerning the key factors driving energy markets, we 
include a number of alternative cases in AEO2001. Two sets of these 
cases illustrate the impacts of improved technology in energy-consuming 
equipment and in the production of oil and gas.
    One alternative case assumes more rapid improvement in new 
technologies for end-use demand, through lower costs, higher 
efficiencies, and earlier availability for new technologies, relative 
to the reference case, as well as more rapid improvement in the costs 
and efficiencies of advanced fossil-fired and new renewable generating 
technologies. As a result, projected energy demand in 2020 is 8 
quadrillion Btu lower than in the reference case, reducing carbon 
dioxide emissions to 1,875 million metric tons carbon equivalent in 
2020, compared to 2,041 million metric tons carbon equivalent in the 
reference case (Figure 12). Such technology improvements could result 
from increased research and development, but should not be considered 
the most optimistic improvements that could occur with a very 
aggressive program of research and development. The AEO2001 reference 
case assumes continued improvements in technology for both energy 
consumption and production; however, it is possible that technology 
could develop at a slower rate. In the 2001 technology case, it is 
assumed that all future equipment choices will be made from the 
equipment and vehicles available in 2001, with new building shell and 
industrial plant efficiencies frozen at 2001 levels. Also, new 
generating technologies are assumed not to improve over time. In this 
case, efficiencies improve over the forecast period as new equipment is 
chosen to replace older stock and the capital stock expands; however, 
projected energy demand in 2020 is 6 quadrillion Btu higher than in the 
reference case, increasing carbon dioxide emissions to 2,157 million 
metric tons carbon equivalent.
    Another alternative case assumes more rapid technological 
improvement in the exploration and production of petroleum and natural 
gas. By 2020, these assumed improvements are expected to raise natural 
gas production by 1.1 trillion cubic feet and raise lower 48 crude oil 
production by nearly 300 thousand barrels per day compared to the 
reference case. The more rapid technology progress would also be 
expected to reduce the average wellhead price of natural gas in the 
United States from $3.13 per thousand cubic feet (1999 dollars) in the 
reference case to $2.50 per thousand cubic feet in 2020 (Figure 13). 
Conversely, slower technological improvements are assumed in another 
case, which reduce natural gas production by 1.9 trillion cubic feet 
and reduce lower 48 crude oil production by nearly 400 thousand barrels 
per day in 2020 relative to the reference case. In this slow technology 
case, the average wellhead price of natural gas in 2020 reaches $4.23 
per thousand cubic feet.
    Conclusion. In the near term, we expect crude oil and petroleum 
prices to decline slightly from their current levels by the end of the 
year and to decline further next year. Stock levels of both petroleum 
and natural gas remain tight. In the long term, continuing growth in 
the U.S. economy is expected to stimulate more energy demand, with 
fossil fuels remaining the dominant source of energy. As a result, our 
dependence on foreign sources of petroleum is expected to increase and 
domestic natural gas production and natural gas imports are expected to 
grow significantly. These forecasts incorporate an expectation of 
efficiency improvements in both demand and supply although different 
paths for technological development could lead to slower or more rapid 
efficiency gains.
    Thank you, Mr. Chairman and members of the Committee. I will be 
happy to answer any questions you may have.

    The Chairman. Thank you very much, Ms. Hutzler. I 
appreciate that excellent presentation.
    Our next witness will be Mr. Guy Caruso, executive director 
of Strategic Energy Initiative. I am going to have to step out 
for a moment, but please proceed.
    And, Senator Bingaman, I will be back in just a moment. I 
have a constituent that I have to shake hands with.

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

    Mr. Caruso. Good morning, Mr. Chairman. Thank you very much 
for this opportunity to present the results of the Center for 
Strategic and International Studies report, the Geopolitics of 
Energy into the 21st Century.
    The chairman was one of the congressional co-chairs on this 
report, along with his colleague across the aisle, Senator 
Lieberman. And I will briefly summarize the key findings of the 
report in the oral remarks. And the full statement will be 
submitted for submission into the record.
    Our report examined the global energy trends projected to 
2020 and analyzed the implications of those trends for 
geopolitical developments during that same time frame. Let me 
highlight just several of the most important energy trends, 
which were drawn very heavily from the work of the EIA and Mrs. 
Hutzler's office. So I will not belabor them.
    The robust economic growth and the population growth 
projections and expanded global trade are expected to lead to 
more than a 50-percent increase in world energy demand by 2020. 
And the most rapid growth in that demand will be in developing 
countries, which we believe has important geopolitical 
implications.
    In terms of supply, the Persian Gulf suppliers will become 
even more dominant in world trade. According to some 
projections, Persian Gulf oil would represent as much as 60 
percent of world oil trade in 2020 with Saudi Arabia by far 
being the leading oil exporter, as it is today. And the reason 
for that concentration is the rapid and steadily growing oil 
imports, not only in this country but in Europe and, more 
importantly I think for this forecast, in the developing 
countries of Asia.
    The third trend which has important geopolitical 
implications is the rapid growth in electricity demand and 
natural gas demand, as Mary pointed out in her forecast, not 
only in the United States, but globally. The global 
infrastructure of electricity and natural gas is stretched 
thin. As well as we have witnessed in this country, it is also 
true globally.
    The study reaches three very broad conclusions. The first 
is that the United States has and will continue to have a 
special responsibility for preserving worldwide energy supply, 
which will become increasingly difficult if world oil 
developments play out as these forecasts indicate.
    Secondly, in order to develop an adequate and reliable 
energy supply to meet the projected demands mentioned, we are 
going to need massive investments in the global energy 
infrastructure, and they must begin now. It is not just the 
United States. It is around the world that some of these same 
constraints are beginning to be felt.
    And the third point is following up the points several of 
the Senators made in opening remarks, that we need to balance 
economic growth with environmental concerns. And that presents 
a special challenge in this geopolitical outlook. The 
integration of energy and environment policy is essential in 
order to achieve a balanced and diverse national and 
international energy policy.
    And in the report we do list a number of policy issues for 
consideration. I will just mention a few of them in the oral 
remarks, but they are listed in their complete recommendations 
and considerations in the written submission.
    On energy availability, the United States will need to 
retain as far as possible its ability to defend open access to 
energy supplies and international ceilings. And this will 
become increasingly difficult. And we may have to seek some 
burden sharing from our allies to accomplish this, given this 
outlook.
    Secondly on the availability issue, the report recommends 
that we avoid indiscriminate use of sanctions. In particular, 
unilateral sanctions have not been an effective policy tool and 
should be dropped. They have not been effective, and they only 
harm U.S. commercial interests abroad.
    With respect to energy reliability, governments should 
maintain and, where appropriate, expand government financed and 
controlled strategic petroleum reserves, reserving their use 
for supply disruptions. And with respect to supply disruption 
mitigation, international cooperation with organizations, such 
as the International Energy Agency, will continue to be 
essential in order to mitigate those risks.
    On the energy and environment issue, the report recognized 
this is a long-term issue, particularly the global 
environmental concerns with respect to greenhouse gas 
emissions, but also air and water concerns as well. And that 
one way to begin dealing with this and recognizing the long-
term nature of it is the need to make economically and 
environmentally sound technologies available to developing 
countries in order to meet their increasing energy demands, 
which, as I mentioned, are growing dramatically, and will also 
affect the environmental side of the issue.
    In the report we specifically single out the possibility of 
nuclear power being utilized in developing countries to deal 
with both the environment issue and their increasing 
electricity needs.
    On the question of what do we do about reducing our oil 
imports and our dependence and the issue that several of you 
mentioned earlier about dependence versus vulnerability, it is 
clear that we will continue to be dependent. The real issue is, 
what can we do about reducing our vulnerability. One way is 
with strong emergency preparedness procedures and having a 
strong strategic petroleum reserve.
    But another way is taking care of our own business, because 
OPEC is going to continue to take care of their business. And 
the idea that we have a balanced access to our own energy 
resources is certainly a step in the right direction. So I, 
again, agree with the statements made that we need to diversify 
our fuel sources within this country, as well as from abroad 
and have a balanced approach.
    Let me conclude there my oral remarks, and I would offer to 
make available the full three-volume study to any members who 
would so desire. Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Caruso follows:]
Prepared Statement of Guy Caruso, Executive Director, Strategic Energy 
       Initiative, Center for Strategic and International Studies
    Good morning, Mr. Chairman, members of the committee, thank you for 
this opportunity to testify today and to present the results of the 
Center for Strategic and International Studies (CSIS) study ``The 
Geopolitics of Energy into the 21st Century'' which was released on 15 
February 2001.
    Today I want to share with you some of the more important findings 
of this study, because these findings have policy implications not just 
for the United States but for all energy producing and consuming 
countries.
    Our Geopolitics study was cochaired by former Senator Sam Nunn, who 
also chairs our Board of Trustees, and by Dr. James Schlesinger, former 
Secretary of Energy. For this project we had four Congressional 
cochairs: Senator Frank Murkowski and Senator Joe Lieberman; and 
Representatives Benjamin Gilman and Ellen Tauscher. We also formed a 
Senior Advisory Panel, supported by a number of special task forces, 
comprised of individuals drawn from both the public and private 
sectors, approximately 100 experts contributed to the project.
    We began work in July 1998 in response to concerns that a lengthy 
period of secure energy supplies had led U.S. policy makers to pay 
relatively little attention to the changing relationship between 
geopolitics and energy at the turn of the century. This changing 
relationship required a rethinking of U.S. foreign policies, 
environmental policies, and the broader national security strategy. Our 
completed report responds to these concerns.
    The geopolitics of energy is rarely static. Events of the day carry 
implications for energy supply consumption, and prices--sometimes 
immediate, sometimes delayed, sometimes hidden. By attempting to 
define, in advance, the form these events may take--and the resulting 
impact on energy--the report may remove some surprise from the future 
and ease the way for decision makers in both the public and private 
sectors.

                              THE MESSAGE
    ``One of the ironies at the turn of the century is that, in an age 
when the pace of technological change is almost overwhelming, the world 
will remain dependent, out to the year 2020 at least, essentially on 
the same sources of energy--oil, natural gas, coal--that prevailed in 
the twentieth century.''
    This message carries our assessment that for renewable and 
alternative forms of energy, although increasing in absolute terms 
during the coming years, their relative contribution to total energy 
supply is not likely to increase substantially.
    We came to three broad conclusions based on our analysis of the 
geopolitics of energy into the twenty-first century.
    First, the United States, as the world's only superpower, must 
accept its special responsibilities for preserving worldwide energy 
supply.
    Second, developing an adequate and reliable energy supply to 
realize the promise of robust global economic growth early in the 
twenty-first century will require significant investments, and they 
must begin to be made immediately.
    Third, decision makers, in both the public and private sectors, 
face the special challenge of balancing the objectives of economic 
growth with concerns about the environment. This challenge is probably 
the most contentious of any of the challenges which lie ahead and it is 
going to be difficult to secure agreement by the protagonists on how to 
proceed.

                              WHAT'S NEW?
    Let me begin my review of our findings by describing for you What's 
New? For those who closely follow the energy industry, these findings 
may not necessarily be new. Rather, the real question is, how will 
energy producers and consumers alike respond to each?

                                  NGOS
    First, we found that the influence of nongovernmental organizations 
or NGOs on public and private energy-related policy decisions will 
considerably expand in the coming years. Nongovernmental organizations 
are broad in definition, ranging from terrorist groups to radical 
activists to well-intentioned environmentalists and human rights 
monitors. By adroitly using new information technologies, opposition to 
a particular project or idea can be mobilized quickly and effectively, 
backing shareholder resolutions and disinvestment campaigns against 
offending oil companies, for example.
    One recent example can be cited, and that is how widely separated 
NGOs came together against the proposed Chad-Cameroon pipeline. This 
pipeline is the largest infrastructure project underway in Africa 
today. What is interesting is this. For three years, until construction 
began last October, NGOs set the agenda. First, NGOs opposed the 
pipeline, then recognizing that the people wanted the pipeline, began 
to set demands on the oil companies if the project were to move ahead. 
Probably the greatest victory for the NGOs was agreement that 80% of 
the oil revenue be spent on education, health, infrastructure, and 
rural development. Whether that turns out to be the case is 
questionable.

                   DEVELOPING COUNTRIES TAKE THE LEAD
    At some point in time before the year 2020, the consumption of 
energy by the developing countries of the world is expected to exceed 
energy consumption by the developed world. Last year the developed 
world accounted for 53% of all energy consumed; the developing world 
for just 34%, economies in transition account for the remainder. Twenty 
years later, the picture will change rather dramatically, as the 
developed world share drops to 43%, while the developing world share 
rises to 46%.
    This shift in consumption patterns carries tremendous political, 
economic, and environmental implications. Among other issues, what 
kinds of energy will the developing world be consuming? Will it be 
natural gas, or local coals? Where will the oil and gas come from? The 
Persian Gulf, Russia? Closer energy ties will likely translate into 
closer political ties. As China, for example, relies increasingly on 
Persian Gulf oil, would that country be willing to intervene to protect 
oil flows from disruption?

                         CYBERTERRORIST ATTACKS
    The spread of information technology and use of the Internet 
drastically change the way business is conducted, and this change 
carries with it a new set of vulnerabilities. One such vulnerability is 
the prospect of cyberterrorist attacks on energy infrastructure. These 
prospects are very real, and such attacks, in our estimation, may be 
one of the greatest threats to energy supply during the years under 
review.
    The U.S. Central Intelligence Agency, along with our Department of 
Defense, has been working for years to perfect ways to electronically 
meddle with other countries' banking systems and electricity grids. I 
think we can safely assume that others are targeting our own 
electricity grids and banking systems.
    No enemy would be foolish enough to engage the United States in a 
way that would allow us to use our vastly superior military force. But 
a handful of computer hackers, given the opportunity, could play havoc 
with our economy, at minimal cost to the host country.

                         POLICY CONTRADICTIONS
    While we may voice our strong opposition to the use of oil as a 
political weapon by oil exporting countries, the United States, in its 
own way, uses oil as a political weapon on a quite broad scale. How so? 
As an importing country, the United States could refuse to buy crude 
oil originating from a particular country, but that clearly would have 
no discernable impact. That embargoed oil would simply be directed to 
another market, and would be replaced in the U.S. market by crude oil 
of a different origin.
    No, it is through our broad application of sanctions that we employ 
oil as a political tool. We have unilateral sanctions against Libya and 
Iran, and we join in the multilateral sanctions against Iraq, with 
these three sanctions then encompassing a total of 7 million barrels 
per day. Do these sanctions really work? Have they caused the 
sanctioned countries to alter their behavior as originally intended? 
The answer is no, and no.
    The greater need for oil in the future is at odds with current 
sanctions on oil exporters Iran, Iraq, and Libya. If our estimates of 
world oil demand in the year 2020 are reasonably correct, then Iran, 
Iraq, and Libya will have to substantially expand their current 
productive capacity and to produce at or very near full capacity if 
that demand is to be satisfied.

                             GLOBALIZATION
    There is another policy contradiction that I want to bring to your 
attention. The United States deals with energy policy in domestic 
terms, not international terms. The U.S. policy is therefore at odds 
with globalization. U.S. consumers have primarily one concern, and that 
is price. Our consumers do not care where our oil comes from. That we 
are presently importing about 57% of the oil we consume is of no 
concern at all. Although most certainly view Saddam Hussein as an 
enemy, would they then reject Iraqi oil? They almost certainly would 
not. We import in excess of 700,000 b/d of Iraqi oil, to no one's 
objection. Moreover, one of the great ironies of the day is that we 
refine this Iraqi crude, producing some volumes of jet fuel, and 
presumably use some of that jet fuel in our military aircraft sent out 
to bomb Iraq. The circle is closed; we are returning their oil to them, 
but in a slightly different form.
    Some time ago, at a CSIS-sponsored conference, Mack McLarty, former 
White House chief of staff under President Clinton, presented a very 
perceptive--and commonly-held view of how globalization will work.
    ``When a Brazilian brews her morning coffee today, she is likely to 
use electricity from a power plant in Uruguay that runs on natural gas 
provided by a Chilean company. She drives to work in a Ford fueled with 
Venezuelan gasoline, and her Canadian-owned factory may soon be powered 
by a 2,000 mile natural gas pipeline from Bolivia.''
    But I would like to offer another view of globalization. There is a 
downside to globalization that, at least in energy terms, affects all 
of us. For globalization makes us vulnerable to events around the 
world, anywhere, anytime, over which we have no control.
    Indeed, one astute observer has written that globalization actually 
helps terrorists. The lowering of borders, the rise of a global 
economy, the revolution in information technology, all these great and 
wonderful things have enormous benefits for terrorists.
    A major oil exporting country sneezes, so to speak, and the rest of 
the world catches a cold. The so-called ``Asian flu,'' if you will 
recall, was one of the triggers leading to the oil price collapse of 
several years ago. We can no longer hide behind national boundaries.

                           SECURITY OF SUPPLY
    Any energy importing country must concern itself with security of 
supply and, because we do, we seek security through diversity of 
supply. The energy policy of the United States encourages the search 
for oil outside the country, but away from the Persian Gulf. All in an 
effort to reduce our dependence on those exporting countries. But as we 
work to reduce our reliance on Persian Gulf oil, others are raising 
theirs.
    We have intervened militarily in the Persian Gulf in the past to 
protect oil supply and likely would do so again. But if U.S. military 
power were committed to a limited but extended protection effort in 
Northeast Asia, for example, the capacity to respond to a crisis like 
that of 1990 in the Persian Gulf would be severely limited. As a 
result, the United States will need to rebalance its security relations 
and other consuming countries will have to weigh in. The United States 
cannot go it alone.

             ENERGY SUPPLY AND DEMAND INTO THE 21ST CENTURY
    As we looked ahead in our study to the year 2020, in terms of 
proportional shifts in energy supply, what did we find?

   We found that the relative shares of crude oil, of coal, and 
        of nuclear electric power all will decline, compared with 
        relative contributions made in the year 2000.
   Indeed, nuclear electric power was seen as the only form of 
        primary energy to decline both in absolute and relative terms.
   We found that renewables will hold their own, in relative 
        terms.
   Natural gas, to no one's surprise today, was the only form 
        of energy to demonstrate both absolute and relative gains.

    Looking more closely at crude oil, would the geographic 
distribution of production change much during the intervening 20 years?

   The Persian Gulf would substantially increase its dominance 
        of global oil trade by the year 2020.
   The contributions from the former Soviet Union, particularly 
        from Kazakhstan and Russia, plus from Africa, would show 
        considerable gain.
   But for the United States and the North Sea, the future was 
        one of continued decline.

    On an individual country basis, Saudi Arabia would maintain its 
leadership, at about 17% of the world total, followed by the former 
Soviet Union, then Venezuela, Iraq and Iran, all three at around 5 
percent each. No real surprises here, although for the former Soviet 
Union we need to separate out Russia, Kazakhstan, Azerbaijan, and 
Turkmenistan. These countries warrant individual attention.
    The potential of the Caspian Sea is a subject of considerable 
attention and continues to attract heavy media coverage. Just what can 
we expect in the years ahead? Looking just to the year 2010, and 
presuming that oil exploration and development programs are successful 
and that pipeline carrying capacities are adequate, then the new oil 
from the Caspian might represent as much as 3% of world oil supply that 
year. Not pivotal, by any means, and certainly not a substitute for 
Persian Gulf oil, but nevertheless important at the margin, and for 
adding to diversity of supply, which is a main theme of U.S. foreign 
policy towards that region.

            ELECTRICITY, NUCLEAR POWER, AND THE ENVIRONMENT
    We found that electricity would be the most rapidly growing form of 
energy use during the years 2000-2020. This growth will be concentrated 
in the developing countries, where electricity use will more than 
double.
    Clearly, access to adequate and reliable electricity supply is 
essential for modern civilized life. But two concerns emerge. 
Substantial capital investments will be required to build power plants 
and grids, and will NIMBYism (Not in My Back Yard) intrude in a way to 
interfere with the timely construction of power generators and 
supporting grid?
    Moreover, can adequate electricity supply be developed while 
protecting the environment? This question particularly pertains to 
developing countries.
    Nuclear power currently accounts for 16% of worldwide electricity 
generation. But by the year 2020 that contribution is expected to 
decline to just 10%. This decline will lead to a commensurate increase 
in worldwide carbon emissions, at a time when the world is increasingly 
aware of the need for emissions-free energy, and at a time when the 
developing world is confronted with dramatically large future energy 
requirements. To protect the environment, do we provide the poorer 
coal-burning countries with the latest in clean coal technology? Do we 
encourage them to take up the nuclear electric power option? Perhaps 
both approaches are needed.

                        THE EXPORTING COUNTRIES
    Volume 3 of our Geopolitics study deals in large part with the 
geopolitical situation in the key oil exporting countries. 
Unfortunately, pessimism prevails when longtime observers consider the 
outlook for stable political systems in many of these oil exporters.
    Any geopolitical analysis of world oil inevitably begins with a 
survey of Saudi Arabia, and includes a scenario under which its oil 
exports are reduced or even eliminated. We began with Saudi Arabia 
because of its dominant role as an oil supplier and in recognition that 
no other supplier can replace Saudi Arabia should the need arise. 
Several sources of Saudi instability quickly come to mind: structural 
economic problems; ethnic and social tensions; and problems of royal 
succession.
    Russia is the number two oil exporter, at roughly 4 million b/d. 
Today, Russia is weak, and a weak Russia is just as much concern to the 
world as was a strong Russia during the Cold War, in large part because 
of its large arsenal of weapons of mass destruction. In 1998 Russia was 
producing more oil than anyone else--11.5 million b/d. Then a collapse 
in production set in, eventually to 6 million b/d, not because of war 
or developments in the market place, but because of field mismanagement 
and the lack of investment capital. Foreign oil companies are prepared 
to invest in Russia, but only if the investment climate is attractive 
and if the investment is properly protected under the law. These two 
conditions have not yet been met.
    The oil future of Venezuela is a bit uncertain because of 
uncertainty regarding President Chavez. The uncertainty regarding the 
sanctioned states of Iran, Iraq, and Libya has already been mentioned.
    We want to be optimistic about Mexico as an oil supplier and 
potentially of natural gas, and there are signs of change and progress. 
But these come slowly. In western Africa, all the unwelcome attributes 
of a petro-state are to be found in oil-rich Angola, where its natural 
resources are used to fund a civil war.
    But there is good news out there. The U.S. neighbor to the north, 
Canada, is our leading supplier of energy, surpassing all others. Last 
year our imports of Canadian oil averaged 1.7 million b/d, accounting 
for 15.2% of all oil imports. Canada supplies most of the natural gas 
imported by the United States a bit more than 97%, representing in turn 
some 15% of marketed U.S. natural gas production. The coincidence of 
U.S. and Canadian national interests protects these supplies.

                         POLICY CONSIDERATIONS
    In order to assist decision makers in the public and private 
sectors the CSIS study offers the following policy considerations:
Energy Availability
   Avoid the indiscriminate use of sanctions. The value of 
        multilateral sanctions should be weighed against the value of 
        engagement and dialogue. When their use is deemed admissible in 
        the support of international interests, ensure that the 
        coverage of sanctions is as targeted as possible. Unilateral 
        sanctions are not an effective policy tool.
   Do not obstruct the development of economic routes that 
        would ultimately offer Caspian and Central Asian exporters a 
        diverse set of options for transporting oil and gas to foreign 
        markets.
   Encourage energy-producing countries to ensure their energy 
        sectors attract and support greater foreign investment.
Energy Reliability
   The United States should retain as far as possible its 
        ability to defend open access to energy supplies and to 
        international sea-lanes.
   U.S. allies in Europe and Asia should be prepared to 
        shoulder a greater burden of the financial cost of protecting 
        energy supply, including sea-lane protection.
   Governments must find ways to work with the private sector 
        to minimize the vulnerability of energy infrastructure to 
        sabotage or terrorist attack, including cyberterrorism.
   Governments should maintain and, where appropriate, expand 
        government-financed and controlled strategic petroleum 
        reserves, reserving their use for supply interruptions.
Energy and the Environment
   Economically and environmentally sound technologies must be 
        made available to help developing countries meet increasing 
        energy demands.
   Western nations should assess the conditions under which 
        nuclear power could make a significant contribution to 
        electricity generation in the developing world.
   OECD governments should expand basic research on energy 
        technologies while concurrently policymakers should eliminate 
        those environmental regulations that inhibit bringing 
        technological innovation to market. All governments should 
        review the extent to which domestic energy subsidies are 
        inconsistent with global energy policies.

                            A FINAL THOUGHT
    Let me leave you with this final thought. There are troubles ahead. 
Where is the growth in energy demand coming from? Unstable countries. 
Where is the growth in energy supply coming from? Unstable countries. 
All this makes for a somewhat uncomfortable and unpredictable future. 
Moreover, the end of the Cold War discipline has enhanced the prospects 
for increased volatility, which in turn may constrain investment 
levels, resulting in tight supplies.
    In retrospect, our assessments stress prospects for instability and 
interference in energy supplies during the coming years. But we did so 
only to alert policymakers as to how fragile timely supplies really 
are. The larger task, however, will be to convince the consuming public 
that there is a cost to reliable supplies of energy and to a protected 
environment, and that this cost must be reflected in the prices they 
pay. But how to convince the consuming public that higher prices may be 
in their longer-term interests? This is a critically important 
challenge before policy makers and legislators at all levels.

    The Chairman. Thank you very much.
    Is the pronunciation ``Placke''?
    Mr. Placke. Placke, sir.
    The Chairman. Placke. Why do you not go right ahead, Mr. 
Placke? Welcome.

 STATEMENT OF JAMES A. PLACKE, DIRECTOR, MIDDLE EAST RESEARCH, 
       ON BEHALF OF CAMBRIDGE ENERGY RESEARCH ASSOCIATES

    Mr. Placke. Thank you very much, Mr. Chairman. And like the 
other members of the panel, I appreciate the opportunity to be 
here today.
    I have submitted a statement to the members of the 
committee, which I will simply draw on in a way that will 
highlight some of the points made in that statement that I hope 
will be helpful to the members of the committee.
    Let me begin by painting a very general picture. We see 
sources of primary energy supply around the world, that is, the 
natural resources themselves, the coal, the gas, the oil, as 
not only adequate currently but adequate to support rising 
consumption into the indefinite future. The issue is not 
resource availability. The issue is getting the energy to the 
consumer in the form at the time and the place where it is 
needed. And that is part of the problem. It is really the heart 
of the problem that we confront today in the United States. 
That is the issue in California. It is the issue in gas supply 
this past winter.
    I think we are not trying to be proscriptive, but in 
general the things that need to be done are to maintain an 
investment climate that will encourage development of the 
facilities necessary to delivery the energy in a timely manner. 
And that requires a regulatory environment, and regulation 
continues to be necessary to protect the public interest, 
clearly, but an environment that keeps in mind as well the 
objective, which is to deliver the energy in an efficient 
manner.
    These are very general characteristics. Let me turn to a 
couple of specifics in each of the areas that we have under 
review, oil, electricity, and natural gas. The good news on oil 
is that, despite rising oil consumption, world oil reserves 
have more than doubled over the last 30 years. In the United 
States, as members of the committee have already noted, as well 
as members of this panel, U.S. production has continued to 
decline over a very long period of time. We passed the point of 
self-sufficiency in 1973. And in general, with very few 
exceptions, the trend has been consistently downward ever 
since.
    The good news is we are about to turn around. For the first 
time in nearly 30 years, we anticipate an actual increase in 
U.S. domestic crude oil production this year. We see that 
continuing through the rest of this decade. And by the end of 
the decade, we anticipate that U.S. crude oil production will 
be more than a million barrels a day higher than it is now.
    At the same time, of course, consumption continues to grow. 
And indeed, consumption will grow faster than the increase in 
supply. At the end of the decade, we think there will be a 
modest growth in U.S. dependence on foreign oil sources, which 
for the past year, the year 2000, we put at about 56 percent of 
consumption. And by the year 2020 we see that rising to 57 
percent. A modest increase, but the trend, I think, is clear.
    The question of security supply hinges on not only the 
amount of oil produced in the United States, but where the 
imported oil is coming from. And here again, the news is not 
all bad. Increasingly, imports into the United States are 
coming from western hemisphere sources, Canada, Mexico, and 
Venezuela principally. They are three of the top five suppliers 
to the U.S. market.
    The largest supplier to the U.S. market is Saudi Arabia, 
with which the United States has had a long and, I think, 
satisfactory relationship in the energy area. And finally, the 
fifth supplier is Nigeria, which, in terms of transportation, 
is relatively well located on the west coast of Africa.
    In the end, however, it is really price that is the issue. 
It is not the resource itself. And if the price of oil is $50 
in Tokyo Bay, it will be $50 in New York Harbor. So the world 
oil market is unitized in a way that we cannot simply escape 
from.
    Turning to electric power, a great deal of attention, of 
course, has been focused in this area because of the events in 
California over the last 6 months. Really, the origins, I 
think, of the issue nationally go back to the beginnings of the 
1990's when questions of deregulation and restructuring of the 
industry began to come onto the public agenda.
    This induced a good deal of caution into investors because 
the investment climate was uncertain. It was not certain what 
the rules of the game were going to be. And as a consequence, 
very little new capacity was built in the United States during 
the 1990's.
    That, however, began to turn around toward the end of the 
decade of the nineties, as the regulatory and restructuring 
environment and the directions in which the country was going 
became clearer. We added 27 gigawatts of electric power 
generating capacity nationally last year. We anticipate that 
over the next 5 years, we will add another 300 gigawatts, which 
is equal to 40 percent of our total generating capacity 
currently.
    On a national basis, the capacity is certainly adequate. 
That, of course, does not deal with the issue of getting it, 
again, to the consumer when it is wanted. And that is really 
the problem. The transmission system is not capable of shifting 
the power around from where there is surplus supplies to where 
there are deficits.
    Prices are also going to increase because increasingly, in 
part for environmental reasons and in part simply because of 
economic efficiency, most of the new generating capacity is gas 
fired. Gas prices are already high. And as power demand grows 
and new plants come on, more gas will be required. So those 
higher gas prices will be supported by generation demand. And, 
as far as electric power is concerned, they will be passed 
through to the electric power consumer.
    As has already been noted, the principal problems in the 
United States are California in the first instance, and that is 
on everybody's front page these days. So very little more needs 
to be said about it, I think. It is a supply and demand issue. 
There simply was not adequate new capacity being built at a 
time when California was growing at an extraordinarily high 
rate. The consequence is the power now is not available.
    We anticipate, as has already been noted as well, perhaps 
as early as this summer, power shortages in downstate New York. 
That is, New York City and immediate counties around the New 
York area. Here again, the transmission system is inadequate to 
transport power from New England, where we see a power supply, 
into downstate New York, where we see a deficit.
    The California problem will be with us. It is going to be a 
difficult year in California this year and probably next year. 
On the basis of what we can see today, we would expect that the 
situation may return to something like normal in about three 
years; that is, about the year 2003.
    On the natural gas side, the picture is perhaps even more 
mixed. We have had an actual decline in gas produceability in 
the United States. And that has been masked by three 
consecutively warm winters beginning in 1997. The winter of 
2000/2001, as we all know, was one of the coldest on record. 
And it really pressed the system very hard. So hard, in fact, 
that gas prices tripled at their high point. They have now 
fallen into a range that has about double what had been the 
norm. And they are likely to stay there for the foreseeable 
future.
    The positive side of that is that this has created a 
climate in which gas well drilling is at record levels, having 
fallen dramatically in 1997 and 1998 and 1999. The questions, 
however, many of which this committee will need to deal with, 
of the permitting environment for construction of additional 
gas transmission capacity and expansion of existing gas lines 
will be important to bring supply to where it is needed. Where 
the supply will come from is also changing. It is not going to 
come, as it has, so much from the traditional producing areas, 
but rather areas that are only now beginning to appear on the 
horizon, such as arctic gas, for which there is a growing 
supply. Then reinjection into the fields in Alaska is 
approaching capacity. Something really needs to be done to 
facilitate transmitting that gas from where it is to where it 
is needed.
    And this does not get into questions of ANWR. These are 
fields that are already developed and are producing. A 
coordinated policy involving our neighbor to the north, Canada, 
is likely to have to be part of that solution, because a 
pipeline would have to cross Canadian territory.
    As well, deep well drilling in the Gulf of Mexico is the 
primary promising frontier for U.S. domestic gas production. 
And that increasingly will take, I think, our attention and 
absorb larger and larger amounts of investment.
    Finally, liquified natural gas imports, which were 
fashionable in the 1970's, are back on the agenda. There are 
four terminals in the United States that are capable of loading 
liquified natural gas. And at today's price levels, which we 
expect to be with us for some time, it has become economically 
feasible to import natural gas in liquified form from supply 
points around the Atlantic basin.
    Mr. Chairman, you asked in particular for a comment on 
sanctions, which I will be happy to do. It is something that I 
devote actually a good bit of attention to. Several points have 
already been made, which I would endorse. And that is, that, in 
general, and this is a generalization, multilateral sanctions 
are much more effective than unilateral sanctions. The General 
Accounting Office has produced at least two studies on this 
issue, as have a number of other institutes. And I think that 
is a generally accepted principle.
    But unfortunately, it is not a guarantee. Multilateral 
sanctions have been applied to Iraq for more than 10 years 
following Iraq's invasion of Kuwait in 1990. Saddam Hussein is 
still in office in Baghdad and likely to remain there.
    I think what the administration is doing to address that 
issue to re-figure, reconfigure sanctions in a way to make them 
more effective, focusing on the arms issue and the control of 
the oil revenue, which is a means of directing expenditure by 
the Iraqi government and preventing them from doing as much as 
they might otherwise do in the area of developing weapons of 
mass destruction. So it is limited, but it does have its uses.
    Perhaps the most dramatic case where sanctions have had an 
effect is Libya. We have had a serious tension in our 
relationships with Libya going back to the early 1980's. And we 
have virtually totally sanctions on Libya by presidential 
executive order since 1986. But it was not until 1994, when the 
Security Council acted to impose multilateral sanctions, that 
the pressure really began to be felt by the Libyan authorities 
and ultimately resulted in the release of the two Libyans 
accused in the bombing of Pan Am 103 in 1988 last year. The 
trial, as we all know, concluded in January with the conviction 
of one of the two accused and the release of the other.
    Those sanctions have been suspended, but not removed. And 
they remain, I think, an issue in U.S.-Libyan relations that 
needs to be dealt with in a way that takes into account Libya's 
past record of involvement with international terrorism, the 
legitimate and urgent claims of the families of the Pan Am 103 
victims, and, finally, some degree of acceptance of 
responsibility for the incident by the Libyan authorities, 
which has yet to be forthcoming.
    That is a subject, Mr. Chairman, that could absorb a lot of 
time. I think I probably have said enough on it. If members of 
the committee wish to go into it further, I would be happy to 
answer questions. Thank you.
    [The prepared statement of Mr. Placke follows:]
Prepared Statement of James A. Placke, Director, Middle East Research, 
           on Behalf of Cambridge Energy Research Associates

                                OVERVIEW
    The world's energy resources are sufficient to fuel a rising living 
standard for a growing world population for the indefinite future. This 
view is based on what is known about energy sources today, what is 
projected for future resource discovery and development, and the 
additions to world energy supply that can reasonably be expected from 
advancing technologies. Uncertainty about meeting energy demand at 
specific places and times comes about because of the need for 
continued--even rapid--development of the processing and delivery 
systems to make energy available in acceptable forms where and when it 
is wanted.
    Meeting energy demand in the United States as well as globally 
involves more than just identifying adequate primary fuel sources. 
Since a large and growing proportion of the world energy supply system 
is privately owned and operated, the investment climate must be 
attractive for rising demand to be met. Delivery means, such as 
shipping terminals, oil and gas pipelines and power transmission lines 
need to be regulated to protect the public interest, but in ways that 
do not inhibit responding to consumers' needs. Finally, environmental 
standards need to promote the public welfare, but in the context of 
enabling economic growth, including energy consumption, to support 
rising standards of living.
    Clearly, government has a role to play in reconciling these 
parallel and sometimes competing interests. For the United States, in 
particular, there is a need for government to facilitate the further 
development and delivery to consumers of domestic energy as well as 
access to needed, and growing, amounts of imported energy resources. 
Both an informed vision and policy leadership are required.

                               OIL TRENDS
    Over 30 years from 1970 through 1999, the world consumed 
approximately 657 billion barrels of oil. The world's proved oil 
reserves stood at 470 billion barrels in 1970. Yet, despite consuming 
nearly half again this amount of reserves by 1999, world proved oil 
reserves had grown to 1,038 billion barrels. Moreover, our research 
indicates that oil will remain the world's dominant source of primary 
energy to at least 2020, although declining slightly in its share of 
primary energy demand from 41 percent in 2000 to 39 percent in 2020--
with the difference largely taken up by greater use of natural gas.\1\
---------------------------------------------------------------------------
    \1\ See: 2020 Vision: Global Scenarios for the Future of the World 
Oil Industry (CERA, 2000)
---------------------------------------------------------------------------
    Unites States' oil production has trended steadily downward since 
1973, except for a few years in the late 1970s and mid-1980s reflecting 
Alaskan production peaks. United States' crude oil production averaged 
5.8 million barrels per day in 2000--a little less than two-thirds of 
the 1973 rate. However, primarily because of advances in deep-water 
production technology being applied to the Gulf of Mexico, we estimate 
that the rate of U.S. crude oil production will rise by more than one 
million barrels per day by 2010. This is apart from any new production 
that may come from areas presently closed to oil operations.
    Rising U.S. oil demand is, however, expected to exceed forecast 
production increases, and U.S. dependence on imported oil--although 
increasingly from sources within the Western Hemisphere--is expected to 
continue to grow, but at a slower rate. The United States imported a 
net 56 percent of its oil consumption in 2000. Imports are estimated, 
on the basis of present trends, to grow slightly to 57 percent of 
consumption by 2010.
Government and Industry Efficiency
    In the oil arena, the role of government remains one of:

   being an arbiter among competing interests, such as 
        environmental concerns that restrict resource exploitation or 
        impose standards on combustion emissions that increase costs or 
        limit the availability of fuels;
   providing a buffer against supply emergencies, such as 
        through the strategic petroleum reserve;
   regulating the industry's interstate operations as 
        necessary, but in a manner that does not detract from 
        investment incentives and that is consistent with competition.

    Innovation has been, and remains, the key both to meeting rising 
U.S. and world oil consumption while controlling, or even reducing, 
costs. For example, a rising proportion of additions to world oil 
reserves is from discoveries made in deep water (below 2,500 feet) on 
the continental margins of North and South America, West Africa and the 
outer reaches of the North Sea where exploration and production was not 
technically feasible only ten years ago. At the same time, the price of 
oil in constant dollars is now about the same as it was 15 years ago, 
while world oil consumption has grown by 16 million barrels per day 
since 1985, or about 1.6 percent per year. For the oil industry to 
continue this performance, an open, competitive business environment is 
essential.

                         ELECTRIC POWER TRENDS
    Little new generating capacity was added in the United States 
through most of the 1990s because of investor uncertainty due to 
discussion of industry deregulation and restructuring. Over the past 
few years, as U.S. restructuring plans and rules began to take shape, 
many power plant developers shifted their development efforts from Asia 
and Latin America to the United States. Now, a new wave of generating 
supply has arrived. In 2000, about 27 gigawatts (GW) of new generating 
capacity came on line. Another 300 GW of capacity is under development 
and is scheduled to come on-line within the next five years. This 
represents about 40 percent of today's total U.S. capacity of 770 GW, 
which is much more than forecast demand growth.
    About 80 of the projected 300 GW addition to capacity is already 
under construction and is scheduled to come on-line by the end of 2002. 
More than 90 percent of the 300 GW total will be gas-fired. As these 
power plants come on-line, pressure on natural gas supply will 
intensify. High gas prices over the past year have already affected 
power prices, particularly in regions more dependent on natural gas for 
power generation.
    This large increase in power generating capacity, which is a 
virtual supply tsunami, is uneven--not enough in California and 
downstate New York and more than sufficient in Texas and New England. 
We see Texas and New England having excess capacity as soon as this 
year. Transmission limitations, however, have prevented movement of 
electricity from regions with a surplus to regions with a shortage. A 
transmission system set up for one kind of electric power industry 
needs to be adapted to a different, competitive industry. This 
structural transition will require at least another five years and 
probably much longer. This is because, after more than a decade of low 
investment in transmission capacity, a great deal of uncertainty about 
transmission restructuring remains. Major physical upgrades will likely 
not happen until institutional arrangements are settled.
The Special Case of California
    The source of California's power crisis is a shortage of supply.\2\ 
Over the past five years, California's economy grew 29%, driving 
electricity consumption up by 24%. But no major power plant was built 
over the past decade. Flawed market design turned a surplus at the 
beginning of deregulation in 1996 into a shortage now. The shortage 
will likely get worse before it gets better. This summer will be very 
challenging. Given that hydroelectric capacity is about 80 percent of 
normal, Californians are fated to endure blackouts if summer weather is 
normal. The summer of 2002 will likely be difficult too. It took a long 
time to produce the current shortage--ten years of inadequate additions 
to generating capacity--and it will take several years to work out of 
it. California may not be back to normal before 2003. Downstate New 
York is likely to see shortages beginning as early as this summer--
again because no major power plant has been built there recently, and 
transmission limitations prevent tapping surplus capacity elsewhere.
---------------------------------------------------------------------------
    \2\ See Beyond California's Power Crisis: Impact, Solutions, and 
Lessons, CERA 2001 (retained in committee files)
---------------------------------------------------------------------------
    California's experience is affecting the speed of restructuring in 
other states. Already more than ten states have decided to review 
whether to delay planned restructuring, of which four have recently 
decided to delay.
Summary of the Near-term Outlook
   Except for California and downstate New York, we do not 
        expect power shortages for the United States in the near term. 
        Downstate New York is likely to be the hot spot this summer 
        along with California. Because of transmission limitations, it 
        is not possible to move a significant amount of additional 
        power into downstate New York, despite present and projected 
        capacity availability elsewhere.
   Most existing coal (330 GW) and nuclear plants (100 GW) can 
        operate economically for at least the next five years, and most 
        likely much longer. We expect that these plants will remain the 
        backbone of the generating fleet even though some of them will 
        need retrofits for environmental compliance with 
        NOX, SOX, Mercury and fine particles 
        standards. Any C02 restrictions would add to these 
        requirements and pose a different challenge.
   Some have claimed that Internet-related electricity 
        consumption represents about 9-13 percent of total electricity 
        consumption and argue that, since Internet use is still growing 
        fast, we will see higher growth in electricity demand than the 
        historical trend would indicate. We take a different view. Over 
        the past five years, computers and Internet use have penetrated 
        significantly into U.S. businesses, households, and schools. 
        But electricity intensity--measured by kWh consumption per real 
        dollar of GDP--has continued a decline that began in the mid-
        1970s. This suggests that the new economy is less electricity 
        intensive than the old economy, i.e., it is economically more 
        efficient.
   Natural gas prices have been high over the past year 
        (averaging $4.23 MMBtu at Henry Hub), and we expect them to 
        remain relatively high for at least the next three years. 
        Regions that rely heavily on gas-fired power plants, such as 
        New England, New York, Texas, and Florida will continue to see 
        higher power prices because of high natural gas prices.

                           NATURAL GAS TRENDS
    The natural gas price shock is ongoing. Wholesale prices this past 
winter reached a peak of as much as $10.00 per million British thermal 
units (MMBtu) at the Henry Hub--nearly four times the level of the 
previous winter. Prices have moderated to near $5.00 per MMBtu, but are 
still nearly double the price level of just one year ago. While this 
rapid price jump has been shocking to customers and to the economy as a 
whole, it is, in fact, the result of longer term forces that have 
strained gas supply availability in North America. Tightening natural 
gas production capacity was masked by three warm winters beginning in 
1997. At the same time, lower cash flows--owing to the oil price 
collapse of 1998 and low gas prices because of weaker demand--resulted 
in a fall-off of drilling activity and a decline in U.S. production. In 
2000, very cold early winter weather and growing demand for gas use in 
power generation resulted in a sudden upsurge of demand and a heavy 
draw-down of storage inventories. When combined, this was the perfect 
mix for a dramatic price shock.
    Deregulation of natural gas prices served consumers well--with a 30 
percent decline in real prices from 1985 to 1999. Without a doubt the 
natural gas price shock this past winter has caused intense pain for 
customers. Homeowners are facing heating bills that have nearly 
doubled--costing the typical family $500-600 in disposable income. 
Businesses are also hard hit--often unable to pass their higher energy 
costs on to customers. Energy intensive industries, such as steel and 
fertilizer manufacturers, are seeing higher energy costs devour their 
profit margins to the extent that some have curtailed production.
    The good news is that the gas market worked this past winter:

   There is no threat to reliability. Customers faced sticker 
        shock, but the reliability of gas service has been preserved 
        despite the coldest November/December period in the 106 years 
        that this weather data has been tracked.
   There is no financial crisis among gas utilities. By and 
        large, rates are being adjusted through cost pass-through 
        mechanisms, preventing utilities from being squeezed between 
        high wholesale costs and low retail prices. Many utilities are 
        preparing ``risk mitigation'' proposals for the consideration 
        of their state commissions in order to prepare for the 2001-
        2002 heating season.
   The market is pushing off demand. During the peak of the 
        demand pressure in December and early January, more than 7 
        percent of ``base'' gas consumption was pushed off the market 
        through a combination of switching to alternative fuels, plant 
        closures, and through processors and pipelines leaving certain 
        gas liquids in the gas stream to boost the Btu's available for 
        customers (``ethane rejection.''). While gas prices have 
        moderated since the peak, much of the curtailed demand remains 
        off, as gas prices remain at or above the equivalent level of 
        distillate oil prices, one of the principal alternative fuels.

    The result is impressive. Despite fundamental market conditions 
(low storage, record cold) that were more extreme than the ``gas 
shortage'' of the 1975-1977 period, the market managed the shock this 
winter without the extensive interruptions of businesses and schools 
that occurred in the previous crisis. While prices are still high, the 
market has worked to moderate the extremes that were experienced 
earlier this winter.
The Gas Market Pressure Continues
    Despite moderating gas prices, pressure on the market continues 
and, with it, the potential for additional price shocks in the year 
ahead. Spring has finally arrived and the gas market has already 
shifted its focus to the daunting challenges that lie ahead: 
specifically, the need to refill storage inventories for next winter 
while at the same time meeting potentially higher demand for gas use in 
power generation this summer. At the same time, there is a need to 
store at least 400 billion cubic feet (Bcf) more than was stored in 
each of the previous two summers--representing roughly 4 percent of 
total gas supply. With production only slowly increasing, storage 
demand will keep pressure on the gas market.
    To provide an adequate supply for storage, gas prices need to 
remain high enough to continue to suppress demand. Specifically, this 
means price levels above those of residual fuel and distillate oil--the 
alternative boiler fuels. Given current oil prices, this means a gas 
price above $4.50 per MMBtu. Prices must continue to discourage demand, 
for if demand returns to gas from oil it will cut into storage 
injections, and the risk of extreme price volatility next winter will 
increase. Indeed, reaching even last year's low storage inventory level 
heading into next winter will prove challenging, and there is little 
margin for any interruption in what must be a consistent and aggressive 
pace of injections into storage.
    The beginning of the injection season will prove especially 
critical this year, because there is little prospect to make up later 
ground lost in April. Unless injections start strongly this season, 
inventories next autumn are not likely to reach even last year's record 
low level, and the market could be exposed yet again to crisis pricing 
in colder-than-normal circumstances. As a result, there will be little 
price relief for customers until 2002 at the earliest.
    Injections this spring will be closely watched for another reason 
as well: as an indicator of the health of U.S. wellhead supply. If 
injections are higher (or lower) than demand and imports would appear 
to imply, the injection rate will be interpreted as a leading indicator 
of the state of the long-awaited supply response in the United States, 
just as last year's low injections early in the season indicated a 
supply decline. This will only add to price volatility this spring and 
summer.
Longer-term
    While the gas market has proven remarkably resilient in managing 
the price shock, many of the underlying market pressures that caused 
the shock are not abating, principally because the underlying demand 
pressure in the market from power generation continues to grow. While 
electric power and gas supply issues are largely separate in terms of 
their underlying causes, but the solutions are interwoven. 
Specifically, the more that power generation needs are addressed by a 
wave of new gas fired power generation capacity additions, the more 
pressure will be exerted on the gas market. This means a growing 
probability that gas prices over the next several years will remain in 
a high and broad price band--principally between $3.00 and $6.00 per 
MMBtu.
    Behind this is a longer term challenge that will test the ability 
of the gas industry to draw forth new supply. Specifically:

   The power wave. There is a wave of new gas fired generation 
        being built across the nation, with the result that annual 
        demand growth for gas is likely to average between 1.5 and 2.0 
        Bcf per day. This is more than double the pace of growth in the 
        1990s.
   The supply challenge. Satisfying this demand pressure will 
        require connecting up to 20 Bcf per day of net new supply 
        capacity during the course of this decade--more than a 30 
        percent increase in the size of the gas industry. We estimate 
        that more than $400 billion of capital investment, nearly twice 
        the level of the 1990s, will be required for production 
        development alone.
   Discouraging signs from traditional producing regions. 
        Recent trends in production in several key regions point to how 
        difficult meeting this growth imperative will be. There is a 
        gas well drilling boom, but this has occurred in previous 
        years. Typically such a boom increases production by 1.0 to 1.5 
        Bcf per day within one year. When demand growth was lower, this 
        was more than enough to correct an imbalance and knock prices 
        down, more will be needed this time. At the same time, key 
        regions, such as the Gulf of Mexico shallow water area and the 
        Western Canadian Sedimentary Basin, have experienced an 
        increase in decline rates. For instance, production in the 
        shelf area of the Gulf of Mexico has fallen more than 5 Bcf per 
        day (30%) since the mid-1990s. In Canada, production growth has 
        slowed dramatically despite record levels of drilling in the 
        last several years.

    With current high prices and record drilling levels, overall U.S. 
production is showing signs of a rebound in several promising 
developments in the Rocky Mountains and parts of East Texas. But this 
is unlikely to be enough to do more than offset potential demand 
growth; it will not return the market to surplus. As a result, prices 
are likely to remain abnormally high ($4-6 range) until there is a more 
significant addition to North American gas supply.
The Importance of New Supply Frontiers
    With the limitations on production growth from traditional 
producing basins, we must increasingly turn to the supply frontiers to 
bridge the gap. These tend to be capital intensive projects with longer 
lead times and greater market risk. United States' energy policy needs 
to be directed toward facilitating the development of several of these 
``frontiers''. The good news is that these regions are highly 
prospective and potentially highly profitable to develop.\3\ Highlights 
of these alternatives include:
---------------------------------------------------------------------------
    \3\ See Towards New Frontiers: The Future of U.S. Natural Gas 
Supplies (CERA 2001)
---------------------------------------------------------------------------
    The deepwater Gulf of Mexico. The deepwater Gulf of Mexico is a 
preeminent exploration and production hot spot. It is already in active 
development--with exploration pushing the technological frontier 
associated with development in water depths of more than 5,000 feet 
(and potentially as much as 10,000 feet). This area already is 
producing more than 4 Bcf per day and has the potential to grow to over 
10 Bcf per day--with annual growth exceeding 1 Bcf per day over the 
next several years.
    LNG imports. With recent or pending reactivation of the four 
existing LNG import facilities in the United States, we expect a 
significant increase in imports, particularly after 2002. With 
expansions, these terminals could accommodate 3-4 Bcf per day of total 
imports--principally from Atlantic Basin suppliers such as Trinidad, 
Nigeria, Algeria, and possibly Venezuela. Beyond this, several new 
``greenfield'' LNG facilities have recently been proposed--including 
projects on the west coast to serve constrained gas and power markets 
in California. While these will be challenging to site, they can 
provide a foundation for additional growth.
    Atlantic Canada gas. Major discoveries in offshore Nova Scotia can 
add to the recently completed Sable Island/Maritimes and Northeast 
project--which is now delivering nearly 0.5 Bcf per day to New England. 
These supplies have the advantage of being reasonably close to high 
value eastern U.S. gas markets. With additional development and major 
pipeline expansions/looping, Atlantic Canada gas supplies could climb 
to over 2.0 Bcf per day.
    Arctic gas. The highly prospective regions of the northern frontier 
and arctic represent a tremendous long term resource for the North 
American market. In Prudhoe Bay alone, more than 8 Bcf per day of gas 
is already being reinjected. Of course, connecting these supplies will 
require a major and complex pipeline project--costing at least $6-10 
billion and taking more than five years to develop. Nevertheless, this 
could provide a major new source of supply (2.5-4.0 Bcf per day) before 
the end of the decade.
    Collectively, these frontier sources can account for the majority 
of incremental gas supplies in North America. Best of all, they are 
competitive at prices well below current levels, potentially as low as 
$3.00 to $3.50 per MMBtu, but they are highly complicated and capital 
intensive projects. Timely implementation will require cooperation 
among industry members, local communities, and governments, but they 
have the potential to bring what consumers really need: a low cost, 
reliable and environmentally attractive form of energy.
Policy Implications
    Natural gas can and should become a vital part of the nation's 
energy solution. Long-term policies need to be developed to encourage 
the environmentally friendly and balanced development of this resource. 
We, therefore, encourage consideration of five long-term policy 
objectives pertaining to natural gas:
    1. Streamline the infrastructure approval process. All of the new 
frontiers will require significant investment in gas transmission and 
handling infrastructure--such as LNG terminals, pipelines and storage 
fields. Some of these, such as the Arctic pipeline and LNG, have not 
been seriously examined for over 20 years--having been last considered 
during the 1970s. But they are not totally new either. State and 
Federal governments should take steps to ensure the balanced but 
expeditious consideration of these new facilities.
    2. Add economics to the land access issue. Federal land access 
considerations have become a polarizing issue in North America. Rather 
than treating this in black and white terms, we need to move to a more 
deliberate case by case approach to land access considerations--with 
more balanced consideration of the economic and environmental costs and 
benefits.
    3. Promote environmental flexibility relative to fuels. One lesson 
of the California power crisis is the growing importance of fuel 
flexibility during times of shortage or constraints. Natural gas 
markets go through boom/bust cycles with periods of relatively 
constrained supply. During these periods there needs to be flexibility 
to ease emissions restrictions and allow switching to alternative 
fuels, such as oil.
    4. Develop an energy policy with a continental perspective. Many of 
the most pressing energy issues for gas and power are not limited to 
the United States--they play out against a continental backdrop. 
Therefore, U.S. energy policy must be developed in dialogue with Canada 
and Mexico.
    5. Bring a portfolio strategy to energy. If we have learned 
anything from the energy cycles of the past several decades it is the 
need for diversity. Whether it is through term contracting for gas and 
power, mixing new supply with conservation, or in fuel choice, a 
comprehensive energy policy needs to promote and balance all of the 
resources and options.

    The Chairman. Thank you very much, Mr. Placke. I appreciate 
that statement.
    We will next move to Mr. William Nugent, commissioner of 
the Maine Public Utilities Commission. Please proceed.

  STATEMENT OF WILLIAM M. NUGENT, COMMISSIONER, MAINE PUBLIC 
  UTILITIES COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF 
                REGULATORY UTILITY COMMISSIONERS

    Mr. Nugent. Thank you, Mr. Chairman. I have provided 
written testimony that addresses the topics that my colleagues 
have already addressed here today. And I would like to take 
this opportunity to add a dimension to the testimony before the 
committee, and would appreciate your including my written 
statement in today's hearing record, as if I had read it.
    The Chairman. Without objection.
    Mr. Nugent. What I would like to add to this is, the next 
thing I would like to add is, the impact on consumers at the 
local level. Maine restructured its electricity market a year 
ago.
    On March 1, 2000, we opened to all customers the retail 
markets, retail competition. To serve customers who chose not 
to choose a supplier or could not find one, the Maine PUC 
arranges so-called standard offer service. Our customers' bills 
now show two separate lines; one for generation service, the 
other for transmission and distribution service, T&D.
    T&D prices have been constant. But as a direct consequence 
of national energy price increases, the generation prices in 
our two largest service territories rose sharply from March 
2000 to March 2001. There is a table, which staff has put 
before you, which is titled Generation Prices. And it includes 
in the top left-hand corner Central Maine Power Company. You 
will see three categories for Central Maine and Bangor Hydro.
    And with the exception of the residential and small 
business customers in Central Maine's service territory, who 
have a 2-year contract arrived at prior to March 1, 2000, you 
can see the price increases for the remaining five customer 
classes whose contracts were newly arranged to start March 1, 
2001. And the price increases, as you can see in the right-hand 
column, range from 45.3 to 62.2 cents--or percent, I should 
say.
    Generation prices may appear less dramatic when combined 
with T&D rates to produce an all-inclusive bill, but there is 
no disguising for Bangor Hydro's residential customers a 2.8-
cent per kilowatt hour increase in the price in the past year. 
That is a 20-percent increase when you come down to even an 
all-in rate, a double digit, big impact. People are not happy.
    To match market circumstances, we let medium and large 
customer prices vary by season and time of use. CMP's large 
industrial standard offer customers will see summer peak 
generation prices this year of 14.6 cents per kilowatt hour 
plus T&D charges. And a large paper mill can easily use 13 
million kilowatt hours in a month.
    The story is similar for natural gas customers. The typical 
bill of a customer who heats with natural gas has increased 85 
percent from the winter of 1998/1999 to this coming summer. And 
equally important for many of them, the numbers do not stand 
still. The cost of gas adjustments are coming twice as rapidly 
now as they have in the recent past.
    Maine restructured its electricity and gas industries 
because we believe that in the long run competition will 
provide Maine consumers with lower prices than traditional cost 
of service regulation. We could not responsibly promise lower 
prices, but we could, and we did, promise that we would do 
everything to bring about a healthy, vigorously competitive 
market.
    And in choosing to restructure, the one clearly 
unacceptable outcome for Maine commissioners, as well as 
regulators across the country, is the elimination of price 
regulation without competition to take its place.
    A fair, well-functioning, competitive wholesale market is a 
must. No amount of brilliance in designing the retail market 
will correct defects at the wholesale level.
    And remember, these are regional wholesale markets. How 
much consumers in any one State pay is driven not by supply and 
demand in that State alone, but by supply and demand throughout 
the region and, to some extent, in adjacent regions. There is 
but one hourly clearing price for an entire region.
    State commissioners have no legal jurisdiction over retail 
markets. That authority and responsibility ultimately rests 
with the Federal Energy Regulatory Commission, the FERC. Now 
having established the structure for the retail market, I 
suppose we State commissioners could back away and say that 
whether or not restructuring works is out of our hands. But we 
cannot do that. We have to make certain that truly competitive 
markets, free of market power and gaming, replace price 
regulation.
    As a State regulator who spends, and as do my colleagues 
across the country, a great deal of time trying to figure out 
regional energy markets and how to improve them, I cannot tell 
you today that I believe that they are truly competitive, free 
of market power and gaming, and that your consumers, as well as 
mine, are paying just and reasonable prices.
    Now do not get me wrong. Markets are functioning. Markets 
will always function. The question is how stably and reasonably 
will they operate. They are not yet, in my view, truly 
competitive and free of that market power.
    Now transforming the electricity markets, wholesale and 
retail, is a difficult process. Each regional wholesale market 
is different. The markets are still just forming. And the 
players in the markets need to know the ground rules in order 
to make decisions that have extraordinarily large financial 
consequences. You and the FERC, pursuant to the authority you 
grant it, write the rules. Right now, in my view, the FERC is 
overwhelmed by the task before it. The regional markets need 
prompt, informed decision making, not forced compromises among 
monied interests.
    The issues before the FERC have major financial 
implications for inadequately represented rate payers, 
typically residential and small businesses. For example, the 
FERC must pay additional attention to the installed capability 
matter in New England, an issue which could cost Maine rate 
payers as much as $90 million a year and ten times that amount 
across the New England region.
    I did a back-of-the-envelope calculation last night as to 
what that would mean for households in Maine. My estimate comes 
up to about $84 a year per household. And that is just the 
household impact, not the business impact.
    New England continues to wait for the FERC's decision on 
complaints regarding last May 8's--this is 10 months ago now--
$6,000 megawatt hour price spike. Some people estimate that the 
incorrect pricing at that time resulted in a cumulative, an 
additional cumulative, $90 million overcharge to the spot 
market.
    At last count, ISO-New England's website revealed 20 market 
rules filed with the FERC that are still pending decision. If 
we are to have competitive wholesale markets, the FERC must 
give prompt decisions to market participants.
    Now let me tell you how fast that moves. When we were 
buying supplies to start March 1, 2000, we set a 2-month 
process to evaluate the offerings and pick a winner. In the 
wake of that process, the supplier said: Too slow; markets move 
faster.
    We condensed it from 2 months to 2 weeks. And let me tell 
you, that was too slow. And at one time trying to buy supply 
for this year, we had suppliers offering to call us, in fact 
calling us, at 11:15 every day and telling us they had to have 
our yes or no on the offer they made to us by 11:20. We had 5 
minutes to examine very complex offers that would commit Maine 
rate payers for a year.
    And if we have to make more rapid decisions, we need a 
market rules, as determined by the FERC, that will do that.
    The Chairman. Could you react that fast?
    Mr. Nugent. We did not to--to some extent, at first blush, 
when those prices were instituted, they were not the best 
prices. But we did arrange our procedures so that we met at 11 
o'clock, were there to receive the bid that came at 11:15, and 
had an official notice deliberations of our commission set 
immediately after we received them. So we could have, had that 
been a competitive price.
    It is not a usual position for someone that many people 
describe as kind of a bureaucrat. Right? I mean, we do not 
normally move like that. But we have to, and at least we are 
trying to do that. But we also need market rules, which more 
clearly spell out the alternatives in advance and do so in a 
way that protects the rate payer interest.
    The Chairman. Now that worked because they knew that there 
was a competitive market out there to bid that power in. If 
everybody had said no, obviously some people would have been 
without energy, but the people that were promoting this would 
not have been able to make their deals.
    Mr. Nugent. Yes. Their concern is that they get in in the 
morning and they scan the availabilities and then they fashion 
a bid. I mean, they were acting very quickly, too. This is not 
a scheme to squeeze us. Well, maybe it was. But in any event--
--
    The Chairman. Well, the question is--what they are saying 
is whatever the traffic will bear is the price.
    Mr. Nugent. That is right. And that is what we have stepped 
up to, as you can see by the price increases.
    The Chairman. That is called a free market.
    Mr. Nugent. I understand.
    The Chairman. You know, you pay through the nose if you are 
caught in a bind. And the idea is you are supposed to be smart 
enough to make sure that does not happen.
    Mr. Nugent. Well, Mr. Chairman, a free market is one in 
which people price uncertainty. And to the extent that one 
writes clear rules on which suppliers, as well as consumers, 
can rely, you will wring that uncertainty out of the market. 
And right now I think what is happening in the market and the 
reason I can say that it is not fully fair and competitive and 
the prices are not just unreasonable right now is that there is 
too much uncertainty.
    And I think we, as government have to step up and form 
those rules so as to give greater certainty to suppliers, as 
well as rate payers. And I think that will lead to lower prices 
and greater confidence in the market.
    The Chairman. Well, go ahead and tell us how to do it then.
    Mr. Nugent. Well, we are still working on that one, too. 
And we hope we would have a continuing dialogue with you and 
your colleagues. And I think one thing that would help would be 
two members on the FERC.
    The Chairman. I agree with you.
    Mr. Nugent. And we need a FERC that will also work closely 
with State commissioners in addressing regional problems. We 
are not special interest litigants pleading before the Federal 
commission. We are the only representatives appearing there, 
sworn to pursue and exceed the public interest in these 
matters.
    To that end, the New England utility commissioners have 
asked the FERC to establish a regional market monitoring 
structure. The Maine commission has proposed going even beyond 
that to establish a regional organization that could advise and 
comment to the FERC on critical matters here.
    We recognize that such an organization's advice would be 
fully subject to final determination by the FERC and might in 
fact be rejected. But to the extent that we have an identity of 
interest, the public interest, the efforts of an expert, 
informed, and independent regional body could help ease the 
FERC's burden and aid the development of those competitive 
markets.
    The FERC must perform its role as a fact finder and decider 
of these important and complex issues. Every day it does not, 
rate payers are paying far more for power than even long-run 
marginal costs would suggest they might.
    Now finally, a word about the EIA, the Energy Information 
Administration. Recently it proposed to treat certain power 
generation information as confidential and not release it in 
individually identifiable form. To the extent that State 
commissions must protect the public interest and help develop 
markets, we must have access to those data with appropriate 
safeguards. We deal all the time with commercially sensitive 
information. And we grant legally binding protective orders.
    But today, when gaming and market power abuse are more 
possible than ever, to deny those charged with protecting the 
public interest access to the information we need to protect 
that interest makes no sense at all. That is not in the public 
interest.
    I thank you, Mr. Chairman and members of the committee, for 
giving me that extra minute or two past your red light.
    [The prepared statement of Mr. Nugent follows:]
  Prepared Statement of William M. Nugent, Commissioner, Maine Public 
 Utilities Commission, on Behalf of National Association of Regulatory 
                         Utility Commissioners
    Mr. Chairman and members of the committee: Good morning. My name is 
Bill Nugent. I am a Commissioner on the Maine Public Utilities 
Commission and First Vice President of the National Association of 
Regulatory Utility Commissioners, commonly known as NARUC. I greatly 
appreciate the opportunity to appear before the Senate Energy and 
Natural Resources Committee on behalf of NARUC and I respectfully 
request that NARUC's written statement be included in today's hearing 
record as if fully read.
    NARUC is a quasi-governmental, nonprofit organization founded in 
1889. Its membership includes the state public utility commissions for 
all states and territories. NARUC's mission is to serve the public 
interest by improving the quality and effectiveness of public utility 
regulation. NARUC's members regulate the retail rates and services of 
electric, gas, water and telephone utilities. We have the obligation 
under State law to ensure the establishment and maintenance of such 
energy utility services as may be required by the public convenience 
and necessity, and to ensure that such services are provided at rates 
and conditions that are just, reasonable and nondiscriminatory for all 
consumers.
    NARUC's membership has been and continues to be central to the 
development and implementation of policy initiatives affecting the 
nation's energy industry and its consumers. For better or worse, the 
States are the proving grounds for innovations in energy policy. One 
observation that can be made regarding State energy policy activities 
is that one size does not fit all. States and their energy industry 
stakeholders are experimenting with many different solutions to the 
energy challenges that are confronting this Nation. These proposals 
range from retail competition implementation to demand side and 
renewable energy incentives to the use of new technology applications. 
Clearly, in light of the difficulties being experienced not only in the 
Western region, additional solutions are necessary.
    As policy makers we all must be cognizant of the fact that, as we 
explore solutions to the challenges before us, the main obstacle that 
the energy industry faces is a paucity of predictability and certainty. 
When the right economic or market signals are sent there is an 
appropriate corresponding response by the market participants. If the 
market participants perceive that the rules are constantly changing and 
therefore the market will never develop or mature, the participants 
will not invest in development of the market or the production 
mechanisms to participate in that market.

                         HISTORICAL PERSPECTIVE
    As the electric power industry developed the technical generation 
and transmission capability in the early part of this century, the 
industry was transformed from a local and urban industry into one 
capable of producing large amounts of power at a central location and 
transmitting this power vast distances. As efficiencies improved prices 
declined. For most of the twentieth century States have regulated all 
aspects of bundled retail electric service and rates.
    The inability of the States to regulate prices and other aspects of 
electricity sold in interstate commerce under the Constitution and the 
absence of Federal regulation of those activities created a vacuum of 
regulation over electricity flowing in interstate commerce. The 
enactment of the Federal Power Act in 1935 constituted the first 
comprehensive effort to bring interstate aspects of the electrical 
power industry under governmental regulation.
    As a consequence of major power outages during the late 1960's-
early 1970's and the energy crisis of the 1970's, Congress held 
extensive hearings looking into specific electricity blackouts and 
capacity shortages. Much of this attention focused on the matter of 
interconnection of utilities as a method of assuring greater 
reliability and coordination among utilities. Out of these 
congressional reviews, more formalized planning responsibilities and 
wheeling requirements were incorporated into the Public Utility 
Regulatory Policies Act of 1978 (PURPA).
    PURPA provided that State public utility commissions should 
consider and determine whether to adopt cost-of-service and other 
standards that were contained in PURPA section 111 and 113. Section 201 
and 210 of PURPA provided that certain qualified facilities (QFs) could 
sell their power to their host utility at that utility's State-
determined avoided cost. There are two categories of QFs: cogeneration 
facilities, and renewable facilities. The Federal Energy Regulatory 
Commission promulgated general rules in 1980 on avoided cost 
calculations, and by 1982 all the State commissions had developed 
specific formulas and methods to administratively-determine and 
implement avoid costs. One State early on, New Jersey, set its avoided 
costs at the Pennsylvania-New Jersey-Maryland (PJM) wholesale market 
rate.
    While other PURPA provisions purported to encourage wheeling of 
electricity, they were for the most part ineffective. Wheeling of 
electricity took place only voluntarily. Wholesale electricity markets 
were limited, except where State commissions encouraged and utilities 
formed tight power pools, such as PJM and the New England Power Pool 
(NEPOOL). To break down the barriers to a more robust wholesale power 
market, Congress enacted Title VII of the Energy Policy Act of 1992 
(EPACT).
    EPACT provided that FERC could mandate wheeling of electricity. 
This provided generators with open transmission access to any wholesale 
buyer of electricity. EPACT also created Exempt Wholesale Generators 
(EWGs). These EWGs could, subject to State siting and environmental 
review, build power plants to sell electricity on the wholesale 
markets.
    By 1994, the wholesale price of electricity fell dramatically 
because of the surplus of generation capacity. Large industrial 
customers in high cost States asked their State legislatures or State 
commissions to allow retail customers to have direct access to 
wholesale markets. Today, 25 States, plus the District of Columbia, are 
in the process of implementing retail competition laws and/or 
regulations. These States have also provided for recovery of stranded 
costs. Most of these States have also either allowed or required their 
host utilities to divest themselves of their generation capacity, in 
order to break up vertical market power.
    Independent System Operators (ISOs) were set up in PJM, California, 
and New England to coordinated regional wholesale markets. After the 
initial success of these ISOs, FERC required all jurisdictional 
utilities to organize themselves into Regional Transmission 
Organizations (RTO) in FERC Order 2000. These RTOs will help to 
coordinate regional transmission systems and regional power markets. 
They are also intended to monitor regional markets and plan regional 
transmission expansion.
    State commissions must have a greater role in RTO governance and 
oversight than is now provided by FERC Order 2000. In particular, State 
commissions are the entities most directly concerned with monitoring 
local and regional markets because retail customers are most affected 
by market power abuses. In addition, the State commissions typically 
are the entities that must coordinate and approve transmission 
expansion and siting consistent with regional plans. State commissions 
have consistently expressed a willingness to work with FERC on such 
regional issues, but thus far the FERC has taken a position that it can 
and should preempt the field. Congress should provide an appropriate 
State role for regional oversight of RTOs concerning market power 
monitoring and transmission expansion planning, and for other areas 
where State commissions in a given region can cooperate and have the 
distinct advantage of knowledge of the region and the workings of its 
energy industries.
    On the gas side, in 1977 the nation had just suffered through 
natural gas shortages and curtailments that were caused by an imbalance 
of supply and demand in the interstate gas market. This supply-demand 
imbalance can be traced to the 1954 Philips Supreme Court decision, 
which interpreted the Natural Gas Act of 1938 to extend federal 
authority to regulate the wellhead gas price of gas sold in interstate 
commerce.
    Congress, as part of the Energy Policy Act of 1978, enacted the 
Natural Gas Policy Act of 1978 (NGPA) and the Fuel Use Act (FUA). The 
NGPA provided for phased deregulation of wellhead gas. By 1985, the 
wellhead price of natural gas was effectively deregulated. The FUA 
provided that there would be no new gas-fired electric generation after 
1978. However in 1985 the FUA was repealed. Thus, for seven years there 
was a federally mandated moratorium on new gas-fired electric 
generation.
    As the phase-in for deregulation ended, wellhead prices dropped 
because the supply of gas was more than adequate for the demand and 
higher-cost gas wells were shut down. To encourage further gas 
consumption, the FERC issued FERC Order 436 (in 1985) and Order 500 (in 
1987). Specifically, with these two orders, the FERC provided for 
voluntary open access to gas pipeline transportation, coupled with 
offering take-or-pay gas wellhead contract relief for high cost gas. 
This was the equivalent of allowing for a stranded cost recovery. It is 
worth noting that end use gas customers only paid about 11 cents for 
each dollar of take-or-pay relief, contrasted with the $1 for $1 
stranded cost recovery for electric utilities in FERC Order 888.
    During this period, gas supplies remained abundant when compared to 
gas demand; this was reflected in the continued low wellhead price of 
natural gas. In 1992, the FERC issued Order 636, which mandated 
unbundling of gas as a commodity for the transportation service 
provided by interstate pipelines. Order 636 also provided for pipeline 
capacity release and a secondary market for released pipeline capacity. 
In FERC Order 637, issued in 2000, FERC removed the rate cap on short-
term secondary pipeline capacity. This resulted in the development of a 
spot market for natural gas, a secondary market for capacity, ancillary 
gas services (such as storage), and 40 gas transportation hubs that are 
market centers for gas.
    Since the late 1980s, nearly all State commissions have allowed 
large industrial and commercial customers to have unbundled gas 
service, through which they can purchase gas transportation from their 
distribution company and directly purchase wellhead gas. Currently 
(either as a pilot program or part of a broader customer choice 
program), 23 states and the District of Columbia now allow retail 
residential customers to purchase gas directly from the wellhead 
(typically through aggregators or marketers).

                       ENERGY TRENDS AND MARKETS
    The following observations are not listed in any particular order 
because many build upon each other; they should be considered as a 
whole, not separately. While these trends do not provide us easy 
answers to our Nation's energy policy challenges, but these 
observations may help to identify the problems that we must soon 
confront.
Natural Gas Trends
            Trend 1--Gas demand has increased, production has not kept 
                    pace, and there is no ``quick fix''
    Natural gas wellhead prices more than doubled for the fourth 
quarter of 2000 compared to the fourth quarter of 1999, and working gas 
storage was down in 2000 compared to 1999. Additionally, from 1994 
through 1997 while the growth in domestic gas reserves exceeded 
incremental gas production, domestic gas production was projected to 
increase by only .05 percent in 2000 compared to 1999 (from 18.66 to 
18.76 Tcf). At the same time, nearly all new electricity generation 
being is gas-fired. Therefore, a principal reason for the increased gas 
prices is the increased demand for gas caused by new gas-fired electric 
generation (gas peaking turbines and combined-cycle gas turbines). 
Domestic gas production is likely to increase in response to higher gas 
prices, but in the short and mid-term most of the increased supply is 
likely to come from existing gas fields in Canada. While it might take 
only six months to explore and drill a gas well, it takes years to 
build a pipeline to transport it, if the gas does not come from 
existing or nearby existing gas sources which have pipelines in place.
    These trends are well illustrated in Maine. In 1997 the closure of 
the Maine Yankee Nuclear Generating Station reduced Maine's electric 
generating capacity from 3,100 megawatts (mW) to 2,200 mW. Over the 
last three years we have added more than 1,600 mW of new, gas-fired 
generation, bringing our total to 3,800 mW, more than double Maine's 
peak demand.
    This was made possible by the construction in 1999 and 2000 of two 
new gas pipelines, the Portland Natural Gas Transmission System, which 
brings western Canadian natural gas through Maine to the New England 
Market, and the Maritimes and Northeast Pipeline, which transports gas 
from the Sable Islands gas fields, 150 miles off the coast of Nova 
Scotia. These pipes were planned, sited, and permitted before today's 
higher natural gas prices. There is reason to believe that, in response 
to today's market opportunities, M&NE will boost its capacity by more 
than 50 percent through higher compression. And further increases in 
production off the Canadian Maritimes may be in the offing.
            Trend 2--Convergence
    In 1998, over $30 billion in convergence mergers transpired as 
electric utilities merged with gas pipelines, gas providers, and local 
gas utilities. These mergers provide the converged companies an 
opportunity to vertically integrate and also to market BTUs in the form 
of natural gas or electricity, whichever is more lucrative. This allows 
the energy industry stakeholders to respond to market demand and 
preference, while providing them an opportunity to hedge against the 
uncertainty confronting this industry today.
            Trend 3--Though the majority of natural gas is still being 
                    bought on the spot market, market participants are 
                    increasing their use of risk management tools
    Retail gas customer choice programs have been established in nearly 
half of the states, but nearly 60 percent of the natural gas consumed 
is still being bought on the spot market. Without hedging, forwards, or 
futures contracts, most retail customer prices will continue to be 
volatile placing a heavy burden on many small customers. However, in 
response to this winter's price increases, gas companies and their 
affiliates, as well as gas marketers, are increasingly emphasizing 
hedging and other risk management tools.
            Trend 4--States have increased their assistance to 
                    residential ratepayers
    Nationwide, as a result of increased gas prices, State commissions 
have redoubled their efforts to inform consumers of the likelihood of 
increased prices and ways they can lower their gas bills through more 
efficient usage. State commissions have also been re-examining their 
disconnection policies for gas customers, provided information on the 
availability of levelized or budget billing, and energy weatherization 
and conservation programs. State commissions have also informed 
customers of low-income energy assistance programs and in many 
instances have expanded those programs.
Electricity Trends
            Trend 1--Customers are demanding increased reliability
    Recently there have been an increased number of major utility 
interruptions as a result of a lack of generation capacity or the 
result of problems with equipment failures at the distribution system. 
Because of our increasing reliance on electro-technologies, including 
the manufacture of solid state electronic silicon chips, there is an 
increasing customer desire for fewer electricity interruptions and for 
higher quality of power, that is, power without voltage sags, surges, 
spikes, interruptions, or harmonics. Internet farms and informational 
services are particularly sensitive to power disruptions. As our 
economy increasingly depends on technologies driven by electricity, 
reliability becomes exceedingly important to our economic health.
            Trend 2--Reserve Margins
    Reserve margins are low in several regions in the country. They are 
particularly low in California, where utilities are projected to not 
have enough capacity to serve their customers at times if this summer 
is average or warmer than normal. And at least according to one major 
electricity marketer (Dynegy), most regions of the country (the sole 
exceptions are Texas and New England) will be in a capacity deficit 
situation through next year.
            Trend 3--Gas fired generation
    During 1999, about 80 percent (11,073 mW of the 13,763 mW) of new 
capacity additions by utilities and non-utilities were gas-fired. Gas-
fired units drew heavily on gas supplies during the summer of 2000, the 
season when a time gas utilities and pipelines traditionally put 
natural gas in storage. This led to higher gas prices during the 
summer, lower inventories last fall, and even higher gas prices this 
winter. While gas prices have since moderated somewhat, this pattern is 
likely to repeat itself until increased gas supplies reach the market. 
While it might take as little as six months for gas production to 
increase, if new gas supplies are located such that additional pipeline 
capacity is needed, the period for new gas supplies to reach the market 
could be two years or more.
    Nearly all of the additions of generation capacity that are planned 
for 2000 through 2004 are gas-fired electric generation. Of the 44,410 
MW of planned generation capacity, 41,339 (93 percent) are gas-fired. 
This additional planned electricity capacity, if completed, will 
provide upward pressure on natural gas prices. If the capacity fails to 
come on-line as scheduled, most electric reliability regions throughout 
the country will face electricity capacity shortages, if not 
immediately, then within the next few years. While it only takes two 
years for a gas-fired plant to be built once sited, it takes coal 
plants several years. Petroleum-fired plants also have high fuel 
prices, and currently no nuclear plants are planned. New hydro capacity 
is limited; and the amount of capacity from waste heat (cogeneration) 
and renewables is also limited.
            Trend 4--Generation jurisdiction shift from State to FERC
    During 1999, three quarters (10,266 mW of the 13,763 mW) of new 
capacity added was added by non-utilities. Most of this capacity is 
being sold on regional wholesale electricity markets, which are 
regulated by the Federal Energy Regulatory Commission (FERC). As State 
commissions allow retail electricity competition, they often also allow 
or require generation plant divestiture by the host utility. Most of 
these generation assets are acquired by non-utilities and the power is 
sold on regional wholesale markets, regulated by FERC.
    This is, I believe, the right model. But it requires a clear vision 
on the part of the FERC, consideration of the facts on the ground in 
each of the different regions of the country, and prompt decisions by 
the Commission. Delay costs ratepayers--the people you and we serve--a 
great deal of money. At stake right now before the FERC in a current 
controversy over installed capability is $90 million for Maine 
ratepayers alone, and perhaps ten times that amount across the six New 
England states.
            Trend 5--Competitive markets require States to have access 
                    to more information not less
    State public utility commissions around the country, but 
particularly in the West, increasingly are faced with refusals by 
utilities and non-utilities that own generation facilities to provide 
data. Without requested data, State regulators are severely hampered in 
their efforts to determine whether there is gaming of the market, 
through bids that are many multiples of production costs, by 
withholding of capacity at or near peak, or withholding of available 
transmission capacity. State commissions need to know which units (not 
plants) are down and/or at what output in megawatts are all units 
producing. This information needs to be given in a timely manner as a 
useful average.
    Additionally, the Energy Information Administration of the U.S. 
Department of Energy is proposing to aggregate its data form reports 
and to withhold data that might be confidential. Without such data, 
State commissions, State attorneys general, and the FERC will be unable 
to monitor the markets to ensure the market is free of market power, 
and that market rates are just and reasonable.
            Trend 6--Nuclear plants are being re-licensed
    Ten years ago it seemed certain to many that the operating nuclear 
plants in this country would be shut down rather than renew their 
licenses. But today, two have been renewed, additional license renewals 
are pending, and generating companies are purchasing nuclear units that 
could not be given away in the late 1980's and early 1990's. 
Increasingly, nuclear units are seen as a cost effective way to produce 
electricity in a competitive electricity market. This trend can 
continue only if the Federal government meets it's statutory obligation 
to begin excepting spent fuel for disposal and if the Congress 
appropriates the necessary monies that America's ratepayers have 
already paid into the U.S. Treasury for the purpose of building a 
nuclear waste disposal facility.
    In conclusion, I would like to leave you with one last trend that I 
will call a ``general energy trend,'' which I believe is accurate 
regardless of the energy source. Demand for energy is at an all time 
high and, if current estimates are accurate, each year this demand will 
continue to increase. Prices for energy have followed suit and 
increased as well. This trend has placed a severe financial burden on 
many consumers across the nation.
    NARUC believes that the impact of the current energy price 
increases can be mitigated, in a number of ways. First, for our most 
vulnerable citizens, Congress should provide substantial increases in 
funding for the Low Income Home Energy Assistance Program (LIHEAP). We 
believe that LIHEAP should receive a ``core'' appropriation of at least 
$3.4 billion as is proposed in Senator Bingaman's bill (S. 352) plus 
emergency contingency funding of at least $1 billion as is proposed in 
Chairman Murkowski's legislation (S. 388 and S. 389).
    Second, Congress needs to take action to promote development and 
encourage the production of renewable energy sources and technologies. 
Congress must also balance supply/production policies targeted at 
conventional energy sources (nuclear, coal, gas, oil and hydroelectric) 
with meaningful incentives and policy to encourage demand reduction and 
conservation.
    Thank you for your attention and availing me the opportunity to 
testify today. I look forward to your questions.

    The Chairman. Thank you very much, Mr. Nugent.
    Our last presentation will come from Mr. Frederick Hoover, 
director of the Maryland Energy Administration. Please proceed.

   STATEMENT OF FREDERICK H. HOOVER, JR., DIRECTOR, MARYLAND 
  ENERGY ADMINISTRATION, ON BEHALF OF NATIONAL ASSOCIATION OF 
                     STATE ENERGY OFFICIALS

    Mr. Hoover. Mr. Chairman, members of the committee, I am 
Frederick Hoover, Jr. I am pleased to testify on behalf of the 
National Association of State Energy Officials. I serve as an 
officer of NASEO and a director of the Maryland Energy 
Administration, the State energy office in Maryland.
    We congratulate you for holding this hearing on energy 
trends. As an initial matter, I want to emphasize that we did 
not get into our energy problems overnight. And they will not 
be solved overnight. But as many of you have stated today, we 
must act.
    We know that the general public and most of Congress and 
various administrations do not worry about energy prices until 
they go up. At the State level, the energy offices attempt to 
keep the focus on energy and support a balanced set of policies 
at the State, regional and national levels. The major trend we 
see, and what you have heard stated today, is tighter supplies 
of natural gas, oil, and other distillate fuels and propane.
    Another major problem is price volatility, especially tied 
to extremely low inventory levels of these products. In 
addition, the interrelationship between fuels has never been 
greater. For example, natural gas is dramatically expanding its 
use in electric generation. And interruptible contracts in this 
area put enormous pressure on heating oil supplies during the 
winter season. We must focus on fuel diversity.
    Whatever action we take at the national and State levels 
must expand our supply mix, increase inventory levels, and 
reduce price volatility. Ultimately, extremely high or low 
prices hurt consumers, business, and energy industry alike. 
Supply and demand side measures should not be seen as 
conflicting. We need both.
    There are certain actions we can take. Many of the elements 
in both Chairman Murkowski's and Senator Bingaman's bills are 
positive and should move forward. For example, tax incentives 
for new gas pipeline development and energy efficiency tax 
credits for new and existing buildings, regional approaches of 
the type suggested by Senator Bingaman. Expansion of funding 
for the low income home energy assistance program, the State 
energy program, and the low income weatherization assistance 
program are needed.
    Creation of a new program for energy efficiency in schools 
is a critical need and passage of reliability legislation, 
included in basic form in both bills.
    The Chairman. Are you talking about Price-Anderson 
liability legislation?
    Mr. Hoover. No. I meant to say reliability legislation.
    As Commissioner Nugent mentioned, FERC must take a more 
aggressive role in market monitoring, and strong consideration 
should be given to the cost of service pricing for wholesale 
sales in the West. The market is broken, and insufficient 
supply is present in the market.
    If generators think that FERC is not serious, excess 
profits will be made. The two refund orders and the market 
orders FERC just issued head in the right direction but do not 
go far enough. There are enough incentives to build powerplants 
in California and the West now. It just cannot be ramped up 
quickly enough. With wholesale price regulation at FERC, the 
States are put in a very difficult position, if market 
participants do not take the commission seriously.
    The energy emergency function at the Department of Energy 
needs to be revitalized and funded. We also support 
Commissioner Nugent's position reflecting the concern on the 
new EIA proposal issued on March 13. It would make a great deal 
of powerplant data confidential and make it more difficult to 
deal with market problems.
    At the State level, NASEO is working with NARUC and our 
sister organizations representing State environmental 
commissioners and State air directors and have begun the 
difficult process of attempting to integrate our energy and 
environmental policies, programs and regulations. Greater 
coordination at the Federal level is warranted as well.
    Finally, there is an enormous disconnect between 
authorizations and appropriations. We must set priorities. In 
addition, information on the preliminary budget numbers raises 
concerns on our part that if we are in an energy crisis, why is 
the budget not being produced to reflect that? Cuts in fossil 
energy programs, other than clean coal, and cuts in energy 
efficiency programs and renewable energy programs are 
inconsistent with a smart, comprehensive energy policy.
    We need both short- and long-term solutions to this 
problem. We support the pipeline that was discussed by Mr. 
Placke earlier to bring natural gas from existing resources in 
Alaska. And we are attempting to do things at the State level 
to try and increase the supply of energy.
    In my own State, we have a proposal in front of the Federal 
Energy Regulatory Commission to reopen one of the liquified 
natural gas terminals that was mentioned earlier as a way of 
bringing new gas supply into the country. The States are doing 
their part to try and step up to this. And we look forward to 
working with the Congress and the administration to solve this 
problem.
    With that, I will conclude and answer any questions you may 
have.
    [The prepared statement of Mr. Hoover follows:]
  Prepared Statement of Frederick H. Hoover, Jr., Director, Maryland 
   Energy Administration, on Behalf of National Association of State 
                            Energy Officials
    Mr. Chairman, members of the Committee, my name is Frederick H. 
Hoover, Jr., and I am pleased to testify before the Committee to 
discuss the views of the National Association of State Energy Officials 
(NASEO) on current energy trends and changes in energy markets. I am 
Director of the Maryland Energy Administration. I am also an officer of 
NASEO, which represents forty-nine of the state energy offices, as well 
as the territories and the District of Columbia. NASEO's objective is 
to support balanced national energy policies and to provide state 
perspectives on important energy issues.

                INTERNATIONAL AND NATIONAL ENERGY TRENDS
    Complete energy independence is not going to happen. As the 
Committee knows, our energy markets are tied to the world markets, 
especially in the oil sector. That is not to say we are helpless as a 
Nation. On the other hand, we must recognize that we fought the Gulf 
War to protect our strategic interests, i.e., access to oil. OPEC has 
now cut production by 2.5 million barrels/day this year, which should 
push oil prices up this summer. The real cost of energy is much higher 
than most of us would like to believe.
    At a national level we have an energy infrastructure (e.g., 
production capacity, refinery utilization, pipeline capacity and 
terminal storage) that is stretched to its limits. We have seen 
historically low inventories of important energy products in the past 
year, and we have seen tremendous price volatility for more than two 
years. Consumers benefited from such downward price swings as $11/
barrel oil in 1998, only to face the reality of historically high 
heating fuel and gasoline prices a year or more later. We would argue 
that energy price volatility, both up and down, hurts consumers, 
businesses and the energy industry as each is forced to adjust to boom 
and bust cycles. For example, when energy prices dropped to the very 
low levels of 1998, drilling stopped and supply began to tighten. Even 
with the high prices we are seeing, new significant supply will take 
months to come on line.
    We saw natural gas prices for the past few years slip to the $2-
2.50/mcf range, and this winter spike to $10/mcf, much higher in the 
West on the spot market, and now hopefully settling down to a range of 
$4-6/mcf for the foreseeable future. This means the average Midwest 
household saw yearly heating costs go from $540 to $950. We are 
concerned that prices will go up much higher later this year.
    Last year it was heating oil that spiked to over $2/gallon. While 
prices dropped back, the average consumer in the Northeast is paying 
approximately $1,000, up from $760 last year and $520 the year before.
    Propane, a critical fuel in rural America for heating and in the 
agricultural sector for crop drying, hit its highest levels of over $2/
gallon in places like North Carolina. While propane has fallen back, it 
is still high.
    What does this tell us? Energy price volatility is the big problem 
for everyone. Inventories are well below historic levels. Low 
inventories of a critical commodity, a logical business response to 
avoid carrying charges with volatility in place, is not acceptable for 
consumers and businesses alike. Many energy economists tell us that is 
the way of the markets and is the right way to go. This is not 
acceptable. Low inventories put consumers and businesses at risk.
    As we look at comprehensive energy legislation, we must examine 
incentives, both tax and direct financial incentives, to encourage 
inventory build-up for all these fuels. Massachusetts instituted a 
state-based program this Winter to expand heating oil inventories. With 
only a few million dollars in state funds, this market-oriented program 
helped ensure a reasonable level of heating oil in storage so that all 
consumers could purchase the product they needed. This program should 
be examined as a model.
    Natural gas has experienced explosive growth as the fuel of choice 
for new electrical generation. Historically we saw inventory build-up 
in the summer months in natural gas stocks so that the fuel could be 
used for heating in the winter. Now natural gas is running electrical 
generation to power air conditioning. We need expanded inventories and 
we need expanded gas infrastructure. This may require tax incentives to 
install this infrastructure. Inventories of natural gas stand at 711 
billion cubic feet, down by 37% from last year at this time, and 36% 
lower than the five-year average.
    For example, the construction of a gas pipeline from Prudhoe Bay 
(where gas production rivals that of the lower 48 states) through 
Canada is a necessity. Accelerated depreciation for this effort would 
be a good idea.
    The tie between natural gas and heating oil/No.2 oil is also clear. 
As interruptible customers shift from higher priced natural gas they 
shift to No.2 oil, driving up the price of heating oil. New York 
established a program to require interruptible customers to hold 7-10 
days of supply of alternative fuels in stocks to help protect 
consumers. This is a good idea. Other states are examining options in 
this area.
    Refining capacity is down in this country. We are concerned with 
the closure of a major refinery in Chicago and the impact that might 
have on higher reformulated gasoline prices in the mid-west this 
summer. Incentives for refining capacity expansion is important.
    With lower inventory levels across fuels, we are expecting more out 
of our transportation sector. This is not a perfect market. For 
example, the Coast Guard has a reduced capacity to provide ice-breaking 
services in the Northeast due to budget reductions. With lower 
inventory levels, ice breaking becomes a critical necessity. As we look 
at Coast Guard appropriations, we need to examine energy infrastructure 
to ensure that sufficient funds are provided for ice breaking.
    The Northeast Heating Oil Reserve should be helpful in ameliorating 
future supply problems. It is small, but it could help.
    We cannot forget about the value of the Strategic Petroleum 
Reserve. The idea of tapping the reserve to cover budget shortfalls 
should never happen again. We should try to expand the reserve and 
obviously to buy low, not high. The royalty-in-kind effort for filling 
the reserve is an excellent idea and we applaud both Chairman Murkowski 
and Senator Bingaman for supporting it.
    In FY '96, the energy emergency function at the Department of 
Energy was slashed. It was done on a bi-partisan basis, with the 
support of the last Administration. While we complained, energy didn't 
seem like a big deal to people. We need to focus on appropriations for 
a vibrant energy emergency function at the Department of Energy. We 
urge you to encourage your appropriations colleagues to support this 
effort within the DOE, including regional and national emergency 
exercises. These are very helpful. We had states, federal officials and 
industry in attendance at emergency exercises in New Hampshire in 
December 2000 and in Nevada earlier in 2000.
    Finally, we cannot forget about the impact on consumers and 
businesses. Moratoriums on utility shut-offs are coming off in the next 
two months and individuals homeowners will be shut-off. This will lead 
to consumer reaction and political problems. Low-Income Home Energy 
Assistance (LIHEAP) funds in FY 2001 are drained in many of the states 
and the advance appropriations for FY 2002 were eliminated this past 
year. Quick action on supplemental appropriations will be critical this 
year. Inclusion of the expanded authorizations for LIHEAP, 
Weatherization and the State Energy Program in the Chairman's bill and 
Mr. Bingaman's bill is very positive. Senator Bingaman's amendment on 
the bankruptcy bill, supported by Senator Murkowski and Senator 
Domenici, among others, should also be retained in conference. Now we 
must move to quick appropriations in this area.

                          ELECTRICITY MARKETS
    You have had hearings on California and the House Energy and Air 
Quality Subcommittee is holding two hearings this week on the same 
subject. We need to look at this situation and understand how it is 
both a symptom evidencing problems, but also how it can instruct us how 
to act differently at the state and federal level, while recognizing 
political realities.
    We have heard much talk about the ``failure of incomplete 
deregulation'' in California. We all recognize problems in the 
California market, principally the failure to permit utilities to enter 
into long-term contracts; but we must try to remember the context of 
how we got to this position today. Can this type of problem occur in 
other places: yes (but probably not exactly in the same way).
    We will not provide comprehensive views on why California got to 
this point, but suffice it to say, the twenty-five states that have 
moved on restructuring, including my own, are being very careful to 
look again at our legislative and regulatory mix to evaluate our risk 
factors. It should be noted, however, that the 1996 California 
legislation (A.B. 1890), probably would not have passed without retail 
price caps in place. That is political reality. In many states the 
trade of stranded cost recovery for retail competition, required retail 
rate freezes to pass muster. This was driven by the widely held view 
that residential consumers would be the last to see the benefits of 
competition.
    At the state level we recognize that wholesale price regulation 
resides at FERC, and that has caused enormous problems. If market 
participants do not believe that FERC will examine market monitoring 
seriously, then a free-for-all of market manipulation may be the order 
of the day. While I am not here suggesting a definitive conclusion, one 
must wonder how wholesale prices can be permitted to escalate twenty 
times above the cost of production. While we have not had a full 
opportunity to review FERC's decisions of last week on refunds, we are 
concerned that California not be a precursor of what might happen in 
many other jurisdictions, especially where generation has been divested 
from incumbent providers.
    If the market is not working and prices are set in an un-capped 
way, consumers and taxpayers are picking up the tab. The Federal Power 
Act has not been repealed; just and reasonable prices, possible cost-
of-service pricing and possibly regional rate caps, should be 
considered. New generation takes time to bring on line--no amount of 
price signals will make it happen in a big way by this summer. The 
state is moving aggressively to permit new generation and to impose new 
energy efficiency programs to reduce demand.
    Certainly environmental rules should be examined, though it does 
not appear that this was a significant part of the problem in terms of 
power plant development. Power plants simply were not ordered in 
California very much during the past decade, because there was not a 
perceived need.
    Whatever is done in California, the west, mid-west, northeast and 
mid-Atlantic, must include demand responsiveness measures. These are 
being initiated by state officials and Independent System Operators 
(ISOs), and should be encouraged.
    We also must focus on fuel diversity in the generation mix. Over-
reliance on natural gas is not healthy. Clean-coal technology is an 
important component of a national energy policy. We must promote new 
generation from a number of conventional and non-conventional sources, 
utilizing state-of-the-art environmental controls.
    Another area which deserves attention is in the area of regional 
regulation. We have read with interest Senator Bingaman's promotion of 
regional approaches. We understand that energy markets cross state 
lines. We must do a better job, both at the federal and state levels, 
of encouraging regional efforts.
    As you examine comprehensive energy legislation, at a minimum we 
would encourage support for the modified Gorton bill (S. 2071) from 
last year on electricity reliability. This is basically contained in 
Chairman Murkowski's bill. This approach, with suggestions from the 
states and PJM, is necessary to establish uniform standards for 
reliability. This legislation should move. We would also suggest 
consideration of a public benefits program so that we can address 
demand responsiveness issues in a more comprehensive way at the state 
and federal level. Overall, the electricity sector needs more state-
federal and regional coordination and cooperation.
    While not directly related to these electricity issues, we also 
cannot ignore the transportation sector. With two-thirds of our oil use 
in this sector, we must act on transportation. A simple action would be 
to allow hybrid vehicles (for purposes of qualifying under EPACT) to 
clearly fit the definition of alternative fuels. NASEO strongly 
supports ethanol production, but also supports hybrid gasoline-electric 
vehicles that are already available in the marketplace and achieving 
great than 50 miles per gallon. These high-mileage, hybrids can 
significantly reduce our dependence on imported oil. With the 
Committee's assistance, the Department of Energy should move to include 
hybrids as an option for meeting state fleet alternative fuel mandates. 
This no-cost action can deliver immediate and cost-effective reductions 
in oil consumption.
    The new proposal from the Energy Information Administration (EIA), 
issued in the Federal Register on March 13, 2001, would provide 
confidential treatment for power plants of data on fuel quantity, fuel 
quality, useful thermal output and financial data. This must be 
reversed. It would prevent the states and FERC from effectively 
evaluating whether market manipulation is occurring in the wholesale 
and retail electric markets. It is precisely this information that we 
need today in order for regulators to monitor market activity.

                   ENERGY AND ENVIRONMENT CONNECTIONS
    NASEO, along with the National Association of Regulatory Utility 
Commissioners (NARUC), the Environmental Council of the States (ECOS--
state environmental commissioners) and the State and Territorial Air 
Pollution Program Administrators/Association of Local Pollution Control 
Officials (STAPPA/ALAPCO), initiated an effort almost two years ago to 
begin coordinating programs, policies and regulations in the energy and 
environment area. Just as the federal agencies involved have generally 
not coordinated well, so the state agencies have not necessarily 
coordinated. We held a meeting in March 2000 and again in September 
2000, to first understand the ``vocabulary'' of the other officials and 
then to plan programs. This includes pilot state efforts in a number of 
jurisdictions, including my own, Maryland.
    The concept is that if energy and environmental policy is moved in 
concert then better programs will be developed. With the U.S. Supreme 
Court's recent decisions regarding the State Implementation Plans for 
NOX and the eight hour rule for ozone, this effort should 
have new immediacy. In my own state of Maryland, we have been working 
closely with the Maryland Department of Environment to promote joint 
activities.
    There are many areas where energy and environment meet: 1) new 
power plant siting; 2) fuel sources for generation; 3) siting of gas 
and electric transmission and distribution; 4) reliability 
requirements; 5) use of distributed generation (diesel versus other 
sources); 6) role of energy efficiency and renewable energy; 7) use of 
tradeable credits, such as NOX; 8) environmental 
requirements for new generation; 9) transportation sector issues, etc. 
The states are interested in streamlining processes for moving forward 
in these areas, with an eye on efficiency and the cost-effectiveness of 
energy management, while recognizing the need for environmental 
protection. Individual states may have different priorities, but the 
need for coordination is there for all. This coordination also extends 
to regional activities.
    Another area where energy and environment meet is in efforts to 
expand Brownfields development. This is generally positive. While we 
need to be mindful of environmental justice requirements, these sites 
could be excellent for development of power plants.
    We look forward to working with this Committee as well as the 
Environment and Public Works Committee on developing rational programs 
and ensuring state-federal cooperation. We have received support from 
DOE and EPA in this area, and we hope this will continue and expand.

                   AUTHORIZATIONS AND APPROPRIATIONS
    As Congress and the Administration move forward in crafting 
comprehensive energy legislation, we have a few cautionary words. As 
this Committee knows, the energy problems we are facing today were not 
created overnight and will not be solved overnight. There is also a 
risk to promising too much.
    As we review Chairman Murkowski's legislation and the legislative 
proposals of Senator Bingaman, we are pleased that there are many 
positive features in both bills. However, simply authorizing important 
legislative initiatives does not produce, in many cases, accompanying 
appropriations. It would be instructive for us to look back on the 
Energy Policy Act of 1992 and review the programs that were authorized 
and then subsequently not funded.
    Many of the tax provisions are positive and should be strongly 
considered. In addition to some of the elements noted above, we would 
suggest investment tax credits for renewable resources.
    On the other hand, we must examine budget and appropriations 
matters. On the basis of what we are hearing with respect to the 
President's budget, due to be submitted on April 3, 2001, we are seeing 
many troubling signs that those developing a comprehensive energy 
policy are not talking with OMB. We hear of proposed cuts in fossil 
energy budgets of 30%, with the exception of clean coal technology. We 
hear of proposed cuts of 30% in energy efficiency funding, absent a 
very positive increase of $120 million in Weatherization. We hear of 
proposed cuts of 40-50% in renewable energy programs, absent biomass 
programs. These budgets should be increasing not decreasing.
    The major energy emergency response mechanism for the states 
involving federal-state cooperation is funded through the State Energy 
Program (SEP). In FY 2001 SEP received $38 million, down from $53 
million in FY'95. The President during the campaign proposed a doubling 
of the Weatherization Program from $153 million to $306 million and a 
doubling of SEP from $38 million to $76 million. The President is 
proposing a $120 million increase in Weatherization, but apparently no 
increase in SEP. We assume this is either an oversight by OMB, and/or a 
lack of understanding of the important role of SEP. SEP is the vehicle 
not only for emergency response, but for leveraging state and private 
funds to implement energy projects in all sectors of the economy, 
including businesses, homeowners, industry, schools, agricultural, etc. 
The failure to support this campaign promise would be a highly 
unfortunate event. Senator Bingaman's bill (S. 352), which increases 
funding for LIHEAP, Weatherization and SEP, along with sound changes in 
the Federal Energy Management Program and promotion of energy savings 
performance contracts is sound legislation, and should also be passed. 
Chairman Murkowski's legislation (S. 389) supports similar 
authorizations for these programs. We support funding of $3.4 billion 
for base LIHEAP funds and up to $1 billion in emergency funds. Under 
existing funding, without increases, LIHEAP only serves 20% of the 
eligible population. Chairman Murkowski and Senator Bingaman also 
support a new program for addressing the energy problems of our 
nation's schools. This should be authorized and appropriations should 
be provided. We have seen dramatic cost increases for schools, while we 
all recognize education as one of our highest priorities.
    The Interior and Related Agencies and Energy and Water Development 
Appropriations Subcommittees are under a great deal of pressure. 
Without increases in 302b allocations and support for higher 
appropriations levels to accommodate energy needs this year, we will be 
stepping into even greater problems.
    Many suggestions have been made for national energy policy 
development and a national energy summit. These are good ideas, but a 
summit that needs to occur is one between the energy committees and the 
appropriators, possibly in the form of a joint hearing to discuss 
energy priorities. Otherwise, this national energy policy effort will 
be a hollow exercise, in many ways.
    We understand there is a proposal to cut the Energy Information 
Administration's budget at DOE, included among these cuts would be 
reductions in state level data and cuts in the State Heating Oil and 
Propane Program (SHOPP). The so-called ``SHOPP'' allows approximately 
one-half of the states to cooperate with EIA to share data and warn of 
upcoming problems so actions can be taken. This type of cut would be 
ludicrous.

                                MARYLAND
    Governor Glendening has taken a leadership role in ``smart growth'' 
efforts. This is a specific area where the interface between energy and 
environment needs to be promoted. As we expand our suburbs and outer 
suburbs we expand our use of single occupancy vehicles. With two-thirds 
of our petroleum use in the transportation sector, we must focus 
nationally and in each of our states, on reducing the impacts of 
unchecked growth. This is an energy issue.
    The Governor, just this past week issued a ``green'' procurement, 
construction and operating policy for state government. We are 
attempting to construct energy efficient buildings in Maryland and 
setting goals for solar and wind power. We are concerned about 
protecting the Chesapeake Bay and the development of on-site storm 
water treatment, conservation infrastructure, natural lighting and the 
use of recycled materials are non-partisan ideas.
    Last year Maryland passed the ``Maryland Clean Energy Incentive 
Act, which provides tax credits for energy efficient appliances, 
promotes renewable energy generation and for the purchase of electric 
and hybrid vehicles. We will be working to push those credits even 
harder this year.

                               CONCLUSION
    Thank you for the opportunity to testify. I stand ready to answer 
any questions you might have. We are also still reviewing the 
Chairman's bill as well as Senator Bingaman's legislation. We hope to 
provide more comprehensive comments at a later date.

    The Chairman. Thank you very much, Mr. Hoover. I do not 
know that I necessarily agree with your generalization on the 
budget process.
    The pass back has gone back from OMB, but it does not 
necessarily reflect the congressional budget, nor does it 
reflect what is going to be in the energy bill when it is 
ultimately debated by the House and Senate, because in both 
these bills there is significant assistance for new technology, 
clean coal, and so forth and so on. But your point is well 
made.
    I am going to go through the questions briefly. We will 
allow members 7 minutes.
    But quickly, if we assume that we have an increase in 
demand and a shortage of supply, and government ability to 
respond with specifics is limited to a snail's pace, depending 
on the involvement of a lot of people in many areas of 
responsibility, in your opinion what is the first thing that we 
should do, one thing that we should immediately do to try and 
alleviate this crisis relative to relief? And relief, to me, 
suggests that you make a drastic improvement in your 
conservation or you do something immediate about supply.
    Now, Mr. Hoover, you are talking about reopening that old 
Columbia gas facility on the Western Shore, which has been 
utilized to store gas, but not bring gas in. And the question 
is, how long is it going to take you to get permits? And you 
can answer that when it comes down to you. But I think that is 
one of the problems. But let us take the first question first. 
What would you suggest we do right now to get relief?
    Do you want a pass, Mary, for 30 seconds?
    Ms. Hutzler. Yes. We do not really deal with total policy 
issues. We do analysis.
    The Chairman. We do not either deal with policy issues. We 
have to start somewhere.
    Okay. Mr. Caruso?
    Mr. Caruso. I think immediately the problem is electricity 
and, more specifically, California. But as Jim pointed out, it 
could be New York this summer. So I think we need to do 
something to stimulate the production of electricity and to 
remove obstacles and bottlenecks to----
    The Chairman. That may mean cutting temporarily some 
environmental oversights.
    Mr. Caruso. It may, yes.
    The Chairman. Are people ready to support that, or do they 
have to go in the dark for a while in order to accept it?
    Mr. Caruso. And the other side of that, of course, is the 
price issue, that the price signals were not appropriate. And 
that is one of the reasons we are facing the kind of demand 
situation that we are. And whatever can be done to allow 
appropriate price signals to be passed to the consumer, that 
would be another----
    The Chairman. Well, the Governor of California said he 
could fix this thing in, what, 3 minutes. He made a statement 
to that effect, maybe it was 7 minutes--10 minutes or 12 
minutes, by simply passing through the price and done. 
Obviously, there is a political consequence associated with 
that. But, I mean--go ahead, Mr. Placke.
    Mr. Placke. Well, I think in the first instance, Mr. 
Chairman, to do something immediate about the only alternative 
is conservation.
    The Chairman. Conservation.
    Mr. Placke. In an immediate sense. In the sense of----
    The Chairman. Now let us talk about that in the sense of 
California. Because what is the incentive for a Californian to 
go down and buy a new energy-saving refrigerator when the other 
one is not worn out yet? And the California consumer is paying 
a relatively low rate that they have been paying for some time, 
because they have not felt the price increase. So there is no 
incentive, is there? So how are you going force--how do you 
force conservation under that scenario?
    Mr. Placke. Well, passing through the real cost of energy 
is obviously part of the solution. Without that market signal, 
consumers simply will not respond. That is quite correct. 
Ultimately, industrial users, I think, probably are easier to 
influence and to monitor than individual households. But it has 
to be a broad collective effort.
    The Chairman. So if one were a real critic, and objective 
critic, you are not going to force California to conserve 
unless there is an incentive, is that right?
    Mr. Placke. Certainly.
    The Chairman. And the incentive is to pass on the true cost 
of power, which California's political structure refuses to do.
    Mr. Placke. Then the problem is just going to drag out, 
sir.
    The Chairman. The problem will drag out.
    Mr. Nugent?
    Mr. Nugent. Mr. Chairman, I do not think there is any one 
single thing. You have to attack this on a number of fronts. 
This is----
    The Chairman. But we have to get started. We cannot even 
figure out how to get started.
    Mr. Nugent. This is too urgent a problem. Obviously, you 
need some additions to supply, but they take time. I think 
passing through the price signals, as Mr. Placke has indicated, 
is a very appropriate response. And you can look to Maine for 
having done that. Fourteen cents for large industrial users on 
peak, 50, 60 percent increases in the price of generation.
    We have no deferrals in the rates to be recovered, or the 
bills to be recovered, to pay to generate it. So the signals 
are out there, and I expect that we will see the public 
responding.
    On the other hand, we, as regulators in government, must 
give mechanisms to the public which enable them to have the 
information in real time and to be able to respond. Large users 
in Maine are doing that. They have suspended operation at 
certain peak hours, sold the obligations they had back into the 
market. They have benefitted, and they have also eased the 
ultimate energy clearing price spike in the region.
    The Chairman. And you have no caps.
    Mr. Nugent. There is--we have no caps. New England has a 
$1,000 cap, which I think is not an unreasonable one. I mean, 
you are not going to get hurt bumping your head too often on 
$1,000. It happened on maybe one or two----
    The Chairman. $1,000 per----
    Mr. Nugent. $1,000 per megawatt hour in the regional market 
clearing price. It exists up till April 1. We are looking for 
it and expect it to be extended. That--this is kind of 
reinsurance or catastrophic insurance. It keeps you from being 
really mortally wounded, but enables the market to function and 
to give the incentives to producers to go out and build new 
supply. They apparently have that inducement. Maine increased 
its generating capacity in the last three years by 75 percent. 
And we are not big, but we built twice as much as California 
did.
    The Chairman. That is big in comparison. How close have you 
come to that $1,000 in bids?
    Mr. Nugent. I do not know that off the top of my head. I 
will get the information for the committee, if you care. I 
will.
    The Chairman. Now that is electricity, your capacity. Was 
it gas fired or----
    Mr. Nugent. Yes. We have had the benefit in Maine, which 
has been at the end of the road and down a little narrow path 
when it comes to gas. We have two new pipelines, 22-inch, 24-
inch pipelines, with Canadian supply. And we have put in five 
new generators of more than 1,600 megawatts within a two- or 3-
year period.
    The Chairman. I am not going to ask you whether you 
recommend $1,000 for California. But clearly, there are some 
things that are working out there. We look at Pennsylvania 
sitting there with both retail and wholesale caps. But they are 
so high that there is enough flexibility, so that they have 
been able to attract companies to come in and put in 
generation. And now they have adequate generation, and it 
works.
    Mr. Hoover, did you have----
    Mr. Hoover. The only addition I would make to the 
conservation issue is, in my own State, as a way of trying to 
move the market, the question you asked earlier about how do 
you get people to buy these higher efficiency appliances, we 
eliminated the sales tax on Energy Star appliances in the State 
of Maryland.
    Retailers can now say to consumers, if you buy this 
appliance and upgrade, not only will you save money over the 
long term in the operation of it, but, you know, the State of 
Maryland is not going to take their traditional cut from the 
price.
    We have a number of programs to try and encourage people to 
do that. We tie a lot of our energy efficiency situations to 
our environmental ethic with the Chesapeake Bay, because of our 
concern about air pollution to the bay and the amount of money 
that Congress and the State of Maryland have spent in trying to 
restore the Chesapeake Bay.
    We use a combinational approach to try and give financial 
incentives for people to do the right thing, but also to appeal 
to their better nature.
    The Chairman. I think it was Mr. Caruso's reference--and my 
time is almost up. But the implication that people really do 
not care where the oil comes from, as long as it comes.
    You gentlemen, Mr. Nugent and Mr. Hoover, come from parts 
of the United States that, from the standpoint of developing 
oil in my State of Alaska for the most part are pretty much 
opposed. The environmental activism has been very prominent.
    And as a consequence, those of us who produce the oil and 
feel we can do it safely are rather provoked, if you will, by 
the observation that we have, that you really do not care where 
the oil comes from as long as you can get it.
    You just do not reflect on whether it is coming from the 
rainforests of Colombia, where there is no environmental 
sensitivity, but since you are motivated by an environmental 
concern, you do not question the legitimacy of that concern, 
you just say no.
    So, you know, from the standpoint of the Northeast, you are 
very dependent on heating oil. Where it comes from is 
incidental. Am I missing something there, or is there an old 
adage that charity begins at home, if indeed you can keep your 
house clean?
    Mr. Nugent. No. I think you fairly characterize the 
problem. The public and its views on things is not always 
consistent.
    The Chairman. I would agree with you there. Well, if you 
can enlighten me, you have more time. If not, I will go to Mr. 
Hoover.
    Mr. Hoover. Well, I know in my State, I mean, it is 
difficult to site energy producing facilities. I mean, we have 
a relatively small coal industry in the western part of my 
State. Now we have brought on line a coal plant. The people in 
that part of the State actually saw that as a great benefit 
because of the economic impact, and we were able to bring it on 
line and mitigate the environmental consequences of it.
    I do not think that people are to the extent that they do 
not care, because I think they understand the geopolitical 
concerns that we have about energy production. I mean, a lot of 
American citizens sent their sons and daughters to the Persian 
Gulf to defend those supplies and understand the commitment we 
have to make there.
    I think overall the American people feel that we need a 
balanced approached to this and do not think that it is any one 
region's responsibility to take care of our energy needs.
    The Chairman. Senator Bingaman.
    Senator Bingaman. Let me ask Mary Hutzler about the 
criticism of EIA that we have heard here about your decision to 
keep data on powerplants proprietary. I think most of the trend 
in government seems to be toward more transparency. This seems 
to be an aberration from that.
    Could you explain how that decision was made or whether 
that is still subject to review or what your position is?
    Ms. Hutzler. In competitive markets it can be detrimental 
to producers if certain statistics are published on an 
individual basis. So what we do is we aggregate these 
statistics and release them in an aggregated fashion. We do 
this in the oil and gas area, for instance. And this would be 
following up in the electricity area in the same way.
    Now those forms are out for review. There was a public 
register notice in March, earlier this month. And I do 
encourage people to comment, and we could still discuss the 
issues. But we do have to deal with the issue of 
confidentiality. Otherwise we do not get the data, and without 
the data, we could not even provide aggregate statistics.
    Senator Bingaman. As I understand Commissioner Nugent's 
point, the State utility commissioners need that information. 
Even if they have to obtain it on a confidential basis, it is 
useful for them in making their decisions. Is that something 
that is being considered?
    Ms. Hutzler. That is something that we can look into. There 
have been Federal Government agencies who have asked us for 
certain data, which we were allowed to release. So we will 
evaluate that.
    [The information follows:]

    Over the past three years, the Energy Information Administration 
has been evaluating its data collection forms in light of the many 
changes occurring in the electric power industry. It particular, EIA 
wanted to assess the impact of these changes on its data 
confidentiality policy.
    From our analysis of the industry, we have determined that the 
wholesale trade of electricity and the retail sales in a number of 
States have become increasingly competitive. Because of this, EIA is 
proposing to not disclose data that could result in competitive harm to 
companies participating in competitive electricity markets. This is 
consistent with the Trade Secrets Act and Exemption 4 of the Freedom of 
Information Act. Therefore, EIA has proposed to hold the following 
types of information confidential: quality and quantity of fuel 
receipts and consumption, fuel stocks, useful thermal output (i.e., 
heat or steam), plans (i.e., retirements, capacity additions), selected 
financial and cost data, heat rates, amount of purchased power, amount 
of power exchanges between companies and information from energy 
service providers who only provide electricity. While EIA is proposing 
to hold the individual data confidential, we would still make 
aggregated data available to everyone.
    Our proposal for changes to our data collection forms and 
confidentiality policy was published in the Federal Register on March 
13, 2001, for the express purpose of soliciting comments from all 
concerned parties. The comment period lasts until May 11, 2001. After 
that period closes, we will evaluate comments and determine how to best 
address them. We will then submit our final proposal to the Office of 
Management and Budget for its approval. If someone disagrees with our 
proposed confidentiality policy, it is important that they tell us why 
a particular data element is needed in the public domain, despite 
possible competitive harm, demonstrate that public disclosure would not 
result in competitive harm, or suggest measures which would permit 
release while mitigating competitive harm. We can then consider those 
comments in our final evaluation.
    It should be noted that over the past three years, EIA has met with 
a variety of stakeholders to obtain their input to our evaluation 
process. This was done using several methods. First, 11 focus groups 
met to discuss what information EIA should provide in the future. These 
groups included State and Federal officials, investor-owned utilities, 
publicly owned utilities, media, nonutilities and renewable energy 
companies, investment bankers, consumer organizations, academic 
consultants, and congressional staff. In addition, EIA staff has 
briefed over 20 organizations representing these types of groups on our 
project. In particular, the National Association of Regulatory Utility 
Commissioners and the National Association of State Energy Officials 
participated in the focus groups and were briefed on a variety of 
occasions on EIA's work. While the proposal that EIA is now sharing 
with the public was not made public prior to March 13, it was developed 
with input from all interested parties and we look forward to hearing 
their comments on it.
    Subsequent to the hearing, Commissioner William Nugent of the Maine 
Public Utility Commission was contacted by ETA. He explained that they 
are in the process of collecting comments from within his agency, from 
the other New England public utility commissioners and from members of 
NARUC. In their reply, he plans on explaining the needs of the States 
for the individual data elements that ETA proposes to hold 
confidential. ETA offered to give a technical briefing to a NARUC 
subcommittee on the ETA data collection forms to help them better 
understand how to use ETA electric power data. Commissioner Nugent will 
investigate the need for such a briefing and coordinate with ETA.

    Senator Bingaman. Okay. I have sort of a printout of an 
article in Megawatt Daily, dated March 14, entitled ``Deutsch 
Bank Sees Excess Capacity by 2005.'' It goes on to say ``Power 
generation capacity will be tight across the United States for 
the next few years, but the Nation as a whole should be faced 
with a glut of power by 2005, according to this new analysis.''
    I just wondered, Mr. Placke or anybody else or Ms. Hutzler, 
any of you, do you agree or disagree with this analysis? Are 
you familiar with it?
    Mr. Placke. I am not familiar with that specific article, 
Senator. But in general, it sounds like it is consistent with 
our analysis that, as I indicated, we anticipate that 300 
gigawatts, which is 40 percent of our capacity nationally, will 
be added over the next 5 years. In part, I suppose, as usual, 
it depends upon the definition of excess or surplus.
    I think California illustrates more than adequately the 
point that you cannot program your generating capacity to equal 
exactly demand. There has to be a cushion in electric power, 
unlike other forms of energy where you can gauge it more 
closely to the rate of consumption. But power demand is a 
variable. It varies with season and other conditions. And there 
has to be a cushion.
    Now I do not know whether that definition includes a 
cushion or if it does not. But I do not think we would regard 
the additions to generating capacity as excessive or likely to 
produce an unwanted surplus. And I think one of the keys to 
gauging that is the reaction of investors themselves. Investors 
do not have a habit of building plants that are not going to 
produce a profit.
    Senator Bingaman. Yes. This article does go on to say that 
by 2004 they project that the national average capacity reserve 
will be about 15 percent.
    Commissioner Nugent, let me ask you about--we have a bill 
that was developed by two of our members here on the committee. 
Senator Feinstein and Senator Smith jointly have put together a 
bill to try to deal with the situation in California. I did not 
know if you have had a chance to look at that.
    The bill directs FERC to control wholesale prices of power 
coming into the State contingent upon the State passing through 
a significant portion of that cost to the rate payers in the 
State. Have you had a chance to look at that? Have you taken 
any position on it?
    Mr. Nugent. No, sir. I have not seen it.
    Senator Bingaman. That would be useful to the committee, I 
think, if you do get a chance to look at that legislation.
    Do any of the rest of you, who have looked at the bill, 
have a comment on it? I would be anxious to get any expert 
advice we could on that issue.
    Let me also ask any of you to respond. I know several of 
you criticized FERC. Is there something that we need to do with 
regard to the Federal law governing FERC to allow them to 
consider demand responsiveness in their review and FERC's 
review of wholesale rates? Is there something that we should be 
doing to change the law related to FERC? Or do you think that 
the law is not the problem and that they have just not 
aggressively enforced or implemented the authority they have?
    Mr. Nugent?
    Mr. Nugent. Mr. Bingaman, I am unaware of any shortcoming 
in the Federal law with regard to demand responsiveness. New 
England has mounted a demand responsive program for its 
wholesale markets. And I will go back and ask the people who 
know it in greater detail if there are any points at which that 
was abrading against Federal law limited in its effectiveness 
by that.
    But as a matter of fact, we do have buy-backs that are 
possible when one is able to forecast moments of peak demand 
coming. So I think we are able to operate all right.
    Senator Bingaman. Okay.
    Mr. Hoover, I think you alluded to this perhaps. But we do 
have some provisions in this bill that I have been working on 
with other Senators that try to move us toward this region-wide 
coordination and planning process. Any of you have thoughts as 
to changes we need to make in Federal law to accomplish that 
more effectively?
    Mr. Hoover. The proposal that we have seen in your bill we 
think goes in the right direction to do this. As these boundary 
lines sort of disappear as electricity starts going across the 
country, I mean, a regional approach to doing this is going to 
be the only way to really figure this out. I mean, States 
cannot become islands in and of themselves, either from an 
electricity supply standpoint or the demand standpoint.
    So the communication and coordination among State 
regulatory commissions and the regional power authorities is 
going to be a necessity.
    Senator Bingaman. Do you have any thoughts on this, Mr. 
Nugent?
    Mr. Nugent. I think cross-regional effects are important as 
well, because while we may be able to perfect the market within 
the New England region, if market power is being demonstrated 
in adjacent areas, or dysfunctional elements are apparent in 
those adjacent areas, you can see suppliers flee our market, 
driving our price up, to take advantage of even higher prices 
in adjacent regions.
    We have to give some more attention and look forward to 
continuing our----
    Senator Bingaman. Mr. Placke, you mentioned there are 
likely to be power shortages in New York this summer, 
particularly in the New York City area, not because there is 
inadequate power, but because of transmission problems getting 
the power from New England to New York. What, if anything, can 
the Congress do or should FERC do to solve that problem? Is 
there anything?
    Mr. Placke. Again, I am afraid there is probably not a very 
short-term solution. But in the longer term, facilitating the 
construction of transmission facilities, which means expediting 
the permitting process and perhaps dealing with the right of 
eminent domain, I think, are the areas that I would point to.
    Senator Bingaman. You believe those permitting problems and 
the difficulty of getting eminent domain has been the major 
factor that has kept that transmission capacity from being 
built.
    Mr. Placke. I would say that--I would look to those 
prospectively. I think those are the areas that could expedite 
a solution to the problem.
    Senator Bingaman. Okay. Anyone else have a comment on that 
point?
    Mr. Nugent. There are moves to meet that need. There are 
proposals for building generation, both within the New York 
City load pocket and out on Long Island. And there is also a 
proposal for a merchant transmission line to be built, my 
recollection is, between New Haven and the central part of Long 
Island to bring power in that way. And they are working through 
the siting problems, you know, through the New Haven oyster 
beds, right now.
    It is a value judgment as to whether you want to ride 
roughshod over those interests or whether you want to give them 
a full hearing. I am not sure how I would suggest you intervene 
at this time. I think the problem is being worked.
    Senator Bingaman. Thank you very much, Mr. Chairman.
    The Chairman. Thank you very much, Senator Bingaman.
    I believe, Senator Craig, you were next, and then Senator 
Thomas.
    Senator Craig. Thank you, Mr. Chairman.
    Let me thank all of you for your testimony. You have added 
a great deal of information to and thought to our concerns and 
our thought processes, and we appreciate it. A couple of 
questions and appreciate your reactions. Mr. Nugent, you struck 
a sensitive positive chord with me when you talked about 
regional concerns. Everybody is focused on California at this 
moment. California is dragging the whole Pacific Northwest down 
with it. It is very much a regional problem. California is not 
feeling the price shock, but California's price shock is 
hitting the wholesale market in the Pacific Northwest. And 
Oregon and Washington and Idaho's prices are going up 
dramatically.
    The bill that Senator Bingaman mentioned and produced by 
Senator Feinstein and Senator Gorton is a regional bill, would 
have a regional impact. I know he mentioned California. It is 
not just California that it would impact. It would be a 
regional hit or positive or negative, I think. And so I would 
appreciate you looking at it. I mean, obviously it is 
sensitive, it attempts to be sensitive, to the short-term 
reality.
    And, of course, in the Pacific Northwest we remain fairly 
heavily hydro. We have something else going on out there this 
year. It is called a drought. And our hydro capacities could be 
substantially lessened, even with just a slight warming trend 
in the L.A. Basin and a little pull-back by Pacific Northwest 
production in the last week, we can see what happens. Wait 
until it gets hot this summer, if California does not get real.
    And I agree. I do not know how we get California to 
conserve. Finally, I heard someone out there talking about in 
the 24 hours, but the marketplace is not reacting. Testimony 
from the investor-owned utilities would demonstrate to us that 
quite the opposite has happened.
    As they have leveraged down their retail price and then 
capped it, conservation went away. And it is not back yet in 
California, and it will not be back until they begin to feel 
the bite of the market in part, I would have to think. And of 
course, that is the reaction that that legislation deals with.
    So I would appreciate your reaction to that. And as a State 
PUC person, I think that would be extremely valuable for us.
    Mr. Nugent. Senator Craig, I am in touch from time to time 
with my colleagues, Mr. Alan Becker in Wyoming, those in 
Montana, Idaho, and throughout the Pacific Northwest. But for 
me to give testimony or to offer it would be really somewhat 
hearsay evidence. We will work to get their views and try to 
give you the comments you seek.
    Senator Craig. Well, I think all of us--I have been 
somewhat resistant to restructuring. Coming from our least-cost 
state with a hydro base, I did not see that our costs could go 
down much further. And now, of course, quite the opposite is 
happening. They could go up pretty dramatically.
    But in other words, my point is, and the point you have 
made, is that regional realities are there. And something 
happening outside your State clearly has, could have, a 
substantial impact in your State. And that is appreciated.
    You mentioned in the State of Maine that you had new gas 
capacity, new gas pipelines, and therefore new gas generation. 
Do you remember how long it took from the time the gas 
pipelines were an idea until they were in place and functional?
    Mr. Nugent. Well, some of these ideas go back 15 years or 
more.
    Senator Craig. But I mean----
    Mr. Nugent. But as a practical matter, I would say it was 
about 3 years.
    Senator Craig. It took you only 3 years to site those and 
get it out of the ground.
    Mr. Nugent. You are dealing here with--when you go back 15 
or 20 years, you are dealing with Sable Island offshore 
production. To some extent what happened was the economics of 
offshore production coming down because of experience gained in 
the North Sea. So things became economically possible.
    At some point, the energy companies pulled the trigger and 
said, we can make a go of this. And it first appeared, really, 
with us in 1996 or 1997. And the lines were in place and 
operating by 2000.
    Senator Craig. Because I know in an effort to bring gas 
into the Northeast, especially in those areas where they are 
still dependent upon oil for space heating, several of those 
gas pipeline companies finally just walked away. They could not 
cost it out. It became so economically unfeasible, based on 
environmental concerns and regulations and----
    Mr. Nugent. Well, actually here I think you have an 
illustrative contrast between the siting, which is controlled 
by the FERC in the gas area and what goes on in electricity. 
And my sense is that once the decision was to go forward with 
that pipeline that those problems were worked through in fairly 
reasonable order. And we are including in that 3-year period 
construction. That is a year and a half.
    Senator Craig. No, I am aware of that. That is why I asked 
you the question. And that is why I thought 3 years is short 
term, really.
    Mr. Nugent. Yes.
    Senator Craig. And you are right. The FERC, in fact, it 
appears they were quite busy trying to front load some of these 
things. And we think that could change a bit now. And certainly 
we are encouraging that the FERC get under way with full 
employment. And I think it will get there fairly quickly.
    Mary, a question of you, and it comes from--well, John Kane 
of NEI sent a letter to Representative Boehlert on March 14 
relative to your testimony of February 28 before the House 
Science Committee. Mr. Kane suggests that EIA is modeling 
nuclear in such a way that disadvantages nuclear with respect 
to coal and natural gas. Are you familiar with the letter? And 
how do you respond to Mr. Kane's assertion?
    Ms. Hutzler. Yes, I am familiar with the letter. We do not 
believe that we are modeling nuclear to be in a negative 
situation compared to gas and to coal. We looked at nuclear 
plants in terms of what it would cost to keep the capacity 
operating. We cost that out, and we take a look at it in terms 
of what the competition is, that is building a new plant. 
Combined cycle plants today can be built for $400 to $500 a 
kilowatt.
    So when you look at the economics of it, we do retire some 
of the existing nuclear plants. But we also retire some of the 
existing coal and oil and gas steam plants as well. As a matter 
of fact, our forecast has about 70 gigawatts of retirements. 
And more of that is in the fossil category than it is in the 
nuclear category.
    Senator Craig. Obviously, your figures and your modeling is 
important to us. And all of us, not all of us, some of us are 
of the belief that in the pursuit of clean energy that nuclear 
can play a role, and an increasing role.
    And as these costs go up, if we can do new generation 
nuclear and license it, site it and license it, more 
expeditiously, then those costs come down. In fact, there are 
some interesting models out there now that can show that some 
of these current operating plants are actually operating below 
costs of other types of energy. And I think that is why we are 
concerned.
    Kane asserts that you are not factoring in future clean air 
compliance costs. Is that true?
    Ms. Hutzler. In our Reference Case, we look at current laws 
and regulations. We do look at the Clean Air Act Amendments. 
Anything that has passed is included where the specifications 
are such that we can represent them.
    Senator Craig. Then you can factor them in.
    Ms. Hutzler. Right. Right.
    Senator Craig. But any additional or any new plants would 
not be a factor there yet.
    Ms. Hutzler. Not in our reference case. We have done other 
studies at the request of House congressional committees. But 
in those studies, they have asked us not to build new nuclear 
capacity.
    Senator Craig. Mary and gentlemen, thank you very much.
    The Chairman. Thank you, Senator Craig.
    Senator Thomas.
    Senator Thomas. Thank you, Mr. Chairman.
    Mr. Nugent, I do not quite understand your arrangement in 
Maine. Have you re-regulated at all? What is your process?
    Mr. Nugent. Effective March 1, 2000, all or the two large 
investor-owned utilities had to divest themselves of their 
generating----
    Senator Thomas. Why? Why did they have to?
    Mr. Nugent. Because--and they would continue to operate as 
transmission and distribution companies. And anyone, any 
licensed seller of generation, could sell to any customer they 
chose.
    Senator Thomas. So that is your State regulation.
    Mr. Nugent. It is State regulation. And the attempt here 
was to provide a level playing field for all sellers of 
generation. There was a concern that a special relationship 
between one seller and the transmission and distribution 
company would unfairly influence that market and would inhibit 
the entrance of other players.
    Senator Thomas. Well, it has not been a market. It has been 
controlled, has it not, by your PUC?
    Mr. Nugent. I mean, it is fully open. And it----
    Senator Thomas. I mean, I am talking about where it was. 
You had the distribution and generation were provided by the 
same person, and they serve----
    Mr. Nugent. Transmission and distribution are provided by 
one company. That is correct.
    Senator Thomas. And they--no, and generation.
    Mr. Nugent. Well, historically, prior to March 1, 2000.
    Senator Thomas. Okay. So then they serve their service area 
under a price that you all establish.
    Mr. Nugent. That is correct.
    Senator Thomas. You separated it so you could have 
competition, then, among the wholesale.
    Mr. Nugent. Correct.
    Senator Thomas. Then I do not understand your role in the 
pricing of it, if you wanted competition.
    Mr. Nugent. We have no role directly on the pricing between 
customers and competitive energy supplies. But believing that 
many customers, typically residential and small business 
customers, would either not choose or would be unable to find a 
supplier----
    Senator Thomas. Well, it is not up to the customer, is it? 
It is the distribution system, is it not?
    Mr. Nugent. No.
    Senator Thomas. You mean each customer gets to select his 
own wholesale supplier.
    Mr. Nugent. Every customer in Maine has the right to go out 
and find his own competitive energy----
    Senator Thomas. So you essentially have tried to deregulate 
it and give choice.
    Mr. Nugent. That is correct. And we have a default category 
for people who do not.
    Senator Thomas. But then you still have your position of 
controlling the wholesale price.
    Mr. Nugent. We do not control the wholesale price.
    Senator Thomas. Then why do you have to find out 11:20 and 
do something by 11:50?
    Mr. Nugent. That is for the category of customers who make 
no choice and still want to be served. I mean, there are a lot 
of people out there who do not understand this and do not want 
to be in the middle of it, others who cannot find a supplier. 
So to cover them, we have a default category.
    Senator Thomas. I am sorry. I do not understand that. If 
they cannot find a supplier--they have a supplier, do they not? 
If they do not choose to do it differently, they have a 
supplier.
    Mr. Nugent. As selected by the State pursuant to 
competitive----
    Senator Thomas. So you are halfway re-regulated.
    Mr. Nugent. It is not a regulated price. It is the market 
price we find.
    Senator Thomas. Okay.
    Mr. Nugent. We go into the market, and we try to get the 
best price. But it is the market that determines it.
    Senator Thomas. It does not sound like you are really into 
the market business, but that is okay.
    Mary, you are part of the Energy Department, correct?
    Ms. Hutzler. Yes.
    Senator Thomas. As you went through this and we are at $1, 
$1.50 gas, was that a market message? Did they share that with 
the department? Would you not imagine that production would go 
down at $1.50 wellhead price?
    Ms. Hutzler. Yes, that is correct.
    Senator Thomas. What did they do about it?
    Ms. Hutzler. What did the Department of Energy do about it?
    Senator Thomas. Yes.
    Ms. Hutzler. I cannot speak for the Department of Energy.
    Senator Thomas. Are you not part of the Department of 
Energy?
    Ms. Hutzler. We are an independent agency within the 
Department of Energy. We supply data and forecasts, but we do 
not deal with policy issues.
    Senator Thomas. I see. We have not had a policy on this 
then, have we?
    Ms. Hutzler. On natural gas pricing?
    Senator Thomas. On energy.
    Ms. Hutzler. I believe the policy of the last 
administration was competitive markets, and that is what they 
have indicated in their testimony.
    Senator Thomas. Okay. I do not quite understand why you use 
storage as the component, as opposed to production.
    Ms. Hutzler. Storage is an indicator of price volatility. 
If storage levels are very low, then that means that to meet 
your demand; you either have to produce or you have to take 
more from storage. And as storage gets lower, your prices are 
going to go higher.
    Senator Thomas. You would not have storage if you did not 
have production, would you?
    Ms. Hutzler. Well, that is correct. You do need to produce 
it. But what is happening now is we are withdrawing from 
storage faster than we are producing. Our production is not 
keeping up with demand.
    Senator Thomas. So production is the key.
    Ms. Hutzler. All factors, all those factors, are keys.
    Senator Thomas. Okay.
    Ms. Hutzler. But if you want to look at pricing----
    Senator Thomas. It is interesting that you list storage all 
the time, when there is relatively little storage available 
often in a gas field. And indeed, if you do not have a place to 
go with it, you just do not produce it. So storage is kind of 
iffy, is it not?
    Ms. Hutzler. It depends on what factor you are looking at. 
If you want to look at price volatility, it is an extremely 
important factor.
    Senator Thomas. Storage went down there, and the price 
stayed the same for the last several years until recently.
    Ms. Hutzler. You are talking about natural gas markets?
    Senator Thomas. Right.
    Ms. Hutzler. Yes. We need to go back to the chart and look 
at the precise timing. But I believe that storage was fairly 
high during the period when production was up. But then we had 
the severe weather patterns.
    Senator Thomas. Yes.
    Ms. Hutzler. And that weather pattern meant that demand was 
higher than what was anticipated.
    Senator Thomas. Did you not mention 1,400 3-megawatt 
plants?
    Ms. Hutzler. Fourteen hundred 300-megawatt plants.
    Senator Thomas. Three hundred megawatt plants.
    Ms. Hutzler. Right.
    Senator Thomas. And so you are expecting that they will be 
gas fired and relatively small.
    Ms. Hutzler. When I gave that statistic, it was an average 
statistic. These plants will vary in size over time. But it is 
one way for me to show the magnitude. The total capacity that 
we are talking about is 413 gigawatts, 92 percent of which we 
think will be gas fired.
    Senator Thomas. I guess, you know, what we really--
certainly we have an immediate problem. But it seems like what 
we ought to be doing is looking at the future a little bit. And 
if the gas price is what it is now, it is interesting to see. 
It seems coal is our best opportunity over time, I think, for 
stationary generation. And yet we seem to not be dealing with 
that at all. We just seem to think, well, we are going to go 
for gas. And that was kind of the plan when gas was $1.50 at 
the wellhead. It is not now. And it is interesting that that is 
your projection.
    Ms. Hutzler. When we did these forecasts, we did not 
anticipate the very high natural gas prices that we are seeing 
right now in 2001. We were very close to the price that we 
anticipated in 2000. We were about 20 cents from the actual 
price in that year.
    The coal plants that we do build are built in the earlier 
time horizon of our forecast because of the higher gas prices 
right now. But we do believe that the resources are there for 
the natural gas prices to come down over time.
    And because of the resources and because there are other 
benefits for natural gas, which include the lower capital cost, 
the friendlier environmental issues associated with natural 
gas, the shorter lead times to construct and also to get 
permits, that natural gas is going to be favored in markets 
that have deregulated electricity.
    Senator Thomas. Well, I think that is a great thing, but I 
do not think that looks ahead. We really ought to be looking at 
our most--our greatest volume resource, which happens to be 
coal. We can do some more research on the cleanliness part. I 
think if you talk about a 2,000-megawatt plant, the idea that 
it is cheaper is probably not true.
    If you want to build a small plant, then gas is probably 
easier. If the idea is going to go to close to the market 
instead of having a national transmission grid, then perhaps 
that is right. But we ought to be talking a little bit about 
what we want, where we want to be over time, do you not think?
    Ms. Hutzler. Our forecasts, as I mentioned, are based on 
current law and regulations and also based on current 
economics. So based on those economics, as we see them, that is 
where the future will be over the next several years.
    Senator Thomas. Well, I hope all of us will give some 
thought to the future, as to how we see it in 15 years, what 
kind of energy is going to be the most useful for us, and where 
can we do it, where can use a flexible energy source like gas, 
as opposed to coal. Some of these kinds of things, I think, are 
part of the mix, and we really ought to be--and we need people 
like you in research to be able to at least stimulate some 
thought in those kinds of directions, it seems to me.
    One more question. What about the Middle East? Did we work 
as closely as we could? Do we not have any leverage with OPEC?
    Mr. Placke. With OPEC as an organization, I do not think 
so, Senator.
    Senator Thomas. Of all the things we do for the countries 
in OPEC, and we do not have any leverage.
    Mr. Placke. No. The rest of my statement was that within 
individual members of OPEC, indeed we do. And I would point in 
particular to Saudi Arabia, which continues to be the largest 
foreign supplier of crude oil to the U.S. market.
    And the relationship with Saudi Arabia that goes back, 
really, to the end of the Second World War, the tradeoff 
between an implicit and an increasingly explicit U.S. guarantee 
of Saudi Arabia's external security, in exchange for a 
preferential treatment of American companies in the early days 
of the oil development there, and increasingly Saudi commitment 
expressed through price to maintain itself as the leading and 
reliable supplier of crude to the U.S. market.
    When I say price, Saudi Arabia deliberately maintains its 
position as the number one supplier, when it could in fact get 
another 50 cents a barrel or so by sending that crude oil to 
Far Eastern markets. So in that sense, there is even a subsidy 
built into it.
    Senator Thomas. A subsidy.
    Mr. Caruso. Senator, could I add to what Jim said?
    Senator Thomas. That is pretty hard to accept. But you can 
try it, yes.
    Mr. Caruso. I agree that the best way to deal with OPEC is 
on a bilateral country basis and certainly with the Saudis. But 
probably more importantly, since they are going to do what is 
in their best interest, is for us to pursue what is in our best 
interest. And that is diversifying our resources.
    Senator Thomas. Absolutely. But we have allowed ourselves--
and we have all been involved in it, including you guys, for 
years we have allowed ourselves to become dependent to almost 
60 percent on OPEC. And I have not heard a lot of complaining 
about it before, and here we are.
    I guess that is why I am saying, you know, it is pretty 
easy to get up now and talk about where we are and how we got 
there, but we ought to be thinking a little more about the 
future and see if we want that. Do we? I do not think so.
    And so we ought to be talking about what we are going to do 
in terms of production and access and a few things here, which 
we have not heard much about until very recently.
    Anyway, yes, sir.
    Mr. Placke. The United States is approximately 60 percent 
dependent upon foreign sources of crude. Actually, we estimated 
56 percent for the last year. But that is all sources, OPEC and 
non-OPEC.
    Senator Thomas. I understand.
    Mr. Placke. Two of the largest suppliers to the U.S. market 
are Canada and Mexico, neither of which, of course, are members 
of OPEC.
    Senator Thomas. No, that is true. But we also have friends 
like Venezuela and others that it seems like maybe we could get 
a little more pressure there somehow. At any rate, thank you, 
sir.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Let me just bring out a couple of points, and I would ask 
if you agree. If you agree, there is no necessity of commenting 
further. But the statement was made by Mr. Caruso in his 
presentation that the irony of the 21st century, with all our 
technological advantages, is that through the year 2020, at 
least, we will depend on the same basic energy sources, namely 
coal, oil, natural gas, that prevailed in the 20th century. 
Would you agree with that?
    Well, since nobody is saying otherwise, I think it is 
important to recognize that, because there is a significant 
portion of the public that assumes that through technology 
alternatives, renewables, we can substantially relieve 
ourselves of our conventional sources of energy. Now you and I 
know that we have expended about $5 billion to $6 billion in 
grants, subsidies, to bring on and assist alternative 
renewables, but they are still less than four percent of the 
market.
    So if we can generally agree upon that, then I would hope 
that we would establish that as a premise that we are going to 
continue to develop alternatives and renewables, but they are 
not going to replace for the next 20 years our conventional 
sources of energy.
    Now, Mr. Nugent, you feel uncomfortable with that. If you 
have something to say, please say it, because I want to try and 
move through this in a way that at least draws some 
conclusions.
    So if we have no objection to that, then--also, Mr. Caruso, 
you indicated that developing an adequate and reliable energy 
supply to realize the promise of robust global economic growth 
will require significant investments that must be made 
immediately. Obviously you are talking about domestic 
investments in power generating facilities, transmission and so 
forth.
    Further, you state decision makers in both the public and 
private sectors face the special challenge of balancing the 
objectives of economic growth and the legitimate concern about 
the environment.
    Now, we have in the area of nuclear energy an environmental 
opposition, clearly. We cannot come to grips with what to do 
with the waste. Yet obviously nuclear has something to offer, 
as far as emissions are concerned. Coal, we cannot come to 
grips with currently the permitting process necessarily, so we 
are not building coal-fired plants. We have the coal and 
environmental objection.
    Again, certain areas, if you look at the Overthrust Belt, 
where you have energy resources, a lot of it is withdrawn. The 
east coast has been withdrawn from offshore production through 
moratoriums, also the west coast. These are environmental 
objections.
    Is there a way to bring the environmental community into a 
realization that we are an electronic society, we use more 
energy in spite of our efforts to conserve, and they are going 
to have to join with us? Otherwise, we are going to continue 
to, you know, dance the dance of the crab going down the beach 
sideways. We will not achieve what our objective is, which is 
to clearly get some reasonable relief from the four 
conventional resources of energy that we have had.
    Am I missing something? How do we bring the environmental 
community into an awareness that conservation is not going to 
do it alone? Is there a way, or does the shoe have to pinch to 
the point where the public is inconvenienced with gas lines 
around the block or power outages or--anybody want to try that 
one? Yes, Mr. Placke?
    Mr. Placke. Well, being a research organization, Senator, 
that is part of what we would suggest might contribute to the 
solution.
    The U.S. Geological Survey could perhaps do a more complete 
analysis of the Overthrust Belt that you mentioned, for 
example, and come up with a more precise estimate of what the 
hydrocarbon resources are in these environmentally sensitive 
areas, and I think also contribute--and you might bring in the 
national laboratories to analyze more fully the environmental 
impacts and how they could be mitigated. That might begin to 
form the basis for a dialogue with the environmental 
organizations.
    Ultimately, they are dependent upon public opinion. And I 
think in the end it is public opinion that has to be persuaded.
    The Chairman. But does public opinion have to be determined 
by public inconvenience and public price increases?
    Mr. Placke. Well, again, California provides a case where 
that is exactly what has happened.
    The Chairman. I mean, I do not know if you have seen this, 
but I think this is food for thought. Okay? It says, ``The last 
thing California needs is more powerplants.'' Now somebody is 
either misreading reality or knows something the rest of us do 
not know.
    Mr. Placke. Well, as you had pointed out, Mr. Chairman, the 
consumers in California and the voters, as well, they are the 
same, have been protected from the impact of price. I think if 
there were less of that, perhaps that ad would read 
differently.
    The Chairman. I know, but these are well-meaning people. 
And we assume that the people who, in the New York Times, take 
these ads and read them before they allow them to be printed 
and that they make some sense, even though I am sure the New 
York Times is happy to get the revenue. Maybe this same thing 
is playing in the State of California. I do not know. But it is 
inconceivable to me that--this is called the Energy Foundation 
Towards a Sustainable Energy Future, which is something we all 
want. But if California has a supply problem, these people are 
not buying it. And these people represent a portion of public 
opinion, which they are certainly entitled to do.
    This is part of the problem, ladies and gentlemen. And I do 
not know what we can do here, and we are supposed to be able to 
fix things through changes in Federal law. But if the public is 
not inconvenienced or does not believe that they really need 
more supply, I do not know.
    Anyway, the last point I want to make--we have been joined 
by Senator Dorgan. And we appreciate his participation--is, you 
say, Mr. Caruso, on the issue of sanctions, which is a 
legitimate concern relative to bilateral sanctions, Iran, Iran, 
Libya, if our estimates of world oil demand in the year 2020 
are reasonably correct, then these countries will have to 
substantially expand their current production.
    By the same token, they are members of OPEC now. Saudi 
Arabia has a tremendous capacity for increased production. 
Cannot Saudi Arabia and the other OPEC countries, with the 
exception of these two or three, meet the demand?
    Mr. Caruso. Not according to the projections we have 
reviewed, including those of Mary Hutzler's office and the 
International Energy Agency. CERA's outlook, I think, indicates 
that Saudi Arabia alone would not be able to meet the demand 
increase.
    The Chairman. Now we have oil companies, American oil 
companies, we are going to lose a position over in Libya or 
some of these countries relative to the sanction issue. And the 
question is, do we take off the sanction law, which expires in, 
what, August? And is called what, the law? Anybody know?
    Staff. The Iran/Libya Sanctions Act.
    The Chairman. Yes, the Iran/Libya sanction law. Do you have 
any opinion on whether we should continue the sanctions when 
they expire or leave the matter of foreign policy up to the 
President?
    Mr. Caruso. It should be allowed to expire, in our view.
    The Chairman. And leave it up to the President. Now Israel 
does not like that.
    Mr. Placke. Well, I would also, I think, Senator--it would 
be worth looking into how effective the Iran/Libya Sanctions 
Act has been. There has not been a single country, that is, a 
single company, foreign company, investing in either of those 
two countries that has been sanctioned during the nearly 5 
years that the law has been in effect.
    The Chairman. You are absolutely correct.
    Mr. Placke. So it would not seem to me that the purpose of 
the legislation has been served.
    The Chairman. Well, you conclude with your statement, there 
are troubles ahead. Where is the growth of energy demand coming 
from? Unstable countries. Where is the growth in energy supply 
coming from? Unstable countries.
    I could not agree with you more. You indicate that people 
do not care where the oil comes from in the United States, as 
long as it comes. It can be coming from the scorched earth of a 
rainforest in Colombia. They do not care. They are unconscious. 
They do not care whether it comes in a foreign leaky tanker. As 
long as it does not leak on our shores, they do not care who 
has it, as opposed to the ability to develop oil domestically, 
keep it in U.S. tankers, under U.S. flag, with U.S. jobs.
    And I think it is a responsibility of the media, who are 
supposed to tell the American people both sides of an issue 
relative to the exposure of the continued increasing our 
dependence on foreign oil.
    Senator Dorgan, you can wind up the hearing. You can have 
the gavel. You can answer every question that ever came to 
mind.
    Senator Dorgan. Mr. Chairman, let me just say that you are 
sounding a little bit like a protectionist here.
    The Chairman. I am.
    Senator Dorgan. We have this debate on globalization, and 
anyone who says that the interests of this country somehow 
ought to be considered is called a protectionist. And now I 
come here, and, on this energy issue, you sound a little like I 
do on some of the trade issues. So----
    The Chairman. Well, like on the farm issues, we believe 
charity begins at home.
    [Laughter.]
    The Chairman. Thank you.
    Senator Dorgan [presiding]. I will only ask two brief 
questions. I was at a committee hearing on defense 
appropriations this morning, and so I was unable to be here, 
but thank you for holding this hearing.
    I mentioned this issue of globalization. And there is an 
interesting tension here with respect to energy supply and 
energy demand and to the robust discussion about globalization 
in other areas. All of a sudden, we are very concerned about 
our interests, but there is this tension now on the issue of 
globalization. And I think that it is interesting for us.
    Let me ask any one of you who is able to answer this--there 
is a discussion among Middle Eastern OPEC countries about 
opening opportunities for private capital investment in oil 
expiration in those countries. If that were to happen, what 
impact would that have on investment in the United States by 
the major oil companies? Anybody have any observation about 
that?
    Mr. Placke. Well, Senator, the process that you referred 
to, the so-called upstream opening in Iran, Kuwait, Saudi 
Arabia, has been moving very slowly.
    Given the growth that we anticipate in world demand for 
petroleum, which we see continuing to grow at about 1.6 to 1.8 
percent annually, from a base of now 76 million barrels a day 
of consumption worldwide, there is plenty of room for 
investment and development of resources around the world. Those 
areas attract investment because they are the low-cost 
producers.
    Senator Dorgan. Money moves where it has its best return. 
So the reason I am asking the question is, if that is open to 
private investment in the future, that you make decisions about 
those investments based on return you expect. And better 
returns will exist in areas where it is less expensive to 
explore and to find oil. Would that not be the case?
    Mr. Placke. That is certainly true.
    Senator Dorgan. Would it not be the case, then, that there 
would be a shift in investment potential from here to there?
    Mr. Placke. If it were an uncontrolled market, but it is 
not really on either end. Foreign investment--this may sound 
bizarre--is still regarded with some suspicion in each of those 
areas, or at least it is regarded as something that needs to be 
controlled, so that the national influence over the national 
resources is not lost. So it is not likely that the investment 
opportunities are going to be fully opened to the extent that 
the kinds of tradeoffs that you describe will take place.
    Also, there are advantages to investing in the United 
States, not only locational, but the political risk factor in 
the United States is as close to zero as it can get. That is 
not true anywhere outside the United States. And as you get 
into riskier areas, I think companies simply would be careful 
about how much of that risk they chose to absorb in all of 
their investment alternatives.
    Senator Dorgan. Ms. Hutzler, your conclusion is fairly 
bleak on page seven. You do, however, say that the forecasts, 
which you have made here, incorporate an expectation of 
efficiency improvements in both demand and supply, although 
different paths for technological development could lead to 
slower or more rapid efficiency gains.
    What kinds of things do you think are on the horizon that 
could lead to more rapid efficiency gains? And what kind of 
public policy requirements would have to exist to make that 
happen?
    Ms. Hutzler. What we look at in those cases are different 
rates of new technologies coming on line and different capital 
costs and performance for them. In our Reference Case, which is 
based on historical trends in technology development, we see 
that intensity changes could decline by about 1.6 percent per 
year.
    In the High Case that you are looking at, if we could 
develop some of these technologies to come on at a lower cost 
and greater performance, you could in fact improve that 
intensity to about a 1.9 percent decline rate. So it does deal 
with development of technologies.
    Senator Dorgan. Let me make just a concluding comment. The 
chairman held up, I believe it was, the Washington Post ad 
asking a question about powerplants in California. Whether it 
is California or the general energy outlook for this country, I 
think we have to do a lot of things and do them right. Frankly, 
this may well come from one side of the debate that believes 
that we ought not build more powerplants, we ought to do more 
in conservation, radically more in conservation.
    On the other hand, there are those on the other side who 
could probably just as easily put an ad in and probably say, 
no, no, what we need to do is just build, build, build. I mean, 
that is the only issue. Go find and produce.
    Well, that is one side of the equation, but neither of 
these approaches provide an answer. If we do not do a lot of 
everything and do it right, we are not going to begin to 
address this country's energy issue.
    I do not know whether you put up Senator Bingaman's chart 
today, the one that shows energy usage and shows the 
transportation line going up and shows production over a long 
period of time and shows that either stable or going down. It 
seems to me that you have to address all of these issues, such 
as transportation usage.
    Well, the next time you pull up to somebody that is driving 
a huge gas hog full of chrome and weight, belching smoke and 
getting 8 miles to the gallon, and who is complaining because 
they have to stop at the gas station every few miles, you know, 
we might ask ourselves--does this contribute to the problem? Do 
we have a right to drive these things? Yes. But should we 
complain about them? If we drive them, probably not.
    We need conservation. We need aggressive, robust 
conservation efforts in this country. We need renewable 
resources. And frankly, I am a little sick and tired of the 
energy companies telling us renewable energy sources are 
largely irrelevant. They have done most of what they can to 
depress renewable energy sources for a long while. We need to 
use them, and we need to encourage them. And I think they will 
become commercially successful, viable, and important.
    And we also need to find more and to produce more energy, 
oil, natural gas, and coal, using clean coal technology. We 
need to do a lot of things. And I just think that the voices 
coming down in one crevice or one corner saying ``this is my 
position, this is what I am going to sit on,'' I am just 
telling you, is the wrong way to address this issue.
    Mr. Caruso, your statement, I thought, was very 
interesting, because you really talk about the tensions I tried 
to describe to the Chairman with some mirth here about the 
global economy and domestic needs and our dependence and so on.
    So this is a highly complicated issue. It is not going to 
be solved any time soon. We can go back 10, 20 or 30 years, or 
perhaps 70 years, and find a similar debate that was held in 
this U.S. Senate with just as distinguished folks testifying 
and folks at the dais here. And we would all be talking about, 
yes, we need to cut this cord, and we need to move in another 
direction. And perhaps 20 years from now, we will be having 
similar hearings.
    But my hope is--I think, Mr. Caruso, you said it in your 
testimony. One of the ironies at the turn of the century is 
that, at an age where the pace of change, technological change, 
is almost overwhelming, the world will remain dependent up to 
the year 2020. And the same sources of energy, oil, natural 
gas, and coal, everything, virtually everything in our lives, 
has changed except most of the engines in our vehicles. You 
have to drive up to a gas pump and stick a hose in and pump 
some gas in. That has not changed much at all. But everything 
else has changed.
    And there ought to be ways for us, as a society, to think 
our way through these problems to branch out, and give us ample 
opportunity to find new sources of energy and new approaches.
    And even as we do that, reach agreement between the parties 
and the philosophies about how to do a lot of things right in 
developing an energy strategy that is comprehensive, and do 
that soon.
    Thank you all for being here. I regret the brevity of my 
appearance, but it was a necessity caused by another hearing.
    This hearing is adjourned.
    [Whereupon, at 11:52 a.m., the hearing was recessed, to be 
reconvened on April 3, 2001.]

                           U.S. ENERGY TRENDS

                              ----------                              

                         TUESDAY, APRIL 3, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:43 a.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Frank 
Murkowski, chairman, presiding.

         OPENING STATEMENT OF HON. FRANK H. MURKOWSKI, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. Good morning, ladies and gentlemen. We will 
call the hearing to order on the Energy and Natural Resources 
Committee. I apologize for being tardy, and I have already been 
taken to task by my colleagues, so we will start off even.
    The purpose of the hearing today is to consider the role of 
our domestic oil and natural gas resources that play such an 
important part of our overall energy security. We want to talk 
about what impediments exist to domestic production. We are 
pleased to have, I think, an outstanding panel of witnesses to 
provide expertise on the topic and look forward to their 
testimony.
    I would encourage you as you address energy and oil 
specifically to address the issue of our continued dependence 
on oil for transportation. In spite of what you believe, even 
when we leave Washington, D.C., to go home, we do not go home 
on hot air. We have to get some gasoline for that airplane, and 
it has to come from some place. As we look at relief and 
relieving our dependence on that fuel, we need to look at some 
specifics. What are the alternatives, or are there any in the 
foreseeable future? I would hope that you can enlighten us.
    The same is true as we become more dependent on natural gas 
for our homes and for our power generation. We look forward to 
the findings of a study currently be conducted by the 
Department of the Interior under legislation which I authored 
that will further define the impediments to production, or 
limiting production.
    This last week Secretary Gale Norton, as you know, Senator 
Bingaman, Mary Matalin, representing the Vice President, and a 
group of staff were part of a delegation that visited my State 
of Alaska, visited the Arctic North Slope. It was a relatively 
quick visit; we left Friday and came back Sunday. I think we 
had twelve take-offs and landings, if I am not mistaken. You 
counted them, Jeff, on Saturday, but we went from Fairbanks to 
Deadhorse to Kaktovik to Nuigsut, to Alpine back to Nuigsut, to 
Barrow. It must have been about sixty or seventy below in 
Barrow on Sunday, and even for Alaska it was a little chilly. 
The ranking member here finally found a pair of gloves and got 
some relief, but it was like it is. It is interesting to see a 
place like it is for most of time. There has been some 
criticism we did not take the group up during the summer, but I 
assure you there is going to be another group.
    We have, as you know, considerable gas reserves in Alaska. 
I think there's about 12 billion barrels have been recovered 
from Prudhoe Bay, and there were supposed to be 10 billion 
barrels in the field. It is estimated by responsible geologists 
that about 35 trillion cubic feet of natural gas are associated 
with discoveries in Prudhoe Bay, and the natural petroleum 
reserve in Alaska, 4.5 million acres have been opened for 
exploration. Of course, the 1002 area of ANWR is unknown, but 
it is clear if we look to reducing our dependence on foreign 
oil, a good deal of the energy wealth of North America lies 
above the Arctic Circle, and we also need to use our petroleum 
products more efficiently to get greater conservation and, of 
course, develop alternative fuels. Maybe you can enlighten us 
on that.
    There are other promising areas, of course, for development 
of natural gas--OCS, overthrust belt--that are necessary given 
our growing demand for gas, but it is interesting to look at 
some of the charts and recognize that OCS availability offshore 
on the East Coast from Maine to Florida is pretty well covered 
by moratoriums that mandate that there shall be no development. 
The same is true on the West Coast of the United States: 
Washington, Oregon, California. So the question is where are we 
going to find it?
    So we have several barriers that prevent use of these 
resources to meet our growing energy needs. Many areas, as I 
have indicated, are under moratoria. Even when leases are 
granted, it gets hard to get the permits through. We have got 
administrative inaction and duplicate regulatory environment 
processes, disputes and legal challenges by stakeholders, local 
communities, environmental groups, regulatory structures not 
keeping pace with technology. The reduced footprint is 
relatively dramatic, relative to the technology available. I am 
told that when two thousand acres was developed in 1973, today 
we do it in two hundred acres. We have 3D seismic mapping, 
which we did not have a decade ago; horizontal drilling allows 
one well to replace several.
    We saw this this weekend in Alaska. We have seen wells that 
reach out using directional drilling as much as 15 miles. So we 
have a technology to find and develop our oil and gas reserves 
in a way that minimizes impact on the environment, and we can 
respect the land that both people and animals depend on for 
their welfare. So we have got the potential here to preserve 
and develop at the same time, and we must preserve cultures and 
ecosystems alike. Some would suggest that this particular issue 
has become so politically polarized that it is very difficult 
to get people to objectively view it. It has been threatened 
with filibusters, and I would hope that we would rise above 
that and use sound science and factual information to make our 
decisions.
    I have said before we cannot produce and cannot drill our 
way out of this. We need all the sources of energy to address 
the shortfalls, but we must look at the barriers, review them 
with the ways to streamline leasing while encouraging 
stakeholders' dialogue to ensure safe environmental 
responsibility.
    It is kind of interesting to see where we have been on this 
area. Some say progress has been made, particularly in the deep 
waters of the central and western Gulf of Mexico. Nearly 35 
million offshore acres were leased from 1993 to 1998, 
representing over a 50 percent expansion in the cumulative 
leasing prior to that time. However, this was not due to 
increased access to those areas, the areas had been previously 
available. The increase was due to the combined effects of 
major technological breakthroughs and deep water royalty 
incentives passed by Congress in 1995 and passed, I might add, 
by this committee. At that time, Senator Bennett Johnson was 
chairman of this committee, and I supported him on that effort. 
That was a considerable consequence, I think, for much of the 
offshore development that we see today.
    It is interesting to note that Western States contain 45 
percent of the proven oil reserves, 35 percent of the proven 
gas reserves, and even a larger share of the estimated 
undiscovered oil and gas in the lower 48 onshore. It is kind of 
interesting to reflect on the reality that when we have seen 
moratoriums designed from time to time to accommodate some of 
the special interests within those States, while obviously 
there is a certain sensitivity, it simply takes these promising 
areas and puts them off-limits and we do not go back and 
prioritize them again.
    Some of the problems that we have had continually that we 
are going to have to overcome are the delays by BLM in 
processing applications for permits, expansive interpretations 
of The Endangered Species Act by the BLM, Forest Service, U.S. 
Fish and Wildlife Service which have led to the creation of de 
facto critical areas which unreasonably restrict oil and gas 
activities by imposing dramatically reduced drilling windows. 
BLM's designation of previously studied wilderness study areas 
have become again de facto. We seem to be going through a de 
facto process without the Congress making the determination. 
The administrations and the agencies have been doing it.
    In the absence of cooperation and coordination between BLM, 
Forest Service, EPA, FERC and other agencies in implementing 
national environmental policies or NEPA requirements, it has 
led to tremendous interagency disputes, delays for permitting, 
leasing. I could go on and on with what the problems are, but 
the problems result in obviously it becoming more difficult, 
more time-consuming, and more expensive. The question is, is 
this done in the interest wholly of environmental sensitivity 
and compatibility, and is it all necessary? Hopefully today we 
will find out a little bit more about that process--what is 
holding up the development and why we are becoming more and 
more dependent upon foreign sources for energy.
    Senator Bingaman, good morning.
    [The prepared statements of Senators Campbell and Dorgan 
follow:]
   Prepared Statement of Hon. Ben Nighthorse Campbell, U.S. Senator 
                             From Colorado
    Thank you, Mr. Chairman. I would like to welcome all of the 
witnesses and my colleagues for appearing before the committee today. I 
am looking forward to the testimony that you all will be providing us 
shortly. I am delighted to see that so many of you are here to address 
this critical problem.
    In the past, public lands were locked up, and were prohibited from 
oil and gas exploration and extraction, often without legislative 
oversight. Known resources are sifting idly by when our nation is 
reeling from a dwindling supply of energy. And, our crisis is only 
going to get worse this summer from our inadequate supply of energy.
    Granted, some of the lands which are locked up are worthy of the 
protection, but others were locked up for the sole purpose of 
prohibiting exploration and extraction of oil and gas. These are the 
lands and regulations that need to be revisited. Since 1992, U.S. crude 
oil production is down while our consumption has substantially climbed. 
We can help ourselves get out of this mess, but we have to be allowed 
to do so, even if that means opening up more lands.
    Don't get me wrong, we have to have environmental safeguards so 
that we do not do more harm than good. The technology is there to 
accomplish this goal. We just have to be able to prove it. Many people 
think that mining operations are all big open pit mines, which is not 
the case. There are mining operations that are environmentally sound 
and have minimal degradation to the surrounding areas.
    Many are going to say that even this isn't good enough, that any 
environmental harm is unacceptable. But, we have to be realistic. Many 
want the cheapest and cleanest form of energy, but they do not have any 
``real'' solutions to replace our traditional types of power. Sure they 
claim that renewables are up-and-coming, but they are not in full swing 
yet. We have to deal with what is in front of us.
    We are a nation that could use our land to supply a majority of our 
power needs, which would also help us to decrease our dependence on 
foreign oil. Our locked lands have discouraged many from trying to do 
what is right and now our nation is reaping the bitter fruits of this 
practice. I will have some questions for the witnesses that I would 
like them to address so that we can further explore this issue during 
the time for questions.
    Thank you Mr. Chairman.
                                 ______
                                 
       Prepared Statement of Hon. Byron L. Dorgan, U.S. Senator 
                           From North Dakota
    Mr. Chairman, I am concerned that we are having yet another hearing 
pertaining to the supply side of energy policy.
    While I believe that we do, in fact, need to examine oil and gas 
exploration and development options, I also emphatically believe that 
we must have a balanced energy policy. That means we also need to focus 
on the demand side of the energy equation. I am pleased that at least 
one of our witnesses, Mr. Hayes, agrees with this policy approach.
    We cannot drill our way out of our energy problems. Even my 
colleague, Chairman Murkowski, will agree with me in this regard. We 
must do more to promote renewable energy and energy efficiency. Yet, 
the Administration is proposing to cut renewable energy and energy 
efficiency research and development funding by approximately 30-50 
percent.
    Moreover, the Administration is considering delaying or doing away 
with proposed efficiency standards, at this very moment. These 
standards would improve the efficiency of clothes washers, water 
heaters, air conditioners and commercial heating and cooling systems. 
These standards, combined with others for refrigerators and room air 
conditioners completed earlier, would cut residential energy use by 
about 13% by 2020. The air conditioner standard would be the single 
most effective standard in reducing residential energy use. Further, 
the new standard for washing machines is projected to save the 
equivalent of the annual energy use of 21 million households, with 
water savings of as much as 11 trillion gallons. Not enacting these 
standards during an energy crisis is incomprehensible to me.
    Unfortunately, the Administration instead seems to want to open up 
public lands and drill our way out of this problem. Opening up every 
last public land is not the answer. In addition, one must only look at 
the facts to realize that there do not appear to be so many obstacles 
to drilling on public lands, either, as some would have us believe.
    Drilling on public lands actually increased during the past eight 
years, while having decreased on private lands. In fact, public lands 
provide a greater percentage of oil and gas to meet U.S. energy needs 
today than at any time in the past two decades. In 1992, during the 
first Bush administration and following eight years of Reagan policies, 
oil and gas production from the Federal lands provided 13% of overall 
domestic oil and gas production. By 1999, the contribution of oil and 
gas production from the Federal lands as a percentage of overall 
domestic oil and gas production had risen to 25%. Moreover, the Bureau 
of Lands Management (BLM) is in the process of granting more than a 
thousand permits to drill for oil and gas in the Powder River Basin in 
Wyoming, an extremely prospective area for western oil and gas 
production. Again, one of our witnesses will testify to these facts.
    Opening up the Arctic Refuge also is not the answer. Even President 
Bush is realizing this, as he stated last week. Drilling in the Arctic 
Refuge would take years to access and would produce only a small amount 
of petroleum supply. What we need instead is natural gas. I support 
exploring natural gas supplies in Alaska's North Slope. But this 
proposal, too, will take time to see to its fruition. We also need to 
examine exploration and development on private lands.
    In the interim, the most effective steps we can take to address our 
immediate problems is to implement alternative conservation and 
renewable energy measures. These measures can be put in place far more 
quickly than pipelines or power plants.
    So, rather than exploring impediments to oil and gas exploration 
and development, which are limited, we should instead be exploring ways 
to expedite and facilitate means to improve efforts for energy 
efficiency and alternative energy resources.
    Thank you, Mr. Chairman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Good morning, and thank you for having 
the hearing, Mr. Chairman. I do think this is an important 
issue. I believe that there is a real need to inventory our 
public lands and our private lands as well and look at where 
the opportunities are for additional production of oil and gas 
in particular. I think we need to look at the various 
moratoria, which you have alluded to, and see whether there is 
any genuine prospect for relaxing any of them.
    My sense is that there probably is not in most cases, at 
least the offshore moratoria. Those are moratoria that the 
previous administration supported. I believe former President 
Bush supported those when he was in office. I believe that 
current President Bush has indicated his support for those 
moratoria, so I do not know how far we get in trying to pursue 
relaxation of those moratoria. I do not know if that would be 
wise or productive on the part of the committee.
    I do think that we need to look at all opportunities for 
increasing oil and gas production in an environmentally-
sensitive way. I think that in addition to looking at Federal 
lands, we need to look at private lands. My impression is that 
we have seen increases in production from Federal lands in the 
last decade. At the same time we have seen decreases in 
production from State lands and private lands, and we need to 
see if anything can be done about that.
    I also agree with you that there are enormous resources on 
the north slope of Alaska where we were this weekend and we 
need to find ways to develop some of those resources. One 
specific that I know the chairman is very interested in, and I 
also support, is to try and find a way to bring that natural 
gas to the lower 48 as quickly as possible and build a pipeline 
to accomplish that. Therefore, we have a provision in the 
energy bill that I introduced a week or so ago that tries to 
provide an incentive for early construction and use of that 
pipeline. I would be interested in anyone's reaction to that as 
to whether that is the correct direction to go in or not, but I 
do think we should hear some good testimony and hopefully 
understand the issue better when the hearing is over.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, very much. In the order of Senator 
Burns, Senator Thomas, Senator Cantwell, and Senator Landrieu.

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

    Senator Burns. Thank you, Mr. Chairman, and I will just put 
my statement to record.
    The Chairman. Without objection.
    Senator Burns. I think that never at a time since I have 
been around has there been so much interest in energy, and this 
shortage that we have this time covers all bases. Not only is 
it the production of electricity, our transportation fuel, and 
the overall costs--and I come from the agricultural community, 
and right now it has hit all segments of our ability to produce 
food for this nation. We do not want to forget about that for 
the simple reason that I do not know what the first thing you 
do when you get up every morning, but I know what the second 
thing you do is, and that is eat, and we must not forget about 
that. Our ability to produce a food supply, fertilizers, 
transportation costs, processing, purveying is all equally hit 
in this country, and that is going to start showing up right 
away, so thank you for holding this hearing, and I am 
interested in listening to the witnesses today.
    Thank you.
    [The prepared statement of Senator Burns follows:]
   Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
    Mr. Chairman, I'd like to thank you for holding this hearing to 
look at impediments to domestic oil and gas development. We have been 
spending a lot of time lately discussing this energy crisis and I 
appreciate that, but in my mind this hearing is different in one very 
significant way. Up to this point we have talked a lot about the 
problem, and I see this hearing as focusing on potential solutions.
    I know that Montana can be part of this solution, because we are 
fortunate to possess great quantities of gas, oil, coal and coal bed 
methane reserves within our state. In fact, I held a hearing in Montana 
on March 10 to investigate what coal bed methane could mean in our 
State, and what we need to do before we proceed. Coal bed methane is 
one promising possibility in the range of federal land use, but that is 
what makes it rare. Unfortunately, most of our stories about energy 
development in Montana have had one common theme: lost opportunity at 
the hand of federal land use restrictions.
    Today we have with us some folks who are very experienced in the 
gas and oil business, and I am looking forward to what they have to 
say. I think they will tell us we have the opportunity to make this 
country more energy independent by using some of our vast energy 
reserves. I believe that these energy resources can be tapped to help 
bring energy prices back down to a reasonable level. A great deal of 
these reserves exist on public land, and we owe it to the public to use 
these lands wisely. To me, it is only common sense that energy 
production should be seen as a legitimate use for public lands where 
that is appropriate. We seem to have forgotten that part of the 
equation in the last few years.
    I am glad the U.S. Geologic Survey has released its report on 
potential energy reserves within recently declared monuments. From that 
report, you will see what we have known in Montana for quite a while, 
which is that there are significant energy reserves underlying the 
Upper Missouri River Monument. There is a great deal of natural gas in 
that area, and considering that it is in high demand as a clean-burning 
fuel and as an input into agricultural fertilizer, I believe we need to 
do what we can to use it well. Prudent development is already taking 
place just north of the Breaks and a reasonable boundary must be 
established for the Monument to allow access to this known resource and 
even natural gas development within the Monument.
    To further this access discussion there is already a gas pipeline 
crossing the Missouri. Expansion of the pipeline because of increased 
future volumes and routine maintenance must be able to continue for 
both safety and continuing power generation and heating needs. This 
infrastructure consideration must be dealt with in any document that is 
finalized on the Missouri Breaks.
    The Upper Missouri River Monument is a good example of how the 
federal government has restricted oil and gas exploration on public 
lands. The declaration of this monument in north central Montana was 
one of President Clinton's last actions in office. The monument is 
about 495,000 acres and includes BLM land, state land, and private 
land, much of it along the Missouri River. It is beautiful, remote, 
remarkably well-preserved, and home to some of the most promising land 
for natural gas in all of Montana.
    Within the monument are thousands of acres of valid leases, mainly 
natural gas, numerous producing wells, and gas pipelines. Under the 
current arrangement, these have been tied up from any further 
development. Even though the draft management plan states that the 
``designation does not affect valid oil and gas leases'' the truth is 
that without access to pipelines, and reasonable turnaround time for 
permit approval, leaseholders will not be able to pursue their rightful 
ownership to the gas within monument boundaries. According to current 
leaseholders, the permit approval for these leases has averaged about 
60 days, up until word leaked that the Monument designation was being 
considered, and since then some have been waiting for a year or more.
    When we look at States like Montana and others like it, the careful 
extraction on natural gas and oil could contribute significantly to the 
tax base of the State and local governments. When we tie that land up 
and bar development of the resource base, we also limit the ability of 
state and local governments access this valuable source of income. 
Instead, the federal government locks it up, and pays the counties PILT 
money for the lost revenue. That just doesn't make any sense. There is 
a very real economic impact to the State treasury, and to the Federal 
tax rolls (the State would receive one-half of Federal revenues from 
royalties and land sales).
    Continued restriction on the Federal land base and the contribution 
it makes to western States treasuries needs to end. The tax burden 
continues to shift back to the State level without due compensation 
from the Federal government. The Federal government cannot afford to 
take revenue sources off the table and continue writing checks to cover 
bad policy decisions and extremely poor management. That just isn't 
right.
    I support careful management, and that includes looking at all 
options for a piece of land. The mindset that no management is good 
management does not sit well with me, and that is the attitude I have 
seen in regard to energy resources on public lands. I look forward to 
hearing the testimony of our witnesses today, and finding out how we 
can improve the viability of energy development on public lands.

    The Chairman. Thank you very much, Senator Burns.
    Senator Thomas.

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

    Senator Thomas. Thank you, sir, and I too appreciate this 
hearing. I am very much interested in today's topic, of course, 
which is how we improve and increase our domestic oil and gas 
production. Obviously one of the things that has to be done is 
dispel this myth that development versus environment is the key 
issue. I am persuaded we can do both; we have shown that we can 
do that, I think, in Wyoming. There is substantially less of 
the mineral reserves that is leased now on Federal lands than 
there was. It has declined by more than 65 percent since the 
early 1980's, only about 17 percent of the total estate 
compared to 72 before. I am not suggesting it ought to be back 
where it was, but we have to take a look at it.
    I think the broader thing--and I have said this over and 
over again, but I feel very strongly--if we are going to have a 
policy that brings us in energy where we want to be, we have to 
improve domestic production, we have to have access to public 
lands, the same time protect the environment. That's our task. 
I think we have to have diversity in the kinds of sources that 
we have. We have to begin to use them in that way. We have 
produce renewables. They are a very small factor now but can be 
larger. We have to have some conservation as part of that 
policy. We have to do something about rights of way so that we 
can move this energy from one place to another so that it can 
be used. I think there is a possibility for incentives when 
they have low production wells and things of that kind. 
Regulations need to be reasonable, and we have to respond as we 
go along to some of the market signals which we failed to do in 
California.
    In any event, there is a lot we can do. I look forward to 
it. I was listening to the radio--something about his reaction 
was a little less talk and a little more action. Maybe we need 
to do that.
    The Chairman. Thank you very much.
    Senator Cantwell, good morning.
    Senator Cantwell. Good morning, Mr. Chairman. Thank you. 
And I too will submit my comments for the record.
    The Chairman. Would you speak a little more in the 
microphone, please? It doesn't pick up very well.

        STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR 
                        FROM WASHINGTON

    Senator Cantwell. Thank you, Mr. Chairman. Please excuse 
the fact that I will not be here for part of the hearing. I 
also have a Judiciary hearing and I think some of our other 
members are doing double duty too.
    This is an important hearing, and I would like to associate 
myself with the comments of Senator Bingaman. We have to look 
at this energy crisis that we are facing in the Northwest, not 
only on the supply side but also making sure that we do not put 
undue pressures, permanent strains, on our environment. This 
past weekend we just had a day-long conference of the entire 
delegation on conservation. I was most impressed by a group of 
students from a middle school in Seattle who said, ``What have 
we learned from the last energy crisis that we are going to 
apply today so as not to make the same mistakes?''
    We also have a group of high school students from Port 
Townsend who are in the audience, and who will provide various 
members here with research that they have done on recyclable 
materials. While today we are going to hear about the supply 
side and appreciate the chairman's dedication to the supply 
side of this issue, we need to remember that there is a 
delicate balance here both in the short term and the long term.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Cantwell.
    Senator Landrieu.

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

    Senator Landrieu. Mr. Chairman, I thank you and the ranking 
member for holding this hearing, and I look forward to hearing 
from our distinguished panelists and am hopeful they can shed 
some additional light on this important issue for our nation. I 
am going to submit my statement for the record.
    The Chairman. Without objection.
    Senator Landrieu. I would just like to make a couple of 
brief comments. First, the chairman has held hours of hearings 
over the last year and I am convinced that the most immediate 
problem is the transmission grid. Before we even work on supply 
or demand, the transmission grid, the transmission lines, the 
way that we move from the production to the use, whether it is 
gas lines or electricity lines, is something that has to be a 
priority in any legislative initiative that we take up in this 
committee.
    Secondly, I agree with our chairman and ranking member that 
the diversity, quality and quantity of our supply are 
important, and that one lesson we can learn from the last 
energy crisis is we have to emphasize diversity of supply and 
cannot be over-reliant on one source of energy. As a State that 
has been a proud producer of oil and natural gas and continues 
to advocate for their use, I also support other sources of 
energy such as clean coal and nuclear.
    In addition, I do think that we must focus our efforts on 
efficiency and conservation. However, we should continue to 
look at opportunities to expand our supply. The question is 
should one or two States stand in the way of a Nation that 
needs a steady supply of energy to keep our economy moving?
    I know these are tough issues, and there are some 
delegations that feel very strongly about moratoria, but we 
must evaluate whether these moratoria are serving our Nation's 
best interest. I believe we need to look at all opportunities 
for production whether in the Rocky Mountains, the Gulf of 
Mexico, or even Alaska, while still emphasizing energy 
efficiency and conservation.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Landrieu follows:]
       Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator 
                             From Louisiana
    Thank you, Mr. Chairman. I want to thank you for holding this 
hearing today on the development of domestic oil and natural gas 
resources as part of a national energy policy.
    We are well aware that the U.S. is currently experiencing unusually 
high and volatile energy prices. Residents of my state of Louisiana as 
well as citizens across the country faced abnormally high gas prices 
this past winter and often could not pay their bills. Most of the 
forecasts for this summer are even more ominous. While there are some 
steps we can take in the short run to help, the situation is complex in 
nature and any attempt at an overall solution will require a number of 
different remedies over the long run focusing on both the supply and 
demand side of the equation. However, the need to increase our domestic 
supply of energy is apparent.
    One of the great strengths of the electric supply system in this 
country is the contribution that comes from a variety of fuels such as 
coal, nuclear, natural gas, hydropower, oil and renewable energy. The 
diversity of available fuels we have at our disposal should enable us 
to balance cost, availability and environmental impacts to the best 
advantage. Unfortunately, we have not made adequate use of this supply. 
Today our focus is domestic oil and natural gas resources. In 1998, 
natural gas and petroleum combined for approximately 65% of total 
energy consumption in the U.S. I am hopeful that during today's hearing 
we can explore any and all reasonable opportunities for potential 
development of these respective resources.
    We have available in this country plentiful natural gas and oil 
resources that can be developed in an efficient and environmentally 
sensitive manner. One area with great potential is the deep water of 
the Gulf of Mexico which has had an explosion of development in recent 
years. The Mineral Management Service (MMS) is scheduled to hold a 
lease sale, Lease Sale 181, in December of 2001 for an area in the 
Eastern planning area of the Gulf. The lease sale would cover a narrow 
strip of federal waters directly south of the Alabama coast line which 
expands into a broader area a hundred miles out in the Gulf. Industry 
has developed oil and gas in this huge expanse of federal waters for 
years in a safe and environmentally sound manner. The MMS estimates 240 
million barrels of oil and 1.8 trillion cubic feet of natural gas will 
be developed from this area. Those figures could go as high as 370 
million barrels of oil and 3.2 trillion cubic feet of natural gas. When 
the MMS prepared the leasing plan for this five year period, extensive 
public meetings and consultations with states were conducted. This area 
is a huge expanse of federal waters where industry has developed oil 
and gas for years in a safe and environmentally sound manner. The 
Minerals Management Service (MMS) should proceed with Lease Sale 181 in 
December of this year as planned.
    The waters of the Gulf of Mexico have proven to be a plentiful 
source of oil and natural gas and are predicted to remain so in the 
immediate future. Nearly 80% of the Federal oil and gas that is 
produced annually from the Outer Continental Shelf is produced from the 
waters adjacent to the State of Louisiana and I am happy for this 
development to continue. However, the supply in the Gulf is not without 
limits. One day this supply will cease. We owe it to ourselves and 
future generations to at least consider other areas both on and 
offshore for prospective development. While we cannot recklessly cast 
aside any restrictions to development on certain lands and off certain 
shores that are in place out of concern for the environment, an 
analysis of the costs and benefits of such development which takes into 
account advances in exploration and production technologies does not 
seem unreasonable.
    One area in particular that I am interested in hearing about from 
the witnesses is the Rocky Mountain region and its potential natural 
gas supply. The 1999 National Petroleum Council study on Natural Gas 
found that, in addition to the Gulf of Mexico, the other most promising 
region for future gas production was the Rocky Mountains. The report 
estimated that an estimated 40%--or 137 TCF--of potential gas resource 
in the Rockies is on federal land that is either closed to exploration 
or is open under restrictive provisions. To ignore the potential of 
this area does not seem like good policy.
    Thank you, Mr. Chairman.

    The Chairman. Thank you very much. I appreciate your 
statement, and we will proceed with our witnesses now. Let me 
introduce them at this time. We have Panel One, Dr. Patrick 
Leahy, a good Irishman, Associate Director of Geology, U.S. 
Geological Service from Reston, Virginia; Mr. Matt Simmons, 
president, Simmons & Company International from the great State 
of Texas, downtown Houston; the Honorable David Hayes, who is 
no stranger to us, although he is wearing a new badge--he has 
joined the fraternity of lawyers which is expanding all the 
time in Washington--as a partner with Latham & Watkins here in 
Washington, D.C.; Mr. Mark Rubin, who is general manager of 
Upstream. And do you want to explain the difference between 
upstream and downstream?
    Mr. Rubin. Upstream is exploration and production.
    The Chairman. And downstream is?
    Mr. Rubin. Refining, marketing, that kind of thing.
    The Chairman. I wanted to make sure because some of our 
colleagues, including myself, have been both upstream and 
downstream, but not necessarily in the petroleum business.
    Mr. Rubin. It is up the creek.
    The Chairman. It is up the creek? Okay. Well, I was 
maintaining the metaphor here, and I thought it was appropriate 
for this distinguished group, but he comes to us as general 
manager, Upstream, American Petroleum Institute in Washington, 
D.C. Mr. Neal Stanley--Mr. Stanley is vice president, Western 
Region, Forest Oil Corporation of Denver, on behalf of the 
Independent Petroleum Producers of America. If we have got that 
right, we will proceed and would ask that you try to keep your 
statements to about seven minutes, and then when we are all 
through, we will have some questions for you. Is that fair 
enough? Thank you.

   STATEMENT OF DR. P. PATRICK LEAHY, ASSOCIATE DIRECTOR FOR 
  GEOLOGY, U.S. GEOLOGICAL SURVEY, DEPARTMENT OF THE INTERIOR

    Dr. Leahy. Mr. Chairman and distinguished members of the 
committee, thank you for this opportunity to present on behalf 
of the U.S. Geological Survey, testimony regarding our 
assessment of oil and gas resources nationally, and our 
assessment strategy of Federal lands as called for in the 
recently enacted Energy Act of 2000. I will summarize my 
written statement in the interest of time.
    The USGS is responsible for assessing undiscovered oil and 
gas resources of all onshore and State offshore areas of the 
Nation. In February 1995, the USGS released the National 
Assessment of the U.S. Oil and Gas Resources. We are updating 
that assessment in selected regions thought to have high 
potential for undiscovered natural gas, including coal bed 
methane and gas hydrate. This update will be completed in 2004 
with interim products available in early 2002. The updated 
assessment will include allocations of undiscovered oil and gas 
resources to Federal lands. Additionally, the USGS is 
completing a national coal resource assessment during 2001. 
Assessments of some areas have already been released relative 
to the coal.
    The 1995 USGS assessment of the Nation's undiscovered oil 
and gas was conducted in collaboration with the State 
geological surveys, the Minerals Management Service, and other 
Federal agencies, and industry geologists under the auspices of 
the American Association of Petroleum Geologists. Assuming 
existing technology, there are approximately 113 billion 
barrels of technically recoverable oil on shore and in State 
waters. The technically recoverable conventional natural gas 
equals approximately 716 trillion cubic feet. When one includes 
unconventional gas resources, the total increases to 1,074 
trillion cubic feet.
    The total technically recoverable oil and gas resource base 
on shore and in State waters of the United States is displayed 
in the table on page two of my written statement.
    In January 1998, the 1995 assessment was used and USGS 
published a report that provided estimates of the volumes of 
undiscovered oil and gas on Federal lands. Estimates of oil in 
undiscovered conventional fields ranged from 4.4 to 12.8 
billion barrels, with a mean value of 7.5 billion barrels. 
Estimates of technically recoverable gas in undiscovered 
conventional fields ranged from 34 to 96 trillion cubic feet.
    The Chairman. What is the difference between a conventional 
field and a nonconventional field?
    Dr. Leahy. Nonconventional fields make our continuous gas 
resources. They are not in structural traps or sedimentary 
traps, so things like coal bed methane would be considered 
unconventional.
    The Chairman. What is conventional?
    Dr. Leahy. Conventional are those gases that are in 
stratigraphic traps so that you drill into the trap and 
structural traps, so they are discrete resources.
    As before when unconventional gas resources are included, 
the volume increases. Estimated volumes of undiscovered oil and 
gas and natural gas liquids in onshore Federal lands of January 
1994 are displayed in the table on page three of my statement.
    [Chart.]
    Dr. Leahy. I would like to refer to this poster now. This 
shows the 113 billion barrels of oil, as well as the 1,074 
trillion cubic feet of natural gas in onshore and State waters. 
It also shows the breakdown as a percentage into four major 
categories: crude resources, reserve growth in known fields, 
and undiscovered resources on both Federal lands and non-
Federal lands. And the colors that were used are identical in 
both graphs.
    What I would like to do now is talk a little bit about the 
Energy Act of 2000. Section 604 of that Act requires the 
Secretary of the Interior to conduct an inventory of energy 
resources and the restrictions and impediments to their 
development on Federal lands. It is our understanding that the 
role of the USGS will be to assess the oil and gas resources of 
basins with Federal land ownership using USGS assessment 
methodology. Then USGS geologists will allocate resource 
estimates to those specific land parcels owned by the Federal 
Government. USGS resource assessments will be combined with 
reserve volumes from the Department of Energy and will be 
incorporated into a geographic information system which shows 
the spatial distribution of potential resources as well as the 
known reserves. The resource and reserve information will be 
integrated with geographic information on the restrictions and 
impediments constructed by BLM and the Forest Service, and the 
inventory will be provided to Congress within two years of the 
enactment of the legislation which was this past November.
    I have also been asked as part of my testimony to talk a 
little bit about the Minerals Management Service, and I will 
provide to you the results of the Mineral Management Service 
2000 assessment of the Federal Outer Continental Shelf 
undiscovered oil and gas resources. The part I have not talked 
about are shown in these graphs.
    MMS estimates that the total mean undiscovered 
conventionally-recoverable resources for the United States OCS 
are 75 billion barrels of oil and 362 trillion cubic feet of 
gas.
    Mr. Chairman, thank you for the opportunity to testify, and 
I will be happy to respond to any questions the committee has.
    [The prepared statement of Mr. Leahy follows:]
  Prepared Statement of Dr. P. Patrick Leahy, Associate Director for 
      Geology, U.S. Geological Survey, Department of the Interior
    Mr. Chairman and Members of the Committee, thank you for this 
opportunity to present, on behalf of the U.S. Geological Survey (USGS), 
testimony regarding our national assessment of onshore oil and natural 
gas resources. Additionally, the Committee has requested that we 
include information recently provided by the Minerals Management 
Service (MMS) to the Congress concerning estimates of the undiscovered 
oil and natural gas resources of the Outer Continental Shelf (OCS).
    Within the Federal Government, the USGS is responsible for 
assessing undiscovered oil and gas resources of all onshore and State 
offshore areas of the Nation. In February 1995, the USGS released the 
National Assessment of United States Oil and Gas Resources. Currently, 
we are updating that assessment in selected regions thought to have 
high potential for undiscovered natural gas, including coal-bed methane 
and gas hydrate. This update will be completed in 2004, with interim 
products available in early 2002. The updated assessment will include 
allocations of undiscovered oil and gas resources to Federal lands. 
Additionally, the USGS is completing a National Coal Resource 
Assessment during 2001. To date, coal resource assessments of the 
Colorado Plateau and of the Northern Rocky Mountains and Great Plains 
have been released, and coal resource assessments of the Appalachian 
and Illinois Basins, and Gulf Coast Region will be available later in 
2001. USGS coal assessments also identify volumes of coal under 
Federally owned lands, and of Federally owned coal under privately 
owned lands, where present.
    MMS is responsible for developing estimates of Federal offshore 
crude oil and natural gas resources. The most recent MMS resource 
assessment was completed in 2000, and I will discuss some of the 
highlights of that assessment later in my testimony. I would also like 
to submit for the record a copy of the testimony MMS presented on its 
most recent resource assessment before the House Resources Subcommittee 
on Energy and Mineral Resources on March 22, 2001.
  usgs 1995 national assessment of united states oil and gas resources
    The 1995 USGS assessment of the Nation's onshore undiscovered oil 
and gas was published in digital format on a CD-ROM (USGS Digital Data 
Series-30) and in a non-technical summary, as USGS Circular 1118. The 
Assessment was conducted in collaboration with State Geological 
Surveys, with MMS, and with industry geologists under the auspices of 
the American Association of Petroleum Geologists. Additional 
cooperation with the Bureau of Land Management, National Park Service, 
U.S. Forest Service, and Bureau of Indian Affairs was essential for the 
USGS to generate information regarding oil and gas resources on Federal 
lands. The current update of the 1995 assessment is being conducted 
with many of the same partners.
    Assuming existing technology, there are approximately 112 billion 
barrels of technically recoverable oil onshore and in State waters, 
according to the USGS's most recent assessment. Technically recoverable 
resources are those that may be recoverable using current technology 
without regard to cost. Economically recoverable resources are that 
part of the technically recoverable resource for which economic factors 
are included and which can be recovered at a given market price. This 
includes measured (proved) reserves, future additions to reserves in 
existing fields (reserve growth), and undiscovered resources. The 
technically recoverable conventional resources of natural gas in 
measured reserves, future additions to reserves in existing fields, and 
undiscovered accumulations equal approximately 716 trillion cubic feet 
of gas.
    In addition to conventional gas resources, the USGS has made an 
assessment of technically recoverable resources in continuous-type 
(largely unconventional) accumulations. We estimate about 308 TCFG 
(trillion cubic feet of gas) of technically recoverable natural gas in 
continuous-type deposits in sandstones, shales, and chalks, and almost 
50 TCFG of technically recoverable gas in coal beds. The total 
technically recoverable oil and gas resource base onshore and in State 
waters of the United States is displayed in the table below.

        RESULTS OF THE USGS 1995 NATIONAL OIL AND GAS ASSESSMENT
------------------------------------------------------------------------
                                                             Natural gas
                                         Oil        Gas        liquids
          Resource category            (billion  (trillion    (billion
                                       barrels)   cu. ft.)    barrels)
                                         1995       1995        1995
------------------------------------------------------------------------
Undiscovered resources
  Conventional Accumulations........      30        259            7
  Unconventional Accumulations......
    Sedimentary reservoirs..........       2        308            2
    Coal-bed methane................      NA         50           NA
Anticipated Reserve Growth..........      60        322           13
------------------------------------------------------------------------
    Total...........................      92        939           22

Proved Reserves (in 1994)...........      20        135            7
------------------------------------------------------------------------
    Total...........................     112      1,074           29
------------------------------------------------------------------------

    The estimates presented in this testimony reflect USGS 
understanding as of January 1, 1994. They are intended to capture the 
range of uncertainty, to provide indicators of the relative potential 
of various petroleum provinces, and to provide a useful guide in 
considering possible effects of future oil- and gas-related activities 
within the United States.
    The geographic information system (GIS) coverages contained in this 
assessment and related databases provide the capability to estimate oil 
and gas resource potential on specific tracts of land, including those 
owned and/or managed by the Federal Government. This process is called 
allocation, based on expert opinion, and is accomplished using a 
methodology that takes into consideration all geologic information 
available about the basin.
 1995 national oil and gas assessment and onshore federal lands (1998)
    In January 1998, the USGS published an Open-File Report (OFR 95-
0075-N) that reported estimates of volumes of undiscovered oil and gas 
on Federal lands. Estimates of oil in undiscovered conventional fields 
range from 4.4 to 12.8 billion barrels (BBO), with a mean value of 7.5 
BBO. Estimates of technically recoverable gas in undiscovered 
conventional fields range from 34.0 to 96.8 trillion cubic feet (TCF), 
with a mean value of 57.9 TCF. Almost 85 percent of the assessed 
natural gas in undiscovered conventional accumulations was non-
associated gas, that is, gas in gas fields rather than gas in oil 
fields. Estimates of technically recoverable resources in conventional 
(continuous type) accumulations for oil are from 0.2 to 0.6 BBO, with a 
mean value of 0.3 BBO, and for gas, from 72.3 to 202.4 TCF, with a mean 
value of 127.1 TCF. These ranges of estimates correspond to 95 percent 
probability (19 in 20 chance) and 5 percent probability (1 in 20 
chance) respectively, of a least those amounts occurring.
    An economic evaluation was applied to these technically recoverable 
estimates. Our study concluded that at $30 per barrel for oil and $3.34 
per thousand cubic feet of gas, 3.3 BBO oil and 13.6 TCF in 
undiscovered conventional fields can be found, developed, and produced. 
In addition, at these estimated prices, 0.2 BBO oil and 11.4 TCF in 
continuous-type accumulations and 11.8 TCF of coalbed gas can be 
developed.
    Estimated volumes of undiscovered oil, gas, and natural gas liquids 
in onshore Federal lands, as of January 1994 are displayed in the table 
below.

----------------------------------------------------------------------------------------------------------------
                                                                          Technically           Economically
                                                                          recoverable           recoverable*
                                                                   ---------------------------------------------
                                                                                             $18/bbl    $30/bbl
                                                                      F95    Mean     F05     $2/mcf   $3.34/mcf
----------------------------------------------------------------------------------------------------------------
Conventional
  Oil (BBO) **....................................................     4.4     7.5    12.8      1.6        3.3
  Gas (TCF).......................................................    34.0    57.9    96.8      9.7       13.6
  NGL (BBL).......................................................     1.1     1.8     2.7      0.7        0.9

Unconventional
  Oil (BBO).......................................................     0.2     0.3     0.6      0.1        0.1
  Gas (TCF).......................................................    72.4   127.1   202.4      6.1       11.4
  NGL (BBL).......................................................     0.1     1.5     2.6      0.0        0.1
  Coalbed methane (TCF)...........................................    13.0    16.1    19.6      7.0       11.8
----------------------------------------------------------------------------------------------------------------
 * Includes cost of finding, developing, and producing the resource. Based on mean values of technically
  recoverable estimate.
** BBO=billion barrels oil; TCF=trillion cubic feet; BBL=billion barrels liquid, mcf=thousand cubic feet.

 applications of the usgs 1995 national oil and gas resource assessment
    The results of the USGS National Oil and Gas Resource Assessment 
have been used by the Energy Information Administration for its Annual 
Energy Outlook, by the California Energy Commission and Canadian Energy 
Board to model inter-regional natural gas supply and demand and the 
resulting economic impacts, and by numerous petroleum companies as a 
basis for evaluating risk associated with exploration and development 
of domestic oil and gas resources.
    Many Federal agencies use the information in the USGS National Oil 
and Gas Assessment for land-use planning, energy policy formulation, 
and economic forecasting. Customers include the Department of the 
Interior, Bureau of Land Management, National Park Service, U.S. Forest 
Service, Bureau of Indian Affairs, Energy Information Administration, 
and the Department of Energy, among others. In addition, most State 
Geological Surveys and/or State Divisions of Oil and Gas use the USGS 
assessment for regional and local resource evaluation and lease 
planning purposes. Many private sector organizations also use the 
digital oil and gas assessment results, including environmental 
protection advocacy groups, petroleum exploration companies, and 
utility companies (including natural gas and electricity utilities).

                      SEC. 604 ENERGY ACT OF 2000
    The Secretary of the Interior is charged with conducting an 
inventory of energy resources and the restrictions and impediments to 
their development on Federal Lands in Section 604 of the Energy Act of 
2000, signed into law on November 9, 2000. The exact text is given 
below:
    SEC. 604. SCIENTIFIC INVENTORY OF OIL AND GAS RESERVES.
    IN GENERAL.--The Secretary of the Interior, in consultation with 
the Secretaries of Agriculture and Energy, shall conduct an inventory 
of all onshore Federal lands. The inventory shall identify--
          (1) the United States Geological Survey reserve estimates of 
        the oil and gas resources underlying these lands; and
          (2) the extent and nature of any restrictions or impediments 
        to the development of such resources.
    (b) REGULAR UPDATE.--Once completed the USGS reserve estimates and 
the surface availability data as provided in subsection (a)(2) shall be 
regularly updated and made publicly available.
    (c) INVENTORY.--The inventory shall be provided to the Committee on 
Resources of the House of Representatives and to the Committee on 
Energy and Natural Resources of the Senate within 2 years after the 
date of the enactment of this section.
    (d) AUTHORIZATION OF APPROPRIATIONS.--There are authorized to be 
appropriated such sums as may be necessary to implement this section.
    It is our understanding that the role of the USGS will be to assess 
the oil and gas resources of oil and gas-bearing basins with Federal 
land ownership, consistent with the USGS assessment and allocation 
methodology. Then, USGS geologists will allocate resource estimates to 
those specific land parcels owned by the Federal government. The USGS 
resource estimates will be combined with reserve volumes from the DOE/
EIA, and will be incorporated into a geographic information system 
(GIS) that shows the spatial distribution of those potential resources 
and known reserves. The resource and reserve GIS will be integrated 
with a GIS of restrictions and impediments constructed by BLM and USFS. 
The USGS has met several times with representatives of the Bureau of 
Land Management (BLM), the US Forest Service, the US Department of 
Energy and their Energy Information Administration and the staff of 
this committee to discuss plans to produce this inventory.
    The USGS intends to use some of the resource estimates from the 
1995 National Oil and Gas Assessment, for which there are not 
significant new data, and will update resource estimates for the gas-
prone areas of the country for which we have new data and are 
developing improved assessment methods.
     the minerals management service's 2000 ocs resource assessment
    As background, MMS's mission consists of two major programs: 
Offshore Minerals Management and Minerals Revenue Management. The 
leasing and oversight of mineral operations on the Outer Continental 
Shelf (OCS) and all mineral revenue management functions for Federal 
(onshore and offshore) and American Indian lands are centralized within 
the bureau. In 2000, OCS oil and natural gas production accounted for 
roughly 25 and 26 percent, respectively, or our nation's domestic 
energy production--oil production was over 500 million barrels and 
natural gas production was over 5 trillion cubic feet. The amount of 
oil and natural gas production in 2000 was the most ever produced on 
the OCS. In addition, in fiscal year 2000, MMS collected and 
distributed about $7.8 billion in mineral leasing revenues from Federal 
and American Indian lands.
    In its role as manager of the Nation's OCS energy and non-energy 
mineral resources, MMS is responsible for assessing those resources; 
determining if they can be developed in an environmentally sound 
manner; and if leased, regulating activities to ensure safety and 
environmental protection. An integral element in that mission is to 
identify the most promising areas of the OCS for the occurrence of 
crude oil and natural gas accumulations and to quantify the amounts of 
oil and natural gas that may exist in these areas.
    Since its creation in 1982, MMS has completed four systematic 
assessments of Federal OCS undiscovered oil and natural gas resources, 
including its most recent assessment. The 2000 resource assessment was 
done to support staff work and analysis needed in formulating the next 
5-Year Oil and Gas Leasing Program covering the timeframe 2002-2007. It 
should be noted that the methodology for the 2000 assessment has not 
changed significantly from that used in the previous 1995 assessment.
    The 2000 assessment presents the updated assessment results since 
the 1995 assessment for the Alaska, Atlantic, and Gulf of Mexico OCS 
Regions. In the Alaska Region only the Beaufort and Chukchi Seas, Hope 
Basin, and Cook Inlet areas were updated, as other planning areas 
lacked new data and changes since the last assessment. The Pacific OCS 
Region was not updated for the same reasons. The Atlantic OCS Region 
was re-evaluated to reflect recent exploration results offshore Nova 
Scotia, current exploration and production technologies, and to make 
the water depth divisions compatible with the ones now being used in 
the Gulf of Mexico.
    The MMS has recently made public the 2000 assessment, and I have 
included a copy of the assessment with my written testimony for the 
hearing record. MMS estimates that the total mean undiscovered, 
conventionally recoverable resources for the United States OCS are 75.0 
billion barrels of oil and 362.2 trillion cubic feet of natural gas. 
Within that total, MMS determined that the undiscovered conventionally 
recoverable resources foregone by the 1998 moratoria (i.e., the 
President's June 1998 OCS decision) would be approximately 16 billion 
barrels of oil and 62 trillion cubic feet of gas.
    The total mean undiscovered economically recoverable resources for 
the United States OCS are 26.6 billion barrels of oil and 116.8 
trillion cubic feet of gas at prices of $18 per barrel and $2.11 per 
thousand cubic feet, respectively, and 46.7 billion barrels of oil and 
168.1 trillion cubic feet of gas at prices of $30 barrel and $3.52 per 
thousand cubic feet, respectively.
    Mr. Chairman, this concludes my remarks. However, I would be happy 
to respond to any questions members of the committee may have.

    The Chairman. I think when we get to your questions, we 
will probably get some questions relative to how much of this 
OCS is off-limits because of moratoria, and how much is 
actually available.
    Mr. Matt Simmons.

          STATEMENT OF MATTHEW R. SIMMONS, PRESIDENT, 
                SIMMONS & COMPANY INTERNATIONAL

    Mr. Simmons. Chairman Murkowski and Senators, I first of 
all commend this important committee for conducting hearings on 
the impediments to developing added oil and gas supplies. For 
far too long this topic lingered on the sidelines of America's 
critical issues. America no longer has the luxury of debating 
whether domestic energy is important or not because we are now 
in the early stages of, in my opinion, the most serious energy 
crisis this country has ever faced. It will become more serious 
over time, and if we do not correct the severe energy problems 
we now face, America's economic future is grim.
    As our energy crisis unfolds, it could become the most 
critical threat to our economy since World War II. The energy 
crisis is very real, as we have run out of virtually all spare 
energy capacity in all three basic forms of energy: oil, 
natural gas, and electricity. And we have run out of all three 
almost simultaneously. We accidentally created a perfect energy 
storm.
    There are still many skeptics--most well-intended but 
simply misinformed--who say the energy crisis is not real. 
Other skeptics argue that even if the problem is real, the 
solution is not on the supply end. This is merely a bad policy 
of draining America first. Instead they would argue that we 
should either conserve our way out of this problem or finally 
embrace renewable energy which has been ignored for too long. 
These concepts would be worthy topics to debate had we not 
allowed a true crisis to arise. It is now time to buckle down 
to the real energy issues we face, to roll up our sleeves and 
finally solve our current energy mess.
    Winter is finally coming to an end, and it became a true 
energy winter of discontent, causing the most prosperous State 
in the most affluent country on earth to suffer through 
frequent energy blackouts. The Northeast got through the winter 
without running out of heating oil but had Europe's winter been 
colder, the record levels of Russian and European heating oil 
we imported would not have spared yet another energy crisis on 
our east coast, too. With winter ending, America now needs to 
shift its focus to the threat of a potentially hot and humid 
summer. If this summer's weather is as hot as the summer of 
1999, peak electricity demand will be far higher than last year 
and we could get ultimately get a wake up call with blackouts 
that potentially stretching on both of our coasts at the same 
time.
    To make matters worse, our gasoline stocks are lower than 
the low levels of a year ago, and reformulated additives are at 
far lower levels. The grim reality is that we are now in the 
early stages of a very serious energy crisis. For years America 
had a comfortable cushion of spare energy capacity. In the 
petroleum market, this was a combination of commercial 
petroleum stocks with days or even weeks of extra supplies, but 
we've whittled this down to less than a day, or even a few 
hours, in too many aspects of our petroleum system. In natural 
gas, our spare margin was a massive underground system of 
natural gas storage. Today, natural gas storage levels are also 
at historic lows.
    In electricity margins, the reserve margins are now gone in 
most States whenever weather reaches hot or cold extremes. 
These energy problems cannot be ignored. I certainly do not 
need to remind this committee that the U.S. economy has never 
grown when energy consumption has declined. There are only two 
ways to solve this problem. The easy way is to merely use a lot 
less energy. On the surface, this sounds like a plea for energy 
conservation, but anyone doing any hard analysis of the real 
numbers will see the numbers do not work.
    Let me give just two examples to illustrate this point. If 
we suddenly had a fleet of one million 80-mile-per-gallon 
vehicles on our roads taking the place of one million average 
automobiles, this would only save 50 thousand barrels of oil 
use each day. Ten wells or less in the deep water Gulf of 
Mexico produces an equivalent energy amount. Refrigerator----
    The Chairman. Could you repeat that?
    Mr. Simmons. If we created a fleet of one million 80-mile-
per-gallon cars and they replaced one million conventional 
cars, that would save 50 thousand barrels a day. Not much.
    Refrigerators are the single biggest energy consumption 
unit in all of our homes. If a new generation of refrigerators 
using 50 percent less electricity suddenly took the place of 
all 100 million refrigerators in all of our homes, this would 
save 2.5 percent of the electricity use we use each day, or 1 
percent of America's daily energy use.
    Conservation is extremely important for America to embrace, 
but it does not provide a silver bullet to solve our energy 
crisis. Renewable energy sources are an important ingredient of 
our long-term energy mix, but we need to be extremely realistic 
about how tiny these future energy sources are. Less than one-
tenth of 1 percent of the electricity we use this year came 
from wind, solar, and biomass. Take away biomass, and the 
balance provides only one-thousandth of 1 percent of our 
electricity use.
    There is only one way to solve our energy problems, and the 
solution involves increasing our energy supplies in all forms 
of energy, including an ultimate return to more nuclear power 
in the United States, and major increases in coal use, 
hopefully accompanied by startling breakthroughs in clean coal 
technology.
    We can also never wean the country from imported oil and 
imported natural gas, but it is a dangerous assumption to 
believe that foreign imports of oil and gas will always solve 
our severe energy crunch. Our infrastructure is simply not 
plumbed for any additional foreign supplies, and the foreign 
oil and gas markets are also getting very tight. No country is 
ever going to supply our needs before taking care of their own 
energy demands first. At the end of the day, we have to 
increase our domestic supply of oil and natural gas, but 
getting this done requires fast action by both public and 
private sectors to begin eliminating all of the obstacles that 
now make it so hard to make real gains in the supply of either 
domestic gas or oil.
    Access to where these reserves reside is obviously 
extremely important. While it is politically popular to attack 
the need to open up a few thousand acres of ANWR, this 
important area could create several hundred thousand barrels a 
day of extra oil and natural gas, and possibly even far more. 
So it is too important to abandon. It is time for ANWR's 
opponents to stop broadcasting photographs of pristine alpine 
mountain meadows of areas within the 19 million acre reserve 
which happen to be hundreds of miles away from where any oil 
and gas development would ever take place.
    Lease Sale 181 in the eastern portion of the Gulf of Mexico 
is just as vital as ANWR, perhaps even more so. This highly 
gas-prone area is over 100 miles west of Florida at its closest 
point, but it is right next to the most efficient 
infrastructure to bring these reserves to where they can be 
consumed.
    The Department of the Interior is just beginning a 
critically important survey or inventory of all of the reserve 
prospects to the lower 48 States. I would highly encourage 
expanding this inventory assessment to the entire Outer 
Continental Shelf of the United States, including the waters 
offshore of California. This exercise does not commit any area 
to development, it would merely help identify where emergency 
relief might be found.
    How tragic it would be to see the economy of a State like 
California destroyed through a lack of natural gas and 
electricity, all because natural gas lying just off its coast 
was never developed. Access is not the only impediment to 
increasing domestic supplies. The list of other barriers is 
very lengthy. Many of these obstacles involve a fragile 
capacity throughout most of the private sector. Few of the 
various parts of the energy business have any near-term ability 
to respond in any quick matter to creating more domestic supply 
if all the access issues were resolved, but no private sector 
participant is likely to begin a costly and complex expansion 
of its capacity on the mere hope that access will someday be 
granted.
    Solving our energy crisis will take a long time. The 
quicker our country gets started on this task, the sooner the 
first signs of relief will occur.
    Mr. Chairman, thank you for the opportunity to address this 
hearing.
    [The prepared statement of Mr. Simmons follows:]
         Prepared Statement of Matthew R. Simmons, President, 
                    Simmons & Company International
    Chairman Murkowski and members of the Senate Energy and Natural 
Resources Committee, I am Matthew Simmons, president of Simmons & 
Company International, a specialized energy investment bank. I have 
spent the past 28 years focusing exclusively on energy related 
investment banking and energy research. I am a member of the National 
Petroleum Council and was a member of the Bush-Cheney Energy Transition 
Advisory Committee. I also am a past Chairman of the National Ocean 
Industry Association. I served as the Demand Task Force Chairman on the 
National Petroleum Council's extremely important review of natural gas 
and the challenges we face in addressing a future market likely to 
exceed 30 tcf per year.
    I commend this important Senate Committee for conducting these 
hearings today on the impediments to developing added domestic oil and 
natural gas supplies. For far too long this topic lingered on the 
sidelines of America's critical issues. While some would occasionally 
warn that the country was taking its energy issues far too casually, as 
long as cheap energy prices persisted and no energy shortages occurred, 
it was hard for most Americans to focus on energy issues, particularly 
if a serious review implied the need to ultimately pay higher prices 
for a key resource that had become virtually free.
    America no longer has the luxury of debating whether domestic 
energy is important or not. We are now in the early stages of the most 
serious energy crisis this country has ever faced. It will become more 
serious over time and if we do not correct the severe energy problems 
we now face, America's economic future is grim. As the energy crisis 
unfolds, it could become the most critical threat to our economy since 
World War II.
    Many are still skeptical about the actual severity of this crisis. 
Some think all of our energy problems are contained within the state of 
California. But the problem is now not only nationwide, it is spreading 
to most other parts of the globe. So, the USA makes a critical mistake 
by assuming we can solve our nation's energy problem by simply 
consuming more foreign energy supplies. This was one of the classic 
energy mistakes California made. It assumed states like Arizona, 
Nevada, Utah, Idaho, Oregon and Washington would always have ample 
spare energy supply, on the slight chance California's internal 
supplies ran out.
    Our Energy Crisis is very real. We have run out of virtually all 
spare energy capacity in all three basic forms of energy: oil, natural 
gas and electricity and we ran out of all three almost simultaneously. 
We accidentally created a perfect ``Energy Storm.''
    America must take the lead in solving this crisis. There is no 
other country with the resources, or the likely intent, to bail us out. 
The idea of America continuing its economic expansion without being 
able to expand its energy use is a true oxymoron. For the U.S. to 
remain the leader of the world and also struggle with a chronic energy 
shortage is just as far fetched. So we have now created a true crisis. 
But true crises are when American ingenuity has historically been at 
its best.
    There are still many skeptics, most well intended but simply 
misinformed, who say that the energy crisis is not real. Time Magazine 
took a savage poke at the Bush Administration on this thesis just last 
week. Other skeptics argue that even if the problem is real, the 
solution is not on the supply end. This is merely a bad policy of 
``Draining America First.'' Instead, we should either ``conserve'' our 
way out of this problem or finally embrace renewable energy which has 
been ignored for too long. Some argue that we need to do both and then 
all our energy woes will be solved.
    These concepts would also be worthy topics to debate, had we not 
allowed a true crisis to arise. But, we failed to postpone this event 
so the debate would be fruitless effort. It is now time to buckle down 
to the real energy issues we face, to roll up our sleeves and finally 
solve our current energy mess. After we solve the energy crisis, we can 
return to a polite and gentlemanly debate on theoretical issues.
    Winter is coming to an end. It became a true ``Energy Winter of 
Discontent,'' causing the most prosperous state in the most affluent 
country on earth to suffer through frequent energy blackouts. This 
caused billions of dollars of lost productivity and took two first rate 
triple A electric utilities to a point of insolvency. This should have 
been a classic wake-up call for all Americans that something had gone 
very wrong on our energy front. But too many viewed these problems as a 
unique situation in California.
    The Northeast got through the winter without running out of heating 
oil, but had Europe's winter been colder, the record levels of Russian 
and European heating oil we imported would not have spared yet another 
energy crisis on the east coast too.
    With winter ending, America needs to shift its focus to the threat 
of a potentially hot and humid summer. If this summer's weather is as 
hot as the summer of 1999, peak electricity demand will be far higher 
than last year and we could get the ultimate wake-up call with 
blackouts that potentially stretch from coast to coast.
    To make matters worse, our gasoline stocks are lower than the low 
levels of a year ago and reformulated additives are at far lower 
levels. Unless a poor economy begins to slow America's driving habits 
way down, we could face gasoline shortages, or at least high price 
spikes at the same time as electricity problems envelope the country.
    The grim reality is that we are now in the early stages of a very 
serious energy crisis. It was no single entity's fault. Rather, it is 
the cumulative effect of multiple energy mistakes stretching over the 
past two or three decades. At the heart of the problem is that we all 
consumed more energy than anyone planned to produce. So, energy demand 
is constantly bumping against the daily ability to create energy 
supply. There is only one irrefutable physical law about energy demand. 
It cannot exceed supply without triggering shortages.
    For years, America had a comfortable cushion of spare energy 
capacity. In the petroleum markets, this spare capacity was a 
combination of commercial petroleum stocks with days or even weeks of 
extra supply. But, we whittled this down to less than a day, or even a 
few hours in too many aspects of our petroleum supply. In natural gas, 
our spare margin was in the massive underground system of natural gas 
storage that gets built-up during the 7 months when heating needs are 
minimal or non-existent. Today, natural gas storage levels are also at 
historic lows, running a third less than last year's levels. In the 
electricity market, various regional regulatory commissions mandated 
stiff ``reserve margins'' of spare power generating capacity. Through 
bad supply estimates and ultra-strong demand growth, these reserves are 
now gone in most states whenever the weather reaches hot or cold 
extremes.
    These energy problems cannot be ignored or they will severely harm 
our economy and cause pain and hardship to virtually every American. I 
do not need to remind any of this committee that the U.S. economy has 
never grown when energy consumption has declined. There are only two 
ways to solve this problem. The easy way is to merely use a lot less 
energy. On the surface, this sounds like a plea for energy 
conservation. But if anyone does hard analysis of the real numbers, no 
technology available within the next ten years eliminates enough energy 
demand to make a dent on the severity and magnitude of the problem.
    Let me give just two examples to illustrate this point. If we 
suddenly had a fleet of 1 million 80-mile per gallon vehicles on our 
roads, taking the place of 1 million average automobiles, this would 
only save 50,000 barrels of oil use each day. Ten wells in the 
deepwater Gulf of Mexico produces an equivalent energy amount. 
Refrigerators are still the single biggest energy consumption unit in 
many homes. If a new generation of refrigerators using 50% less 
electricity suddenly took the place of all 100 million refrigerators in 
all of our homes, this would only save 2.5% of the electricity we use 
each day or only 1% of America's total daily energy use.
    Conservation is important for America to embrace. But it does not 
provide a ``silver bullet'' to solve our energy crisis. The only 
available conservation measure that really works would be a major 
shrinkage of our economy, possibly including cutting demand through 
energy rationing and blackouts. Not a single American would wish this 
on our country.
    Renewable energy sources are an important ingredient of our long-
term energy mix but we need to be extremely realistic about how tiny 
these future energy sources are. Less than 1/10th of 1% of the 
electricity we used this year came from wind, solar, and biomass 
burning. Take away biomass burning and the balance provides only one-
thousandth of 1% of our electricity use.
    While some well-intentioned Americans would like to argue 
otherwise, there is only one real way to solve these problems and the 
solution involves increasing our energy supplies in ALL forms of 
energy, including an ultimate return to more nuclear power in the USA 
and major increases in coal use, hopefully accompanied by startling 
breakthroughs in clean coal technology.
    We can also never wean the country from imported oil and imported 
natural gas but it is a dangerous assumption to believe that foreign 
imports of oil and gas will always solve our severe energy crunch. Our 
infrastructure is not ``plumbed'' for any additional foreign supplies 
and the foreign oil and gas markets are also getting very tight. No 
country is ever going to supply our needs before taking care of their 
own energy demands first.
    At the end of the day, we have to increase our domestic supply of 
oil and natural gas as long as there is any reasonable prospect of 
being able to do so.
    But getting this done requires fast action by both public and 
private sectors to begin eliminating all the obstacles that now make it 
so hard to make real gains in the supply of either domestic oil or 
natural gas.
    Access to where these resources reside is obviously extremely 
important. While it is politically popular to attack the need to open 
up a few thousand acres of ANWR, the prospect that this important area 
could create several hundred thousand barrels a day of extra oil and 
possibly even far more, is too important to our economic future to 
abandon this key resource because it is not politically popular to do 
so. It is also important to realize that extra natural gas from ANWR 
could help make one or even two pipelines economic, bringing additional 
supplies to the gas-starved lower 48 states.
    It is time for ANWR's opponents to stop broadcasting the 
photographs of pristine alpine mountain meadows of areas within the 19 
million acre wildlife reserve which happens to be hundreds of miles 
away from where any oil and gas development would ever take place and 
seriously examine the importance of these valuable reserves to our 
country. Prudhoe Bay has demonstrated for over 30 years that oil 
developments, the environment and ecology can live in harmony.
    Lease Sale 161 in the Eastern portion of our Gulf of Mexico is just 
as vital as ANWR, or even more so. This highly gas-prone area is over 
100 miles west of Florida at its closest point. But, it is right next 
to the most efficient infrastructure to bring these reserves to where 
the will be consumed by all of America. If our natural gas supply turns 
out to be as fragile as I worry it will be, the reserves lying beneath 
Lease Sale 181 just might prevent Florida and Georgia from becoming the 
next California.
    The Department of the Interior is just beginning a critically 
important survey or inventory of all the reserve prospects throughout 
the lower 48 states. I applaud this effort but would highly encourage 
expanding this inventory assessment to the entire Outer Continental 
Shelf of the USA, including the waters offshore California. This 
exercise does not commit any area to development. It would merely help 
identify where emergency relief might be found. How tragic it would be 
to see the economy of a state like California destroyed through a lack 
of natural gas and electricity: all because natural gas, lying just off 
its coast, was never developed.
    Access is not the only impediment to increasing domestic supplies. 
The list of other barriers is lengthy. Many of these obstacles involve 
the fragile capacity through most of the private sector. Few of the 
various parts of the energy business have any near term ability to 
respond, in any quick manner, to creating more domestic supply if all 
access issues were resolved.
    But no private sector participant is likely to begin a costly and 
complex expansion of its capacity on the mere hope that access will 
someday be granted.
    Solving our energy crisis will take a long time. The quicker our 
country gets started on this task, the sooner the first signs of relief 
will occur.
    I applaud this committee for the comprehensive energy bills that 
both sides of the aisle have tabled. In my opinion, energy is as just 
as bipartisan an issue as our foreign policy. It is one of the few 
issues that literally impact every single American. When we have 
plentiful energy, everyone benefits. When we do not, we all suffer.
    Mr. Chairman, thank you for the opportunity of addressing this 
hearing.

    The Chairman. Thank you very much, Mr. Simmons. I 
appreciate that statement.
    David Hayes, please proceed.

  STATEMENT OF DAVID J. HAYES, FORMER DEPUTY SECRETARY OF THE 
                            INTERIOR

    Mr. Hayes. Thank you, Mr. Chairman. It is a pleasure to be 
here back again. Thank you. I am the former Deputy Secretary of 
Interior now, and on the private side I have submitted a 
written statement for the record, Mr. Chairman.
    The Chairman. It will be included in the record.
    Mr. Hayes. Thank you.
    I will make a few points orally. My focus will be on the 
Federal lands piece this morning, Senators. I am not qualified 
to speak on the general issue of what is obviously a very 
serious energy situation, and there is obviously a need for 
comprehensive policy. I know that Senators Bingaman, Daschle 
and others have submitted a bill, and that the chairman and 
others also have done so, and that the President will.
    What I would like to talk about is give a little 
perspective on the Federal lands piece, because I think there 
are some great expectations about the potential for new energy 
development on the Federal lands, and I would like to talk 
about some of the realities of it, and also some of the 
potential constraints per the subject of today's hearing.
    First, a bit of history. There is a sense that oil and gas 
development on Federal lands has been in decline. That is, in 
fact, not the case. While there has been a long-term decline in 
domestic oil production across the board since 1970, the high 
water mark, and in fact the low point came in 1992 when oil 
prices were extremely low, and then oil and gas drilling 
activity in the United States was at its lowest level since 
1942--since then on the Federal lands there have been 
significant increases in oil and gas production.
    Those statistics are laid out in our written statement, and 
let me give a few examples. Chairman Murkowski, you mentioned 
an important aspect of the increase has been in the deep water 
Gulf where, in 1995, supported by this committee and signed by 
President Clinton, deep water royalty relief led to very 
significant increases in both oil and gas production in the 
Gulf. In the last 2 years alone, gas production in deep Gulf of 
Mexico waters increased by 80 percent. And overall in addition 
to the Gulf increases, there have been significant oil and gas 
drilling on both on-shore lands and in Alaska leading to, over 
the 8 years of 1992 to 1980, an actual increase in the 
contribution of energy from the Federal lands for the total 
domestic energy picture.
    In 1992, 13 percent of domestic oil and gas production came 
from the Federal lands; last year, it was up to 25 percent. So 
the contention that the Federal lands are essentially closed 
for business is simply not correct. And, in fact, I would like 
to talk about that a little bit more, if I can. There have been 
efforts in the last few years that I think we should build on 
to continue to open up some public lands for energy production. 
One, in addition to the Gulf of Mexico example, where seven 
thousand new leases were issued on the Outer Continental Shelf. 
The National Petroleum Reserve in Alaska was opened up in 1998, 
and up to 4 million new acres area available for oil and gas 
production. A lease sale was held that netted 100 million 
dollars in terms of bonus bids for those leases. Exploration is 
only now beginning, but there should be great productivity from 
that very large oil field.
    Also in the Powder River basin there has been significant 
new oil activity. BLM has issued over one thousand new permits 
in Senator Thomas' backyard and is geared up to issue several 
thousand more if we can get BLM the funding and the wherewithal 
to help them proceed in that manner. They certainly have the 
willingness, and had a green light from our administration, and 
I am sure do from Secretary Norton as well. Also, the Clinton 
administration in front of this committee agreed with Senator 
Bingaman and the chairman that there should be a natural gas 
pipeline from Alaska, and suggested that the Joint Pipeline 
Office in Alaska would be a good forum for helping to expedite 
permitting for such a pipeline.
    As you know, there are 25 trillion cubic feet of natural 
gas in the current Prudhoe Bay fields that are simply being 
wasted, and it is appropriate to get a pipeline to bring 
those----
    The Chairman. Did you say wasted?
    Mr. Hayes. Well, not utilized by Alaskans or for the lower 
48.
    The Chairman. Are they utilized for the recovery of oil?
    Mr. Hayes. Yes, there is some reinjection. Wasted is too 
strong a term.
    The Chairman. I think you are right. I think it is too 
strong a term.
    Mr. Hayes. Let me amend my statement by saying that there's 
25 trillion cubic feet of natural gas that could be 
productively utilized by consumers in the lower 48 at Fairbanks 
and in Alaska--I think there is strong bipartisan support for 
that.
    Now with regard to the issue of lands that are unavailable 
for oil and gas drilling in the Federal domain--I would like to 
talk about some of the areas. There is a potential here to 
issue sweeping statements about unavailability of lands. It is 
true that there are significant potential reserves that are 
currently unavailable, but it's not helpful I do not think to 
talk about large numbers.
    Instead it is more helpful to look in breakdowns where 
those lands are located. Perhaps the most significant lands 
that are not available for oil and gas drilling are the 
offshore resources that Dr. Leahy discussed--offshore 
California, Washington and Oregon, also the east coast and down 
into Florida. Most of that area was established as a moratorium 
in 1990 by then-President George Bush and confirmed in an 
Executive Order in 1992 which was reconfirmed by President 
Clinton. The issue of opening up that moratorium is obviously 
an important public policy issue, but to suggest that it can 
easily be opened up as Senator Bingaman questioned is an issue 
that will involve the public policy interests of all of the 
members of those delegations in those States. I know that 
Governor Jeb Bush and Governor Davis and many others feel very 
strongly about the importance of maintaining those moratoria.
    Let me close by mentioning the national monuments. This is 
another area where there has been criticism of President 
Clinton's naming of national monuments and a suggestion that 
very large reserves of oil and gas were thereby put aside from 
potential development. The Interior Department recently 
reconfirmed a survey of oil and gas prospects in the 21 
national monuments that were named during the Clinton 
administration, and it confirmed that of those 21, only five 
had potential oil and gas reserves.
    One of the five are the offshore rocks in California which 
are already subject to a moratorium; another of the five was in 
the Canyon of the Ancients, southwest Colorado, where in fact 
the monument designation allows continued leasing. The other 
three, there were moderate oil and gas capabilities there--
Hanford Reach, Corizo Plain, and the upper Missouri River 
Breaks, but the Interior Department analysis that was just 
reached last month demonstrates that the quantities involved 
are quite insignificant, particularly when compared with the 
environmental values that are incorporated in those monuments.
    So again, my main message here is that it's not helpful, I 
do not think, to the debate to make sweeping statements about 
lands that have been withdrawn from potential oil and gas 
development. The facts show that concerted good policy can lead 
to significant increases in oil and gas development on the 
Federal lands, and on appropriate offshore areas. That is what 
the track record has been in the 8 years of the Clinton 
administration, and I am convinced that with your guidance it 
can continue in that way.
    I know the MMS has continued to promote the deep water Gulf 
activity with new regulations that it came out with in working 
with industry last fall, and I think it will be very helpful to 
have the inventory that is now being conducted by the 
Department of the Interior to see if there are further 
administrative changes that can be done to help streamline the 
permitting process to make sure that oil and gas reserves are, 
and can be, productively produced with environmental 
sensitivity, that those opportunities in fact do come on line, 
because energy needs in the United States certainly are acute, 
and the Federal lands have to play their part, but we need to 
be realistic about what that part is.
    Thank you very much.
    [The prepared statement of Mr. Hayes follows:]
     Prepared Statement of David J. Hayes, Former Deputy Secretary 
                            of the Interior
    My name is David J. Hayes. I am the former Deputy Secretary of the 
Department of the Interior. I currently am practicing law in 
Washington, D.C., as a partner at Latham & Watkins. I am appearing 
today in my personal capacity, at the request of the Committee.
    I appreciate the opportunity to testify on the important subject of 
the development of domestic oil and gas resources in the United States. 
My expertise on this issue relates to oil and gas development on the 
public lands in the U.S., and I will focus my testimony on that 
subject.
    I would like to address four primary points in my testimony today:
    1. Significant efforts have been made over the past few years to 
enhance, where appropriate, oil and gas production from our public 
lands. Even though energy prices remained very low throughout the 
1990s, the pace of oil and gas production on federal lands increased 
during the Clinton Administration, rising from 13% of total domestic 
production in 1992 to approximately 25% of total domestic production in 
1999.
    2. Important new areas have been opened up for oil and gas 
exploration in recent years and additional opportunities are available 
for development including, in particular, 4 million acres in the 
National Petroleum Reserve in Alaska that are newly available for oil 
and gas production. Also, more than 25 trillion cubic feet of existing 
natural gas supplies currently are available for export from Alaska''s 
North Slope without any additional exploration or production 
activities.
    3. Although significant oil and gas opportunities continue to exist 
on federal lands, some sensitive public lands are, and should be, off 
limits for oil and gas production, in accordance with our nation's 
longstanding recognition that some public lands and offshore resources 
are inappropriate for oil and gas drilling. In addition, even if we 
were to reverse course and impose a new federal mandate to engage in 
new oil and gas drilling in, for example, the offshore waters of 
California and Florida (to name two protected areas that have the most 
significant potential reserves), opening up these protected areas for 
new oil and gas production would not ``make the difference'' and lead 
to energy independence for the United States.
    4. A balanced energy policy is needed--one that continues to 
address supply side needs by promoting responsible oil and gas 
development on public and private lands in the United States and 
encouraging the development of renewable energy sources, and a policy 
that gives equal weight to demand side issues by addressing energy 
efficiency and energy conservation. Our nation cannot and should not 
expect new drilling activities on our federal lands to address and 
resolve long-term supply and demand imbalances that have been in place 
for several decades.
        oil and gas production on public lands: the track record
    There is a significant amount of revisionist history that is being 
written regarding oil and gas production on our public lands. A myth is 
being perpetuated that oil and gas development activities on federal 
lands have been shut down in recent years, with the shut-down occurring 
based on one-sided environmental concerns.
    I would like to address the history as it stands, and take on the 
myths that are being conjured up on this important issue.
    First, for the history.
    Domestic oil production in the United States has been declining for 
several decades, after peaking in 1970 at 9.6 million barrels per day. 
During the prior Bush Administration, domestic oil production decreased 
by an average of 250,000 barrels per day each year. During the last 
year alone (1992), domestic gas and oil drilling activity decreased by 
nearly 17%, and was at its lowest level since 1942.
    The causes for these declines are varied including, in particular, 
plentiful global oil supplies, including significant new sources of 
supplies from non-OPEC nations, and correspondingly depressed prices. 
Except for the oil price spike associated with the Gulf war, the 
average price of crude oil during the 1990s approximated $15 per 
barrel. The price of natural gas, while less volatile, also was quite 
low at $1.83 per million cubic feet (mcf) due to a ``gas bubble'' of 
excess supply following restructuring in the natural gas markets. 
Indeed, the Asian recession which began in late 1997, coupled with an 
increase in OPEC production, caused the world oil price to fall to $10 
per barrel by the end of 1998.
    Despite these severe price pressures, several steps were taken in 
the Clinton Administration to maintain healthy levels of oil and gas 
production on federal lands. Deep water royalty incentives, proposed by 
former Senator Johnston and supported by the Clinton Administration, 
contributed to a 65% increase in offshore oil production over the last 
eight years. This new incentive system also boosted natural gas 
production dramatically, with gas production in deep Gulf of Mexico 
waters increasing by 80% in the past two years alone. The previous 
administration also implemented royalty reductions on marginal oil 
wells and heavy oil on federal lands to maintain production and ensure 
maximum recovery. (Other proposals, including President Clinton's 
request for nearly $1 billion in tax incentives for the oil and gas 
industry unfortunately were not implemented by Congress.)
    I have attached an exhibit that was prepared by career staff at the 
Department of the Interior which tracks overall oil and gas production, 
and outer-continental shelf leasing activity, during the past twenty 
years. The data confirm that oil and gas production on federal lands 
have continued at a robust pace, despite unfavorable world prices, 
throughout the past decade. Indeed, as I summarized in testimony that I 
presented to this Committee on July 26 of last year, the contribution 
of oil and gas production from the federal lands, as a percentage of 
overall domestic oil and gas production, increased from 13% in 1992, to 
25% of total domestic production in 1999.

       ``CLOSING OFF'' FEDERAL LANDS FOR OIL AND GAS PRODUCTION: 
                         SOME ADDITIONAL FACTS
    In addition to the myth that oil and gas production declined 
unacceptably during the Clinton Administration, a corollary myth has 
developed: namely, that the Clinton Administration inappropriately and 
without balanced decisionmaking--closed off large areas of productive 
lands from oil and gas production due to one-sided environmental 
concerns.
    At the outset, it is important to note that the previous 
Administration took significant steps to open up significant new areas 
of federal lands for exploration and production. The vast expansion of 
deep water natural gas production in the Gulf of Mexico is one notable 
example. From 1992 to 2000, 7,091 new leases were issued on the Outer 
Continental shelf, covering approximately 38 million acres.
    Of equal note is the opening up of nearly 4 million acres of the 
National Petroleum Reserve in Alaska for oil and gas exploration and 
production in 1998. Exploration of these vast new lands, adjacent to 
the existing Prudhoe Bay fields, is now underway, following an initial 
lease sale that netted more than $100 million dollars for the U.S. 
treasury.
    Likewise, when it appeared that the Powder River Basin could become 
a productive oil producing region, the Bureau of Land Management geared 
up its permitting effort in the area. BLM is in the process of granting 
more than a thousand permits to drill in that Basin, with many more 
expected to follow.
    Finally, the Clinton Administration indicated its willingness last 
year to help facilitate the construction of a new natural gas pipeline 
from the North Slope of Alaska that would bring to market the more than 
25 trillion cubic feet (tcf) of known natural gas reserves that 
currently are available at Prudhoe Bay. These unutilized natural gas 
supplies can, and should, be made available to Alaskans, and to 
Americans in the lower 48.
    With regard to potentially productive public lands that are closed 
to development, many of these lands have been unavailable to oil and 
gas development for many years, based on a recognition that not all of 
the nation''s shared landscapes are appropriate for oil and gas 
drilling activity. The National Arctic Wildlife Refuge illustrates this 
point. In 1980, Congress explicitly stated that ``production of oil and 
gas from the Arctic National Wildlife Refuge is prohibited and no 
leasing or other development leading to production of oil and gas from 
the range shall be undertaken until authorized by an Act of Congress.'' 
(See Section 1003 of ANILCA; 16 U.S.C. 3143.) In accordance with 
Congress' explicit instruction, the Arctic Refuge has been, and 
continues to be, unavailable for oil and gas production activity.\1\
---------------------------------------------------------------------------
    \1\ In previous testimony before this Committee, on April 5, 2000, 
I outlined the reasons why it is appropriate to continue to honor the 
long-standing restriction on exploration and production activities in 
the Arctic Refuge. The area proposed for drilling is the coastal plain 
that has been called the ``biological heart'' of the Refuge because it 
is the primary calving grounds for the Porcupine Caribou Herd. Unlike 
the Prudhoe Bay area, the coastal plain narrows significantly in the 
Arctic Refuge, inviting a direct conflict between the untouched 
wilderness and proposed oil and gas drilling, pipeline infrastructure, 
and related industrial activities. In addition, because it appears that 
oil and gas reserves in the Arctic Refuge are spread out in several 
pools, rather in one large formation like Prudhoe Bay, additional 
``footprints'' and pipeline connections may be required to develop oil 
and gas resources in the area. Finally, water resources are much more 
limited in the coastal plain area of the Arctic Refuge, as compared 
with the Prudhoe Bay region. Substantial water consumption is required 
for oil and gas activities; utilizing the limited available water 
supplies would likely negatively impact the existing ecosystem. (The 
construction of ice roads requires approximately 1.35 million gallons 
of water per mile and 30,000 gallons of water per day is necessary to 
support a drilling rig. Exploratory wells require approximately 15 
million gallons of water per well.)
---------------------------------------------------------------------------
    Likewise, long-standing concerns have led to the imposition of a 
moratorium on additional oil and gas production off of the California 
coast, and in the offshore waters of Florida, and other East Coast 
states. These moratoria are not new, and they do not represent ill-
considered policy choices that can or should simply be reversed.
    The moratorium on oil and gas leasing activity in offshore 
California, for example, was initiated by President Bush in 1990, and 
reaffirmed in a 1992 presidential directive. (President Bush's 
presidential directive also covered waters offshore of Washington, 
Oregon, Florida, and New England (George's Bank)). When campaigning, 
now-President Bush indicated that he intends to continue to honor his 
father's actions, at least as they relate to the continued ban on new 
drilling in California's offshore waters.
    Limitations on drilling offshore of the Eastern States likewise has 
a bipartisan history. The current dispute regarding potential lease 
sale 181 in the eastern Gulf of Mexico illustrates the point. The USGS 
and MMS have indicated that a very large reservoir of natural gas is 
available at this lease location, but Governor Jeb Bush of Florida has 
objected to moving forward with proposed development of that site. I 
assume that President Bush will honor Governor Bush's wishes and 
decline to proceed with drilling in this gas-rich area.
    As these examples demonstrate, important facts lie behind the 
``restrictions'' on oil and gas development on federal lands that 
typically are presented in sweeping, unqualified terms (as, for 
example, in the National Petroleum Council's recent report). No one 
should assume that lease restrictions reflect arbitrary decisionmaking 
that can or should be easily undone or reversed through broad policy 
pronouncements.
    Finally, of course, our nation has a long history of restricting 
oil and gas leasing activity on sensitive landscapes. We would not 
accept drilling for oil or gas in our National Parks, or in many other 
treasured public lands. Because we have made this policy choice, our 
nation loses the potential energy potential associated with the 
extraordinary geothermal resources in Yellowstone Park, the potential 
hydropower available if we were to flood the Grand Canyon, or potential 
oil or gas production from the red rock canyons of Bryce or Zion, or 
from the Indian ruins at Mesa Verde. But in all of these cases we have 
recognized, and are honoring, competing values associated with 
conserving these lands in their natural state.
    Against this historic backdrop, President Clinton set aside 
approximately 5 million acres of public lands as national monuments 
that should be protected from further development. The United States 
Geological Survey recently confirmed that only 5 out of the 21 national 
monuments had moderate to high probability for the occurrence of oil 
and gas resources. Of these five, one of the monuments (California 
Coastal National Monument) is covered by the existing moratorium on 
off-shore California lease sales, three of the others allow continued 
oil and gas development under existing leases (Carrizo Plain National 
Monument; Hanford Reach National Monument; Upper Missouri River Breaks 
National Monument), and the fifth monument, Canyons of the Ancients, is 
open to further leasing.
    While new exploration and production activities will not be allowed 
in most of these special places, this limitation is fitting, and 
consistent with long-standing American values, given the unique 
treasures that these lands hold. In any event, the total acreage 
covered by these four national monument is less than one million 
acres--far less than 1 percent of the Bureau of Land Management's land 
base.\2\
---------------------------------------------------------------------------
    \2\ One of the witnesses testifying today alleges that the 
designation of the Grand Staircase-Escalante Monument in Utah in 1996 
withdrew promising valid oil and gas leases on state lands. A recent 
USGS report confirms that oil and gas reserves in Grand Staircase-
Escalante are not significant. Recent history confirms this 
observation. Pursuant to the Utah Schools and Land Exchange Act of 
1998, state leases in the monument were converted into federal leases, 
and were allowed to be developed. Conoco subsequently drilled wells in 
the monument, but it is my understanding that none of the wells 
produced viable quantities of oil or gas, and that leaseholders are 
allowing existing leases in the monument to expire.
---------------------------------------------------------------------------
    The story is the same for other areas that are being protected for 
environmental purposes. In connection with the limitations on 
development in the roadless areas of our National Forests, for example, 
it is my understanding that the oil and gas industry historically has 
demonstrated limited interest, over the years, in pursuing these remote 
areas for oil and gas production. (In those limited areas in which the 
oil and gas industry has shown interest, and where they have leased 
federal lands for oil and gas exploration or production purposes, such 
activities will remain unaffected by the roadless rule.) I understand 
that additional studies of these areas are now underway, and I will 
defer further discussion of these points to those who are more 
knowledgeable than I am about these National Forest lands.

                 CONSTRUCTING A BALANCED ENERGY POLICY
    As the testimony indicates, reversing public policy decisions and 
seeking to open up protected lands for new oil and gas production--be 
they in offshore waters, in the Arctic Refuge, or in national 
monuments--would raise fundamental public policy issues. While it 
certainly is appropriate to discuss these policy issues, it would not 
be responsible, in my view, to assert that there are economically and 
politically realistic opportunities to increase oil and gas production 
on our public lands so as to achieve domestic ``energy independence.'' 
Our nation is consuming 9.6 million barrels of oil per day. While 
domestic production on public lands has held its own in recent years 
(see Attachment A), we have been importing more than 50% of our 
nation''s oil needs for many years. Even if we were able to reverse the 
long-term declining trend of domestic oil production, and greatly 
increase our oil production on federal lands, there is no plausible 
scenario by which new oil production from our federal lands (which 
supplies approximately 10% of our total oil needs) could enable the 
United States to become independent of the foreign oil markets, or even 
to reduce our oil imports to less than 50% of our total needs.
    A balanced energy policy is needed--one that continues to address 
supply side needs by promoting responsible oil and gas development on 
public and private lands in the United States, and provides incentives 
for the development of renewable energy sources, and a policy that 
gives equal weight to demand side issues by addressing energy 
efficiency issues, and energy conservation needs.
    Thank you for the invitation to present testimony on this important 
topic.

                              ATTACHMENT A

  PRODUCTION OF OIL, GAS, AND COAL FROM OFFSHORE AND ONSHORE FEDERAL &
                       INDIAN LANDS--1981 TO 2000
------------------------------------------------------------------------
                                            Oil                  Coal
                                         (Barrels     Gas    (short tons
                                         x 10\6\)    (BCF)     x 10\6\)
------------------------------------------------------------------------
Clinton Administration (1993-2000 *)...    18,615   156,705     8,477
Bush Administration (1989-1992)........    10,788    73,933     4,004
Reagan Administration (1981-1988)......    25,154   142,674    6,983
------------------------------------------------------------------------
* (CY2000 data is preliminary)

                                         OUTER CONTINENTAL SHELF LEASING
----------------------------------------------------------------------------------------------------------------
                                                                      Reagan           Bush           Clinton
                                                                  administration  administration  administration
                                                                   1981-1988  (8   1989-1992  (4   1993-2000  (8
                                                                      years)          years)          years)
                                                                 -----------------------------------------------
                                                                           Gulf            Gulf            Gulf
                                                                   Total    of     Total    of     Total    of
                                                                    OCS   Mexico    OCS   Mexico    OCS   Mexico
----------------------------------------------------------------------------------------------------------------
Tracts Leased...................................................   6,509   4,948   2,754   2,669   7,091   7,032
Million Acres Leased............................................    34.7    26.0    14.2    13.8    37.7    37.5
----------------------------------------------------------------------------------------------------------------

    The Chairman. Mr. Mark Rubin. Mr. Rubin is upstream 
manager, American Petroleum Institute.

 STATEMENT OF MARK RUBIN, GENERAL MANAGER, UPSTREAM, AMERICAN 
                      PETROLEUM INSTITUTE

    Mr. Rubin. Thank you. I appreciate this opportunity to 
discuss oil and natural gas issues on behalf of API's over 400 
member companies. We are very appreciative of the efforts by 
the chairman and ranking member of the committee to forge 
energy legislation and are encouraged by much of what we see in 
the two bills that have already been introduced.
    Federal offshore production now supplies 24 percent of the 
oil and 27 percent of the gas produced in the United States, 
and DOE forecasts that offshore production will rise to nearly 
a third of our domestic oil and gas supply within a decade. 
Clearly we must maintain access to those areas currently open 
to development in the Gulf of Mexico and elsewhere, including 
that small portion of the eastern Gulf included in Federal OCS 
Sale 181 scheduled for December.
    We are encouraged that Senator Bingaman's legislation S. 
596 endorses this lease sale. We continue to believe, however, 
that the sale should include all of the tracts planned for the 
sale volume in this. To do otherwise would significantly reduce 
the amount of energy, natural gas in particular, that Sale 181 
is expected to provide.
    The 3,900 oil and gas platforms operating offshore have an 
outstanding safety environmental record. U.S. offshore 
exploration production are among the most heavily-regulated 
activities in this country and meet the world's most stringent 
government regulations and industry standards. Protecting the 
environment is a national imperative, and our operations have 
an impressive record of protecting coastal waters.
    Moving to onshore, last fall this committee directed the 
Departments of the Interior and Energy and the Forest Service 
to conduct an inventory of oil and natural gas resources on 
onshore government lands and identify the restrictions limiting 
access as part of the reauthorization of the Energy Policy and 
Conservation Act. This inventory is critical to creating a more 
informed decision-making process that will allow Congress and 
the agencies to focus attention on providing access to the 
areas with the greatest potential for oil and natural gas 
production.
    Over the last several years, we have seen numerous 
decisions that have eliminated access to millions of acres with 
high potential for oil and natural gas exploration. DOE studied 
the recently-adopted Forest Service roadless moratorium and 
identified significant oil and natural gas resource potential. 
What is more, the vast majority of these resources could have 
been developed if the Forest Service had merely withheld a 
small amount of the roadless area from the final rule. In the 
Rocky Mountains, for instance, access to 83 percent of the 
total gas resources in the roadless areas could have been 
preserved with a less than 5 percent reduction in the acreage 
included nationwide.
    Recently, as Mr. Hayes mentioned, the USGS conducted an 
assessment of the new national monuments designated since 1996 
and found that five of these monuments had moderate to high 
potential for oil and gas resources. We believe that these 
actions underscore the importance of understanding the resource 
potential of government lands before such far-reaching 
decisions are made, not afterwards. And although, as Mr. Hayes 
mentioned, production from Western U.S. lands has actually 
increased over the last several years, the actual amount of 
producing acreage in the West on Federal lands has actually 
declined since 1990.
    Alaska still holds much promise for new energy development, 
not only in ANWR, but in also in the National Petroleum Reserve 
in Alaska west of Prudhoe Bay. These are areas where advanced 
technology has allowed us to make great strides in developing 
fields with little impact to the environment.
    For example, in Phillips' Alpine field, only 97 acres are 
needed on the surface to produce from 40 thousand sub-surface 
acres. North Slope exploration takes place during the winter 
using ice roads and ice pads that melt in the spring, leaving 
no trace of exploration activities.
    These technological advances would allow us to limit our 
impact in the coastal plain of ANWR, should Congress decide to 
allow development. In spite of the claims to the contrary by 
those who oppose opening ANWR, the resource potential in ANWR 
is enormous. The EIA predicted that if oil is found in ANWR, 
the area could produce well over 1 million barrels per day for 
over 20 years. Anyone who doubts the positive impact this could 
have for consumers should consider the fact that when OPEC 
recently decided to reduce production to affect the price of 
oil, they cut their production by 1 million barrels per day.
    If our industry is given the opportunity to explore for and 
produce our country's oil and natural gas resources, it is the 
U.S. consumer who will derive the greatest benefit. We are 
willing to make enormous investments to increase domestic 
production of both oil and gas, and to do so in a manner that 
minimizes environmental impacts, but we must have access to our 
national resources for exploration and production. Thank you.
    [The prepared statement of Mr. Rubin follows:]
     Prepared Statement of Mark Rubin, General Manager, Upstream, 
                      American Petroleum Institute
    The American Petroleum Institute (API) welcomes this opportunity to 
present the views of its member companies on the question access to 
government lands for the United States. API is a national trade 
association representing over more than 400 companies engaged in all 
sectors of the U.S. oil and natural gas industry, including 
exploration, production, refining, distribution, and marketing.
    We are gratified that this committee is working towards a national 
energy policy. For too long, energy has been an afterthought, rather 
than a key component of government decision-making. This has to change. 
The events of the past year--heating oil problems in New England, 
gasoline shortfalls in the Midwest, and the California electric power 
disruptions--have forced us to start thinking comprehensively about the 
energy issues facing our country. The only way we can deal with these 
issues is by forging an effective national energy policy. 
Fundamentally, a sound national energy policy will be market-based, 
rely on all forms of energy, encourage technological advancement, 
improve energy efficiency and conservation, and ensure environmental 
quality.
    We applaud the Bush Administration for creating a cabinet-level 
task force on the subject, and we are encouraged that you and other 
members of Congress of both parties are putting energy policy at the 
top of your agenda.
    It is important to emphasize one point: Americans can be provided 
with reliable and affordable energy supplies and a clean environment. 
This is not an either-or situation. We are confident that, with the 
proper changes in the policy arena, we can help keep the nation 
supplied with fuel while at the same time continuing to improve our 
technology for the future--technology that will also enable further 
extraordinary environmental gains.
    That is the encouraging news. The sobering news is that there are 
no quick fixes to a serious situation that has developed over the last 
25 years. It will take some years to rectify our energy problems.
    Our nation is going through a period of economic uncertainty. We do 
not know whether this will turn out to be a bump in the road or the 
beginning of an economic downturn. What we do know is that every 2-
percent growth in Gross Domestic Product requires an almost 1-percent 
growth in energy usage. If we are to continue America's economic 
prosperity, creating jobs and wealth for our growing population, we 
must have the affordable, reliable energy that fuels our economy and 
supports our way of life.
    We must face the fact, though, that our energy infrastructure is 
straining at the seams and barely keeping up. Let me cite some 
examples:

   U.S. crude oil production peaked in 1970 at 9.6 million 
        barrels per day (B/D). During 2000, it averaged 5.8 million B/
        D, some 40 percent less than 30 years earlier;
   U.S. oil imports are meeting 57 percent of U.S. needs, 
        compared to 47 percent 10 years ago and 35.7 percent 20 years 
        ago;
   In the face of tremendous demand, U.S. production of natural 
        gas declined 14 percent between 1973 and 1999;
   Half the nation's refineries closed their doors over the 
        past 20 years, and not a single new major refinery has been 
        built in the U.S. in more than 20 years. The refineries we do 
        have operate at well more than 90 percent capacity on average, 
        at times exceeding 95 percent.
   The continuing California crisis underscores the serious 
        electric supply problems we face; and
   No orders for new nuclear units have been placed since 1978, 
        and no construction permits have been granted since 1979.

    Today I will focus on the two energy sources provided by my 
industry: oil and natural gas--and what we see ahead.

                               CRUDE OIL
    The petroleum industry is vertically integrated. That is, we finds, 
produces, and transports crude oil, and then refines it into a wide 
variety of products that we deliver to the retail level. A 
comprehensive national energy policy requires that we address both our 
capacity to produce crude oil and natural gas as well as our capacity 
to refine and distribute petroleum products.
    Chart No. 1 shows how the Department of Energy forecasts U.S. 
energy consumption by fuel between 1999 and 2020. Natural gas rises 
from 23 percent of consumption in 1999 to 28 percent in 2020, while oil 
maintains its current share. This reflects the reality that 70 percent 
of petroleum consumed in the United States is for transportation. Most 
recent energy studies agree that this share is likely to continue well 
into this century--even with strong increases in energy efficiency and 
a rapid infusion of new technology. Thus, we need to focus on our 
future needs for reasonably priced petroleum products and not be misled 
by the false hope that new and dramatically cheaper sources of 
renewable fuels are available just around the corner. Such hopes have 
led us in the past to waste billions of dollars on government efforts 
to develop and promote so-called renewable and alternative fuels that 
turned out to be expensive and unavailable. However, renewables used in 
gasoline--ethanol--play an important role and will continue growing 
well into the future.
    Chart No. 2 shows how we are becoming more and more dependent on 
oil imports. This dependency now amounts to about 57 percent of U.S. 
oil demand. DOE projects that 64 percent of oil demand will be met by 
imports in 2020.
    In order to ensure reliable and secure sources of oil, we have no 
choice but to diversify the sources of our supplies, both domestic and 
foreign, and to increase both. To do this, we must remove the barriers 
that currently impede the U.S. oil and natural gas industry's ability 
to compete both domestically and abroad.

                          THE NEED FOR ACCESS
    What is access to government lands? The U.S. oil and gas industry 
does not ask to drill on parklands or in wilderness areas set aside by 
acts of Congress. Rather, we seek access to areas offshore, in Alaska 
and in the American West that have been designated as ``multiple-use'' 
by Congress so that numerous activities can take place there.
    Most of these multiple-use areas are simply vast expanses of 
nondescript federal lands. However, because they lack the beauty and 
grandeur of the Grand Canyon or the Grand Tetons does not mean that we 
treat them with less respect than we do any other lands entrusted to us 
by the government, or by private landowners. Most people driving near 
or hiking in one of these areas would be hard-pressed to locate one of 
our facilities once the drilling rig is removed. Safety and 
environmental protection are critical concerns, regardless of the 
location of drilling, and where our contractual obligations with the 
government require us to, we return the land to its original condition 
once drilling and production cease.
    Yet, despite our record of sound stewardship, President Clinton 
used his executive powers under the Antiquities Act to bar oil and gas 
exploration and other activities on vast regions of government lands.
    For example, the designation of the Grand Staircase-Escalante 
Monument in Utah in 1996 summarily withdrew promising valid oil and gas 
leases on state lands without even notice to or consultation with state 
and local authorities, or affected communities. Likewise, the U.S. 
Forest Service recently banned our companies from exploring for oil and 
natural gas on promising government lands when it published rules to 
bar road building on nearly 60 million acres in the Forest System that, 
according to a Department of Energy study, could hold 11 trillion cubic 
feet of natural gas.
    In the lower-48 states, a study by the Cooperating Associations 
Forum found that federal lease acreage available for oil and gas 
exploration and production in eight Western states (California, 
Colorado, Montana, Nevada, New Mexico, North Dakota, Utah and Wyoming) 
decreased by more than 60 percent between 1983 and 1997--and that does 
not count the major land withdrawals, such as Monument designations, 
since 1997.
    Approximately 205 million acres of federal lands in these states 
are under the control of two federal agencies with broad discretionary 
powers. The Bureau of Land Management (BLM), whose land management 
planning authority is derived from the FLPMA of 1976, and the U.S. 
Forest Service (USFS), whose jurisdiction is derived from the National 
Forest Management Act, administer these federal, non-park lands. (Chart 
#3 shows the extent of government lands.)
    Both agencies are required to manage lands they administer under 
the congressionally mandated concept of multiple use. Yet, BLM and USFS 
discretionary actions have withdrawn federal lands from leasing, and 
long delayed other leasing decisions and project permitting.
    Congress has directed the BLM and Forest Service to allocate non-
wilderness lands for resource use, identify areas that are available 
for oil and gas leasing, identify important wildlife habitat areas, and 
inventory wilderness candidate lands among other uses. Each agency has 
completed land resource management plans for the lands they administer, 
including lands that are candidates for wilderness designation. Yet, 
some lands found unsuitable for wilderness designation are, however, 
managed as ``wilderness study areas,'' effectively removing 
approximately 28 million acres inappropriately from consideration for 
resource development. Further, these agencies often dictate 
extraordinary lease stipulations as conditions of approval for 
exploration and production. Stipulations are intended to protect 
resource values in conjunction with proposed projects, such as 
exploratory wells, yet many conditions required, such as ``no surface 
occupancy,'' essentially preclude exploration and production from 
occurring.
    Moreover, Congress has refused to authorize exploration on the 
small section of the Arctic National Wildlife Refuge (ANWR) that was 
specifically set aside by law for exploration in 1980. DOE's Energy 
Information Administration estimates that the ANWR coastal plain 
contains between 5.7 billion and 16 billion barrels of technically 
recoverable oil. The coastal plain provides the best prospect in North 
America for a new giant, Prudhoe Bay-sized oil field.
    As a result of the enormous technological advances of recent years, 
only an estimated 2,000 acres would be affected by ANWR development--
out of the 1.5 million-acre coastal plain and the total ANWR area of 
19.8 million acres. Moreover, Prudhoe Bay oil operations, located 60 
miles to the west of ANWR, have been underway for nearly a quarter 
century and have produced more than 10 billion barrels of oil during 
that time. Prudhoe Bay is among the most environmentally sensitive oil 
operations in the world. For example, the Central Arctic caribou herd 
at Prudhoe Bay has grown from 5,000 to 27,000 over the last 25 years. 
The industry's North Slope record provides overwhelming evidence that 
ANWR coastal plain development would not be harmful to the Arctic 
ecology and wildlife.
    We have heard, repeatedly, the charge that ANWR represents only 6 
months (or some finite amount) of U.S. consumption. There are several 
analyses that put this erroneous charge in perspective.
    The United States consumes 20 million barrels of oil a day. Today, 
no source supplies more than 8.4 percent (Canada's share in 2000) of 
U.S. consumption. Prudhoe Bay, which was estimated to hold 9.6 billion 
barrels when discovered, represented only 261 days supply. But, in 
reality, it has supplied an average of 9 percent, and as much as 12 
percent, of our daily consumption for the last 24 years. ANWR reserves 
may be in the same ballpark.
    If all the oil in Prudhoe were delivered at once, we would have 
consumed it in 9 months. That, of course, is a physical impossibility 
and distorts the true value of oil discoveries.
    Prudhoe production, though representing only 9 percent of 
consumption, has allowed the U.S. to avoid importation of 1.6 million 
barrels per day, keeping $289 billion from flowing out of the United 
States.
    And we know that small changes in supply can have dramatic impacts 
on price. For example, in March 2000, OPEC increased production by 1.7 
million barrels per day (2 percent of world supply) and crude oil 
prices dropped by $10 a barrel. Thus, a permanent increase in world 
supply because of ANWR is likely to have a significant impact on world 
crude oil prices. This price impact is important since for every dollar 
decline in world prices, the U.S. import bill declines by $4 billion 
per year.
    Offshore, the OCS has assumed increasing importance to U.S. energy 
supply over the past half century. The federal portion of the OCS now 
supplies 24 percent and 27 percent of the gas produced in the United 
States. Offshore production promises to play an even more significant 
role in the future. The Department of Energy forecasts that offshore 
production will rise to nearly a third of our domestic oil and gas 
supply within a decade.
    Technological revolutions, such as 3-D seismic profiling of 
promising structures, coupled with astounding computer power and 
directional drilling techniques which allow numerous reservoirs to be 
accessed from one drill site have driven down the costs of finding oil 
and gas. And at the same time these technologies allow development with 
much less disturbance to the environment. Tremendous advances in our 
ability to drill and produce in the deep waters of the Gulf have also 
resulted in vast new reserves being added to our resource base. The 
Deepwater Royalty Relief Act developed by this Committee, and passed by 
Congress in 1995, has significantly aided that endeavor. Those in the 
federal government who are most familiar with our industry have lauded 
our technological advances.
    A 1999 DOE report, Environmental Benefits of Advanced Oil and Gas 
Exploration and Production Technology, stated that, ``. . . innovative 
E&P approaches are making a difference to the environment. With 
advanced technologies, the oil and gas industry can pinpoint resources 
more accurately, extract them more efficiently and with less surface 
disturbance, minimize associated wastes, and, ultimately, restore sites 
to original or better condition. . . . [The industry] has integrated an 
environmental ethic into its business and culture and operations . . . 
[and] has come to recognize that high environmental standards and 
responsible development are good business. . . .''
    However, there is now accumulating evidence that resource depletion 
is overtaking the effects of technical advances on the cost structure 
of OCS development. The volume of reserves added per dollar of capital 
spent in the OCS has been falling steadily since the early 1990s. 
Because of increased demand, reserves are being depleted at an ever-
increasing rate. Because of more efficient extraction technologies, the 
decline from new gas wells is now estimated to be as high as 40 percent 
per year.
    This does not suggest the imminent collapse of OCS production, but 
it does suggest that the drilling and capital expenditures required to 
replace and augment reserves will become increasingly important. We 
must increase deepwater development, and provide access to areas 
presently restricted. Currently, presidential moratoria, and annual 
Interior appropriations bill riders preclude leasing in most of the 
Eastern Gulf of Mexico, the entire Atlantic and Pacific federal OCS, 
and portions of offshore Alaska.
    Moreover, the ``consistency'' provisions of the Coastal Zone 
Management Act (CZMA), under the guise of due process and consultation, 
have caused serious duplicative and incredibly costly delays to federal 
OCS leasing and production activities that would have no adverse 
environmental impacts on states' coastal zones. And regulations issued 
by the National Oceanic and Atmospheric Administration (NOAA) in the 
last days of the Clinton Administration appear to add impediments to 
environmentally compatible energy development in the OCS, contrary to 
the balancing of competing interests directed by Congress when it 
enacted the CZMA. Both the summary withdrawal of multiple use 
government lands without stakeholder consultation under the Antiquities 
Act, and the endless due process used by opponents to block federal 
offshore production that does not affect a state's coastal zone are 
extreme, and must be moderated.
    The nation will soon have a great opportunity to augment its 
reserves. Federal OCS Lease Sale 181 represents a plan for leasing by 
the Department of the Interior in the Eastern Gulf of Mexico Planning 
Area. Scheduled since the mid-1990s, Sale 181 is slated to be conducted 
in December 2001. The sale area is based on comprehensive environmental 
reviews, and consultations between former Secretary of the Interior 
Bruce Babbitt and then-Governors Lawton Chiles of Florida and Fob James 
of Alabama. We are encouraged that Senator Bingaman and the other 
sponsors of S. 596 have endorsed the lease. We continue to believe, 
however, that the sale As such it is already a middle-ground agreement 
and the deletion of 120 blocks, as has been proposed in S. 596, would 
seriously undermine the spirit of the good-faith negotiations that led 
to it. More important, it would significantly reduce of the amount of 
energy--natural gas in particular--that Sale 181 is expected to 
provide.
    Congress in the past several appropriations bills understood the 
importance of Sale 181 going forward and did not include it in the 
areas placed off-limits by moratoria. The area available in Sale 181 is 
estimated by the National Petroleum Council to contain 7.8 trillion 
cubic feet of natural gas and 1.9 billion barrels of oil. This means 
that natural gas from the Sale 181 area could satisfy the current 
electricity needs of Florida's 5.9 million households for the next 13 
years. Lastly, the crude oil from the Sale 181 area (most of which is 
expected to come from the deepwater areas, far removed from the 
coastline) could fuel 74,000 cars for 20 years.
    These resources can be produced cleanly, for advances in technology 
have made offshore oil and natural gas exploration and production safer 
than ever. For the 1980-1999 period, 7.4 billion barrels of oil have 
been produced in the OCS with less than 0.001 percent spilled--a 99.999 
percent near perfect record.
    We applaud the action taken in the last Congress when it 
reauthorized the Energy Policy and Conservation Act (EPCA) (Section 
604) directing the Departments of the Interior and Energy and the 
Forest Service to conduct an inventory of the oil and gas resources on 
federal lands and the restrictions that prevent access to these 
critical resources. We urge Congress to fully fund this inventory in 
the FY 2002 appropriations bill so that adequate information will be 
available on resource availability. This is an important step in 
bringing about increased development of U.S. oil and gas resources and 
an important component in any effective national energy policy.

                              NATURAL GAS
    The petroleum industry finds and produces the natural gas, moves it 
through the nation's pipelines, processes it, and delivers it to the 
distributors. The attached Chart No. 4 illustrates the basic problem we 
face on natural gas. The middle line shows how U.S. production has been 
virtually flat for more than a decade, while demand (the top line) has 
steadily grown. The bottom line shows how imports have also continued 
to grow to help meet demand.
    If we are to have an effective national energy policy, we must 
recognize the steadily growing role of natural gas in meeting our 
energy needs. Natural gas is a clean, safe, efficient and reliable 
fuel. Consequently, demand from all customer segments is rising, 
particularly as the fuel of choice for new power plants.
    Since natural gas markets are regional, rather than global, 86 
percent of the natural gas consumed in the United States is produced 
domestically. Most of the remainder comes from Canada. Although our 
domestic gas supplies are adequate for the near-term, significant 
challenges will have to be overcome to meet the increasing demand. The 
landmark natural gas study issued over a year ago by the National 
Petroleum Council--a DOE advisory committee--projected that producers 
would have to invest about $658 billion in upstream capital between 
1999 and 2015 to meet the growth in gas demand.
    The growing demand for natural gas underscore the urgent need for 
increased access to potentially gas-rich government lands.
    However, many government lands with the best prospects for new gas 
discoveries are off limits to development: 100 percent of resources 
offshore on both coasts; 56 percent of the eastern Gulf of Mexico 
resources; and 40 percent of the Rocky Mountain region resources. As 
Chart 5 shows, 21 trillion cubic feet (Tcf) are estimated to lie in the 
federal waters beneath the Pacific, 346 Tcf in the Western states, 43 
Tcf in the Eastern Gulf of Mexico, and 31 Tcf beneath the Atlantic OCS. 
Clearly, we cannot increase our reliance on natural gas, while 
continuing to prevent development of these potentially vast gas 
resources within our borders.
    Often, getting a lease is not the most significant problem for 
producers. Difficulties in acquiring permits to drill wells on onshore 
government lands and overly restrictive lease stipulations are 
responsible for limiting natural gas production. These are 
restrictions, such as ``no surface occupancy'' or seasonal 
stipulations, that go above and beyond the normal environmental 
stipulations and can prevent economic development of the lease without 
commensurate environmental benefit.
    Almost half of the untapped natural gas on multiple-use government 
lands in the Rockies is in areas either off limits or restricted by 
this type of stipulation laid down by one federal agency or another.
    This information is important because the facts are often ignored 
and often distorted by those who do not believe greater access to 
government is needed by our industry. In recent testimony before the 
House Commerce Committee's Subcommittee on Energy and Mineral 
Resources, for instance, we heard material distortions by witnesses for 
the Natural Resources Defense Council (NRDC) and for the Wilderness 
Society.
    In particular, the NRDC witness, in her testimony and in the study 
submitted by the Wilderness Society witness for the record, concluded 
that only a small percentage of BLM lands in five western states is off 
limits to leasing and development.
    Those conclusions gloss over the most significant point: the 
percentage of government lands available for leasing is a meaningless 
figure without knowing whether the leases can be developed.
    In many instances, lessees cannot obtain the permits needed to 
develop leases. In others, development is rendered uneconomic by 
unnecessarily restrictive operating stipulations. An appropriate 
analogy would be leasing a car without a starter motor or keys. Or 
renting a house and being allowed to use only the roof. Would a person 
really have a car if he or she cannot drive it? And what good would it 
do anyone to rent a house if it can't be lived in? Similarly, a lease 
that cannot be developed is a lease in name only.
    The NRDC and Wilderness Society witnesses surgically selected 
certain data, and omitted other significant data to attempt to prove 
their inaccurate assertions. For example, while the numbers presented 
by the Wilderness Society do show that only about 3.5 percent of the 
BLM lands in Wyoming, Utah, New Mexico, Montana, and Colorado is 
strictly off limits to development, oil and gas resources in those 
states are not distributed uniformly across BLM lands. Specifically, 
while the Wilderness Society says only 3.5 percent of BLM lands are 
off-limits, the Wilderness Society identifies another 3.2 percent that 
are subject to No Surface Occupancy. The NPC study indicates that this 
6.7 percent of BLM lands represents 15 percent of the BLM natural gas 
resources, which are either off-limits or significantly impinged.
    More important, however, is the role of non-standard lease 
stipulations. The Wilderness Society's data show that seasonal and 
other non-standard stipulations restrict access to an additional 32 
percent of BLM lands. However, this impacts access to 47 percent of the 
natural gas resources estimated to exist on BLM lands in the Rockies. 
When all of these restricted and off-limit BLM lands are combined they 
total 38.7 percent, affecting 62 percent of the natural gas resources.
    Further, BLM is not the only federal land management agency making 
such restrictions. These witnesses have omitted the U.S. Forest 
Service, the Bureau of Indian Affairs and the departments of Defense 
and Energy in their computation of federal multiple-use lands that are 
restricted to oil and gas development. In total, the National Petroleum 
Council estimates that some 137 Tcf of natural gas resources lie 
beneath Federal land in the Rockies that is either off limits to 
exploration, or heavily restricted. This is 48 percent of the natural 
gas on Federal land in the region.
    In addition to this total, a recent Department of Energy study 
concluded that more than 11 trillion cubic feet (Tcf) of natural gas 
was summarily placed off limits late last year alone by the USFS 
``Roadless'' rule.
    But stipulations are not the only impediments to bringing the oil 
and natural gas to America's consumers. Inadequate agency resources in 
many BLM offices and required but outdated resource management plans 
often make it difficult to get drilling permits, seriously delaying 
viable projects for up to 100 days, or sometimes years. In the Rawlins, 
Wyoming BLM office, for example, thousands of Applications for Permits 
to Drill are awaiting action because of manpower shortages. In the 
Buffalo, Wyoming office, thousands more are not being accepted by BLM 
because of limitations of the resource management plans (RMP) for the 
area. This is because the ``Reasonable Foreseeable Development'' (RFD) 
figures, estimates of future development, failed to recognize the 
interest in developing coal bed methane. Updating these RMPs and RFDs 
takes the BLM two or more years to complete thus preventing any further 
oil and gas activity in that area until the plans are finished.
    With natural gas in short supply, it is essential that industry and 
government work together to increase production from all areas, 
including multiple-use government lands. Ultimately, it is the American 
consumer who is likely to suffer from a failure to address this 
critical situation.
    The NPC study on natural gas referred to earlier also points out 
that vast reserves of natural gas in the form of coal bed methane (CBM) 
lie beneath federal lands, especially in Wyoming and Montana. However, 
BLM's inability to grant permits in a timely manner has greatly 
hindered CBM development, and may contribute to further shortfalls in 
necessary future gas production. In some instances, we recognize that 
individual BLM offices may be understaffed and therefore are simply 
unable to efficiently process permitting requests. We therefore support 
increased funding for BLM to adequately address these critical 
permitting backlogs.
    As supply adjusts to greater demand, liquefied natural gas looks to 
become a more significant source of natural gas. Liquefied natural gas, 
largely imported from outside North America, requires a complex 
infrastructure, including specialized terminals and additional 
pipelines. If this source of supply is to be relied on more heavily, 
policy-makers will need to ensure that necessary regulatory and 
permitting decisions are expedited.

                            ROYALTY-IN-KIND
    Royalty-in-kind is another important component for an effective 
national energy policy. The Department of the Interior, working with 
the states and other federal agencies, should pursue the most efficient 
means at its disposal to use the United States' energy resources for 
the good of the American people. One way to do this is for the 
Department's Minerals Management Service (MMS) to expand its use of 
royalty-in-kind (RIK) as its standard method for collecting royalties.
    Existing mineral leasing statutes already allow the government to 
take its royalties for natural gas or oil produced from government 
lands either in value (cash) or in kind, actual barrels of oil or cubic 
feet of natural gas. Until now the government has favored taking its 
royalty in value, even where complex and controversial valuation 
procedures must be used. However, over the last few years a number of 
pilot (trial) RIK programs have been conducted with considerable 
success. A robust RIK program would short-circuit these contentious 
valuation procedures and provide simplicity, greater certainty, 
efficiency and transparency in the collection of federal royalties.
    RIK results in major cost savings to the government by streamlining 
the administrative process and avoiding many costly and time-consuming 
audits, agency appeals and court litigation. With the simplicity and 
finality it offers, RIK also makes drilling on federal lands more 
attractive for producers, especially small producers, at a time when 
the nation needs to encourage stable and adequate sources of domestic 
energy.

                            LESSONS LEARNED
    We are encouraged about the possibilities for a new era of 
cooperation between industry, government and consumers to align our 
nation on a path toward energy stability. However, we cannot be 
successful at forging a workable energy policy if we do not learn from 
the mistakes we have made in the past.
    Price controls, allocation schemes, limitations on natural gas use, 
and massive subsidies to synthetic fuels are all measures that were 
tried at one time or another because it was believed that they were 
sure-fire answers to our problems. All of them failed. They failed 
because the key premise on which these programs were based--namely that 
oil and gas were nearing exhaustion and that government ``guidance'' 
was desirable to safely transition to new energy sources--is now 
recognized as having been clearly wrong and to have resulted in 
enormously expensive mistakes.
    The wrong energy choices made by government intervention in energy 
markets increase costs, hurt the nation in terms of lost economic 
growth, stifled innovation, limited consumer choice and slowed progress 
in achieving other societal objectives.
    Over the past two decades, we have, fortunately, come to rely 
increasingly on markets to sort out technologies and fuel choices--and 
markets have moved us impressively forward. Technology has led us to 
find more oil and gas in more places and in larger quantities than was 
ever dreamed imaginable 50 years ago. It has led to increased use of 
natural gas in a wide variety of ways.
    We can continue to prosper and grow in this new century, but only 
if government follows a positive and cooperative approach. Government 
should recognize the vital role that markets play and avoid the 
intrusiveness that has proven so damaging in the past. It should 
provide a level playing field on which fuels can compete--and recognize 
the cost trade-offs that are so essential in a global economy.

                        A NATIONAL ENERGY POLICY
    What is needed from government decision-makers is a serious effort 
to address these problems and shape a fair and effective national 
energy policy. That's why we at API welcome the energy policy 
initiatives now underway in both Congress and the Administration.
    A successful national energy policy must be comprehensive in order 
to be effective. It must seek to ensure enough energy to support 
economic growth by promoting responsible development of both domestic 
and foreign resources. It should recognize that sophisticated new 
technology developed by the oil and natural gas industry greatly 
reduces adverse impacts on the environment by exploration and 
production, both onshore and offshore.
    A successful national energy policy will recognize that there is no 
quick fix to our energy problems. It must reflect the reality that we 
need to increase supplies of all forms of energy to fully support our 
growing economy. It is important to encourage responsible use of energy 
and increase supplies of all fuels, including both fossil fuels and 
alternative fuels.
    A successful national energy policy must be flexible to allow 
companies to adapt to new energy and environmental challenges. It 
should recognize that our refinery and delivery infrastructure 
continues to be stretched to its limit, restraining the industry's 
capability to meet new energy demands. It should remove unreasonable 
and complex regulations on cleaner energy production and transportation 
to accommodate growth and the continued high demand for energy--and to 
meet seasonal or unexpected requirements.
    A successful national energy policy must rely primarily on the 
private sector working through free markets, and it must recognize the 
value of diversified energy sources. To that end, it should encourage 
competitive trade practices and international investment.
    Finally, a successful national energy policy must create a 
predictable operating and investment environment for energy suppliers. 
Government must work to create a more stable regulatory environment so 
that producers can invest with the confidence that they will be able to 
get a fair return on their investment.

                               CONCLUSION
    Having said that, we should understand that it took some 25 years 
to get into today's energy situation--and the problems will not be 
solved overnight. Moreover, supply cannot be matched to demand without 
massive capital investment, construction and turnover in equipment and 
this requires long lead times. In order to ensure that these 
adjustments are made as soon as possible with the least amount of 
disruption, we must start making the necessary policy decisions now. So 
it is absolutely critical that energy be fully represented at the 
government decision-making table and that the energy impact of 
environmental and other decisions be fully considered.
    After more than two decades of inaction, the American public can no 
longer afford the luxury of not coming to grips with U.S. energy needs 
while maintaining a clean environment. We can, as a nation, do both--
and we cannot afford to heed those negativists who tell us otherwise. 
Meeting U.S. energy needs and protecting the environment are both 
critical to our nation's continued economic growth--and critical to 
achieving the future prosperity and wellbeing we all seek.
    API and its members look forward to working with you in the coming 
months.

    The Chairman. Thank you very much, Mr. Rubin.
    Mr. Neal Stanley.
    Mr. Stanley. Thank you, Mr. Chairman.
    The Chairman. On behalf of the Forest Oil Corporation, 
please proceed.

 STATEMENT OF NEAL A. STANLEY, VICE PRESIDENT, WESTERN REGION, 
  FOREST OIL CORPORATION, ON BEHALF OF INDEPENDENT PETROLEUM 
                 ASSOCIATION OF MOUNTAIN STATES

    Mr. Stanley. For the record, I did submit a written 
testimony, but I have some oral testimony also. I am senior 
vice president of Forest Oil and President of the Independent 
Petroleum Association of Mountain States, both based in Denver, 
Colorado. Forest Oil is a producer of oil and gas from the 
offshore Gulf coast, Louisiana, Oklahoma, Texas, New Mexico, 
Rocky Mountain States, Canada, and in the Alaskan Cook Inlet. I 
would like to thank this committee for focusing its attention 
on the impediments to the development of our domestic oil and 
natural gas resources.
    Policies that either limit or encourage energy development 
on government land have very real consequences. As such, I 
imagine we all desire land policies that will provide for human 
needs, contribute to the sustainability of our nation's 
economic vitality, and concurrently help secure the health of 
the land for the benefit of current and future generations.
    The United States' economic expansion over the past 15 
years has been fueled by low energy prices. Since there was 
sufficient energy supply during this time, no real attention 
was paid to the problems that face the oil and gas industry. In 
1981, 89 thousand wells were drilled in the United States. This 
declined to 19 thousand wells in 1999. So there is no wonder 
that our oil and gas production decreased significantly during 
this time. With these declines in production and with our 
expanding economy, it should also be no surprise that we 
consumed our surplus energy capacity, and prices have 
dramatically increased as a result.
    I believe the oil and gas industry can meet the Nation's 
growing demand for natural gas, but the price of natural gas 
will be dependent upon a number of factors, most notably having 
adequate access to the resources in a timely manner. Policies 
that promote reasonable access to the Nation's abundant 
supplies of natural gas will bring gas to market more quickly 
and also lower the price of this energy. It is important to 
understand that increased drilling will result in an increased 
supply of oil and gas. However, this increased supply will be 
added one well at a time.
    Some critics that say that areas that only supply 5, 10 or 
15 percent of our oil or gas are not significant enough to 
pursue. This is erroneous logic. It will require the sum of all 
of these areas to supply our energy needs.
    [Handout.]
    Exhibit One in my handout shows a map of the United States 
that 52 percent of the land in the West is government land.
    Exhibit Two shows the estimated percentage of those 
resources that are subject to severe, if not outright, 
prohibitions on access. In the Rocky Mountains where abundant 
supplies of natural gas exist, Federal policies prohibit access 
to an estimated 137 trillion cubic feet of natural gas. Without 
access to such areas, the gas industry will not be able to keep 
pace with steeper decline rates in the mature basins.
    Impediments to gaining that access for natural gas 
development come in many forms. Recent monument designations, 
new policies prohibiting road construction, and continuous 
wilderness reviews prohibit access to some areas. Outdated 
resource management plans and overly-restricted surface use 
requirements also prevent access.
    Exhibit Three in my handout shows surface use restrictions. 
A natural starting point for looking at limits on access is 
with the restrictions and effectively reduced access where oil 
and gas leasing has already occurred. Please notice in Exhibit 
Three the length of time associated with each restriction shown 
in the red bars, and also that the time required to drill a 
well is 20-30 days.
    Companies exploring for natural gas have a very short 
window to build their wells when all these restrictions are in 
place. We should be able to obtain a balance between 
development of the resource and conservation. Look at the 
common restriction on drilling during winter months to protect 
the big game winter range. We do support the protection of big 
game. However, we should seek to strike a balance that will 
protect game and also allow drilling during the winter months. 
This effort to find a way to meet both needs has been missing, 
but it does not have to be.
    If a balance between both resources could be found, 
hundreds of wells could be drilled in the winter months to help 
meet natural gas demand pressures that we will have each 
summer. Examples like this point out an important shortfall in 
land management policy. There has been no clear direction for 
land managers with respect to energy development on government 
land.
    In conclusion, I would remind the committee that natural 
gas resources are not uniformly distributed across the 
landscape. Even so, natural gas development can co-exist with 
the other values. We do not need to choose between this or that 
use of public land. Responsible management can allow for this 
and that use. Responsible management can provide a low-cost, 
reliable and sustainable energy supply to fuel our economy for 
many years and concurrently help secure the health of the land 
for the benefit of current and future generations.
    Mr. Chairman, I view the balance between energy supply and 
its price and access to government land as somewhat of a 
teeter-totter. If the energy industry is shut out from 
government land, then the price will be much higher. If we have 
access to more land, then the price will be much lower. It is 
really up to the American people and this Congress to establish 
that balance of the trade-offs of allowing reasonable access to 
government land with the tangible benefits of securing an 
adequate supply of natural gas to meet the nation's growing 
energy needs.
    Mr. Chairman, members of the committee, I thank you for 
hearing me today.
    [The prepared statement of Mr. Stanley follows:]
Prepared Statement of Neal A. Stanley, Vice President, Western Region, 
    Forest Oil Corporation, on Behalf of the Independent Petroleum 
                     Association of Mountain States
    Mr. Chairman, members of the committee, I am Neal Stanley, Senior 
Vice President of Forest Oil Corporation, and President of the 
Independent Petroleum Association of Mountain States (IPAMS). Both 
Forest Oil and IPAMS are based in Denver, Colorado. Today, I am 
testifying on behalf of the Independent Petroleum Association of 
America (IPAA), and IPAMS. IPAA and IPAMS represent thousands of 
independent oil and natural gas producers across the nation. 
Independents drill 85 percent of the wells in the U.S., and produce 40 
percent of the oil and two-thirds of the natural gas.
    I would like to thank this committee for focusing its attention on 
the impediments to the development of our domestic oil and natural gas 
resources. Policies that either limit or encourage energy development 
on government land have very real consequences. As such, I imagine that 
we all desire land policies that will provide for human needs, 
contribute to the sustainability of our nation's economic vitality, and 
concurrently help secure the health of the land for the benefit of 
current and future generations.
    Despite our best conservation efforts, electricity demand in the 
United States will continue to increase as a function of our growing 
population and the role of computers in our new economy. The role of 
natural gas in meeting this new demand cannot be understated. Ninety-
five percent of all the new power plants now scheduled to be built will 
run on natural gas. Electricity produced from natural gas fired 
generation will increase from 15 percent to 40 percent by the year 
2020. In 1999, the National Petroleum Council forecast natural gas 
consumption increasing from 22 trillion cubic feet (TCF) this year to 
35 trillion cubic feet (TCF) in 2020.
    In the United States, the economic expansion over the past fifteen 
years has been fueled by low energy prices. These low prices have been 
good for everyone, except for the 400,000 American oil and gas company 
workers that have lost their jobs. Since 1981, exploration and 
production employment has decreased from 700,000 to 300,000, a decrease 
of 57%. Since the oil price collapse of 1986, the domestic oil and gas 
business has been in a severe depression. In most areas, wells could 
not be drilled economically due to the low oil and gas prices. Many 
companies went broke by drilling wells with the hope that higher prices 
would appear in the near term. In short, the oil and gas industry is a 
small shadow of its former self.
    Since there was sufficient energy supply during the past fifteen 
years, no attention was paid to the problems that faced the oil and gas 
industry. Rules and regulations that further restricted the industry 
were applied with vigor. In 1981, 89,000 wells were drilled in the U.S. 
This declined to 19,000 wells in 1999. It is no wonder that our oil 
production decreased from 8.6 million to 5.8 million barrels a day and 
our gas production decreased from 19.2 to 18.7 trillion cubic feet per 
year over this time frame. With these declines in production, and with 
our expanding economy, it should be no surprise that we consumed our 
surplus energy capacity, and prices have dramatically increased as a 
result. This is basic Economics 101, supply and demand.
    The oil and gas industry can meet the nation's growing demand for 
natural gas, but the price of natural gas will be dependent upon a 
number of factors, most notably, having adequate access to the resource 
in a timely manner. Policies that promote reasonable access to the 
nation's abundant supplies of natural gas will bring gas to market more 
quickly and also lower the price of this energy. It is important to 
understand that increased drilling will result in an increased supply 
of oil and gas. However, this increased supply will be added one well 
at a time. Some critics say that areas that only supply five, ten, or 
fifteen percent of our oil and gas are not significant enough to 
pursue. This is erroneous logic. It will require the sum of all of 
these areas to supply our energy needs.
    Exhibit #1 * is a map showing government lands. The various colors 
represent the different agencies with surface management 
responsibility. A map showing the federal government's mineral interest 
in the western United States would encompass an even larger portion of 
the West than is depicted on this map. Fifty-two percent of the land in 
the western United States is managed by federal and state governments.
---------------------------------------------------------------------------
    * The exhibits have been retained in committee files.
---------------------------------------------------------------------------
    Exhibit #2 shows the total estimated natural gas resources in the 
lower 48 states, with the corresponding percentage of those resources 
that are subject to severe, if not outright, prohibitions on access.
    Developing the substantial domestic natural gas reserves in 
offshore areas of the Eastern Gulf of Mexico, Atlantic Ocean, and 
California is prohibited by moratoria. President Clinton extended these 
moratoria for another ten years in 1998 saying, ``First, it is clear we 
must save these shores from oil drilling.'' This is a flawed argument 
ignoring the state of current technology. It results in these moratoria 
preventing natural gas development as well as oil. In fact, both the 
Eastern Gulf and the Atlantic reserves are viewed as primarily gas 
reserve areas, not oil. Those coasts are not at risk. Too often, these 
policies seem to be predicated on the events that occurred 30 years 
ago. Federal moratoria policy needs to be reviewed and new policies 
need to be based on a sound understanding of today's technology.
    Offshore Lease Sale 181 is scheduled for December 2001 and is 
outside the areas covered by moratoria. The resources contained in this 
sale area, approximately 7.8 TCF of gas and 1.9 billion barrels of oil, 
are important to the nation and surrounding coastal states. We strongly 
recommend the sale stay on schedule. This sale includes much needed gas 
resources for the Gulf of Mexico to even partially meet this country's 
natural gas needs.
    In the Rocky Mountains, where abundant supplies of natural gas 
exist, federal policies prohibit access to an estimated 137 trillion 
cubic feet of natural gas. Long-term sustainable gas production will be 
achievable only through the development of frontier areas such as the 
Rockies. Without access to such areas, industry will not be able to 
keep pace with steeper decline rates in the mature basins.
    Impediments to gaining access for natural gas development come in 
many forms. Recent monument designations, new policies prohibiting road 
construction, and continuous wilderness reviews prohibit access to some 
areas. Administrative withdrawals, inaction, and extensive delays work 
similarly to restrict access. Outdated resource management plans and 
overly restrictive surface-use requirements also prevent access. The 
constraints differ in severity, but in each case, these impediments 
work individually and cumulatively to prevent the development of 
natural gas.
    A natural starting point for looking at limits on access is with 
the restrictions that effectively reduce access where oil and gas 
leasing has already occurred. We should be able to obtain a balance 
between development of the resource and conservation. Take for example 
a common restriction on drilling during winter months to protect Big 
Game Winter Range. We support the protection of big game. However, we 
should seek to strike a balance that will protect game and allow 
drilling during winter months. This effort to find a way to meet both 
needs has been missing, but it does not have to be. My personal 
experience of sitting on many drilling rigs throughout the Rockies over 
the past 20 years has been that these animals are not the least bit 
bothered by our activity and we can easily coexist. If a balance 
between both resources could be found, hundreds of wells could be 
drilled in the winter months to help meet natural gas demand pressures 
that we will have each summer.
    Examples like this point out an important shortfall in land 
management policy. There has been no clear direction for land managers 
with respect to energy development on government land. Accordingly, 
each land manager assigns a relative value to the development of energy 
with no sense of how his or her actions contribute to or detract from 
the nation's energy sustainability. Mixed messages and a lack of 
accountability have led to a situation where land managers focus 
entirely on process with no apparent regard for the outcome. If left 
unattended, this lack of direction will become even more disastrous.
    Another example that illustrates the BLM's failure to recognize the 
urgency to develop natural gas can be seen in a recent wildcat well 
Forest Oil drilled in southwest Wyoming. In this case, the BLM's 
interpretation of field rules ended up costing Forest Oil $120,000, and 
even more when you consider the opportunity costs associated with 
delays. The well site was six miles from an improved road with an 
existing two-track road that went directly to the location. The BLM 
required Forest Oil to design and construct an improved road to the 
location at a cost of $90,000, even though the well was only going to 
take 20 days to drill. If drilling proved it to be a dry hole, we would 
not need to continue to go to that location. Indeed, the well was a dry 
hole that cost the company $800,000 to drill. After we plugged the 
well, the BLM required Forest to either maintain the road forever, or 
reclaim the road to its previous two-track status. It will cost Forest 
another $30,000 to reclaim the road. The money wasted, $120,000, could 
have been spent drilling more wells and hopefully supplying more 
energy.
    Natural gas companies rely on federal land managers to process 
their permit requests in a timely manner. Without the necessary 
environmental studies, permits, and authorizations, access to drill on 
federal lands is prohibited. Throughout the gas-rich basins of the 
Rocky Mountain Region, backlogs for issuing permits to drill and 
rights-of-way for roads and pipelines continue to grow. Many resource 
management plans are outdated and revisions are being required before 
any leasing and development can occur.
    Staffing is short in many offices and the problem seems to get 
worse with time. The use of sophisticated mapping tools and other 
technologies could ameliorate some of these problems but, as with many 
other issues, addressing agency priorities and goals is a necessary 
first step.
    Exhibit #3 shows the surface use restrictions and seasonal 
restrictions on a southwestern Wyoming federal lease. Please notice the 
length of time associated with each restriction and also note the 
amount of time required to drill a typical 8,000-foot well and a 
horizontal well. Companies exploring for natural gas have a very short 
window to drill wells. If the BLM has not processed the permits in time 
to meet that window of opportunity, the company will have to release 
the drilling rig they have contracted and wait another year before 
drilling.
    Exhibit #4 demonstrates the time requirements associated with 
operating on private land and federal land. The table shows the 
timeframe to get a well permitted and drilled. The difference between 
developing energy on private land and federal lands is 3 months versus 
1-5 years.
    To further illustrate the pervasiveness of land access problems 
throughout the Rocky Mountain Region, the following four examples are 
provided.
    Exhibit #5 is a map of the newly designated Canyons of the Ancients 
National Monument in southwestern Colorado. Canyons of the Ancients 
encompasses McElmo Dome, one of the Rocky Mountain region's most 
significant sources of natural gas used for advanced oil and gas 
recovery in Colorado, New Mexico and Texas. On the map, of the 183,000 
acres within the Monument's boundary, there are nearly 155,000 acres of 
active federal oil and gas leases, 141,000 acres of which are held by 
oil and gas production or are included in four federal oil and gas 
production units.
    When the monument was designated, the BLM proposed stringent 
surface use restrictions on 79,000 acres, including a No Surface 
Occupancy stipulation. Given the BLM's predilection for restricting 
access, the Resource Management Plan that will be developed for the 
monument creates even more uncertainty for producers.
    Exhibit #6 is a map of Jack Morrow Hills Resource Area in 
southwestern Wyoming. The Environmental Impact Statement for the Green 
River Resource Management Plan, which includes the Jack Morrow Hills 
area, was started in 1989, with the Record of Decision finally issued 
eight years later, in October 1997. The decision of whether to lease 
for oil and gas exploration and development in Jack Morrow Hills area 
was deferred in the ROD until a Coordinated Activity Plan for the area 
could be completed, which took another four years. When the Draft EIS 
for the CAP was issued, the preferred alternative was for ``staged 
leasing,'' effectively postponing leasing decisions indefinitely. On 
the map, areas designated as potential Wilderness Study Areas (WSA) are 
shown in light blue stippling. Note that there are active leases and 
leases held by production within the new WSAs.
    The attached map of the Jack Morrow Hills area shows the BLM-
managed mineral estate with active oil and gas leases in yellow. Of the 
623,000 acres within the red boundary of the Jack Morrow Hills area, 
there are 239,000 acres of active federal leases, 36,000 acres that are 
productive. Also note that within the CAP area, there are 137,890 acres 
recommended as Wilderness Study Areas.
    Exhibit #7 is a map showing the entire state of Utah. Current 
leases are shown in yellow, a total of 3,567 active federal leases. 
Also shown on the map are the BLM's 1990 recommendations for three 
million acres of new Wilderness Study Areas, as well as former Interior 
Secretary Babbitt's reinventory of an additional three million acres, 
described in the map's legend as ``HR1500 Boundaries''. Note that the 
proposed Wilderness Study Areas include lands that are already leased, 
making development as difficult as the examples of Jack Morrow Hills 
and Canyons of the Ancients. Not shown on the Utah map are the nearly 
29,000 leases that were previously leased in the past but were not 
renewed as a direct result of administrative direction from Washington.
    Exhibit #8 is a map of the Upper Missouri Breaks National Monument. 
On January 17, 2001, President Clinton signed a proclamation 
establishing the Upper Missouri River Breaks National Monument for the 
primary purpose of protecting the corridor along the Missouri River 
traveled by Merriwether Lewis and William Clark nearly 200 years ago. 
The Monument was formed under the authority of Section 2 of the 
Antiquities Act of June 8, 1906. This Act states that lands reserved 
shall be ``in all cases be confined to the smallest compatible with the 
proper care and management of the objects to be protected.'' Although 
the members of the expedition rarely explored more than two miles away 
from the river through this region, the new Monument encompasses over 
495,000 acres of federal, state and private land and extends, in some 
instances, more than fifteen miles on either side of the river.
    This new Monument is located in the most prolific natural gas 
producing province in the State of Montana. Within the Monument are 
thousands of acres of valid private, state and federal oil and gas 
leases, numerous producing and shut-in wells and several natural gas 
pipelines. In a recent Bureau of Land Management publication, the 
promise is made that the Monument designation does not apply to 
``private or state land, inside the boundary'' and that ``the 
designation does not affect valid oil and gas leases.'' Despite this 
rhetoric, the reality is that applications for permits to drill within 
and adjacent to the Monument have sat in limbo, without any action by 
the Federal regulators for over a year. Development of the natural gas 
resources on private and state lands within the monument is impossible 
because pipelines to transport the gas will not be allowed to cross the 
surrounding federal lands.
    These examples are only a few of many examples of the overzealous 
application of singular surface uses that preclude other resource 
development. Some even more egregious examples would include 1) the 
backlog of drilling permits and rights of way applications in 
northeastern Wyoming, 2) de facto wilderness management of Wyoming's 
Bridger/Teton National Forest and Montana's Rocky Mountain Front, and 
3) excessively stringent applications of NEPA planning documents and 
subsequent delays in Utah, Colorado, Montana, and the Dakotas.
    My final point is that the employment of advanced technology for 
both land managers and industry must occur if we are to reach our 
goals. Research and development spending by the oil and gas industry 
has decreased from $10 billion to $2 billion per year over the past 
twenty years as the large integrated companies have shrunk in size. Yet 
we know that past innovations from this R&D, such as horizontal 
drilling and 3-D and 4-D seismic, have provided significant increases 
in the recovery of oil and gas. Frontier areas like the Rocky Mountain 
region will require new and sophisticated technologies to develop a 
large portion of the unconventional gas resources found in the region. 
Federal efforts to aid the R&D effort by directing a portion of federal 
oil and gas royalties to a research fund would be a significant win-win 
program. Increased R&D spending will increase oil and gas production, 
resulting in a commensurate increase in federal royalties.
    In conclusion, I would remind the committee that natural gas 
resources are not uniformly distributed across the landscape. Even so, 
natural gas development can coexist with other values. We do not need 
to choose between ``this or that'' use of public land. Responsible 
management can allow for ``this and that'' use. Responsible management 
can provide a low cost, reliable, and sustainable energy supply to fuel 
our economy for many years and concurrently help secure the health of 
the land for the benefit of current and future generations.
    I view the balance between energy supply, and hence, price and 
access to government land as a teeter-totter. If the energy industry is 
shut out from government lands, then the price of energy will obviously 
be much higher. If we have access to more land where the resource 
exists, then the price of energy will be much lower. The American 
people and this Congress must balance the perceived trade-offs of 
allowing reasonable access to government land with the tangible 
benefits of securing an adequate supply of natural gas to meet the 
nation's energy needs.
    Mr. Chairman and members of the committee, thank you for the 
opportunity to appear before you today.

    The Chairman. Thank you, Mr. Stanley. I noted on page seven 
of your testimony you have this exhibit, and I would like the 
young lady to hold this up, because I think it represents to 
some extent the reality. Here is the east coast which you 
indicate is 100 percent restricted, and that goes from Maine to 
Florida. And then we have the west coast, which you have 100 
percent restricted, which goes from Washington to the end of 
California--the Mexican border. There is kind of the over-
thrust belt that we refer to that has been substantially 
restricted as a consequence of withdrawals, and then we have 
this area off Florida that currently is under debate. It is 
Lease Sale 181 that is discussed. So as we look at what we have 
done with moratoriums, we have pretty much excluded a 
significant amount of area that would otherwise have the 
potential of energy-bearing oil and gas. Is that right?
    Mr. Stanley. Yes, sir.
    The Chairman. And a lot of this has to do with the 
attitudes associated with the risk of OCS drilling. Is that 
correct?
    Mr. Stanley. Yes.
    The Chairman. This area here--Texas, Louisiana, Alabama, 
Mississippi--that is where most of our activity is coming from 
as far as OCS. How do you as a professional manager of oil and 
gas relate to the fact that it is okay here--or seems to be 
okay here, and we are out in three thousand feet of water now, 
and we are selling leases at six thousand feet, when it is not 
okay here and it is not okay there.
    Mr. Stanley. I do not have a good answer for that. 
Certainly the oil and gas industry has operated in the Gulf of 
Mexico for many years, and without very many problems. Forest 
Oil has been an operator----
    The Chairman. Is it local support? Why should this area 
have to carry the burden for the United States when this area 
and this area benefit but do not have to put up with any oil 
and gas activity?
    Mr. Stanley. I agree.
    The Chairman. I do not know that equity has anything to do 
with the argument.
    Mr. Stanley. I agree.
    The Chairman. In my State of Alaska, for that matter.
    Mr. Stanley. In my opinion, we need to go after all of the 
resources that are available. It would help to supply more 
energy----
    The Chairman. Would it help to reprioritize these areas off 
either coast and say now we have them all closed, could you 
reprioritize them and say some have a higher environmental 
value than others, therefore they should be closed and other 
areas should be opened? Is that a reasonable approach? I mean, 
it is going to have to come from somewhere. If it does not come 
from here, it is going to come from overseas. We are going to 
import it, right?
    Mr. Stanley. That is correct.
    The Chairman. We are importing 56 percent of oil now, 57, 
we are going to be up to 60. I mean, I do not know what the 
American people want to believe, but there is a certain reality 
to this, is there not? Where is it going to come from? Well, 
thank you.
    Mr. Leahy, you indicated--that is fine, thank you--an issue 
of CAFE standards and, in your professional opinion, while we 
have got to conserve more, there is a certain impracticality 
associated with that being the answer. Would you enlighten us a 
little bit more? You used some rather startling figures here, 
and I do not know whether we could all turn our cars in and get 
56 or 86 mile per gallon cars. Many people say production is 
not the answer; it is CAFE standards.
    Dr. Leahy. Basically the numbers I quoted were the 
technically recoverable volumes of oil and gas. Let me explain 
what technically recoverable means. Basically, technically 
recoverable is the amount of oil and gas that can be extracted 
using current technology--current drilling techniques and so 
forth. There is obviously an economic piece that influences the 
volume of oil and gas that is practical, and that changes with 
the economy. Essentially what we are doing is defining the 
resource base, and actually we have done some economic analyses 
to put those numbers in a little better practical context for 
the decision-makers.
    The Chairman. I am sorry. Mr. Simmons, you were pretty much 
highlighting CAFE, too.
    Mr. Simmons. The 80-miles-per-gallon car.
    The Chairman. Go ahead.
    Mr. Simmons. You know, first of all I did that analysis 
myself, so I know the number is right. It is actually 49,600 
barrels per day.
    The Chairman. Just give us--slow us down again so we pick 
it up.
    Mr. Simmons. You take an 80-mile-per-gallon car----
    The Chairman. An 80-mile-per-gallon car. Do we have any of 
those now?
    Mr. Simmons. No, we have a prototype that will be out in 
2004. It is an imaginary----
    The Chairman. We have got a 56-mile-per-gallon car if you 
want to buy one. Toyota makes one, Nissan makes one.
    Mr. Simmons. And what we do is we replace that car with a 
car that gets an average of 17 miles a gallon, because if you 
take the vehicle fleet, that is our average today, and the 
delta is the savings. So a million 80-mile-per-gallon cars is a 
phenomenal concept, but it does not make a dent, a single dent.
    The Chairman. A million 80-gallon cars would save us how 
much oil?
    Mr. Simmons. 50 thousand barrels a day.
    The Chairman. 50 thousand barrels a day, and we consume 
19----
    Mr. Simmons. Well, we are getting up a little over 20 
million during the seasonal peaks, so it has absolutely no 
relevance. It is a great concept.
    The Chairman. Okay, well--50 thousand barrels a day is what 
you would save if you had one million cars that go to 80. And 
how many cars do we have in this country? Somebody figured it 
out.
    Mr. Simmons. 220 million vehicles.
    The Chairman. 220 million. Well, I do not know if you could 
stretch the car buyers to that point. Mr. Hayes, you indicated 
that you--would you hold this up here, please? You indicated 
that significant portion under your direction of the Naval 
Petroleum Reserve had been opened for oil and gas leasing. 
Would you care to indicate the percentage that had been opened?
    Mr. Hayes. Yes, I believe that the environmental impact 
statement was done on 3.9 million acres of the 25 million acres 
of the National Petroleum Reserve. That was the area that is 
the closest to Prudhoe Bay.
    The Chairman. This is the area here?
    Mr. Hayes. Yes, yes. Well, I am not sure that is correct. 
That looks like it is offshore or just barely onshore.
    The Chairman. It is onshore. There is nothing out there.
    Mr. Hayes. Okay. The area that is opened--now, that may be 
the area that is currently--there are about six wells in the 
last 2 years that have been put in. That may be where the wells 
have been put in but, in fact, 3.9 million acres are open now 
for leasing under that 1998 Environmental Impact Statement.
    The Chairman. Well, the record will indicate that there 
were 4.3 million acres that were studied. Would you agree with 
that?
    Mr. Hayes. That sounds right.
    The Chairman. Okay. Good. And only 861,318 acres were 
actually leased.
    Mr. Hayes. So far. We just had the first lease sale in 1999 
that netted over 100 million, presumably with prices now at $28 
a barrel, there will continue to be more interest.
    The Chairman. Yes, but I do not want to mislead people, and 
I think there is a certain assumption out there that this area 
is open for leasing when, in reality, less than 25 percent of 
the four million acres has been leased and there is only 4.3 
million that has been studied. Factually, much of the area that 
industry asked to be leased was taken out of the proposed lease 
sale because of environmental objection. So I want the record 
to note the reality that this area is not all open for oil and 
gas. Much of this coastline here, as you know, has been 
excluded because of environmental objections.
    The point is 14 percent of Alaska's Arctic shoreline is 
actually open for exploration. Obviously ANWR is closed. This 
white area is open here. That happens to be State land. This 
little spot here which represents 861,000 acres is the only 
area that has been open for competitive bids that have been 
leased, and that is all. And then obviously we have got this 
huge area. This is about 1200 miles from here to here, so I do 
not want to have any more misunderstandings, particularly from 
the media, that suggest that only--95 percent of the coastal 
plain is open. It is not.
    Now let me ask you, Mr. Hayes--if you were approached by 
the Governor of the Virgin Islands, Governor Turnbull, and 
asked to explain why under your stewardship the Department of 
the Interior withdrew 12,700 acres of the Virgin Islands 
National Park and 18,000 acres in the Buck Island National 
Monument without any consultation to the Governor or the 
Delegate, Donna Christianson, how would you explain that 
action? When the Governor comes into this committee and says, 
Senator, my entire commercial fisheries have been eliminated by 
this action in the closing days of the Clinton administration 
with no consultation with me, no consultation with the 
Delegate. What am I supposed to do? What would you tell him, 
Mr. Hayes?
    Mr. Hayes. Well, I would have to check the record on that. 
I know that after the----
    The Chairman. That is the record.
    Mr. Hayes. Well, after the Grand Escalante issue, a new 
approach was taken to national monuments because of the 
concerns about the way that the Grand Escalante Monument was 
created. In each of the monuments, there were trips to the 
areas, stakeholder discussions. Senator Burns will remember up 
in Missouri Breaks there were several meetings.
    The Chairman. We are talking about this area specifically.
    Mr. Hayes. Well, I will check the record on this.
    The Chairman. This Governor specifically, this Delegate who 
was elected and the attitude of your administration, and 
particularly the Department of the Interior----
    Mr. Hayes. I know that Bruce Babbitt went to the Virgin 
Islands at least three or four times and had discussions on 
this point.
    The Chairman. They have got great beaches down there.
    Mr. Hayes. Well----
    The Chairman. I mean, what did you tell this Governor?
    Mr. Hayes. I cannot help you on that one, Chairman.
    The Chairman. Well, you were there.
    Mr. Hayes. No, I did not go to any of those meetings.
    The Chairman. Well, I know, but it was under your 
stewardship. You were in a responsible position.
    Mr. Hayes. I would be happy to supplement the record, look 
into it, and provide the facts as I can reconstruct them.
    The Chairman. Well, I am going to go for a second round. 
Excuse me.
    Senator Bingaman. Thank you very much, all of you, for 
being here to testify. Let me see that chart again that we had 
of the North Slope. Since we were just up there, it is sort of 
on my mind. Still thawing out.
    My impression, and tell me if I am wrong about this--maybe 
Mr. Hayes could respond, or any of the rest of you--my 
impression is that administratively the Department of the 
Interior now has about 95 percent of the North Slope available 
to it, which can be made available for lease if it determines 
to do so. The only part that is off-limits for leasing is this 
1002 area over here in the ANWR. Is that correct?
    Mr. Hayes. Right.
    Senator Bingaman. On the coastal plain. Is that right?
    Mr. Hayes. That is correct, Senator, and I appreciate the 
question because I would like to clarify this. The vast 
majority of the Federal lands there are open and potentially 
available for leasing. In order to lease, there has to be an 
Environmental Impact Statement that will be done to evaluate 
the area to essentially provide the basis for opening it up for 
leasing, and then there has to be a lease sale, and then 
production can happen.
    What happened on the National Petroleum Reserve in Alaska 
is Governor Knowles approached the President and asked that 
this area begin to be opened up because of the downsizing of 
the Prudhoe Bay field. The administration responded, scoped 
NEIS, and the chairman's numbers sound right--I think it was 
about 4.25 million acres which is what industry wanted and the 
Governor wanted the initial leasing to look at. As a result of 
the EIS, 85 percent of that 4.25 million was opened up for 
potential lease sales. Only 15 percent of that approximately 
four million acres was set aside because of environmental 
concerns.
    Then the first lease sale occurred, and over eight hundred 
thousand acres already have been leased, but there are still 
available--and I am sure BLM is willing to schedule if it has 
not already scheduled--additional lease sales. And if there is 
industry interest, there can be further Environmental Impact 
Statements done, and other areas of the National Petroleum 
Reserve--the balance of the 25 million--can also be potentially 
opened up.
    Senator Bingaman. My impression is that there have been 
leases in the National Petroleum Reserve previously that 
expired because the drilling did not indicate that those were 
promising areas with the technology they had, and then all that 
you described is recent.
    Mr. Hayes. Right.
    Senator Bingaman. It is a new effort to go back in and say, 
let us lease again, because we now think new technology has 
persuaded us that maybe we can do better with 3D, seismic and 
all of those kinds of technology. Is that your thought?
    Mr. Hayes. That is right. In fact, I think we are going to 
get some important feedback. The first exploratory wells were 
just put in the winter before this, and I believe a couple more 
are coming in this winter. We are going to have the results of 
six to eight exploratory wells based on the new areas just west 
of Prudhoe Bay that were opened up.
    Senator Bingaman. Let me ask Mr. Stanley. You had some 
interesting testimony where you basically pointed to some of 
the deficiencies in staffing, as I understand it, in getting 
some of these permits approved. You cited the backlog in 
drilling permits and rights-of-way applications in northeastern 
Wyoming, for example, and indicated that you think we need 
additional staffing. Is that within BLM land about which you 
are talking?
    Mr. Stanley. Yes, sir, in the BLM regional offices.
    Senator Bingaman. Could you elaborate a little bit on that 
point? Am I understanding your point correctly that there is 
this backlog there and in other places, particularly in the 
Rocky Mountain region?
    Mr. Stanley. Yes, sir. The overall permitting process is 
quite cumbersome and quite slow, which----
    Senator Bingaman. So that needs to be streamlined.
    Mr. Stanley. Yes, sir, it does.
    Senator Bingaman. But you also believe that additional 
staff would help get those permits processed?
    Mr. Stanley. Yes. In the Powder River basin, the coal bed 
methane activity has been a wonderful happening for increased 
energy, but it has put a real burden on the existing BLM 
infrastructure and, frankly, the oil and gas industry to try to 
ramp up and handle that activity.
    Senator Bingaman. You also referred to the importance of 
maintaining research and development funding for increased 
supply.
    Mr. Stanley. That is correct. Over the last 20 years as the 
major oil companies have shrunk in size, their research and 
development programs have also shrunk in size, so I think it 
would be really a win/win process to take some of the royalty 
money and fund research and development which should, 
therefore, create more production and therefore more royalty. 
So it should be a self-fulfilling type of an endeavor.
    Senator Bingaman. All right. Let me stop with that, Mr. 
Chairman.
    The Chairman. Thank you, Senator. I believe Senator Burns 
is next.
    Senator Burns. I just have a couple of questions. We have 
more people working for BLM in Montana than ever before in the 
history of it, and we are still not getting anything done? I 
think the same thing is happening, not just in--I had a hearing 
in Montana to explore the possibilities of coal bed methane and 
it was a very big finding down there and it will be part of the 
energy mix in that basin, as soon as we figure out how to 
handle the water. What are we going to do? Are we going to go 
back in the ground with the water, or are we going to handle 
it? Right now it does contain a lot of salt, but most of it is 
potable and can be used.
    Mr. Hayes, I want to straighten out one thing. The USGS 
report in the upper Missouri tells us that gas reserves are 
higher than you would indicate in your testimony today. Do you 
take issue with that? With the USGS folks?
    Mr. Hayes. No, no. I do not take issue with their report. I 
was saying that those three monuments, including the one in 
your State, their reserves when compared against the energy 
needs of the country are not significant. The USGS did say in 
their study that those five monuments had moderate to high 
potential reserves, and the numbers are in the report and they 
speak for themselves.
    Senator Burns. The thing about it is that in the upper 
Missouri--and I am pretty familiar with that country--I think 
Secretary Babbitt flew across that pipeline where it crosses 
the river three or four times and never could find it. So the 
way we move our supply and the way we lift supply, and even the 
way we discover or hunt for it is a lot different now than it 
ever has been in the history of the business. Even though you 
say there are inside these monuments there are inholders and 
leases, and they are going to be allowed to proceed, I would 
caution you to say that for the simple reason that that has not 
been the case when these monuments have been established.
    In other words, we get some land manager who has no 
interest in energy production or even grazing for that matter 
and has for the first time in his whole life a fiefdom, and he 
is going to prevent this from happening, and they do it. That 
is what concerns me about the staffing as far as getting out--
we had to change the law in order for the BLM to get their work 
done on our grazing permits, and we finally got that done. I do 
not know whether they are catching up or not, and I would 
imagine that the same thing is happening in the oil and gas. 
But I am concerned that there is a lot of misinformation 
floating out here, and one sort of contradicts the other.
    I can remember going through the years of Gloria Flora. She 
was in Montana and worked with the Forest Service on the 
withdrawal of the eastern front, of which we have some 
production up there now and you cannot find it, but yet in that 
overthrust belt contains great reserves and should be--if 
nothing else, like Mr. Simmons says, it should be at least 
inventoried and we know that it is there, and we have got a 
pretty good shot.
    I wish I had gotten Dr. Bill Ballard from Billings on this 
panel today, and I know most of you know Bill, and I do not 
know that there is anybody who is as knowledgeable about the 
West and oil and gas supplies as Dr. Ballard is, so I am 
concerned about this information. But I know up there that they 
are causing a lot of heartburn in our State. I think coal bed 
methane and our ability to produce gas is very important, and I 
am not going to say it just for electricity.
    Folks, I am going to tell you--fertilizer is going to cost 
30-40 percent more this year than it did a year ago, and the 
urea--in other words, the nitrogen that we take all comes from 
natural gas. We cannot afford that in agriculture and still be 
a viable producing industry like we have been in the past. So I 
am still concerned about that, and I was very interested in 
your testimony today. Thank you, Mr. Chairman.
    The Chairman. Senator Thomas.
    Senator Thomas. Thank you. Dr. Leahy, what involvement do 
you have in the decision-making process with respect to the 
Department of the Interior and the Energy Department, and so 
on?
    Dr. Leahy. Basically the U.S. Geological Survey is a 
scientific and information organization. Our role is to provide 
the resource estimates.
    Senator Thomas. I understand that, but do you have a part--
your information in their decision-making?
    Dr. Leahy. Our information is used by many different groups 
in terms of their role in decision-making, so I think we are 
viewed as unbiased provider of information.
    Senator Thomas. I think one of the problems--and I am 
delighted that Vice President Cheney is on a work group that 
brings together some of these agencies. We have had Energy up 
here for all 8 years, and Interior has more to do often with 
energy than Energy does, and we need to get some coordination 
so that there is some work there, I think.
    Dr. Leahy. I will say that we are providing information to 
those groups that you mentioned.
    Senator Thomas. I am urging you to participate in some of 
the decision-making, as well. Mr. Simmons, you are pretty down 
on conservation, then, are you not?
    Mr. Simmons. No, I think conservation is a terrific 
concept. I think the proponents of the conservation issue, 
though, are suggesting that it is a solution as opposed to 
supply, and they literally must have never done any numbers. I 
am a numbers person, you cannot be in investment banking and 
not do numbers.
    I think that if we had vast energy capacity, it would not 
really even matter, but I literally think that the conservation 
argument is equivalent to snake oil sales back in the days 
before Rockefeller. What is disturbing to me is every time I do 
some analysis like the refrigerator numbers--first of all, who 
will create a 50 percent more efficient refrigerator. It is 
just a dream. But if you did, to save 1 percent of daily 
energy, or 2.5 percent of electricity is stunning. I would have 
actually thought it would have been a lot more than that.
    Senator Thomas. Many people would think it would be more 
than that, but in any event, it seems to me from a political 
standpoint of getting some of the things done we need to do, 
conservation has to be something we are for, as well as the 
environment.
    Mr. Simmons. Absolutely.
    Senator Thomas. This idea that all you do is production is 
not going to work in terms of the politics of this issue. You 
talked about production, which obviously we are for. What about 
refining and transportation? We can produce all of the 
electricity or coal in Wyoming that you can handle, but if you 
cannot get it to where the market is, you did not mention that.
    Mr. Simmons. Well, in 7 minutes it is hard to--we are out 
of capacity right across the face of energy. There is almost no 
data on what transmission capacity is in electricity, for 
instance. In Houston we added our last transmission lines of 
any significance in 1983. We are out of refining capacity. 
Virtually every finished product pipeline in the United States 
operates at virtually 100 percent all of the time. We must be 
bumping up against the literal logistics to bring any more 
foreign imports into the United States, so right across the 
face of energy we are out of capacity.
    Senator Thomas. We talk a lot about production, but you 
cannot put oil in your 80-mile-a-gallon car.
    Mr. Simmons. Absolutely not.
    Senator Thomas. Mr. Hayes, you obviously are sensitive 
about the last 8 years in which we have not had an energy 
policy, but don't you think that the increase in production on 
Federal land has been more a function of the price than it has 
been on any change that was made in the last administration?
    Mr. Hayes. Well, the price increases, as you know, did not 
really kick in--as late as 1988, oil was still $18 a barrel.
    Senator Thomas. True, but most of the changes you are 
talking about in production are a result of the price.
    Mr. Hayes. Certainly. I agree with your proposition that 
the market is a huge driver in all of this and is probably the 
reason why the overall production has declined in the United 
States pretty steadily since 1972, plus a lot of the fields are 
mature.
    One of the reasons why there have been increases on the 
Federal side are the incentive side. This committee and the 
Congress and the President put in place a deep royalty 
incentive, and there are other incentives that where put in 
place over the last eight years. Of course, that is an 
important part of your consideration of an overall energy 
policy.
    Senator Thomas. It is pretty tough, and I understand your 
defense of Babbitt, but someone mentioned Jack Morrow Hills. 
Well, we went through a whole EIS--Secretary Babbitt came out 
and said, we want you to change your results. Now, you cannot 
do that.
    Mr. Stanley, yours and Mr. Rubin's comments were not 
consistent with Mr. Hayes'. Would you like to comment on that?
    Mr. Stanley. Well, I think there is some confusion over the 
accessibility of land. As I stated, many lands have been leased 
but, in effect, but are almost off-limits because of all the 
severe restrictions.
    Senator Thomas. Roadless.
    Mr. Stanley. Roadless. Even all the various surface use 
restrictions, and no surface occupancy. Some of those 
restrictions make drilling wells uneconomic, so you may have a 
lease but then you decide it really does not make economic 
sense to do it because of the severe restrictions. The timing 
of the restrictions where we only have a small window in the 
year to drill many leases plays real havoc with the drilling 
contractors. They cannot hire a crew that only wants to work 
two months out of the year, and so there is a tremendous run on 
the drilling contractors in the late summer to drill wells, and 
then----
    Senator Thomas. We ran into that just recently in western 
Wyoming. Jonathan Field, isn't it? At any rate, it might be 
Piney where the contracts--they cannot do it at certain times 
of the year.
    Mr. Stanley. Right. Exactly.
    Senator Thomas. Mr. Rubin, do you have any reaction to Mr. 
Hayes' comments?
    Mr. Rubin. Yes. I think it is really critical to advance 
this inventory of western lands as quickly as we can so that we 
can sort of end some of the debate and get something on paper 
that everybody can look at and agree on.
    The Chairman. Can you pull your microphone closer?
    Mr. Rubin. Yes, sir.
    Senator Thomas. Will we be confused about the availability 
to lease against the practicality of leasing?
    Mr. Rubin. Right. The fact that you have got a lease does 
not mean that you can actually develop that lease in a lot of 
cases. Even more subtle problems compared to no surface 
occupancy or something like that are the difficulties in 
getting permits. We would be pleased if the BLM could do as 
good a job of getting permits out as quickly as the States do. 
We would like to see their performance improve, and whether 
that takes more resources or a reprioritization of resources--
whatever it takes, it is important to do that if we are going 
to increase gas production.
    I understand that at least the initial part of this lands 
inventory has started, and preliminarily from what I understand 
they are looking at the Green River basin right now. They are 
actually finding leasing or resource restrictions significantly 
greater than what we found in the NPC report, so we are looking 
forward to seeing more of that information.
    Senator Thomas. We have been working on that for about 4 
years, as I recall, or more. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. We have been joined by Senator 
Craig. Senator Craig is one of the senior members of this 
committee from the State of Idaho, another Western State with a 
lot of public land.
    Senator Craig. Mr. Chairman, a lot of public lands, but we 
became volcanically too active about 11 million years ago, so 
we do not have many hydrocarbons left under our structures. 
Just a little lip of the overthrust over in southeastern Idaho, 
but it apparently does not hold a great deal of potential.
    David, 17 percent of the National Petroleum Reserve in 
Alaska is in itself valuable, but that is not to suggest that 
the world is now open to exploration, and I believe that 3.9 
million acres that did receive recognition in your tenure 
represents 17 percent. Is that correct?
    Mr. Hayes. That sounds about right, because that was the 
request of the Governor and the industry in terms of the first 
bite of analysis to open it up. The assumption was that the 
industry would prefer to have the access close to the current 
infrastructure of Prudhoe Bay, and obviously as you move 
further west, the production costs go up higher. I am sure that 
Secretary Norton would be happy to, and we would have been 
happy to, to start an EIS process to open up additional areas 
in the National Petroleum Reserve. That is really what the 
reserve is for.
    Senator Craig. And therefore you would advise her to do so?
    Mr. Hayes. She is not asking for my opinion, Senator, any 
more.
    Senator Craig. I would have a comment to that, but it would 
probably be less than honorable.
    Mr. Hayes. No, no, I do not feel it is appropriate for me 
to advise her, but obviously if there is--I do not think there 
is any question that the National Petroleum Reserve is a very 
important piece of our energy future, and that if there are 
potential additional reserves that industry is interested in 
developing, it certainly should be explored.
    Senator Craig. Well, we can all debate on what is or is not 
available. I do not know a great deal about the agencies 
functioning in oil and gas because it is of direct interest to 
me, but it is not of direct impact to my State. But I do watch 
very closely a strategy that was employed over the last eight 
years that dramatically declined the ability to offer up timber 
sales.
    About an 89 percent decline in timber production on public 
lands occurred in an 8-year period. One of the ways of doing 
that is to basically disallow and/or diminish the ability of 
the on-ground staff to put up, or make available, or to review, 
and that is exactly what happened. In fact today, as a result 
of the last 8 years, it is almost impossible for some of my 
force in Idaho to muster people of any talent that would put up 
a timber sale, or could, that would have the basic knowledge to 
do so. So it is one thing to suggest there is a green sale 
program; it is another thing to suggest that we have the staff 
to do it.
    It was an interesting strategy, but it worked. I am not 
sure that is true in oil and gas, because I do not know, but I 
know that Senator Burns is suggesting that in Billings there 
are, I believe, 557 BLM employees, and yet they are incapable 
of or less than capable of, or less than timely, in their 
ability to deal with the applications in a way that is 
meaningful. So there are a lot of ways of dealing with this, 
and certainly all of the environmental standards must be met.
    In the mid-1980's while we were still active in the 
overthrust belt, I was serving in the House, and I felt it was 
important that my colleagues from Eastern States go West and 
look at the oil production that was going on in the overthrust 
belt. I had people like the late John Siberling--certainly a 
devout environmentalist--and others who traveled with us. I 
wish my colleague from Wyoming was still here, because I will 
never forget the morning that we lifted off from Jackson Hole, 
and we all know about Jackson Hole, Wyoming, a beautiful, 
pristine valley up against the backdrop of the Tetons. And we 
were flying south of Jackson Hole and slightly west, still in 
the State of Wyoming, looking for a drill site in which 
drilling had gone on but nothing had been discovered.
    So the drill rig had been pulled, the reclamation had gone 
forward about 2 years before that, and the road had been 
obliterated, seeded in, and we overflew the area a couple of 
times. The pilot and the Federal person could not find the 
site. So we finally circled a clearing, and as we dropped down, 
we lost sight of Jackson Hole which was in the distance. We 
could still see the city, and we landed in a clearing and 
scared out a cow, a elk and her calf and found the drill site.
    My point is simply this: The technology and the ability we 
have today to recover and reclaim and make safe is so real 
compared to where we were decades ago--and this was still 
nearly 2 decades ago, 15 years ago, I would guess--that the 
tragedy of an unwillingness to look at reality today is that 
the American consuming public and the economy often times gets 
put through what they should not have to be put through. I am 
often times interested when people say, Mr. Chairman, will we 
develop an energy policy if the Senate cannot support ANWR? And 
why should ANWR be a part of an overall energy strategy?
    Why should any of us as public policy makers debate energy 
without laying all of our potential energy cards on the table? 
I think that is what my colleagues were talking about when they 
talked about areas offshore that are restricted today. That is 
not to suggest that we would not restrict them in the future, 
but if we are really going to be honest with the American 
public, then we ought to lay all of the cards on the table and 
once again decide based on our ability and technology, and not 
emotion and not politics, what is or is not doable, what is 
right or wrong in the current economy, and in the current 
environmental technology that is available. Hopefully someday 
we will get there; I would hope that it is not driven by $3 or 
$4-a-gallon gas, but it may well be in time.
    So we have got a job to do, and Mr. Chairman, thank you for 
your willingness to pursue it in a very direct way. But to be 
dishonest with the American people at this time, and to suggest 
to them that they spend ever-increasing amounts of their income 
for their energy needs in an absence of a responsible and 
honest dialogue is in fact false policy, and I hope that we can 
adjust that.
    The Chairman. Thank you very much, Senator Craig.
    Mr. Hayes, relative to your comments with regard to what 
action your administration under your stewardship took--I think 
we have a few differences of opinion. I would ask you a 
specific question whether the Department of the Interior--the 
Department responsible for OCS leasing--supported deep water 
royalty relief within the Clinton administration initially.
    Mr. Hayes. I cannot speak to initially. I know the 
President signed the bill and supported it. Of course, Senator 
Johnston is the key to that.
    The Chairman. I was ranking member then and worked with 
Senator Johnston. The fact is--and perhaps we ought to ask 
Senator Johnston, but the Department of the Interior fought 
this issue, and it was the Department of Energy that prevailed.
    Mr. Hayes. Yes.
    The Chairman. So, to suggest that it is appropriate that 
the Department of the Interior take credit for this I think is 
a bit misleading, and we would be happy to have any comments 
that Senator Johnston might care to make as to the 
concentration of efforts to prevail during the Clinton 
administration. You know, it is kind of interesting between 
monument designation withdrawals and a last-minute 60 million 
acre roadless policy, the amount of lands closed to energy 
exploration and development almost doubles--almost doubles the 
total OCS acreage leased during the past 8 years.
    There were approximately 38 million acres of OCS area land 
leased, and there were about 65 million acres that were closed 
in the monuments and roadless on shore. So while you point out 
with some pride what you accomplished, I do not think you are 
giving the American people a fair evaluation of what you closed 
in the process of accomplishing it. Your role in this probably 
was not of significance, but nevertheless I think it reflects a 
reality that clearly the Department of the Interior was opposed 
to OCS royalty relief, and the Department of Energy was the one 
that prevailed as a consequence of the good works of Senator 
Bennett Johnston. If you care to dispute that, please proceed.
    Mr. Hayes. Mr. Chairman, it is rare that I would dispute 
anything you say. I respect you very much, but let me just say, 
if I can--my statement was that the administration supported 
the Royalty Relief Act, and the President signed the bill and 
the Interior Department moved out very quickly and aggressively 
in implementing it, and the leasing numbers show the result.
    If I could comment very briefly on the amount of land 
designated in national monument status. As I said in my 
testimony, prior to the designation of national monuments, we 
obtained oil and gas survey and mineral survey information from 
the USGS. That information has recently been confirmed in 
another U.S. report that was done in March of this year by the 
new administration, and they confirm that less than one million 
acres of the monument-designated areas have any significant 
potential for oil and gas, and I have laid that out.
    With regard to the roadless rule, I would just like to 
point out that that is now underway--the analysis of how much 
potential oil and gas there might be. The Department of Energy 
study suggests about 11 TCF of natural gas. I would just like 
to point out that that is less than 1 percent of the total 
reserves as identified in the National Petroleum Council 
report.
    The Chairman. Do you recall the figures that were given to 
this committee in the overthrust area, Rocky Mountain West, 
that there was probably somewhere in the area of 21 trillion 
cubic feet of recoverable gas reserves that were eliminated by 
the roadless withdrawal, and did you have any role in that, or 
did you have any knowledge of it?
    Mr. Hayes. No. My knowledge of this is based on the record. 
Of course, it was the Forest Service that did that rule. My 
understanding is that the record includes the study the 
Department of Energy commissioned which indicates that the 
potential loss--and this was disputed by the Forest Service--is 
11.3 trillion cubic feet of natural gas, which would be less 
than 1 percent of the potential available gas according to the 
National Petroleum Council report.
    The Chairman. Well, I think there is some reasonable 
dispute on that, and obviously that withdrawal had a dramatic 
affect on the domestic prospects for gas, particularly to 
discoveries in the overthrust belt. The fact that it was made 
roadless put it off-limits, and I think it is fair to say that 
there was very little consideration given from the standpoint 
of--I do not know. Mr. Rubin, can you comment on that at all?
    Mr. Rubin. Yes. I think that part of what Mr. Hayes is 
saying makes our case in that it would have been fairly easy to 
consider the impacts on energy from these decisions, and just 
to have modified their decisions a little bit, and we could 
have captured most of the natural gas, for example, that was in 
the roadless moratoria by just modifying the moratoria a little 
bit in the Rockies by limiting the moratoria by about 5 
percent, and by taking a look at the few monuments that had 
significant resource potential, and actually modifying what 
they did beforehand rather than having to get information after 
the decisions are made to indicate what the resource potential 
was.
    The Chairman. I am looking, Mr. Hayes, at the study of 
Advanced Resources International, and the conclusions. And it 
says the vast majority of natural gas resources in IRAs--IRAs--
are found in the Rocky Mountain region. These resources, 11.3 
trillion cubic feet, are mostly contained in the largest nine 
plays in the Rocky Mountain region.
    Implementation of the roadless policy will close to 
development 9.4 trillion of natural gas, increasing the total 
estimate by the 1999 NPC study from 29 to 38 trillion cubic 
feet, a significant 32 percent increase. Now, to me the only 
way I can read this is that areas of potential oil and gas have 
been taken out of development by this roadless action, and it 
was under your watch.
    Mr. Hayes. That's correct. Those are the same figures, and 
just to put that into perspective, if you add those two figures 
together plus the west coast and the Gulf and the east coast, 
the offshore resources together, it is about 100 trillion cubic 
feet of gas that largely because of the offshore moratorium, is 
unavailable for drilling. And that total is about 7.5 percent 
of the Natural Petroleum Council's estimate of the reserves. I 
should mention that the USGS apparently is potentially upping 
that estimate.
    The Chairman. Well, to a large degree I do not think you 
can dodge the reality that our energy crisis is due, in some 
portion, to the idea of a death of thousand cuts. Whether it is 
what is done in the overthrust belt, what has been done with 
the moratoriums, what has been done, and done, and done, and 
yet we are crying for energy. Mr. Leahy, I was hoping that one 
of you would give us a little information on when we could 
expect to relieve our dependence on oil for transportation. 
Well, look at conservation--it is important. We look at 
alternative energy and it is important. But oil flies the 
airplanes, the ships, the trains, the automobiles, the trucks. 
When are we going to get some relief?
    Dr. Leahy. I guess the way I would answer that question, 
Senator is, as you know, we are dependent on foreign sources 
for more than or about 50 percent of our consumption.
    The Chairman. And we are just going to import it?
    Dr. Leahy. Well, the point is it will require, I believe, 
all of the issues in terms of conservation and development that 
this group has talked about.
    The Chairman. Well, I know what Mr. Simmons just told us of 
50 thousand barrels that we could save if we put a million cars 
in there. Do we have an answer? Are we going to continue to 
depend on fossil fuels, particularly oil, for transportation in 
the foreseeable future?
    Dr. Leahy. I do not see our dependence on oil disappearing 
quickly.
    The Chairman. Well, that is supported. I assume some of you 
have seen the CSIS study that came out here a short time ago. 
It said for the next 20 years just not the United States--and I 
think that is part of our problem, we think of ourselves as a 
little island, that everything circulates around us--but there 
are developing countries, and then there is China, and the 
demand for oil is going to increase, and we are either going to 
produce more and relieve our dependence, or we are going to 
import more in spite of the efforts and the necessity of 
conservation.
    I wish these people that say conservation is the answer 
would give us a formula for achieving it. Indeed the answer is 
we can do more, but we use more. We have more airplanes flying, 
whatever.
    Now a couple more questions and I think we can break this 
up because it has been valuable. I think we have had some 
conversation about leasing lands, and that does not necessarily 
make then suitable for exploration and production. Permitting 
time and development time are significant, and we have had 
problems in this area where we try and balance legitimate 
environmental consequences, but is there in your collective 
opinions--and maybe Mr. Stanley, you are in the oil business--
can we take steps, still protect the environment and the 
legitimate concerns and still expedite the process that you 
would specifically recommend?
    Mr. Stanley. Yes, sir, I think we can. The footprint is so 
much smaller today than it ever has been, and drilling gas 
wells in the Rocky Mountain region where you usually have one 
gas well per every 160 acres, the size of the drill site is 
only two to three acres, so it is a very small part of the land 
that is used to drill a well. And then after we finish 
drilling, most of that two to three acres is reclaimed, and the 
resulting producing pad is maybe only a half an acre or a third 
of an acre, so it is a very small imprint on the land.
    The Chairman. Has government made it easier or more 
difficult as time has gone on? In other words, you have had 
experience in this for some time. Is it getting easier, or is 
it getting tougher?
    Mr. Stanley. It is getting much tougher. An example is I 
guess I keep talking about the big game winter range, but that 
is a significant problem. In the old days--5, 10, 15 years 
ago--we were only precluded from drilling if the animals were 
actually in the area and then moving in, and then only on part 
of a lease. More recently, that restriction has been much more 
widespread, so that stops a lot of wells from being drilled in 
the winter time.
    The Chairman. Mr. Leahy, the proven reserves of oil for the 
United States--did you include--I think you used something like 
23 or 24 billion barrels of proven reserves?
    Dr. Leahy. Let me go back to my notes. Based on our 1995 
assessment for onshore and State waters, our proven reserves 
were 20 billion barrels.
    The Chairman. 20 billion. And that is onshore?
    Dr. Leahy. And State waters.
    The Chairman. And State waters. Can you differentiate 
onshore and State waters of your 20 or so?
    Dr. Leahy. We should probably answer that for the record, 
Senator. I cannot----
    The Chairman. Most of it is onshore?
    Dr. Leahy. Yes. I would say so.
    The Chairman. Did you include any estimate for ANWR in 
there? In that figure? The ANWR figure being a low of 5.6 and 
high of 16, maybe a mean of ten?
    Dr. Leahy. Okay, the ANWR figures are basically 
undiscovered resource base, not proven reserves.
    The Chairman. Right.
    Dr. Leahy. So it would be----
    The Chairman. So you are only using proven reserves?
    Dr. Leahy. Yes.
    The Chairman. Are you using the ANWR figures in your 
unproven reserves?
    Dr. Leahy. Not in 1995. The 1995 numbers that I quoted did 
not include the more recent estimates of ANWR that were done in 
1998.
    The Chairman. Now would you explain--there were three 
estimates on ANWR over the last decade.
    Dr. Leahy. Uh-hm.
    The Chairman. And one of them was done in less than a week?
    Dr. Leahy. Yes.
    The Chairman. To accommodate the Department of the Interior 
at a time when they wanted a different figure. Is that about 
right?
    Dr. Leahy. That is correct. Well----
    The Chairman. Well, whatever. And can you elaborate for us 
the different figures that were used and how long it took 
roughly for each estimate to be developed?
    Dr. Leahy. I can provide some insights but, again, probably 
not figures. Basically the national assessment was done in 
1994. The numbers used in that were based on a 1987, I believe, 
assessment of ANWR. But clearly in the 1994 assessment, they 
ranked the Alaska north shore as having high potential, but 
there was not much known about ANWR at that point in time.
    The Chairman. Well, there has not been any more known about 
it since then.
    Dr. Leahy. Well, there was geophysical data that was 
available and was basically used in the 1998 assessment, so we 
were able----
    The Chairman. Well, you are not----
    Dr. Leahy. There was more geological information than there 
was----
    The Chairman. Well, there was not any exploration that went 
on.
    Dr. Leahy. No, no, but there were some geophysical lines 
that we were able to take a look at, and there were some wells 
drilled.
    The Chairman. So what did you come up with in 1987 on the 
1987 figure which came out in 1994?
    Dr. Leahy. I do not have that--I would have to answer it 
for the record, but clearly in the 1998 assessment in terms of 
technically recoverable resources, if we look at the entire 
assessment area----
    The Chairman. 1002 area is what we are talking about.
    Dr. Leahy. You want the 1002 area?
    The Chairman. Well, that is----
    Dr. Leahy. Well, let me do the entire assessment area. At 
the 95 percent probability----
    The Chairman. When you say the entire assessment area, are 
you telling me that consists of all of the million-and-a-half 
acres?
    Dr. Leahy. It is all of ANWR, yes.
    The Chairman. Okay. So it is all of the 1002 area.
    Dr. Leahy. Well, yes. 1002 was----
    The Chairman. And this was in 1998?
    Dr. Leahy. This is the 1998 number. At the 95 percent 
probability, 5.7 billion barrels of oil, at the mean 50 percent 
probability, 10.36, and at the 5 percent probability, about 16 
billion barrels of oil.
    The Chairman. Okay, now for the record, if it were 10.36, 
where would that ranking in size in the standpoint of oil 
fields found?
    Dr. Leahy. It would be--this is multiple fields, keep in 
mind.
    The Chairman. I am saying a million-and-a-half were 1002 
area, if you say it is 10.36, what would it rank with?
    Dr. Leahy. Well, just to give you some perspective, Saudia 
Arabia--the giant oil fields----
    The Chairman. I am talking about the United States.
    Dr. Leahy. I believe the east Texas field is about five 
billion.
    The Chairman. Well, obviously this 10.36 is bigger than 
five, so it is bigger than the east Texas field. Is it bigger--
--
    Dr. Leahy. That is one of the larger ones.
    The Chairman. Are you suggesting it is the largest if it is 
10.36?
    Dr. Leahy. Yes.
    The Chairman. I have to deduce that unless you come up with 
something else.
    Dr. Leahy. Keep in mind that the number I quoted you was 
basically for multiple fields; it is the volume of the 
undiscovered resource.
    The Chairman. It is in--I know. The issue before the 
Congress is whether to open the 1002 area, the million-and-a-
half acres or not.
    Dr. Leahy. Okay.
    The Chairman. And I assume you have given us a mean of 
10.36.
    Dr. Leahy. For the entire assessment area. For the ANWR 
area which is smaller, as you know----
    The Chairman. Now, just a minute. You just told me the 
assessment area was a million-and-a-half acres, which is the 
question here. It is not the 19 million acres that are in ANWR.
    Dr. Leahy. Okay. Let me just quote the 1002 area, which is 
the smaller area. That would be 7.7 billion barrels of oil at 
the 50 percent probability. I believe the Prudhoe Bay field is 
something on the order of 13 billion barrels.
    The Chairman. It was 10 originally; it has produced 12.
    Dr. Leahy. And there are some estimates that there are 
three left.
    The Chairman. So you are taking in 19 million acres of ANWR 
in your mean of 10.36? Is that correct?
    Dr. Leahy. Yes, that is for the 19 million.
    The Chairman. So you are picking up roughly 3 million acres 
outside the 1002 area in your calculation?
    Dr. Leahy. Correct.
    The Chairman. Okay. And what would be the high then for 
just ANWR?
    Dr. Leahy. 11.8 at the 5 percent probability level.
    The Chairman. So if you took the mean it would be 7.7?
    Dr. Leahy. Correct.
    The Chairman. And if you took the high it would be 11.8. 
And the largest field in North America is----
    Dr. Leahy. Prudhoe Bay.
    The Chairman [continuing]. Prudhoe Bay, and that was 10 
initially, and it has produced 12. So what I am attempting to 
draw from you--and I am having some difficulty in doing it--
even if it were the mean of 7.7, it would be the largest field 
found in the United States in the last three or four decades?
    Dr. Leahy. It is not a field; it is multiple fields. But 
certainly the volume of oil----
    The Chairman. It is in the 1002 area, and the only thing 
Congress can address is whether to open the 1002 area or leave 
it closed. The question I continually ask is how much oil is 
there, and obviously we do not know and we have to depend on 
you and you are telling me that there is a mean of 7.7 and a 
high of 11.8.
    Dr. Leahy. That is correct. Senator, I think a way to 
appropriately look at the relative size is that in 1989 in 
Colombia, the Cuciana Field turned out to be the second largest 
field discovered in all of the western hemisphere. They thought 
it was going to be about the size of Prudhoe Bay, and it turned 
out to be half that size, so I would guess that this area would 
rank number two.
    The Chairman. Okay, well, it is hard to get a guess out of 
the professionals, but we have a guess out of the financiers, 
which are the ones that have to finance this development.
    How important is the energy problem to our economy, Mr. 
Simmons, and relate to the fact that we are now looking at 
natural gas as our savior.
    Mr. Simmons. I do not think you can have any form of 
economy that makes any sense----
    The Chairman. What kind of an economy?
    Mr. Simmons. Any form of an economy that makes any sense at 
all without reliable and dependable energy. When Henry 
Kissinger wrote his last book, when he reflected back on the 
1970's, with the benefit of 25 years of hindsight, he described 
the 1973 oil shock as the second worst threat to the economies 
of the world since World War II. I think what we are in now is 
significantly worse than the 1973 oil shock once it plays out.
    The Chairman. Why do you say it is worse now than the 1973 
oil shock? We had lines around the block in 1973. The public 
was outraged.
    Mr. Simmons. Yes.
    The Chairman. They were pointing their fingers at everybody 
and government was ducking. Why is it worse now?
    Mr. Simmons. The 1973 oil shock lasted 65 days. It was 
consumers panicking, topping off their tanks, and it was 
strictly related to oil. We had ample supplies of natural gas 
and electricity. By the time this plays out, I am afraid we 
will look back and say this was far worse, because it is all 
three forms of energy at the same time.
    The Chairman. Well, how is this going to play out in your 
vision? You made a broad statement there that we will look back 
on this and it could be worse than 1973.
    Mr. Simmons. When we have hot weather this summer--if we 
have hot weather this summer--we are going to find the 
electricity problems in California are going to spread to many 
other parts of the country. I am afraid that we are not likely 
to see any supply response from natural gas, despite the high 
prices, for quite some period of time.
    The Chairman. No supply response?
    Mr. Simmons. To natural gas.
    The Chairman. Why do you say that?
    Mr. Simmons. Because we have basically had a rig count 
drilling for natural gas that exceeded 600 rigs 16 months ago, 
and it has now hit a 20 year high, and so far we have had 
absolutely no supply response to the increased drilling. Canada 
is a year ahead of us----
    The Chairman. You say that we are drilling more, we are 
putting more in, but we are using more?
    Mr. Simmons. We are drilling--we are finding smaller 
prospects, and the decline curves in almost all the basins of 
North America are now so high that we created a treadmill that 
created a need for an exponential amount of wells to be 
drilled, and we are now just about out of drilling rigs.
    The Chairman. Do you gentlemen agree with this statement 
that we are going to look back at this time--weather patterns 
obviously, we are now dependent for our energy policy on the 
uniqueness of weather patterns--are we going to look back at 
this time and say it is worse than it was in 1973? Mr. Leahy, 
do you agree with that?
    Dr. Leahy. I do not know.
    The Chairman. Mr. Hayes?
    Mr. Hayes. I do not know.
    The Chairman. Mr. Rubin?
    Mr. Rubin. I think we do have the unique situation in that 
we do have tight supplies of a number of forms of energy. I am 
not capable of predicting the future, but I am certainly 
concerned about what is going to happen over the next several 
months.
    The Chairman. Mr. Stanley.
    Mr. Stanley. Yes, sir, I agree with Mr. Simmons that we 
have a shortage of oil, we have a shortage of gas supply, and 
we have a shortage of electricity, and it is going to take a 
tremendous effort to increase that supply. We are going as fast 
as we can trying to drill more wells wherever we can, and as 
Mr. Simmons said, we are just really holding our production 
flat. We are not increasing it.
    The Chairman. Well, Mr. Simmons, you predict a very bleak 
picture. We have got a few people in this room that are 
students of energy or are associated with energy, and a few 
that are associated with the environmental community. We have a 
few press that are left, and we have some television stations, 
but this message is not getting across to the American people. 
Why, Mr. Simmons, is it not getting across?
    Mr. Simmons. I think there is embedded in too many energy 
economists, and a lot of industry executives, a denial of the 
fact that we are out of capacity. I think there is some 
confusion about the difference between being out of energy 
capacity and people think you are saying that we have run out 
of energy.
    A week from this coming Thursday, the Council of Foreign 
Relations and the Baker Institute will be releasing an energy 
White Paper, and there was a lot of debate among the forty or 
fifty of us in what the energy issues were, but within about 12 
hours I was incredibly pleased with the clarity that came out 
of this group. I think that basically over the next few months 
America will be starting to open its eyes more to the problems, 
but they are very real, and as the months progress, they are 
not going to get any better. They are just going to continue to 
get worse.
    The Chairman. You know, I am at a loss to know how to 
communicate the likelihood of this problem occurring and 
affecting our economy, our standard of living, our 
vulnerability from the standpoint of our national security. 
When I say that, I mean that we import 56 percent. In 1973 we 
were at 37 percent. We created SPRO. We were concerned enough 
to do something; we said we would never, ever allow ourselves 
to be over 50 percent. Now we have lulled ourselves into a 
complacency; we are at 56, 57. The Department of Energy is 
saying we are going to be 60. We have seen OPEC develop a 
discipline that they had not had before where when they want to 
constrict the supply, they do, and the price goes up as we have 
seen--it is $22 to $28, floor and ceiling? We still don't get 
the message.
    And as we look at our transportation system where I can see 
relief potentially if we can develop more natural gas, 
recognizing that we are now having a transmission problem, and 
you heard the lady from Louisiana, distinguished Senator 
Landrieu, say that she feels strongly that before we go off and 
increase the supply, we better go off increasing delivery, and 
she is right in that sense. We are constricted by transmission 
adequacy in both pipeline and electric transmission.
    So we are heading for this inevitable clash, and we are not 
addressing it. They are going to blame government--they are 
going to blame you and I as to how this could happen, and they 
are going to blame our new President. We cannot seem to wake 
anybody up. It is absolutely incredible, but I guess until the 
squeaky wheel really squeaks or there are gas lines around the 
block, or there are blackouts and there is no air conditioning 
in certain parts of the country, they are going to get the 
message.
    If you look at the economy and the threat to the economy, 
you look to the threat to our national security--we are 
importing oil from Saddam Hussein. I keep telling you as a 
general rule, what do we do? We take the oil from him, put it 
in our airplanes and enforce the no-fly zone. We have flown 
234,000 individual sorties over Iraq, endangered our men and 
women. We have been very lucky.
    Sometimes we bomb targets over there. He takes our money, 
develops a missile capability, delivery capability, and aims it 
at Israel, and the American people say, oh, gee, he shouldn't 
do that. Where is it going to end? I do not know. Does anyone 
want to add anything?
    Mr. Simmons. I commend you for your speaking out very 
loudly on this, and I share your frustration at the inability 
to have people hear. A lot of denial going on.
    The Chairman. For the record, Mr. Hayes, I did a little 
checking so that we can work off the same song sheet, and with 
regard to the Naval Petroleum Reserve in Alaska--you can put up 
that chart while I speak--the record will note that 4.6 million 
acres are available in the sense of leasing; 2.3 million acres 
were set aside with the explicit provision of no leasing would 
occur, and those are primarily in this area right here--on the 
coastal area because of concern over our fish and wildlife. 
There is a significant wildlife--particularly bird population--
over here. There is not much in this area. Three hundred 
thousand acres of no surface occupancy, 220,000 acres 
available, but with strict stipulations. 1.8 million acres 
available with no restrictions, and 861,000 acres that were 
ultimately leased.
    The factual reality is that only 12 percent were leased, or 
861,000 acres. One of the things that a lot of people forget is 
they see this whole land mass here and assume there is oil on 
all parts of it, and therefore if this is closed, NPR ought to 
be able to supplant the idea that it would offset what 
potentially might be in ANWR.
    As Mr. Hayes knows, Husky drilling under a contract with 
the Federal Government did extensive oil and gas exploration 
without 3D seismic in the 1960's, and it was not very 
promising. A geologist will tell you where you look for oil 
based on rock formations and the likelihood. This is a hot 
prospect but, nevertheless, I do not want to disclaim the value 
of NPRA because clearly there is a potential.
    One of the interesting things from the standpoint of 
Alaskans is this used to be called Naval Petroleum Reserve 
Number Four when we were a territory. This was set aside by 
Congress with great wisdom back around the turn of the century. 
Of course, you can have a Naval Petroleum Reserve at the top of 
the world for our Navy that was sailing around the world at 
that time on oil, but (a) they didn't know what was there, and 
(b) they had no capacity to deliver it. Now we still do not 
know what is there, and we do not have the capacity to deliver 
it.
    I would hope that this hearing had some value in the 
relationship to communicating to the American people the 
inevitability of what is going to occur, and I just hope that 
somehow this message is going to get through, but so far we 
have not had much luck. Hopefully your contribution is like 
adding one more weight to the camel, and maybe we are going to 
have to keep doing this until the camel collapses. I just hope 
that the American economy and our national security interest is 
not under the camel when the camel comes down. I wish you well. 
Thank you.
    [Whereupon, at 11:52 p.m., the hearing was recessed, to be 
reconvened on April 26, 2001.]

    [Subsequent to the hearing, the following was received for 
the record:]
                                  American Gas Association,
                                     Washington, DC, April 4, 2001.
Hon. Frank Murkowski,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Chairman Murkowski: The American Gas Association requests that 
the attached portions of the Potential Gas Committee's (PGC) biennial 
report on long-range supplies of natural gas, which was released today, 
be included in the record of the Senate Energy Committee's hearings on 
domestic oil and natural gas resources, which was held on Tuesday, 
April 3rd, 2001.
    The PGC's report shows that the U.S. natural gas resource base is 
estimated to be even larger than previously thought, but that the size 
of the resource base is immaterial unless the nation can access 
supplies and can build the infrastructure needed to deliver it. The 
committee's report showed 1,258 trillion cubic feet (Tcf) in total 
natural gas resources in the United States at the end of 2000. That is 
the equivalent of a 63-year supply of natural gas at current rates of 
production.
    The size of the resource base actually increased since the 
committee's last report in 1998, even though, since that time, 38 Tcf 
of natural gas have been drawn down. During the past 10 years the PGC 
has increased its estimate of the U.S. natural gas resource base with 
each successive report. This year's increase is attributable to 4 
percent growth in traditional reserves and 10 percent growth in coal 
bed methane resources.
    The Potential Gas Committee consists of more than 170 volunteer 
members from the natural gas industry, government agencies and academic 
institutions. It functions independently, but with the guidance and 
technical assistance of the Potential Gas Agency of the Colorado School 
of Mines. The committee receives financial support from AGA, the Gas 
Technology Institute and other companies, organizations and 
individuals.
    Thank you for your consideration of this matter.
            Sincerely,
                                         Richard D. Shelby,
                                          Executive Vice President,
                                                    Public Affairs.
Attachments:
    Overview of Potential Gas Supply in the United States and 
Limitations on Access to Public Lands have been retained in committee 
files.

                           U.S. ENERGY TRENDS

                              ----------                              

                        THURSDAY, APRIL 26, 2001

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:38 a.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Frank 
Murkowski, chairman, presiding.

         OPENING STATEMENT OF HON. FRANK H. MURKOWSKI, 
                    U.S. SENATOR FROM ALASKA

    The Chairman. Good morning, ladies and gentlemen. I would 
urge the witnesses to come together with us. And I wish you all 
a good morning. Let me introduce the one panel that Senator 
Bingaman, through our collective staff efforts, has extended 
invitations to, and we appreciate your attendance.
    Mr. Gary Heminger, executive vice president, Supply, 
Transportation and Market, Marathon Ashland Petroleum, Findlay, 
Ohio. Our next witness is Mr. Thomas Robinson. Mr. Robinson is 
the CEO of Robinson Oil Company, San Jose, California. Good 
morning.
    I went to Bellarmine and Santa Clara. So I know something 
about your prune orchards, or at least the prune orchards you 
use to have. And I understand you are going to testify on 
behalf of the Society of Independent Gasoline Marketers and 
National Convenience Stores. You do not sell cigarettes to 
minors, is that right?
    Mr. Robinson. Absolutely not.
    The Chairman. And Mr. Daniel Greenbaum, president of the 
Health Effects Institute, Cambridge, Maryland. That is a rather 
interesting title, ``health effects.'' I have a pollen problem. 
So if you can address that in your testimony, provide some 
relief, it would be most appreciated.
    [Laughter.]
    The Chairman. And it will take some pressure off the Senate 
physician.
    [Laughter.]
    The Chairman. Mr. Don Daigle, director of Americas 
Refining, ExxonMobil Refining and Supply Company, Fairfax, 
Virginia, joined by Mr. Craig Moyer, executive director of the 
Western Independent Refiners Association, Los Angeles, 
California.
    Good morning, gentlemen.
    Today is a hearing, which is a part of a series of hearings 
which Senator Bingaman and I have agreed to. And for those of 
you who were not present yesterday, Senator Smith on the 
Commerce Committee, Senator Wyden, both of whom are on this 
committee, held a rather interesting hearing on why gasoline 
prices were so high on the west coast. I think Senator Boxer 
showed a picture of one of the stations in San Francisco with 
prices up to, what was it, $2.35, which is rather startling.
    I happened to mention on the side that if they got up to 
$3, would she support opening up ANWR. And she ducked that 
issues. But nevertheless, it was a good opportunity.
    [Laughter.]
    The Chairman. In any event, out of that hearing there was a 
good deal of finger pointing. But there was some substantive 
discussions on the reality of supply and demand. And the demand 
has increased, and the supply has shortened as a consequence of 
some of the things that hopefully you will bring about today.
    We talked about reformulating gasoline, the duplications in 
various areas of the country and the cost associated with 
transporting and refining and batching. We talked about the tax 
issues relative to various States.
    We talked about the lack of refining facilities, which I 
think to some extent came about publicly as a consequence of 
the previous administration when they called down 30 million 
barrels from SPR and found that, as we took that 30 million 
barrels and sent it to the refiners, we found we did not have 
any excess capacity. So really all we did with that was offset 
what we are importing and did not get any net new supply.
    I hope some of you will be able to amplify that, because I 
am not sure the media and the public really understand the 
severity of the issue with regard to the adequacy of our 
refining capacity in this country.
    We also touched a little bit about not in my backyard. The 
entire east coast offshore of the United States is off limits 
to OCS drilling. The entire west coast, with the exception of 
Alaska, is off limits. So the question is: Where is this magic 
going to come from?
    We are going to look at fuel specifications infrastructure 
and their impacts on the energy supply and the price. I hope we 
will get a better understanding that gasoline is no longer just 
gasoline, as a result of the State, local and Federal 
regulations. I am told there are now 34 different types of 
gasoline. I am surprised that the standard car can take them 
all.
    But nevertheless, we have this situation. And the 
legitimate question is: Is this all necessary? Is there some 
average witches brew that could be concocted that would lessen 
the amount of reformulated gasolines we have? For example, fuel 
made for consumption in Oregon is not suitable for California. 
I know in Chicago, they have to use a different fuel than they 
use in Springfield, Illinois.
    The EIA reports that one Eastern U.S. pipeline operator 
handles 38 different grades of gasoline, 7 grades of kerosene, 
16 grades of home heating and diesel fuel, and 1 grade of 
trans-mix. Maybe that is--well, we will not ask what that is. 
But in any event, I think it is startling to recognize the 
complexities that have occurred over an extended period of time 
and the rationale behind those.
    Refiners do not have the flexibility to move supplies 
around the country to respond to local or regional shortages. 
We have the issue of MTBE on one hand and then the throwing it 
out and going to Iowa for ethanol, which makes Senator Grassley 
very happy.
    Now refining capacity we have talked a little bit about. 
But the last significant refinery of any consequence, with the 
exception of one that was built in my State, which is not as 
big as the marathon refinery in Louisiana, which was built in 
1976, was the refinery that Williams Brothers has in Fairbanks, 
but it is a smaller refinery. So it is not in the same class.
    In any event, we have not built any refineries for a long 
time. Between 1990 and 1999 refining capacity actually 
increased in the United States from 15 million barrels to 16 
million barrels a day, but during the same time that 
consumption went from 17 to almost 20. As a result, in 1990, 
U.S. refineries could supply 94 percent of our needs, and in 
1999 it is about 84 percent.
    Now over the next 8 years, I am told the situation, unless 
we do something about it, is obviously going to get worse. The 
refining industry will be asked to comply with over, I gather, 
dozens of new regulatory programs that will impact both the 
cost to the consumer and the supply of fuels to the motoring 
public.
    Some of the regulatory programs directly impact 
manufactured fuels, while others require new standards for 
operation of refineries. As a consequence, refiners around the 
country, already unable to keep up with the demand for product, 
are being asked to make significant investments to supply 
seasonal product for specific markets. And the cost of this is 
added to the complexities and supply restrictions and is passed 
on to the consumer.
    Now we have not had the input from the administration yet 
on their task force report. And so we are looking forward, 
because we understand that some of the things we will be 
discussing today will be addressed by the administration and 
what they are for and what they are basically opposed to.
    I want to thank my colleague, Senator Bingaman, for the 
concern he shares in this hearing. I know there has been 
concern about the state of our fuel delivery and our refining 
system for a long time. We have watched the impacts on the 
Nation's energy supplies, as Federal laws were passed and 
implementation by administrations of both parties, in ways that 
obviously added to the burden of American taxpayers.
    But if the United States is to have an energy policy that 
gives the American people some degree of certainty, the least 
the American public should expect from its leaders. And I think 
it is time to look at the impacts of all our decisions that 
have been made on our fuel delivery system and determine where 
the priorities are. So I look forward to hearing more from our 
witnesses today.
    Senator Bingaman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Well, Mr. Chairman, thank you very much 
for scheduling the hearing. And I also believe it is very 
timely and very important. And when we scheduled it, we did not 
realize how timely it would be, at least as far as the news is 
concerned. But there are a combination of factors that I think 
have a part in creating this tight inflexible market we are in.
    [Chart.]
    Senator Bingaman. I have a few charts I wanted to just 
briefly go through here. The first of them shows the problem we 
have talked before, and that is the escalating consumption of 
petroleum by gas, by light duty passenger vehicles. Of course, 
this is led by the growth in the sports utility vehicles, which 
the EIA projects to increase over two million barrels a day 
within the next ten years. So that chart, I think, is one we 
have shown before here. And I think it reminds us of a lot of 
where the problem is.
    [Chart.]
    Senator Bingaman. A second chart relates to the number of 
different fuel specifications that need to be produced and 
distributed around the country. I think this is an instructive 
chart that just shows at least part of the problem that we have 
to try to deal with and legislation that I hope we can move 
through this committee here in the next month or so.
    [Chart.]
    Senator Bingaman. A third deals with the difficulty of 
siting new facilities, whether--I guess we do not have a chart 
on that. But we do have a chart that shows the different 
regions, called the PADDs. That is a--it is interesting that we 
still use that phrase, ``petroleum administration for defense 
districts.'' The map identifies the different PADDs that we 
have in the country.
    [Chart.]
    Senator Bingaman. The other chart shows how reliant some 
regions are on other regions for their refined products. I 
think this chart here makes the case pretty dramatically that 
the Gulf Coast region is providing by far the largest portion 
of our refining product. And that, of course, creates the need 
to transport those fuels hundreds of miles. That increases the 
opportunity for something to go wrong somewhere in the system.
    If we cannot produce enough gasoline, then we need to 
obviously rely on greater imports. It is my understanding that, 
given the number of different fuel formulations in this 
country, it is very difficult for us to import gasoline from 
anyplace but Europe.
    Another complication, which you mentioned, Mr. Chairman, is 
the concern about MTBE as an oxygenate, as required for 
reformulated gasoline. California has banned MTBE beginning in 
2003. Other States are seeking to do the same because of 
concerns about groundwater contamination. I appreciate Dr. 
Greenbaum being here to give us his views as to the science 
related to that issue.
    In the energy bill that I introduced with many of the 
members as cosponsors here, we did propose streamlining the 
number of fuel specifications around the country. And I hope we 
can hear from the witnesses as to their views on that proposal 
and whether it is appropriate or needs to be changed.
    We also proposed increasing fuel efficiency for passenger 
vehicles. I have serious concerns that without action to deal 
with that demand growth, that soon we are going to see even 
higher and more volatile gasoline prices. The public does 
expect us to take some action to prevent that from happening. I 
am sure the industry would also like to see that prevented.
    And I look forward to hearing the testimony from the 
witnesses on these very important issues.
    The Chairman. Thank you, Senator Bingaman.
    I think Senator Dorgan--were you next? I am sorry. Senator 
Thomas.

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

    Senator Thomas. Thank you, Mr. Chairman. I appreciate the 
hearing. I am going to have to leave. We are having one on the 
assistant secretary in Foreign Relations. So I have a statement 
that I will submit.
    But I just, I guess, wanted to say that we have talked a 
lot about the problems. We have spent a lot of time trying to 
identify what the problems are, and I think we know those 
pretty well. I think it is time we found some solutions. And we 
are going to have to do it in a short time. We are going to be 
really pressed this summer; we already are.
    We see the gas prices going up. It has an impact, not only 
on tourism and all those things. But I just had some 
contractors in my office. You can imagine the impact on 
contractors.
    As a matter of fact, the State is beginning to change their 
contracts a little to reflect the prices. There is an electric 
shortage. We know that that is going to happen. What are we 
going to do in the short time? Those are hard questions. And I 
think most of us have a pretty good grasp on what we want to do 
over time, more production, more drilling, more movement, 
transmission grid, all those things. That is not going to 
happen right away.
    So when people start banging on our doors more than they 
are now and on yours, what are we going to do in the short 
time? Heating fuel, very high. We have a lot of impacts. And, 
of course, as I said, the impact on the economy may be more 
severe than interest rates have been.
    So I think we really--and I hope that you all will today. 
What are your solutions? What are we going to do? Let us not 
talk all about the problem, but let us start talking about some 
of the solutions. Talk about the high prices, what is the high 
profit that is being reported on the big companies? How does 
that relate? What can we do on that?
    So that is pretty tough stuff. I understand. And I am a big 
supporter of energy and energy production. But I can tell you, 
we have talked enough about the problems. We need to spend a 
little time on the solutions. So as someone said, my reaction 
is, a little less talk and a little more action.
    Thank you, sir.
    The Chairman. Thank you very much, Senator Thomas.
    Senator Dorgan.

        STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR 
                       FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much.
    I think we are all for less talk and more action. The 
question is: What action? And I must say that I think our 
energy policy, to the extent we have one, is a colossal mess in 
this country. I think all of us understand that.
    This hearing is on the issue of fuel specifications and 
infrastructure constraints and so on. You know, it is 
interesting. We come here now short of breath about this 
problem, and we should be. But, you know, we were pretty 
apathetic when oil went to $10 a barrel and people stopped 
looking for oil and natural gas.
    You know, we probably ought to understand in the future, 
when oil goes to $10 a barrel, well, it might feel good in the 
short run, but is it going to mean you are going to dry up the 
funds and the incentive to search for oil and natural gas?
    We sat around and yawned while people started buying gas 
hogs that looked like armored cars in this country. And, you 
know, the fact is that has a profound impact. People have a 
right to do that, but that has a profound impact on 
consumption.
    Mr. Bingaman put up the transportation chart up there, or 
the usage chart, that showed transportation on the top line 
growing rather substantially. It has a significant impact. And 
we have largely sat on our hands in this country and in this 
Congress while the largest oil companies in the world decided 
that they wanted to fall in love and get merged and get 
together and pervert the marketplace. And if anybody does not 
think that the larger and larger enterprises are not perverting 
the marketplace, I say just take a look behind the headlines 
and see what is happening.
    On a related energy issue, I might note, yesterday I 
received some information about the California situation. 
Admittedly this is electricity, but it relates back to natural 
gas. Californians paid $7 billion for power in 1999, $28 
billion in the year 2000, and it is estimated to run as high as 
$70 billion in 2001. Let me say that again. In 2 years $7 
billion to $70 billion. Somewhere behind these figures is 
something called grand theft. And as we evaluate what kind of a 
policy and strategy we should develop, we ought to understand 
where that comes from as well.
    But we need to do a lot of things. We need to do a lot of 
things right in order to address these issues. The absolute 
number of refineries in this country has declined. We have 
expanded capacity to existing refineries and facilities to help 
them meet growing demand. And one of the questions is: What 
kind of expansion can be expected with existing refineries?
    The import of refined products has been relatively flat. We 
have the flexibility to import more refined product or not. The 
array of fuel specifications, as the chairman and the ranking 
member have described, has reduced the flexibility in these 
markets. I think that is a serious problem and one that we have 
to address.
    Are there alternative fuels that we could use as well to 
address some of these issues? There are a whole series of 
things that we need to deal with with respect to these energy 
issues. And I think someone mentioned the issue of price 
gouging and profits and so on. We ought to take a look at that 
as well in a significant way.
    Mr. Chairman, you and Senator Bingaman have done a great 
job in trying to put together a series of hearings on all of 
these issues. And I appreciate it. I am on the appropriations 
subcommittee that is holding a hearing at 10 o'clock. And I am 
the ranking member and have to be there. I regret I cannot be 
at this entire hearing, but I want to thank you for these 
hearings and am happy to play a role in them.
    The Chairman. Thank you, Senator Dorgan.
    Senator Craig.

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

    Senator Craig. Well, Mr. Chairman, I, too, join with you in 
obviously having tremendous interest about this hearing. I 
thought it was fascinating yesterday morning. I was listening 
to Matt Lauer interview our new President. And the question of 
$3 gas in California this summer came up, recognizing that it 
is already over $2 for premium. And the immediate response of 
Matt Lauer was open up the Strategic Petroleum Reserve. And the 
President tried to suggest to him that that was not the 
problem, that it was much more involved, much more in detail.
    And I think we are going to hear from some of our witnesses 
today that that is absolutely the case. America will want a 
very quick, short remedy to a problem that has been building 
now, in part by some of our own doing, for a good long while. 
And the question is: Can we move quickly to get out of what we 
have seen as a kind of balkanization of the gas markets and do 
a variety of things?
    I am pleased that Thomas Robinson is back with us. I am 
reading his testimony. I see that in 1996 he sat before this 
very committee and suggested exactly what would happen, if we 
did not respond, and it has happened. And somehow we have not 
been willing to recognize the impact of our decisions or our 
failure to make decisions on the impacts of those.
    The ITCs looked at price gouging in California and would 
suggest that that is not the case. While those tremendous run-
ups in energy costs were going on out in California, the 
Federal Energy Regulatory Commission under the last 
administration failed to respond. We have a new Chairman. He is 
responding. And we are going to have to determine whether we 
can give them the just and reasonable language within the 
wholesale deregulation law to move in phase three and possibly 
phase two without deterring investment into a market that 
dramatically needs investment and new supplies.
    There is a great deal out there to be dealt with. But in 
the short run, turning on the spigot of the SPR is not the 
answer. Recognizing that we have had a deteriorating 
infrastructure and a rapidly increasing demand, or at least a 
modified infrastructure, is a part of what we ought to be 
about. And I think that is what we are going to hear from our 
witnesses today.
    Thank you.
    The Chairman. Thank you very much, Senator Craig.
    Senator Hagel.
    Senator Hagel. No statement.
    The Chairman. Obviously you are anxious to hear the 
witnesses.
    Senator Hagel. Let us get at it.
    The Chairman. All right. We will move over Senator Bayh, 
who has left us briefly. So we are down to Senator Schumer, 
followed by Senator Landrieu. And we would appreciate brevity, 
if it is possible.
    Senator Landrieu. Down to us?
    Senator Schumer. We do not think it was down to us.
    Senator Landrieu. It is just including us.
    Senator Schumer. It is over to us.
    The Chairman. To the left of me.
    [Laughter.]
    Senator Schumer. Anyway, thank you, Mr. Chairman. I 
appreciate it. I will be brief.
    The Chairman. Good.

      STATEMENT OF HON. CHARLES E. SCHUMER, U.S. SENATOR 
                         FROM NEW YORK

    Senator Schumer. This is a very important hearing. And it 
is important for a whole lot of reasons. It is important in the 
short term because, for the second summer in a row, Americans 
are going to face the prospect of paying record high prices for 
gasoline at the pump.
    We have called a whole bunch of experts. Very few think it 
is going to be less than $2 a gallon for high test. That is 20 
cents higher than last year. And then each winter home heating 
oil is higher than it was the year before, as well. So these 
are very, very serious, serious problem.
    And, frankly, Washington has been deadlocked for the last 
several years on the energy crisis. Republicans talk about 
drilling and increasing supply. Democrats talk about 
conservation. We talk past each other, and nothing much is 
done. And it is about time that we came together. Each of us is 
going to have to give some. Democrats are going to have to be 
willing to increase supplies in ways that they were not before, 
environmentally friendly, if you will, but still more supply.
    Republicans are going to have to be talking more about 
conservation than before. Because in my judgment we are on the 
edge of a crisis. We are not there yet, but if we twiddle our 
thumbs a little longer, it will be upon us. And then we will 
have to do all sorts of things that nobody wants to do.
    So I just hope that this hearing, which talks about our 
gasoline markets, is not the end-all and be-all, important as 
it is. We have a serious problem that affects every faction and 
every part of the energy equation, whether it be oil products, 
natural gas, or electricity. And until we come up with some 
kind of policy that both deals with supply and demand, we are 
not going to succeed.
    And I have a feeling each side would be willing to move a 
little in the other direction, if they thought the other side 
was moving a little in their direction. And that will be the 
job of this committee, in my judgment, under your leadership, 
Mr. Chairman, over the next several years.
    Thank you.
    The Chairman. Thank you very much, Senator.
    Senator Landrieu, good morning.

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

    Senator Landrieu. Good morning. And thank you, Mr. Chairman 
and our ranking member, for calling this important hearing. And 
I would like unanimous consent to submit my written remarks for 
the record.
    The Chairman. Without objection.
    Senator Landrieu. And just to add a brief comment, to agree 
actually, with Senator Schumer, a new member of our committee, 
but one that is well-versed in this area, that we are going to 
have to really compromise and be more vigorous in our 
compromise, both sides moving to the middle, so that we can 
increase production, increase exploration, increase refining 
capacity, and transporting the fuel and the energy from one 
part of the country to the next, as well as on the conservation 
side.
    But I would, as I do regularly, just note what a 
contribution that the gulf coast is making overall, and that we 
need help and support and reinvestment in the gulf coast region 
of this Nation, so that we can continue to produce oil, to 
produce gas, minimize the environmental footprint, do it in a 
way that conserves, also, but how the contribution in this 
chart, which will be part of the hearing this morning, shows 
how much moves from the gulf coast area, primarily from 
Louisiana and Texas, to supply the east coast and to the 
Midwest.
    So I thank the panel for being here and just would hope 
that we would continue to be sensitive how important it is to 
reinvest some of these tax dollars from the oil and gas 
industry back to the gulf coast area to help us with our 
environmental challenges that are presented, as well as 
environmental infrastructure necessary to supply this Nation in 
this way.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Landrieu follows:]
       Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator 
                             From Louisiana
    Today's hearing on the present and future state of our country's 
motor fuel market provides an excellent forum for us to focus some much 
needed attention on the crucial role infrastructure plays and will 
continue to play in energy policy. Without pipelines and refineries we 
are simply unable to distribute necessary energy to consumers.
    Most, if not all, of us are anticipating high and volatile gas 
prices at pumps across the country this summer. Not only does the 
evidence before us support this less than promising outlook for the 
short term but it also extends to the long term. The Energy Information 
Association expects demand for transportation fuel in the United States 
to increase by almost 1.5% a year through 2020. To keep pace with this 
growth our refineries will have to increase their production. However, 
while the number of refineries in the U.S. has fallen sharply from 320 
in 1980 to 150 in 2001, the ones that remain are operating at almost 
full capacity.
    This balance between supply and demand is fragile at best. The 
probability of even the slightest problem causing supply shortages and 
a sharp increase in price is too real to ignore any longer. It is 
unacceptable for us to expect this system to continue to operate at a 
level where there is no room for error. We are placing too much strain 
on too few refineries. Without increased refinery capacity through new 
construction or expansion of existing capacity, problems seem 
unavoidable. In fact, in a recent report, the Federal Trade Commission 
predicted price spikes for consumers unless refining capacity is 
increased substantially. I am hopeful that today's hearing will stress 
this point but also provide other options.
    I also look forward to examining the other equally important 
component of the process, distribution. Three of the country's top ten 
gasoline consuming states are in the Midwest. The Midwest imports 25% 
of its total demand from the Gulf Coast. While the Gulf Coast refining 
centers handle half of the total barrels processed in the U.S. today, 
there are only two pipeline systems in place to move the product from 
the South to the Midwest. This is a tremendous amount of pressure on 
Gulf Coast refining to meet demand in the Midwest. What happens if one 
or both of these systems experiences problems? We must take the 
appropriate steps to ensure that adequate infrastructure is in place in 
order to guarantee the delivery of fuels to wherever they are needed. 
Siting new pipelines can and should be efficient yet provide whatever 
information is necessary so that proper consideration is given to any 
potential environmental implications as well as the interests of the 
community.

    The Chairman. Thank you very much.
    Before we bring on our witnesses, I would encourage people 
who are interested in energy conservation go down on The Mall 
at Seventh and Madison. There is a home built there, 3,000 
square feet, by an outfit called Solar Strategies. And the 
interesting part of this home is it is constructed in such a 
way as to produce the energy is consumes.
    Now that is done through solar panels and storage and 
batteries and so forth, but it is a relatively interesting 
advancement in technology. And it also has a capability, 
through the switch gear, that at a time when the home is not 
consuming energy through the utilization of the various washer, 
dryer and so forth appliances, it has a switch gear capability 
to kick back, if you will, onto the power source that comes 
into the house, so it can be a net contributor to energy. It is 
rather interesting. It is going to be down there for the 
balance of this week. It is on the mall at Seventh and Madison.
    I was caught by Senator Bingaman's reference to the larger 
vehicles, the Suburbans and so forth. And it reminds me of 
something that I picked up along the way. It says to the effect 
that sometimes public policy has to reach a point of high 
comedy or satire before this Nation can regain any sense of 
respective to make intelligent decisions.
    The national energy issue has reached that point, perhaps, 
because last week the comedian Dennis Miller commented that 
``every other vehicle in this country is a Lincoln Navigator. 
And on that Lincoln Navigator's bumper is an Earth First 
sticker.''
    [Laughter.]
    The Chairman. So I do not know whether you can blame our 
new President George W. Bush for not being able to let you have 
it both ways.
    With that profound observation, I would encourage our 
witnesses to come up with a solution.
    Please, Mr. Heminger.

 STATEMENT OF GARY HEMINGER, EXECUTIVE VICE PRESIDENT, SUPPLY, 
    TRANSPORTATION AND MARKETING, MARATHON ASHLAND PETROLEUM

    Mr. Heminger. Good morning, Mr. Chairman and members of the 
committee.
    My name is Gary Heminger. I am the executive vice president 
of Supply, Transportation and Marketing for Marathon Ashland 
Petroleum, which we refer to as MAP. MAP was formed in 1998 by 
combining the refining, marketing and transportation assets of 
Marathon Oil Company and Ashland, Inc., to make the Nation's 
fifth largest refiner.
    We sell our products at all marketing levels through our 
Marathon and Speedway stores, as well as to other retailers and 
spot markets mainly in the Midwest. We are also the Nation's 
largest blender of ethanol in motor fuel.
    First, I would like to thank the committee for scheduling 
today's hearing. Often we speak of energy issues. There is a 
tendency to think only in terms of the upstream part of the 
petroleum business. I am very pleased to have this opportunity 
to present an overview of key aspects of the so-called 
downstream part of our business.
    We believe that these factors must be taken into account in 
any discussion of national energy issues. We believe that we 
can best serve the Nation's need for fuel delivery with minimal 
interruption or inconvenience to the consumer by improving and 
expanding our existing supply and distribution network. This 
system is called upon to work flawlessly each day and every 
day, despite ever changing market conditions.
    The key point I would like to make today is that current 
U.S. supply and demand is at a delicate balance. And any type 
of disruption can cause local supply shortages and resulting 
price spikes. EPA's recent tier two gasoline and highway diesel 
regulations are a perfect example of rules that we believe will 
increase the likelihood and duration of these supply 
disruptions and move the entire U.S. gasoline and diesel 
markets into the mode that California has experienced during 
the last four years, one of volatility and high prices.
    What the entire refining marketing and transportation 
industry needs instead is a regulatory approach that will lead 
to investment certainty, a fair and responsive permitting 
system, and market sensitivity on the part of government 
agencies.
    Every day more than 60 million barrels of crude oil are 
produced and shipped around the world with approximately 8 
million barrels landing in the United States, which depends on 
imports for nearly 60 percent of crude oil needs. At 18 miles 
an hour, the trip from the Persian Gulf takes 45 days. That is 
only the first step of a very long journey.
    Pipelines transport crude oil to refineries, refineries 
manufacture gasoline, diesel and other products, and the liquid 
refined products then move to market over more than 70,000 
miles of pipeline. All in all, it takes between 1\1/2\ and 2 
months of detailed planning and adjustments to put the end 
product where it needs to be when the consumers pull into our 
service stations to fill their tanks.
    Because today's available crude is high in sulfur and heavy 
in gravity, the ever-increasing requirements for cleaner fuels 
force us to make very large capital investments just to stay in 
business. It is important to understand that the Midwest, where 
my company is centered, is chronically short of product. This 
area imports as much as 1 million barrels a day or 25 percent 
of its total demand from the gulf coast.
    Twenty-five Midwest refineries have been idled during the 
last 20 years, the most recent closing, Premcor's Blue Island 
refinery in Illinois.
    The Chairman. Would you tell us why?
    Mr. Heminger. Most of them were smaller refineries that 
cannot hurdle the investment, the new EPA investment, for new 
fuels and lower sulfur diesel, lower sulfur gasoline.
    Senator Bingaman. Could I also ask a question there? Has 
the actual output of refiners in your region decreased during 
that same time, or has the output increased?
    Mr. Heminger. Other refineries, the larger refineries, some 
of those have increased.
    Senator Bingaman. Overall has it increased or decreased?
    Mr. Heminger. Overall it would have decreased marginally.
    Senator Bingaman. In your region.
    Mr. Heminger. In what I call PAD 2.
    Senator Bingaman. Right. Thank you.
    Mr. Heminger. Getting product from the gulf coast to needy 
Midwest markets in the spring and summer is an obvious 
priority. Yet there are only two major pipeline systems 
handling this south to north traffic today. If one of these 
lines is shut down during this critical time of the year for 
damage repair, as was the case with Explorer pipeline last 
year, the disruption is likely to be critical.
    Even after the disruption, when the line is again fully 
operational, the replacement volumes will only move to market 
at about four miles per hour. And there is no pipeline capacity 
or excess refining capacity to make up for that last volume.
    Ethanol shipments by pipeline is not possible because of 
contamination problems resulting from alcohol's affinity for 
bonding with water. Ethanol, therefore, is blended mainly in 
areas close to corn stills, most of which are in the Midwest. 
Where RFG areas are far from the corn belt, ethanol 
transportation costs increased significantly.
    Within the pipeline industry, products move in batches. 
That is, we operate somewhat like freight train. A batch of 
unleaded gasoline may be followed by diesel and then maybe jet 
fuel and back to gasoline. Because some products may contained 
elevated sulfur levels, the ultra-low sulfur fuel requirements 
will likely be difficult to meet due to product contamination.
    Our company is planning two important projects. One is the 
construction of a products pipeline from our Catlettsburg, 
Kentucky refinery into the Columbus, Ohio market. And the other 
is the conversion of a natural gas pipeline to liquid products 
use. This project, dubbed Centennial Pipeline, will add another 
vital link between the Midwest and gulf coast refining centers.
    Major investment will be required to upgrade and enhance 
our Nation's supply and distribution system. We want to provide 
clean, cost-effective fuels for our customers. And we are 
willing to do our part. But in order to make the necessary 
investment, we need an improved regulatory climate. We need an 
end to unreasonable permitting delays and final rules that are 
unambiguous. Regulations must also provide adequate lead time 
and an appropriate phase-in period, as well as sufficient time 
to recover the investments required.
    Finally, the Government should refrain from interference in 
the marketplace. Our industry has traditionally opposed 
mandates, such as the requirement for oxygenates in RFG, 
because such requirements only add inefficiencies to an already 
complex system designed to supply America's fuels needs.
    I appreciate the opportunity to appear before you today, 
and I look forward to answering any further questions. Thank 
you.
    [The prepared statement of Mr. Heminger follows:]
Prepared Statement of Gary Heminger, Executive Vice President, Supply, 
        Transportation and Marketing, Marathon Ashland Petroleum
    Good morning. My name is Gary Heminger. I am the Executive Vice 
President of Supply, Transportation & Marketing for Marathon Ashland 
Petroleum LLC.
MAP Statistics
    My company, which we refer to as MAP, was formed in 1998 by the 
combination of the refining, marketing and transportation assets of 
Marathon Oil Company and Ashland Inc. Marathon Ashland Petroleum is the 
nation's fifth largest refiner. We operate seven petroleum refineries 
in the U.S. with a combined throughput capacity of 935,000 barrels of 
oil a day. In addition we operate 93 marketing terminals in the Midwest 
and Southeast U.S. which distribute gasoline, diesel and asphalt, and 
we operate over 5,400 retail outlets in 20 states. We are also the 
nation's largest blender of ethanol in motor fuel.
The Need to Improve Transportation Systems
    I appreciate the opportunity to discuss motor fuel market 
conditions and logistical challenges with you. It is our view that we 
can best serve the nation's need for fuel delivery--with minimal 
interruption or inconvenience to the consumer--by improving and 
expanding our existing supply and distribution network. The supply and 
distribution system is called upon to work flawlessly, each day, every 
day, though the context of market conditions changes constantly. The 
key point that you should take away from my testimony is that current 
U.S. supply/demand is at a delicate balance, and any type of major 
disruption can cause local supply shortages with their resultant price 
spikes.
    EPA's recent Tier 2 gasoline and highway diesel regulations, plus 
their non-road diesel rule under development, will increase the 
likelihood and duration of these supply disruptions and move the entire 
U.S. gasoline and diesel markets into the mode that California has 
experienced during the last four years--one of volatility and high 
prices.
    What MAP and the whole refining, marketing and transportation 
industry need to minimize these potential disruptions is: Regulatory 
Certainty, a Fair and Responsive Permitting System, and Market 
Sensitivity on the part of government agencies. I will elaborate on 
these later in my testimony.
Major Tanker Movements Around the World
    Every day more than 60 million barrels of crude oil are produced 
and shipped around the world, with approximately eight million barrels 
landing in the U.S., which depends on imports for nearly 60 percent of 
its crude oil needs. At 18 miles an hour, the trip from the Persian 
Gulf takes 45 days.
Value Chain
    Pipelines transport crude oil to refineries, a process that takes 
ten days on average. Refineries then manufacture gasoline, diesel, 
asphalt, petrochemicals and other products.
Refined Products
    The refining process takes roughly five days on average. During 
this time, for example, federally mandated reformulated gasoline (RFG) 
goes through up to ten processing steps at temperatures and pressures 
as high as 1000 degrees and 2000 pounds per square inch.
U.S. Products Pipeline & Barge System
    The liquid refined products, such as gasoline and diesel, move to 
market over more than 70,000 miles of pipeline, accounting for 
approximately two trillion barrel miles of product movement at roughly 
four miles per hour . . . that's right, four miles per hour. Products 
also move along the nation's inland waterways. This step alone, 
including the hauling by transport truck to service stations, adds 10 
to 15 days to the entire process.
Time From Oil Well to Gas Pump
    This means that about 1\1/2\ to 2\1/2\ months of detailed planning 
and adjustments are required so that our customers have the fuel to 
fill their vehicles when they pull into our service stations.
    As a major petroleum refiner, Marathon Ashland refines nearly one 
million barrels of crude oil per day, including a significant portion 
from the national oil companies of Saudi Arabia, Kuwait and Mexico. 
With the available crude being higher in sulfur and heavier in gravity, 
the ever-increasing requirements for cleaner and cleaner fuels force 
refiners to make very large capital investments just to stay in 
business.
    We buy additional intermediate feedstocks so that our refined 
product yield increases to about 1 million barrels per day. We also buy 
products from other refiners so that our total products-for-sale equals 
1.25 million barrels per day, or 19 billion gallons annually. We sell 
our products at all marketing levels; through our Marathon brand and 
Speedway brand stores, as well as to other retailers and spot markets.
Midwest Material Balance
    Please note that the Midwest--which includes three of the nation's 
top ten gasoline consuming states--is chronically short of product. The 
Midwest imports as much as 1 million barrels a day or 25 percent of its 
total demand from the Gulf Coast. This volume will increase as fuel 
needs in the Midwest return to historic norms: 2% growth or 280,000 new 
barrels per day.
Midwest Refineries Idled
    Twenty-five Midwest refineries have been idled during the last 20 
years--the most recent closing--Premcor's Blue Island refinery in 
Illinois--came in February of this year. These smaller plants could not 
perform in an environment of increasingly costly regulation. Gulf Coast 
refineries fared better. America's Gulf Coast refining center now 
handles one out of two barrels processed in the U.S., thanks to the 
area's economies of scale, lower labor costs and access to crude oil.
Teppco, Explorer Proration Days
    Getting product from the Gulf Coast to needy Midwest markets in the 
spring and summer is an obvious priority. Yet there are only two major 
pipeline systems handling this south to north traffic today. They are 
full during the nine months of the year that surround the peak summer 
gasoline demand, and routinely turn down nominations for additional 
shipments. If one of these lines is shutdown during this critical time 
of the year for damage repair, as was the case with Explorer last year, 
the disruption is likely to be critical. Even after the disruption, 
when the line is again fully operational, the replacement volumes will 
only move to market at about four miles per hour, and there is no 
pipeline capacity or excess refining capacity to make up for the lost 
volume.
The Inland Waterway
    Movement on the inland waterway is similarly constrained. The 
waterway system includes 25,000 miles of navigable rivers and canals, 
but only 12,000 miles are commercially and actively maintained. Despite 
technological innovations, system utilization is restricted due to 
weather, outmoded locks, dams, low bridges, and waterway deposits. Over 
50 percent of the locks and dams created by the Corps of Engineers are 
over 50 years old. Many built in the 20's and 30's are at the end of 
their design lives. In fact, 8 of 20 locks and dams on the Ohio River 
are scheduled for repair.
    Because Corps of Engineers funding for lock and dam maintenance and 
dredging operations has been cut for 2001, it is doubtful the Ohio 
River maintenance program can be completed in a timely fashion. We 
believe it is imperative to ``catch up'' and increase investment in 
waterway infrastructure because this mode of transportation moves 
commodities valued at $33 billion to the Midwest's Ohio River basin, 
$3.3 billion in petroleum alone.
No Ethanol Movements With Pipeline Sign
    Ethanol movements by barge are limited by waterway, weather, and 
infrastructure problems. In addition to physical infrastructure 
problems, chemistry can frustrate our operations. Ethanol shipment by 
pipeline is impossible because of contamination problems resulting from 
alcohol's affinity for bonding with water. Water is present in all 
pipelines. Without low cost pipeline movement, ethanol proves expensive 
to transport, and it is blended mainly in areas close to corn stills, a 
majority of which are in the Midwest. Where reformulated gasoline 
markets are far from the corn belt, ethanol trucking costs increase 
significantly.
Cumulative Regulatory Impacts on Refineries, 2000-2008
    Regulatory restrictions ranging from oxygenate requirements in RFG 
to urban air toxics requirements have imposed additional burdens on our 
business in terms of cost and infrastructure. Of immediate concern are 
EPA's requirements for dramatically lowering the sulfur content in 
gasoline--30 ppm by 2006 for highway diesel--15 ppm in the same 
timeframe, while off-highway diesel regulations are still under 
development. To date, only the refinery process has been studied. Just 
as important is the transportation process. Within the pipeline 
industry, products move in batches; that is, we operate somewhat like a 
freight train. A batch of unleaded gasoline is followed by diesel fuel 
and then maybe jet fuel and back to gasoline. Because some products may 
contain elevated sulfur levels, there is a high probability the ultra 
low-sulfur fuel requirements will be difficult to meet, due to product 
contamination in pipeline or tankage.
    We are in the process of evaluating what additional investments 
will be needed for our pipeline and terminal systems to avoid 
contaminating these ultra clean fuels as they move through a 
distribution system not designed to maintain this low level of sulfur.
High Consequence Area Testing
    At the same time that we are dealing with pipeline investment 
related to new fuels, we are required to establish new and more 
frequent testing programs for environmental risks associated with 
pipelines moving through what the Office of Pipeline Safety calls High 
Consequence Areas. What worries some of us in the industry is whether 
there are enough resources available to test, interpret, and analyze 
the data generated by the line tests. By implementing a date certain 
timetable, rather than phasing in the testing, regulators have assured 
a ``gold rush'' for scarce and expensive testing equipment. Costs will 
skyrocket and deadlines will be missed.
Cardinal and Centennial Projects
    Our company is planning two projects that will address some of the 
problems I have reviewed with you this morning. One is a products 
pipeline from our large Catlettsburg Kentucky Refinery into the 
Columbus, Ohio area--the fastest growing fuels market in the state. The 
second is the conversion of a natural gas pipeline to liquid products 
use, a project--dubbed Centennial Pipeline--that will add another vital 
link between the Midwest and the Gulf Coast refining centers. We are 
grateful for government assistance on both projects--we particularly 
appreciate being commended for site surveys and environmental care in 
the case of Cardinal and the rapid approval for abandonment that is 
allowing us to move forward with the conversion of the Centennial 
Pipeline to refined products use.
How Can the Government Help?
    As I stated earlier, the current supply/demand equation in the U.S. 
is balanced on a knife's-edge. Any type of disruption can push this 
delicate balance off center, and price spikes may result. What can the 
government do to minimize these problems and help us to continue to 
meet the needs of our customers?
    Major investment will be required to upgrade and enhance our 
nation's supply and distribution system. Companies like Marathon 
Ashland want to provide clean, cost effective fuels and are willing to 
do our part, but in order to make the hundreds of millions of dollars 
of investment, we need:
          1. Regulatory Certainty
          2. Fair and Responsive Permitting
          3. Market Sensitivity
    By regulatory certainty we mean that rules should be unambiguous 
and not subject to revision simply to serve a new regulatory agenda. 
For example, our Cardinal Pipeline project was stymied while parties 
argued over whether the term ``petroleum'' included gasoline. A similar 
ambiguity significantly affects expenditures involving control of 
refinery fuel gas, a term that customarily has been used to indicate 
natural gas burned for fuel, but which is now being interpreted to mean 
vapors combusted for any purpose on refinery grounds.
    By fair and responsive permitting, we mean there must be an end to 
unreasonable delays. For example, we currently face a potential air 
quality permit application period of one and a half years to install a 
new gasoline loading rack at one of our refineries. This type of delay 
is clearly unreasonable.
    By market sensitivity we mean new regulations must provide adequate 
lead time and an appropriate phase-in period, as well as sufficient 
time to recover the investments required. Market sensitivity would also 
encourage examining regulatory effects on an entire system--refining 
and distribution--rather than only one portion of one process 
component, as was the case in regulating highway diesel formulations.
    Finally, market sensitivity means discouraging any interventions, 
such as fuel subsidies, that frustrate free market dynamics. Mandates 
and subsidies only add inefficiencies to the process of supplying 
America's fuel. Renewable and alternative fuels need to be economically 
competitive. It is appropriate for the federal government to support 
research into these fuels, but it is inappropriate for the government 
to intervene in the marketplace. This intervention places government in 
the position of picking market winners and losers. Not only does this 
repress industry investment in the most efficient technologies, but 
history has shown that governments do not do a particularly good job in 
picking the best technologies because politics rather than technology 
tend to drive the process.
    The current MTBE situation is a prime example of this problem. MTBE 
is added to RFG because of a politically driven RFG oxygen mandate. Now 
with public concern over MTBE in groundwater, the U.S. Congress appears 
to be unable to provide a simple, direct resolution of the problem. 
Every time a bill proposing a solution to the MTBE issue emerges, a 
myriad of alternative fuels, renewable fuels, and new fuel 
specification requirements get added. These provisions do not resolve 
the MTBE situation, they compound the original problem.
    I appreciate the opportunity to appear before this committee and I 
look forward to answering any questions the committee may have either 
now or at a later date.

    The Chairman. Thank you very much, Mr. Heminger.
    Mr. Robinson, please proceed.
    We have a time light on here. And you notice Mr. Heminger 
stayed within the limits. And we would encourage the rest of 
you to do the same thing.
    Mr. Robinson. I will try to be quick.

   STATEMENT OF THOMAS L. ROBINSON, CHIEF EXECUTIVE OFFICER, 
                    ROBINSON OIL CORPORATION

    Mr. Robinson. Good morning, Mr. Chairman and members of the 
committee. Mr. Chairman, I was not a Bell, but I am a graduate 
of Santa Clara.
    My name is Tom Robinson. I am CEO of Robinson Oil of San 
Jose, California. Our company owns and operates 28 Rotten 
Robbie retail gasoline outlets located in the San Francisco Bay 
area of California.
    I appear before this committee today as a representative of 
the National Association of Convenience Stores, NACS, and the 
Society of Independent Gasoline Marketers of America, SIGMA. 
Collectively NACS and SIGMA members sell more than 65 percent 
of the gasoline and diesel fuel purchased by American consumers 
each year. The companies I represent today are different from 
the other witnesses. For all practical purposes, we are a 
surrogate for the Nation's gasoline and diesel fuel consumers.
    My company is not involved in the exploration or production 
of oil, nor does it refine oil. Instead, we are an independent 
marketer. If independent marketers of motor fuels, like my 
company, are unable to secure adequate supply, then we cease to 
be a competent force in the marketplace. And if independent 
marketers cease to be an effective, competitive force in the 
marketplace, then consumers lose as retail gasoline and diesel 
fuel prices rise to unnecessary high levels in response to the 
supply shortage.
    NACS and SIGMA have two primary messages for this committee 
today. First, we must collectively and aggressively address the 
motor fuels supply problems that are facing this Nation. 
Otherwise the fuel price spikes we have witnessed for the past 
decade in California and for the past 2 years in other parts of 
the Nation will become worse and more frequent. Our failure to 
act has, is, and increasingly will cost consumers more at the 
pump.
    Second, the debate over the future of the Nation's energy 
policy need not be confrontational. Our Nation can have both a 
clean environment and affordable, plentiful supplies of 
gasoline and diesel fuel.
    However, in order to achieve these twin goals, all sides of 
the current debate, industry, government, consumers and 
environmentalists, must approach this debate in the spirit of 
cooperation, compromise, but not confrontation. This includes a 
reasonable attitude and an understanding of the tradeoffs.
    These are not new points for the associations I represent 
or for me. In fact, I have had the opportunity to present these 
points to Congress in the past. Five years ago, I was invited 
to appear before this committee in the wake of the gasoline 
price increases in the spring of 1996. At that time, I stated, 
``The Federal and State governments regulate the gasoline 
refining and marketing industry with little or no thought given 
to costs, distribution difficulties, or market efficiencies. 
Congress must acknowledge that future EPA and State actions, if 
the present course is followed, will lead to further market 
disruptions and higher gasoline prices at the pump.''
    My prediction in 1996 was pretty accurate. It is my 
personal hope that the renewed attention to the need of a 
national energy policy will produce the results NACS and SIGMA 
have been calling for for years. The challenge facing this 
committee and your colleagues in Congress today is 
straightforward.
    We must preserve current and future improvements in air 
quality while at the same time maintaining and expanding 
supplies of motor fuels. Otherwise our Nation's consumer will 
pay an exorbitant price when supply shortages occur and retail 
prices at the pump spike, as they have done repeatedly over the 
past few years. As a Californian, I have become only too 
familiar with this routine.
    It should not surprise policy makers that after tens of 
billions of dollars in environmental compliance costs borne by 
refiners and marketers, after the complete fragmentation of the 
motor fuels distribution system, and after the politically 
motivated diverse gasoline formulations adopted by various 
States that there is a price to pay, a price that ultimately 
must be paid by consumers of gasoline and diesel fuel.
    As long as the motor fuels refining and distribution 
systems works perfectly, supply and demand stay roughly in 
balance and retail prices remain relatively stable. However, if 
a pipeline or refinery goes down, overseas crude oil production 
is reduced, the weather disrupts smooth product deliveries, or 
a new regulatory curve ball is thrown at the motor fuels 
refining and marketing industries, we do not have the 
flexibility to react and counterbalance these forces.
    The public policy solution to the current motor fuels 
supply crisis will not be simple, but it must be addressed. 
NACS and SIGMA submit that the solution is not a rollback of 
environmental protections. That proposal is a non-starter and 
should be discarded. Alternatively, NACS and SIGMA encourage 
Congress to consider restoring fungibility to the Nation's 
distribution system and an effective plan to assist our 
Nation's domestic refining industry to meet the challenges 
posed by ever more stringent environmental mandates. This will 
increase gasoline and diesel fuel supplies and keep retail 
prices down.
    NACS and SIGMA do not have a specific legislative proposal 
to put forward at this time. Instead we offer the following 
principles, which we are convinced must be part of any 
legislative initiative. One, greater fungibility in motor fuels 
and a stop to the balkanization of our Nation's gasoline and 
diesel fuel markets. I cannot overemphasize the importance of 
this point.
    Two, fuel requirements that recognize the limitations and 
the strengths of the motor fuel distribution system in the 
United States. Three, reasonable implementation plans for new 
environmental initiatives. Four, fuels programs that set 
performance goals, rather than specific formulas or mandates. 
And five, it must be economically feasible to upgrade the 
Nation's refining capacity to make these clean fuels.
    NACS and SIGMA commend Chairman Murkowski and Senator 
Bingaman and their colleagues for introducing comprehensive 
national energy policy legislation that includes many of the 
legislative principles outlined above. Such legislation, 
however, needs to give increased attention to the downstream 
portion of our Nation's petroleum supply and distribution 
industry. Without such attention, a national energy policy will 
not succeed.
    We look forward to working with this committee and other in 
Congress. We certainly offer assistance to this committee. 
Thank you for allowing me to present this testimony.
    [The prepared statement of Mr. Robinson follows:]
  Prepared Statement of Thomas L. Robinson, Chief Executive Officer, 
                        Robinson Oil Corporation
    Good morning, Mr. Chairman and members of the committee. My name is 
Tom Robinson. I am Chief Executive Officer of Robinson Oil Corporation 
of San Jose, California. Our company owns and operates 28 ``Rotten 
Robbie'' retail gasoline outlets located in the San Francisco Bay Area 
of California.
    I appear before this committee today as a representative of the 
National Association of Convenience Stores (``NACS'') and the Society 
of Independent Gasoline Marketers of America (``SIGMA''). NACS 
represents an industry of more than 120,000 retail outlets, 75 percent 
of which sell motor fuels. In 1999, convenience stores sold more than 
117 billion gallons of motor fuels, which accounts for more than 60 
percent of American consumption.
    SIGMA is an association of approximately 260 motor fuels marketers 
operating in all 50 states. Together, SIGMA members supply over 28,000 
motor fuel outlets and sell over 48 billion gallons of gasoline and 
diesel fuel annually--or approximately 30 percent of all motor fuels 
sold in the nation last year.
    Collectively, NACS and SIGMA members sell more than 65 percent of 
the gasoline and diesel fuel purchased by American consumers each year.
    I appreciate the invitation to appear at this hearing to present 
testimony on our nation's energy policy and the role that diverse 
gasoline and diesel fuel specifications have on motor fuel supplies and 
prices. The companies I represent today are different from all of the 
other witnesses at today's hearing. For all practical purposes, we are 
a surrogate for the nation's gasoline and diesel fuel consumers. Our 
primary mission is to secure adequate supplies of gasoline to sell to 
consumers at a competitive price. My company is not involved in 
exploring for oil or in the production of oil. Nor does it refine oil. 
Instead, we are an independent gasoline marketer. If independent 
marketers of motor fuels, like my company, are unable to secure this 
adequate supply, then we cease to be a competitive force in the 
marketplace. And if independent marketers cease to be an effective 
competitive force in the marketplace, then consumers lose as retail 
gasoline and diesel fuel prices rise to unnecessarily high levels in 
response to the supply shortage.
    NACS and SIGMA have two primary messages for this committee today. 
First, we must collectively and aggressively address the motor fuels 
supply programs that are facing this nation. Otherwise, the fuel price 
spikes we have witnessed for the past decade in California and for the 
past two years in other parts of the nation will become worse and more 
frequent. Our failure to act has, is, and increasingly will, cost 
consumers more at the pump.
    Second, the debate over the future of our nation's energy policy 
need not be confrontational. Our nation can have both a clean 
environment and affordable, plentiful supplies of gasoline and diesel 
fuel. However, in order to achieve these twin goals, all sides of the 
current debate--industry, government, consumers, and 
environmentalists--must approach this debate in a spirit of 
cooperation, not confrontation. This includes a reasonable attitude and 
an understanding of the trade-offs.
    These are not new points for either the associations I represent or 
for me. As a California marketer I personally have witnessed these 
events happening over and over again. In fact, I have had the 
opportunity to present these points to Congress in the past. Five years 
ago, I was invited to appear before this committee in the wake of 
gasoline price increases in the Spring of 1996. At that time, I stated: 
``The federal and state governments regulate the gasoline refining and 
marketing industry with little or no thought given to costs, 
distribution difficulties, or market efficiencies. Congress must 
acknowledge that future EPA and state actions, if the present course is 
followed, will lead to further market disruptions and higher gasoline 
prices at the pump.'' \1\
---------------------------------------------------------------------------
    \1\ Testimony of Thomas L. Robinson before the Senate Committee on 
Energy and Natural Resources, May 9, 1996.
---------------------------------------------------------------------------
    My prediction in 1996 could not have been more accurate. 
Unfortunately, our warnings were ignored in 1996 and continue to be 
ignored today. However, it is my personal hope that the renewed 
attention to the need for a national energy policy will produce the 
results NACS and SIGMA have been calling for over the years.
    The challenge facing this committee and your colleagues in Congress 
today is straightforward. We must preserve current and future 
improvements in air quality while at the same time maintaining and 
expanding supplies of motor fuels. Otherwise, our nation's consumers 
will pay an exorbitant price when supply shortages occur and retail 
prices at the pump spike, as they have done repeatedly over the past 
few years. As a Californian, I have become only too familiar with this 
routine.
    The prices facing consumers during these spikes will not be limited 
to the additional expense of producing the new cleaner fuels. Rather, 
they will be multiples of this amount when, in times of short supply, 
the market drives prices far above the additional cost of manufacture.
    I firmly believe that our nation is facing a serious energy 
situation in the motor fuels refining and marketing industry. Dozens of 
petroleum refineries have closed over the past two decades and new 
environmental protection mandates, such as low sulfur gasoline and 
diesel fuel, are likely to exacerbate this trend. Operating inventories 
of diesel fuel and gasoline are at historically low levels and the 
nation's refineries are operating at or near maximum capacity. Gasoline 
and diesel fuel demand is increasing by between one and two percent 
each year, and yet the number of refineries operating to meet this ever 
increasing demand is decreasing. In 1990, there were essentially six 
different types of gasoline being sold nationwide. Now, there are more 
than 25 different gasoline formulations, all being transported and 
distributed through the nation's motor fuel infrastructure. The 
pressure of overlapping federal, state and local regulations has 
crippled what was previously one of the most efficient commodity 
distribution systems in the world--the United States' fungible grade 
motor fuels distribution system.
    As the saying goes, there is no free lunch. It should not surprise 
policy makers that after tens of billions of dollars in environmental 
compliance costs borne by refiners and marketers, after the complete 
fragmentation of the motor fuels distribution system, and after the 
politically-motivated diverse gasoline formulations adopted by various 
states, there is a price to pay. A price that ultimately must be paid 
by consumers of gasoline and diesel fuel. As long as the motor fuels 
refining and distribution system works perfectly, supply and demand 
stay roughly in balance and retail prices remain relatively stable. 
However, if a pipeline or refinery goes down, overseas crude oil 
production is reduced, the weather disrupts smooth product deliveries, 
or a new regulatory curve ball is thrown at the motor fuels refining 
and marketing industries, we do not have the flexibility to react and 
counterbalance these forces.
    If there is one point that I really want to emphasize it is the 
point of ``no free lunch''. Our country can have clean and 
environmentally friendly fuels and it can have plentiful supplies--
there will be a cost and it will be borne by the consumer (that is a 
given)--our job is to make the lunch, if not free, at least as 
inexpensive as possible.
    Californians have become somewhat accustomed to motor fuels price 
volatility over the past five years because California is, in fact, the 
laboratory for the fuels programs that EPA currently is imposing on the 
rest of the country. When a refinery in California goes down, or a 
pipeline breaks, the impact on prices is almost immediate. In 
California, gasoline prices can increase by 40 cents per gallon within 
two to three weeks. When prices get high enough to attract supply from 
other markets, then eventually the supply shortage is alleviated and 
prices start to fall.
    This is the reason I am appearing before you today. The motor fuels 
supply problems we have witnessed in California over the past decade 
are now being visited on the rest of the nation. If we do not act, 
independent motor fuels marketers (about whom I am very concerned), and 
gasoline consumers (about whom we all should be very concerned), will 
suffer in the near future.
    The public policy solution to the current motor fuels supply crisis 
will not be simple, but it must be addressed. NACS and SIGMA posit that 
the solution is not the rollback of environmental protections. That 
proposal is a non-starter and should be discarded. Alternatively, NACS 
and SIGMA encourage Congress to consider restoring fungibility to the 
nation's distribution system and an effective plan to assist our 
nation's domestic refining industry to meet the challenges posed by 
ever more stringent environmental mandates. This will increase gasoline 
and diesel fuel supplies and keep retail prices down.
    We must collectively arrive at a public policy that assures that 
our nation's refineries, both large and small, stay in business, expand 
to meet increases in demand, and produce clean, affordable motor fuels. 
But this policy cannot be achieved without enlightened government 
policies and programs. The capital expenditures that refineries must 
make over the next six years in order to meet new environmental 
mandates are huge. And many refineries, particularly small, regional 
refineries, will be unable to justify those expenditures and will cease 
operation--further straining motor fuels supplies. Already, this year, 
Premcor announced that it would close its Blue Island refinery rather 
than undertake the upgrades necessary to make low sulfur gasoline and 
diesel fuel. Other refineries, owned by both large and small companies, 
will follow suit in the next few years.
    NACS and SIGMA urge Congress to work to streamline the permitting 
process for refinery upgrades and to assist these refineries in making 
these upgrades. This assistance will be particularly important to 
small- and medium-size ``regional'' refineries. Environmental upgrade 
costs fall more heavily on these smaller refineries because they do not 
enjoy the economies of scale that some larger refineries possess to 
make these upgrades. In many cases, these smaller refineries represent 
the ``marginal'' gallon of gasoline and diesel fuel in many 
marketplaces--the gallon that is the difference between adequate 
supplies and supply shortages.
    Motor fuels marketers and refiners are not always on good terms. We 
compete daily in the marketplace for customers and market share. So it 
may seem odd to have motor fuels marketers recommend to Congress that 
assistance must be given to our nation's domestic refining industry. 
However, without adequate and diverse sources of gasoline and diesel 
fuel supply, independent marketers cannot exist. Thus, the solution we 
are proposing to Congress is the only way our segment of the marketing 
industry can survive and can continue to provide consumers--your 
constituents--with the most affordable, clean gasoline and diesel fuel 
in the world.
    NACS and SIGMA do not have a specific legislative proposal to put 
forward at this time. Instead, we offer the following principles which 
we are convinced must be a part of any legislative initiative: (1) 
greater fungibility in motor fuels and a stop to the balkanization of 
our nation's gasoline and diesel fuel markets (I cannot over-emphasize 
the importance of this point); (2) fuel requirements that recognize the 
limitations and strengths of the motor fuel distribution system in the 
United States; (3) reasonable implementation plans for new 
environmental initiatives; (4) fuels programs that set performance 
goals, rather than specific formulas; and (5) it must be economically 
feasible to upgrade the nation's refining capacity to make these clean 
fuels.
    NACS and SIGMA commend Chairman Murkowski and Senator Bingaman and 
their colleagues for introducing comprehensive national energy policy 
legislation that includes many of the legislative principles outlined 
above. Such legislation, however, needs to give increased attention to 
the ``downstream'' portion of our nation's petroleum supply and 
distribution industry. Without such attention, a national energy policy 
will not succeed. It will be irrelevant that domestic crude oil 
production increases by 50 percent if our nation does not have the 
refining capacity to convert that additional crude into gasoline and 
diesel fuel or if our nation's motor fuel distribution system, already 
stressed to the breaking point, cannot handle additional volumes of 
finished products.
    We look forward to working with this committee and others in 
Congress to explore legislative options in the months ahead. We 
certainly offer our assistance to this committee in this exploration.
    As a final note, NACS and SIGMA encourage this committee to embrace 
long-term solutions to our nation's current motor fuels supply crisis. 
While it may be tempting or politically expedient to seek a quick, 
short-term solution to this crisis, such quick fixes are only rarely 
effective. Our current situation stems from over two decades of decline 
in the motor fuels manufacturing and distribution industries. The twin 
goals of ample gasoline and diesel fuel supplies and affordable retail 
motor fuels prices will not be reached in 2001, but rather over a 
period of years. Just as the damage did not happen overnight, the cure 
will not happen overnight.
    The debate over our nation's energy policy is just starting. But 
the crisis has been on the horizon for some time. We can either discuss 
potential solutions collectively now, or we can wait until the next 
price spike, and the outraged response of consumers. We encourage all 
parties to this debate to adopt fresh approaches to the problems our 
nation is facing. Both the environment and our nation's motor fuel 
consumers can be the winners in this debate, but only if all sides 
agree with the premise that environmental protection and affordable 
energy are not inherently contradictory goals. NACS and SIGMA assert 
that these goals need not be irreconcilable.
    Thank you for inviting me to present this testimony. I would be 
pleased to answer any questions my testimony may have raised.

    The Chairman. Thank you very much, Mr. Robinson.
    Our next speaker, Mr. Greenbaum.

         STATEMENT OF DANIEL S. GREENBAUM, PRESIDENT, 
            HEALTH EFFECTS INSTITUTE, CAMBRIDGE, MA

    Mr. Greenbaum. Thank you, Mr. Chairman. I am pleased to 
have the chance to appear before you today.
    I will say, Mr. Chairman, that I cannot guarantee that I 
can find you a total solution for the pollen problem, but I 
wish I could, because I, too, am a sufferer. Although if we had 
to do without springtime, it may be a little harder.
    The Chairman. Well, you know, we have spring in Alaska, and 
we do not have pollen.
    [Laughter.]
    Mr. Greenbaum. Well, I do not think you would like us all 
to move up there either.
    The Chairman. No, that is for sure.
    Mr. Greenbaum. I speak today both as the president of the 
Health Effects Institute, which is an independent scientific 
institute funded jointly and equally by government and 
industry, to provide impartial health effects science on air 
pollution, and also as the chair of the Blue Ribbon Panel on 
Oxygenates in Gasoline, with which you may be familiar. The 
panel consisted of experts in air and water quality, as well as 
representatives of the oil, ethanol and MTBE industry, and the 
environmental community, and presented our report in 1999.
    I am here today to speak of both the good news from the 
last decade about fuel specifications and clear air and about 
the opportunities and challenges that lie ahead. First the good 
news.
    The Clean Air Act Amendments of 1990 passed by Congress and 
signed into law by President Bush required the introduction of 
new, cleaner burning fuels, reformulated gasoline, in all areas 
of the country facing serious ozone problems. That fuel 
containing by law at least two percent by weight of oxygenates 
was introduced in 1995 and resulted in a clear and measurable 
air quality benefit.
    Among other pollutants that were reduced, levels of benzene 
in ambient air, a known human carcinogen, were reduced almost 
immediately by 39 percent. At the same time, because in that 
case of adequate lead time for refineries to plan for and 
implement these fuels, they were introduced in some of the 
largest markets in the United States with relatively little or 
no impact on cost or supply of fuel.
    Looking ahead, we have the opportunity to continue this 
good news. Tier two RFG, also envisioned in the Clear Air Act 
and being implemented in this decade, has the potential, when 
coupled with continued improvement in motor vehicle emissions 
technology, to provide air quality and public health benefits 
well into this century.
    Also, although these fuels needed oxygenates to replace 
octane when RFG was first introduced in the 1990's, the Blue 
Ribbon Panel found that today's refinery technology has been 
improved to enable the production of these clean fuels in a 
variety of ways, with oxygenates, such as ethers and ethanol, 
but also without oxygenates altogether. This offers the 
opportunity to take a much more market-based approach to 
providing clean fuels, continuing the strong clean air 
performance standards, but giving the market much more 
flexibility to choose, based on efficiency and cost, the best 
way to ensure a low-cost abundant fuel supply.
    This good news, however, does not come without its 
challenges. First and foremost, there is the challenge of MTBE. 
Although MTBE has shown itself to be a cost-effective and clean 
fuel burning component with relatively low potential for health 
effects, its relatively rapid transport through groundwater and 
its distinctive odor and taste have caused a number of drinking 
water wells to be shut down.
    As a result, the Blue Ribbon Panel recommended strongly a 
substantial reduction in its use. A number of States, including 
California, Connecticut and New York, have gone further and 
legislated bans on its use to take effect in 2003 and 2004.
    Second, this pressure to reduce use of MTBE, which makes up 
11 percent by volume of RFG, comes at a time when consumer 
demand for fuels has grown, when supplies are tight, when 
refiners, as we have already heard, are beginning to gear up to 
produce even cleaner burning fuel for tier two. The Blue Ribbon 
Panel clearly saw the opportunity for a portion of MTBE demand 
to be met by increased use of ethanol.
    But it was concerned that at this stage in clean fuel 
development, when refiners need maximum flexibility and a range 
of alternative ways to make clean fuels, it was neither 
appropriate nor necessary to maintain the strict oxygenate 
content rules of the 1990 Clean Air Act Amendments. Thus, the 
panel recommended that the clean air performance requirements 
of RFG be maintained and continued, but that the oxygenate 
mandate be removed.
    In conclusion, where do these opportunities and challenges 
leave us today? We have two paths we can follow for clean 
fuels, to continue clean-burning fuels with legislatively 
mandated fuel additive requirements and risk potential market 
dislocations and increases in price or to keep the strong clean 
air performance requirements for these fuels but to free the 
market to make them in the most cost-effective way possible 
with a minimum of specific fuel additive requirements.
    In the view of the Blue Ribbon Panel, this market-driven 
path is clearly preferable. It will result in continued clean 
air benefits, but also in a substantial increase in the use of 
ethanol but without risking the higher prices and market 
shortages that could result from continued fuel additive 
mandates. With this path, we have the chance to see clean air 
improvements and stable fuel markets well into the 21st 
century.
    Thank you for the opportunity.
    The Chairman. Thank you very much, Mr. Greenbaum.
    Mr. Daigle.

   STATEMENT OF D.H. DAIGLE, DIRECTOR OF AMERICAS REFINING, 
             EXXONMOBIL REFINING AND SUPPLY COMPANY

    Mr. Daigle. Chairman Murkowski, members of the committee, I 
am Don Daigle, director of Americas Refining in the ExxonMobil 
Refining and Supply Company. In the interest of your time, I 
will summarize my remarks and ask that my written testimony be 
submitted for the record.
    My expertise is in the refining and supply of petroleum 
products. I also chaired the group that prepared the National 
Petroleum Council's June 2000 report on U.S. refining. Much of 
my testimony today is underpinned by the council's conclusions.
    Due to antitrust and competitive concerns, please 
understand that I cannot discuss company-specifics regarding 
inventory, supplies, pricing, and plans for operations and 
investments.
    ExxonMobile believes that it is critically important to 
develop a national energy policy which will allow us to 
continue to supply quality products to consumers. The 
committee's interest in this aspect of energy policy, along 
with that of the new administration, is most welcomed and 
encouraging. There are important decisions to be made in the 
relatively near term, which will significantly affect 
industry's ability to meet future consumer demands.
    To set the stage briefly, refining is economically risky 
and volatile and not one of the more profitable segments of the 
petroleum business. Industry downstream financial returns have 
historically run about 5 percent, just a little more than a 3-
month T-bill. Even so, industry has expanded domestic capacity 
to meet growing demand.
    The key energy policy question is: How to ensure that the 
refining industry is allowed to continue expanding capacity. 
The National Petroleum Council identified a number of obstacles 
that the industry skill and technology may not be able to 
overcome without changes in policy. While I want to focus on 
these policy solutions in this summary, it is vitally important 
to understand just how serious the current situation is.
    To summarize the key National Petroleum Council findings, 
the changes mandated in gasoline and diesel quality, coupled 
with the potential for removing MTBE from gasoline, will be 
very expensive, perhaps beyond the bounds of affordability for 
some refiners. These requirements will make the U.S. supply and 
logistics system much more rigid.
    The new source review enforcement initiative launched 
several years ago by the Environmental Protection Agency poses 
very significant further challenges. The industry will have a 
very hard time implementing all these changes in a compressed 
time frame. The refining system is tight, creating a very real 
risk of increased supply disruptions and price volatility.
    I would like to discuss how we see resolving these 
challenges beginning with new source review, or NSR for short. 
My written testimony covers in some detail the very serious 
problems we face under this program. To address these concerns, 
we urge this committee and the new administration to take a 
fresh look at the EPA's entire NSR enforcement program. 
Specifically, we recommend that new source review enforcement 
activities be suspended until there has been a thorough review 
of the program and its implications.
    We encourage this committee and the administration to 
examine the implications for consistency with a balanced energy 
policy. Guidelines should be established to assure that EPA's 
application and enforcement of its new source review 
requirements are compatible with that policy.
    Finally, clear new source review regulations, consistent 
with responsible implementation of the statutory framework, 
should be developed through an open administrative process.
    The second difficult legacy policy is the Federal oxygen 
mandate. New scientific data and technological advancements 
obviate the earlier environmental basis for mandating 
oxygenates in gasoline. While the environmental objective is 
laudable, this out-dated mandate is vulcanizing fuel supplies 
and hamstringing our ability to provide gasoline to the 
motoring public.
    Congress can be a part of the solution. We support repeal 
of the oxygen mandate or, at a minimum, an amendment that 
grants governors authority to waive this mandate on a regional 
basis. In the meantime, Congress should encourage the EPA to 
grant State requests for waivers. Granting California's request 
is a good place to start.
    A third area that warrants a fresh look is the EPA's recent 
ultra low sulfur diesel rule promulgated late last year. We 
accept the need to provide lower sulfur fuel to enable new 
cleaner vehicle technology. However, only brand new diesel 
vehicles will need this ultra low sulfur fuel. There is 
virtually no environmental benefit in requiring it for the 
existing fleet, as the rule now does.
    Coupled with other fuel changes, such as low sulfur 
gasoline in 2004, the refining industry's resources will be 
stretched to the limit. A mandate to manufacture large volumes, 
especially diesel, ahead of the time that it is needed is 
likely to cause significant diesel supply disruptions.
    We recommend that the low sulfur diesel rule be adjusted to 
phase in volumes on a time frame that is much more consistent 
with the actual vehicle needs. This will provide the same 
environmental benefits as the current rule while decreasing the 
risk of diesel fuel shortages.
    In conclusion, we look forward to working with this 
committee and with the administration to develop a cohesive 
energy policy based on free markets and open competition. 
Improving the environment is an important goal, but basic 
reliability and availability of fuel supplies and consumer 
costs are equally so.
    Energy and environmental objectives can be addressed, but 
they must be considered together. A good scientific base, 
clear-headed cost benefit analysis, and consistent and 
responsible application of rules are also key. Change should 
proceed at a pace that allows investments to be made in an 
orderly manner, so as not to threaten the supply of fuels to 
U.S. consumers. We look forward to working with the committee 
towards these ends.
    I will be happy to take questions from the committee.
    The Chairman. Thank you, Mr. Daigle.
    [The prepared statement of Mr. Daigle follows:]
   Prepared Statement of D.H. Daigle, Director of Americas Refining, 
                 ExxonMobil Refining and Supply Company

                              INTRODUCTION
    Chairman Murkowski and members of the committee, I am Don Daigle, 
Director of Americas Refining in ExxonMobil Refining & Supply Company. 
The divisions and affiliated companies of ExxonMobil operate or market 
products in the United States and nearly 200 other countries. Our 
principal business is energy, involving exploration, production, 
refining, transportation and sale of petroleum products.
    My area of expertise is in the refining and supply of petroleum 
products. I also was Chair of the Coordinating Subcommittee for 
preparing the National Petroleum Council's (NPC) June 2000 report on 
U.S. Refining. Much of my testimony today is underpinned by the 
conclusions reached by the NPC. I welcome the opportunity to outline 
some of the important proactive steps which can and should be taken to 
ensure a reliable supply of petroleum products for American consumers.
    Due to antitrust and competitive concerns, I hope you will 
understand that I'll not be able to discuss company specifics regarding 
inventory, supplies, pricing, and plans for operations and investment. 
Within the bounds of that caveat, however, I'll be as responsive as 
possible to the committee's questions.
    We believe that it is critically important to develop a national 
energy policy which will allow the industry to continue to refine 
quality products and distribute them efficiently to consumers. The 
committee's interest in this aspect of energy policy, along with that 
of the new Administration, is most welcome and encouraging. There are 
important decisions to be made in the relatively near term which will 
significantly affect industry's ability to meet future consumer demand.
    For at least the next several decades, and likely beyond, fossil 
fuels, particularly oil and gas, will be required to meet the vast 
majority of our U.S. energy needs. The refining business has a critical 
role to play in meeting that demand, both now and in the future.
    To set the background, it should be recognized that refining is an 
economically risky and volatile venture. Historically, it has not been 
one of the more profitable areas of our business. In fact, industry 
downstream financial returns have averaged about 5% over the last 2 
decades--just a little more than a 3-month T-bill. This reality is 
reflected in the fact that during the 1990s, the number of operating 
U.S. refineries decreased from 194 to 155. Many of those which shut 
down were too small to be economically viable. Notwithstanding this 
trend, however, total U.S. refining capacity increased through 
expansions and efficiencies at existing refineries. Industry has been 
able to meet growing consumer demand with essentially no change in 
refined product imports.
    A key question for this committee is how to ensure that the 
refining industry can continue this trend. As we see it now, there are 
a number of obstacles which the industry's skill and technology may not 
be able to overcome without changes in policy. Refineries are currently 
running at essentially maximum capacity to meet the increased demand. 
Building new domestic refineries is unlikely to be a practical option 
given siting and permitting issues and fundamental economics of the 
business. As a result, we will need to took to capacity expansions at 
existing refining locations to meet the bulk of our future demand 
growth. At the same time as the industry is challenged to add capacity, 
there are a number of competing environmental regulations that push us 
in a different direction--adding cost and complexity to our plants 
without capacity benefits, and sometimes, with a capacity debit. As 
capable as our industry is from a technical perspective, we cannot 
always serve both of these masters simultaneously.
    At the request of former Energy Secretary Richardson, the NPC 
assessed the impact of proposed and potential government policies and 
actions on refinery operations and petroleum product supply over the 
1999 to 2005 time frame. The NPC assessment, entitled ``U.S. Petroleum 
Refining--Assuring the Adequacy and Affordabiliiy of Cleaner Fuel,'' is 
a blunt call to action. Let me paraphrase its key findings. The changes 
we face in gasoline and diesel quality coupled with the potential for 
MTBE removal from gasoline will be very expensive, and significantly 
stretch capital resources, potentially beyond the bounds of 
affordability for some refiners. They will also make our supply and 
logistics system more rigid. The New Source Review (NSR) enforcement 
initiative launched several years ago by the Environmental Protection 
Agency poses further permitting and investment obstacles to necessary 
capacity expansion. The industry faces very significant challenges in 
implementing all these changes in the time frame which current 
regulations require. The tightness of the system creates a very real 
risk of increased supply disruptions and price volatility.
    The main refining and supply areas which we believe need attention 
from this committee and the administration are: the reinterpretation of 
the NSR regulations; elimination of the oxygenate mandate contained in 
the 1990 Clean Air Act Amendments as part of an overall MTBE removal 
strategy; and phasing in the volume requirements for the new ultra low 
sulfur diesel regulations. I will comment on each of these in order.

                           NEW SOURCE REVIEW
    The New Source Review program was originally intended to improve 
air quality through a permit review of new sources and major 
modifications to existing facilities. Over time, however, the NSR 
program has evolved from a 20-page rule into 4,000 pages of confusing, 
often contradictory and continually changing ``interpretative 
guidance.''
    Several years ago, EPA began an aggressive initiative attempting to 
enforce retroactively new and more stringent interpretations of NSR 
requirements. In a stroke, it has attempted to undo years of Federal 
and state agency and industry interpretation and understanding and 
created conflicts with existing regulations, past actions, and state 
permitting decisions. This enforcement initiative occurred after EPA 
largely abandoned efforts to change NSR regulations through the normal 
rulemaking process.
    Under EPA's reinterpretation, the number of projects that would 
require intrusive, costly and time consuming NSR review and permitting 
would increase substantially. Left to stand this will significantly 
increase the cost and difficulty of implementing improvements at 
refineries, and result in a significant permitting backlog for both 
state and federal officials. A company's ability to make even the most 
minor changes to improve refining capacity, energy efficiency and 
environmental performance can be compromised.
    These legacy NSR enforcement actions were premised heavily on what 
we believe are erroneous reinterpretations of two elements of its 
permitting requirements. First, EPA asserted that numerous previously 
permitted projects resulted in ``potential'' emission increases when in 
reality they had no effect on actual emissions or were followed by 
emission decreases. In fact, overall, refinery emissions have actually 
decreased while production of fuel products increased. Second, that 
routine maintenance, repair and replacement at refineries--activities 
that were previously exempt from NSR--are now required to obtain 
permits. Such a strategy of ``regulation by enforcement'' puts industry 
in a difficult position. If unchecked, it will require refineries to 
seek permits for many more activities including many with little or no 
environmental benefit. This activity would divert resources that could 
have been used to expand and improve existing refinery capacity.
    We believe this committee and the new administration should take a 
fresh look at the entire NSR enforcement program. Without revision to 
this program, the refining industry (and others) faces the threat of 
penalties and additional unnecessary investments for emission 
reductions above and beyond those currently required by regulation. A 
similar enforcement initiative imposed on the power generation sector 
has the potential to affect the ability of the electric utility 
industry to meet electricity requirements.
    We offer the following recommendations as a means to prevent NSR 
enforcement policies from interfering without tangible benefit to 
industry's ability to meet our energy and fuel supply needs:
    First, we recommend that NSR enforcement activities be suspended 
until such time as there has been a thorough review of both the program 
itself and its implications.
    Second, we encourage this committee, and others involved in 
establishing new directions for national energy policy, to factor the 
implications of NSR interpretations into the policy making equation. 
Guidelines should be established to assure that EPA's application and 
enforcement of its NSR requirements are compatible with the nation's 
energy and fuel supply policy. Attention from the White House Office of 
Energy Policy, and from the Secretary of Energy will also be helpful. 
Finally, clear NSR regulations should be developed through an open 
administrative process, which are consistent with responsible 
implementation of the statutory NSR framework.

                       FEDERAL OXYGENATE MANDATE
    Another legacy of past policy making that poses hurdles for the 
refining industry is the federal oxygenate mandate. The Clean Air Act 
Amendments of 1990 required the use of oxygenates in reformulated 
gasoline for nine areas of the nation with the most severe air quality 
problems. While the intention is laudable, this requirement is 
outmoded, fails to deliver promised benefits, and exacerbates the risk 
that supply issues will affect consumers.
    EPA's own MTBE ``Blue Ribbon'' Panel concluded that the current 
Clean Air Act's mandate ``to require oxygenates in RFG must be removed 
in order to provide flexibility to blend adequate fuel supplies in a 
cost-effective manner while quickly reducing usage of MTBE and 
maintaining air quality benefits.'' Additionally, new scientific data 
that became available after the 1990 Clean Air Act amendments 
demonstrate that oxygenates are not needed to provide the requisite 
environmental benefits of reformulated gasoline. Further, technological 
advancements in newer vehicles obviate any earlier justification for 
mandating oxygenates in RFG in order to address environmental concerns.
    The oxygenate mandate is causing further balkanization of fuel 
supplies and is hindering the supply system and refineries' ability to 
get product to markets where and when needed. For example, Alabama and 
Georgia have chosen to require a unique fuel within their borders 
rather than adopt reformulated gasoline (RFG) and the costs and issues 
associated with oxygenates such as MTBE. As another example, Maine has 
opted out of the RFG program, choosing instead to require a lower 
volatility fuel. New Hampshire is requesting the same. Chicago and 
Milwaukee have their own brand of unique fuels because ethanol is the 
oxygenate used in those areas.
    The solution? First, Congress should repeal the oxygenate mandate 
or, at a minimum, amend the law to grant authority to governors to 
waive the oxygenate mandate on a regional basis. In the meantime, 
Congress should encourage the EPA to grant state waivers from the 
oxygenate mandate. Granting California's request is a good place to 
start.
    We are aware that some of the committee members are concerned about 
the continued market for ethanol. We expect that even without mandates 
there will likely continue to be additional opportunities for ethanol 
use as long as it is economically viable.

                      ULTRA LOW SULFUR DIESEL RULE
    Another area which we believe deserves a fresh look is the ultra 
low sulfur diesel (ULSD) rule promulgated late last year. We accept the 
need to provide new lower sulfur fuel to enable new cleaner vehicle 
technology, but believe the regulations should recognize that only new 
diesel vehicles will need this ultra low sulfur fuel. There is little 
environmental benefit in requiring it for the existing fleet as the 
regulation now does. Coupled with the requirement to produce lower 
sulfur gasoline in 2004 and the need to address the oxygenate issue, 
the refining industry's resources will be stretched to the limit in 
order to manufacture large volumes of a fuel that will benefit only a 
few vehicles initially. In fact, there is reason for concern that there 
will not be sufficient on-road diesel to meet demand.
    We are concerned that a supply disruption could result that would 
be more serious than the one that occurred in 1993 during the 
introduction of new California diesel fuel. We recommend that the ULSD 
rule be phased in with volumes more consistent with actual new vehicle 
needs, specifically, refiners would produce ULSD beginning June 1, 
2006, in volumes needed to meet new on-road vehicle and retail 
availability requirements. Production volumes would increase as vehicle 
turnover occurs and market demands increase. Additionally, refiners 
would produce current low sulfur diesel (LSD; current 500 ppm sulfur 
cap highway diesel) to meet older on-road vehicle diesel demands. As 
ULSD demands grow, production would increase and LSD production would 
decline.
    The advantages of implementing these recommendations are numerous.
    (1) Essentially the same vehicle emission benefits and timing as 
the final EPA highway diesel rule would be maintained; (2) the 
potential for diesel fuel supply disruptions is reduced; (3) greater 
refinery energy efficiency and lower refinery CO2 emissions 
are achieved by avoiding overproduction of ULSD in the early demand 
years; (4) by avoiding overproduction, ULSD is cost effectively 
provided to consumers who own new vehicles that benefit from the new 
fuel; (5) this approach stages investment and spreads out permitting, 
financing, investment, engineering and construction activity for 
refinery modifications, freeing critical resources to help implement 
other key fuel requirements; and (6) it provides an opportunity for 
further technological development to reduce the ultimate cost of sulfur 
removal.
                               CONCLUSION
    ExxonMobil encourages members of this committee to help clarify 
where we, as a nation, are going in the energy policy area and what is 
needed to get there. We look for ways to work with you and other 
branches of government to develop a cohesive energy policy. In our 
view, that policy needs to be based on free markets and open 
competition if it is to be effective. It should also take an integrated 
approach to energy and environmental regulation. We urge you to ensure 
that industry is given the flexibility to provide new fuels that will 
support new engine emission control technology in the most cost-
effective and environmentally sound manner. New pipelines and refinery 
upgrades needed to meet growing product demands and more stringent 
specifications, as well as new electricity generating capacity, will 
all be benefited by improvements in the regulatory review process.
    In conclusion, I'd like to reiterate a core belief at ExxonMobil: 
in all the energy sectors, the market must be allowed to work. 
Improving the environment is a fundamentally important goal, but so are 
basic reliability and availability of fuel supplies, at reasonable 
costs to the consumers. All these objectives can be addressed, but they 
must be considered together. We believe that policy making must be 
based on sound science coupled with rigorous cost-benefit analysis and 
we urge that it proceed at a pace that allows investments to be made in 
an orderly manner. We look forward to working with you toward those 
ends.
    I will be happy to answer any questions the committee may have.

    The Chairman. Mr. Moyer, please proceed.

     STATEMENT OF CRAIG MOYER, EXECUTIVE DIRECTOR, WESTERN 
                INDEPENDENT REFINERS ASSOCIATION

    Mr. Moyer. Thank you. Yes, I am Craig Moyer. I am the 
executive director of the Western Independent Refiners 
Association, WIRA. I want to thank this committee for the 
opportunity to speak this morning, but more importantly for 
your leadership in developing a national energy policy.
    WIRA represents small business refiners, which are defined 
as small businesses pursuant to the Small Business 
Administration, fewer than 1,500 employees, and less than 
155,000 barrels per day total capacity. WIRA members produce a 
full slate of petroleum products, including everything from 
gasoline, diesel, jet fuel to asphalt, lube oil and specialty 
petroleum products.
    From the ground to the pump, there are three phases of the 
process: Exploration and production, refining, and marketing. 
members of WIRA are involved only in refining crude oil into 
products. No members of WIRA drills for oil or operates service 
stations.
    WIRA is also part of a larger group of small business 
refiners that produce diesel fuel throughout the United States. 
Among the constituents of Senators on this panel include 
PetroStar in Alaska represented by Senator Murkowski; Calcasieu 
Refining, Placid Refining in Louisiana represented by Senator 
Landrieu; Countrymark, a farm cooperative in Indiana 
represented by Senator Bayh; Frontier in Wyoming, a refinery 
both in the State of Wyoming represented by Senator Thomas; 
Golden Bear, Kern Oil, Paramount, San Joaquin Refining 
represented by Senator Feinstein of California; and U.S. Oil 
and Refining in Washington represented by Senator Cantwell; 
Montana Refining represented by Senator Burns; and of course, 
Navajo Refining in New Mexico represented by Senator Domenici 
and Senator Bingaman.
    I would like to make three brief points today. First, small 
refiners are important, both regionally and nationally. Two, 
EPA's low sulfur diesel regulations poses a challenge to the 
continuing viability of small business refiners. And three, 
Congress should act to mitigate the potentially harmful effect 
that this regulation is going to have on small business 
refiners and, as a result, the effects on the Nation's refining 
capacity.
    Individually, small business refiners may be a small part 
of the market, but cumulatively their impact is substantial and 
historically and decidedly pro-competitive. Small business 
refiners are also very important to the regions they are in. 
For example, just in California, small business refiners 
represent 100 percent of California's grade 80-aviation fuel, 
aliphatic solvents, and JP-4 jet fuel. Small refiners also 
manufacture 100 percent of the asphalt that is produced in 
southern California and most of the off-road diesel fuel. Half 
of the diesel fuel produced in the San Joaquin Valley, 
California's farm belt, is refined by small business refiners.
    I am from California. But if we are reviewing the 
statistics from other States, such as Wyoming or Louisiana, I 
believe other similar references could be made to the regional 
and product manufacturing importance of these small business 
refiners.
    Your former colleague, the Secretary of Energy Spencer 
Abraham, recently commented that the number of American 
refineries has been cut in half since 1980. Many of these were 
small businesses unable to meet the challenges of poor refining 
margins and expensive regulations. Meanwhile, as noted in your 
opening comments, Mr. Chairman, not one refinery has been built 
in the United States in over 25 years except for your plant in 
Alaska.
    Small business refiners cumulatively account for a 
substantial part of the Nation's refining capacity; for 
example, 5 to 6 percent of the U.S. supply of on-road diesel 
fuel and 20 percent of the military jet fuel supplied to our 
bases. Experience confirms that when small business refiners 
leave the market, prices go up and consumers suffer.
    I would like to turn, then, to the ultra low sulfur diesel 
fuel regulation quickly. You are familiar with the rule. It 
requires 15 parts per million sulfur limit for most on-road 
diesel beginning in June 2006. Some of the associations of 
large refiners are appealing this regulation in court. WIRA has 
not joined that effort. Instead our members are making good 
faith efforts to comply with the regulation.
    In the final rule, EPA stated that, and I quote, ``small 
business refiners would likely experience a significant and 
disproportionate financial hardship in reaching the objectives 
of our diesel fuel sulfur program.''
    However, EPA made no provision to assist small business 
refiners in financing the mandated capital expenditures. The 
Energy Information Agency forecasts a 6.5-percent increase in 
diesel demand, while other studies almost universally 
anticipate that that rule will result in a decline in diesel 
production nationally.
    Meanwhile, ongoing challenges face the industry, as 
discussed by others on this panel and by the members of this 
committee. Existing refineries are operating at capacity 
resulting in more frequent unplanned shutdowns. And every small 
refiner forced from the marketplace increases our 
vulnerability.
    Given the foregoing, we must agree with now-Secretary 
Abraham that we have a refining industry strained to capacity, 
leaving us dangerously vulnerable to regional supply 
disruptions and price spikes. The new EPA regulation adds one 
more financial and regulatory burden on an already at-capacity 
industry.
    Small business refiners want to be a part of the solution. 
Without assistance to make the capital investment, however, 
small refiners may be forced to shut down. EPA has estimated 
that small business refiners will incur on average capital 
costs of $14 million per facility to meet the new diesel 
regulations.
    For some facilities, that cost will be substantially more. 
And some small business refiners are considering going out of 
business rather than expend the capital necessary to comply 
this and other regulations.
    Unmitigated, the new regulations will make it even less 
likely that new refineries will ever be built. Therefore, it is 
important to seek methods to reimburse small business refiners 
for their costs in meeting these new government-imposed 
mandates, which endanger their long-term economic viability.
    On behalf of the Western Independent Refiners Association 
and the rest of the small business refiners in the United 
States, I ask that this committee, while considering 
legislation to implement a national energy policy, work with 
small business refiners to find some way to mitigate the 
disproportionate impact this regulation will have on them. 
Senator Murkowski's bill, S. 389, includes provisions providing 
tax relief for petroleum refiners. A similar incentive for 
compliance with this regulation would be an appropriate method 
to help offset the hardship this regulation will place on small 
business refiners.
    I thank you for your attention this morning. I look forward 
to discussing this matter with you all further.
    [The prepared statement of Mr. Moyer follows:]
        Prepared Statement of Craig Moyer, Executive Director, 
                Western Independent Refiners Association
    On behalf of the Western Independent Refiners Association (WIRA), 
in my capacity as Executive Director for WIRA, I am pleased to have the 
opportunity to testify before this committee and to provide this 
statement for the record addressing national energy policy with respect 
to fuel specifications and their infrastructure constraints.

                           BACKGROUND ON WIRA
    WIRA is a trade association of small and independent refineries on 
the West Coast. At this time, ten small independent refineries continue 
to operate on the West Coast, nine in California and one in Tacoma, 
Washington. In California, these refineries are located in each of the 
three refining areas within California. One is located in the San 
Francisco Bay area. One is located in the Bakersfield area of the 
Southern San Joaquin Valley and the remaining facilities operate in the 
Los Angeles Basin. Small independent refineries employ thousands of 
people and each company pays millions of dollars in taxes, even after 
excluding income taxes. WIRA members produce a full slate of petroleum 
products including gasoline, diesel fuel, jet fuel, asphalt, lube oil 
and specialty petroleum products.
    While I am here on behalf of WIRA, we are also part of a larger ad 
hoc committee representing small refiners throughout United States. 
There are small refiners located from as far North as PetroStar Inc. in 
Alaska and Holly Corporation in Great Falls, Montana to Placid Refining 
Co. in Port Allen, Louisiana. Other small refiners included are 
American Refining Inc. in Pennsylvania, Gary-Williams Energy Corp. in 
Oklahoma, and Navajo Refining in New Mexico. (See attachment A for a 
complete list of small refiners in the United States.)

                            SUMMARY OF ISSUE
    Small and independent refiners (refiners with fewer than 1,500 
employees and less than 155,000 barrels per day total capacity) have 
long been recognized as an important competitive force in the refining 
sector. Individually, each small refiner represents a relatively small 
share of the petroleum product marketplace. Cumulatively, however, 
their impact is substantial. In some regions, small refiners represent 
50 percent or more of the market for certain products. Their pricing 
competition pressures the larger integrated companies to lower prices 
to the consuming public. Without that competitive pressure, consumers 
will pay more. Small refiners also are key suppliers to the Department 
of Defense and other niche markets such as diesel fuel, asphalt and jet 
fuel. Loss of supply in these products will not easily be filled by the 
major refineries.
    Under new Environmental Protection Agency (EPA) regulations, coming 
into effect in 2006, refiners must meet a stringent new standard of 15 
parts per million sulfur limit for most on-road diesel volume. EPA 
estimates that small business refiners will incur average capital costs 
of $14 million per facility to meet the new diesel regulations. Our 
projections indicate that the initial cost to meet these new standards 
will be approximately $300 million for the whole industry. Regarding 
these standards, EPA stated that: ``small business refiners would 
likely experience a significant and disproportionate financial hardship 
in reaching the objectives of our diesel fuel sulfur program.''
    U.S. consumer demand for diesel fuel, as forecast by the Energy 
Information Administration, is expected to grow by 6.5 percent between 
now and 2007. It is important to seek methods to ensure small business 
refiners are able to meet these new government imposed mandates, which 
endanger their long-term economic viability. Some 25 U.S. refineries 
have shut down over the last decade and virtually no new refinery has 
been built in the United States for over 20 years.

                   NEW FUEL SPECIFICATION REGULATIONS
    On January 18, 2001, the EPA published new regulations, which 
create new standards for levels of sulfur in highway diesel fuel 
beginning in June, 2006. Under the new regulations, refiners must meet 
a stringent new standard of 15 parts per million sulfur limit for most 
on-road diesel volume (``Ultra Low Sulfur Diesel Fuel''). Small 
refiners produce about four percent of the Nation's diesel fuel and in 
some regions produce over half of the diesel fuel. In the final rule, 
EPA stated regarding the diesel sulfur standards ``that small business 
refiners would likely experience a significant and disproportionate 
financial hardship in reaching the objectives of our diesel fuel sulfur 
program.'' In the final rule, EPA agreed with the final Small Business 
Administration report regarding the diesel sulfur standards ``that 
small business refiners would likely experience a significant and 
disproportionate financial hardship in reaching the objectives of our 
diesel fuel sulfur program.'' However, EPA has made no provision to 
assist small business refiners in financing the mandated capital 
expenditures.
    The new regulations also will make it even less likely that new 
refineries will ever be built. With the exception of one small topping 
facility in Alaska, no new refinery has been built in the United States 
for almost 20 years. Existing facilities are operating at full 
sustainable capacity. Operational demands imposed by the new 
regulations will result in a reduction of on-road diesel production. At 
the same time, U.S. consumer demand for diesel fuel, as forecast by the 
Energy Information Administration, is expected to grow by 6.5 percent 
between now and 2007. If small business refiners are eliminated from 
diesel production, supply shortages will become even more likely. 
Therefore, it is important to seek methods to reimburse small business 
refiners for their costs in meeting these new government imposed 
mandates, which endanger their long-term economic viability.
    EPA estimates that small business refiners will incur average 
capital costs of $14 million per facility to meet the new diesel 
regulations. For some facilities, the cost will be substantially more.
    In addition, costs to produce low-sulfur diesel fuel and to comply 
with other regulations will add significantly to capital requirements 
in approximately the same time frame. Such capital investments are 
significantly beyond the financial capability of facilities operated by 
small business refiners, whose total investment is dwarfed by these 
requirements. On top of the initial required capital expenditures, the 
related increases in operating costs could equal or exceed the 
refineries' historical annual profits, and thus, imperil the viability 
of these important U.S. businesses.
    While WIRA does not oppose the regulation, and is fully committed 
to compliance, we believe that national energy policy should take into 
account the importance of the small refiners and should include 
proposals for mitigating the impact of this regulation. Without such 
provisions, some small business refiners will shut down and all will 
struggle to meet the mandated expenditures. Such a policy ignores the 
important role of the small business refiner in the U.S. energy market. 
The result of such a policy will have serious consequences for our 
country.
 national energy policy: the pro-competitive role of the small refiners
    Small and independent refiners have long been recognized as an 
important competitive force in the refining sector. Individually, each 
small refiner represents a relatively small share of the petroleum 
product marketplace. Cumulatively, however, their impact is 
substantial. Their pricing competition pressures the larger integrated 
companies to lower prices to the consuming public. Without that 
competition pressure, consumers will pay more. For example, in early 
1991, Amoco shut down a 40,000 barrels per day refinery in Casper, 
Wyoming, and gasoline prices jumped almost 10 cents per gallon. In 
California, the Attorney General concluded that after five small 
refiners shut down because they could not manufacture California's 
cleaner burning gasoline, the loss of competition cost consumers 
hundreds of millions of dollars. Through experience, we know that when 
small refiners leave the marketplace, prices go up and consumers 
suffer.
    Congress and many agencies, including the Environmental Protection 
Agency (``EPA'') and the California Air Resources Board (``CARB''), 
have long recognized the importance of the independent refining sector 
to maintaining a competitive market for petroleum products. For 
example, after EPA promulgated rules limiting the sulfur content of 
diesel fuel to 500 parts per million effective October 1, 1993, 
Congress recognized the implications of this rule on small diesel 
refiners and authorized the issuance of acid rain credits to small 
diesel refiners pursuant to Section 410 (h) of the 1990 Clear Air Act 
amendments. Because of the important pro-competitive impact of small 
refiners, CARB, an agency that has promulgated perhaps the most 
stringent fuels regulations in the country, has provided separate 
treatment for small refiners in virtually every fuels regulation it has 
passed since 1988. In its two most recent fuels rule makings, EPA has 
authorized separate treatment for small business refiners, as well. 
Even the South Coast Air Quality Management District, an agency leading 
the nation and perhaps the world, in stringent air quality regulations, 
authorized separate treatment for small refiners in its recently 
promulgated Rule 431.1 regulating diesel fuel.
    In addition to maintaining competition, small and independent 
refiners often supply other petroleum products not otherwise available 
in certain areas. For example, small refiners manufacture 100 percent 
of California's grade 80-aviation fuel, aliphatic solvents, and JP-4 
jet fuel. Small refiners also manufacture 100 percent of the asphalt 
produced in southern California and much of the off-road diesel fuel. 
Half of the diesel fuel produced in the San Joaquin Valley, 
California's farm belt, is refined by small refiners.
    Small business refiners also fill a critical national security 
function. For example, in 1998 and 1999, small business refiners 
provided almost 20 percent of the jet fuel used by U.S. military bases. 
This adds up to almost 500 million gallons of jet fuel supplied each 
year under defense contracts between the government and small business 
refiners.

                     CHALLENGES FACING THE INDUSTRY
    Today, approximately 124 refineries are operating in this country. 
About 25 percent are small, independent refiners. Small business 
refiners are primarily owned by U.S. citizens including privately held 
businesses and one farmer cooperative.
    As Secretary of Energy Spencer Abraham noted in recent comments to 
the United States Chamber of Commerce, the number of American 
refineries has been cut in half since 1980. Many of these were small 
business refiners unable to meet the challenges of poor refining 
margins and expensive regulations. Meanwhile, no new refinery has been 
built in the United States in over 25 years and regulatory requirements 
limit the ability of existing refineries to expand capacity. Government 
regulations require the production of more than 15 types of gasoline. 
Existing refineries are operating at capacity resulting in more 
frequent unplanned shutdowns. Every small refiner forced from the 
marketplace increases our vulnerability. Given the foregoing, one must 
agree with Secretary Abraham that we ``have a refining industry 
strained to capacity, leaving us dangerously vulnerable to regional 
supply disruptions and price spikes.''
    Additional challenges facing small refiners include the following:

   Small refiners are large users of electricity and natural 
        gas. The remarkably high prices of these inputs are affecting 
        the small refiners.
   The phase out of MTBE as an oxygenate has led to increased 
        costs as replacements are found.
   Access to crude oil is not reliable, as the larger companies 
        are not consistently willing to supply small refiners.
   Wastewater treatment controls and stationary source controls 
        have become increasingly stringent, thus raising costs for 
        small refiners.
  conclusion: u.s. government energy policy should recognize and take 
        steps to mitigate the impact of new fuel specifications
    New fuel specifications will adversely impact the financial 
viability of small refiners producing diesel fuel. Because of the 
importance of these refiners to the competitive structure of the fuel 
market, Congress should consider mitigation, including tax measures, 
for this important segment of the energy market.

                                                  ATTACHMENT A
----------------------------------------------------------------------------------------------------------------
                                                                                          Refinery   Parent Co.
Co. No.      Parent  company       Ref. No.          Refinery              Refinery       capacity    capacity
                                                                           location      crude bpd    crude bpd
----------------------------------------------------------------------------------------------------------------
 1       Age Refining Inc.......   1         Age Refining Inc.......  San Antonio, TX..      5,000      5,000
 2       American Refining Inc..   2         American Refining Inc..  Bradford, PA.....     10,000     10,000
 3       Countrymark               3         Countrymark              Mt. Vernon, IN...     22,000     22,000
          Co.operative, Inc..                 Co.operative, Inc..
 4       Cross Oil & Refining...   4         Cross Oil & Refining...  Smackover, AR....      6,000      6,000
 5       Foreland Inc...........   5         Foreland Corp..........  Eagle Springs, NV      5,000      5,000
 6       Frontier Oil Corp......   6         Frontier Refining &      Cheyenne, WY.....     41,000    151,000
                                              Marketing Co..
 6       Frontier Oil Corp......   7         Frontier Refining &      El Dorado, KS....    110,000
                                              Marketing Co..
 7       Gary-Williams Energy      8         Wynnewood Refining Co..  Wynnewood, OK....     50,000     50,000
          Corp..
 8       Golden Bear Oil           9         Golden Bear Oil          Bakersfield, CA..     12,500     12,500
          Specialties.                        Specialties.
 9       Holly Corp.............  10         Montana Refining Co....  Great Falls, MT..      7,000     69,000
 9       Holly Corp.............  11         Navajo Refining Co.....  Artesia, NM......     62,000
10       Kern Oil & Refining Co.  12         Kern Oil & Refining Co.  Bakersfield, CA..     25,000     25,000
11       Paramount Petroleum....  13         Paramount Petroleum      Paramount, CA....     43,000     43,000
                                              Corp..
12       PetroStar Inc..........  14         PetroStar Inc. (Topping  North Pole, AK...     15,000     57,000
                                              only).
12       PetroStar Inc..........  15         PetroStar Inc. (Topping  Valdez, AK.......     42,000
                                              only).
13       Placid Refining Co.....  16         Placid Refining Co.....  Port Allen, LA...     48,000     48,000
14       San Joaquin Refining     16         San Joaquin Refining     Bakersfield, CA..     24,300     24,300
          Co..                                Co..
15       Somerset Refining, Inc.  18         Somerset Refining Co...  Somerset, KY.....      5,500      5,500
16       U.S. Oil & Refining Co.  19         U.S. Oil & Refining Co.  Tacoma, WA.......     46,000     46,000
17       Transworld Oil USA.....  20         Calcasieu Refining Co..  Lake Charles, LA.     22,000     22,000
18       Wyoming Refining Co....  21         Wyoming Refining Co....  Newcastle, WY....     12,500     12,500
                                                                                        ------------
                                                                                           613,800
----------------------------------------------------------------------------------------------------------------

    The Chairman. Thank you very much. I appreciate the 
testimony collectively.
    Let me focus on Dr. Daniel Greenbaum. And it is my 
understanding that your blue ribbon panel on oxygenates on 
gasoline recommended doing away with the additive requirement 
to comply with EPA. Is that basically correct?
    Mr. Greenbaum. That is correct, that you could----
    The Chairman. That is a pretty profound statement. Okay. 
And I hope we take note of it, a recommendation to do away with 
the additive requirement. Now many of our current gasoline 
balkanization, so to speak, problems appear to be directly 
related to that requirement. Is that not correct?
    Mr. Greenbaum. I am not an expert in the refining industry, 
but that is a significant component of that.
    The Chairman. All right. Now is this a case, in your 
opinion, of Congress writing fuel standards?
    Mr. Greenbaum. Well, it certainly----
    The Chairman. The EPA has to adhere to the law? What in the 
hell does Congress know about writing fuel standards? I do not 
know anything about it. I can tell you a little bit about 
banking.
    Mr. Greenbaum. I am assuming that was not a question.
    The Chairman. I do not know. Maybe Senator Nickles can tell 
us something about our qualifications to write fuel standards.
    Senator Bingaman. Mr. Chairman, I thought we all voted for 
that Clean Air Act.
    The Chairman. Well, did we know what we were voting for?
    Senator Bingaman. I am not sure.
    The Chairman. I am not either. Now there may be some folks 
out there that will take issue with your rather profound 
statement, but I certainly admire your willingness to evaluate 
this based on your background and expertise and your blue 
ribbon panel on oxygenates that suggests that this is not 
necessary. And we look at EPA with forked tongue and say, how 
could they do this, when they are enforcing a law that we 
passed.
    And I would suggest, if you feel strongly enough, you blame 
the Congress.
    Mr. Greenbaum. We recommend to Congress that Congress take 
action, because only Congress can address the issue. I think it 
is fair to say that in the very early stages of the RFG 
program, the oxygenates were a relatively quickly available way 
to move to get the clean fuels. What we found, though, is that 
the refining industry responded and was able, and is definitely 
able today, to make clean fuels with far less reliance on the 
oxygenates. And we argue strongly that, therefore, the mandate 
was counterproductive at this point, particularly in light of 
the problems with MTBE.
    The Chairman. If the science supports removing the 
oxygenate standard, then why has it not been done? America, in 
your opinion, could enjoy cleaner fuels at less price. So are 
you waiting for Congress in its wisdom to do it for you?
    Mr. Greenbaum. I think Congress has to do it because of 
the--because this is a mandate that was put into the law very 
specifically. And I think it is an interesting lesson in 
actually when the mandates get that specific, how had it is to 
then be flexible in the face of changing technology, changing 
market conditions. And that is why the panel really thought 
that performance standards--and several of us have spoken to 
this--were the way to go.
    The Chairman. Well, we have committees, committee 
jurisdiction. This case, I assume, was the Environment and 
Public Works Committee on the Senate side and the Commerce 
Committee on the House side. And the professional staff or 
experts or whomever put this together, and now we are hearing 
it is unnecessary and adds additional price to the consumer, 
and that the industry can meet requirements, ultimately 
``cleaner fuel'' at less price, if we do away with this.
    Is that--do the witnesses generally agree with that 
statement?
    Mr. Daigle. Senator, may I comment on that?
    The Chairman. Please.
    Mr. Daigle. We firmly support removal of the oxygen 
mandate. New scientific data, technological advancements 
clearly indicate that clean fuels can be made, maintaining all 
the benefits of the Clean Air Act, without the use of oxygen 
mandates. Imposing a mandate reducing flexibility on the part 
of the refiners and, as a result of that, ultimately decreases 
flexibility in the system and increases cost.
    The oxygen mandate is clearly one of the major causes of 
the balkanization in the various regional fuel supplies, fuel 
requirements, that was shown on one of the charts earlier.
    I think if the oxygen mandate were removed, a lot of the 
areas that have selected these regional specifications, because 
they do not want to deal with the potential problems associated 
with the oxygen mandates, then could very much move back to the 
RFG standard and get rid of a number of these specific 
standards that are causing a lot of the rigidity in the system 
and reducing the flexibility in the system, to move supplies 
around to where there are regional shortages for every reason.
    The Chairman. And do you generally agree with that 
statement?
    Mr. Moyer. Senator Murkowski, could I add to this? 
Expanding--I not only agree with that, I would expand upon it, 
that as one of these oxygenates, MTBE, is looked at as a bad 
actor now in California, as you all know.
    The Chairman. It supposedly gets in the water table. I do 
not know.
    Mr. Moyer. It moves very quickly and gets into the water 
and moves much faster than gasoline.
    The Chairman. Right.
    Mr. Moyer. The elimination of MTBE exacerbates the problems 
associated with the oxygenate mandate.
    Mr. Daigle. I would add to that that clearly Congress has a 
role in setting the specifications that are required to balance 
between environmental demands and supply demands. But Congress 
should----
    The Chairman. Yes, but when Congress begins to write 
specifics relative to fuel standards, you know, I question 
Congress's collective wisdom. It is torn between environmental 
concerns that may have some validity or not. And what I am 
getting at here is, is there general agreement with this 
statement that has been made relative to the recommendations 
that doing away with the additive requirements, because it 
really--there is a simpler and better way to achieve the 
objective of enjoying cleaner fuels.
    Mr. Robinson. Absolutely.
    The Chairman. All right. Now, would you gentlemen be 
willing to draft collectively some legislation in a draft form 
to submit to this committee that would propose how you bring 
about this change and still have the reasonable safeguards? And 
I do not want to go down a million rabbit trails here.
    But you know your business, and we do not. But we would be 
willing to take this, review it, and see if we can address in 
reality what you have suggested here, which is clearly a relief 
from duplicity, clearly offers more simplicity to achieve a 
better standard, which is what you are telling me you can do. 
Would you be willing to do that?
    Mr. Daigle. I think we clearly would be willing to do it. 
And I think there are activities underway along those regards 
with organizations, such as API and NPRA.
    The Chairman. Okay.
    Senator Nickles. Would the Senator yield to this----
    The Chairman. Yes. Just one more question, though.
    We are going to get some of this from the administration's 
task force. But how long is it going to take you to submit 
something to the committee?
    Mr. Daigle. I would think something could be submitted in a 
very short period of time.
    Mr. Robinson. Mr. Chairman, I think it is much, much 
easier. Basically you maintain all your performance standards. 
No one is complaining about a performance standard whatsoever. 
You just delete the oxygenate mandate. That is your 
legislation. That is all it is.
    The Chairman. All right. What I want you to do is submit 
this and give us the counter argument that is going to come up 
as a consequence of deleting the oxygenate mandate.
    Senator Nickles. I was going to say, I think that is the--
that was my suggestion. We just go back and eliminate the 
additive mandate language, the challenge being that I see--and 
maybe I am incorrect--is that the ethanol crowd will come 
unglued.
    [Laughter.]
    Senator Nickles. That would be more political than--that 
argument will not be based purely on economics. It would be--
that would be our challenge. But clearly, MTBE has not proven 
to be effective. The mandate was a mistake. It was in the bill. 
Some of us opposed us back in 1990, thinking we should not be 
doing that. You might remember the terminology, government gas, 
when we were involved in writing this legislation. And a lot of 
us were opposed to the mandate.
    Anyway, it was put in. And it was put in--correct me, if I 
am wrong. And this is stretching my memory--but it was put in 
coupled with ethanol as one solution. And the ethanol lobby is 
very strong, and it has a lot of votes in the Congress. And 
that is our real challenge. I do not think the challenge is 
going to be on removing the mandate, except for the fact that 
it pulls ethanol.
    The Chairman. Well, misery loves company, Senator Nickles. 
And I would like to have something from this collective group, 
because I think it represents a balance, if you will, and a 
point of view that should be considered. And clearly, there is 
potential relief for consumers, achieving the same objective. 
My time is----
    Senator Nickles. Tell Grassley you are thinking about this.
    The Chairman. No, I am not going to tell him, either.
    [Laughter.]
    Mr. Greenbaum. Mr. Chairman, if I might just add something 
to Senator Nickles's comments. One of the things we found in 
the blue ribbon panel was that removing the oxygenate mandate 
does not mean less use of ethanol. It undoubtedly, if you keep 
the performance standards, it undoubtedly means you will see 
increased use of ethanol.
    The Chairman. That would be good news for Senator Grassley.
    Mr. Greenbaum. Right. And I think the question, because in 
fact the mandate has largely been met by MTBE, ethanol is a 
relatively clean additive. It has some limitations, as we have 
heard today. But you would see increased use of it. And I think 
everybody would agree on that. I think the question is how much 
and do you need a guarantee. I think the panel felt you did 
not. In fact, it was better to have a mix of solutions, not 
just rely on ethanol.
    But the data was there to suggest that you would see an 
increase in ethanol under any circumstance.
    Senator Nickles. Help me a little bit, because I thought we 
were saying we wanted to eliminate the additive mandate, which 
would also eliminate the mandate--well, it is either going to 
be supplied by MTBE or ethanol, by and large.
    Mr. Greenbaum. Right. What we said, and what I think 
everybody here has said, is that there are RFG specifications, 
which are performance based. You need to have a certain level 
of clean emissions from the fuel. They do not tell you how to 
mix it or what has to be in it. Those should stay in place.
    What should be moved was the mandate, which only said you 
had to use oxygenates to get to that. If you do that and you 
keep those standards, you will still need to have something to 
make sure the fuel is clean. You will have to have lower 
benzene, so you will need a source of octane to replace it. You 
need some other things, and ethanol is one of the sources for 
that.
    So you will still have use of that, and you will see at 
least the same level and undoubtedly an increase in the use of 
ethanol.
    Senator Nickles. Your statement is very helpful in the 
success of this endeavor.
    The Chairman. Mr. Heminger, you are a large blender of 
ethanol. Would you care to comment relative to the concern that 
has been expressed on the politics associated with ethanol?
    Mr. Heminger. Yes, Mr. Chairman. We are the Nation's 
largest blender of ethanol. I would provide caution, though, to 
this discussion. In order to take MTBE out and bring ethanol in 
as a replacement, we are talking about 1.6 billion gallons in 
volume to replace. We believe just ethanol alone, that is about 
a 4-year minimum project. So I provide caution. We cannot snap 
our fingers and correct that today. It is going to take at 
least four years to be able to have the ethanol plants to 
supply that.
    But beyond that, the problems, as I had in my testimony, of 
transporting ethanol, you cannot ethanol refined products with 
ethanol through the pipeline system. It just does not work 
because of the affinity ethanol has for water. So we have to 
look beyond just ethanol corrects the problem. We have to look 
at how we transport, how we get the product eventually to 
market. It is a partial solution, but there are many other 
things we have to consider as well.
    Mr. Daigle. Mr. Chairman, may I clarify something?
    What we are suggesting is not the replacement of one 
mandate with another mandate. We are not asking to remove MTBE 
and then mandate to meet an oxygenate level of ethanol. We are 
asking to remove the mandate, put the performance specs out 
there, leave them in place as they are now, and then allow the 
industry to use its skill and its know-how to come up with the 
optimum blend and the optimum set of components to meet the 
gasoline supply.
    And I think what is being suggested is that if that is 
done, there will be a continued use for ethanol, particularly 
where it is economically attractive to use ethanol. And it may 
well grow above and beyond the current level. But we are not 
asking, clearly, to remove MTBE and replace with ethanol. I 
think----
    The Chairman. I appreciate your clarification of that. And 
my time is up. But before I quit, I want to know which one of 
you is going to volunteer to coordinate the effort of the five 
panelists to get something to us.
    [Laughter.]
    Mr. Daigle. Why do I not take that on, Senator, working 
with appropriate industry groups to get that done?
    The Chairman. All right. And what I also want you to 
address here is the concern that Mr. Moyer raised, where he 
indicated that the smaller refiners are working to try and 
comply with the mandate to reduce from, what, 500 to 15.
    Mr. Moyer. Exactly.
    The Chairman. But I am concerned about the ability of the 
small refiners to be able to bite financially that bullet, 
because we have seen the small refiners close down because the 
economics just would not address significant changes to meet 
various new requirements. Now it is one thing to be committed 
to try and achieve it. I do not want to see you folks going out 
of business.
    Now Exxon and the rest of them with their larger refineries 
can afford the retrofit. So I would like you to--you know, it 
is fine to pursue something, but if you do not achieve it, you 
go out of business.
    Mr. Moyer. That is exactly right, Senator. And indeed, in 
California one of the reasons that, according to the attorney 
general's task force, we have such volatility is the loss of 
five small and independent refiners that were not able to 
achieve the California RFG specification.
    The Chairman. Well, you tell me what you are going to have 
to have to stay alive.
    Senator Bingaman.
    Mr. Daigle. Mr. Chairman, with all due respect, there are 
two different issues. One is the oxygen mandate, and we will 
get you what you have asked for on the oxygen mandate.
    A completely different issue is the low sulfur diesel rule 
and what is the appropriate response on the part of the EPA, on 
the part of the industry to that.
    Mr. Moyer. I will be happy to take the lead on----
    The Chairman. That is fair enough. Okay. And remember, what 
we are looking at is, we recognize that the bigger oil 
companies, the bigger refineries, can do it. But we do not want 
to drive you folks out of business. And if the technology is 
there and achievable, that is one thing. If it is not or it is 
simply unavailable to the standpoint of your financial 
capacity, then what do you suggest?
    Senator Bingaman.
    Senator Bingaman. Well, thank you very much. I want to just 
underscore the point that Senator Nickles made. As I recall, 
this oxygenate mandate is in the law because the ethanol 
industry wanted it in the law. And as you pointed out, several 
of us opposed adding it as a mandate.
    I believe the Environment and Public Works Committee this 
last year proposed an additional mandate for the use of 
ethanol. I think that came out of that committee. So I think 
there is a strong level of support here in the Senate for 
maintaining some mandate. I think clearly I agree with the 
policy of eliminating the mandate and keeping the standards, 
and I hope we can do that.
    We have a provision in the bill that we introduced, S. 597. 
It is section 306 of that bill, which is entitled streamlining 
fuel specifications not later than 9 months after the date of 
enactment. The administrator of EPA and the Secretary of Energy 
shall join the report to Congress on the technical and economic 
feasibility of developing national or regional vehicle fuel 
specifications for the contiguous United States that would 
enhance flexibility in the distribution of fuels, reduce price 
volatility and costs to consumers, and meet local, regional and 
national air quality standards.
    Have any of you had a chance to look at that? Would you 
have a comment as to whether this kind of a provision is 
adequate or something different should be done on this problem 
of fuel specifications? We are anxious to get input from any of 
you as to how to address this problem in a constructive way.
    Mr. Daigle. Senator, if I may comment?
    Senator Bingaman. Yes, please.
    Mr. Daigle. In our view, it is really not practical to have 
one single national fuel. Different areas of the country have 
different needs, particularly from a volatility requirement 
standard, to assure proper operation of vehicles. What refiners 
really need is the flexibility of producing the needed fuels. 
So any fuels requirements that get put in place need to 
recognize the physical realities of the fuel supply system, the 
distribution system, and the current refining capacity.
    So mandates, quotes, rigid specifications, I think, are 
really not the way to go. The industry needs to know what 
specifications are required and then have the latitude and the 
flexibility to go out and use its know-how and its capability 
and its technology to provide that fuel in the most economic 
fashion.
    There are areas of the countries that need cleaner burning 
fuels because of particular problems with overall levels of 
contaminants in the air in those areas. There are other areas 
of the country that really do not need those. To the extent we 
pick one single fuel supply and impose that nationwide, there 
will be a number of areas in the Nation that will be incurring 
a lot higher fuel costs with really no net economic benefit.
    Senator Bingaman. Well, I can certainly understand that, 
and I agree with it. What about the idea, though, of having 
regional vehicle fuel specifications? Does that make sense to 
you or not?
    Mr. Heminger. Senator, if I can answer that? I agree with 
what Mr. Daigle said. And if you go to a regional mandate, the 
regional, looking at the west coast, you would have carb 
gasoline. Looking at the Midwest, RFG in Chicago is the most 
stringent. So if we were to use that fuel for the balance of 
the Midwest, that is the most difficult, however, the most 
stringent gasoline to make.
    In doing so, you are going to take volume out of the 
system, when volume is required. And also doing that, you are 
going to put further difficult reasons on the infrastructure or 
requiring additional infrastructure to be able to design and 
make this fuel. And again, it is just for a region.
    We do not believe that it is right today to change to where 
we have possibly three, four, six, who knows how many different 
regional fuel components. The system has been designed today to 
make these individual fuels. The system is getting much better 
at being efficient in transporting those fuels. But we do not 
believe it is right to mandate, to go to the strictest sense 
for a given region.
    Senator Bingaman. So my understanding is that both of you 
then take the view that we should do nothing at the Federal 
level to deal with the problem that is reflected in this map 
over here.
    Mr. Heminger. That is not what----
    Mr. Daigle. That is really not what I am saying, Senator.
    Senator Bingaman. What are you saying that we should do? I 
guess that is my question.
    Mr. Daigle. What I am saying is a lot of the balkanization 
and a lot of the regional specs now are the result of the 
oxygen mandate.
    Senator Bingaman. So if we eliminate that----
    Mr. Daigle. If the oxygen mandate is removed, I think you 
will see the removal of a lot of the impediments that caused 
areas to go to regional and specific fuel supplies and move 
back toward RFG in the areas where the cleaner burning fuel is 
needed and the----
    Senator Bingaman. So you say if we eliminate that oxygenate 
mandate, that will solve the problem to the extent that we 
ought to solve the problem.
    Mr. Daigle. That is my view, Senator. It will----
    Senator Bingaman. And is that your view, too, Mr. Heminger?
    Mr. Heminger. Yes, sir. It will start to solve part of the 
problem.
    Senator Bingaman. Mr. Robinson, did you agree with that?
    Mr. Robinson. Not entirely. I would probably take a little 
bit more aggressive position on that, in the sense that I think 
what this is saying is, look at the technical and economic 
feasibility of developing national or regional fuel 
specifications. I do not know at this point whether it really 
makes sense to go to a national specification.
    I certainly think that we need to move away from making 
more and more different specifications. I think moving in the 
direction of less specifications is going to make a 
significant--will significantly assist the distribution system.
    You know, whether we move all the way to a single or not, 
that is a pretty large step. But we have continued to make it 
more difficult. We need to start shrinking it back the other 
direction, at least.
    Senator Bingaman. So you think just eliminating the 
oxygenate requirement or mandate does not necessarily get us 
where we need to go.
    Mr. Robinson. Probably not, although that would be a huge, 
very, very important first step.
    Senator Bingaman. Okay.
    Mr. Daigle. I think, Senator, one thing to keep in mind is 
moving to one size fits all around the Nation on fuel specs, or 
regional even, again, that is putting in arbitrary regulations, 
arbitrary requirements, not necessarily required by a given 
region, and has the potential to create supply problems, supply 
reduction, and more cost to the consumer.
    Senator Bingaman. Well, what I was trying to deal with is, 
some of your testimony talks about the problems and the 
increased cost that has resulted from balkanization. And it 
seemed to me that one way--maybe I am not defining that word 
the way you folks are. But I thought that the way to deal with 
that is to go to more uniformity and less balkanization.
    Yes.
    Mr. Moyer. Senator Bingaman, could I address this? First of 
all, I think we all agree that the elimination of the oxygenate 
mandate would be a good thing. But the question is, do we go 
further than that? Let me--there is a bit of a tension here.
    On the one hand--and we can take California as an example. 
On the one hand, all of California has California reformulated 
gasoline, even though clearly in the high Sierras, which has 
some of the pristine air in the country, do not really need 
that fuel. Yet the State of California chose to have one fuel 
to make it easier to distribute that fuel throughout the State.
    However, that also has eliminated, because we went to that 
lowest common denominator fuel, eliminated the ability of some 
folks to be able to actually supply that. That is the small 
refiners, for example, that went out of business, that cold not 
make that change to get to that lowest common denominator.
    And I believe that is the point being emphasized by Mr. 
Daigle, that if you go to that lowest common denominator, that 
will reduce the supply. It will certainly improve distribution, 
but it will reduce the amount of supply. And that is the 
tension that I was mentioning.
    Mr. Heminger. Senator, along the same lines, if you look at 
Chicago being the strictest, the additional cost to make the 
RFG for Chicago, if that was a regional fuel, we do not believe 
the consumer needs to pay in southern Illinois, in southern 
Indiana, midwest Ohio, that they need that strict fuel blend. 
So to have----
    Senator Bingaman. But you are assuming that if we went to a 
regional specification, it would be the most stringent. It 
would be Chicago's.
    Mr. Heminger. That is what we are assuming, if the same 
regulations are going to apply for emissions today. Now if we 
are going to change those, then you could come off of the 
strict compliance of Chicago. So you are right, that is the 
assumption we are making.
    Senator Bingaman. All right. I think it is you and me here, 
Chuck. Why do you not go ahead with any questions you have?
    Senator Schumer. Thank you, Mr. Chairman. And I appreciated 
the testimony of all the witnesses. As I have mentioned, I 
think we are on the precipice of a very large energy crisis, 
gasoline, home heating oil, gas for heating your home, 
electricity. And I have also said that Democrats talk about 
conservation, decreased demand; Republicans talk about new 
exploration, increased supply. The twain never meet, and 
nothing gets done.
    So your testimony is good, is one aspect of that, the 
gasoline market. We are going to have all sorts of problems 
down the road, if we do nothing. But I am delighted that we 
talked about this subject.
    Now, I would like--my first question is for Mr. Greenbaum, 
because we in New York are very concerned about the oxygenate 
issue. And you made reference to the problems brought about by 
the use of MTBE. In fact, my State, New York, is seeking to 
phase out MTBE by 2004. But the $64,000 question is: What can 
the Northeast put in gasoline to replace MTBE? Ethanol is not 
economically feasible. What is?
    And if you are faced with the choice of knocking out MTBE 
and putting nothing in its place or keeping it, what do you do? 
Not easy questions that we are all grappling with.
    Mr. Greenbaum. I entirely understand that. And the blue 
ribbon panel saw that in New York, in a number of States. And 
California is also wrestling with that, as well. I think that 
there are--we spent a fair amount of time a few minutes ago 
talking about one solution to that.
    And that is, if one could remove the oxygenate mandate, 
keep the standards, the specifications, for the clean fuels, 
the performance standards, that would not only allow places 
like New York to continue to have the clean fuels and avoid the 
MTBE, but it would, on that map, for example, allow Maine to 
come back into the RFG program and not require a separate 
little fuel in Maine and another one in some of these other 
areas. So it would have that dual advantage.
    I think short of that, the other route that is available--
--
    Senator Schumer. What is the major problem with doing that?
    Mr. Greenbaum. Well, I think--it would appear to all of us 
that the major problem with doing that is that, thus far, 
Congress, which would need to remove the oxygenate mandate, has 
not done it, largely because the ethanol industry would be 
concerned that it would somehow lose market or would--it would 
prefer to have more sale.
    Senator Schumer. Even if we did it--now, I do not know. 
Maybe this is not possible. But what if we did it just in areas 
where ethanol, you know, in the Northeast, where ethanol is not 
around. So they would not have a disadvantage, they would just 
forego a potential advantage, which is not going to happen.
    Mr. Greenbaum. Well, the second alternative, which I think 
Mr. Daigle also mentioned, is the one that California is 
pursuing, which is to seek a waiver from the EPA of the 
oxygenate mandate in its area, because of the need to deal with 
this problem.
    And that is--as long as that is done consistently in 
whatever area does it--I mean, I would guess that my colleagues 
on the panel would be concerned if only New York got a waiver, 
and Connecticut and New Jersey did not get a waiver, because 
then they would have yet another sort of funny color on that 
map.
    Senator Schumer. Right.
    Mr. Greenbaum. But that is the other mechanism. I know the 
regional--for example, in your region, that the Northeast 
States for coordinated air use management is attempting to come 
up with that kind of proposal as a fallback, because I think 
everybody understands that if we are going to get MTBE out of 
the fuel supply, there has to be a way to come up with a 
reasonable, consistent, uniform fuel supply to replace it.
    Senator Schumer. If we did your preferred choice, would it 
make either the supply less or the cost greater?
    Mr. Greenbaum. Well, the others on the panel could speak to 
it, but I think our experience was that as long as you give 
time for people to make the adjustments, and particularly in 
that case, it would certainly not increase cost. And it might 
have the potential, because it would not require the additive, 
to decrease it.
    Senator Schumer. Does everyone agree with that? Mr. Daigle?
    Mr. Daigle. Yes, if I may comment. I think if the oxygen 
mandate is removed, quality specs stay the same as they are 
now, there will be incentives in certain areas of the country 
to continue to use ethanol and possibly increase ethanol use. 
The key is going to be the distance from the supply to the 
needed source.
    So I think removing the oxygen mandate will not necessarily 
reduce ethanol use, could potentially increase ethanol use. And 
it will unshackle the rest of the industry to use its 
capability and its know-how to blend fuels in an optimum 
manner. To the extent you remove those arbitrary restrictions, 
directly that reduces the cost, directly it increases the 
supply.
    So if you do not tell the industry what spec to make, but 
do not tell the industry the recipe, allow the industry to use 
its know-how to come up with the optimum recipe and keep the 
cost down----
    Senator Schumer. Would the ethanol industry agree with your 
analysis?
    [Laughter.]
    Mr. Daigle. I do not know what the ethanol industry would 
agree to. Up to now, they seem to have seen it a different way, 
Senator.
    Senator Schumer. All right. Does anyone else have anything 
to say about that question that I asked, in terms of whether 
this would increase cost, decrease supply?
    Mr. Moyer. Nothing really. But----
    Senator Schumer. Go ahead.
    Mr. Moyer. I guess I would--no one here on this panel, I do 
not think, would have the right to speak for the ethanol 
industry. But I can speak for our members in California that 
will continue to--that would use some ethanol, even if there 
were no such mandate. And in fact, I believe that that 
flexibility--performance-based specs is clearly the way to go. 
Why should government demonstrate how to do the fuel?
    Senator Schumer. Yes, sir.
    Mr. Robinson. Senator, in California we will have MTBE--the 
ban will go into effect in less than 2 years. At that point, we 
will effectively have a mandate for ethanol, effectively a 
monopoly. It will not be a $64,000 question.
    Mr. Moyer. Agree.
    Senator Schumer. You agree with that. Okay.
    My next--just another question. We talked a little bit 
about the--well, we talked about gasoline inventories being 
lower than they were a year ago. And it was reported in 
yesterday's New York Times that some refiners have been slow to 
convert from a focus on heating oil production to gasoline 
production in order to maximum profits created by rising 
prices.
    Do you agree with this analysis? And what is the best way 
to make refineries more sensitive to decreasing supply 
conditions that might get dangerous? Mr. Heminger?
    Mr. Heminger. Yes. If you look back at the year 2000, as we 
were coming off of the summer problems of lower gasoline 
inventories, the industry was called upon for excess heating 
oil going into the winter because of the serious concern of the 
Northeast, the lack of heating oil availability in the Upper 
Midwest.
    The industry responded and made large amounts of heating 
oil throughout the winter and, in fact, early into February and 
March. When you are running at a full slate, or as much as you 
can, of heating oil and then you turn to a full slate of 
gasoline, you are going to have an imbalance in the system. 
What we have seen, then, is that due to last summer's and 
winter's requirements of the industry to make the given 
products, is that maintenance and large repair orders--we call 
them turnarounds--within the refineries were delayed in order 
to be able to make the fuels that were required.
    Here in the January/February time frame, it appears that 
about three times more plants were down for heavy maintenance 
and turnaround because they delayed from last year. We are 
seeing those plants come on--and in fact, the run time capacity 
that the industry forecasts has come back to where we are 
running again today at full capacity. But we did have in the 
first part of the year, plants just had to take the turnarounds 
to be prepared to make gasoline for the coming----
    Senator Schumer. You think they all did it as quickly as 
they possibly could.
    Mr. Heminger. Yes, Senator.
    Senator Schumer. There was not a view of, well, let us wait 
a little bit and the price will get higher and all of that.
    Mr. Heminger. No. In fact, if you go back and look at the 
January/February time frame, generally when you are starting to 
turn to gasolines, we call those the collar months in the 
business, collar meaning outside of the main transportation 
months. The refiners had every incentive to make every gallon 
of gasoline they could at that time.
    Senator Schumer. Everyone agree with that?
    Mr. Daigle. Very much so, Senator. I guess the other point 
I would make is, number one, our customers are every bit as 
important to us as your constituents are to you. Refining is a 
very capital-intensive industry. About the worst thing a 
refiner can do from a profitability standpoint is hold his 
equipment off the line or run his equipment spare.
    So I think you will see refineries typically motivated to 
run all out and make the product that is in demand at the time. 
That is the way you get the maximum utilization of your 
capital, and that is the way the industry always operates.
    Senator Schumer. All right. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Schumer. I know 
that we all share in the responsibility to address this with 
action, as opposed to extended words. They are awfully cheap 
around here. And we have heard some witnesses say that we are 
on the verge of a crisis. I would differ with that. I think the 
crisis is here.
    And, you know, we can talk a lot about what we can do 
before the crisis occurs. But if you believe the crisis is 
here, you are already too late. And with what Senator Boxer 
showed us yesterday relative to gasoline prices in San 
Francisco at $2.35 a gallon--this was a poster that she had, so 
it was obviously accurate--suggests that reality is here.
    I am going to look forward to receiving collectively from 
your group your specific recommendations relative to our 
ability to achieve the objective, which is obviously cleaner 
air as a consequence of your specific recommendations on 
oxygenates and additives and what the industry can do. But I 
think it points out a terrible inconsistency when government 
committees set fuel standards and do not really understand the 
implications.
    And here we have clear evidence of what has been the 
result. And while we can blame EPA, EPA is only enforcing the 
law. So I think that if anything has come out of this hearing, 
it has been that specific realization.
    And I want to thank you particularly, Mr. Greenbaum, for 
your willingness to come before this committee with a specific 
recommendation, based on your blue ribbon committee that has 
evaluated this for an extended period of time.
    One last question, gentlemen. I am a businessman, and I 
want to make some money. And I look at the refining industry 
and say, gee, there has not been a new refinery built in 25 
years. Now you are small--Mr. Craig Moyer, you are familiar 
with the difficulties of the small refiner. Mr. Daigle, 
representing Exxon, you are--obviously, capital is not 
necessarily a problem for Exxon, if Exxon wants to build a new 
refinery. Why do you not build a new refinery?
    Mr. Daigle. Several reasons, Senator. As I mentioned 
earlier----
    The Chairman. Well, just give me a couple of good ones.
    [Laughter.]
    Mr. Daigle. Okay. Two real good ones is permitting and 
siting.
    The Chairman. Okay. Permitting. The Nation obviously needs 
more refining capacity, as evidenced by previous 
administration's SPR, when they went out and took 30 million 
barrels and said, let us refine it so we can increase supply of 
heating oil. And then we found out that the refiners did not 
have the capacity. And we simply replaced what we were 
importing.
    Mr. Daigle. Senator, if I could get back, permitting and 
siting is one problem. Another problem----
    The Chairman. Okay. But tell us permitting. Okay. Why can 
you not get a permit? The need is there.
    Mr. Daigle. The ability to be able to get the permit from 
the Environmental Protection Agency----
    The Chairman. What do they require you to do that is 
unreasonable or uneconomic?
    Mr. Daigle. You need to link permitting and siting along 
with the overall basic economics of the refining industry. In 
the United States over the last 10 years, the U.S. industry has 
earned around 5 percent return on capital employed.
    The Chairman. Five percent?
    Mr. Daigle. About 5 percent return on capital employed. So 
I think the way to go in expanding refining capacity is not 
necessarily grassroots refining. The industry over the last 10 
years has basically increased capacity by expanding at existing 
sites. Efficiency improvements, incremental capacity 
improvements, there is still the potential to do a lot of that.
    Getting back to my testimony, though, a very real 
impediment to that is the current initiative by the EPA on new 
source review enforcement, where they are going in and 
retroactively reinterpreting a bunch of regulations, putting a 
new spin on it, looking at what the industry has done over the 
past 20 years, and now, with the new interpretations, 
concluding that those refineries or those expansions were not 
permitted correctly and threatening large penalties and fines 
and very much undermining the industry's capability to continue 
to have this ongoing capacity expansion at existing locations.
    So I think that is a very significant problem that needs to 
be addressed.
    The Chairman. So, sir, what you are telling me is there is 
simply no economic incentive for investment to go into a 
refinery with the requirements currently for siting, as well as 
EPA requirements.
    Mr. Daigle. Grassroots refineries definitely are not 
attractive in the United States at this time frame. However, 
there is the potential to continue to expand, as the industry 
has been expanding. The impediment now is the new initiative by 
the EPA. And unless that is addressed, as I recommended in my 
testimony, I think that will seriously undermine the industry's 
ability to continue to bring on stream that incremental 
capacity to allow the capacity to meet the demand.
    The Chairman. So we are right back with supply and demand. 
And as a consequence, the demand is going to be there, but the 
supply is going to be tight, simply because you can do better 
with a passbook savings account than invest in a refinery. You 
can get 5 percent almost on a CD, at least.
    Anyway, Mr. Heminger?
    Mr. Heminger. We recognize the same permit problems that 
Mr. Daigle is talking about. And it even goes into a number of 
the pipeline of industries, in being able to get permits to lay 
new pipelines, to convert pipelines. It is very time consuming, 
very long lead times. And many times, you just walk away from 
the project because there are roadblocks that stop you from 
getting it accomplished.
    Now, you know, Congress has a way about kicking big oil. 
And I guess there is some difference of opinion on where they 
kick them. But in any event, the reality suggests that you are 
not making any money in the refining business, you are making a 
little better than a return on investment.
    On the other hand, when oil was selling for $10 a barrel, a 
lot of production was below your basic costs. But you had to 
produce. So theoretically, your profits were less.
    Recent reports from several of the major oil companies 
indicate near record profits as the price of oil has risen 
dramatically. Some of that is supply. Obviously, we are 
dependent 56 percent on imports. So we have seen OPEC explain 
an extraordinary discipline on supply. And when the supply is 
tight, the price goes up.
    But in this current market with a tight supply, where, Mr. 
Daigle, are the major profits coming from? They are not coming 
from the refining. Yet, you know, the American public is 
confronted with refined product, and they pay an increasing 
price for refined product. So if you are not making it in the 
refineries, where are you making it?
    Mr. Daigle. Well, Senator, from an Exxon Corporation 
standpoint, a very large portion of Exxon Corporation's 
profits, as reported in our earnings statements, comes from 
overseas operations. A very large portion of that----
    The Chairman. So that is the efficiencies you get from 
having oil overseas and producing it and transferring it over 
to the United States and refining it. So it is really on the 
fields that you have found, the development that you have made.
    Mr. Daigle. Yes. Earnings and returns typically are very 
much higher in the up-frame portion of the business. That is 
not to say that we are not in the down-frame portion of the 
business long range. As I mentioned in my testimony, returns 
for the industry have been in the 5-percent league. But if you 
look at the last decades, you will see that the refining 
industry has incrementally brought on capacity needed to meet 
demand.
    Demand has increased over the last 20 years. Imports have 
not increased. So demand has been met by refinery capacity. The 
industry has been doing that, even at the low returns. The 
industry will continue to meet its customers' needs, if 
impediments that are being put in place are removed and the 
industry is allowed to continue to operate.
    I keep getting back to this new source review. That is very 
significant. And again in my written testimony, I have specific 
recommendations for the committee to consider there. They are 
retroactively reinterpreting regulations, applying those to the 
industry, causing very long delays in permits.
    And they have the potential to do that even more in the 
future, and also causing significant increases in investments 
to bring on capacity and trying to require the industry to 
reduce emissions by having to install equipment that is not 
required by the regulations. And that is going to be a big 
impediment on the industry's ability to continue to bring on 
the----
    The Chairman. Many of my colleagues are not here, but 
several of them, I think, have some misconception on 
justifiable return on investment that efficient companies that 
apply Americans deploy in their operations. I think your 
explanation that if you are lucky enough to own an oil field 
over in Saudi Arabia and you are producing and selling at $10 a 
barrel and then the price goes up to $28 a barrel, you are 
going to start making some money.
    Are you not entitled to that? Certainly you are.
    Mr. Daigle. Certainly.
    The Chairman. Who sets the price of oil? It is not set by 
an Exxon or a BP. It is set by world market. And that world 
market is not controlled by the United States. It is controlled 
by Saudi Arabia and several of the OPEC nations that have put 
together something that we could not do in the United States, 
because antitrust laws prohibit it.
    They put together a cartel. So the producing nations have 
got us. As long as they hold their discipline and hold the 
supply, they are going to dictate the price. Is that not 
generally correct?
    Mr. Daigle. I think that is generally correct, Senator.
    The Chairman. And we are exposed to that. So, you know, 
this business of kicking big oil for making a return or having 
higher profits for a period of time is directly related to the 
reality that they made investments on oil production.
    And somebody else controls the supply. And the price is 
relative, obviously, to the demand and the discipline of who--I 
mean, it is like the old golden rule. What was it? He who has 
the gold rules, as far as oil is concerned, it is OPEC.
    So I hope some of my colleagues can understand that. And 
some of the press people have a little problem with that as 
well.
    But in any event, I am going to give you one more 
opportunity to conclude. If you do not have anything to say, 
that is fine. I do not either. But I want to thank you for your 
contribution today. And I do look forward to the coordinated 
effort collectively through Mr. Daigle. And Mr. Moyer, you are 
going to cover what the small refiners are going to have to do 
to stay alive.
    Mr. Daigle. Senator, the only comment I would add to the 
comment that you just made is the situation you described is 
real. And again, it clearly spells out the need for more access 
on the part of the industry to areas that have the potential to 
allow more production in the United States.
    If there were more access, I think there are funds that the 
industry would put into exploring and developing. And I think 
the industry has clearly demonstrated that it has the know-how 
and the technology to do this in an environmentally sound 
manner and balance energy needs for the Nation versus 
environmental considerations.
    So access is a very clear need, if we are going to really 
reduce or reduce the increase in dependence on foreign oil for 
this nation.
    The Chairman. Yes. I cannot help but refer to the Wall 
Street Journal today, April 26. I would encourage all 
participants to--if you are too tight to buy it, I will give 
you a copy. But in any event, they make a suggestion that the 
energy task force is reflecting on what the priorities and 
objectives are. And they indicate in the article that the media 
debate has focused on whether the task force will suggest 
opening up that sliver of ANWR and reviving the nuclear power 
industry.
    The Wall Street Journal happens to suggest both. And then 
they go on to hope that the green lobby will blow a gasket. And 
then we hope the liberal Congress and the liberal Democrats go 
berserk. But they say they are getting ahead of themselves. So 
if you want the rest of the story, go buy a paper.
    Mr. Heminger. Yes, Mr. Chairman, just one last comment. We 
spoke today about oxygenates and the delicate balance of supply 
and demand on the downstream. And as we see refineries running 
at full capacity, that is today. In 4 years, I guess it is 5 
years, we are required to meet low sulfur diesel and low sulfur 
gasoline specs. We did not discuss those issues today.
    I just want to provide additional caution that what we are 
talking about today will help us in the near term. We need to 
look way beyond at those requirements coming down at us in 5 or 
6 years, the hundreds of millions of dollars of investment that 
we are going to have to put in to meet these low sulfur specs 
and, again, the delicate balance.
    If small refineries cannot make that investment, they are 
going to close. And it is going to continue to multiply and 
accelerate the problems that we have in this industry.
    And lastly, the waterway systems are very important 
infrastructure transportation needs to us as well. And again, 
the budget this year, we have noticed that 8 out of 20 locks 
within the Midwest require repair. That has been stricken from 
the budget. $3 billion per year of energy moves across the Ohio 
region and the upper Mississippi waterways. Again, here we have 
taken funding away to be able to support an infrastructure 
system that is very, very important to the livelihood of the 
entire Midwest.
    Thank you.
    Mr. Robinson. Mr. Chairman, I am a Californian. What is 
going on in California is replicating itself across the Nation. 
Crude oil is not the problem in California. Crude oil is 
important. I am not trying to minimize that. But what is going 
on in California and across the Nation is we have a very 
severely stressed refining and distribution system. And as long 
as you have a stressed system, you are going to have 
volatility.
    It is incredibly important that we make it possible for 
refineries to make the upgrades necessary to reduce that 
stress. And certainly two really key areas to help that 
distribution system is moving away from mandates, moving 
strictly to performance standards, and also a more fungible 
type of a standard.
    The Chairman. Thank you.
    Mr. Greenbaum.
    Mr. Greenbaum. Well, Mr. Chairman, thank you very much for 
having this hearing and giving me the opportunity to bring 
forward the blue ribbon panel comments. I might say that when 
that panel issued its report, we had a rare occurrence in 
Washington.
    We actually agree from a very wide range of interests, 
including both the oil industry and the environmental 
community, as well as State regulators and a number of experts 
on the kinds of things we have talked about today.
    And I look forward to working with you and the committee 
staff as you move forward to see if we can get some of the 
recommendations of that broad group implemented.
    The Chairman. We look forward to that.
    Mr. Daigle.
    Mr. Daigle. Thank you, Mr. Chairman. I would only conclude 
by saying that we certainly look forward to working with this 
committee and with the administration to develop a cohesive 
energy policy based on free markets and open competition.
    The Chairman. Thank you. Well, clearly, Senator Bingaman 
and I feel an obligation to address the crisis with what 
appropriate action should be taken by the Congress.
    Mr. Moyer.
    Mr. Moyer. Thank you. I really just want to thank you and 
this committee for your leadership in addressing the national 
energy policy. It is clear it is time, and I do appreciate that 
you and Senator Bingaman are working very closely together. And 
I cannot tell you, both as a citizen and as a member of the 
small refinery industry, I really want to thank you for your 
leadership in that regard.
    The Chairman. Thank you, gentlemen. We conclude the hearing 
and wish you all a good day. And when might I get this 
material?
    Mr. Moyer. Soon, within 30 days.
    The Chairman. No, no. I have to have it within 10 days.
    Mr. Moyer. You will have it.
    The Chairman. Thank you.
    [Whereupon, at 11:36 a.m., the hearing was recessed, to be 
reconvened on May 15, 2001.]

    [The following additional comments of Mr. Daigle follow:]

                          ExxonMobil Refining & Supply Co.,
                                          Fairfax, VA, May 8, 2001.
Hon. Frank Murkowski,
Chairman, Energy and Natural Resources Committee, U.S. Senate, Hart 
        Senate Office Building, Washington, DC.
    Dear Mr. Chairman: Thank you very much for the opportunity to 
testify before the Senate Energy and Natural Resources Committee on 
April 26, 2001.
    Per my commitment to respond to your request for legislative 
language to repeal the federal oxygenate mandate, attached is an 
industry letter which provides such language.
    I'd be happy to answer any questions you may have regarding the 
attached. Amy Hammer in our Washington, D.C., office also is available 
to answer questions. She can be reached at 202-862-0216. Again, thank 
you for the opportunity to address your committee.
            Sincerely,
                                               D.H. Daigle,
                                         Director, Americas Region.
[Attachment]
                                                       May 7, 2001.
Hon. Frank Murkowski,
Hart Senate Office Building, Washington, DC.
    Dear Mr. Chairman: At the April 26, 2001 hearing on national energy 
policy, fuel specifications and infrastructure constraints, you asked 
that all the witnesses provide additional information on the oxygen 
requirement for reformulated gasoline (RFG). In particular, you asked 
whether we agree that removal of the oxygen requirement would enhance 
refiners' supply flexibility and, if so, whether we could provide 
legislative language to accomplish that goal.
    As you noted during the hearing, refiners' flexibility is enhanced 
when they are allowed to meet emission reduction goals in the form of 
performance standards rather than product specifications. When the 
Clean Air Act Amendments of 1990 were enacted, none of us recommended 
that Congress attempt to prescribe a ``recipe'' for gasoline in the 
statute.
    Perhaps Daniel Greenbaum's testimony summarized todays situation 
best by indicating:

        ``We have two paths we can follow for clean fuels: to continue 
        clean-burning fuels with legislatively-mandated fuel additive 
        requirements, and risk potential market dislocations and 
        increases in price; or to keep the strong clean air performance 
        requirements for these fuels, but to free the market to make 
        them in the most cost-effective way possible, with a minimum of 
        specific fuel additive requirements.''

    The most straightforward approach to removing any constraints 
associated with the oxygen requirement in RFG is to simply delete those 
sections of the Act that impose the requirement. The language in option 
1 in the attachment to this letter does just that.
    Should you want an alternative approach that could enhance state 
flexibility in choosing whether to require oxygenates in RFG, you might 
consider the approach outlined in option 2 of the attachment. It 
provides states with the right to waive the oxygen requirement. Of 
course, this approach would need approval and coordination at the 
federal level to ensure that such waivers do not impose additional 
constraints on the fuel distribution system.
    We would be happy to answer any questions you may have or provide 
further information. Please do not hesitate to contact us.
            Sincerely,
                                American Petroleum Institute
                                National Association of Convenience 
                        Stores
                                Society of Independent Gasoline 
                        Marketers of America
                                Western Independent Refiners 
                        Association

Option 1. Elimination of Reformulated Gasoline Oxygen Mandate

    Section 211(k) of the Clean Air Act (42 U.S.C. 7545(k)) is 
amended--

          (1) by striking 211(k)(2)(B) and 211(k)(3)(A)(v);
          (2) by renumbering 211(k)(2)(C) and (D);
          (3) by striking 211(k)(7)(A)(i) and 211(k)(7)(C)(ii);
          (4) by renumbering 211(k)(7)(A)(ii) and (iii); and
          (5) by renumbering 211(k)(7)(C)(iii).

Option 2. Waiver of Reformulated Gasoline Oxygen Mandate

    Section 211(k) of the Clean Air Act (42 U.S.C. 7545(k)) is amended 
by adding the following new paragraph at the end:

          (11) WAIVER OF OXYGEN CONTENT REQUIREMENT--
                  (A) IN GENERAL--Upon petition to the Administrator by 
                the Governor of a State, the Administrator shall waive 
                any oxygen content requirement in effect under this 
                subsection for that State.
                  (B) ACTION BY ENVIRONMENTAL PROTECTION AGENCY--Not 
                later than 270 days after the date of receipt of a 
                petition submitted under subparagraph (A), the 
                Administrator shall grant the waiver of the oxygen 
                content requirement requested in the petition. If, by 
                the date that is 270 days after the date of receipt of 
                such a petition, the Administrator has not granted the 
                petition, the petition shall be deemed to be granted. 
                The waiver under this subparagraph shall take effect on 
                the date 90 days after the petition is granted or 
                deemed granted unless the Administrator establishes an 
                earlier effective date.
                  (C) SPECIAL RULE--The oxygen content requirement in 
                effect under this subsection shall not apply to a State 
                referred to in subsection (c)(4)(B).
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