SECRETARY SAMUEL BODMAN: Good morning, everybody.  It’s been a while since we’ve seen each other, so welcome back, and we’re glad that we’ve got a chance to get together.

I want to welcome my friend, Secretary Johanns.  Mike and I have become good friends, and that makes it a lot easier for our departments to work effectively together.  We do a number of joint projects on renewable energy and biofuels issues, projects which complement the missions of both of our departments.

Spurring greater development of energy from biomass is a key part of the president’s Advanced Energy Initiative.  By increasing the amount of energy that we get from these renewable fuels we can alleviate pollution, we can reduce our dependence – or our addiction, as I guess it has been described – on foreign sources of oil, and it also helps America’s farming communities by expanding the market for their agricultural products.

The focus of our gathering this morning is our enthusiasm for a renewable energy conference that we are co-sponsoring, the Agriculture Department and the Energy Department, on October 10th through 12th in St. Louis.  The participants will include federal government, state government, local officials, utility and energy company executives, farmers, as well as members of nongovernmental organizations.  The conference will address areas where government, industry and stakeholders can work together to overcome obstacles to expand our use of renewable energy.

We certainly would encourage all of you to attend.  Those of you who are not planning on it, we’d ask you to at least look at that.  And there is more information on the conference at advancingrenewableenergy.com, and so I would refer you to that,

I think my friend and colleague, Secretary Johanns, would like to say a word, and then we’d be happy to take questions.

MIKE JOHANNS:  Well, let me start out and just express my appreciation for the invitation to be here this morning, and I also look forward to the conference.  We’ve been working aggressively on the details and it looks like it’s going to be a great conference.

The president has really reinforced the commitment to renewable fuels in his State of the Union address.  I suspect there weren’t many that knew even the terminology “switchgrass” until he mentioned it.  But now with renewable fuels coming to the forefront, we have a great opportunity for rural America and for our nation.  On the agricultural side, we literally see rural America changing because of what’s happening here.

Traditional U.S. ethanol has been corn-based, as you know.  In 2005, 3.9 billion gallons of ethanol were produced.  I might mention that’s a four-fold increase in five years.  Annual production is now equivalent to about 3 percent of national gasoline consumption.  At this pace we will easily surpass the goal of 7.5 billion gallons by 2012.  There are 101 ethanol plants in operation.  There are 39 plants that are under construction, so you can see a significant amount of capacity is soon to be added.

But having said that about corn-based ethanol, cellulosic ethanol presents a promising future also – not as far along as corn.  We certainly recognize that potential cellulosic feedstocks do include such products as switchgrass – it might be wheat straw, corn, woody biomass, forest byproducts, recycled wood.  Really, anything that’s a biomass has potential.

Our farm and forestlands can supply enough feedstock to displace about 30 percent of current U.S. petroleum consumption, and we think that can be done by 2030 if the country is committed to that.  USDA spent nearly $1.7 billion on energy related programs between 2001 and 2005.  In 2006 alone we estimate that USDA will spend more than $270 million on these programs.  Just last week I announced $17 million worth of grants for renewable energy, energy efficiency.

So we’re excited about what we see.  Like I said, it’s really changing the landscape of rural America.  We’re also excited to be a partner with the Department of Energy.  I would also encourage you to take a look at the conference in St. Louis.  We think it’s going to be a great conference.  We’re excited about it and I’m looking forward to it.  Thank you.

MR. BODMAN:  Thanks, Mike.

Questions?  Yes, sir.

Q:  I have a question for both of the secretaries.  There is a public backlash against ethanol.  I wonder if either of you has been following this debate.  Consumer Reports said this month that it’s not a good choice for consumers, that it encourages more gasoline use because of – that it’s got far lower energy content, encourages more gasoline use because of the structure of the flexible-fuel vehicle law, that it doesn’t do a great deal for cleanliness.  It’s probably good for farmers; is it good for individual consumers?

MR. BODMAN:  Well, I believe that it’s good for individual consumers in that this is a domestically produced product.  And I think that’s really the centerpiece of this, that it’s – that it is something that we’re by the money that our consumers are paying for fuel, whatever the price end up in America, and ends up in the hands of – first and foremost, of the agricultural community but also the manufacturers and so forth who are U.S. based.  So I think it’s important to focus on that.

It’s also important to note that ultimately the market will decide.  There are other forms of synthetic product, butanol being one, that some companies are working hard on.  DuPont and BP have made a formal announcement of it.  Chairman Holliday from DuPont will be a speaker at the conference, and so I’ll be looking forward to his remarks.

So we will see, and I think the initial work that they are doing is in England, using sugar beets as a raw material, but then they’re expanding feedstock alternatives, and I’m not sure just how much he’ll have to say about that, but I’m sure he’ll be asked about it.  So there’s a lot going on and the goal is to have this be domestically economically based.

I don’t know – Mike, do you want to comment on that?

MR. JOHANNS:  Yeah.  I probably would start out and maybe debate with you a little bit about public backlash.  There has always been a debate here.  I’ve been involved in public policy relating to ethanol for a long time.  I come from a state where we’ve produced a significant amount of ethanol – the state of Nebraska – and there has always been a debate to some extent about the efficiency of the plants and the efficiency of the product and this and that.

But having said that, we have such great examples, not just in the United States, of the benefits, but around the world.  I look at what Brazil has done in the ethanol industry.  Now, their raw material is sugar cane, but they have really moved toward an agenda of energy independence, which I find to be enormously exciting and I’m sure they do also.  I’ve been to Brazil; I’ve looked at their plants and, you know, they were way ahead of the United States when it came to ethanol, but very definitely we’re catching up.

The other thing is the point that Sam has made, and that is that we are going to grow corn in the United States.  That’s a given.  We do it very well.  The other thing that the American farmer does is they’re just hugely productive.  The productivity increases, we chart it at about 2 percent a year.  It’s just a remarkable phenomena.

And so, if we can use this product that we grow here in the United States and we can add value to it by producing a value-added product that you can put in your fuel tank and make it available to more consumers, there really is just many win-win opportunities.  It is good for the environment, it is good for rural America, but it also good in terms of moving toward more independent effort when it comes to our energy needs in the United States.

Q:  (Off mike.)  The ethanol industry is heavily subsidized.  Is it 54 cents per gallon tax incentive?  And a lot of people say that if – some people at the USDA actually – it won’t be profitable without those government subsidies and also with protection from the import of ethanol – (off mike).  But strictly the tax incentives, how long will it be, or will it ever be, profitable standing alone without all the government subsidies?  And how much does the government – how much does that 54 cents – how much does that cost taxpayers every year?

MR. JOHANNS:  You can do the math.  It’s 50 cents, or is it –

MR. BODMAN:  Roughly, I think it’s 50, but I carry 50 cents as a round figure per gallon, so it’s roughly $2 (billion) to $3 billion –

MR. JOHANNS:  Two to 3 billion dollars, because we produce about nearly 4 billion gallons of ethanol, so –

MR. BODMAN:  Last year.

MR. JOHANNS:  Last year.

MR. BODMAN:  And then this year it will increase.

MR. JOHANNS:  This year it will increase, and so we’ll hit that 7.5 billion number pretty quickly here.  I don’t know if it will be next year, but it certainly is not far off.  And again, you can just do the math on that at 50 cents.

Here is what I would say, Bill.  When I was chairman of the Governor’s Ethanol Coalition I gave a speech one time that – I said the real success of the ethanol industry is going to be when we say it’s financially, economically self-sufficient.  That will be success for me.  That’s what we should be working to achieve.  Three-dollar gasoline – and ethanol tends to follow the path of gasoline in terms of pricing – has really changed the economic dynamics, so the ethanol industry has been, certainly this year, I believe economically self-sufficient.

Now, you know, having said that, boy, you really get down now to the question of, well, is this individual plant self-sufficient because a lot of these plants are built with debt, and so there is retirement and debt and that sort of thing, but this is a vastly different industry than it was just a few years ago.  It’s been quite a success story.

Sam, do I have that about right?

MR. BODMAN:  Yeah, I think so.  Very quickly, it costs about 60 cents a gallon – pardon me, $1.10 to manufacture ethanol from corn, all in, today.  You’ve got a 50- cents-a-gallon subsidy, so it’s a net 60 cents a gallon.  You’re selling it, as the Secretary just said, at three bucks or as high as $4 recently.

The payback on these plants is very fast, and so there is debt to finance them for sure, but the payback on them is very rapid.  That’s why we’re seeing such great increases in capacity.  So this industry is extremely self-sufficient.  You don’t have to worry about that.

Q:  So, should Congress –

Q:  If I might –

Q:  Should Congress take away the incentive?

MR. JOHANNS:  You know, it’s there until 2010, and I think Congress’ hope was to –

MR. BODMAN:  Stimulate it.

MR. JOHANNS:  – stimulate it to jumpstart the ethanol industry.  And for a lot of reasons that policy approach is working.  It’s not only the congressional action.  Like you said, $3 gasoline has changed things pretty dramatically everywhere.

So it is in place until 2010.  I’m not sure what the energy title will look like in the farm bill next year – you know, Congress will write that – but I think you’re going to see a strong energy title.  I think there’s other policy considerations that work here.  But I would say this:  If your goal was to have some success in building out this industry, we certainly have seen that success – a lot of plants under development.

Q:  If I might follow up on the economics of the issue, I’ve been speaking recently with one of the foremost ag economists who says that the biggest risk to the ethanol industry is a drop in gasoline prices because the – as you mentioned, the price of ethanol follows gasoline.  What will the effect of new supplies such as this recent Gulf find have, and what is the risk to the ethanol industry and the investment for farmers?

MR. JOHANNS:  Sam, you can talk about that.

MR. BODMAN:  Yeah, let me – first of all, we are hopeful.  We – speaking parochially for the Energy Department, we’re hopeful that this new find will be as good as it has been reported to be, but it is clearly not going to have any near-term impact on the availability of oil.  I mean, you’re looking five, six, probably 10 years before you see meaningful contributions from there very deep offshore potential resources that have been described in the press.  And in that time we are hopeful that we will see substantial enhancements of capacity in the ethanol field.

You know, I am not one to forecast what oil prices will be in the future.  In the past, 30 years ago, we had a huge decline in oil prices.  It went from what – we then had this outlandish price – I think it was $30 a barrel or $35 a barrel at its peak and it went down to $7.  And that’s what the great fear is; that’s where the concern is in this, and our approach has been one to let the markets determine the price for oil.  We think that’s important.  There are many who feel that we have seen – the days of single-digit oil prices is going to be ancient history.  There are many who feel that way, and that we’re looking at prices that are – minimum prices that are well above what historic levels of $20 to $25 a barrel have been.

So, you know, that’s the prime issue, not just in ethanol but in refining capacity, in investment in new oil reserves – that’s going on all over the world – and that by and large you’re seeing the companies who do the best, both the state-owned companies and the privately owned corporations of the United States in particularly are making judgments and they are taking positions that would indicate that their views are that the days of single-digit prices are going to be ancient history.  That seems to be the position that is at work.  We’ll see.

Yes, sir.

Q:  The sale of ethanol – is your department’s goal to get the cost of production down to like $1.07 a gallon?

MR. BODMAN:  The goal is to get it down to be commensurate with corn, and so – which is about $1.10.

Q:  And in terms of years, this is just right around the corner; companies are close.  From your department’s knowledge, where do things stand right now?

MR. BODMAN:  We’re about double that right now.  It’s about $2.20 today.  That’s what it costs today to manufacture ethanol using cellulose.  Right now in our renewable energy laboratory out in Golden, Colorado we have work going on – have had this year going on right now, and they are working in particular using corn stover, which is the material left over after you harvest the corn, so it’s the cobs, it’s the leaves, it’s the stalks, it’s the cellulose left over, and converting that into ethanol, and that’s about $2.20.

There are those who are using other enzyme systems that claim that they’re down on the $1.50 range.  And so we are – that’s one of the things that we have that’s part of the Energy Policy Act.  We will have a loan guarantee office here in this department that will help guarantee loans for new technologies, and we will be working on that, and we are in the process of making announcements and developing programs for that.

So that’s a piece, and the president’s Advanced Energy Initiative will increase funding out in Colorado by about 50 percent for manufacturing ethanol from cellulose, and that is meant to deal with a broader range of feedstocks: switchgrass, as the secretary mentioned, wood chips, any source of cellulose.

The other thing I would tell you is that we’re perhaps most excited about here within the Energy Department, we’re a primary funder of research in both the physical sciences, and to a degree in the biological sciences, and we have a proposal in the works right now to solicit interest from various communities in the United States to develop a consortia that would include universities, include the private sector, include federal laboratories, and that we are offering to fund up to $25 million a year for five years for each of two centers.  And the goal will be to use very high-tech genetic modification of the reproductive technologies inside microbes so that we can develop new microbes that hopefully will lead to the ability to manufacture ethanol at even lower prices than the ones you suggest.

So we’re going at this, bringing the heart and soul of the American high-tech communities to bear on this.  And so we expect a lot of interest in Boston and San Francisco and St. Louis and the research triangle, New York.  You name it, there’s a lot of interest and we’re quite enthused about it.  So there’s a lot going on.

Q:  Just a follow up on that.  When do you expect – given what you know now, when do you expect the first economically viable commercial-scale plant to be in operation?

MR. BODMAN:  Cellulose?

Q:  Yes.

MR. BODMAN:  Five years?  It’s a guess.  You know, I think we’ll see – we’ll see, I think, interest in the private sector in loan guarantees, and that to the extent we provide those, I would expect those to be available and we would have deals done next year – in the first half of next year, and then it takes two or three years to build a plant.  So I said five years, sort of giving myself a little flexibility on it, but potentially even faster than five years.  But that’s, I think, a reasonable time period.

Tom?

Q:  Secretary Bodman?

MR. BODMAN:  Yes?

Q:  If I could just ask you about something a little different but really important. Today we’ve got the hearings on the Hill on BP.

MR. BODMAN:  Yes.

Q:  And I’m wondering, given BP’s admission that it didn’t properly take care of the pipelines there in Prudhoe Bay and the spills occurred –

MR. BODMAN:  Right.

Q:  – do you think BP has misled the public with its pro-environment marketing campaign, and do you think BP or any oil company can be trusted now to build and maintain the proposed natural gas pipeline in Alaska, or drill in ANWR for oil if it’s ever opened up?

MR. BODMAN:  Well, first of all, the pipeline safety issues are not the province, as you know, of this department; they are the province of the Transportation Department and the Office of Pipeline Safety, and those are the folks that are working the issue.  I have spoken to the gentleman who is the chief executive of BP’s North American Activities.  He has articulated what they’re doing.  My primary function was to try to understand what the problem was and what they were doing to deal with it.  I think that he seems to have responded very rapidly and professionally to dealing with what was and is a very – not just an unfortunate circumstance; clearly there have been management failures within that corporation.

You know, having said that, I think that they have – they seem to be responding well and their record of accomplishment and of focus on environmental matters is there.  I believe it’s real and I believe that they have – they have failed to deliver in this instance, but I’m not one to try to tar someone that if you make a mistake that forever you are branded as someone who is unable to function and perform effectively.

Q:  So you’re saying you think BP can be trusted to maintain properly the natural gas pipeline if drilling in ANWR happens?

MR. BODMAN:  I would trust but verify, obviously.  (Laughter.)  Well, that’s the approach we’ve always taken, and the approach that the Interior Department – I would presume it would be the Interior Department that would again – I want to make sure I’m careful on this.  This is not something that is in the province of the Energy Department.  The Interior Department would be the agency that would undertake any leasing discussions of ANWR or anywhere else, and they have standards and I’m sure that they will factor into their decision-making the past performance, and the past performance of BP has not been good in this instance.

So I think it would certainly be a factor, and therefore I think the issue of trust but verify is probably the operative term.

Q:  But you were in charge of the – DOE is in charge of the loan guarantee program, is it not, for the natural gas pipeline?  You do have some role in that.

MR. BODMAN:  We do, for the –

Q:  And so you wouldn’t have a problem with BP being the operator of that pipeline?

MR. BODMAN:  We would be – first of all, we have a role in the beginning of helping getting it organized and off the ground.  That then would be in the province of an individual who is currently an Energy Department employee but would then become an independent agency basically working for Congress and dealing with this specific issue.  So we do have responsibilities now, but the responsibilities will pass basically to the Congress as that project unfolds.  At least that’s my understanding.

And so, you know, I guess I would say that we would take into account – to the extent that we’re involved in this, we would take into account the performance of this company, as we do all companies, and make a judgment that would hopefully be balanced, that would not just take whatever promises they make but also would look at how they performed in the past, and not just in this instance.  They’ve also performed and done a good job in other respects.  And so it would be trying to bring a balance.

Q:  Both secretaries, we’ve seen the president make commitments on alternative energy, on reducing dependence on foreign oil.  Is there going to be a commitment as well to reduce carbon emissions from the United States?  And by the way, have either of you seen “An Inconvenient Truth”?

MR. BODMAN:  I have not seen “An Inconvenient Truth.”

MR. JOHANNS:  I haven’t either.

Q:  (Off mike.)

MR. JOHANNS:  We don’t get out at all.  (Laughter.)

Q:  On global climate changes, is there going to be a commitment on carbon emissions coming out?

MR. BODMAN:  I think that the – I can’t speak to that because I don’t know.  I mean, that’s really the province of the president.  I can tell you that from my life in the Commerce Department that this administration has been very focused on funding global climate science work, that we are just beginning.  We’ve got the first of 21 reports.  The first one was delivered about two months ago, as I recall, last summer.  And we will be seeing more of those coming out in the early part of this next year.

And so we’re learning more.  The president has made – continued to make it clear that this is a serious matter, he takes it seriously, and that he is – you know, he is focused on it.  That’s all I can tell you in terms of whatever decisions he might or might not make with respect to carbon emissions.  I can’t say.  I can tell you that based on the last input that I’ve had from the president, this is not something that he has, at least at this point in time, changed his mind about.

Q:  Mr. Secretary –

Q:  Did he change his mind about, in terms of having a deadline, a goal?

MR. BODMAN:  Of having a limit on carbon emissions.  The other thing I would say is we continue to work with companies around the world.  The idea of developing a friendlier environment is central to what this president is all about.  We continue to work with China, we work with India, and we’re trying to develop and make available technology to them.  We have the Asian-Pacific Partnership that we work with.  We have a number of different initiatives that are in the works that are seeking to use market mechanisms to deal with the carbon question, and we would like to do it without mandates.  And that’s something that I presume we will continue to evolve as we learn more and more from the work that I’ve already alluded to.

Q:  Mr. Secretary – Lynn Garth (ph), BNA.  It’s true ethanol production is increasing rapidly, but one of the problems is getting it to the consumer, and one of the issues has been E-85 and the number of stations that are around, around 800 or so in the country.  And you were going to have talks with the oil company CEOs about how to expand it, and I just wonder what your thoughts are about that issue and how many you see in the future and whether the oil companies are doing what they should be doing to expand the use of ethanol, or E-85 in particular.

MR. BODMAN:  Well, first, I mean, I have had conversations as I’ve said I would, and I have done that.  We are continuing to encourage the oil industry to expand the availability of ethanol, and they are doing that.  There are a number of projects that are ongoing with individual companies working within individual parts of our country.  Shell I believe is working extensively in Chicago, Chevron in California, et cetera, so that there – and it varies company by company.  We would like to do this without mandates, so we are continuing to do it.

And I guess I would tell you that I am satisfied that we are seeing a reasonable response at this point in time, but we are hopeful of seeing an even greater response.  The initial issue to me is getting ethanol available broadly throughout our country.  That’s really the question, and the question will be only answered as we start to get – as Secretary Johanns has mentioned, we were at 4 billion gallons last year; we’re going to be running at the rate of 6 billion gallons or so at the end of this year.  I agree with him we’re going to go by this 7.5 billion gallons that’s in the – I think that’s supposed to be by 2012 but I think we’re going to be by that in the next couple of years.  I would expect us to be.

And so that’s the good news, if you will.  The bad news is we used 140 billion gallons of motor fuels in this country, and so it’s a huge, huge business and it takes time.  It takes time for companies to respond and to operate.  And so I’m satisfied that they are working hard and that they are doing the right thing, that the commitments are being made.  But we’re continuing to work that, and as I said, I would like to – I feel strongly that it’s very important to do this without mandates, without our specifying – stepping in and saying you will produce so many E-85 stations.  We’ve seen a huge increase – it’s a small number, 800 or so, as you’ve said.  I don’t happen to know the number, but that’s a big – the last number I remember was 160 I think, or so.  So we’re seeing significant increase in numbers of stations that are available, and I’m hopeful that we will continue to see that happen.

As I say, one of the interesting things will be the response of the oil and gas industry because if you look at it from their standpoint, they have now seen roughly 5 percent of their market being taken up by ethanol.  And with the prospects – if the secretary is right and we see maybe a doubling of that, then you’ve got 10 percent of their market.  And the federal government is spending a lot of money to develop alternative feedstocks.

So you see the prospects and so I think that an intelligent company will start to take a lead and to put some of their technical resources to work in developing alternative processes.  That’s what they’re experts at.  You’ve already seen it because DuPont is working with BP in manufacturing butanol.  And so I think you’re going to see that as more and more opportunities present themselves.

MR. STEVENS:  Last question, please.

Q:  Mr. Secretary, in advance of next week’s OPEC meeting, have you been in touch with any of the OPEC ministers?  And what is your feeling about current OPEC production levels, and do you think that perhaps they should be increased?

MR. BODMAN:  As best I can tell – first of all, I have not, in the last month or so, been in touch with any of the OPEC oil ministers or energy ministers.  As best I can tell, OPEC is producing at pretty close to their available rate.  As I have said repeatedly, for the first time in my lifetime, the suppliers of oil are having great difficulty keeping up with demand, and so you have a demand, and so you have a demand-led situation and that’s why you’ve seen this big spike in prices that has been extremely painful for the American public.  And I’m hopeful that we will see, as we look at alternative sources of oil and gas in our country, as we look at alternative sources of renewable energy in our country, among other places in the world, that we will see, over a period of time, some reduction in terms of pressure that is on oil prices.

You have a very, very tight market today, and so when you say do I think they should increase them beyond where they can today, you know, you’re talking about a few hundred thousand barrels, not – you know, you use about 84 million barrels a day of oil in the world, 20 million of it or so – 21 million of it is in this country, barrels a day, and so you’re dealing with hundreds of thousands of barrels, not tens of millions, and so it’s a big – it’s a real issue.  That’s why prices are where they are.

MR. STEVENS:  Thank you, everybody.

Q:  Mr. Secretary, limousines run on E-85.  Do you have – (cross talk) – trouble finding stations to refill?  Well, I’m sure you don’t, Mr. Secretary.  Secretary Bodman, do yours?  What do you drive?  Do yours run on E-85?

MR. BODMAN:  We are in the process of acquiring a vehicle that will run on E-85, and I’m sure it will be fueled by going right over to the Pentagon – (laughter) – where there is a station right next to the Pentagon that sells E-85.

MR. STEVENS:  Thank you, everybody.

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