<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:33118.wais]
KEEPING THE FUEL FLOWING FROM THE GULF: ARE WE PREPARED FOR THE
HURRICANE SEASON?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND RESOURCES
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 7, 2006
__________
Serial No. 109-213
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
______
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
JON C. PORTER, Nevada C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia ELEANOR HOLMES NORTON, District of
PATRICK T. McHENRY, North Carolina Columbia
CHARLES W. DENT, Pennsylvania ------
VIRGINIA FOXX, North Carolina BERNARD SANDERS, Vermont
JEAN SCHMIDT, Ohio (Independent)
------ ------
David Marin, Staff Director
Lawrence Halloran, Deputy Staff Director
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Energy and Resources
DARRELL E. ISSA, California, Chairman
LYNN A. WESTMORELAND, Georgia DIANE E. WATSON, California
ILEANA ROS-LEHTINEN, Florida BRIAN HIGGINS, New York
JOHN M. McHUGH, New York TOM LANTOS, California
PATRICK T. McHENRY, North Carolina DENNIS J. KUCINICH, Ohio
KENNY MARCHANT, Texas
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Lawrence J. Brady, Staff Director
Dave Solan, Professional Staff Member
Lori Gavaghan, Clerk
Richard Butcher, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on June 7, 2006..................................... 1
Statement of:
Greco, Robert, group director of upstream and industry
operations, American Petroleum Institute; and Tyson Slocum,
energy program research director, Public Citizen........... 68
Greco, Robert............................................ 68
Slocum, Tyson............................................ 90
Johnson, General David L., Director, National Weather
Service, NOAA; Admiral Thomas Barrett, Administrator,
Pipeline & Hazardous Materials Safety Administration,
Department of Transportation; and Guy Caruso,
Administrator, Energy Information Administration........... 11
Barrett, Thomas.......................................... 21
Caruso, Guy.............................................. 36
Johnson, David L......................................... 11
Letters, statements, etc., submitted for the record by:
Barrett, Admiral Thomas, Administrator, Pipeline & Hazardous
Materials Safety Administration, Department of
Transportation, prepared statement of...................... 23
Caruso, Guy, Administrator, Energy Information
Administration, prepared statement of...................... 38
Greco, Robert, group director of upstream and industry
operations, American Petroleum Institute, prepared
statement of............................................... 71
Issa, Hon. Darrell E., a Representative in Congress from the
State of California, prepared statement of................. 3
Johnson, General David L., Director, National Weather
Service, NOAA, prepared statement of....................... 14
Slocum, Tyson, energy program research director, Public
Citizen, prepared statement of............................. 92
Watson, Hon. Diane E., a Representative in Congress from the
State of California, prepared statement of................. 64
KEEPING THE FUEL FLOWING FROM THE GULF: ARE WE PREPARED FOR THE
HURRICANE SEASON?
----------
WEDNESDAY, JUNE 7, 2006
House of Representatives,
Subcommittee on Energy and Resources,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2203, Rayburn House Office Building, Hon. Darrell E. Issa
(chairman of the subcommittee) presiding.
Present: Representatives Issa and Watson.
Staff present: Larry Brady, staff director; Lori Gavaghan,
legislative clerk; Tom Alexander, counsel; Dave Solan, Ph.D.
and Ray Robbins, professional staff medmber; Richard Butcher,
minority professional staff member; and Jean Gosa, minority
assistant clerk.
Mr. Issa. The subcommittee will come to order, a presumed
quorum being present.
Last year's Hurricanes Katrina and Rita provided the
government and energy industry with a painful education.
Emergency communication systems were rendered inoperable. The
electric power on which refineries and pipelines depend was
unavailable for much longer than the baseline scenarios had
predicted.
We were also made acutely aware that, although we have a
strategic petroleum reserve of crude oil, we do not have a
strategic reserve of refined fuels such as gasoline and diesel.
I remind everyone that, following Hurricane Katrina, I
introduced a bill, H.R. 4043, to have the National Academy of
Science study the feasibility of creating a strategic gasoline
reserve.
The lessons of 2005 go far beyond a wake-up call. Not only
should we expect the unexpected, but we should be prepared for
the unimaginable. Anything less could be catastrophic.
Besides the extraordinary and tragic loss of human life of
two 100-year storms in the same season, we are left with almost
$3-per-gallon average gasoline prices entering the 2006
hurricane season. The production of petroleum and natural gas
in the Gulf of Mexico is just now getting back close to normal
levels. Petroleum refining capacity was already stretched to
the limit before the 2005 hurricanes.
The importance of the Gulf to the United States cannot be
overstated.
It is the energy breadbasket for our Nation.
For the 2006 hurricane season--and I do not want to preempt
the testimony--but NOAA forecasts that we will have above-
average activity.
One noted forecaster has calculated that there is almost a
40-percent chance of the area of Florida or the Florida
panhandle, into Brownsville, TX, being hit by a category three,
four, or five hurricane in 2006, and I am sure we will hear
much more detail as the witnesses begin.
Bearing this in mind, it is critical that we assess
government and industry's preparedness efforts to keep the
critical fuels flowing from the Gulf of Mexico to the rest of
the country. Spiking fuel prices are a grave concern, but even
higher prices pale in comparison to the consequence of
widespread fuel shortages. During the crisis after Hurricane
Katrina, parts of the country were within hours of running
short of critical fuels. It was only through the ingenuity and
determination of government and industry personnel that the
fuel crisis was averted and the U.S. economy did not grind to a
halt.
Much was learned from the events of last year. It is
imperative that the lessons learned be applied in a systematic
manner.
Government and energy industry must closely coordinate
their preparedness in response efforts.
In short, are the Federal Government and industries
prepared to keep the fuel flowing from the Gulf of Mexico this
hurricane season? The answer to this question must be
affirmative, and it must be answered in actions, not only
words.
Today, we have experts from government, industry, and the
marketplace to help answer this over-arching question.
For our first panel of witnesses, we are privileged to have
General David Johnson, director of the National Weather
Service; Admiral Thomas Barrett, recently sworn in as
Administrator of Pipeline & Hazardous Material Safety
Administration, Department of Transportation--congratulations,
Admiral--and once again, we are joined by the Honorable Guy
Caruso, Administrator of the Energy Information Administration.
[The prepared statement of Hon. Darrell E. Issa follows:]
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Mr. Issa. I look forward to hearing from our distinguished
panel today. When our ranking member is able to join us, we
will undoubtedly pause, if she would like, for her opening
remarks. Since we have no other requests for opening
statements, I would ask that each of the witnesses stand, along
with anyone who is going to provide information, to take the
oath, as is required by this committee.
[Witnesses sworn.]
Mr. Issa. Let the record show that three witnesses and four
in the back row have all been sworn.
Before we begin, I would like to thank all who have
attended.
This is a real showing of the level of interest to have
this committee room filled to the brim when, often,
subcommittee hearings are echo chambers. I think that speaks
well of the gravity of what we are going to hear today. With
that, I would like to begin with Gen. Johnson.
STATEMENT OF GENERAL DAVID L. JOHNSON, DIRECTOR, NATIONAL
WEATHER SERVICE, NOAA; ADMIRAL THOMAS BARRETT, ADMINISTRATOR,
PIPELINE & HAZARDOUS MATERIALS SAFETY ADMINISTRATION,
DEPARTMENT OF TRANSPORTATION; AND GUY CARUSO, ADMINISTRATOR,
ENERGY INFORMATION ADMINISTRATION
STATEMENT OF DAVID L. JOHNSON
General Johnson. Good afternoon, Mr. Chairman and members
of the committee.
I am General David Johnson, Assistant Administrator for
Weather Services and the director of the National Weather
Service at the National Oceanic and Atmospheric Administration
[NOAA], in the Department of Commerce. Thank you for inviting
me here today to discuss the outlook for the 2006 Atlantic
hurricane season.
Last year's hurricane season set records for the numbers of
hurricanes and tropical storms. However, whether you are
predicting an above-average hurricane season like this year or
even a below-normal season, such as in 1992, the crucial
message is the same: prepare, prepare, prepare. It only takes
one powerful hurricane like Andrew or Katrina to expose our
vulnerabilities.
First, let me express my sincere gratitude to the members
of your committee. Your continued support of NOAA and our
hurricane program enables us to make the best forecast possible
in order to help protect lives, property and livelihoods.
There is a great interest among the media and public in the
research community about the upcoming hurricane season. People
want to know how many hurricanes there will be and the chances
of one hitting their area. This attention generates needed
awareness about the potential effects of hurricanes and helps
ensure people take the right actions at the right time.
The official hurricane season began just a week ago, on
June 1st, and runs officially through November 30th. The
average peak activity occurs with the warmest water
temperatures from the middle of August to the end of October.
NOAA's official prediction for the 2006 Atlantic hurricane
season is for 13 to 16 named tropical storms, with 8 to 10 of
those storms becoming hurricanes. Of those, we predict four to
six will be major hurricanes, or what we call a category three
or higher, packing winds over 110 miles per hour. It is these
category three storms that are the ones likely to cause the
most extensive damage.
This hurricane season, we are predicting an 80-percent
likelihood of an above-average number of storms in the Atlantic
basin, and that is the highest probability we have ever
predicted in a May outlook.
This high degree of confidence in our seasonal forecast
comes from many favorable conditions, including warmer sea
surface temperatures in the Atlantic basin, combined with a
lower wind shear, low surface pressures, and an African
easterly jet stream.
Many believe these favorable conditions, which started
coming together around 1995, are part of the multi-decadal
climate pattern which peaked in the 1950's and 1960's.
This multi-decadal signal could keep us in an active period
for major hurricanes for another 10 to 20 years or more.
One question that is raised frequently is the role of
climate change and how that affects hurricane frequency and
intensity, and this issue is important to NOAA. Our
meteorologists and research scientists are actively engaged in
ongoing research to better understand how this climate
variability and change may impact hurricane frequency and
intensity.
Steering patterns for major hurricane landfalls can
sometimes persist over years. During the 1940's, many major
hurricanes hit Florida. During the 1950's, the focus of land-
falling hurricanes shifted to the U.S. east coast, and during
the 1960's, the central and west Gulf States were again hit by
hurricanes. This pattern might lead one to assume that, given
the recent major hurricanes in 2004 and 2005, Florida and the
Gulf coast are likely targets again this season. However, in
each of those decades, there were exceptions, with some
hurricanes impacting other areas of the coast.
While it is possible to observe these trends and make
generalizations, it is important to understand that, in any
given year in the Atlantic, a hurricane can impact any part of
the U.S. coastline from Texas up to Maine, and it only takes
one hurricane over a given community to make a bad year.
In 1983, there was only one land-falling hurricane in the
United States, but it was category three Alicia that hit the
Houston and Galveston area, and in 1992, we only had one
hurricane make landfall in the United States, but that was
category five Hurricane Andrew, which hit southern Miami and
Dade County, FL.
The message from NOAA's National Weather Service is very
consistent.
We want every business, every family, every individual, and
every community or industry that operates on or near the coast
to have a hurricane preparedness plan and have it in place at
the start of the hurricane season.
I must emphasize that any city or community along the coast
can be devastated by a hurricane and that a hurricane is not
just a coastal event. The strong winds, heavy rains, flooding,
and tornados from weakening tropical systems can spread well
inland.
The damage created can hinder recovery or continued
evacuation efforts, and lead to increased loss of life and
property.
While NOAA has made great strides in the accuracy of our
hurricane track forecasts, much more work needs to be done,
especially on intensity forecasts, and we have been very honest
about that.
NOAA has asked outside experts to review our research and
our programs to improve our forecast intensity capabilities,
and NOAA also continues to test new products and models to
improve our overall hurricane forecast.
We do intend to introduce a new hurricane modeling system
called the Hurricane Weather Research and Forecasting Model,
developed by the National Center for Environmental Prediction.
We appreciate the Congress' support of this effort and its
overall support for the satellites, the aircraft, the buoys,
and most importantly for the people who make these critical
forecasts possible.
While NOAA will continue to do its best to provide accurate
forecasts with as much warning as possible, it is my hope that
each family, each business, and each community on or near the
coast will develop and be able to execute a hurricane
preparedness plan. We must all be ready to protect lives and
property from the power of hurricanes.
I thank you for your time today, sir, and look forward to
the questions.
[The prepared statement of General Johnson follows:]
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Mr. Issa. Thank you, General, and without objection, all of
the witnesses' written and oral testimony will be in the
record, and without objection, we will also leave the record
open for 5 days for additional inclusions or answers that come
from today's panel.
Admiral Barrett.
STATEMENT OF THOMAS BARRETT
Admiral Barrett. Good afternoon, Mr. Chairman. Thank you
for your leadership in scheduling this hearing and on this
issue, and the invitation to appear and discuss PHMSA's
response to last year's hurricanes and our preparedness for
this year.
Secretary Mineta is keenly focused on the Department of
Transportation's crisis response responsibilities, as I am for
Pipeline and Hazardous Materials Safety Administration. In my
view, PHMSA personnel and the pipeline industry did a terrific
job last year, under very difficult conditions, to keep fuel
flowing from the Gulf following the storms. Lessons learned
from that experience have helped us prepare for the current
season.
Secretary Mineta and PHMSA both understand the role our
pipeline transportation systems play in the national energy
supply, and the risk of fuel shortages from mid-Atlantic States
that could followupon a major storm.
When Katrina and Rita hit last year, PHMSA moved quickly
and aggressively to help industry return transmission lines to
full service.
As you may be aware, the hurricanes did not do extensive
damage to the underground transmission pipelines, and
historically, above-ground pipeline facilities have performed
well during hurricanes. However, the storms did cause extensive
damage to the electric power transmission network that pump
stations rely on for power, and restoring power to those major
pumps rapidly emerged as the critical issue.
Immediately after landfall of Katrina, PHMSA personnel
surveyed damage and monitored pipeline service restoration
activities throughout Louisiana, Mississippi, Alabama, and
Texas.
Through contacts with pipeline operator and their
customers, PHMSA was able to forecast fuel shortages throughout
the southeast and mid-Atlantic within 48 hours of landfall. If
you will look at the first chart, you can see the storm track
up through central Mississippi would have affected a number of
major pump stations on both Plantation and Colonial lines,
which are major feedings to the northeast.
PHMSA personnel from headquarters were dispatched by
Secretary Mineta to provide onsite coordination with local
emergency response centers. They worked with the FAA to
facilitate emergency fly overs for damage assessments and with
the Federal Motor Carrier Safety and Federal Highway
Administrations to obtain police escorts and waivers of hours
for service and weight restrictions to safely and rapidly move
19 large generators from around the country, as far away as
Washington State, to restore pumping capability.
Dedicated PHMSA personnel traveled to remote storm-damaged
areas to help industry personnel assure manual pipeline
startups were safe. PHMSA issued special permits to
Mississippi, Alabama, Louisiana, Florida, and later, Texas, for
Rita, to accommodate emergency transportation, and rescue and
relief materials, and facilitate removal of debris.
The bottom line is potential fuel shortages that could have
had major impacts up to the mid-Atlanta were averted by rapid
response and solid teamwork between industry, PHMSA, FERC, and
multiple other Federal, State, and local agencies, and if you
look--you can see the track on restoration and how it worked.
This is Katrina, but on the Plantation lines, you can see
that, within several days--August 30th would have been Tuesday,
so it is 2 days after the storm hit, a day after landfall
there. Restoration was crucial and moved rapidly.
On Colonial, you can see the same thing. It took a little
longer.
It is a much larger line. This line is over a 2-million-
barrel-a-day capacity, and so, it took a little longer to
restore, but it was promptly brought back in service.
Following the experience of the 2005 season, we have looked
at lessons learned and steps we could take to prepare for
future challenges. Our approach will be to analyze risk prior
to an event, bring rapid assessment of potential impacts, help
mitigate releases, facilitate safe restoration of fuel supply,
and approve special permits as warranted to facilitate movement
of supplies.
We have been meeting regularly with the pipeline industry,
FERC, DHS, DOE, and FEMA officials to execute responsibilities
under the national response plan. Our regional and headquarters
personnel have participated in numerous drills and training
exercises to more effectively deal with potential emergencies.
In the office of our chief safety officer, we have
established a new focal point for security and emergency
preparedness.
Last week, Secretary Mineta visited the Gulf coast to
discuss with State and local leaders ways to improve large-
scale emergency response plans. In addition, PHMSA staff met
with Mississippi and Louisiana officials, including the staffs
of Governor Barbour and Governor Blanco, to discuss emergency
response actions, held discussions with the Mississippi
Emergency Management Agency, the Louisiana Department of
Natural Resources, Louisiana Department of Homeland Security,
on the best ways to resolve potential pipeline and related
transportation emergencies, and we intend to continue those
meetings with local officials in other States as we move
forward.
Mr. Chairman, like you, DOT and PHMSA are committed to safe
operation of our Nation's pipeline transportation system under
both normal and emergent conditions. We understand how
important this is to our economy and to the safety and security
of our citizens.
I will be glad to respond to questions, and I thank you and
the committee for your interest and attention on this issue.
[The prepared statement of Admiral Barrett follows:]
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Mr. Issa. Thank you, Admiral.
Mr. Caruso.
STATEMENT OF GUY CARUSO
Mr. Caruso. Thank you, Mr. Chairman, and I appreciate the
opportunity to present the Energy Information Administration's
energy market outlook and discuss the potential effects of the
hurricane season. As you know, EIA is the independent
statistical and analytical agency in the Department of Energy.
As of today, we released our Short-term Energy Outlook for
June, and we see crude oil prices continuing to rise this year
and into next year. As you know, they are set in international
markets based on world oil supply and demand, and recently,
strong economic growth worldwide has accelerated the demand
growth, while global production capacity has struggled to keep
pace. This is an industry straining to meet the demand it is
facing.
At the same time, the perceived risk to supply caused by
political instability and other factors, such as natural
disasters, continually affect the market.
In our current short-term outlook, the monthly average
price of crude oil is expected to average $68 per barrel in
2006 and 2007, with retail gasoline prices projected to average
$2.60 per gallon in both years. Looking at the 2006 summer
driving season, we expect gasoline to average about $2.75 per
gallon, nearly 40 cents higher than last summer.
U.S. crude oil production should increase this year,
recovering from last year's hurricane damage, but only moderate
increases in both OPEC and overall non-OPEC production are
expected.
At the same time, world demand for oil is expected to
increase by 1.7 million barrels per day in 2006, and 1.9
million barrels per day in 2007, with China accounting for
about half-a-million barrels a day of the growth in both years.
Limited surplus capacity and concerns about potential
supply problems, not only due to natural disasters but geo-
political events, continue to keep upward pressure on oil
prices.
Turning to natural gas, total demand in 2006 is expected to
be slightly lower than last year, due mostly to the mild winter
conditions that reduced heating needs earlier this year.
However, industrial demand is expected to increase with the
recovery in the natural gas-intensive industries following last
year's hurricanes.
It is important to note that our projections do not include
any production losses or outages from hurricanes this season.
However, significant amounts of U.S. oil and natural gas
production and refining capacity are potentially vulnerable to
hurricane-related disruption. In 2004, the federally
administered areas in the Gulf of Mexico contributed 27 percent
of the total U.S. crude oil production and 20 percent of total
natural gas.
There was also significant production in the off-shore and
on-shore of the State administered areas in Alabama, Louisiana,
Mississippi, and Texas.
In addition, Gulf coast States account for more than 46
percent of U.S. refinery capacity.
Hurricanes Katrina and Rita passed through the heart of the
Gulf producing region.
According to the Minerals Management Service, as of June
1st this year, total production of crude has been reduced by
more than 160 million barrels, and production of gas by nearly
800 billion cubic feet due to the effect of last year's
hurricanes. That amounts to about 30 percent and 21 percent of
a normal year's oil and natural gas production from the Federal
off-shore fields.
About 228,000 barrels a day of Gulf production and 1.1
billion cubic feet per day of natural gas still remain off-
line, some permanently.
At the height of the refinery outages in late September,
nearly 30 percent of U.S. refinery capacity and over 60 percent
of refinery capacity in the Gulf coast region were shut down.
From August 26th through the end of 2005, about 105 million
barrels of refined products were not produced as a result of
refinery shutdowns. In addition, some refinery maintenance that
would normally have occurred last fall was deferred to this
spring.
The effects of Katrina and Rita and, to a lesser extent,
Hurricane Ivan in 2004 were unusually severe compared to past
experience.
As discussed in my written testimony, the impacts of
Katrina and Rita on refinery operations were even more
exceptional, pushing the normalized index of refinery capacity
utilization in the Gulf coast during October and September far
below levels experienced at any time over the past 20 years.
As General Johnson has just detailed, NOAA has issued its
preliminary outlook for this year's hurricane season, with an
80-percent probability of above-average hurricane--number of
hurricanes, and particularly major hurricanes. There is
considerable uncertainty, as General Johnson has indicated, in
predicting disruptions to oil and natural gas operations due to
hurricanes, because it depends on the precise locations and
intensities of the storm. However, based on our analysis of the
last 45 years of production losses and taking into account the
current NOAA forecast, we expect the total reduction in crude
production from Federal off-shore to range from zero to 35
million barrels during this hurricane season, with a reduction
in natural gas ranging from zero to 206 billion cubic feet.
In addition to the potential damage from production--to
production and refinery operations, hurricanes have other
potential effects, such as disruptions in transportation, as
Admiral Barrett has just indicated, electric power supply, and
other necessary infrastructure.
Last year, EIA assisted DOE's Office of Energy Delivery and
Energy Reliability, and the Office of Fossil Energy, in their
emergency response efforts during the hurricane season. We
stand ready again to support them and the agencies represented
at this table, and others, in responding to any potential
disruptions this year.
Mr. Chairman, this completes my oral testimony, and I would
be happy to answer questions at the proper time.
[The prepared statement of Mr. Caruso follows:]
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Mr. Issa. Thank you, and I will start off with 5 minutes of
questioning.
Mr. Caruso, you know, I think facts and figures are great,
and I have a staff that goes through them and runs the numbers
and pours over them, but in layman's terms, if we are to assume
the upper end of those shortages that you just described occur,
and since last year we came within, I believe it was hours,
sometimes adding up to a day, sometimes not, of running out of,
for example, jet fuel here in Washington, DC.
If we hit the upper end due to an outage, not similar to
last year but based on your forecast, do the pipelines go dry
for a period of time, and if so, what can we or are we likely
to be able to do as far as preventing aircraft trapped on the
ground in airports and unmanageable lines for other fuels?
Mr. Caruso. Well, if the intensity is limited to those
numbers that I have just discussed--and we also know that there
is certainly a potential for revisions upward--it would put
upward pressure on price, but this level is so much less than
last year, I do not think there would be a issue of anywhere
near the reduction in supply or the potential disruptions that
you indicated.
So, I would say it would probably be limited to price
impacts, and depending on how long the refineries or pipelines
were off-line, I do not see it approaching anywhere near the
intensity or disruption level of last year.
Mr. Issa. I hope you are right. I guess I would followup
with one quick question, which is that, since inventories are
generally--and capacity is not as good as it was going into
last year's hurricane season, and since jet fuel does not enjoy
the elasticity of demand, if prices go up, it does not change
the amount of fuel necessary to make the amount of flights that
we have people demanding, and even raising the cost of a ticket
doesn't reduce that many people who physically use aircraft to
travel, we can presume that aviation fuel, particularly, is not
going to go down over even days or weeks of short supply. So,
price is not going to change that.
If price does not change that, are we reasonably at risk
that, as close as we came last year, we could find ourselves
unable to supply, if there is a refinery outage even close to
last year, the aviation fuel in the northeast?
Mr. Caruso. I think the other element that you have to take
into account is inventories, and as of now, the starting of the
season, inventories of jet fuel and other--what we call middle
distillates--are in reasonable good shape. So, we do think
that, again, based on the assumption that we do not get above
the numbers that I have talked about, we should have adequate
supply, but as I mentioned, there would be an impact on prices.
Mr. Issa. General Johnson, as a southern Californian, I
often ask too many questions about the southwest part of the
United States, so please note that my biggest concern right now
is: if a hurricane were to hit the Washington to Maine coast,
particularly along New York and New Jersey, where we import
fairly substantial amounts of gasoline and distillates, what
would be the effect?
General Johnson. Well, sir, any coastal community or port
is certainly at risk, and New York, for example, has had
significant hurricanes in 1985 with Gloria and with Bob in
1991.
I think probably the most memorable one was 1938, where a
category three came in with 10 to 12 foot surge going in.
That is a pretty significant surge. Katrina had doubled
that in the Gulf coast, and the Mississippi coast had about
double that, but that is a significant surge and could disrupt
port operations; I defer to the port experts on that.
Our job is to provide on accurate, timely forecast, and so,
we will be watching the east coast and the Gulf coast very
carefully this year.
Mr. Issa. Would you say, based on your predictions that we
have a higher-than-normal opportunity to have that kind of hit
to New York and New Jersey this year versus previous years?
General Johnson. I have heard speculation on geographic
proximity, and I believe that is exactly what that is.
That is speculation at this point in time. There are so
many factors that go into where the hurricane will actually
track.
I think there is, however, sir, a direct correlation with
higher-than-average and an above-normal season and with a
higher probability for land-falling hurricanes. However it is,
in fact, scientifically less believable that we can associate
with a geographic proximity at this point in time.
Mr. Issa. Well, I do note that, yesterday, on June 6, 2006,
with the prime rate at 6.6, they said there was only a 1 in
100,000 chance that it would be the end of the world.
General Johnson. I will defer to you, sir.
Mr. Issa. Those were odds I could live with, but obviously,
the odds are dramatically more likely than 1 in 100,000.
For all practical purposes, isn't this, particularly at
this high level of activity--we are sort of in that it is going
to happen once in a 100 years and it is going to happen more
likely at this point in the 100 years than some other points,
from a weather standpoint?
General Johnson. Sir, we do see that cyclical, multi-
decadal signal, and since 1995, we have only had 2 years in the
last 11 that have been below normal, and those were both El
Nino years.
So, at this point in time, I believe that we are in this
above-normal decadal signal and we will remain there for the
next decade or so.
So, yes, sir, I think that this is something that all
America needs to pay attention to, especially those on the
coast, but as you point out, those effects can go inland
through energy and other industries, as well.
Mr. Issa. Thank you.
Mr. Caruso, did you have a partial answer to that first
question?
Mr. Caruso. Yeah. One point to keep in mind about New York
and the east coast----
Mr. Issa. New York, New Jersey, Connecticut. Let's not
forget Connecticut.
Mr. Caruso. I could never forget my home State. The
refining concentration in the Gulf coast, 46 percent of the
country's refining capacity, makes it obviously far more
critical to the supply. For example, there are 1.5 million
barrels a day of refining capacity in the east coast, and 7
million in the Gulf coast, but as the General just pointed out,
the ports are critically important, because they import
substantially more product into the east coast, as a share of
their final consumption, than any other region.
So, that is the area where I would be most concerned about
in terms of weather-related disruptions: port activity
disruption, as opposed to refineries themselves or even
pipelines.
Mr. Issa. Admiral, that probably brings us very logically
to you.
All of you spoke a little bit about where we are this year
versus last year, but that is the short run. That is how much
we could patch together with string and a little glue.
What is left to be done for this year that you are in the
last minutes of trying to figure out how to do it? Obviously,
down in New Orleans, we are very acutely aware that they are
welding and pushing to try to get things done, and they are
past what was their deadline. Admiral, what is it we have to
do, perhaps with additional emphasis from the Congress, for the
long run, for this entire 10-year period in which we are
probably at triple or quadruple the chances of a 100-year flood
occurring or a 100-year hurricane cycle?
Admiral Barrett. Sir, in terms of this year, and
particularly in light of your earlier question, I would point
out, there is a little more resiliency and flexibility once you
get above Baltimore in terms of--you have multiple modes, as
Guy mentioned, you have stuff coming in, in terms of restoring
capacity or capability. You do have pipelines coming up. You do
have pipelines coming up to the midwest and coming across, and
you have barge and shipping transportation.
So, there is a little more flexibility up there once you
move up into the Baltimore-Washington-New Jersey corridor. I
think fundamentally, if I take your question, I think Secretary
Mineta has an initiative to reduce, over the long term,
congestion on our Nation's highways.
It is an impediment to economic growth and a national-level
issue that needs attention.
Well, in a similar sense, I think we need to be creative
about ways, with the industry and with the Congress and the
administration, to reduce congestion on the energy highways, if
you will, the means by which we move energy around this country
and provide the reliability of those supplies to American
citizens.
So, I think, long-term, we need to take a look at that
issue: the congestion of the energy highway, as well as the
Secretary has clearly stated the need to pay attention to our
national highway system. That is what I think needs attention.
Mr. Issa. Obviously, we, as Californians, are acutely aware
of what happens when a highway becomes a parking lot, and that
is just every day, and that is without earthquakes or
hurricanes. But Admiral, following up, the pipelines that we
depend on in the northeast, the Colonial and Plantation, we
depend on them operating at virtually peak level.
First of all, what happens if we have widespread flooding,
we lose electricity, they shut down? What are we doing to
prevent that, to really attack the fact that we are an electric
economy, that we depend on electricity to get petroleum, rather
than we think that petroleum creates electricity?
Admiral Barrett. I think the industry, following, again,
the lessons learned--and we certainly have been looking at this
from last year--have been much more aggressive in positioning
in place emergency generators, food and water supplies. In
addition, they are paying more attention to how they can get
their employees into these sites, gaining appropriate access,
and I do think it is going to depend on what we encounter.
Despite the increasingly accurate predictions, it is a little
hard to know exactly what will be hit, but I know they have
been moving aggressively, and we have been monitoring their
efforts to put more capability in place, to be more immediately
responsible to any outage that is caused by loss of electrical
grid.
Mr. Issa. I am just going to ask one closing question, and
you have been a great panel, but last year, we discovered two
things.
First of all, we did not know where a lot of the assets
that we needed were. We might not have known we needed them
until the incident occurred, but once we did, we did not know
where they were.
It took a while to find out where generators were. You
included the fact that some came from as far away as Washington
State to the Gulf.
Then, second, once we had located them, contracted them,
crews were driving them in, we discovered that they had been
stopped by the very people who were intending to provide
relief.
One, what have we done about the first part, to your
knowledge, and this includes both liquid assets in the way of
replacement fuels and solid assets--for example, generators--
and two, to the extent that each of you has overseen this, what
are we doing to guarantee that if the asset is located and
heads in, that it will arrive uninterrupted?
Admiral Barrett. Thank you, sir.
In response to your first question, there has been a lot
more planning this year at multiple levels within the Federal
Government, partnering with industry and at the State and local
levels, to make sure that the assets, to the extent they can be
anticipated, are identified, that mechanisms are in place to
prioritize and assign them to where they are needed. I know for
a fact that the industry has been very aggressive, at least the
pipeline industry, in making sure they have in their pocket, if
you will, a little more depth to deal with emergent conditions,
and I think, two, the Federal Government, led by the Department
of Homeland Security, and from our perspective at Department of
Energy, and FERC, specifically, have been paying much more
attention to how, in an emergency, at both the national level
and down at the local level at emergency operations centers and
command centers, appropriate prioritization, with law
enforcement support, would be in place.
Last year, I know my deputy, Brigham McGown, was very
heavily engaged in arranging escorts from law enforcement to
move this equipment onto the sites where it was needed. Our
hazardous material folks worked with other agencies, Federal
motor carriers, to get the special permits we needed.
I believe, from what I know that those mechanisms will be
much more regular this year, and we are still working on that.
We are exercising regularly, and we will continue to do that,
and pay attention to where we identify any risks.
Mr. Issa. Thank you.
I am going to break my own promise where I said this was
the last question.
There was one other piece of testimony that came out, and
it was maybe an offhand remark, but I do not know that most of
us on this side of the dais are used to the term ``and some
assets in the Gulf are permanently off-line.''
Mr. Caruso, that was in your opening testimony.
Can you provide the committee--because I do not think we
are aware of what and why assets--and I am basically talking
about wells--are abandoned as a result of last year and what
the impact of that is, to the extent that it can be quantified.
Mr. Caruso. I would be happy to do that. Minerals
Management Services has made that estimate.
Mr. Issa. I appreciate it.
All congressional committees pride themselves on knowing
everything. I would appreciate it if you would help me in
getting that.
Mr. Caruso. I would be happy to do that, Mr. Chairman.
Mr. Issa. In closing, I would like to thank all of you for
excellent testimony, excellent question and answers. We were
very fortunate to have you with us here today.
This is no surprise that, if all goes well, we will not
have you back, but if any concern develops I have no doubt that
we will all be together again.
Thank you again, and we will hold the record open for 5
days.
We will now hear from our second panel.
With us today, we have Mr. Robert Greco, group director of
upstream and industry operations for the American Petroleum
Institute, and Mr. Tyson Slocum, energy program research
director of Public Citizen.
Before we proceed with the second panel, I apologize, but I
do not believe you have been sworn in yet.
Mr. Slocum. No.
Mr. Issa. Would you please rise to take the oath? Is there
anyone with you that is going to advise? It is harmless. It
does not hurt a bit.
Thank you.
[Witnesses sworn.]
Mr. Issa. Let the record indicate all were in the
affirmative and smiling, and before we begin, I would like to
recognize my ranking member, Ms. Watson, for an opening
statement.
Ms. Watson. Mr. Chairman, I would like to apologize for
being so late to this meeting. It was unavoidable, but thank
you for proceeding on, and I also want to thank you for
convening this most important hearing.
This subcommittee can play a vital role in examining the
issues regarding the availability of fuel supplies during this
upcoming hurricane season. Protecting the gas and oil
infrastructure in the Gulf of Mexico is essential to ensure
that gas prices do not exceed the record highs they are at this
time.
The Gulf produces 20 percent of domestic natural gas
production and 28.7 percent of domestic off-shore crude oil
production.
In the upcoming weeks, we must work diligently so we will
not be faced with the same fuel supply problems that we
encountered during the 2005 hurricane season. A repeat of last
year's unpreparedness would be devastating to our Nation's
economy.
Mr. Chairman, gas prices rose above $3 a gallon in
September 2005, creating record highs.
Constituents in my home State, and yours, of California
experienced situations where gas stations did not have any oil
to sell.
In northern California, along with a few other States in
the union, constituents faced jacked-up prices in excess of $6
per gallon of unleaded gasoline.
We do not want America to experience this kind of financial
strain again.
The Gulf of Mexico also provides an estimated 47.4 percent
of the total U.S. domestic refining capability. A shutdown or
even partial shutdown of this region would have a disastrous
effect on our Nation's oil and gas processing.
The National Oceanic and Atmospheric Administration has
predicted a very volatile hurricane season in this year, 2006.
In 2005, there were an unprecedented 28 storms and 15
hurricanes.
This season, scientists are predicting at least 13 to 16
named storms, with 8 to 10 becoming hurricanes.
Powerful storms can and do cause tremendous damage; we
witnessed that.
A destructive storm has a ripple effect on every citizen's
pocketbook, as well as on every citizen's life.
Oil companies are in a very powerful position. The global
thirst for oil has placed American consumers in a very
difficult situation.
An investigation by the Government Accountability Office
finds that recent mergers in the U.S. oil industry have
dramatically increased concentration in the refining sector. In
the last 30 years, there have not been any new refineries built
in the United States.
The increase in market concentration has allowed oil
companies to withhold supply, thereby increasing prices. This
makes it easier for companies to drive up gas prices while
holding consumers hostage.
Mr. Chairman, we must look at ways to decrease demand,
increase fossil fuel efficiency, and explore alternative fuel
sources.
Couple those thoughts with the expanding refining capacity
of existing industry, and we will start to move down the right
path.
So, thank you again for holding this hearing, and with the
Gulf region comprising almost half of this Nation's domestic
oil refining, one-third of America's domestic oil production,
and one-fifth of the natural gas production, the safety and the
security of the Gulf of Mexico should be at the forefront of
our agenda.
I look forward to questions and dialog with our witnesses
today, and I hope we will not have to go through the travesty
suffered last August and September in New Orleans and the rest
of the Gulf, or at the pump, ever again.
I yield back my time.
[The prepared statement of Hon. Diane E. Watson follows:]
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Mr. Issa. I thank the gentlelady, and I particularly thank
you for noting that our efforts to go toward bio-diesel and
ethanol, including in California, where there are a number of
new facilities under construction, will take us away from a
dependence on nearly half of all our refined fuels coming out
of the Gulf, but for today, I am pleased to have a panel that
can help talk about how we get through this season.
I would ask that you bear in mind we have already received
unanimous consent that your written statements be put in the
record, and additionally, you will be allowed to augment with
extraneous or pertinent information, as you see fit, and
answers to any questions you are unable to answer today.
So, I would encourage you very much to stay within the 5-
minutes for your opening statements, and to use as much of the
ideas not already preprinted as you possibly can.
Mr. Greco.
STATEMENTS OF ROBERT GRECO, GROUP DIRECTOR OF UPSTREAM AND
INDUSTRY OPERATIONS, AMERICAN PETROLEUM INSTITUTE; AND TYSON
SLOCUM, ENERGY PROGRAM RESEARCH DIRECTOR, PUBLIC CITIZEN
STATEMENT OF ROBERT GRECO
Mr. Greco. Thank you, Mr. Chairman.
Good afternoon.
I am Bob Greco, group director of industry operations and
upstream for API, the national trade association of the U.S.
oil and natural gas industry. We appreciate this opportunity to
discuss the oil and natural gas industry's hurricane
preparedness.
During and following last year's hurricanes, API and the
industry worked closely with Federal agencies, including the
Departments of Energy, Transportation, Homeland Security,
Minerals Management Service, the EPA, the Coast Guard and
others.
We want to thank these agencies for their cooperation and
support as we work together to learn from last year's
experiences and prepare for this year's hurricane season. The
suggestions which follow are meant to improve on an already
positive and very successful working relationship between the
government and the oil and natural gas industry during this
past hurricane season.
Our industry is proud of its hurricane record.
The off-shore infrastructure in the Gulf, which includes
4,000 platforms and 33,000 miles of pipeline, survived the
hurricanes well, with no loss of life and no significant off-
shore exploration and production releases.
Our industry's on-shore operations were safely shut down as
the storms approached, and then safely restarted.
Finally, the industry worked with Federal and State
authorities and electric utilities to get pipelines moving
product as quickly as possible.
Improved operational coordination is now underway with
government agencies at all levels.
In March, API held a 2-day hurricane conference to discuss
lessons learned and identify areas for improvement. Government
participation included DOE, DOT, MMS, DHS, EPA, the Coast
Guard, and State and local agencies. Many industry participants
also attended a DOE-sponsored meeting in Mississippi.
Last week, API joined with DOE and MMS at a joint press
conference to discuss hurricane preparedness, and just this
past Monday, API hosted a hurricane round-table of all sectors
of the industry and relevant Federal agencies and trade
associations.
As we enter the hurricane season, it is critically
important that agencies communicate and coordinate hurricane
response efforts. We need to work together to eliminate overlap
or duplication of effort by multiple government agencies, which
can result in duplicative requests for information from
companies, misdirection of requests within companies, and other
inefficiencies.
It is even more critical that government, to the extent
possible, helps to ensure that a high priority is given to
facilitating a company's transportation and use of emergency
back-up generation and restoration of commercial power to
pipelines and refineries.
Companies also need to work closely with emergency
responders and local law enforcement to ensure that back-up
electrical generators and other essential equipment are not
commandeered for other purposes, which was another concern last
year.
In addition, government authorities need to ensure that
company personnel have access to refineries, pipeline
facilities, and other infrastructure to assess damages and
provide repair quickly. Denial of such access was a problem in
some cases during last year's hurricanes and delayed restart of
operations.
Our industry's experience responding to Katrina and Rita
underscored a fact that was already well known. Our employees
are our most important asset. In preparing for the upcoming
hurricane season, API member companies have taken a number of
activities to ensure that their employees are, first and
foremost, safe during and after a hurricane, that they have the
needed supplies and resources for survival, and ultimately can
return to their jobs when conditions permit.
Examples include coordination of personnel evacuation plans
to ensure that companies know where employees are and can
communicate with them; establishment of distribution centers to
provide food, potable water, and other essential products to
employees in need; and identification of alternative housing
arrangements for employees who have lost their homes.
API and the industry will continue to work closely with
government agencies, and continually reviews our industry
standards and operating practices.
The development of consensus industry standards is one of
API's oldest and most successful programs, dating back to our
first standards in 1924.
Today, API maintains some 500 standards that promote
safety, efficiency, and environmental protection for all
segments of the oil and natural gas industry, and over 100 of
these standards are referenced in Federal regulations.
In recent weeks, API published the first two interim
recommended practices, or RPs, to improve the performance of
drilling rigs, several of which drifted off location during
that hurricane.
These interim RPs can be downloaded free of charge at API's
Web site, www.api.org, and MMS has already quickly incorporated
these guidelines into their regulations.
While the drifting of these rigs did not cause spills, both
industry and government were concerned and saw a need to
improve rig performance.
In conclusion, these interim RPs and our sponsorship of and
participation in hurricane preparedness meetings and
conferences are just a few examples of how the industry is
moving ahead rapidly to be better prepared as the next
hurricane season begins.
Working together, industry and government can meet the
challenges we face.
Thank you again for this opportunity, and I look forward to
answering your questions.
[The prepared statement of Mr. Greco follows:]
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Mr. Issa. Thank you very much, and Mr. Slocum, very good to
have you back with us.
Please give us your best and--I always note that you work
off of a lot of personal notes and have done a lot of personal
presentations, and I always appreciate that, as does, I think,
the entire committee.
STATEMENT OF TYSON SLOCUM
Mr. Slocum. Well, thank you, and thank you, Mr. Chairman
and Representative Watson, for the opportunity to be here
today.
Again, my name is Tyson Slocum, and I'm the director of the
energy program at Public Citizen. My organization is America's
largest consumer group. We represent over 100,000 people across
the United States.
We heard some excellent testimony earlier today from some
of the government witnesses, and I want to provide more of a
bird's eye view of some of the challenges that we're facing
today. What I see from my view is an oil industry that is not
prepared to meet America's energy challenges, especially in the
refining and other downstream aspects of our sector.
What I see from the economic investment decisions by the
oil industry, complemented with statements that they have made
to the media and to investigators at the Federal Trade
Commission and others, is that they will not make adequate
investments in downstream, particularly in refining, because it
is not in their financial incentive to do so, from various
statements that they have made to the media and to Federal
investigators. It is their personal financial self-interest to
maintain as tight supplies as possible, because that guarantees
larger profit margins for their operations. Now, that is what
they should be doing for their shareholders, and I think what
the job of Congress and Government is to do is to make sure
that citizens are represented well in this equation, and that
is why Public Citizen has a reform plan to address some of
these systemic problems that we see in America's energy
markets.
First, we agree with the chairman's call for a strategic
refining reserve of some sort, because it was clear after
Hurricane Katrina that America's strategic petroleum reserve
worked wonderfully.
All of this oil production was knocked out of service, and
we have over 800 million barrels of crude oil in reserve that
we were able to immediately release and supply refineries.
I do not know why the market price of crude oil jumped the
way it did, because there was no justification for it from a
market perspective, because there was never any threat to crude
oil supplies.
Now, the same could not be said for refined products,
because America does not have a Federal refined product
reserve.
Luckily, we were able to quickly import it from Europe, but
I do not think that we should rely on that to happen again.
So, we are definitely calling for a strategic refining
reserve, and having the oil industry help finance the
establishment and maintenance of such a reserve through
something like a windfall profits tax, since the industry is
clearly reaping huge financial windfalls from their control
over crude and refined product supplies that they are selling
to the American people.
The last time I checked, the Federal budget is running
annual deficits of about a half-a-trillion dollars, whereas oil
company profits are the largest in the U.S. economy. Clearly,
they can afford to help finance such an initiative.
Second, doing something about U.S. energy demand would also
help.
I know that, Mr. Chairman, you have discussed the need for
improved fuel economy standards, and that is a major issue that
Public Citizen also promotes. While we are the third largest
crude oil producer in the world--only the Saudis and the
Russians produce more oil every day than we do--we are far and
away the largest consumer. We use one out of every four barrels
of oil consumed every day, and we use oil very inefficiently.
Our competitors in Europe and Asia use about half the oil per
person that we do. Implementing strong fuel economy standards
will make our use of oil and gas far more efficient, and that
will reduce some of the pressures that we are seeing.
Third, I think investing in alternatives to oil and gas is
another important strategy, but right now, it is going to take
billions of dollars to do this.
For example, in promoting ethanol and bio-diesel, there are
going to be challenges to bring these products to the
marketplace.
We currently do not have any ethanol pipelines in the
United States.
So, I think that government is going to have to take the
lead on that kind of investment, and again, I think a windfall
profits tax on the oil industry is an excellent and equitable
means of financing such an investment.
Last, I think that revisiting some of the deregulation
legislation over energy trading markets, where the prices of
gasoline and crude oil are set, are very important for this
committee to investigate, because with under-regulated trading
markets, you are removing transparency, and any time you do not
have an adequately transparent market, you increase the
opportunity for nefarious activities to take place.
So, Mr. Chairman, thank you very much for your time, and I
look forward to your questions.
[The prepared statement of Mr. Slocum follows:]
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Mr. Issa. Thank you.
I have a lot of questions for Mr. Greco, but I want to lead
off with one or two for you, Mr. Slocum.
First of all, I think we probably, from the citizen's
standpoint, can agree that lower prices for citizens' cost of
energy is a goal but that lower prices fly in the face of the
incentive to save, that, unfortunately, we want one but the
other causes us to consume less. Would that be a fair
statement?
Mr. Slocum. Yes, sir, that is definitely true. I also think
that the increased prices that we have seen have not
necessarily been an incentive for consumers to use less, and I
think that is because economists call gasoline consumption
inelastic. It is not a luxury consumption but, rather, a
necessary consumption. So, for example, in the last year, you
have seen gasoline prices go up almost 80 cents, but there has
not been a corresponding significant impact on consumption, and
most economists say that, in order to see a real impact on
consumption, you would have to see prices rise to probably $5
or $6 a gallon, which I think would then be punitive, not only
for consumers but to the entire economy.
Mr. Issa. I appreciate your saying that, because of course,
we are just about at that point in Europe.
So, I think I will buy off that perhaps we do not want to
adopt that portion of the European model, although we certainly
have prices that are closer to Europe than they were a decade
ago. But you know, concentrating on the windfall profits tax, I
watched the windfall profits tax implemented in the past, and
of course, it was a tax.
It may have affected where the money went, but it did not
put the money into the long-term investment that we had hoped
for.
If I understood your testimony, I believe what I heard--and
I am very positively affected by it--that to the extent that a
windfall is declared by the Federal Government relative to
earnings by petroleum companies, your goal would be to ensure
that went into investment. So, if I understand correctly, what
you are calling for here today is perhaps not identical to the
previous windfall profit tax but, rather, a windfall investment
funding or requirement. Would that be fair as a very overview
brief statement?
Mr. Slocum. Yes, sir, that would be correct, and it would
not necessarily be a mandate on the oil industry to make that
investment.
You know, if they chose to do that, that would be
fantastic, but it would be also for the government to take the
proceeds from that new revenue source and make the necessary
investments in our energy infrastructure that are required
right now.
Mr. Issa. I appreciate that, and you know, I was an
observer of that, and Mr. Greco, I am sure, will have an
opinion on it, too, but you know, one of my deep concerns is
that we manage to get the money, but government is funny about
revenue.
We do put a lot of dollars, Federal dollars, into energy
resources, promoting infrastructure, and so on, but usually
what happens, if we get a new revenue source, we suddenly take
money and put it somewhere else.
So, the net effect often is there is no additional
investment.
Mr. Greco, I have given you some food for thought with my
first questions, but I want to get back to the hurricane,
because in the long run, we have a lot of things we can do; in
the short run, we have a matter of days before the first
hurricane is going to be spotted or tropical storm is going to
be spotted in the Atlantic.
Besides the action taken for the current hurricane season,
what measures are government and industry taking to address
preparedness for the long term?
Mr. Greco. First off, some of the short-term actions that
we are taking now do have long-term implications. When you are
talking about redundant communications, cell towers,
prepositioning supplies, you are developing infrastructure
needs and setting up systems that are good for business
continuity and will be helpful in the long term, as well, for
future hurricane seasons, as well as other potential
disruptions.
Longer term, our refineries and our facilities are looking
at their systems to see what they can do to harden them.
For example, from a refining standpoint, you are seeing
people looking at installing additional co-generation, which
basically allows you to generate electricity very cleanly, very
efficiently, onsite. That would certainly help in the instance
of future power shutdowns.
Refiners are considering whether they need to raise the
level of some of their equipment, because there are tidal
surges.
Again, those are longer-term issues that they are looking
at.
Similarly, API, as I mentioned--we got two of our interim
standards out very quickly, in record time. We are undergoing a
comprehensive review of all of our standards to see if there
gaps that need to be addressed longer-term to make sure that we
fully anticipate future events and are prepared for those.
Then, from a policy standpoint, you have a number of
activities that the Congress and the agencies can take a look
at.
Clearly, diversifying our sources of supply is something we
should look at. Our resources are concentrated in the Gulf of
Mexico, because that is where we are allowed to build, and we
are not allowed to build elsewhere. The ability to access oil
reserves off our Outer Continental Shelf elsewhere, in the
mountain west, in Alaska, would certainly diversify sources of
supply and allow us to cushion any future disruptions that are
concentrated in the Gulf, as well as L&G terminal siting, where
should those be, should those be more diversified, as well as
looking at research and development into alternatives,
promoting conservation, streamlining permitting processes.
Those are all longer-term activities that would certainly
help us diversify our supply and make the economy more
resilient to these disruptions.
Mr. Issa. Excellent. I appreciate that.
This is probably a longer question than the answer, because
I think we have already touched on it, but I want to make sure
it gets in the record.
If a hurricane or hurricanes were to hit the Gulf of Mexico
this year, would the recovery time be greater or less than last
year for a given level of hurricane?
Mr. Greco. That would be a very difficult question to
answer.
I think one of the challenges of last year was having----
Mr. Issa. Generally, you know, if the word is good and we
are better off, it is not that hard to answer. So, would it be
fair to say that it is difficult because we may not be better
off this year, we may not actually be able to deal with it
better than we could last year?
Mr. Greco. I think we have taken a number of steps to
improve our responsiveness, to harden our facilities and to
make them more resistant to future hurricanes. If you have two
category five hurricanes spaced a couple of weeks apart, with
the level of impact they had on our off-shore and on-shore
facilities, it is difficult to predict what the impact would be
of those. It is very hard for me to say that, but I do think we
are better prepared this year than last year based on the
lessons learned and the actions we have taken.
Mr. Issa. Following up on that, as we enter the 2006
hurricane season, the Federal Government's coordination
efforts, are we better prepared today, are we going to respond
better, from your observations and your coordination and your
training, than we were last year?
Mr. Greco. I think we are already at a very high level of
coordination and cooperation with the industry, as I mentioned
in my comments.
For example, we had very good success working closely with
the EPA, DOT, and Coast Guard on various temporary waivers that
we needed to minimize the disruption and allow us to get our
facilities back up and running as quickly as possible. The
system worked, and we are justifiably proud of the government's
response, as well as our employees' response, in those
situations.
So, what we are looking at is trying to improve the
education, and thereby better understand how the government is
coordinating.
Much of this is done at the local level. Clearly, we need
to continue to focus on what the people on the ground are doing
to respond, and how can we work closely and educate them about
the importance of getting pipelines up and running; about
restoring electrical generation to pipelines and refineries to
ensure supply in the areas outside the Gulf of Mexico.
Clearly, that is the type of issue that we have been
focusing on.
Mr. Issa. I appreciate that.
My last question: I introduced a piece of legislation
calling for a study leading to a strategic refined fuels
reserve, but in a sense, there is a strategic reserve of fuel,
which is every other refinery in the world.
As Californians, both the ranking member and myself, we
deal with some 28 different blends just in California,
depending on the time of the year, as does the rest of the
country.
In your opinion, would it be a worthwhile goal to have
executive authority in the case of an event like last year for
a predetermined fuel mixture or mixtures available around the
world to be approved--in other words, the logical fuels that we
could import in order to not have shortages. That would not
meet every possible blend, but a blanket waiver for certain
known mixtures available at certain known refineries so that we
could, by one Executive order, whether it was in California or
in the Gulf or in New York, have large amounts of refined fuels
be able to be purchased and brought in fairly seamlessly.
Today, we do not have that authority. There was controversy
about the President even allowing some purchases and what they
were.
Would that be helpful, both from an industry standpoint, to
relieve temporary shortages, and just as important, from a
standpoint of consumer benefit?
As you said, we had large spikes, unexplainable in the case
of crude but explainable in the case of refined distillates and
gasoline.
Mr. Greco. I think your first point was a valid one.
The fact that, despite a 30-percent drop in gasoline
production in the United States, suddenly and unexpectedly, the
market adjusted, we were able to import fuel, and we were able
to get through it.
The price did come back down quickly, and there were only
spot shortages.
The market worked, and from our perspective, given the
severity of those two hurricanes, I think that supports the
fact that the market can work when it is allowed to and when we
work closely with government to take advantage of market
mechanisms.
I think when you're talking about product reserve, you get
into a whole host of issues that are completely separate from
oil reserves, because products do vary by season, they do vary
in different parts of the country. Refineries are optimized to
make particular fuels.
So, when you talk about making a particular default fuel,
for example, that may not work if your refinery is optimized to
make something else. It may not be quite as quick as you are
suggesting that it could be done, as well as storage issues you
have with fuels.
Where are the tanks going to be to store these fuels? Who
is going to own the fuels? Who is going to make the decision
when you release those fuels, and what would those impacts be
on the market?
So, I think, when you look at the performance of last year,
the market worked very well and we should continue to utilize
the power of the market.
Mr. Issa. I appreciate your belief that last year was an
example of industry's performance, under the circumstances, at
its best.
Mr. Slocum, how would you view this?
Mr. Slocum. I think it makes a lot of sense to try to have
better lines of communication and authority to work with other
countries and outside storage systems to try to import during
times of emergency. I do not necessarily agree with trying to
streamline domestic so-called boutique fuel blends.
Mr. Issa. That was not my suggestion. I am simply saying,
in case of an emergency, for example, having at least one
single fuel that could potentially be shipped to substantially
all or major sections of the country, for only the emergency
period, you know, recognizing that if, hypothetically, that
were a California-approved blend, one of the blends, it might
not be perfectly ideal, but it would be substantially up to or
above Federal standards.
You know, one of the problems we as Californians--I want to
make sure I explain it--is that when we run out of fuel--when
Long Beach's refinery had a fire, there was nobody else that
could make the fuel, I think, except Norway.
So, we were in an odd situation of the market could not
work because when one place was off-line, nobody could react in
any reasonable time to prevent a shortage.
Looking at last year and making the assumption that the
world has enough gasoline, particularly gasoline refining
capacity, and they can refine at least one blend acceptable in
the United States, and yet they may not be able to send it to
this State or that State or this district--and I'm not talking
about, at all, narrowing any jurisdiction or any fuel that is
determined.
I think dismissing this option is not appropriate to
emergency response. During a bona fide emergency, do we want
our hospitals' generators running, do we want emergency
vehicles to be able to operate, or do we want to say not if it
means that there is a slightly different blend of gasoline
inside the tank that might have, you know, two noxes
different--and I am not trying to belittle those two noxes--but
for that short period of time, hypothetically, the first 30
days after there has been a severe outage and not beyond.
Mr. Slocum. Yes, sir, Mr. Chairman, I think it makes a lot
of sense to give the President that authority or to investigate
this further, to try to better coordinate, you know, transfers
of--and you know, negotiating with these other countries in
order to have them help us respond to any emergencies that we
have here, and any supply disruptions.
I think that would be extremely beneficial.
Mr. Issa. Thank you, and I appreciate the gentlelady's
patience on that question.
Thank you.
Ms. Watson. This is a question to Mr. Greco.
Last August, during Katrina, we saw prices go up as high as
$5 in some places. We saw those who had cars and could get them
out of the flooded areas lined up for miles to get the
gasoline.
I hear the explanation about how we can get the resources
we need, but what were your feelings about the oil industry
making the largest profits ever? I guess you do the accounting
per quarter, and I understand billions of dollars were made, I
would say at the expense of the consumers during a time of
crisis.
Now, how is that justified?
You know, you made profits for your stockholders. I heard
discussions on TV and radio and saw all about the bottom line,
but at a time when our country is attacked by nature, people
died and so on, why would you look at the bottom line?
Can you explain that to me?
Mr. Greco. During the hurricane, at its peak, nearly one-
third of our gasoline production was suddenly off-line. We lost
that much of our supply.
Nearly one-third of our oil production was suddenly off-
line.
Twenty percent of our natural gas production was off-line.
That is a tremendous drop in a supply in any market,
particularly one as tightly balanced as the U.S. market is.
Not surprisingly, given that huge drop in supply, there was
upward pressure on prices. Just as quickly as imports came in
from Europe, from the gasoline side, we did see prices drop
back down.
Just recently, at the request of Congress, the FTC looked
at this issue and tried to assess what the impacts were of that
price pattern. Was there anything else going on? According to
the FTC, ``the post-hurricane gasoline price increases at the
national and regional levels were approximately what would be
predicted by the standard supply and demand model of a market
performing competitively. The conduct of firms in response to
the supply shocks from the hurricanes was consistent with
competition.''
Ms. Watson. Let me just say this. I understand very clearly
what you said, but you registered the largest profit margin
ever, billions of dollars.
So, it does not really compute to say you had to go and get
petrol from other sources, but you still made so much money off
people who had to escape, who probably did not have money, and
you ripped them off for the bottom line.
So, I just see a matter of the lack of social
responsibility. I recognize all the other problems, but to
register that kind of profit and to say it is competition and
we have stockholders does not compute with the kind of
emergency we were under.
Mr. Greco. May I respond to that, please?
Ms. Watson. Let me go with Mr. Slocum. I think I heard your
response.
Mr. Greco. Well, no, I think the response--the other piece,
which I meant to say, would like to say, is that this was more
than just an industry impact. The men and women of our
employees were spread to the four winds as a result of this
disruption.
We had immediate concerns that we needed to find our
employees, get them back to a position where they could work in
a safe condition, while looking out for their families, where
they lost loved ones, as well, and family members in this
disaster. So, this was a body blow to our industry that our
companies took very personally, and was a significant hit on
them, as well.
Regarding the profits, when you look at the size of our
industry, the profits are not out of line with the size of our
companies.
Ms. Watson. There is no way to socially justify that, at a
time that this Nation was paralyzed with this disaster--we
could not even get people in there for 3 days to remove the
folks that were there, but when people were able to get in
their automobiles, you just jacked those prices up as high as
you could, and I do not think you needed $400 billion just to
take care of your people.
Let me go on to Mr. Slocum.
How do we plan and prepare for the future so that there is
social responsibility?
The consumers were suffering greatly. We are still
suffering.
I saw where a man had to pawn his grandmother's jewels in
order to fill up his truck, and so, how do we need to plan?
I am sorry. This might have been discussed before I got
here, Mr. Chairman.
Mr. Issa. Not by you.
Ms. Watson. Of course.
You know, I am from California. Everyone has not only one
car but two or three, you know.
Their cars are a status symbol.
Mr. Slocum. Not just a status symbol.
I mean you have to have a car to----
Ms. Watson. You have to have a car.
Mr. Slocum [continuing]. Sometimes to work.
Ms. Watson. We are very sensitive to these issues. How do
we prepare so we do not rip off consumers, we take into
consideration that we do have to get alternative sources and we
do have to go maybe off-shore, other countries and all, to get
the resources we need?
How can we prepare so we do not have to have the same kind
of tragedy, and you know, the whole world was watching. The
greatest country in the world, and we could not even meet the
needs for our people for 3 days, and then when we did get
gasoline, the prices were so high, they could not even afford
it.
Now, tell me what you would do in order to protect the
consumers.
Mr. Slocum. Well, first, I think we need to aggressively
start investing in alternatives----
Ms. Watson. Absolutely.
Mr. Slocum [continuing]. To our high dependence on oil to
fuel our economy, and it is going to take billions and billions
of dollars to do that. Like I said earlier, the Federal
Government is currently in this fiscal year alone, set to run
approximately a half-a-trillion-dollar budget deficit, and we
have almost $9 trillion of outstanding debt. Our Federal
Government spending is unsustainable, and we simply do not even
have enough money for our basic government services, let alone
for investments in energy I take a look at the oil industry
profits, which are huge not just in dollar terms but also in
profit margin terms.
Ms. Watson. Staggering.
Mr. Slocum. When you look at their return on their capital
investment, which is what the oil companies emphasize when they
are talking to Wall Street and to shareholders, they look at
return on capital investment, and Exxon-Mobil, for example, a
46-percent rate of return on their oil production activities, a
59-percent profit margin on their U.S. oil refining.
Those are huge levels of profit, and I think that justifies
some sort of new level of income taxation on the oil industry,
dedicating the proceeds to financing the investments that are
necessary in alternative fuels and alternative fuel
infrastructure, in energy efficiency, so we become more
efficient at using energy, so we do not use as much; in mass
transit, which is desperately needed in places like Los Angeles
and elsewhere.
I am lucky that I can take the subway very easily to my
office here on Capitol Hill. Not every American can do that in
every American city.
Also, I think providing some financial protections to
moderate and low-income working families from the impact of
these higher prices is also required. As you emphasized, ma'am,
higher prices are having a huge negative impact on basic
affordability issues for working families.
So, in a nutshell, I think that is what we would emphasize
first.
I think, second, we need to look at some of the systemic
market failures in U.S. energy markets, particularly in the
refining and downstream sectors.
I think that we have allowed far too many mergers. For
example, Exxon and Mobil used to be two global competing oil
companies. Now they're the same company. Same with Chevron-
Texaco and Conoco-Phillips.
Valero was allowed to acquire three different refining
competitors.
All of that has resulted in a high level of concentration
that has really reduced competition. I think that is a huge
reason why we need a strategic refining reserve. As Rex
Tillison told the Wall Street Journal on May 1st of this year,
they do not have any plans whatsoever to build any new
refineries, not because of our environmental laws, but because
it is not in the financial interest of the company and its
shareholders.
They do not want to create huge surpluses of refining
capacity, because it is going to have a downward impact on
prices to consumers, which would have a downward impact on
profits to the company.
So, as long as it is not in their financial interest to
make the necessary investments, we are going to have to take
the lead.
Ms. Watson. Well, let me just say this, and I will yield
back to you, Mr. Chairman.
I think this country will have to respond to what President
Bush said.
We are addicted to gasoline, and in responding, I foresee
that it is going to take us decades. We cannot convert our
systems over.
In the meanwhile, I would like to know what the American
Petroleum Institute would have in mind.
Are we going to see the same situation? I am sure we are
going to have a hurricane this year, probably at the level of
what it was last year because of climatic conditions, and I see
those climatic conditions only getting worse rather than any
better, because we are not attending to them.
So, is the institute looking at ways so that the burden
will not be on the consumer totally in another disastrous
situation? I do not think that levee that we just rebuilt at
the 17th Street down in the lower ninth ward of New Orleans is
going to hold up under a level four hurricane, three last time,
four this time, and so, we are going to have the same kind of
crisis, I feel, that we had. It is just that there are going to
be fewer people to evacuate, because they never have gone back.
So, I am looking at our globe and its atmosphere and the
conditions--I am looking at that for the very near future as
repeating itself in terms of disaster.
What would you propose, and what do you see? I mean how can
you bring some relief to consumers for people who are suffering
greatly?
Mr. Greco. Well, first off, thank you for the question, a
number of things I'd like to address to that one.
First, our industry is investing its profits back into
finding new sources of energy, alternative sources of energy.
For the past decade, our investments in new energy sources
have exceeded our earnings. Also, contrary to what Mr. Slocum
might have you believe, we have been investing in our refining
capacity.
We have added the equivalent of one new refinery every year
for the past 10 years.
There are announced plans to add another six new refinery--
equivalent, not new facilities, because we cannot get them
sited either, but we have expanded the capacity to the
equivalent of six new ones over the next 5 years. Those are
announced----
Ms. Watson. Will you yield a minute? Can you give us that
in writing?
Mr. Greco. Sure.
Ms. Watson. Will you let us know where your new refineries
are going to be located, those you have not started yet?
Mr. Greco. I am sorry. I was not clear. It is not new
refineries. It is expanded capacity.
Ms. Watson. OK. Well, your expanded capacity----
Mr. Greco. Yes.
Ms. Watson. Would you let us know the geographical
locations where they are?
Mr. Greco. Yes, we can do that.
Ms. Watson. And those that you have expanded up to this
date.
Mr. Greco. I am not sure if I can give you all of the
information about past announcements, because I can show you
the data that shows that refining capacity--government data
that shows the amount of expansion.
Ms. Watson. Mr. Greco, you are making a statement.
You said that Mr. Slocum was not correct.
Mr. Greco. He was not.
Ms. Watson. You are correcting him. So, I am asking, the
corrected information that you are giving the committee now--
you are sworn in--that you give it to us in writing and state
the geographical areas that you are extending and expanding.
Mr. Greco. I will do the best I can.
Ms. Watson. Please. Thank you.
Mr. Issa. Actually, the committee has some of it, but we
would appreciate it included in this record. Both of us enjoy
the fruits of the expansions in Long Beach and other areas, but
I think it is important, because both sides of the aisle here
in Congress often talk about the fact that we have had no new
refineries built in ``X'' time. That certainly has forced a
concentration of refineries. A matter of this hearing is our
excess reliance on relatively few locations such that, if a
hurricane hits, we do not have 300 new refineries spread around
the United States, we have 46 percent of them coming from the
Gulf.
Mr. Greco. Yeah. As we mentioned earlier, you are correct,
the concentration of the oil and gas resources are in the Gulf,
refining and upstream, primarily because that is where they
have been allowed and invited and welcomed to be. We are
looking and supportive of efforts to diversify sources, both
supply and refining. Much of that will be done, however, on
existing refineries, whether in California or in other States,
but I would be happy to give you some information about
announced refinery expansion plans and past expansions, as
well.
Mr. Issa. We will just take it for the record. Appreciate
that.
OK. I will just sum up very quickly. I thank our witnesses
for your testimony today, particularly your candid questions
and answers.
I think I would like to close by finding some things that I
believe both the first and second panel exposed.
One is that we need to diversify our fuel sources, because
diversifying our fuel sources helps diversify our fuel supply
locations.
The gentlelady from California and the gentleman from
California certainly agree that ethanol and bio-diesel, because
of their very nature, will be produced much closer to locations
in which they are consumed. That is a goal of not only this
committee but the Energy and Commerce Committee.
Last, I would like to share with the gentlelady my
agreement on an observation. Certainly, my background in
business makes me an appreciator of the elasticity of demand,
of supply and demand, and of opportunistic markets. It is
interesting, however, for this committee to note that, during
the crisis after Hurricanes Katrina and Rita, a McDonald's had
dozens, hundreds, perhaps, but certainly dozens of their
McDonald's facilities off-line and unable to supply hamburgers,
french fries, shakes, and the like, but it did not result in an
increased price in California for hamburgers, shakes, or french
fries. So, it is relatively unique to this particular industry
that, although they were consuming MREs in the Gulf, they were
consuming dramatically less petro-chemicals at the time, we in
California, from the refineries, which had imported oil into
Long Beach and refined them in Long Beach, found our prices
spiking just as much.
It is the difference between a commodity product, perhaps,
and my McDonald's example, but I think that the gentlelady and
I both are sensitive, for good reason, to the fact that the
consumer paid throughout the Nation for a shortage which may,
in many cases, have had nothing to do with the cost and the
normal elasticities, since these were products that could not
easily be shipped from Long Beach to some other location, and
with that comment and agreement with the gentlelady, we stand
adjourned.
[Whereupon, at 3:38 p.m., the subcommittee was adjourned.]
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