<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:39524.wais]
S. Hrg. 109-1012
OVERSIGHT TO EXAMINE TRANSPORTATION FUELS OF THE FUTURE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
ENVIRONMENT AND PUBLIC WORKS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
WEDNESDAY, NOVEMBER 16, 2005
__________
Printed for the use of the Committee on Environment and Public Works
Available via the World Wide Web: http://www.access.gpo.gov/
congress.senate
__________
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COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
JAMES M. INHOFE, Oklahoma, Chairman
JOHN W. WARNER, Virginia JAMES M. JEFFORDS, Vermont
CHRISTOPHER S. BOND, Missouri MAX BAUCUS, Montana
GEORGE V. VOINOVICH, Ohio JOSEPH I. LIEBERMAN, Connecticut
LINCOLN CHAFEE, Rhode Island BARBARA BOXER, California
LISA MURKOWSKI, Alaska THOMAS R. CARPER, Delaware
JOHN THUNE, South Dakota HILLARY RODHAM CLINTON, New York
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
JOHNNY ISAKSON, Georgia BARACK OBAMA, Illinois
DAVID VITTER, Louisiana
Andrew Wheeler, Majority Staff Director
Ken Connolly, Minority Staff Director
(ii)
C O N T E N T S
----------
Page
HEARING DATE
OPENING STATEMENTS
Boxer, Hon. Barbara, U.S. Senator from the State of California... 6
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma... 1
Jeffords, Hon. James M., U.S. Senator from the State of Vermont.. 4
Obama, Hon. Barack, U.S. Senator from the State of Illinois...... 8
Thune, Hon. John, U.S. Senator from the State of South Dakota.... 5
Witnesses
Cavaney, Red, president and CEO, American Petroleum Institute.... 9
Prepared statement........................................... 32
Responses to additional questions from Senator Obama......... 36
Goodstein, Richard, Washington Representative, Air Products and
Chemicals, Inc................................................. 13
Prepared statement........................................... 38
Holmes, Jack B. Jr., president and CEO, Syntroleum Corporation... 17
Prepared statement........................................... 70
Responses to additional questions from Senator Obama......... 93
Honnef, Bill, vice president of sales and marketing, Verasun
Energy......................................................... 15
Prepared statement........................................... 67
Response to an additional question from Senator Obama........ 70
McDougall, Jeffrey, JMA Energy Company, LLC...................... 11
Prepared statement........................................... 37
Additional Material
Charts & Photos:
Air Products and Chemicals, Inc.............................. 43-66
Syntroleum Corporation....................................... 73-92
Statements:
American Forest and Paper Association........................ 94
National Mining Association.................................. 102
OVERSIGHT TO EXAMINE TRANSPORTATION FUELS OF THE FUTURE
----------
WEDNESDAY, NOVEMBER 16, 2005
U.S. Senate,
Committee on Environment and Public Works,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m. in room
406, Senate Dirksen Building, Hon. James M. Inhofe (chairman of
the committee) presiding.
Present: Senators Inhofe, Chafee, Thune, Jeffords, Boxer,
Carper, and Obama.
Senator Inhofe. Good morning. The hearing will come to
order. We always start promptly. We have the important people
here, so we will get started.
OPENING STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM
THE STATE OF OKLAHOMA
This oversight hearing is to consider transportation fuels
in the future. I am especially pleased to welcome two witnesses
from my State of Oklahoma, Mr. Jeffrey McDougall of JMA Energy
out of Oklahoma City and Mr. Jack Holmes from my hometown of
Tulsa, with Syntroleum.
With higher prices at the pumps and a great reliance on
foreign sources of oil, it is important for Members of Congress
to know what else is out there. This is not a new concept. The
United States has sought to develop alternative approaches in
the past and should continue to do so. In a 1979 nationally
televised speech, former President Carter claimed that the
Nation, and this is a quote now, ``The Nation was facing a
crisis that was morally equivalent to war.'' He instituted a
number of market control programs that sent the economy into a
tailspin. Twenty-five years later, we have hopefully learned
something from those mistakes.
Historically, the American people have chosen oil over
other options for two important reasons. First, oil can be
refined to meet the environmental requirements and automotive
performance of the public demands; and second, oil is the most
affordable option.
That said, the President and Congress have worked together
to develop alternatives to supplement oil. Most recently, the
Energy bill established a Renewable Fuel Standard. Currently,
the EPA and affected industries are working toward
implementation, and this committee will ensure that happens.
Also, this committee included in the Energy bill a new
Cellulostic Ethanol Loan Guarantee Program that could diversify
biofuels use even more.
Unfortunately, too many of my colleagues today would rather
gloss over or even ignore the facts, and instead choose and
make sensational populist statements that suggest similar
economy shrinking and price increasing policies that helped to
sink the Country in the late 1970's. The fact is that oil can
be explored for and produced in environmentally responsible
ways and refined into clean fuels. It can be done relatively
cheaply.
Although some members may think it politically beneficial
or even fun to criticize and deride oil companies, I think it
is incredibly short-sighted and exhibits a certain amount of
arrogance on the part of Congress. Americans demand and deserve
solutions and results, not bluster and hot air.
My colleagues should think beyond the major national
corporations. Small independent oil and gas producers have
played and continue to play a critical role in meeting our
domestic needs. In fact, independents produce 68 percent of the
Nation's oil. Not many people are aware of that. It is a very
significant fact that they produce 68 percent of all the
Nation's oil. The independent producer is often times a small
business person, more like a family farmer than the Archer
Daniels Midland.
Like agriculture, oil is the foundation on which several
States were built and has provided jobs for generations of
people. Perhaps, this is most evident in my home State where
some believe that oil made Oklahoma. In fact, oil did make
Oklahoma.
I am excited to learn about developing syn fuels technology
like Syntroleum's coal to liquids demonstration plant in my
hometown of Tulsa. Some years ago, I looked at the national
security benefits of deriving diesel and jet fuel from domestic
oil and domestic coal, and initiated a program at the
Department of Defense. As long as it is price-competitive, coal
to liquids is something that we should be encouraging and
doing.
In my recent Chairman's mark of the Gas Price Act, I
broadened our concept of refining to include coal to liquids
and renewable fuels. I put a plan that does not change
environmental laws, one that is well supported by a number of
State and local groups. It is a shame that partisan rhetoric
frustrated the advance of the reasonable and responsible
legislation. I am hopeful that my friends will consider pro-
economy, pro-jobs policy, rather than a frightening return to
the Carter Era approach that failed then and would fail now.
Let me just say also that it is important that we in
Washington recognize that there is a difference between the
majors and the independents that happens. I am not sure that
some of my colleagues are aware of this, that I started out
when I was very, very young in the independent oil business. In
fact, I think I dare say I am a little older than anybody on
this panel.
You may not remember this technology, but I was a tool
dresser on a cable tool rig, and there is nothing hotter and
more difficult than that. That was back in Oklahoma where it
wasn't uncommon to have temperatures, normal temperatures of
100 degrees down in that Arkansas River bottom and up in the
Osage Hills, and I can recall having to sharpen that bit in
front of a forge. The forge had to be going. It was always
about 120 degrees in front of that forge. So it was very
difficult.
I also remember when I was working for a famous man named
A.W. Swift, who was kind of a father of the marginal well
business in that area. He had one son. The well blew up that we
were working on. I lived; he died. So I almost at that point
decided to get into that business as his adopted son. I always
wondered where I would be today if I had done that. So I do
come here with some background in this industry, and I look
forward to sharing the knowledge that I have from this industry
with my colleagues.
I can assure you that even though our numbers are few in
terms of the Senators here, all the staff is here, and your
testimony will be listened to and read very carefully.
[The prepared statement of Senator Inhofe follows:]
Statement of Hon. James M. Inhofe, U.S. Senator from the State of
Oklahoma
Today's oversight hearing is to consider transportation fuels of
the future. I am especially pleased to welcome two witnesses from the
great State of Oklahoma Mr. Jeffrey McDougall of JMA Energy out of
Oklahoma City, and Jack Holmes of Syntroleum of Tulsa.
With higher prices at the pump, and a greater reliance on foreign
sources of oil, it is important for members of Congress to know what
else is out there. This is not a new concept--the United States has
sought to develop alternative approaches in the past, and should
continue to do so.
In a 1979 nationally televised speech, Former President Carter
claimed that ``the Nation was facing a crisis that was the moral
equivalent of war,'' and instituted a number of market control programs
that sent the economy into a tailspin. Twenty-five years later, we have
hopefully learned something from those mistakes.
Historically, the American people have chosen oil over other
options for two important reasons. First, oil can be refined to meet
the environmental requirements and automotive performance the public
demands. Second, oil is the most affordable option. That said, the
President and Congress have worked together to develop alternatives to
supplement oil.
Most recently, the Energy bill established a renewable fuels
standard. Currently, the EPA and affected industries are working toward
implementation, and this committee will ensure that happens. Also, this
committee included in the Energy bill a new cellulosic ethanol loan
guarantee program that could diversify biofuels use even more.
Unfortunately, too many of my colleagues today would rather gloss
over or even ignore the facts, and instead choose to make sensational
populist statements that suggest similar economy-shrinking and price-
increasing policies that helped to sink the country in the late 1970s.
The fact is that oil can be explored for and produced in
environmentally responsible ways, and refined into clean fuels. It can
be done relatively cheaply.
Although some members may think it politically beneficial or even
fun to criticize and deride oil companies, I think it is incredibly
short-sighted and exhibits a certain amount of arrogance on the part of
Congress. Americans demand and deserve solutions and results, not
bluster and hot air.
My colleagues should think beyond the major national corporations.
Small, independent oil and gas producers have played, and continue to
play, a critical role in meeting our domestic needs. In fact,
independents produce 68 percent of the Nation's oil. The independent
producer is oftentimes a small businessman--more like a family farmer
than ADM.
Like agriculture, oil is the foundation on which several States
were built, and has provided jobs for generations of people. Perhaps,
this is most evident in my own state where some believe that oil made
Oklahoma.
I am excited to learn about developing syn-fuels technologies like
Syntroleum's coal-to-liquids demonstration plant. Some years ago, I
looked at the national security benefits of deriving diesel and jet
fuel from domestic coal and initiated a program at the Department of
Defense. As long as it is price competitive, coal-to-liquids is
something that we should be encouraging and doing.
In my recent Chairman's mark of the Gas PRICE Act, I broadened our
concept of refining to include coal-to-liquids and renewable fuels. I
put forward a plan that does not change environmental laws, one that is
well-supported by a number of State and local groups.
It is a shame that partisan rhetoric frustrated the advance of this
reasonable and responsible legislation. I am hopeful that my friends
will consider pro-economy, pro-jobs policy rather than a frightening
return to the Carter-era approach that failed then, and will fail now.
I look forward to hearing from the witnesses.
Senator Jeffords.
OPENING STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM
THE STATE OF VERMONT
Senator Jeffords. Thank you, Mr. Chairman.
I want to extend a welcome to the witnesses. I appreciate
the time they have taken to appear before us today.
Today's hearing is on transportation fuels for the future.
As the Ranking Member of this committee, I agree that it is
important that we have oversight hearings like this one that
allow the panel and members alike to peek into the future and
make educated guesses on what we will find there. Given that we
are now in the new millennium, it seems to be natural but human
inclination to wonder what the future will bring.
Particularly given the high pump prices we are now
experiencing, we need to help shape that future into one that
will provide stable, clean, domestic supplies of transportation
fuels at affordable prices. Our lifestyle and our economy in
this Country is based on an abundant supply of petroleum in the
forms of gasoline and diesel. Today, the internal combustion
engine powers most of our vehicles.
However, nothing lasts forever, and we are seeing our
plentiful oil and low prices disappear. The outlook for
petroleum reserves in the United States is not cozy. As the oil
supply decreases, especially of clean burning sweet or low
sulfur crude, prices will increase. We need to make sure that
we have a good idea where we go next. We need to continue to
increase our efficiency and reduce pollution in existing
internal combustion engine designs and ultimately transition
from a petroleum-based economy into a new clean fuel-based
economy. Such a transition will be crucial to our national well
being into the next century and beyond.
I do not mean to suggest that a solution is easy. There are
incredible complexities involved in forming a well rounded and
flexible approach to meeting the Nation's fuel requirements,
while at the same time protecting our environment, but we have
taken important steps. Our efforts to reducing harmful
components, such as sulfur in fuels, and to boost the use of
ethanol while maintaining refinery flexibility has worked well.
It should be a model for our pollution policies today and in
the future.
When I visited Iceland last year, I rode on a fuel cell bus
and saw firsthand the promise of that technology. The fuel cell
holds the possibility of marrying low or non-polluting engines
with renewable fuels. This opens the possibility of a future
free of the constraints of limited fuel and production. It is
exactly the kind of environmentally friendly solution I have
always advocated. These innovations have the potential to
propel us into an era when driving a car or truck will no
longer mean polluting the environment or using scarce
resources.
Thank you, Mr. Chairman, and I look forward to the hearing.
[The prepared statement of Senator Jeffords follows:]
Statement of Hon. James M. Jeffords, U.S. Senator from the State of
Vermont
Thank you Mr. Chairman. I want to extend a welcome to the
witnesses. I appreciate the time they have taken to appear before us
today.
Today's hearing is on transportation fuels for the future. As the
Ranking Member of this committee, I agree that it is important that we
have oversight hearings like this one that allows the panel and members
alike to peek into the future and make educated guesses on what we will
find there.
Given that we are now in a new millennium, it seems to be a natural
human inclination to wonder what the future will bring. But,
particularly given the high pump prices we are now experiencing, we
need to help shape that future into one that provides stable, clean
domestic supplies of transportation fuels at affordable prices.
Our lifestyle and economy in this country is based on the abundant
supply of petroleum in the form of gasoline and diesel. Today, the
internal combustion engine powers most of our vehicles. However,
nothing lasts forever, and we are seeing our plentiful oil and low
prices disappear.
The outlook for petroleum reserves in the United States this
century is not rosy. As the oil supply decreases, especially of clean
burning sweet or low sulfur crude, prices will increase. We need to
make sure that we have a good idea where we go next.
We need to continue to increase our efficiency and reduce pollution
in existing internal combustion engine designs and ultimately
transition from a petroleum-based economy into a new clean fuel-based
economy. Such a transition will be crucial to our national well-being
into the next century and beyond.
I do not mean to suggest that such a solution is easy. There are
incredible complexities involved in forming a well-rounded and flexible
approach to meeting the nation's fuel requirements, while at the same
time protecting our environment. But, we have taken important steps.
Our efforts to reduce harmful components, such as sulfur in fuels, and
to boost the use of ethanol while maintaining refiner flexibility have
worked well. It should be a model for our fuel and pollution policies
today and in the future.
When I visited Iceland last year, I rode on a fuel cell bus and saw
first hand the promise of this technology. The fuel cell holds the
possibility of marrying low or non-polluting engines with renewable
fuels. This opens the possibility of a future free of the constraints
of limited fuel and pollution. It is exactly the kind of
environmentally friendly solution I have always advocated. These
innovations have the potential to propel us into an era when driving a
car or truck will no longer mean polluting the environment or using up
scarce resources.
Thank you, again, Mr. Chairman, and I look forward to hearing from
the witnesses.
Senator Inhofe. Thank you, Senator Jeffords.
Senator Thune, one of the witnesses is from your State. You
may want to make a recognition of that, and you are recognized.
OPENING STATEMENT OF HON. JOHN THUNE, U.S. SENATOR FROM THE
STATE OF SOUTH DAKOTA
Senator Thune. Thank you, Mr. Chairman, and I want to
express my appreciation to you for holding this hearing. This
is an important hearing.
There is no bigger economic issue facing the Country right
now than the cost of energy. It is having a profound economic
impact all across this Country and is extremely acute in States
like South Dakota that are very energy-dependent. I appreciate
your leadership in helping us with the Energy bill that we
passed last summer to include a Renewable Fuel Standard which
will increase and provide a market for ethanol going forward.
So I think it is important that the energy policy that we
have in this Country be a balanced energy policy, that it
include a robust Renewable Fuel Standard, and I appreciate your
assistance and help in helping us achieve that goal.
We do have with us today Bill Honnef with VeraSun Energy.
He is the Director of Sales and Marketing or Vice President, I
should say, of Sales and Marketing for that company. They are
the No. 2 producer of ethanol in the Country.
Mr. Chairman, one of the things that Bill will testify to
here in a few moments is the pioneering work that they are
doing in forging partnerships with other parts of the industry
in order to promote the use of renewable fuels. VeraSun has
been on the leading edge when it comes to working with
manufacturers, auto manufacturers, both General Motors and
Ford, with retailers, fuel retailers across the Country in
getting more use of E85.
We have a number of stations in Sioux Falls, SD, that now
market E85. In fact, the Energy bill has a provision in there
that provides a tax credit for those fuel retailers that will
install E85 pumps, and basically what that is, is 85 percent
ethanol. We want to see more of those across the Country.
More of the manufacturers now are producing fuel flex
vehicles, which again provides an incentive for more use of
renewable fuels and moves us in a direction where we lessen our
dependence upon the very unreliable partners we have in the
Middle East. We would rather see our partners be the corn
farmers of the Midwest than the sheiks and the mollahs in the
Middle East.
So Mr. Chairman, I appreciate your holding this hearing. I
am delighted to be able to welcome Bill Honnef to be one of our
panelists today. I think that you will enjoy and appreciate the
light that he will shed on this issue and the, as I said,
innovative and pioneering strategies that they are bringing to
our Country in terms of further promoting the use of renewable
fuels.
Thank you, Mr. Chairman. I look forward to the other
panelists as well this morning and hearing their testimony.
Senator Inhofe. Thank you, Senator Thune.
Senator Boxer.
OPENING STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM THE
STATE OF CALIFORNIA
Senator Boxer. Thanks so much, Mr. Chairman, for holding
this hearing. It is really a wonderful thing that you have done
this, and I really look forward to working with you because you
and I know we have our differences, but when we do agree, it is
a good combination. I think this is an area where we can really
move forward. It was wonderful to hear Senator Jefford's
statement this morning.
You are right about this. We need to take a look at what
else we can do to make our economy stronger and, of course,
with energy independence comes, I think, much better national
security for our Country. So it is such a win-win to look at
these other options.
You did reference some confrontational hearings that were
held in another committee. I happened to be there, and I am
sure I was on the side that you would call populist. I won't go
into that hearing, because I don't want to irritate you in any
way, shape, or form.
[Laughter.]
Senator Boxer. What I would like to say is that it was
contentious, and it wasn't satisfying for anybody there. It was
just one of these things where everyone was talking past each
other, and I think we have to do better than that.
The way I look at things is that right now we are in a
transition. First, I think we were in denial about the fact
that we have to look at alternatives. Now we know we must do
that. In the meantime in this transition, I see hybrid
vehicles, for example, as one way to reduce the demand with a
very good technology. My family owns about three hybrid cars,
and the latest one we got is 52 miles to the gallon easy, and
that is terrific. I know a number of colleagues on this
committee actually drive those cars.
However that is not the long-term solution. The long-term
solution is to look for these alternative fuels. On the ethanol
issue, California has always had problems with ethanol,
although we go against the grain. I know I am saying that on
purpose. We go against the grain of a lot of our Midwestern
friends, but we just know that it is going to be costly for us
because you have to ship the ethanol from the Midwest to
California. Then we have certain requirements.
What we are excited about is the possibility, and Senator
Inhofe mentioned this, of getting that ethanol from, for
example, rice straw, getting that ethanol from agricultural
products. What we did together is we put an incentive in the
Energy bill to give more credit if you use, or your State would
get more credit if it uses this type of ethanol.
So, in any event, I will put the rest of my statement into
the record. Mr. Chairman, I am very happy that you have had
this hearing. I am looking forward to hearing from the
witnesses.
[The prepared statement of Senator Boxer follows:]
Statement of Hon. Barbara Boxer, U.S. Senator from the State of
California
Thank you, Mr. Chairman, for holding this hearing today. This
hearing is very relevant with the skyrocketing gasoline prices that the
American public is confronting.
Last week, the Commerce and Energy Committees had before us the
CEOs of the major oil companies. They took no responsibility for our
struggles with energy prices--shifting the blame to others--and were
unwilling to make sacrifices, at a time when middle-class Americans are
suffering at the gas pump.
I believe we ought to be doing more to control the price of
gasoline such as imposing a windfall profits tax and giving the FTC
more authority to go after the price gougers.
I also believe we need to reduce our dependence on oil by
increasing CAFE standards, by promoting the use and further development
of hybrid cars, and by strengthening our Nation's public transportation
systems. This year's Highway bill, spearheaded through the Senate by
Chairman Inhofe, actually contained many provisions that will benefit
public transportation, and thereby reduce our consumption of oil.
In addition to those efforts, we can, as today's witnesses will
testify, reduce America's dependence on oil by providing consumers with
alternatives to gasoline when they fill up their tanks.
That is why we need to promote promising new fuels such as
hydrogen. California has been a leader in this area with its Hydrogen
Highway, a program that will put 50-100 hydrogen fueling stations in
service throughout the State by 2010. In addition, several California
transit Agencies are, or soon will be, demonstrating and operating
buses powered by fuel cells.
Another potential future fuel is ethanol. Although it is not ideal,
and although all potential health effects are not clear, ethanol does
reduce emissions of toxic air pollutants, such as benzene, a cancer
causing chemical. It can also lower smog forming emissions.
Mr. Chairman, we have the technical know-how to reduce our reliance
on fossil fuels. The question is, do we have the political will?
I hope so. It was clear from last week's hearing that Big Oil will
do nothing to help the American people pay their energy bills and
reduce their dependence on oil. Congress must.
Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Boxer.
Senator Obama.
OPENING STATEMENT OF HON. BARACK OBAMA, U.S. SENATOR FROM THE
STATE OF ILLINOIS
Senator Obama. Thank you very much, Mr. Chairman. I think I
share the view of most of the committee here, that you couldn't
have scheduled a more timely hearing. I think this is an
absolutely critical issue for us to face our future.
In a committee hearing several weeks ago, I made the point
that if the United States were serious about reducing its
dependence on imported oil and insulating our economy from
future supply and disruption shocks, then we have to start
looking at alternative fuel use as part of our strategy.
Actually, thanks in part to your help, Mr. Chairman, I think
that we have actually made some progress this year. With your
support, we enacted a Renewable Fuel Standard that requires 7.5
billion gallons of ethanol in our gasoline supply in 7 years.
I should add, by the way, that I think that support for
corn-based ethanol and improving technologies there is in no
way contradictory to Senator Boxer's interest and concern in
making sure that we look for additional efficient ways of
manufacturing cellulose-based ethanol.
I worked with Senator Baucus and others to include a tax
credit in the Energy bill that promotes the installation of
more E85 pumps at gas stations. One of the problems we have
right now is distribution. A lot of gas pumps don't provide
E85, the ethanol-based blend that can significantly cut down
gasoline use. So, we have got some incentives there. These
measures by themselves, it is estimated will reduce oil
consumption by an estimated 6 percent in 7 years.
There is a problem, though. Despite this significant
progress, United States oil consumption during this period will
far exceed the reductions that we are making, the increases in
oil consumption. So we still have a lot more to do.
I recently introduced a bill with Senator Carper to create
a Renewable Diesel Standard, calling for 2 billion gallons of
diesel substitutes in our 40 billion National diesel pool by
2015. Last week I joined Senators Harkin and Lugar in calling
for all our Nation's cars and trucks to be ethanol capable in
10 years, and I have worked to encourage new technologies that
would convert coal into diesel.
So, as we embark on a search for new transportation fuels,
we need to understand, as I know you do, Mr. Chairman, that
realistically petroleum will not be eliminated from our economy
anytime in the foreseeable future. However we can pursue
existing proven technology that can provide a bridge, as
Senator Boxer indicated, to energy diversity that will begin us
down the path of energy independence.
I know this will be a challenge, but this hearing is a
useful place to start, and I appreciate your taking the time to
hold this hearing.
[The prepared statement of Senator Obama follows:]
Statement of Hon. Barack Obama, U.S. Senator from the State of Illinois
Mr. Chairman, thank you for scheduling this important hearing on
transportation fuels. It's certainly a very timely topic.
At a committee hearing several weeks ago, I made the point that if
the United States were serious about reducing its dependence on
imported petroleum and insulating our economy from future supply
disruption shocks, then increasing alternative fuel use should be part
of that strategy.
I am pleased that over the past year, we've made some progress on
this front.
With the support of Chairman Inhofe, we enacted a Renewable Fuels
Standard to require 7.5 billion gallons of ethanol in our gasoline
supply in 7 years. I worked with Senator Baucus and others to include a
tax credit in the energy bill to promote the installation of more E85
pumps at gas stations. These measures, by themselves, will reduce oil
consumption by an estimated 6 percent in 7 years.
Although this is significant progress, we need to remember that the
growth in United States oil consumption during this period will far
exceed this small reduction. So, much more needs to be done.
Recently, I introduced a bill with Senator Carper to create a
Renewable Diesel Standard, calling for 2 billion gallons of diesel
substitutes in our 40 billion national diesel pool by 2015. Last week,
I joined Senators Harkin and Lugar in calling for all our Nation's cars
and trucks to be ethanol-capable in 10 years. I have worked to
encourage new technologies that would convert coal into diesel fuel.
As we embark on a search for new transportation fuels, we need to
understand that realistically, petroleum will not be eliminated from
our economy any time in the foreseeable future. We can, however, pursue
existing, proven technologies that will provide a genuine bridge to
energy diversity that will begin us down the path of energy
independence.
No doubt, this will be a challenge, but I look forward to working
with my colleagues on both sides of the aisle in moving our country in
this direction.
Thank you.
Senator Inhofe. Thank you very much, Senator Obama.
We will go ahead and start. We will start over here with
you, Mr. Cavaney, and then work across. Your entire statements
will be made a part of the record. If you could abbreviate them
and try to hold your comments down to maybe 5 minutes, it would
be very helpful.
Mr. Cavaney.
STATEMENT OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN PETROLEUM
INSTITUTE
Mr. Cavaney. Thank you, Mr. Chairman and members of the
committee.
API appreciates this opportunity to discuss the future of
transportation fuels. Our industry has met the transportation
needs of Americans for more than a century and will continue to
rely on state-of-the-art technology to do so in the decades to
come.
Looking ahead, we believe that advances in technology,
consumer preference, and the workings of the marketplace will
best determine the fuels of the future. We need to rely on
these forces to shape our energy future rather than attempt to
dictate what fuels are to be used. Past efforts by Government
involving non-market mechanisms have only complicated the
search for solutions to our energy problems.
While it may come as a surprise to some, gasoline, diesel
fuel, and other petroleum products have provided energy for
consumers for well over a century. Why have these fuels endured
for so long? There are a couple of reasons. First, hydrocarbons
have been the choice of consumers worldwide because they
contain more than twice the energy per gallon as many other
energy sources.
A second reason is that technology has reduced dramatically
the environmental impact of their use, enabling the production
of cleaner, more efficient, and environmentally responsive
fuels. For example, the average sulfur content in gasoline has
been reduced by more than 90 percent to less than 30 parts per
million. A new car today, running on the latest low sulfur
gasoline and equipped with the most advanced emissions
reduction technology, has 97 percent less emissions than had a
new vehicle in 1970.
There is a misperception by some about the time and cost
involved in any transition to the next generation of fuels.
Consider what would be involved in replacing the dominant role
of oil with a substitute like hydrogen or solar power. Most
agree that such a transition would require dramatic advances in
technology, and massive capital investments, and take several
decades to accomplish. The United States and the world cannot
afford to leave the Age of Oil before realistic alternatives
are fully in place.
It is important to remember that man left the Stone Age not
because he ran out of stones. Someday we will leave the Age of
Oil, but it won't be because we will have run out of oil. Yes,
eventually, oil will be replaced, but clearly not until
practical alternatives are found, alternatives that are proven
more reliable, more versatile, and more cost competitive than
oil.
We expect that the dominant transportation fuels will
remain gasoline and diesel for at least two or three more
decades. That is the minimum amount of time required to fully
retire any existing and still growing fleet of automobiles and
trucks powered by these fuels, and to deploy any replacement
fuel source throughout the United States fully. We cannot
afford to prematurely retire these century-old champions of
gasoline and diesel without full and complete assurances that
worthy successors are, in fact, in place to serve the consumer.
Those who write off gasoline and diesel fuels fail to
recognize how advanced technology is providing new and more
efficient ways of using these time-tested products. As was
mentioned by Senator Boxer, hybrid vehicles, powered partly by
gasoline and partly by electricity, are a star that has
actually arrived on the scene. Already they are moving
aggressively into the market, and their rate of growth will
depend in large part on their price and ultimate performance.
In addition to hybrids and advanced internal combustion
engines, ICEs if you will, oil companies are working alone and
with auto makers and have invested millions and millions of
dollars researching new fuel cell technologies. Some of these
companies have also partnered with the Federal Government
through the Department of Energy's Freedom Car and Fuel
Partnership, which is a public-private effort to examine the
precompetitive research required to develop technologies for a
full range of affordable vehicles as well as the fueling
infrastructure to support them. These technologies hold the
potential for up to double the fuel efficiency of the current
gasoline powered automobiles and essentially with zero tailpipe
emissions.
However, creating and maintaining a national fleet of such
vehicles will face significant technical, economic, primary
energy source availability, and infrastructure challenges.
So the bottom line at the moment is that gasoline and
diesel will likely remain the dominant transportation fuels for
a number of decades to come. In view of the history of its
reliability and environmental progress, gasoline's continued
dominant role should be reassuring to the American public.
Thank you very much.
Senator Inhofe. Well, thank you, Mr. Cavaney.
Mr. McDougall.
STATEMENT OF JEFFREY MCDOUGALL, JMA ENERGY COMPANY, LLC
Mr. McDougall. Good morning. My name is Jeffrey McDougall,
and I am the owner of JMA Energy Company located in Oklahoma
City. I appreciate the opportunity to appear before this
committee today.
I will offer my remarks from the perspective of an
independent oil and natural gas explorer and on behalf of the
Oklahoma Independent Petroleum Association, which is an
association of more than 1,600 independent oil and natural gas
producers. Although our membership includes some publicly
traded companies, the majority of our members are small, family
owned businesses. Our members explore for and produce oil and
natural gas. We do not refine oil into gasoline or heating
fuels, and we do not market gasoline.
I entered the oil and natural gas industry in 1984 after
receiving a degree in Petroleum Engineering. I was laid off in
1986 when energy prices plummeted. I subsequently started my
own company and have built my business from the ground up by
drilling for oil and natural gas. I currently have 35
employees. In the last 4 years on a cumulative basis, I
reinvested more than 113 percent of my cash-flow through
participation drilling of over 350 new wells. My share of this
drilling has found enough energy equivalence to supply this
Nation's natural gas energy needs for one day.
Oklahoma has a rich history in energy production. During
World War I, we were the largest oil producing region in the
world. We were responsible for supplying critical energy
resources needed for our war effort. Although oil production is
still important to Oklahoma, it has declined through the years.
Oklahoma's exploration focuses turned to natural gas, making it
the No. 2 State in the Nation in natural gas production.
Independent producers are responsible for more than 85
percent of the oil and natural gas production in the State.
Nearly half of this production is from marginal wells which
account for 42 million barrels of oil annually or an average of
slightly more than 2 barrels per day from each of the 48,000
marginal wells. The overwhelming majority of this production is
owned by small family businesses.
I want to emphasizes the independent oil and natural gas
producers reinvest their cashflows back into the ground here in
the United States to find vitally needed domestic reserves of
oil and natural gas. In fact, a recent study shows that
independent oil and natural gas producers reinvest more than
100 percent of their cashflow back into the domestic oil and
natural gas development. The result is the independent oil and
natural gas producers drill 90 percent of the domestic oil and
natural gas wells in the United States while producing 70
percent of the domestic oil and 82 percent of the domestic
natural gas.
Twenty-five years ago a windfall property tax was imposed
upon this industry, and domestic production decreased while
energy exports increased. The $80 billion taken from the
industry during that 8 years the tax was collected prevented
producers from investing in the industry's infrastructure,
resulting in an energy network unable to keep up with growing
United States demand.
A new tax on energy producers today could be expected to
produce the same domestic supply destruction. The domestic
industry is currently hampered by a shortage of experienced and
technically trained employees as well as shortage of drilling
rigs and well servicing capacity, but this infrastructure is
being rebuilt by market forces. The domestic rig count has been
climbing since the Spring of 2002 in response to higher product
prices.
Independent producers are now, more than ever, aggressively
searching for more oil and natural gas reserves. Independent
producers are using new technology to enhance mature oil
fields, exploit unconventional resource plays; and drill to
depths in excess of 20,000 feet at costs approaching $8 million
per well. We are doing what we can to make our Country more
energy secure and less reliant on foreign sources of energy,
and in the process, we are creating American jobs and buying
American products.
While our greatest contribution is finding more oil and
natural gas, we should emphasize that independent producers
have a history of giving back in other ways as well. A majority
of the foundations, endowments, museums, and community projects
in Oklahoma's history have been created primarily through the
generosity of the State's independent oil and natural gas
industry. We are also environmental stewards. We comply with a
myriad of local, State, and Federal environmental requirements.
In Oklahoma, oil and gas producers instigated the creation
of the Oklahoma Energy Resources Board 16 years ago. Through
the OERB, producers have voluntarily contributed over $30
million to clean up more than 6,300 abandoned sites and an
additional $30 million for science-based education projects.
Currently, the Oklahoma Energy Resources Board and the Oklahoma
Independent Petroleum Association are addressing the impact of
high energy prices on the State's low income citizens,
encouraging the State to fully fund the LIHEAP program with
additional dollars collected from the State's 7 percent gross
production tax on producers. We are producing conservation
messages to inform the public of higher heating costs this
winter and advise them of ways to save on their heating bills.
In conclusion, independent producers are reinvesting their
profits to help Americans become less dependent on foreign
supplies. However, we must face the fact that we may never
achieve energy independence. The energy industry is technically
complex and capitally intensive, and an effective energy policy
will require intelligent and realistic people to work together.
We must learn to do a better job of conserving energy. We
must also look to alternative fuels to supply a larger portion
of our Nation's energy needs. At the same time, we must develop
policies that encourage, not discourage, the expansion of our
energy supplies here at home.
Thank you.
Senator Inhofe. Thank you, Mr. McDougall.
Mr. Goodstein.
STATEMENT OF RICHARD GOODSTEIN, WASHINGTON REPRESENTATIVE, AIR
PRODUCTS AND CHEMICALS, INC.
Mr. Goodstein. Chairman Inhofe, and Senator Jeffords, and
Senators Thune, and Chafee, and Boxer, and Carper, and Obama,
thank you very much for the opportunity to speak with you today
about the promise of hydrogen as a fuel of the future, the role
in our economy that hydrogen already plays, and ways in which
this committee and Congress generally can accelerate progress
toward a hydrogen economy.
I am the Washington Representative for Air Products and
Chemicals, the world's largest supplier of third party
hydrogen. Air Products is an $8 billion a year company with
operations throughout the world. We have over 60 hydrogen
generating and processing facilities, more miles of hydrogen
pipeline than anyone else, an unparalleled safety record, and
50 percent of the market share. So I say that Air Products is
the E.F. Hutton of hydrogen, and I appreciate the opportunity
to be here.
You will recall that President Bush heartily embraced the
role of hydrogen in his State of the Union Address in 2003. He
vowed that the first car of a child born that year could be--
should be--a hydrogen fuel cell vehicle. Air Products was
excited by such a strong endorsement from the White House, as
were our friends in the auto industry and among fuel cell
manufacturers.
There are many reasons, of course, and some of you have
referenced them, why a hydrogen economy is such an important
goal. Energy independence will free us from the whims and power
of the oil cartel. It will render the United States less
vulnerable to terrorists. We will no longer need a defense
posture predicated on maintaining open sea lanes for the
movement of oil. Renewable hydrogen will radically clean the
air and will end such an unsustainable trade imbalance.
Hydrogen is spoken of as if it is very futuristic, but in
fact hydrogen is generated in enormous quantities for
industrial purposes today. You will see attached to my
testimony, if you have it handy, a map showing hydrogen
facilities around the Country.
[The referenced map can be found on page 44.]
I will just hold it up in case you don't have it handy. It
shows that virtually every State in the Union has a hydrogen
facility within it or nearby. Hydrogen is used by oil
refineries to make cleaner burning gasoline and in a wide
variety of other industries: steel, glass, semiconductors, food
processing, and many others.
Air Products has a large number of hydrogen generating
facilities as well. Again, let me hold up a photo of one. It
kind of looks like an oil refinery. Again, it is attached to my
testimony.
[The referenced photo can be found on page 43.]
What it says at the bottom is that this hydrogen production
facility, of which Air Products has many in the United States,
generates enough hydrogen to fuel 50,000 vehicles per day.
Currently, there are all of about 100 hydrogen fuel cell
vehicles on the roads of the United States today. The point is
that it will be many, many years before the demand for hydrogen
fuel reaches levels that are even detectable at a single plant,
let alone put a dent in the amount of hydrogen generated
nationally. The point is we have got hydrogen.
Most hydrogen is generated by reforming natural gas, but
one benefit of hydrogen is that it can be derived from oil,
coal, biomass, from waste heat from nuclear, and therefore
whatever alternatives to conventional fuels are pursued,
hydrogen is quite compatible with it. The holy grail in the
hydrogen world is totally renewable hydrogen, where renewable
energy sources such as wind and solar are used to generate the
electricity that separates the hydrogen from the oxygen in
water. As has been said, the only emission from a hydrogen fuel
cell vehicle is water vapor.
Air Products is the leader in the design and deployment of
hydrogen fueling stations, in particular mobile hydrogen
fuelers. Mobile fuelers dispense hydrogen but function
independently of utilities. They don't have to be hooked up to
water or power. Again, I have attached a photo in my testimony.
The advantage of these mobile fuelers is that we don't have to
invest in a permanent fueling station on the ground, waiting
for the auto companies to decide where they want to
commercialize their fuel cell vehicles.
If auto companies want to test vehicles in San Francisco,
we can move a mobile hydrogen fueler there, and, indeed, we
already have. However if they want to test them in Tulsa, or
Burlington, or Warwick, or Wilmington, you get the point, these
mobile fuelers can be moved there, too. One of these mobile
fuelers, I might add, costs less than a single hydrogen fuel
cell car does today.
I have also attached photos of stationary hydrogen fueling
stations which dispense compressed hydrogen into fuel tanks in
a gaseous form.
[The referenced photos can be found on pages 45-46.]
You don't need a moonsuit or a long instruction manual to
use one. There is one two miles away at a Shell station here on
Benning Road that I am sure they will allow you to use just
like they did President Bush with the hydrogen that he pumped
into a car that was generated actually at a facility in
Delaware.
The point is, that between the existence of technology to
dispense hydrogen and the existing network of hydrogen
facilities around the Country, the development of a hydrogen
infrastructure is quite feasible. But because the benefits,
energy security and a clean environment, are embraced by
society as a whole, individual consumer decisions aren't
working with the free market and are probably not enough to get
us where we want to get. The Government is going to play an
important role.
This committee can help through its Public Works
jurisdiction by encouraging Government purchase of hydrogen
fuel cell vehicles, by supporting hydrogen infrastructure in
the next Highway bill--I realize the ink is just barely dry on
this past one, but it is not too early to be thinking about the
next one--and by encouraging the development of codes and
standards applicable to hydrogen production and dispensing.
Congress generally can advance the ball through tax
preferences, robust R&D at the Department of Energy, and even
creative ways to use hydrogen-based technologies for soldiers
on the battle field who don't have to haul around tons of
batteries, and hydrogen fuel cells are totally quiet. So there
is no imprint for the enemy to find.
Hydrogen has great promise and is more here and now than
many think.
Thank you for spending the committee's time on this
important subject, and I look forward to any questions.
Senator Inhofe. Thank you, Mr. Goodstein.
Mr. Honnef.
STATEMENT OF BILL HONNEF, VICE PRESIDENT OF SALES AND
MARKETING, VERASUN ENERGY
Mr. Honnef. Good morning, Mr. Chairman and members of the
committee.
My name is Bill Honnef. I work for VeraSun Energy
Corporation. We are based in Brookings, SD. We are the second
largest ethanol producer here in the Country. We have a 120
million gallons a year plant in Brookings, SD; we have a 110
million gallons a year plant in Fort Dodge, IA, that just
opened up a couple of months ago.
I greatly appreciate the opportunity to testify today as
the committee examines transportation fuels of the future. With
crude oil and gasoline costs at near record highs and the
potential for natural gas shortages across the Country, it is
clear the Nation needs to do more to promote the increased
production of alternative fuel sources and domestically
produced renewable fuels, like ethanol, which can build a
sustainable energy future.
Mr. Chairman, I am happy to report the United States
ethanol industry today is playing an increasing role in
achieving this objective. As a result of the Energy Policy Act
of 2005, which includes a historic Renewable Fuel Standard,
domestic ethanol production is expanding at an unprecedented
rate. I would like to start my comments by first commending
Congress, this committee, and specifically Senator Thune for
your support in passing that very meaningful legislation.
As a direct consequence of that bill, today there are 24
new ethanol plants under construction and several others under
expansion, that when completed will add 2 billion gallons of
ethanol capacity to our current production capacity. This
represents a 50 percent increase in domestic ethanol supply
over what we had just last year. In addition, there are
literally scores of ethanol plants seeking various forms of
financing in various stages of development. This is a fantastic
success story unfolding, and it is happening as a result of
your actions.
The challenge now is to assure that the legislation is
implemented as intended by Congress. Our objective is to make
the program work effectively for our customers in the refining
industry, including specifically a credit trading mechanism to
lower the overall costs of the program. Our understanding from
EPA is that they assume we will issue an interim rulemaking
that we believe will maximize flexibility for refiners and
allow this program to be successfully implemented and on time.
While the RFS provides a baseline for ethanol demand, the
ethanol industry is working hard to create additional demand
through E85. E85 is a blend of 85 percent ethanol and 15
percent gasoline. It is designed for use in flexible fuel
vehicles or FFVs, for short. With approximately 5 million FFVs
on the road today, E85 has great potential as an alternative
fuel. However because flexible fuel vehicles can run on both
gasoline and E85, most owners are not aware they are driving an
FFV and simply use gasoline. Our research indicates that nearly
70 percent of the flexible fuel vehicle owners are unaware they
are driving one.
Based on these research findings, we launched VeraSun E85
or VE85, for short, the Nation's first branded E85 earlier this
year. The program was founded on three basic principles. First,
E85 must be widely available in the target market. Second, E85
must be priced fairly to the consumer. Third, an E85 rollout
must be accompanied by a comprehensive consumer awareness
campaign.
In May, we began the program with the conversion of 35
pumps in the Sioux Falls, SD metro area. Simultaneously, we
launched a marketing program to raise awareness to the benefits
of FFV ownership and E85 use. VeraSun enlisted the support of
General Motors, various local car dealerships, the National
Ethanol Vehicle Coalition, and other organizations across the
State to assist with the rollout of the program. The program
includes elements such as advertising, direct mail, point of
purchase marketing, and retailer education.
Jonathan, if you will show these.
I brought a couple of samples just to show you some forms
of advertising that we are using, which are creating quite a
stir within the community and quite a bit of support around
E85. Here is one billboard that you would see if you drove
around Sioux Falls, SD, or various areas in eastern South
Dakota, Fuel Up For Freedom, obviously playing on energy
independence, the fact that it is 85 percent renewable fuel
that is produced right in the State of South Dakota. People
very much support this.
This is just another example of another billboard, Fuel Up
For The Future. Obviously, we are trying to do this not only
for the here and now but for the future generations. Again,
this has stirred quite a bit of interest.
As a result, E85 awareness has increased, E85 fuel cells
are on the rise, and demand for flexible fuel vehicles in the
local market is up. The community is embracing the fuel as a
viable alternative gasoline. The program is working, and it is
working today.
The success of the program attracted national attention and
the attention of Ford Motor Company. Just 10 days ago, we
announced a first of a kind partnership with Ford to expand
VE85 to other markets throughout the United States with a
public commitment to the partnership from none other than Bill
Ford himself. The initiative will serve to convert existing
fuel pumps to E85 in select markets. A consumer awareness
campaign, like the one shown here, will promote the benefits
and use of E85 and FFV ownership. Local gasoline stations and
Ford dealerships will be asked to participate in the campaign.
Increasing FFV production and E85 use represent the best
near term solutions to significantly reducing our dependence on
our foreign oil, but today only about 500 of the nearly 180,000
retail stations offer E85. In order for retailers to more
widely adopt E85, station owners must have confidence that
there will be sufficient consumer demand. The demand must come
from FFV owners. Today FFVs represent approximately 2 percent
of all vehicles. Without a significant ramp-up in the
production of FFVs, E85 use will remain relatively small.
Auto manufacturers clearly hold the keys to the future of
greater E85 use. With Ford, General Motors, and potentially
auto manufacturers as partners, we believe we can make great
strides in boosting FFV production and E85 use. We are very
optimistic.
In conclusion, Mr. Chairman, as the committee contemplates
future motor fuels markets, please recognize that ethanol is a
viable bridge to the future. Today ethanol is blended into one-
third of our Nation's fuel as a clean blend component. As we
see growth in FFV production, ethanol will play a larger role
in the gasoline replacement market.
In the future, ethanol shows great promise as renewable
feedstock for hydrogen fuel cells. VeraSun Energy Corporation
and the Renewable Fuels Association are committed to working
with you and members of your committee to promote the expanded
use of domestically produced renewable fuels.
Thank you.
Senator Inhofe. Thank you, Mr. Honnef.
Well, Mr. Holmes, welcome from what used to be the oil
capital of the world, the city of Tulsa.
Mr. Holmes. We are going to make a comeback, Senator.
Senator Inhofe. Good. Good.
STATEMENT OF JACK B. HOLMES, JR., PRESIDENT AND CEO, SYNTROLEUM
CORPORATION
Mr. Holmes. Good morning, Mr. Chairman and other members of
this committee.
Syntroleum appreciates the opportunity to speak to you
today about transportation fuels of the future. My name is Jack
Holmes, and I am the President and CEO of Syntroleum, a Tulsa
based company that is focused on developing ultra-clean fuels
using Fischer-Tropsch technology. The Syntroleum process
produces a superior quality diesel fuel, jet fuel, or home
heating oil.
Across the world, we continue to see energy demand increase
at rates greater than the growth of their domestic supplies.
Recently we witnessed the immediate negative impacts of
unexpected disruptions of our Nation's refineries along the
Gulf of Mexico as the result of Hurricanes Katrina and Rita.
Our future economic and energy security rely upon our ability
effectively to utilize our domestic sources of fuels. The world
supply and demand balance dictates that we use our clean coal
technology for development of secure domestic transportation
fuel.
We often categorize Fischer-Tropsch technology as going
back to the future because it was developed in the 1920's in
Germany to produce liquid fuels from coal. Other countries,
such as South Africa, have also utilized Fischer-Tropsch
technology to produce over 1.5 billion barrels of fuel from
coal over the last 50 years.
With over 270 billion tons of proven reserves, the United
States is the Saudi Arabia of coal. Much of this coal is
located in remote areas of Western and Midwestern States. Our
plan is to build the plant at or near the mine to maximize
transportation savings. If we convert just 5 percent of the
estimated proved coal reserves in the United States to ultra-
clean fuel, it would double our proved oil reserves without
drilling a single well. Also, these projects won't require
additional refining capacity because our technology produces
finished fuels onsite.
Syntroleum's 20 years and $200 million of Fischer-Tropsch
research and development have shown our fuels are among the
cleanest in the world with virtually no aromatics and no
sulfur. They are non-toxic and biodegradable. Here, I have got
a sample of Fischer-Tropsch diesel. It is as clear as water and
has no aroma. It is the cleanest fuel in the world.
This chart behind me shows the dramatic reduction in
pollutants achieved in tests using our fuel. This includes
hydrocarbons, carbon monoxide, C0<INF>2</INF>, NOx, and
particulate matter. Our fuels are compatible with existing
energy infrastructure and run well in current diesel engines
with no modifications necessary.
Finally, our fuel is of interest to the military where we
have done extensive research with the Department of Defense to
test a single battlefield fuel. We want to thank Senator Inhofe
for his leadership in this effort.
Congress does not need to fund this new industry forever.
However, support from the U.S. Government for the first coal to
liquid plants will be critical. Syntroleum applauds you for
your action in passing the Energy Policy Act of 2005. This bill
was a major step in the right direction by providing funding
for research and development of clean coal technology and loan
guarantees for construction of commercial scale coal to liquids
plants.
We urge the Government quickly to follow through with its
commitment to dedicate money for loan guarantees and to
encourage long-term contracts to purchase Fischer-Tropsch
fuels. We are sure that the first commercial coal to liquids
plants will have significant impact on the capital markets to
fund additional plants. As we say, everyone wants to be the
first to build the second plant.
Recently, this committee held hearings on the proposed Gas
Price Act, Senate bill 1772. By introducing this bill, Senator
Inhofe has recognized the benefit to this Country in bringing
clean fuels to the market soon.
Americans today are worried about the high cost of fuel and
rightfully so. The effects of Katrina alone are estimated at
several billion dollars in increased energy costs. Whether it
is filling their automobile tanks or heating their homes,
Americans are being hit in their pocketbook because of our
Nation's dependency on foreign oil and our limited refining
capacity. We don't have to continue down this path of energy
insecurity. We have the resources and technology today.
In summary, ultra-clean coal-based Fischer-Tropsch fuels
can have a significant impact on the energy security and supply
balance in this Country and add high paying jobs here at home.
Mr. Chairman, members of the committee, thank you for
allowing me this time to speak about transportation fuels of
the future.
Senator Inhofe. Thank you, Mr. Holmes.
We will do a series of 5 minutes, maybe two rounds. We will
try to see how we come with votes.
I appreciate, Mr. Holmes, your making a reference to the
refinery bill that we, unfortunately, were not able to get out
of committee. It was a very modest bill. It was one that I
think would have been very helpful, and we are still hoping
that there is some way of doing this to get this out and make
that a reality.
Mr. McDougall, right now, things are pretty good in the
industry for independents, but it wasn't long ago things
weren't so good. So, you have the ups and the downs. As one who
has lost his job during one of the low periods, how do you
react when you hear people in Washington making allegations
about the oil industry and wanting to make it harder for you to
do business? What is your response?
Mr. McDougall. Well, Chairman, my first response would be
let the market forces work. That is spoken by people that
probably are uninformed about our industry. They haven't
studied us as close during the down time as they have the up
time.
We are an industry that is heavily regulated. We are
heavily taxed. We take tremendous risks. One thing that we do
is spend our own money. There are lots of nights during the
slow times that I lost a lot of sleep, spending my own money to
try to survive in the slow times. There has also been during
that same period that they weren't experiencing, it was a slow
destruction of the industry and the infrastructure that was
there. Now that prices are up, people are affected by the
consequence of that.
Senator Inhofe. Well, I think it is pretty heroic of you to
make the statement, let the market work, having lost your job
at one time. So I appreciate that very much.
Mr. Cavaney, the President recently signed a bill that
establishes a historic and sizable renewable fuels mandate, yet
some people are already advocating that we have more mandates
for other biofuels. I would just like to know in your opinion
what new mandates would do to the economy. Do you have any
thoughts about that?
Mr. Cavaney. Yes, sir, Mr. Chairman. First of all, we
appreciate the work of this committee in helping craft together
a renewable fuels mandate that had the kind of flexibility that
would allow us to absorb significantly more of the ethanol and
biofuels without a lot of the constraints that we faced when we
used to be on a per gallon basis. I think what we will find is
that is a pretty ambitious amount to absorb. I think we will be
able to do that well.
However if we now, on top of an existing structure, tend to
build more mandates or structures that are less flexible, I
think what will happen is our capacity to move fuel quickly
when tight conditions arrive, whether it is because of a
failure of a pipeline or a problem in a refinery or something
God forbid as terrible as the two hurricanes that hit us down
in the Gulf, you really see the problems.
For example, boutique fuels which is a phenomenon that has
developed over the last 10 years, are all individual fuels that
are mandated by certain municipalities and certain regions. Had
the Government not been willing to grant waivers as a result of
Katrina, we would not have been able to have the gasoline there
where people needed it.
So, Mr. Chairman, I think we need to move with caution.
There is an incentive for the industry. We, in the oil and gas
business, feel that we can use all the energy we can get. Right
now, we are actually out with strong conservation and energy
efficiency messages. Biofuels will have a good place in the
industry. I think this was mentioned earlier.
You are going to see ethanol expand beyond just corn into
other areas. We welcome that addition. I think there is plenty
of room for everyone. So let the market and let the consumer
make those choices and put the fuels where the demand is, and I
think everyone will end up benefiting from that.
Senator Inhofe. Yes, I think so too, Mr. Cavaney. I
appreciate your remarks about it is important to realize that
we were at 100 percent refinery capacity before Katrina. So,
this is something that Washington needs to hear from you.
Mr. Holmes, there are some members who are suspicious of
the coal to liquids for two reasons. One is that it would not
be price competitive, and second, that it is a fossil fuel and
therefore should not be encouraged. How do you respond to those
two criticisms?
Mr. Holmes. Well to answer the first question, we believe
in the current energy price environment that we are cost
competitive, and we have done a lot of work on economics. We
believe that we think what we need is a little push to get the
first plant built and can demonstrate that. I would remind you
that the LNG industry, for example, the early plants that were
built some 20 years ago, they are much cheaper now.
In fact, a new LNG liquefaction plant today is probably one
third the cost of an original LNG plant. So we believe if we
can get the industry started, demonstrate its viability, that
there will be improvements over time.
Second, it is a fossil fuel, but, as was mentioned earlier,
this Nation is going to need fossil fuels for years to come in
the future. It is a fossil fuel, but it is the cleanest fossil
fuel, if you recall the chart that I put up here. We believe it
is an ideal bridging fuel to get to the future. As we said,
there is such a vast amount of coal in this Country, that just
a very small fraction of our coal could have a big, big effect
on our energy supply. Not only diesel fuel on the road but jet
fuel and, more importantly, home heating oil can be made using
our process.
So we think there is a very bright future for it, and we
look forward to participating and helping America solve its
energy problems.
Senator Inhofe. Thank you, Mr. Holmes.
Senator Jeffords.
Senator Jeffords. Mr. Cavaney, you stated that refining
capacity grew between 1994 and the present, and that currently
planned expansions will result in increase in capacity of at
least one million barrels per day from 2005 to 2009. These
expansions will allow us to refine a greater quantity of oil
into transportation fuels. Are similar technological advances
occurring with respect to refining efficiency that will allow
us to get more refined product from each barrel of oil?
Mr. Cavaney. Yes, Senator. What we find is increasingly
these refineries, some of them as many as 50 and 60 years of
age, constantly with each improvement, whether it is for an
environmental improvement or for increased capacity, they go
back in and put in new state-of-the-art technology. So, the
yields that are coming out of refineries as well as the energy
efficiency have moved quite significantly. That is what has
allowed us to be able to take these earlier generation, smaller
refineries and continue to add onto them.
What we have found is that it is much easier, quicker, and
less expensive, ultimately benefiting the consumer, by adding
existing capacity to make more and more capacity in a similar
place. If you start a new greenfield refinery today, you are
generally going to be going to a community that is not familiar
with you; you have a lot of problems with the permitting
process; and you have no guarantee that you are ultimately
going to be able to get permission to do that.
Where if you go to an existing refinery that has been
geared toward accepting incremental increases in capacity, you
are in a community that generally appreciates you, looks at the
value of the jobs, and the tax payments that come to the local
community. For about 60 percent of the cost, we can add
additional barrels of capacity, and again at about half the
time. About 4 years would be about the maximum to add to an
existing refinery as opposed to maybe eight or more if you were
going to build a new greenfield mill. So most of the additions
have come incrementally.
The amounts that we have talked about, a little over a
million barrels here, will represent about 1 1/2 percent growth
per year which exceeds the traditional growth. So we not only
will be taking care of the built-in growth, but we will be
adding a little more spare capacity. These also, I might say,
are not likely to be the only additions that will be announced.
These are the ones we have on the docket right now that we know
about. There may well be others, and therefore we will continue
to see capacity grow.
Senator Jeffords. Thank you. That is very helpful.
Mr. McDougall, you talked a good deal about the investments
that independent oil producers in your State are making in
order to be able to continue to recover more from existing
wells. It is clear you have made significant investments, but
you can't rival the financial investments the major oil
companies are making in research into new technologies. Should
the Federal Government be doing more to research drilling
techniques that improve recovery, reduce losses of oil, and
protect the surrounding environment?
Mr. McDougall. Senator, I believe yes on that. Anything
that promotes efficiencies, promotes additional recoveries,
that would provide more of our product to the Nation, we would
be for that. As an independent producer, when we are out
spending capital, as I referred to earlier, we drilled 90
percent of the new wells.
The majors have been through an exodus from the continental
United States The moneys that we bring to bear are the lion's
share of all the spending in the Country. Ninety percent of the
drilling is done by independents. If the research wants to be
done by the Government to recover the mature production, we
would be all for that.
Senator Jeffords. Mr. Goldstein, you stated in your
testimony that the Clean Air Act's requirements to remove
sulfur from petroleum benefits hydrogen producers. Will you
clarify for the committee why this is the case?
Mr. Goodstein. Well, crude oil has sulfur compounds in it.
Hydrogen reacts with that sulfur to form hydrogen sulfide,
which is removed by adding something like sand that bonds to
it. Basically, hydrogen is used to take the sulfur out of the
crude, and then it actually gets sent on to a chemical plant to
make a usable product like sulfuric acid.
But the fact of the matter is beyond that. Not just insofar
as hydrogen is used as an input to the refinery process, as I
mentioned, hydrogen fuel itself has the promise of clean air,
both with respect to being used in a fuel cell and being used
in a hydrogen internal combustion engine. There are some auto
makers that are going in that route.
So not only would we have no particulates, but if we have
totally renewable hydrogen, we wouldn't even have to worry
about carbon dioxide. How nice would that be to do that in a
way for which there was a market and demand as opposed to
having to turn the screws on industry?
So there are a lot of benefits from the standpoint of
hydrogen, both with respect to serving our friends in the
refinery business but also insofar as hydrogen becomes a stand
alone fuel, again in fuel cells, stationary and mobile.
Senator Jeffords. I have two more questions. Is that all
right?
Senator Inhofe. It will be all right.
Senator Jeffords. Mr. Honnef, you testified that ethanol
producers are expanding at an unprecedented rate and that there
are 24 plants and 7 expansions under construction today. I just
want to be clear. Is it correct that this expansion is
occurring in compliance with the existing environmental law and
with the acceptance of the local communities in which the
plants are located?
Mr. Honnef. Absolutely, and furthermore, communities are
encouraging ethanol plants to come to their communities, unlike
our brethren in the oil industry and the refining industry that
face real challenges with siting refineries, and those issues
need to be dealt with. With ethanol plants, communities
actually encourage ethanol plants to come to the communities,
because our feedstock is obviously in most cases corn. By
pulling corn from the local market, we create demand for the
corn and increase rural economic development. So, in some
cases, communities are actually competing to get plants to come
to their town.
Senator Jeffords. Mr. Holmes, I just want to clarify some
figures presented in your written statement. You stated that if
the United States converted 5 percent of its recoverable coal
reserves to oil, it would be the equivalent of the existing 29
million barrels of proven oil reserves in the United States.
Five percent of the reserve amounts, in your testimony, to 14
billion tons. As I understand it, most processes for converting
coal into liquids turn a ton of coal into a little more than a
barrel's worth of oil or refined product such as gasoline or
diesel. Have you developed a process that is more efficient in
the way it converts coal to oil?
Mr. Holmes. No, sir. Our research shows that approximately
two barrels of oil are created per ton. It varies. For lignite
coal, for example, it is about 1.5; for bituminous coal, it is
about 2.5. So a weighted average of the coal in the United
States is about two barrels per ton, and that is the basis of
that calculation.
Senator Jeffords. Thank you.
Thank you, Mr. Chairman.
Senator Inhofe. Thank you, Senator Jeffords.
Senator Chafee.
Senator Chafee. Thank you very much, Mr. Chairman and
panelists for being here this morning.
I am curious as to the break-even point in each of your
proposals for, say, ethanol, or for marginal wells, or for
hydrogen, or for coal-based fuels. What is the cost per barrel
where you start to make money?
Maybe I will start with you, Mr. McDougall. It seems when
you left in 1985, the price per barrel at $11 or $12 was really
low, but you went into marginal wells, it sounds like. Can you
make money at $11 or $12 a barrel, or do you need it higher?
Mr. McDougall. Senator, first of all, I am primarily a
natural gas producer.
Senator Chafee. Maybe I have my dates wrong. At one point,
it was down.
Mr. McDougall. Yes, it was $11.15, I think is what the
number was, somewhere in that area.
First of all, I am a natural gas producer primarily, so I
think of economics in terms of MCFs. You know, at that time, it
seemed like finding costs were near 85 cents, and then there
were some lifting costs. We have to add on the lifting, and the
processing, and everything else. Gas prices seemed to be about
$1.25 at that time. It was very thin. I would say then that the
rate of returns were probably in the 10 to 15 percent range
would be probably the good ones that were steady.
Today, the break-even for natural gas is probably somewhere
in the $5 range, $6 range, would be my guess. Now that is for a
company that doesn't carry a lot of debt and all the other
things that go with that. That is just straight up without
having that as a cost component.
Senator Chafee. Thank you.
Mr. Goodstein.
Mr. Goodstein. I think from the hydrogen standpoint FE--
Senator Chafee. By the way, thanks for remembering all our
hometowns. I like that.
Mr. Goodstein [continuing]. Yes, thanks. I think from the
hydrogen standpoint, it is not so much a barrel price as it is
a dollar per gallon of gas price. Right now, say in southern
California, we have a hydrogen pipeline that links a couple
large hydrogen generating plants to a number of oil refineries
south of LAX Airport. Hydrogen off that pipeline is now
appreciably less on a per gallon equivalency than gasoline is
today.
The reason, though, that for us to get it basically
delivered to service stations or to these mobile fueling
stations and so forth, then we have to load up a truck and put
it on the road. You are looking at labor costs. You are looking
at the trucking costs and so forth. Economies of scale, as I
mentioned there are all of 100 fuel cell cars in the Country
roaming around. So there is just not much demand.
I guess the point is, though, when we have demand, I think
it has already been demonstrated, and certainly the Department
of Energy is gearing toward about $1.50, $2 a gallon equivalent
for hydrogen as being very feasible. I think you would hear
from a company like Air Products that that is not beyond the
realm of the possible by any means.
Again, what stands between us getting there now is just
that there is not adequate demand, and therefore it is very
expensive, kind of a onesies and twosies basis, to move
hydrogen around in a metropolitan area.
Senator Chafee. Thank you.
Mr. Honnef.
Mr. Honnef. On an ethanol basis, a break-even is somewhere
in the neighborhood of $1.10 to $1.15 per gallon of ethanol to
produce. The majority of that cost, about 66 percent of that
cost, is represented in the cost of corn that we purchase to
make the ethanol. As these plants get larger, similar to ours,
the 100 plus million gallon a year plants, even drop that price
lower. So the larger the plants, the more efficiencies that are
brought into the industry which are seen today. That price
continues to come down.
Senator Chafee. So if the price of oil were to drop again,
it is unlikely but if it does, and thus the price of gas were
to drop below $1.10 or $1.15, you cannot compete?
Mr. Honnef. If it drops below $1.10, we could compete up to
a point, especially with the Renewable Fuel Standard that is in
place. There will be a market for ethanol up to 7.5 billion
gallons by 2012. So we would continue to compete. What may
happen is some plants, if they are above that, may end up
closing down for a period of time until prices came back.
Senator Chafee. Mr. Holmes, any comparison to coal to gas?
Mr. Holmes. Yes, sir. First of all, one of the things that
a lot of people don't realize is that with higher prices come
higher costs. One of the things that the industry is facing
today is there is a demand for equipment and people, and so
forth. The capital costs of building a new plant, drilling a
new well, or whatever is significantly higher today than it was
2 years ago. So there is a little bit of a ratcheting effect.
But at current costs, as we look at it, and I am going to
compare mine to crude oil prices, somewhere in the $35 to $40 a
barrel range gives an adequate rate of return.
If prices were to go down below that, first of all, if you
have already amortized your capital investment and you are just
paying operating costs, you can still stay in business and make
money. Second, we would hope that the capital costs for
construction would go down with that. So it is fairly flexible.
One of the ways we look at it is if energy prices drop
significantly from where they are today, I think most people in
this Country would be pretty happy. We wouldn't be happy in our
industry if energy prices drop significantly, but that wouldn't
be a bad thing for the Country.
Senator Chafee. These capital costs, your investors must be
apprehensive about the swings in the price of energy and the
price of oil.
Mr. Holmes. Well, that is always there, but one thing I
would point out is that the high energy prices that the world
faces today, in our opinion, are a result of a true supply
demand balance situation. What this Country experienced in the
seventies and eighties was an artificially high price that
resulted from political decisions made by the producing
countries.
If you artificially close a valve, you can open it up just
as easily. That is what happened to oil prices, and that is why
a lot of the projects that were underway in the seventies and
eighties turned out to be a problem.
If you look at the future price for oil today, it is a lot
higher, a lot further out than it was in the past. So I think
most people in our industry believe that this higher level of
oil prices and energy prices, resulting from true demand in the
world, will probably stay longer. Second, in financing these
projects, typically the lenders insist that you hedge your
prices, so that you take out some of that risk. If you can lock
in your forward prices at a high enough level to service your
debt, that is generally what people do.
Senator Chafee. Part of the testimony was about India and
China coming on line.
Mr. Holmes. Absolutely.
Senator Chafee. That must give some confidence to higher
energy costs for your investors.
Mr. Holmes. We run into the Indian companies and the
Chinese companies all over the world. Our other business is gas
to liquids which we use stranded gas around the world to try to
develop. Everywhere we go, if there is an Indian company
competing for a project or a Chinese company, they set the
price pretty high.
Senator Chafee. Mr. Goodstein, I don't know much about
hydrogen, but Mr. Cavaney testified that it comes from natural
gas. On page 11, he says, most hydrogen must come from natural
gas which, from an energy security standpoint, is in limited
domestic supply. Is that a problem for you?
Mr. Goodstein. Well, it is certainly true today that
hydrogen, by and large, is generated by reforming natural gas.
As I mentioned, hydrogen can also be derived from oil, coal,
biomass, and renewables. It is true that if the only answer on
hydrogen was natural gas, whether domestic or imported, OPEC
would have us, or some other natural gas cartel would kind of
have us in the same grip that they have us now.
But there is research that is being pursued at DOE and
within the private sector to get to, as I said, the holy grail
of renewable hydrogen, which is a ways off, but nonetheless the
science is there. Taking renewable energy--wind, solar, or
nuclear--and using the electricity generated from that to
separate the hydrogen from the oxygen molecules in water.
That is not going to happen overnight, but once that
happens, you have no emissions in the electricity generation
process and no emissions at the car because the only emission
out of a hydrogen fuel cell vehicle is water vapor.
So it is true. If all we had was a static world, and
natural gas was our only source for hydrogen, and we made no
progress going forward, no question. We see the world evolving
in a way that actually gives a lot of hope.
Senator Chafee. I know more about hydrogen than I did a few
minutes ago.
[Laughter.]
Senator Chafee. Mr. Honnef, Brazil went from 80 percent
importing to self-sufficiency, pretty much based on sugar
conversion to fuel. How different is corn than sugar?
Mr. Honnef. Well, it certainly is a different process with
sugar. Essentially, the ethanol process is in Brazil, they take
the sugar; they convert that into ethanol. Here, we take starch
from corn, but we first have to convert that starch to sugars,
and then that sugar then we ferment to make alcohol. So there
is one additional step in the process.
Sugar to ethanol is clearly a more efficient process.
Brazil's market is approximately the same size as ours. We are
about a four billion gallon a year industry here in the
Country. I think Brazil is somewhere between four and five
billion gallons a year.
What is interesting is what has happened in Brazil is there
has been a growth in what they call total flex vehicles. They
are vehicles that can run anywhere from zero percent ethanol,
all gasoline, up to 100 percent ethanol, similar to the
flexible fuel vehicles that I spoke of earlier. Those are
growing in demand. Next year, 70 percent of the vehicles that
will be purchased in Brazil will be total flex vehicles.
So they have really committed themselves, not only from a
government standpoint but consumers have committed themselves
to ethanol as a viable source of renewable energy. We are
seeing some of that happen here in the United States now with
the growth in E85 and flexible fuel vehicle production.
Senator Chafee. Thank you, Mr. Chairman, and good luck,
gentlemen, on your research in helping us become more diverse.
Senator Inhofe. Thank you, Senator Chafee.
Well, it seemed when you made your opening statement, Mr.
Goodstein, that you were a little surprised when the President
back in 2003 made the statement about that someone who was born
then would be driving a fuel cell at driver's age. That puts it
at, what, 2019. Is that realistic?
Mr. Goodstein. Well, you will have to ask the auto
companies. We feel a little bit like the Maytag repairman. We
have got hydrogen, and we are waiting for there to be demand.
However the auto companies, their line is that they will be
able to commercialize fuel cell cars in the 2015 to 2020
timeframe. I have heard them testify to that effect before
Congress, and I haven't heard them back down from that.
I will say that I think, apropos to Senator Chafee's
question, a lot of where advances are going to be made is
China. I think there are some notions that they are going to
leapfrog--I gather their environment is not a big selling point
at this point, but I think they recognize it--in connection
with a lot of technologies and perhaps autos being one of them,
and they plan to showcase a little bit during the Olympics. So
I think if you asked a lot of the auto companies to the extent
that they are talking about commercializing, I bet China is a
big market that they have in mind.
Will that United States child born in 2003 be able to have
a hydrogen fuel cell car? Probably if they are very wealthy. I
think we are talking a few decades. This is less than a 2050
timeframe, but as I said, 2020, they are going to have to know
somebody to probably drive a hydrogen fuel cell car on a
regular basis.
Senator Inhofe. Mr. Honnef, you made a reference, and I
think all of you did, to the Gas Price Act. That was a great
disappointment to me that we were not able to get that through.
We have a huge refinery problem. If you remember, during the
markup of that bill, your Senator, Senator Thune, had an
amendment of the biorefinery amendment. Knowing that there is
going to have to be a lot of the ethanol plants built, how
would that bill have helped your industry?
Mr. Honnef. Well, clearly stream FE--
Senator Inhofe. With the Thune amendment attached to it.
Mr. Honnef [continuing]. Absolutely. Clearly, supporting
streamlining the permitting process would help, help
considerably, not only in the refining industry but also in the
biorefining industry. As we grow this industry at a rapid pace,
permitting is always an issue that we have to deal with. So
anything to help streamline that process, we look for it. As
long as it is not at the detriment of the environment, of
course, we look at it as a positive step forward.
Senator Inhofe. I will tell my fellow Senators, I do have
one last question. I will be asking it for Mr. Cavaney and Mr.
McDougall. But why don't you go ahead and ask any other
questions you might have, Senator Jeffords and then you, too,
Senators.
Senator Jeffords. I just have one more.
Senator Inhofe. Yes.
Senator Jeffords. Mr. Goldstein, am I correct in my
understanding that the Clean Air Act not only promotes the use
of hydrogen in producing low sulfur petroleum fuels, but it
also supports the use of hydrogen as a transportation fuel?
Mr. Goodstein. Yes, that is absolutely correct, Senator.
Again, because the Clean Air Act has the requirements that
gasoline be clean, there is demand for hydrogen to take that
sulfur out. But because the Clean Air Act, again, is looking to
get cities free of the particulates that they deal with now,
let us put carbon dioxide off to the side for current purposes.
Again, a hydrogen fuel cell car or bus has only water vapor as
an emission.
So clearly, to the extent that the Clean Air Act is trying
to promote, and it does, it is effective in cleaning up urban
air and air outside of cities, hydrogen is very much going to
be used. Indeed, even today, hydrogen is used in conjunction
with compressed natural gas, largely in an experimental basis
but in some buses around different universities and other
areas. California is somewhat on the cutting edge in this, but
there are certainly other areas.
So, yes, the Clean Air Act very much drives the utilization
of hydrogen. Hydrogen, I think indisputably, is used to clean
up the air at present, and I think more so for the future.
Senator Jeffords. Thank you.
Senator Inhofe. Thank you, Senator Jeffords.
Let me just kind of wind up by acknowledging that we are
developing a lot of technologies right now. We recognize that,
and it has been very helpful to have this on record, although
we still have a serious supply problem with crude oil and gas.
It goes all the way back, I say to my good friend, Senator
Jeffords, to the Reagan administration. I can remember back
then I was trying to get the Reagan administration, which was a
Republican Administration, to accept, to put together some type
of an energy program, the cornerstone of which would be some
maximum amount that we could be reliant upon foreign countries
for our ability to fight a war.
So Don Hodel, at that time, well, actually he was two
secretaries; he was Secretary of Energy and Secretary of
Interior at different times. We had a dog and pony show. We
would go around the Country to the consumption States and try
to impress upon them that our reliance upon foreign countries
was not really an energy issue; it was a national security
issue.
And we failed. So he did not establish a policy. I thought
surely when Bush the First came along, coming from the oil
fields, that he would, but that didn't work either. Of course,
it didn't work during the Clinton administration. But this
President has paid a lot of attention to it.
We do need an energy policy. One of the things we have to
recognize, and certainly after everything that has happened in
the Middle East, is that we need to achieve more independence.
This is a serious problem that we have now.
China was mentioned several times during the course of this
hearing. One of the things that bothers me the most about China
is not just the fact that they have had military buildups in
conventional weapons exceeding ours at about a 10 to 1 ratio,
but they now are the No. 2 country in terms of reliance upon
foreign countries for their ability to survive.
We see what they are doing. We see the $70 billion deal
that they made with Iran, and now they are importing 13 percent
of their oil from that country. We have seen the fact that they
did not join us in our sanctions against Khartoum, and now they
are importing some 7 percent of their oil from Sudan.
As I go around, a lot of people are aware of this, I have
kind of a mission. I have been in Africa for many, many years.
As I go around the countries, particularly around the Gulf of
Guinea and the areas where they have huge oil reserves, I see
everything that is new and shiny is built by the Chinese. So,
they are making inroads, and there is where our competition is.
We can't ignore the fact that we are facing a crisis. With
all the technologies coming along, we still are going to have
to have some energy independence. At the time we started this
back in the Reagan administration, we were dependent upon
foreign countries for 35 percent of our oil, and now it is at,
what, 65 percent. So it is a serious problem.
I would like to wind this up. We will start with you, Mr.
Cavaney and then with you, Mr. McDougall.
One of the things that I have observed in the years that I
have been here and having coming from the oil patch is that
there is a lack of knowledge on Capitol Hill, that oil is not
just oil. The majors, which you are representing here, Red,
today and the independents, where I actually started out, are
kind of two different industries. So I would like to ask the
two of you to define the differences between your part of the
energy or the oil industry as opposed to the independents.
We will start with you, Mr. Cavaney, and then the different
types of problems that you are facing.
Mr. Cavaney. Well, the biggest challenge we have is that
our companies tend to be larger, and therefore their
comparative advantage is to tackle the world's most complex
engineering problems. Therefore, they need to be huge in terms
of scale. Seventy-seven percent of the world's oil resources
belong to foreign governments and national oil companies. Those
are the people that the investor-owned oil companies have to
compete with, whether they are U.S., European, or Chinese.
So, as a result, what you need to do, the big challenge is
to find significant locations where oil and natural gas are.
Partner up with others so you can minimize your risk, but use
your comparative brains to bring that product, that might not
otherwise have gotten to market, to market. Finding the
resources and having access is very important.
One of our big problems that the majors have had in the
United States is that so much of the potentially attractive
remaining reserves are off limits. They are not available. So,
in order to get the product, there has been more of a
concentration in the deep water Gulf, in both the Central and
Western areas, which is the only area that is really left that
is attractive that majors can use their technology to
advantage, and then the rest of the world.
What we think is needed is we will always be able to get,
in one form or another, crude oil because crude oil is a global
commodity, and what you can't get from one part, you can get
from the other.
But the bigger problem we have is natural gas. That is not
a global market. That is a regional market, and it has a huge
disadvantage for American consumers and American workers. Most
of the world pays a couple of dollars for the MCFs of natural
gas. Here in the United States, we are at about $11, and the
reason it is so high is because there aren't very many
opportunities to get access to that. Of course, the hurricane
put a premium on it for a couple dollars, and that is probably
going to come down over time.
But our point being that we have lots. The Government says
we have over 1,000 TCF, trillion cubic feet, of natural gas
that is undiscovered within the United States. That is enough
to heat 125 million homes for 120 years. We have got the
natural gas. So, we need to look to using LNG, liquefied
natural gas, imports to help us. We need to bring what we call
the Arctic Pipelines, the one from Alaska and also the one from
Canada down.
But we also need to access the natural gas that we have
here because not only do people pay a high heating bill,
natural gas is so often used in many important industries like
the fertilizer industry and like the chemical industry as a
feedstock.
What we have done is we have been exporting jobs as
companies had to close their operations here for non-
competitive reasons and move jobs elsewhere. One chemical
company owner told me he never thought he would live to see the
day when he had to close a chemical plant in Louisiana and move
his production to Germany, but that is what is actually going
on.
Mr. Chairman, discussing access and discussing an
opportunity where we can bring some of that great technology to
look into some of these new fields, and do it in an
environmentally responsible way, is clearly the opportunity
that is available for the Country if we want to take advantage
of trying to make ourselves competitive again in the natural
gas and products arenas.
Senator Inhofe. Well, Mr. Cavaney, Senator Voinovich, who
couldn't be here today, will be very proud that you brought
that up because his favorite, his major concern is what is
happening to jobs. I think in Ohio maybe he is feeling it a
little more than some of the other States. But the flight of
the chemical companies to Western Europe is something.
Did I understand you right there? Compare the price of
natural gas at current market between here and Western Europe.
Mr. Cavaney. It is a difference that over there, on the
high end, you could say $4; here, I think it is $11 and a
little bit of change.
Senator Inhofe. Yes.
Mr. Cavaney. You can't take a raw material and have to pay
two or three times more than your competition does in
businesses that are essentially commodity and expect to stay in
business, and that is the challenge.
Senator Inhofe. Sure. That is really important for us to
know, and not many people are aware of that. That gets to you,
Mr. McDougall, because you could be part of that solution.
During the time, and I know you were asked a question by
Senator Chafee on lifting a barrel of oil or producing gas, and
how expensive it is, and how much more difficult it is for the
smaller companies to be able to afford that, where your break-
even margin is. But it is very significant.
I have heard that if we had all of the wells that were
plugged in the last 10 years flowing today, it would equate to
more than we are currently importing from Saudi Arabia. Now I
am talking about crude oil, but the same thing applies. Draw
that distinction that I asked you to draw, that Mr. Cavaney was
referring to, between the majors and the independents.
Mr. McDougall. Thank you, Senator. First, I would like to
clarify a point. The $2 gas price that they find in other
nations and the price that is perceived in this Country is
$11.98 which NYMX Net printed today or yesterday. Over the past
weekend, I received around $5.10 in MCF for gas. The next day,
when I picked up the telephone, they paid me $7.25 for gas.
Even at those numbers, I have a basis of almost $5 under the
NYMX.
So I would like everyone to understand that just because
those numbers are printed on the NYMX board, we do not receive
those numbers. The October contract went off $3 under the NYMX
print at close there. So when you look at some of these
percentages, some of those percentages are 40 and 50 percent
less than what the public perceives that we are receiving for
gas. So what producers receive and what is speculated on the
NYMX are different. I wanted to make that point.
As to the contrast between the majors and the independents,
the No. 1 contrast I would start out with is that as
independents, we spend our own money. We drill 90 percent of
the current wells in the Country. We are literally the foot
soldiers of production growth in this Nation. As we go forward,
all we do is produce. We employ Americans. We buy American
products. We pay American taxes. The majority, and for our case
maybe up to 100 percent in my case, is all done domestically.
As far as majors go, they have shareholders. They have
refineries. They refine gasoline; they refine heating oil; and
they retail gas at the pump to you. We do not do that. I can
only say from what I have read, but my perception is that the
majority of majors' capital is spent outside the Country. That
would be my summary.
Senator Inhofe. All right, well, thank you, Mr. McDougall.
Do you have anything else?
Let me just go ahead. The remaining three of you who didn't
get quite as long a shot on that last question, if you have
anything that you are just dying to share with this committee
before we draw it to a close. We will start with you, Mr.
Goodstein, and then work down to Mr. Honnef and Mr. Holmes.
Mr. Goodstein. I actually want to buttress the very point
that you were making and that Mr. Cavaney was making because
Air Products is also in the chemical business. We probably have
about a third of our revenues on the chemical side.
Notwithstanding the variability in the price of natural gas, it
is brutal for those of us in the chemical industry to have to
deal with these prices. Forget the fact that natural gas is a
raw material for hydrogen. It is a raw material for the
chemicals that we manufacture.
So even putting that aside, even from the standpoint of Air
Products as an industrial gas company, again, our companies
that we list as our customers are Procter and Gamble, and
General Motors, and companies that manufacture glass, and
steel, and so forth. If natural gas prices remain anywhere
close to where they are now, there is going to be this de-
industrialization of the United States economy.
It sounds draconian, but I think it is almost kind of hard
to rebut. That means our customers are going to go away,
putting aside the fact that we make chemicals and need natural
gas as a raw material, even from the standpoint of being a
natural gas supplier.
I realize there is a lot behind this whole natural gas
issue in terms of what Congress can and can't do about it, not
all of which is easy, but I can't overstate the fact that it is
a huge, huge problem.
Senator Inhofe. You want to put into that equation also the
plight of the farmers because I had occasion last Saturday to
address the Farm Bureau in Oklahoma. The price of fertilizer
and the relationship between natural gas is huge. It is a
killer for them.
Mr. Honnef.
Mr. Honnef. Yes, I just would like to reiterate my
appreciation for your support for the Renewable Fuel Standard
and the Energy bill. I know Congress took a lot of heat after
the Energy bill was passed that it was meaningless and didn't
do much. I am here to tell you that it is making a difference,
and it is making a difference in the renewable energy industry.
Your support and leadership for the Renewable Fuel Standard and
the Energy bill is much appreciated.
Senator Inhofe. Thank you.
Mr. Holmes, any last comment?
Mr. Holmes. Senator, thank you very much. I have been in
the energy industry for 36 years and seen the very good times
and the very bad times. There is a feeling that I have that
this Congress and the people here in Washington are recognizing
that something needs to be done and moving in that direction.
So I am very encouraged about that.
The one thing I would say is there is no silver bullet; we
need to do it all. I am not here saying that our solution is
the only solution. I think that this Nation is so great, and we
have so many resources, and there is so much capital out there
available to do these projects, that with the leadership that
you all are providing, I am very confident that we are going to
do a very good job of that.
Thank you.
Senator Inhofe. I think that is an excellent statement to
make, and we have often said we need it all, too. I mean when
we look at energy, and don't leave out nuclear, we need it all.
I appreciate that very much.
Well, we thank you so much, all of you, for taking your
time, for coming the distances that you have to testify before
us today. We appreciate you very much, and it has been very
helpful.
We are adjourned.
[Whereupon, at 11:05 a.m., the committee was adjourned.]
Prepared Statement of Red Cavaney, President and CEO, American
Petroleum Institute
I am Red Cavaney, President and CEO of the American Petroleum
Institute (API) the national trade association of the United States oil
and natural gas industry, representing all sectors of the industry,
including companies that make, transport, and market gasoline.
API very much appreciates this opportunity to discuss the future of
transportation fuels. Our industry has met the transportation needs of
Americans for more than a century, and we will continue to rely on
state-of-the-art technology to do so in the decades to come.
Looking ahead, we believe that advances in technology, consumer
preference, and the workings of the competitive market will determine
the fuels of the future. We need to rely on these forces to shape our
energy future and not attempt to impose fuels on the marketplace. Past
efforts by government to interfere with the marketplace have only
complicated and delayed solutions to energy problems, particularly in
times of tight supplies and constrained operations.
We should also recognize that petroleum-based fuels are likely to
continue to be the dominant transportation fuels well into this
century. It is critically important that government not attempt to
force a transition away from these fuels until affordable, reliable
substitutes are available in ample supply. At present, such a
transition would involve extremely high costs and a massive commitment
of resources--with no assurance of success in meeting the broad-based
and growing energy needs of United States consumers.
HYDROCARBON FUELS AND TECHNOLOGY
It may come as a surprise to some, but gasoline, diesel fuel, and
other petroleum products have provided power for well over a century.
Why have these hundred-year-old fuels endured for so long?
There are a few basic reasons. First, hydrocarbons have been the
choice of consumers worldwide, because they contain more than twice the
energy per gallon as many other energy sources. Thanks to advances in
technology and market forces, our hydrocarbon-based economy is getting
more and more energy efficient. In 1970, the United States used about
1.4 barrels of oil for each thousand dollars of real GDP. By 2000, that
had fallen almost in half to about seven-tenths of a barrel of oil for
each thousand dollars of GDP. By 2025, the U.S. Energy Information
Administration projects our nation will consume only about one-half a
barrel of oil for each thousand dollars of GDP.
An additional reason why hydrocarbon fuels have endured so long is
that technology has reduced dramatically the environmental impact of
their use, enabling the production of cleaner, more efficient and
environmentally responsible fuels. Seventy million more drivers--70
percent more--are on the road today in the United States than there
were 30 years ago, driving 143 percent more miles. However, despite
this enormous increase in drivers and miles, vehicle emissions are down
41 percent.
Gasoline improvements have helped bring about this sharp decline in
auto emissions. A major contributor was the phase-out of leaded
gasoline, completed in the 1980s, which cut lead emissions by 98
percent. Further, the introduction of reformulated gasoline has led to
significant reductions in ozone precursors and toxics emissions.
In addition, the average sulfur content in gasoline has been
reduced by more than 90 percent to less than 30 parts per million. A
new car today running on the new low-sulfur gasoline and equipped with
the most advanced emissions reduction technology has 97 percent less
emissions than had a new vehicle in 1970. It takes 33 vehicles running
on low-sulfur gasoline today to equal the pollution emissions of just a
single 1970 vehicle.
API and the industry worked with biofuels manufacturers during this
year's debate in Congress on the energy bill recently signed by the
President. We recognized and agreed to a significant role for biofuels
in the transportation fuels market. While there was debate about the
extent of the role of biofuels, such as ethanol, at the end of the day,
we agreed to support a significant role for these fuels. We assume that
continued advances in technology and growing consumer acceptance will
reduce the costs of producing biofuels, make them more competitive with
conventional fuels, and reduce the need for Government subsidies.
United States refiners are working hard to keep up with the
steadily growing fuel needs of United States consumers. Technological
advancements have helped refineries produce more from existing
facilities than they did in the past. Even though a new United States
refinery has not been built from the ground up in 30 years, existing
refineries are continually being upgraded and reworked to improve
efficiency and output. United States refinery capacity has expanded
from 14.7 million barrels per day in 1994 to 17.1 million barrels a day
today, or 2.4 million barrels a day. This expansion is the equivalent
of about 12 new 200,000 barrels a day capacity refineries. Based on
publicly available data on announced refinery capacity expansion plans,
at least 1 million barrels per day of additional refinery capacity
projects are either planned or under strong consideration for the 4
years 2005 to 2009.
LESSONS OF HISTORY
If history has taught us anything, it is that markets work, and
free markets--including the free flow of oil, products and technology
with legal protections--work best. When Governments have allowed
markets to function unhindered, the laws of supply and demand have
ensured that supply meets demand at affordable prices over the longer
term. Moreover, free markets spur competition--and competition advances
technology to the benefit of consumers and society as a whole.
However, when Government has interfered with markets, the result
has been price volatility, supply shortages, and other disruptions. In
the early 1970s, many United States energy policymakers were ``sure''
that the reserves of oil and natural gas would soon be exhausted, and
government policy was explicitly aimed at ``guiding'' the market in a
smooth transition away from these fuels to new, more sustainable
alternatives. Price controls, allocation schemes, limitations on
natural gas, massive subsidies to synthetic fuels, and other measures
were funded heavily and implemented.
Unfortunately, the key premises on which these programs were based,
namely that oil and natural gas were nearing exhaustion, and that
Government ``guidance'' was desirable to safely transition to new
energy sources, are now recognized as having been clearly wrong and to
have resulted in enormously expensive mistakes. For example, Congress
created the Synthetic Fuels Corporation in 1980, but, in 1986, it was
terminated by legislation signed by President Reagan. In less than six
years, billions of dollars had been spent, plants constructed, and, in
some cases, fuel produced. But the effort was judged a failure due to
noncompetitive economics, project inefficiencies, and delays.
UNDERSTANDING ENERGY REALITIES
We need to understand the energy realities our world faces. Given
the current and projected worldwide demand, we need all sources of
energy. We do not have the luxury of limiting ourselves to a few
sources to the exclusion of others. Nor can we afford to write off our
leading source of energy before we have found cost-competitive and
readily available alternatives.
There is a misperception by some about the time and costs involved
in any transition to the next generation of fuels. Consider what would
be involved in replacing the dominant role of oil with a substitute
like hydrogen or solar power. Most experts agree that such a transition
will require dramatic advances in technology and massive capital
investments and take several decades to accomplish, if at all.
Despite the energy realities we face, we still frequently hear that
we are ``running out of oil'' and that we must find other sources for
the transportation fuels of the future. Nothing could be more at odds
with reality.
The U.S. Energy Information Administration projects conventional
oil alone is sufficient to supply increasing quantities to consumers
each year through 2044. Conventional oil is recoverable oil using
today's technology and does not include vast unconventional supplies,
such as tar sands and oil shale. Moreover, energy analyst Daniel Yergin
and his Cambridge Energy Research Associates recently completed a
field-by-field global analysis that forecasts a 20 percent oil
production capacity increase between 2004 and 2010, based on projects
already planned.
It is interesting to note that forecasts about ``running out of
oil'' have been made many times over the years but have been
consistently wrong.
Back in 1874, the chief geologist of Pennsylvania predicted we
would run out of oil in 4 years just using it for kerosene. Thirty
years ago, groups, such as the Club of Rome, predicted an end of oil
well before the current day. These forecasts were wrong because, nearly
every year, industry has found more oil than used, resulting in
reserves that have continued to grow.
The key factor here is technology. Advances in exploration and
production technology have enabled our industry to find and develop oil
and gas reserves that would have been far beyond our reach several
decades ago. We can now find more and produce more--and we can increase
the yield of our existing reserves.
These changes have been dramatic. Thirty years ago, ``deepwater''
operations meant those in 500 feet--today it can mean 10,000 feet. 3D
seismic technology was still on the drawing board in the 1970s. Today,
it is used widely in offshore operations, enabling drillers to better
``see'' underground oil and natural gas deposits, greatly improving
their ability to develop these deposits.
Primarily due to these advances, the U.S. Geological Survey (USGS),
in its 2000 World Petroleum Assessment, increased by 20 percent its
estimate of undiscovered, technically recoverable oil. USGS estimates
there are 649 billion barrels of undiscovered, technically recoverable
oil outside the United States. But, importantly, USGS also estimates
that there will be an additional 612 billion barrels from ``reserve
growth''--nearly equaling the undiscovered resources.
Looking into the distant future, the Age of Oil will end when
technology finds a more cost-competitive, more desirable fuel. We can
only speculate as to when and how that day will come about. For
example, there is an even bigger hydrocarbon resource that can be
developed to provide nearly endless amounts of energy--methane
hydrates--methane frozen in ice crystals. The deposits of methane
hydrates are so vast that when we develop the technology to bring them
to market, we will have clean-burning energy for over a thousand years.
It is just one of the exciting scenarios we may see in the far-off
future. But, we won't be getting there anytime soon, and, until we do,
oil and natural gas will likely remain our leading energy sources.
The United States and the world cannot afford to leave the Age of
Oil before realistic alternatives are fully in place. It is important
to remember that man left the Stone Age not because he ran out of
stones. We will not leave the Age of Oil because we ran out of oil.
Yes, someday oil will be replaced, but clearly not until alternatives
are found, alternatives that are proven more reliable, more versatile,
and more cost-competitive than oil. We must rely on the energy
marketplace to determine what the most efficient alternatives will be,
and technology will be a key determinant in that regard.
FUELING AUTOMOBILES OF THE FUTURE
We expect that the dominant transportation fuels will remain
gasoline and diesel for at least two or three decades--the minimum
amount of time required to fully retire any existing and still growing
fleet of automobiles and trucks powered by these fuels and to deploy
any replacement fuel source throughout the United States. We cannot
afford to prematurely retire these century-old champions, without full
and complete assurances that worthy successors are in place.
In considering our future energy needs, we need to understand that
gasoline-powered automobiles have been the dominant mode of transport
for the past century and the overwhelming preference of hundreds of
millions of people throughout the world. Regardless of fuel, the
automobile--likely to be configured far differently from today--will
remain the consumer's choice for personal transport for decades to
come. The freedom of mobility and the independence it affords consumers
is highly valued.
Rather than being phased out, gasoline and diesel are likely to be
the leading fuels well into the future thanks to such advances in
technology as advanced internal combustion engines (ICEs) and rapidly
evolving ``hybrid'' vehicles. Those who write off gasoline and diesel
fuels fail to recognize how advanced technology is providing new and
more efficient ways of using these hundred-year-old products.
For example, significant improvements in internal combustion engine
technology have been made, and advancements will continue to provide
higher mileage efficiency and lower emissions. Enhanced vehicle
emission control technologies, made possible by the introduction of
low-sulfur fuels, will be an important component of future conventional
systems.
Another advancing technology is the hybrid vehicle powered partly
by gasoline and partly by electricity. Hybrids are already moving
aggressively into the market; their rate of growth will depend in large
part on their price and performance. Even though hybrids still face
technological challenges, such as battery size and life, there is a
high probability of hybrids being a significant, though possibly not
dominant, part of the United States vehicle population in the not too
distant future. Additionally, low-sulfur, modern day diesel engines,
utilized in hybrid configurations, may hold even greater promise.
Hybrids already provide significant reductions in energy use and
greenhouse gas emissions. Commercially available, they use the existing
fuel infrastructure. Depending upon the hybrid technology and consumer
driving patterns, efficiencies are up to about 1.5 times that of
today's conventional internal combustion engine vehicles. From the
standpoint of total useful lifecycle, hybrids are currently the most
efficient and among the cleanest commercially available technologies.
Moreover, additional cost reductions should make hybrids increasingly
competitive.
In addition to hybrids and advanced ICEs, oil companies--working
alone or with automakers--have invested millions of dollars researching
new fuel cell technologies. Some energy companies have also partnered
with the Federal Government through the Department of Energy's Freedom
CAR & Fuel Partnership, a public/private effort to examine the pre-
competitive research required to develop technologies for a full range
of affordable vehicles and the fueling infrastructure to support them.
These technologies hold the potential for up to double the fuel
efficiency of current gasoline-powered autos. Fuel cell vehicles have
essentially zero tailpipe emissions. However, maintaining a national
fleet of such vehicles would face significant technical, economic,
primary energy source availability, and infrastructure challenges.
Present fuel cell costs are at least 10 times greater than for
internal combustion engines, based on current fuel cell technology
being produced on a large, commercial scale. Long-term fuel cell
durability must be improved and demonstrated. Safe, efficient, and
cost-effective hydrogen storage solutions are needed to make possible
acceptable driving ranges. The current delivered cost of hydrogen fuel
to transportation markets is substantially greater than the energy
provided by units of gasoline or diesel. Making hydrogen widely
available will require extremely large infrastructure investments. Even
hydrogen made from gasoline using an on-board reformer, which would
take advantage of the existing refueling infrastructure, faces many
challenges. Nonetheless, all options should be thoroughly evaluated,
and it is premature to exclude any option at this point.
Our industry takes a balanced view of hydrogen. Like electricity,
hydrogen is an energy carrier, not an energy source. To succeed in the
market, it must be produced in large volumes at reasonable cost. But,
without major breakthroughs, most hydrogen must come from natural gas,
which--from the energy security standpoint--is in limited domestic
supply. Present circumstances notwithstanding, to provide large amounts
of hydrogen, United States producers will need to have access to the
potentially large natural gas reserves on non-park, government lands in
Alaska and the lower-48 States.
We believe consumer preference should and will play the key role in
the choice of these new competing vehicle technologies. That preference
will be based, in large part, on fuel supply availability, cost
affordability, consumer acceptance and environmental compatibility.
We strongly believe that the private sector should continue to play
a major role in applied research and that both the government and the
private sector should be involved in basic theoretical research. The
automobile and oil industries have made tremendous progress over the
years, introducing a range of new products and technologies to improve
emissions, fuel economy, and performance. We fully expect this trend to
continue, both with respect to improvements to today's technologies and
to the introduction of advanced vehicle technologies.
Moreover, whatever role Government plays on advanced vehicle and
fuel technologies, including fuel cell development, it should be a
broad one. Government should not pick winners and losers. It should not
focus prematurely on just one approach which may not prove effective,
while discouraging others that may ultimately have more potential in
the long-term. While technological change can be encouraged by both
public and private industry policies, it must not be forced by
Government mandates. We can learn from the experience in California
several years ago where electric vehicles were mandated by the State
Government. They were not accepted by the driving public for a variety
of reasons and, ultimately, the mandate failed and was withdrawn.
Consumers' acceptance is the key to the success of any vehicular
system, and industry competition for their dollars is the fastest means
of bringing forward the next generation of transportation options.
Societal goals are best attained by setting performance standards.
Government mandates, subsidies, preferential taxation, and the
premature official selection of one technology over another cannot
produce advances as swiftly, or as effectively, as market competition.
CONCLUSION
The intensive use of the latest, most advanced technology to
provide transportation fuels has made the century-old oil and natural
gas industry an innovative, visionary, and highly effective new
industry. Our industry has been producing, and intends to continue
producing, both the fuels and feedstocks that make life simpler and
safer, more comfortable and more convenient for society.
The reality is that gasoline, the time-tested champion fuel of
motor vehicle transportation, is likely to remain the dominant fuel for
many years to come. Its composition may change and its uses may be
shaped by evolving technology, but gasoline, in fact, will be the fuel
of the future--at least for the near-term. In view of its history of
reliability and environmental progress, gasoline's continued dominant
role should be a reassuring prospect for United States consumers.
______
Responses by Red Cavaney to Additional Questions from Senator Obama
Question 1. Are you aware of any branded petroleum companies that
have internal business policies or practices that may discourage the
construction, installation or operation of E85 fueling pumps?
Response. API is not aware of individual member company policies or
practices regarding E85. However, API members have in the past marketed
alternative fuels and many are currently working to determine how to
bring hydrogen, for example, to the retail gasoline station.
Question 2. Are there branded petroleum companies that prohibit the
sale of E85 in certain ways such as:
-prohibiting the dispensing of E85 from a branded pump
-prohibiting the location of an E85 pump under a branded canopy
-discouraging the location of an E85 pump within the refueling
area?
Response. API is not aware of individual member company policies or
practices regarding E85.
Question 3. Would API be willing to issue a directive to its
members that they should not discourage the use of E85, with
recommendations or steps outlining best practices to accomplish greater
access to E85?
Response. The decision on whether to use E85 would need to be made
on an individual company basis. Therefore, it would not be appropriate
for API to issue any directive on the marketing of E85.
In addition to API's answers above, we thought it may be helpful to
provide the following information regarding E85:
E85 fuel is a blend of 85 percent ethanol (alcohol) and 15 percent
gasoline. Because it is 85 percent alcohol, it has significantly
different chemical properties than both straight petroleum gasoline and
E10 gasoline (a blend of 10 percent ethanol and 90 percent gasoline).
The chemical properties of E85 make it incompatible with most existing
gasoline station petroleum equipment. This equipment can be modified or
replaced to allow the storage and dispensing of E85. However, it would
require significant changes to the existing gasoline station
infrastructure.
______
Prepared Statement of Jeffrey McDougall, JMA Energy Company, LLC
The following testimony is submitted in advance of the November 16,
2005 hearing before the U.S. Senate Environment and Public Works
Committee, which will focus on the future of transportation fuels.
My name is Jeffrey McDougall, and I am the owner of JMA Energy
Company located in Oklahoma City. I will offer my remarks from the
perspective of an independent oil and natural gas explorer and on
behalf of the Oklahoma Independent Petroleum Association, which is an
association of more than 1,600 independent oil and natural gas
producers. Although our membership includes some publicly traded
companies, the majority of our members are small, family owned
businesses. Our members explore for and produce oil and natural gas. We
do not refine oil into gasoline or heating fuels and we do not market
gasoline.
I have built my business from the ground up by drilling for oil and
natural gas. After being laid off in 1986 when energy prices plummeted,
I started my own business by drilling shallow wells. I currently have
30 employees and most would characterize our company as a small
business. In the last four years, on a cumulative basis, we have
invested more than 113% of our cash flow into the drilling of over 350
new wells. Putting this in perspective, we have found enough energy
equivalents to supply this nation's natural gas needs for one day.
PROFILE OF OKLAHOMA PRODUCTION
Oklahoma has a rich history in energy production. During World War
I, we were the largest oil producing region in the world, and were
responsible for supplying critical energy resources needed for our war
effort. Although oil production is still important, it has declined
through the years. Oklahoma's exploration focus has turned to natural
gas, making it the number two state in the nation in natural gas
production. Independent producers are responsible for more than 85
percent of the oil and natural gas production in the state. Nearly half
of this production is from marginal wells, which account for about 42
million barrels of oil per year, or an average of 2.35 barrels per day
from each of the 48,000 marginal wells. The overwhelming majority of
this production is owned by small family businesses.
INDEPENDENT PRODUCERS RE-INVEST THEIR EARNINGS
I want to emphasize that independent oil and natural gas producers
re-invest their profits back into the ground here in the United States
to find badly needed domestic reserves of oil and natural gas. In fact,
a recent study shows that independent oil and natural gas producers re-
invest more than 100 percent of their cash flow back into domestic oil
and natural gas development. The result is that independent oil and
natural gas producers drill 90 percent of the domestic oil and gas
wells, produce nearly 70 percent of domestic oil and 82 percent of
domestic natural gas.
Independent producers are now, more than ever, aggressively
searching for more oil and natural gas reserves. New technology is
helping independents find and recover more domestic oil and natural
gas. Small oil operators are using new technology to enhance mature oil
fields, unconventional plays are receiving new attention and companies
like mine are drilling to depths in excess of 20,000 feet at costs
approaching $8 million per well. We are doing what we can to make our
country more energy secure and less reliant on foreign sources of
energy.
INDEPENDENT PRODUCER ENVIRONMENTAL/PHILANTHROPIC ACTIVITIES
While our greatest contribution is finding more oil and natural
gas, we should emphasize that independent producers have a history of
giving back in other ways as well.
Almost every foundation, endowment, museum and numerous community
projects in our State's history have been created primarily through the
generosity of the state's independent oil and natural gas industry.
Also, we are environmental stewards. We comply with a myriad of
local, state and federal environmental requirements, and in Oklahoma,
oil and gas producers instigated the creation of the ``Oklahoma Energy
Resources Board'' 16 years ago. Producers have voluntarily contributed
approximately $30 million to clean up more than 6,300 abandoned well
sites and an additional $30 million for science-based education
programs in schools.
Currently the Oklahoma Energy Resources Board and the Oklahoma
Independent Petroleum Association are addressing the impact of high
energy prices on our state's low income citizens, encouraging the state
to fully fund the LIHEAP program with additional dollars collected from
the state's 7 percent gross production tax. We are producing
conservation messages to inform the public of higher heating costs this
winter and advising them of ways to save up to 35 percent on their
heating bills.
CONCLUSION
Independent producers are re-investing profits to help America
become less dependent on foreign supplies. However, we must face the
fact that we may never achieve energy independence. We must learn to do
a better job of conserving energy. We must also look to alternative
fuels to supply a larger part of our nation's energy needs. At the same
time, we need policies that encourage, not discourage, the expansion of
energy supplies to further harvest the resources we have within our own
borders.
______
Prepared Statement of Richard Goodstein, Washington Representative, Air
Products and Chemicals, Inc.
INTRODUCTION
Mr. Chairman, Senator Jeffords, thank you very much for the
opportunity to testify on the subject of hydrogen and its role as an
important transportation fuel, not just of the future, but indeed of
the present as well. I am the Washington Representative for Air
Products and Chemicals, Inc., which is an $8 billion per year company
in the industrial gases and chemicals business. Air Products has
operations throughout the United States and abroad in thirty countries.
Air Products has previously testified before Congress on the subject of
hydrogen and is regularly a key participant in domestic and
international conferences on hydrogen and the hydrogen economy.
SUMMARY
My testimony will make the following points: (1) Hydrogen is not
some futuristic concept. It is widely and safely used throughout
industry today. (2) The public policy reasons for moving toward a
hydrogen economy--energy security and environmental protection--are
extremely compelling. (3) Technology for dispensing hydrogen into
vehicles already exists and is being deployed, albeit slowly, today.
(4) Hydrogen, mainly generated by reforming natural gas today, can also
be derived from oil, coal, biomass, waste heat from nuclear reactors,
and renewable energy such as wind or solar power, so it is compatible
with all alternative fuels. (5) The federal government must play an
important role in the development of a hydrogen economy.
AIR PRODUCTS: WORLD LEADER IN HYDROGEN
Air Products is the world leader in third-party hydrogen production
and distribution of hydrogen, with approximately a 50 percent market
share globally. Air Products safely operates sixty hydrogen production
and processing facilities throughout the United States and the world,
including Asia and Europe. Air Products is recognized as the industry
leader in safety. The company maintains over 350 miles of hydrogen
pipelines worldwide, and has been operating pipeline systems for over
35 years without a single recordable incident. Air Products alone has
supplied liquid hydrogen to NASA since its earliest launches.
Air Products supplies hydrogen through a variety of supply modes.
The company operates hydrogen pipelines domestically in Texas,
Louisiana, and southern California; delivers hydrogen--both liquid and
gaseous--in tanker trucks throughout the country; and produces hydrogen
on-site, at oil refineries and steel and glass plants. In short, Air
Products is a fully-integrated supplier of hydrogen and also has
unparalleled know-how in handling hydrogen safely.
Air Products has formed collaborations and alliances with the full
range of automotive companies worldwide that are committed to
developing hydrogen-fueled vehicles, whether fuel cell or internal
combustion vehicles. Air Products also works closely with companies
that manufacture fuel cells, and with energy companies looking to
dispense hydrogen fuel at their service stations. The company works
closely with the Department of Energy in its research and development
of the hydrogen economy, with many state and local governments, and
with a range of universities that are moving the country more rapidly
down the path toward a hydrogen economy.
WHY EMBRACE HYDROGEN?
Those of us in the hydrogen world were very excited when President
Bush heartily embraced the role of hydrogen in his State of the Union
address in 2003. He vowed that the first car driven by a child born
that year would be a hydrogen fuel cell vehicle. Such a strong
endorsement of a hydrogen economy from the White House was very big
news for Air Products, and for our ``partners'' who manufacture fuel
cells and hydrogen fuel cell cars as well as many in the petroleum
industry.
The case for moving toward a hydrogen economy has been stated often
in recent years, but it bears repeating. Nothing could be more
important than energy security. To be free of the pricing power of the
oil cartel would have tremendous value to the American economy. A
hydrogen economy, especially once the hydrogen is totally renewable,
will enable the United States to escape the stranglehold of the oil
cartel.
Along with energy independence will come the savings from no longer
having to maintain a defense posture predicated on maintaining open sea
lanes for the shipment of oil. The hemorrhaging trade deficit would
also be addressed in large part by eventually ending our dependence on
foreign oil.
A hydrogen economy also provides a high degree of domestic security
because it can be predicated on a system that delivers both electricity
and hydrogen as fuel for vehicles. No one quite knows exactly how the
hydrogen economy will develop, but there are likely to be several
``right'' answers to hydrogen production and delivery, depending on
regional dynamics. One can imagine a series of regional hydrogen-
generating facilities operating in hub-and-spoke networks. The natural
gas lines that already exist in a city can be used to feed a hydrogen-
generating plant. This plant, in turn, could be the starting point for
the distribution of hydrogen within a metropolitan area. Such a system
could free the United States from the fears of disasters, natural
(consider the havoc wrought by Hurricane Katrina on our Nation's energy
supply) or man-made (such as a terrorist attack on the originating
point of oil pipelines).
Of course, the environmental benefits from a hydrogen economy are
significant too. The only emission from a hydrogen fuel cell vehicle is
water vapor. No carbon dioxide is generated in the production of
renewable hydrogen, nor would there be particulates. A number of United
States cities are currently experimenting with hydrogen fuel cell buses
to help them address urban air quality degradation. While hydrogen
today is generated mainly by reforming natural gas, the vision shared
by hydrogen proponents is of a totally renewable fuel that would rely
on renewable sources of energy to separate the hydrogen from the oxygen
molecules in water and then use that hydrogen in a fuel cell or an
internal combustion engine.
CURRENT ROLE OF HYDROGEN
A review of hydrogen production will help the committee understand
its promise. Thanks to the Clean Air Act's requirement for cleaner
burning gasoline, hydrogen--which removes sulfur from petroleum
distillates such as gasoline and diesel--is generated at or near oil
refineries nationwide. (See attached photo of hydrogen generating
plant.) Hydrogen is thus widely available in the United States today.
(See attached map.)
Hydrogen has many other industrial purposes. It is used in
processes to make steel, glass, semiconductors, detergent, and an
enormous variety of other products. For the most part, hydrogen is made
by reforming natural gas. But a huge advantage of hydrogen is that it
can be obtained from a wide variety of other energy sources, including
oil, biomass, coal, and nuclear. As mentioned earlier, renewable
sources such as solar and wind can generate the electricity to separate
the hydrogen and oxygen atoms in water. Therefore, research and
development into hydrogen should not be seen as taking away from
alternative energy technologies, but instead as dovetailing perfectly
with them. In a hydrogen economy, hydrogen will be derived from several
major sources.
Once generated, hydrogen can be distributed by pipeline, as a
compressed gas in truck trailers, or as a cryogenic liquid in tanker
trucks, as well as by ship and by rail.
The hydrogen used in vehicles today typically is dispensed in a
compressed gaseous form. One challenge for hydrogen is how to store
enough hydrogen in a vehicle to provide the driving range that
consumers demand. The Department of Energy and the private sector are
working on this storage issue, and considerable strides have been made
just within the past few years. Some auto companies have decided to
utilize hydrogen in an internal combustion engine and store hydrogen
onboard in cryogenic (super-cooled) form. Municipal buses are turning
to a mixture of compressed natural gas and hydrogen as their fuel.
Others use hydrogen in fuel cells. Air Products works closely with all
end users.
High-profile use of hydrogen and fuel cells is not new. NASA
incorporated fuel cells into its early spacecraft, and liquid hydrogen,
furnished by Air Products, has been used in space launches since the
inception of the space program. While most of the current attention is
on hydrogen to fuel vehicles, there is also a parallel effort to
develop hydrogen fuel cells for everything from batteries for cell
phones and laptops to backup power for hospitals and office buildings.
NO CHICKEN-AND-EGG PROBLEM: HYDROGEN IS AVAILABLE TODAY
In hydrogen circles it is often said that a chicken-and-egg problem
exists: auto companies wonder whether they can assume the risk of
putting large numbers of hydrogen-powered cars on the roads without an
existing hydrogen infrastructure, whereas hydrogen generators question
the wisdom of deploying a hydrogen infrastructure without enough
hydrogen-powered vehicles to generate sufficient demand for hydrogen.
Air Products believes this argument is a red herring. Because an
extensive hydrogen-generating network exists throughout the country,
hydrogen is very much available today--not in a dispensable form,
perhaps, but it is certainly available to be tapped by the auto
industry for many years to come as we make the transition into a fully
deployed hydrogen economy.
Moreover, Air Products has developed mobile hydrogen fueling
stations devices that are approximately the size of one or two large U-
haul trailers that can hold enough hydrogen to fuel 15-50 cars per
week. (See attached photos of mobile fuelers.) They are self-contained
and require no utility hook-ups. Air Products currently deploys a
number of these throughout the United States, but nothing precludes
rural deployment. Therefore, if an auto company decides to experiment
with hydrogen fuel cell cars in Oklahoma or Vermont, for example,
rather than Florida or California, no technical reason prevents a
mobile fueler from being deployed to service these autos. What's more,
one of our mobile hydrogen fueling stations actually costs less than a
hydrogen fuel cell car does today.
Air Products also has developed a number of stationary hydrogen-
dispensing facilities that look much like a standard gasoline pump at
the corner gas station today. (See attached photos of hydrogen fueling
products.) Indeed, the hydrogen that is used at the Shell station on
Benning Road in Washington, DC (where a number of General Motors
hydrogen fuel cell cars are fuelled) is generated by Air Products in
Delaware and trucked to Washington. The dispensing equipment at this
station is a proprietary design developed by Air Products. I encourage
everyone on the committee to visit that Benning Road station to see
that hydrogen is here and now, not simply some futuristic fantasy.
Air Products has deployed hydrogen fueling station equipment
throughout the country. Seventeen of our fueling stations will have
been deployed in California by the end of 2005, in part to meet
Governor Schwarzenegger's call for a statewide ``hydrogen highway.'' We
also have hydrogen generation and fueling equipment in Las Vegas, in
three California municipalities, at the University of California at
Irvine and at Davis, and at Penn State University, among other
locations. Air Products' stationary hydrogen fueling dispensers are in
place with each of the Big Three auto makers in Michigan, and
internationally in Japan, Korea, Singapore, China, Taiwan Germany, and
Italy. Beijing is trying to use the 2008 Olympics as an opportunity to
showcase a move toward cleaner technologies and we should expect to see
a variety of hydrogen fueling stations and hydrogen fuel cell cars
flitting about Beijing during the Olympics.
Of course, there are only about 100 hydrogen fuel cell cars
currently deployed in the United States. It will be many, many years
before hydrogen fuel cell cars number in the thousands, let alone in
the millions. Given the enormous amount of hydrogen generated for
industrial purposes today, it will be at least a decade in the United
States before hydrogen-fuelled vehicles make a dent in the overall
amount of hydrogen generated for industrial purposes.
The price of hydrogen fuel has come down substantially in the past
few years. Hydrogen generated off our pipeline in Los Angeles, for
example, can be competitive with gasoline in Los Angeles on a per
gallon equivalent. Hydrogen delivered over the road gets more expensive
than gasoline today because of the specialized hauling equipment that
is required. Novel methods of hydrogen delivery that would reduce the
distribution cost are being examined by Air Products. Once economies of
scale are reached, those costs will drop. Moreover, the most commonly
used hydrogen fuel cell is more than twice as efficient as a gasoline
internal combustion engine.
LEGISLATIVE ACTIONS TO FACILITATE HYDROGEN GOVERNMENT'S ROLE IS VITAL
Government has a special role in proceeding toward a hydrogen
economy. The goals to be accomplished--energy security, a clean
environment--are unlikely to be ones that will affect most consumer
behavior. Individual consumers do not purchase our national defense.
The nation as a whole does that through taxation. Similarly, we should
not expect the private sector solely to assume the cost of developing
technologies that benefit society at large rather than any individual
consumer. While the free market will certainly play a role in
responding to consumer choice, government action will be indispensable
to accomplishing the very meritorious objectives of the hydrogen
economy.
THE CLEAN AIR ACT IS A PREDICATE TO THE HYDROGEN ECONOMY
Oil refineries presently use large quantities of hydrogen to comply
with the Clean Air Act. Some in the petroleum industry counsel relaxing
certain provisions of the Clean Air Act for a variety of reasons. To
the extent that this committee believes that movement in the direction
of a hydrogen economy is a worthy goal for the United States, we
strongly advise that the Clean Air Act requirement to remove sulfur
from petroleum distillates not be weakened (nor is anyone seriously
suggesting that is should be).
Air Products, among others, has invested billions of dollars in
building and maintaining hydrogen-generating facilities and the
beginnings of a hydrogen pipeline infrastructure. This was largely in
response to the requirement that oil refineries produce cleaner-burning
fuels. Relaxing or negating these requirements would leave companies
like Air Products with enormous stranded assets and would represent a
huge setback regarding the deployment of a hydrogen fueling
infrastructure in the United States.
We hope the Air Products hydrogen investments, originally intended
to help our refinery customers meet their Clean Air Act and clean fuel
requirements, will pave the way for a robust domestic hydrogen
infrastructure. Indeed, the areas in which Air Products has major
hydrogen generating and pipeline facilities--southern California and a
Houston to Lake Charles corridor--are seen by some as opening up the
possibility of a ``Silicon Valley'' for hydrogen: not just the
widespread introduction of hydrogen-fueled cars and buses, but
factories, dwellings, and commercial establishments that could be
powered by hydrogen fuel cells.
ESTABLISHING CODES AND STANDARDS
Establishing codes and standards applicable to hydrogen storage,
dispensing, and the operation of hydrogen-fueled vehicles is important
to assure public confidence in this new technology. At present, local
fire marshals--given very little guidance--are left to their own
devices to establish setbacks or other requirements applicable to
hydrogen fueling stations. Standardizing hydrogen dispensing
equipment--to assure compatibility between the dispenser and the
vehicle--is obviously essential, but not a forgone conclusion.
Establishing requirements for pressurizing hydrogen, to assure
uniformity, is vital. Given this committee's jurisdiction, to the
extent that hydrogen-fueled cars and buses will be used at or near
public buildings and grounds, the committee can have a major role in
requiring the implementation of codes and standards that can be adopted
throughout the country--indeed, throughout the world.
GOVERNMENT PROCUREMENT CAN BE A MAJOR CATALYST
Air Products, along with others in the hydrogen and fuel cell
industries, encourages the federal government to be as aggressive as
possible regarding procurement of hydrogen-fueled vehicles, including
mass transit buses. There is particular value in having the government
in this role. Until full-blown hydrogen fueling infrastructure exists,
filling hydrogen-fueled vehicles will be easiest at centralized
locations, where fleets are housed. Government fleets tend to fit this
bill quite well. Whether the vehicles are buses that might run among
Government buildings or serve a community, or cars used by Government
employees during the day, we encourage the Federal Government to
procure hydrogen-fueled vehicles wherever possible. To date, automobile
companies have leased hydrogen fuel cell vehicles at costs comparable
to other mid-range vehicle leases, so the high cost of hydrogen fuel
cell vehicles need not necessarily be borne by the Federal Government.
THE NEXT HIGHWAY BILL WILL BE IMPORTANT
While we recognize that the ink on the Highway bill is barely dry,
we encourage this committee to begin thinking of ways to pave the way
for broader use of hydrogen-fueled vehicles in the next iteration of
this legislation. Demonstration of hydrogen fuel cell vehicles in
various contexts--high altitude versus low altitude, dry versus wet,
hot versus cold climates, for example--is likely to still be necessary.
By the time of the next Highway bill, a consensus on the best way
to develop a hydrogen fueling infrastructure is still unlikely.
Therefore, we recommend that the committee consider supporting various
hydrogen production mechanisms for purposes of generating hydrogen as a
fuel--hydrogen generators at individuals' homes or at places of work,
large-scale hydrogen production facilities as the hub of a network of
regional hydrogen pipelines, perhaps, or other methods for assessing
the applicability of different hydrogen fuel production methods.
Certainly the next highway bill will be a welcome opportunity to
integrate hydrogen-powered buses into municipal transportation systems.
TAX PREFERENCES INFLUENCE CONSUMER BEHAVIOR
Legislation beyond the jurisdiction of this committee can certainly
help as well. Tax preferences for the production of hydrogen used as a
fuel will certainly encourage the establishment of a robust network of
hydrogen fueling stations. Any reasonable tax preference that
encourages consumer purchase of hydrogen-powered equipment--whether
mobile or stationary--will provide an incentive for the full
development of a hydrogen fueling infrastructure.
The Department of Energy continues to perform essential research
and development on reliable and long-lasting fuel cells, hydrogen
storage, and other essential ingredients of a hydrogen economy. We
encourage Congress to fund this effort as robustly as possible. We
recognize that the federal budget has limits. We merely urge the
Congress to recognize that the closer we get to a fully deployed
hydrogen economy, the more rapidly we will reduce our enormous trade
deficit, expenditures on foreign oil and on the defense posture needed
to facilitate importing foreign oil, and the expensive health impacts
of polluted urban air.
CONCLUSION
On behalf of Air Products, I thank you for the opportunity to share
with you this perspective on hydrogen, its current applications, and
promise for the future. Hydrogen is not some pie-in-the-sky concept. It
has been shown to work, yet needs the federal government's support to
overcome the remaining technical hurdles and be widely integrated in
society. We very much look forward to working with you, with the entire
committee, and with staff and all stakeholders in achieving a reliable
hydrogen economy as soon as possible.
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Prepared Statement of Bill Honnef, Vice President of Sales and
Marketing, VeraSun Energy Corporation
Good morning, Mr. Chairman and members of the committee. My name is
Bill Honnef, and I am Vice President, Sales and Marketing of VeraSun
Energy Corporation, a renewable energy company headquartered in
Brookings, SD The company is the Nation's second largest ethanol
producer. We operate a 120-million gallon per year production facility
in Aurora, SD and a 110-million gallon per year production facility in
Fort Dodge, IA.
VeraSun Energy Corporation is a member of the Renewable Fuels
Association, the national trade association for the domestic ethanol
industry. The RFA represents the 92 ethanol producing companies located
in 20 States across the United States.
I greatly appreciate the opportunity to testify today as the
committee examines transportation fuels of the future. With crude oil
costs at record highs, declining gasoline inventories and natural gas
shortages across the country, it is clear the nation needs to do more
to promote the increased production and use of additional energy
sources other than petroleum, including domestic renewable sources like
ethanol that can help build a sustainable energy future.
Mr. Chairman, I can tell you the United States ethanol industry is
already doing its part. The domestic ethanol industry has doubled in
size in just the last four years. Today, there are 92 ethanol
production facilities with the capacity to process more than 1.5
billion bushels of grain into four billion gallons of fuel ethanol
annually. Ethanol today is the third largest consumer of corn, behind
only feed and export uses, providing the single most important value-
added market for farmers today.
Ethanol is also becoming a ubiquitous component of the United
States motor fuels market. Today, ethanol is blended into more than a
third of the Nation's gasoline. This level of ethanol production and
use is providing significant economic and energy benefits for the
Nation.
<bullet> In 2004, the ethanol industry added more than $25 billion
to the Nation's gross economic output through annual operating spending
and capital spending for new plants.
<bullet> The industry is now responsible for over 147,000 jobs
across all sectors of the economy.
<bullet> Ethanol producers spent more than $3.1 billion on grain,
using 13 percent of the corn and sorghum crops and becoming the third
largest consumer of each, behind only feed and export. In fact, at a
time when export markets are stagnating or declining, ethanol is
providing farmers a critically important value added market.
<bullet> Another $4.4 billion went directly to consumers this past
year through increased economic activity and new jobs--money that will
go to pay for school shoes and college tuition and putting food on the
table.
<bullet> And Federal and State Governments collected almost two-
and-a-half billion dollars in needed tax revenues from the ethanol
industry.
Domestic ethanol production displaced approximately 400,000 barrels
of oil a day in 2004, about the volume of oil the United States
imported from Iraq prior to the war. And the environmental benefits are
significant also. According to Argonne National Laboratory, the use of
ethanol in 2004 reduced greenhouse gas emissions by 7 million tons, or
the equivalent of taking more than a million cars off the roads.
INDUSTRY GROWTH
Mr. Chairman, the tremendous growth in ethanol production
continues. As a direct result of the Energy Policy Act of 2005, which
includes an historic renewable fuels standard (RFS), ethanol producers
are expanding at an unprecedented rate. There are 24 plants and seven
expansions under construction today that when complete will add nearly
two billion gallons of additional production capacity. This represents
nearly a 50 percent growth in ethanol production capacity. And, there
are literally scores of additional projects seeking financing or in
various other stages of development.
Mr. Chairman, last week you heard from the oil industry about the
challenges associated with expanding domestic oil refining capacity.
Those challenges are real. But it is important to realize that new
ethanol refineries are coming online throughout the country at a pace
of almost one per month. We are expanding domestic fuel supplies.
Unlike the issues that face oil refinery sighting, communities are
encouraging and sometimes competing to have new refineries to be built
in their back yard. This is due to the simple fact that these
communities benefit from the additional demand for the feed source for
ethanol production, corn. Processing corn into fuel creates local
demand for corn, increasing the price of corn in the local market,
which creates local economic development. It is a clear win-win.
As the industry grows, it is changing. The industry is no longer a
Midwest phenomenon. Ethanol plants are now under construction from
California to Texas to New York. There is even a great deal of interest
in producing ethanol in Oklahoma! The industry is also no longer
dominated by a few large agribusinesses. Indeed, taken as a whole, the
single largest ethanol producer today is the farmer-owned ethanol
plant, as farmers have recognized the benefits of being energy
producers and not just energy consumers.
Importantly, today's ethanol industry is becoming more and more
energy efficient with new production facilities using the latest and
most efficient technologies. According to the most recent analysis by
the U.S. Department of Agriculture, ethanol now yields 167 percent of
the fossil energy used to grow, harvest, transport and refine grain
into ethanol. That represents a 24 percent improvement in efficiency
since USDA completed a similar analysis just four years ago.
There will be other changes as well, including perhaps new
feedstocks. Indeed, I would like to take this opportunity to thank you,
Chairman Inhofe, for your leadership in supporting efforts to speed the
commercialization of technologies that will allow us to expand the
feedstocks from which we can produce ethanol. The inclusion of the
Cellulosic Biomass Ethanol and Municipal Solid Waste Loan Guarantee
Program in your committee's fuels bill and in the final Energy bill
will help our industry with the commercial demonstration of these
promising technologies.
Commercialization of the technologies needed to produce ethanol
from agricultural residues (wheat straw, corn stover, etc.) could add
significantly to the amount of fuel currently produced from domestic
resources. As they develop, cellulose conversion technologies will
allow more energy to be extracted from each acre of energy crop. These
new biorefineries would also bring hundreds of permanent, high-paying
jobs to rural America. We hope you will encourage the Department of
Energy to commit funds to using the authority they were given by your
legislation.
ENERGY BILL/RENEWABLE FUELS STANDARD
As noted, virtually all of this growth and the positive changes
occurring in the industry are as a result of the energy bill and the
RFS passed earlier this year. I would like to commend Congress for its
foresight in creating this important program. If the terrible events
along the Gulf Coast taught us anything this past summer, it is that we
must diversify and expand our domestic energy resources. Congress had
done that with the RFS, but Congress can and should do more. I must
specifically praise the leadership of Senator John Thune, who has seen
first hand the efficacy of expanded ethanol production as South
Dakota's economy has been transformed over the past several years by
the value-added benefits of ethanol.
The RFS included in the Energy Policy Act of 2005 boosts the demand
for renewable fuels such as ethanol and biodiesel to 7.5 billion
gallons by 2012. It provides certainty to farmers and ethanol producers
that markets will exist for their product while providing refiners with
the flexibility they have sought in meeting Clean Air Act requirements
by eliminating the federal RFG oxygen standard. The law maintains the
existing clean air benefits of Federal reformulated gasoline (RFG) with
strong anti-backsliding provisions.
Importantly, the RFS does not require that any renewable fuels be
used in any particular area, allowing refiners to use these fuels in
those areas where it is most cost-effective. Moreover, there are
several provisions allowing the requirement to be adjusted or
eliminated if supply problems occur. Small refiners are exempted from
the RFS for several years, allowing those companies an easier
transition to the program.
The ethanol industry is well prepared and on track to produce more
than the 4 billion gallons of renewable fuels required in 2006 under
the law. The Renewable Fuels Association is currently working with EPA
and other stakeholders to expedite an interim rulemaking that will
allow the RFS to be implemented on schedule without unnecessarily
complicating the marketplace for refiners. The industry intends to work
to assure the RFS credit trading program is implemented as intended,
providing maximum flexibility to refiners.
e85
E85 is a blend of 85 percent ethanol and 15 percent gasoline. It is
designed for use in flexible fuel vehicles (FFVs). With approximately
five million flexible fuel vehicles on the road today, E85 has great
potential as an alternative fuel. But, because flexible fuel vehicles
can run on both gasoline and E85, most owners are not aware they are
driving an FFV and simply use gasoline. Our research indicates that
nearly 70 percent of flexible fuel vehicle owners are unaware they are
driving one.
Based on these research findings, we launched VeraSun E85, or VE85
for short, the Nation's first branded E85 early this year. The program
is founded on three basic principles:
<bullet> E85 must be widely available and convenient to the
consumer;
<bullet> E85 must be priced fairly; and,
<bullet> An E85 rollout must be accompanied by a comprehensive
consumer awareness campaign.
In May, we began the program with the conversion of 35 pumps at
stations throughout the Sioux Falls, SD metro area. Simultaneously, we
launched a marketing program to raise awareness to the benefits of FFV
ownership and E85 use. The program is still ongoing today and includes
elements such as adverting, direct mail, point of purchase marketing,
and retailer education. The community is embracing the fuel as a viable
alternative to gasoline.
VeraSun enlisted the support of General Motors, various local car
dealerships, the National Ethanol Vehicle Collation, and other
organizations across the state to assist with the rollout of the
program. As a result, E85 awareness has increased, E85 fuel sales are
increasing, and the demand for flexible fuel vehicles is up in the
local market.
The success of the program attracted national attention, and the
attention of Ford Motor Company. In early November, we announced a
first-of-a-kind partnership with Ford to expand VE85 to other markets
in the Midwest. The initiative will serve to convert existing fuel
pumps to VeraSun's branded E85 -VE85- in existing retail outlets. A
consumer awareness campaign to promote the benefits and use of E85 and
FFV ownership will also be launched. Local retail outlets and Ford
dealerships will be asked to participate in the campaign.
Increasing FFV production and E85 use represent the best near-term
solution to significantly reduce our dependence on foreign oil. But a
complex interplay between four constituent groups must be recognized
before E85 will succeed as a mainstream alternative:
<bullet> Auto Manufactures-Auto manufactures hold the keys to the
future of greater E85 use. Today FFVs represent approximately two
percent of all vehicles. Without a significant ramp up in the
production of FFVs, E85 use will remain relatively small.
<bullet> Ethanol Producers-The ethanol industry must continue to
rapidly expand production of ethanol to assure that ample supplies will
be available.
<bullet> Fuel Retailers-Today only 500 of the nearly 180,000 retail
stations offer E85. In order for retailers to offer E85, the owner must
have confidence that the product will be priced appropriately and that
there will be sufficient consumer demand. Without greater FFV
production and ample supplies of ethanol, the retailer will not see the
value.
<bullet> Consumer-Consumers are demanding alternatives. Consumer
must be made aware that today they have a choice when purchasing a
vehicle and filling the vehicle. The fact that nearly 70 percent of
these vehicle owners are not aware that they have a choice indicates
that much more work needs to be done.
With Ford as a partner, we believe we can make great strides in all
areas.
CONCLUSION
Mr. Chairman, as this committee contemplates future motor fuel
markets, please recognize that ethanol is a viable bridge to the
future. Today ethanol is blended into one-third of the nation's fuel as
a clean blend component. As we see growth in FFV production, ethanol
will play a larger role in gasoline replacement. And in the future,
ethanol shows great promise as a renewable feedstock for hydrogen fuel
cells.
VeraSun Energy Corporation and the Renewable Fuels Association are
committed to working with you and members of the committee to promote
the use of alternative, renewable fuels such as ethanol and biodiesel
to ensure a reliable fuel supply, lower consumer fuel costs, protect
the environment and stimulate further growth and development in
communities across rural America. We are also committed to the expanded
use of E85 to further reduce the nation's deepening dependence of
foreign oil.
Thank you.
______
Response by Bill Honnef to an Additional Question from Senator Obama
Question 1. Are you finding obstacles in your efforts to expand the
availability of E85 at local retail locations, particularly branded
retail stations? Could you share some examples? What changes would you
recommend to the business policies of retail stations that would
encourage greater availability of E85 to consumers?
Response. While the recently enacted Renewable Fuels Standard
provides a baseline for ethanol demand in the United States, VeraSun
Energy believes that we must work hard to do more to lessen our
dependence on foreign oil and expand the use of renewable fuels like
ethanol.
As my testimony highlighted, VeraSun is aggressively working to
increase the usage of ethanol by increasing the availability of and
demand for E85. To this end, we launched VeraSun E85, or VE85 for
short, the Nation's first branded E85 with the conversion of 35 pumps
at stations throughout the Sioux Falls, SD, metro area in May 2005.
More recently we added 20 stations in the Chicago metro area. We are
now aggressively seeking to expand to additional metropolitan areas.
We have found that independent branded gas stations (those neither
owned by a large oil company nor governed by one of their franchise
agreements) are much more receptive to offering E85 than those carrying
a major oil company brand. In a recent survey of just over 300 of the
approximately 580 gas stations in the United States that offer E85, it
was found that 91 percent of those stations offering E85 are
independent stations. Only nine percent were branded retail stations,
either directly owned and operated or franchised by a major oil
company.
This fact is consistent with our experience and is why we are
currently focusing our efforts on expanding the use of E85 at
independent gas stations. After our successful launch in Sioux Falls,
franchise owners of a specific major brand were told by their
franchisor that non-branded fuels could not be sold or distributed to
consumers at branded fuel islands or under branded canopies at their
stations.
As my testimony at the hearing indicated, one of the fundamental
principles of expanding E85 use is that it must be widely available and
convenient to the consumer. This major oil company's policy creates an
artificial barrier to increasing the availability of E85 by forcing
station owners to install new equipment outside of normal traffic
patterns. This artificial hurdle obviously impacts the franchise
owner's ability to offer E85 at their stations since the major oil
company does not provide E85 fuel.
While we will continue to aggressively market E85 across the
country, it may take pressure from elected officials to convince the
major oil companies to embrace E85 in a meaningful way. Anything that
can be done at the Federal level to help facilitate the sale of E85 at
the same pump as other blends of gasoline at branded gasoline stations
will help in the promotion and growth of the use of E85 in the United
States.
The State of Iowa specifically prohibits a franchisor (i.e., major
oil company) from prohibiting a franchisee from purchasing ethanol-
blended gasoline from a source other than the franchisor or limiting
the quantity to be purchased when the franchisor does not normally
supply the franchisee with ethanol-blended gasoline. We think this line
of reasoning has merit. If a major oil company is going to offer a
competitively priced branded E85 product to its franchisees, then they
may have a right to ask that a competitor's E85 not be sold under the
canopy. But if they are not going to offer E85, they should not be
allowed to block the sale of E85 if a station owner wishes to offer it.
Our goal should be to decrease our dependence on foreign oil and
increase our energy independence. We believe that E85 provides a real
opportunity to do so, but we must dramatically increase the percentage
of gas stations in the country that offer E85 from .3 percent, and the
major oil companies must be involved in this effort.
______
Prepared Statement of Jack B. Holmes Jr., President and CEO, Syntroleum
Corporation
Good morning Mr. Chairman and good morning to other members of this
committee. Syntroleum appreciates the opportunity to speak to you today
about transportation fuels of the future. My name is Jack Holmes, and
I'm the president and CEO of Syntroleum, which is a company based in
Tulsa, Oklahoma that is focused on developing ultra-clean fuels
utilizing Fischer-Tropsch technology.
Syntroleum would like to touch on several areas this morning, which
include:
<bullet> The supply and demand issues across the world.
<bullet> Our nation's dependency on foreign energy.
<bullet> Benefits of Fischer-Tropsch fuels.
<bullet> And finally, coal-to-liquids opportunities in the United
States.
Across the world, we continue to see energy demand increase at
rates greater than the growth of their domestic supplies. This trend is
especially true in the United States, China and India. Eight years ago,
China was a crude oil exporter. According to the U.S. Department of
Energy, China alone faces major oil shortages of 5.9 to 8.8 million
barrels per day by 2015. This problem will not get better, it will only
get worse.
Recently, we witnessed the immediate negative impacts of unexpected
disruptions to our Nation's refineries and natural gas processing
facilities in the Gulf of Mexico as the result of Hurricanes Katrina
and Rita. It's apparent that our Nation needs additional energy
resources, and we need to diversify our energy infrastructure away from
the Gulf of Mexico.
Our Nation is too dependent on foreign energy. The United States
currently imports about 60 percent of its crude oil and refined product
requirements. It doesn't have to be this way.
Our future economic and energy security rests upon our ability to
effectively utilize our domestic sources of fuels. The world supply and
demand balance dictates that we use our clean coal technology for
development of secure domestic motor fuel.
Syntroleum has spent 20 years advancing Fischer-Tropsch technology
to produce ultra-clean transportation fuels.
Syntroleum often categorizes Fischer-Tropsch technology as going
back to the future because it was developed in the 1920s in Germany.
Back then, Germany was facing decreasing domestic energy supplies, so
researchers developed Fischer-Tropsch technology to allow companies in
Germany to convert coal into fuel.
Other companies in places such as South Africa have also utilized
Fischer-Tropsch technology to develop fuels, where over 1.5 billion
barrels of Fischer-Tropsch fuels have been produced from coal over the
last 50 years. Our technology is real and now this country needs it.
With over 270 billion tons of proven reserves, the United States is
the Saudi Arabia of coal. Much of this coal is located in remote areas
of western and midwestern states. Our plan is to build at or near mine
mouths to maximize transportation savings. If we convert just 5 percent
of the estimated recoverable coal reserves in the United States, it
would be equivalent to the existing 29 billion barrels of proven oil
reserves in the United States. This data is significant for our country
and can no longer be ignored. We could virtually double our motor fuel
supply without drilling a single well. And, we wouldn't need to build
another refinery because our technology demonstrates that the ultra-
clean middle distillate fuel can be developed on site, where the coal
reserves are located. A growing coal-to-liquids industry would produce
good, high-paying jobs for decades to come.
Because most of this coal is disbursed throughout the heartland of
the United States, it removes concerns about hurricanes in the Gulf of
Mexico and potential terrorist acts by sea.
Based on our 20 years and $200 million of Fischer-Tropsch research
and development, Syntroleum is prepared to deploy its cobalt-based
Fischer-Tropsch technology together with existing coal gasification
technology for the production of ultra-clean transportation and home
heating fuels. Our research has revealed significant findings about the
products, including:
<bullet> Our fuels have virtually no aromatics, no sulfur and are
non-toxic and biodegradable. You can actually drink this fuel.
<bullet> Our fuels can be used as a blending stock to meet
environmental requirements and dramatically extend the volume impact.
<bullet> Our fuels are completely compatible with today's
infrastructure, meaning no hidden infrastructure cost.
<bullet> Our fuel will work in today's diesel engines with no
modifications.
<bullet> And, our fuel can be used by the military. In fact, we
have done extensive research with the U.S. Department of Defense to
test single battlefield fuels.
(See attachments for environmental properties of fuel)
The Government does not need to fund this new industry. However,
support from the U.S. Government for the first coal-to-liquids plants
will be critical. Syntroleum applauds this Congress for their actions
this year in passing the Energy Policy Act of 2005. This bill was a
step in the right direction in developing a long-term energy strategy
by providing funding for research and development of clean-coal
initiatives and loan guarantees associated with the construction of
commercial scale coal-to-liquids plants. The recorded vote shows the
bipartisan support for the need to research alternative forms of energy
and the growing interest in clean coal and coal to liquids
technologies.
Syntroleum urges the Government to follow through with its
commitment to dedicate money for loan guarantees and mandate long-term
contracts to purchase Fischer-Tropsch fuels. We believe that the first
coal-to-liquids plant will have a significant impact on the capital
market to fund additional plant projects.
Recently, this committee held hearings on the proposed Gas PRICE
Act, S. 1772. As a revolutionary industry still in its infancy, coal-
to-liquids technology can look forward to many advances in the years
ahead. Improvements already under evaluation will continue to reduce
capital and operating costs, increase plant energy and carbon
efficiency, and permit continued scale-down of plant size. By
introducing this bill, Senator Inhofe recognizes the benefit this
country would receive in bringing clean fuels to the market sooner
rather than later.
We encourage government to accelerate the rule making to enable the
energy bill to take effect and continue down the path of supporting
innovators to meet today's energy needs, which can be done by creating
an environment of regulatory certainty and favorable market conditions
for the development of alternative energy supplies. The downstream
effect translates into more jobs in this country, not overseas, and
heads us toward a future reduction in our dependence on foreign sources
of supply.
Americans today are worried about the high cost of fuel, and
rightfully so. The effects of Katrina alone are estimated at several
billion in increased motor fuel cost. Whether it's filling their
automobile tanks or heating their homes, Americans are being hit in
their pocketbooks because of our nation's dependency on foreign oil and
our limited refining capacity. But, we don't have to continue down this
path of energy instability. Ultra-clean, coal-based Fischer-Tropsch
fuels can have a significant impact on the energy supply balance in the
United States.
In closing, Syntroleum believes that consumers, regulators, policy
makers, environmentalists and progressive energy companies can agree on
one crucial point--responsible use of our resources and the protection
of the environment is not the job of just one, but of everyone.
Focusing on alternative energy--such as coal-to-liquids development--
will not only enhance and diversify our energy supply and offer a
cleaner product, but can provide thousands of jobs and boost our
national security. There are significant opportunities to create new
sources of energy right in front of us here at home. Now is the time to
embrace these proven technological advancements and start securing our
energy independence.
In summary, we depend on motor vehicles in this country. We need to
depend less on foreign supply and create jobs utilizing our own
technology and natural resources.
Mr. Chairman, members of the committee, thank you for allowing me
this time to speak about the transportation fuels for the future.
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______
Responses by Jack B. Holmes Jr. to Additional Questions from Senator
Obama
Question 1. I understand that the Energy bill provides loan
guarantees for the construction of coal-to-liquids facilities.
Response. Yes. The loan guarantees as outlined in the Energy Policy
Act of 2005 (``Energy bill''), specifically TITLE XVII ``Incentives for
Innovative Technologies'' provide the foundation for technologies, such
as Syntroleum's proprietary Fischer-Tropsch process, to develop a
domestic coal-to-liquids (``CTL'') industry to assist in meeting our
Nation's long-term energy requirements.
Question 2. Is it essential for the commercial success of your
technology within a reasonable timeframe?
Response. Yes. It is essential that Congress fully fund the loan
guarantees and the research and development programs as outlined in
TITLE IX of the Energy bill to expedite the development of a domestic
CTL industry to make the necessary first steps to reduce our reliance
on foreign sources of energy. These provisions provide a crucial
component required for small United States based companies to compete
in the most capital intensive industry.
To facilitate the development of a CTL industry within a reasonable
timeframe strong consideration should be given to a loan guarantee
program specifically outlined for CTL projects similar to the
legislation enacted by the Congress to develop the ethanol industry
during this session. It is critical to move forward quickly as
commercial scale CTL plants have a construction schedule of 4 to 5
years.
Question 3. Is it your sense that the Department of Energy intends
to move forward with this loan guarantee? Is it as the speed that you
find helpful, and if not, do you have recommendations as to how
Congress can encourage the Department of Energy to pursue swifter
implementation?
Response. Yes. Based upon my meetings with Department of Energy
officials I am encouraged that the current DOE administration is
supportive of the development of CTL plants. The success of this
program will depend upon the Congressional funding received by the DOE
for both the loan guarantee and research and development programs.
As previously mentioned, the speed of implementation specific to
CTL would significantly benefit from Congressional direction to the
Department specific to the development of CTL plants, similar to the
ethanol loan guarantee provisions in-place. In addition, legislation to
expedite the permitting process would reduce the overall timeframe for
project implementation. These additional provisions would reduce the
timeframe required to initiate the development of a domestic CTL
industry to make the necessary first steps to reduce our reliance on
foreign sources of energy.
Question 4. Would the economics of commercialization suggest a
collaborative effort between your company, Rentech, or Sasol?
Response. Syntroleum welcomes the opportunity to collaborate with
other knowledgeable companies in our industry. However, the nature of a
developing industry, such as the Fischer-Tropsch industry, does not
readily lend itself to a collaborative effort due to the proprietary
nature of the technology and the competitive marketplace. The
intellectual property of a company, such as Syntroleum, is critical to
its success. Any efforts toward collaboration must be tempered to
protect the independent growth and development of one's technology. We
continue to examine opportunities for collaboration with other parties,
provided appropriate safeguard are implemented.
Question 5. I know that Fischer Tropsch diesel can be used as a
home heating oil substitute; is your company involved in efforts to
address the supply issues associated with seasonal shortages typically
faced in the home heating oil industry, and how?
Response. Currently, Syntroleum operates a small natural gas based
feedstock (70 barrel per day) Fischer Tropsch demonstration plant
located near Tulsa, OK, making this noncommercial facility
inappropriate to address this shortage. Our domestic efforts are
focused on extending our Fischer Tropsch technology to domestic plants
utilizing coal as a feedstock. However, we believe that investment in
CTL plants, such as fully funded legislative efforts on loan guarantees
and research and development programs, make the necessary first steps
to create solutions for this supply issue and other sin the
transportation fuels market.
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