[Senate Hearing 109-279]
[From the U.S. Government Printing Office]
S. Hrg. 109-279
HURRICANES KATRINA AND RITA
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
RECEIVE AN UPDATE ON HURRICANES KATRINA AND RITA'S EFFECTS ON ENERGY
INFRASTRUCTURE AND THE STATUS OF RECOVERY EFFORTS IN THE GULF COAST
OCTOBER 6, 2005
OCTOBER 27, 2005
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Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD M. BURR, North Carolina, TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia JON S. CORZINE, New Jersey
GORDON SMITH, Oregon KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
Alex Flint, Staff Director
Judith K. Pensabene, Chief Counsel
Bob Simon, Democratic Staff Director
Sam Fowler, Democratic Chief Counsel
Lisa Epifani, Counsel
Jennifer Michael, Democratic Professional Staff Member
Deborah Estes, Democratic Counsel
C O N T E N T S
October 6, 2005.............................................. 1
October 27, 2005............................................. 83
October 6, 2005
Akaka, Hon. Daniel K., U.S. Senator from Hawaii.................. 6
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 5
Burns, Hon. Conrad, U.S. Senator from Montana.................... 7
Cavaney, Red, President and CEO, American Petroleum Institute.... 8
Corzine, Hon. Jon S., U.S. Senator from New Jersey............... 3
Curtis, Kevin S., Senior Vice President for Programs, National
Environmental Trust............................................ 25
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Feinstein, Hon. Dianne, U.S. Senator from California............. 4
Hebert, Curtis, Executive Vice President, External Affairs,
Entergy, New Orleans, LA....................................... 43
Helms, Christopher A., President, Pipeline Group, NiSource, Inc.,
on behalf of the Interstate Natural Gas Association of America,
Merrillville, IN............................................... 37
Liveris, Andrew, President and CEO, Dow Chemical Company,
Midland, MI.................................................... 30
Smith, Hon. Gordon, U.S. Senator from Oregon..................... 6
October 27, 2005
Akaka, Hon. Daniel K., U.S. Senator from Hawaii.................. 114
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 88
Bodman, Samuel W., Secretary, Department of Energy............... 99
Bunning, Hon. Jim, U.S. Senator from Kentucky.................... 84
Corzine, Hon. Jon S., U.S. Senator from New Jersey............... 85
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 103
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 83
Norton, Gale A., Secretary, Department of the Interior........... 88
Salazar, Hon. Ken, U.S. Senator from Colorado.................... 86
Talent, Hon. James M., U.S. Senator from Missouri................ 87
Responses to additional questions................................ 131
HURRICANES KATRINA AND RITA
THURSDAY, OCTOBER 6, 2005
Committee on Energy and Natural Resources,
The committee met, pursuant to notice, at 10 a.m., in room
SD-366, Dirksen Senate Office Building, Hon. Pete V. Domenici,
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. Let us get started.
First, thank you, everyone, for coming, in particular the
Senators who are here, and I assume there will be a few more.
I would like to take a few moments to make a few
observations and then yield to Senator Bingaman and to any of
you Senators who would like to comment.
Yesterday Senator Bingaman, Senator Akaka, and I returned
from Baton Rouge. We went down there to see and hear and,
firsthand, to review the hurricane Katrina and Rita damages to
the energy infrastructure and whatever else came to our
attention that might be relevant to us either in this
assignment or as Senators when we begin to address the problems
that have come.
We spent time at Exxon Mobil's Baton Rouge refinery, the
second largest in the country, with the capacity of 500,000
barrels a day. Although that refinery did not sustain major
damage in the storms, its access to oil and its ability to move
products was severely harmed. In addition to loss of
electricity that set the refinery back, many times throughout
the trip we heard about the need to ensure some kind of
redundant and robust power grid if possible.
We met with Colonial Pipeline, which is a 5,500-mile
interstate pipeline, that originates in Houston and terminates
in New York, and delivers millions of gallons of gasoline, home
heating oil, and aviation fuel and other refined products over
that distance and that geography of the United States. Right
now Colonial is operating at about 70 percent of its normal
mainline capacity from Houston. Lack of supply and lack of
commercial power, due to both the storms, are major impediments
to getting that pipeline back to 100 percent.
We went to Dow's St. Charles petrochemical complex and
talked to them about the high cost of natural gas prices after
we had discussed the disaster and how they responded, which was
really something to hear in terms of how they responded. But
the interesting thing was a discussion with this industry which
is so vital to America because it is good jobs, it is products
that they can compete in and technology that is American, that
is modern and has great workers.
With all of that, they are implicitly tied to the price of
natural gas such that, for instance, every $1 increase of cost
of natural gas for this plant means an additional $35 million
in fuel costs per year. Senator Alexander, you have been
working on this. Now, add it all up and they say how far it
goes up could be the difference between whether they can stay
there or not. It is rather frightening. Obviously, natural gas
should be used there. No question. But will it? Maybe not.
At each of these energy facilities, I believe we were
universally impressed by the employees' dedication and the
company's concern for the well-being of their employees and the
extraordinary efforts and extraordinary competence that they
put into preparing for the storm and afterwards.
There is a great deal of work to be done and there is a
great deal of courage and confidence that it can be done, which
was rather surprising. I do not think it should have been
because Americans generally are that way, but this was so
devastating I wondered. Nonetheless it is there. The ``can
do,'' ``we will do,'' the hope is there.
Hurricanes Katrina and Rita did not just hit the gulf coast
region. Those natural disasters impacted our entire energy
chain in all regions of the economy. As we prepare to help, we
have to understand it is not just helping the coastal regions.
It is helping to maximize the positive impact of the great
energy base that is there and the facilities that make it
usable. We need to have realistic expectations about how long
we should expect high prices of natural gas and related
products, and we need to prepare for the potential for
shortages. I hate to say that. I hate to say both of those
statements, but I think it is important to us that we get the
facts out and that we attempt to produce facts that indicate
what I just said is a reality. And I will repeat it. We need to
have realistic expectations about how long we should expect
high prices and, I might add, ever-increasing prices, and we
need to prepare for potential shortages.
Earlier this week Secretary Norton said that substantial
portions of the oil and gas production in the gulf coast
affected by the hurricanes could take several months to resume,
with major repairs extending into next year. She also noted
that some of the hurricanes' most significant energy impacts
were to onshore natural gas processing facilities. Natural gas
prices closed above $14 yesterday, and uncertainty about the
supplies may keep those prices painfully high. I do not believe
just a few months ago anybody believed that was possible. I
believe there is genuine concern that that not only is possible
but probable, and rising is probable also.
The storm impacts have also affected our inventories.
Yesterday the EIA reported that total motor gasoline
inventories fell by 4.3 million barrels last week and
distillate fuels like diesel fell by 5.6 million barrels last
week. Although our inventories are still within the range for
this time last year, these kinds of drops cause serious concern
and most probably cannot be sustained.
Our purpose today is to hear from some of the industries
that have been impacted by the hurricanes. They will tell us
about the damage assessments and the recovery efforts. We know
we have a number of experts and we have a number of Senators
interested. So while we are going to listen, we would very much
like to be as brief as possible and leave us as much
information as you can.
In addition to learning about the physical damage, this
committee will hold hearings on economic effects of the
hurricanes and the price expectations for consumers this
winter. I have alluded to that in general terms, but we will
have hearings on that subject.
We are also planning to convene a hearing where we can hear
from the administration witnesses, DOE and Interior as
examples, about emergency preparations and response, as well as
steps that can be taken to improve the supply/demand picture. I
am impressed with Secretary Bodman's efforts that he has
launched, especially in the campaign to highlight how American
families, business, and the Federal Government can save energy
in response to rising winter costs. I know for some, they still
do not think that is necessary, but I for one think it is
absolutely vital, and I commend them for it and hope they will
do more and do it better.
The President has made it clear that conservation is going
to be one of our most effective tools in this crisis. I agree
with that and hope we can continue on a bipartisan effort to
strengthen conservation in the short term.
I thank the witnesses in advance for today. Senators, we
have Mr. Red Cavaney, CEO of American Petroleum; Mr.
Christopher Helms, president of Pipeline Group, NiSource, Inc.,
on behalf of the Interstate Natural Gas Association of America;
Mr. Andrew Liveris, president and CEO of Dow Chemical. We thank
you for the visit to your plant yesterday. We have Kevin
Curtis, senior vice president for programs, National
Environmental Trust; and we have Mr. Curtis Hebert, executive
vice president of external affairs for Entergy.
Now, with that, I will yield to Senator Bingaman. Senator
Bingaman, thank you for going with me and accompanying me on
the trip. I think it was very good for all of us and I hope it
will help us in our efforts.
[The prepared statements of Senators Corzine and Feinstein
Prepared Statement of Hon. Jon S. Corzine, U.S. Senator From New Jersey
I would first like to thank Senators Domenici and Bingaman for
holding this hearing. Our nation has been dealt a substantial blow by
Hurricanes Katrina and Rita and we have an enormous undertaking ahead
of us. First and foremost, we must take care of the immediate needs of
the victims of these terrible tragedies.
In addition to the lives lost and the devastation that so many Gulf
Coast residents have experienced, the storms greatly impacted our
energy infrastructure. Our offshore production and refining capacity
were severely disrupted and we must take deliberate yet careful steps
to get our supply back on-line.
Mr. Chairman, we must make every effort to repair the devastated
Gulf Coast as quickly as possible and mitigate the immediate effects of
the hurricane on our energy system and gas prices. We must be careful,
however, not to trade effective long-term policies for damaging short-
First of all, we absolutely cannot take the route of drilling for
more oil. Many of my colleagues have cited the events in the Gulf as a
reason to open the Outer Continental Shelf and ANWR to drilling. I
wholeheartedly disagree--the interruption to our energy supply is not a
reason to drill for more oil. Instead, it is a wake up call
underscoring the need to reduce U.S. dependence on oil.
Secondly, many of my colleagues have already made proposals that
will do nothing to address the vulnerabilities in our energy system.
Instead, proposals that would provide the President or the EPA
Administrator with the blanket authority to waive or modify federal,
state, or local statutes or regulations will only prove to be harmful
in the long-run. I urge my colleagues to reject these short-sighted
policies that undermine existing environmental and public health
Mr. Chairman, Hurricanes Katrina and Rita exposed the fragility of
our energy infrastructure and highlighted the inadequacies in the
energy bill passed by Congress this summer. The Senate had a chance to
increase fuel efficiency in the energy bill, but unfortunately my
colleagues voted the CAFE amendment down. This was a blatant missed
opportunity to create a policy that will reduce this nation's reliance
on oil. In addition, it is frustrating that the final energy bill did
not include an oil savings provision. Mr. Chairman, it would take
savings of at least three to five million barrels per day to truly
reduce our energy dependence. Therefore, I supported an amendment on
the floor of the Senate that would reduce imports of foreign oil by 40
percent over the next 20 years, but unfortunately most of my Senate
colleagues did not--again another missed opportunity. It is my hope
that we no longer ignore such obvious ways to increase our energy
Mr. Chairman, while I am pleased that President Bush has asked the
American people to focus on conservation, I am frustrated that it took
the devastation of Hurricanes Katrina and Rita for this Administration
to realize that conservation is key to weaning this country off its
unhealthy dependence on oil. It is essential that the federal
government take the lead in this regard and set an example for the rest
of the country. In fact, I joined many of my colleagues in signing a
letter to President Bush urging him to require a 40 percent commitment
to federal petroleum savings by 2020. We must take these types of steps
to ensure that we are prepared for similar disasters of this magnitude
in the future.
Again, I thank the Chairman for holding this hearing and I thank
the witnesses for being here. I look forward to hearing the testimonies
today. It is my hope that we learn from the terrible tragedies that
have happened in the Gulf Coast to create an energy system that will
make us less vulnerable to these tragedies in the future.
Prepared Statement of Hon. Dianne Feinstein, U.S. Senator From
Mr. Chairman, thank you for holding this timely hearing.
The one-two punch of Hurricanes Katrina and Rita showed us how
dependent we are on the Gulf Coast for our energy supplies. I would
like to thank the witnesses for being here today to give us a status
report on the energy infrastructure in the Gulf.
While I know that natural gas prices are going to soar because of
the damage to the energy infrastructure, I think it is important to
note that prices were rising even before the hurricanes hit.
In California, PG&E expects that utility bills in their service
territory will rise 40 to 50 percent this winter compared with last
winter. In other words, average residential gas bill in January will
likely rise to $154 from $108 last year.
Southern California Edison expects those rates to rise between 30
and 40 percent, or the average bill will rise from $83 to $110 or more.
Higher energy prices means less money for consumers to buy food,
rent, or other necessities.
I know that most of the witnesses today will be talking about
supply side solutions, but I want to take a few minutes to point out
that drilling will not help us get through the price spikes this
winter. What will help us in the near-term are two things: energy
efficiency and diversifying our fuel mix.
While the rest of the nation's per capita energy consumption has
risen by nearly 50% over the past 50 years, California has kept the per
capita average flat.
The State has successfully curbed electricity usage by
cost-effective building and appliance standards;
effective energy efficiency programs, including aggressive
energy savings targets for both electricity and natural gas;
public education programs about the importance of energy
In addition, the State has the most aggressive renewable portfolio
standard in the nation--requiring that 20% of California's electricity
come from renewable resources--not including large hydropower--by 2010.
Further, the Governor has endorsed increasing the renewable
standard to 33% by 2020.
I do not disagree that we need new supply. That was why we included
federal loan guarantees for the Alaska Natural Gas Pipeline as part of
the Fiscal Year 2005 Military Construction Appropriations Bill.
The Alaska pipeline would provide 4.5 billion cubic feet of natural
gas a day, or about 7 percent of current consumption. Yet the pipeline
project sponsors have not even been selected, further delaying the
construction of the pipeline.
It seems to me that we can reduce demand for natural gas if we:
bring to market natural gas from areas where we already
drill for oil, namely Alaska;
fully implement the energy efficiency standards and tax
incentives in the energy bill, and extend those incentives for
another three years;
and implement a national renewable portfolio standard.
I look forward to hearing from the witnesses. Thank you, Mr.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Well, thank you very much, Mr. Chairman,
and thank you for having this hearing. I thought the trip that
you and Senator Akaka and I took to this area was very
informative, and thank you and your staff for organizing it.
Obviously, we did see a lot of heroic effort going on there
by many companies trying to recover from the damage that was
caused by these two hurricanes, and a lot of employees who were
working very long hours trying to restore service and get the
situation back to one of normalcy.
What I am interested in--I think all of us are--is wanting
to know, are there things that we in Congress could be doing to
assist with the recovery that we are not engaged in right now?
Second, are there ways that we could be helping with the
mitigation of the effects of these hurricanes on people in the
region, consumers of various kinds in the region, and also
nationwide mitigation of the high prices? And third, are there
ways to mitigate damage from future hurricanes? Are there
things that we can do to be smarter in this rebuilding, in this
recovery, which will lessen the extent of the damage and the
extent of the disruption that we will encounter in the future?
Those are issues that I think I am anxious to learn more about.
I welcome all the witnesses. Thank you for having the
The Chairman. Thank you very much, Senator.
Mr. Hebert, I had difficulty with your French name and I
Mr. Hebert. I understand that.
The Chairman. If it helps, it took them 10 years to say
The Chairman. Anyway, I am not going to say it. I am going
to call you Curt because I am still going to mess it up. I am
not that familiar with you, so excuse me.
Does any other Senator desire to comment?
Senator Akaka, you were on the trip and I thank you for
coming on the visit.
STATEMENT OF HON. DANIEL K. AKAKA, U.S. SENATOR
Senator Akaka. Mr. Chairman, thank you very much for giving
me this opportunity to make a very brief statement and for
holding this hearing today. I just came from a Homeland
Security hearing with FEMA, and I will be returning to that
after this hearing. We are also investigating Katrina and Rita.
I thank you, Mr. Chairman, for organizing the committee
tour of the damages and challenges to the Nation's and gulf
coast's energy infrastructure.
Mr. Chairman, my immediate impression is that we have a
national crisis on our hands in the aftermath of Katrina and
Rita and that the needs are complex. More than 30 percent of
the Nation's domestic oil comes from the gulf. 10 percent of
our refining capacity has been knocked out. Entergy's New
Orleans subsidiary filed for bankruptcy on September 21.
Natural gas pipeline companies were severely challenged to keep
their supplies going throughout the South and up to the
Northeast, fueling the likelihood of even higher natural gas
For 2 days, we visited energy and chemical companies in the
gulf. I was really impressed and moved by the heroic untold
stories of humanitarian actions by company employees. Companies
deployed their own resources, both personnel and supplies, to
save people from flooding homes, all this as they were fighting
to save the energy infrastructure so vital to our Nation.
The first phase in this national disaster was to assist the
victims with their immediate needs. As we continue to assist
the people displaced by hurricanes, we must also move to the
second phase, which we are doing now, of rebuilding the energy
infrastructure which underlies the economy of the Nation and
Mr. Chairman, I thank you for setting up that trip. It was
enlightening for me, and I can now tell you that we need to
really focus on restructuring and moving our Nation forward
with respect to energy infrastructure. Thank you very much.
The Chairman. Thank you very much.
Would any other Senator like to comment?
STATEMENT OF HON. GORDON SMITH, U.S. SENATOR
Senator Smith. Mr. Chairman, I would like to put a
statement in the record and indicate to my colleagues my
concern about not just these refineries, but also natural gas
prices that are affecting so many industries, and obviously
refineries for home heating oil. It poses a very real problem
for us in this coming winter.
I appreciate your holding this hearing.
[The prepared statement of Senator Smith follows:]
Prepared Statement of Hon. Gordon Smith, U.S. Senator From Oregon
Mr. Chairman, I appreciate your convening this hearing to examine
further the impacts of Hurricanes Katrina and Rita on the nation's
energy infrastructure. While we must continue to aid those directly
affected by these disastrous storms, we must not forget that every
family and business in America feels the effects of these storms.
Gasoline and natural gas are at historically high prices, and those
prices are expected to continue into the foreseeable future.
The most recent report is that almost 90 percent of the oil
production in the Gulf of Mexico remains shut in, and 70 percent of the
region's natural gas production remains off-line. The damage is more
extensive than originally estimated. The Interior Department projects
it will take several months and billions of dollars to restore damaged
refineries, transmission lines and pipelines in the region.
While we will hear today about the impact on the Gulf, I am hearing
from constituents who are concerned about their family budgets and
My agricultural constituents, particularly in eastern Oregon, are
facing lower commodity prices, higher transportation costs, and higher
fertilizer costs. Families that have farmed for generations are getting
out of the business, and selling their land. High energy costs will not
help us revitalize rural America.
Because natural gas is such an important feedstock for the
fertilizer and petrochemical industries, those industries are being
decimated by natural gas prices that are now seven times higher than
they were a few years ago.
The United States has the highest natural gas prices of any
industrialized nation, and industries that rely on natural gas are
finding it increasingly difficult to remain competitive in a global
As we head into the winter heating months, high natural gas prices
will also affect the 55 percent of American households that heat their
homes with natural gas. It is estimated that the average household can
expect to spend $700 to $1200 more to heat a home this coming winter.
I am pleased that the Administration is urging Americans to
conserve energy, and requiring federal agencies to conserve.
However, the federal government is also a major producer of
electricity. I urge the Energy Department to examine the operation of
all federal generation assets to see if those assets can produce more
electricity this winter, so that less natural gas will be needed.
I firmly believe that the recently enacted Energy Policy Act will
enhance our nation's energy security over time. The Act provides
numerous incentives for the development of renewable energy and
cleaner, more fuel-efficient vehicles, as well as incentives for new
electric transmission and natural gas infrastructure.
These incentives are even more critical as we seek to rebuild the
Gulf Coast region.
The Energy Policy Act will not, however, see us through the tight
energy supplies we are facing today. I am committed to working with
you, Mr. Chairman, to examine options to meet our nation's current
energy demands in an environmentally responsible manner.
I want to thank each of the witnesses who have agreed to testify
here today, and I look forward to your statements.
Senator Burns. Mr. Chairman?
The Chairman. Yes, indeed.
STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR
Senator Burns. I do not know whether I am going to get down
to my turn or not. I wanted to hear the testimony this morning.
We are having problems getting to our supplies of natural
gas, as you well know. We have billions and billions of cubic
feet of natural gas in this country that we are unable to
access right now.
I will be holding a hearing on October 25, oversight on
Interior Appropriations on Public Lands and the impediments
that we are running into in accessing and permitting on Federal
lands. I think it is long overdue. When we look at the
staggering figures that we have in front of us, I think it is
time that we took a common sense approach on access to natural
I represent a large agricultural sector. Not only are we
impacted by transportation and transportation fuels, we are
impacted in fertilizer and the operation of our ranches. I want
to tell you the squeeze that we are in real quickly, and this
The other day a young farmer walked up to me and had the
scale tickets from his father's wheat in 1948. Today it is the
same price. Now, there is not anybody in this room that is not
making more money or getting more for their produce and their
production personally or in goods, even at the basic level,
today than American agriculture is.
We are in a bind, and I want to talk about the basics. It
is the way we feed our country. That is the second thing we do
every morning when we get up. Now, with the first thing you do,
you have got lots of options, but the second thing you do is
eat. I will tell you we are in a bind.
So this is a very important hearing. I think it is a very
important thing not only to venture into new technologies. I
was one of the first ones that appropriated money for fuel cell
development because I knew 1 day we are going to need them. It
But I think this acute problem that we have right now, Mr.
Chairman, I think has to be addressed in a very realistic and
common-sensical way, and we are going to do that on October 25
for the folks who will be interested in giving input into that
hearing on oversight on our access to our energy sources. Thank
you very much.
The Chairman. Thank you, Senator.
All right. With that, we are going to proceed. The first
witness is president and CEO of the American Petroleum
Institute. Please proceed.
STATEMENT OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN PETROLEUM
Mr. Cavaney. Thank you, Mr. Chairman, members of the
The U.S. oil and natural gas industry recognizes the
catastrophic impact of hurricanes Katrina and Rita on millions
of Americans. The gulf coast is the very heartland of our
industry, as you have indicated, and we are not just responding
to this disaster, we are actually living it. Thousands of our
workers are suffering hardships of living in this devastated
region they call home, many now without their own homes. In
concert with fire and police, friends and neighbors, suppliers,
government officials, our employees are restoring production,
bringing refineries back on line and restarting the pipelines.
Our companies have made much progress in recovering from
the hurricanes, but let us be frank. Much remains to be done.
Let us remember this was a once-in-a-century natural disaster
of monumental impact. It has been 90 years since two hurricanes
of this magnitude struck the gulf coast in the same year, and
Katrina and Rita came within 1 month of one another. If you
look at the chart to my right, what you will see is the impact
was literally side by side, affecting directly 99 percent of
the gulf facilities, quite an extraordinary occurrence.
So while many refineries, pipelines, and other facilities
are back in operation, some facilities are still out of
service, either because of the lack of electricity or because
of damage. Fuels are flowing to consumers nationwide, but below
normal levels in some areas.
At this time, energy conservation and energy efficiency are
critically important. We support the recent calls to conserve
energy by President Bush, by the Alliance to Save Energy, and
others. API has run full-page ads in major metropolitan
newspapers across the Nation urging consumers to use available
supplies efficiently. We have urged them to use such things as
common sense steps in planning trips carefully, properly
maintaining their cars, driving efficiently, and using energy
wisely in their homes.
Access to crude oil from the Strategic Petroleum Reserve
and various government waivers to expedite the flow of fuels,
particularly to emergency responders, have been vital in
speeding this recovery.
The gulf region includes some 4,000 offshore platforms in
Federal waters, two dozen refineries, and hundreds of
production, transportation, and marketing facilities. These
Federal waters account for nearly 30 percent of our Nation's
crude oil production and approximately 20 percent of our
Nation's natural gas production.
There is a reason for this geographic concentration in a
high-risk weather area. Government policies have largely
limited offshore exploration and production to the central and
western gulf, and our onshore facilities, including refineries,
have been welcomed by the communities in the region.
Unfortunately, offshore oil and natural gas development has
been barred elsewhere, specifically the eastern half of the
gulf, and the entire Atlantic and Pacific coasts.
In my written testimony, I provided you with the latest
detailed information, along with lessons we have learned. The
situation can change markedly from day to day.
In summary, here is where we stand today. Offshore shut-in
oil production is 1.3 million barrels per day, or 86.7 percent
of the daily Gulf of Mexico production, which is down from 100
percent a week ago. Shut-in natural gas production is 6.9
billion cubic feet per day, which is 69 percent of the daily
gulf production, also down from 80.4 percent last week.
Companies continue to assess damage to offshore platforms, on
rigs, and throughout the infrastructure. Of the Nation's
refining capacity, 20 percent remains offline or is in the
process of restarting in the aftermath of both Katrina and
Rita. Eight of those refineries are down due to Rita and four
of them remain down due to Katrina. The restoration of
electricity services is a priority for getting refineries back
up and running.
Many pipelines have recovered rapidly with only limited
damage to those pipelines. The double hit of Katrina and Rita
has negatively impacted several key pipelines that are
currently closed or operating partially. I am pleased to
announce that Colonial this morning has indicated they have
gone from 70 up to 90 percent of capacity, which is very, very
helpful to us all.
We know that the hurricanes have had a huge nationwide
impact through skyrocketing prices for gasoline and other
fuels. We understand the concerns consumers have expressed, and
our companies are doing everything in their power and are
working 24/7 to restore operations and to get supply back to
normal levels. This work, wise energy use by consumers, and a
``do no harm'' approach by government officials provide the
quickest path to consumer relief from tight supplies.
In conclusion, we remain very focused on the serious work
needed to ensure Americans continue to get the fuels that they
need, and we look forward to working with the committee in this
regard. Thank you, Mr. Chairman.
[The prepared statement of Mr. Cavaney follows:]
Prepared Statement of Red Cavaney, President and CEO,
American Petroleum Institute
I am Red Cavaney, President and CEO of the American Petroleum
Institute--the national trade association for the U.S. oil and natural
gas industry, representing all sectors of the industry, including
companies that make, transport, and market gasoline.
The oil and natural gas industry recognizes the catastrophic impact
of Hurricanes Katrina and Rita on millions of Americans, and our
industry has been working around the clock with all levels of
government and the private sector to restore operations and ensure that
consumers have adequate fuel supplies.
As I will explain, our companies have made much progress in
recovering from the hurricanes, but much remains to be done. While many
refineries, pipelines, and other facilities are back in operation, or
are about to be, some facilities remain damaged and out of service.
Fuels are flowing to consumers nationwide, but not at the normal
levels. Thus, our companies are facing a more difficult challenge in
keeping up with demand for gasoline and other products. We are facing
tight supplies, making it all the more important to heed the
President's recent call for consumers to use energy wisely.
Energy conservation and efficiency in this time of tight supply are
crucial--as important as our efforts to bolster supply. Companies are
working 24/7 to get fuels to where they are needed in the quantities
they are needed. And they are supplementing domestic production with
increased imports of gasoline to help alleviate tight supplies.
API has run full page ads in major metropolitan newspapers across
the nation urging industry and consumers to use available supplies
wisely. We have urged these steps:
Plan trips carefully. Combine multiple trips into one to do
your errands. Minimize stop-and-go driving by avoiding rush
hours. Consider car pooling.
Maintain your car. Under-inflated tires can rob up to one
mile per gallon from fuel economy.
Drive efficiently. Unnecessary speedups and slowdowns can
decrease fuel economy by up to two miles per gallon. Accelerate
slowly and avoid engine idling.
Slow down. Typically the faster you drive, the more fuel you
Use energy wisely at home. Turn down thermostats, seal
window and door leaks, clean furnace filters and replace less-
efficient furnaces and hot water heaters.
The Gulf Coast is the very heartland of our industry. We are not
just responding to this disaster, we are living it. Thousands of our
employees and their families and friends are also suffering the
hardships of living in this devastated region they call home. In
concert with fire and police officials, neighbors, suppliers, and
government authorities, our companies are restoring the production,
bringing the refineries back online, and restarting the pipelines--
while at the same time grieving over the loss of homes, neighborhoods,
and even loved ones.
The Gulf Coast region includes some 4,000 offshore platforms in
federal waters, dozens of refineries, and hundreds of production,
transportation and marketing facilities. These federal waters account
for nearly 30 percent of the nation's crude oil production and
approximately 20 percent of the natural gas production. There is a
reason for this geographic concentration in a high-risk weather area.
Government policies have largely limited offshore exploration and
production to the Central and Western Gulf--and our onshore facilities,
including refineries, have been welcomed in communities in the region.
Unfortunately, offshore oil and natural gas development has been barred
elsewhere--including the eastern half of the Gulf and the entire
Atlantic and Pacific Coasts. Onshore construction has been held back by
government restrictions, permitting delays, and not-in-my-backyard
It is ironic that we talk so much about diversifying the sources of
our energy supplies from abroad, yet we have done so little to
geographically diversify our oil and natural gas industry here at home.
An area of much recent concern is the need to bring additional
clean-burning natural gas to industries and consumers nationwide. Yet,
efforts to increase domestic natural gas production, both in the Rocky
Mountain West and offshore, have been stymied--and efforts to build
more terminals outside the Gulf region to permit increased imports of
liquefied natural gas (LNG) have also been largely blocked.
II. THE IMPACT OF HURRICANES KATRINA AND RITA ON THE
U.S. OIL AND NATURAL GAS INDUSTRY
I know that I speak for every one of our member companies when I
say that our first concern--from the moment it becomes evident that a
hurricane is approaching the Gulf--is for the well-being and safety of
the thousands of men and women from across the country who work on
offshore facilities, on the vessels that serve them, and in the
refineries, distribution networks, and retail outlets around the Gulf
Equally as important is the welfare and recovery of the communities
in the Gulf region. Millions of people in the area are experiencing
firsthand the physical and emotional hardship of the death and
devastation caused by these two hurricanes, and our hearts and our
prayers are with them.
API is working with the American Red Cross to facilitate U.S. oil
and natural gas industry efforts to help people throughout the Gulf
region. Our member companies are helping relief efforts through
corporate contributions and by encouraging customer and employee
The companies are donating millions of dollars to humanitarian
relief efforts to assist evacuees and help rebuild lives and
communities. They are supporting national, state and local initiatives
in recovery and relief through contributions of products, services, and
technology. API and its members, in conjunction with the Gulf Coast
Workforce Board and the U.S. Department of Labor, are working with
employers in Texas and the surrounding states to help people displaced
by the hurricanes to find new jobs.
We want to thank President Bush for making available more than 24
million barrels of crude oil from the Strategic Petroleum Reserve (SPR)
to help offset supply shortfalls after Katrina and Rita--truly a
circumstance for which the SPR was intended--and we appreciate the
International Energy Agency (IEA) member nations' contributions of
additional strategic reserves. We are also grateful that the
Environmental Protection Agency (EPA) and the Department of
Transportation, in conjunction with the involved states, have granted
waivers to expedite the flow of fuels, particularly to emergency
responders--an action that is very helpful at a time when logistics and
distribution of fuels are extremely difficult and critical.
In addition, the Department of Homeland Security's waivers of the
Jones Act have helped to provide fuel supplies by enabling foreign as
well as U.S. vessels to transport crude oil and refined petroleum
products between domestic ports. And, through both hurricanes, the
Department of Energy has played a central and invaluable role in
leading and coordinating overall efforts by all levels of government to
respond to the energy impacts of Katrina and Rita.
These and other positive steps by government are most helpful in
dealing with this catastrophe. We also believe it is particularly
important for government officials at the federal, state and local
levels to urge citizens nationwide to use energy wisely, particularly
in terms of not hoarding gasoline and not ``topping off' their vehicle
tanks. We welcomed the President's recent comments on the need to use
fuel wisely and avoid unnecessary travel.
In attempting to meet the challenges we face, it is also most
important to do no harm. The worst thing Congress could do in these
challenging times would be to repeat the mistakes of some past energy
policies by overriding the structures of the free marketplace. Imposing
new controls, allocation schemes, new taxes on industry, or other
obstacles will only serve to make the situation much worse--for the
very individuals who are being relied upon to bring our energy systems
back to full operating order.
Effects of Hurricanes Katrina and Rita on Industry Facilities
While our companies are still assessing the full effects of the
hurricanes on production, refining, and pipeline facilities in the Gulf
region, the storms clearly had a significant and widespread impact on
our operations. Thanks to the around-the-clock work of company
employees and contractors, facilities are coming back online and fuel
is flowing from refineries through pipelines to consumers.
While I will attempt to provide you with the latest information we
have, I would caution you that the situation can change markedly from
day to day, from the standpoint of what we know and what actual
progress has been made.
Our latest information from the Department of Energy (DOE), the
Minerals Management Service (MMS), the Association of Oil Pipe Lines
(AOPL), and member companies on the status of our industry and its
facilities is as follows:
Summary of Impact of Hurricanes Katrina and Rita
Recent hurricanes have reinforced the important role domestic
energy supplies play in our economy. Shut-in oil and natural gas
production from Hurricanes Ivan (2004) and Katrina and Rita this year,
combined with growing demand for petroleum products and natural gas,
have increased costs for all energy consumers. And, the tight supply/
demand balance has made energy markets more volatile.
It had taken almost a year for the last of the offshore facilities
to near recovery from Hurricane Ivan, when Katrina struck. Cumulative
shut-in production from Ivan was 40 million barrels of oil and 160
billion cubic feet of natural gas. Ironically, API, along with the
Minerals Management Service and Coast Guard, had just convened a
workshop at the end of July to evaluate the experiences of Hurricane
Ivan and examine whether new policies/practices should be considered.
Hurricane Katrina initially shut in virtually all oil production
(about 1.5 million barrels per day) from the Gulf of Mexico (GOM) and
88 percent (about 8.8 billion cubic feet per day) of the Gulf's natural
gas production. Just prior to Hurricane Rita's entry into the region,
oil production had recovered with about 55.8 percent (837.6 MMB/D)
still shut in and about 33.7 percent of GOM natural gas shut in (3.375
billion cubic feet per day).
The advent of Hurricane Rita forced offshore facilities to shut
down again to protect employees. It has been estimated that about 75
percent of the offshore facilities in the Gulf were in the path of
Hurricane Rita. Once again, as of 9/30/05, virtually all (97.8 percent)
GOM oil production was offline (1.47 million barrels per day) and about
80 percent of the natural gas (7.9 billion cubic feet per day). This
situation has begun to improve slowly. As of 10/3, shut-in oil
production was equivalent to 92.8 percent (1.39 MMB/D) of daily Gulf
production and almost 75 percent (about 7.5 billion cubic feet per day)
of natural gas production. The cumulative production shut-in from both
Katrina and Rita (8/26/05--10/3/05) is 45.1 million barrels of oil
(about 8.2 percent of yearly GOM production and almost 219.6 billion
cubic feet of natural gas, which is about 6 percent of yearly
At present, this situation continues as companies diligently assess
their platforms and subsea production and delivery systems to assess
damage and ensure that it is safe for employees to return to offshore
structures and that production can resume without any environmental
impacts. Considering the magnitude of the hurricane and its path,
damage to offshore platforms seems less than anticipated. However,
while damage reports are still being collected, we do know that
Chevron's Typhoon platform was severed from its moorings and suffered
severe damage. According to news reports, Typhoon produced about 40 MB/
D of oil and 600 million cubic feet per day of natural gas.
Recovery from Hurricane Rita in terms of offshore oil and gas
production will be dependent on the other vital parts of the supply
chain downstream of the production site. Subsea gathering pipelines and
delivery systems must be operable. For natural gas, onshore processing
plants must be up and running before that gas can be placed in
pipelines for delivery to consumers. For crude oil, pipelines and
terminals associated with shipping the oil must be working--not to
mention the refineries that will transform the oil into products like
gasoline, heating oil and jet fuel as well as the pipelines that will
deliver those products to consumers.
It may seem self-evident, but it is worth remembering that every
hurricane is unique and their impacts can differ substantially. Last
year, Hurricane Ivan's impacts were most notable on the seafloor, as it
triggered undersea mudslides. Hurricane Katrina seemed to have its
greatest impacts onshore, although it did damage deepwater facilities
serving the Mars, Ursa, Cognac and West Delta 143 fields. Shell had
indicated that production from these fields may not be feasible the
rest of this year. According to Bloomberg News, Mars produced 220 MB/D
of oil and 220 million cubic feet per day of natural gas. Prior to
Hurricane Rita, Shell had indicated that about 60 percent of total
production would be restored to pre-Katrina level within the fourth
Katrina's impact was also notable in terms of damage to older
facilities operating in shallower waters. These were mostly low-volume
producing wells. Overall, Katrina destroyed about 45 producing
structures and 20 structures incurred extensive damage.
While the industry is working around the clock to restore
production, damage from Hurricane Rita is still being assessed. And,
damage to the drilling fleet and platforms may turn out to be somewhat
greater than initially thought.
In all of the hurricanes, drilling rigs were impacted--often
photographs of drifting rigs were the most visible impact in terms of
news coverage. Putting this in perspective, during Ivan, five rigs went
adrift; six during Katrina; and eight during Rita. In terms of damage,
Katrina destroyed four drilling rigs, while nine incurred extensive
damage. Based on preliminary reports, Rita inflicted major damage on
five drilling rigs and minor damage on 10. [Source: Reports from
Offshore Production Observations/Lessons Learned
It is important to remember that the offshore infrastructure (4,000
platforms and 33,000 miles of pipeline) is sturdy and has weathered
three powerful storms in the last 13 months without widespread major
damage or environmental pollution. The majority of structures damaged
by these hurricanes were older, lower volume producing facilities in
Not only is resumption of production dependent on the downstream
oil and gas supply chain, all parts of our infrastructure depend on
other critical links such as electrical power. We must continue to make
recovery of all parts of this critical infrastructure a primary
Additional attention should be placed on securing and tracking
drilling rigs. We will incorporate the lessons of Katrina and Rita in
our ongoing work initiated to assess and learn from Ivan. We will
continue to work cooperatively with government to find ways to improve
Communication and coordination between government at all levels and
industry is vital to recovery. Prompt actions by government to, where
necessary, temporarily remove regulatory obstacles have proved
As a nation, we also must confront our energy needs and take the
necessary steps to enhance domestic production of oil and natural gas.
We can no longer afford to place ``off limits'' vast areas of the
Eastern Gulf of Mexico, off the Atlantic and Pacific coasts, and
offshore Alaska. Similarly, we cannot afford to deny Americans
consumers the benefits that will come from opening the Arctic National
Wildlife Refuge and from improving and expediting approval processed
for developing the substantial resources on federal, multi-use lands in
For example, there are about 300 trillion cubic feet of natural gas
and 50 billion barrels of oil (technically recoverable resources) on
the federal Outer Continental Shelf (OCS) off the lower 48 states with
additional resources on the Alaskan OCS of 122 TCF of natural gas and
25 billion barrels of oil. Thus, the total recoverable with today's
technology is equivalent to the oil resources of Canada and Mexico
combined and nearly three times the natural gas resources of these two
countries. Yet, these estimates may be conservative since these areas
are largely unexplored. Generally, the more an area is explored, the
more its resource estimates grow. For example, the U.S. Geological
Survey (USGS) estimates of undiscovered oil resources in the Central
and Western Gulf of Mexico increased from 6.32 billion barrels of oil
in 1995 to 33.39 billion barrels in 2003--an increase of more than 400
percent. And, USGS estimates of undiscovered natural gas resources in
those same areas increased from 88.1 TCF to 180.2 TCF over the same
time period--an increase of more than 100 percent.
The natural gas situation deserves special attention due to its key
role in so many sectors of our economy and especially given its
importance in heating homes throughout the nation. More than 60 million
homes rely on natural gas. On September 29, natural gas prices set a
record. Although they have settled down a bit ($14.017 per MMbtu on
October 4--down 28.4 cents from the record), natural gas prices are
more than double what they were this time last year--$7.15 above last
year. And, winter has yet to arrive.
Unlike petroleum products where increased imports can help enhance
available supplies, the ability to do that for natural gas is limited.
Hurricanes Katrina and Rita have not only shut in a significant portion
of the nation's natural gas supplies, the hurricanes have damaged
natural gas processing plants which must be restored. Major issues
affecting repairs and start-up of these plants include: access to
facilities (standing water remains; some roads are not open); access to
materials needed for repairs; and manpower issues.
Facilities in and near Houston do not appear to have sustained much
damage. The Mont Belvieu area (about 25 miles east of Houston) is in
the process of restarting. Natural gas liquid import/export facilities
around the Houston Ship Channel have returned to service. Overall,
Texas natural gas processing plants seem to have incurred little damage
although some remain closed due to lack of electricity.
The area most impacted from a gas processing standpoint is
Louisiana. A number of these plants were just recovering from damage
due to Hurricane Katrina when Rita approached. Even those that did not
sustain additional damage have been affected by the mandatory
evacuations and other issues (e.g., access to Cameron Parish) related
to Hurricane Rita. Repairs are resuming as conditions allow workers to
return. In Alabama and Mississippi, plants in Mobile Bay and Pascagoula
have been at heavily reduced recovery levels since the Tri-States
pipeline has been out of service since Hurricane Katrina. This line
crosses Lake Pontchartrain and many problems have been encountered in
trying to return this line to service.
Summary of Impact of Hurricanes Katrina and Rita
Based on the latest assessments (as of 10/4), 24.4 percent of U.S.
refining capacity remains off-line or is restarting in the aftermath of
Hurricanes Katrina and Rita. This includes 5 percent of U.S. refining
capacity that remains off-line because of damage caused by Katrina in
Louisiana and Mississippi. Refineries with approximately 6.8 percent of
U.S. refining capacity are in the process of restarting operations,
while refineries with approximately 12.6 percent of U.S. refining
capacity are still awaiting power, continuing to assess damages, or
making necessary repairs. The following is the latest information we
have on Texas/Louisiana refineries:
Houston area (2,291,850 barrel/day capacity)
BP/Texas City...................... 437,000 Shutdown; no restart
Marathon/Texas City................ 72,000 Normal operations
Valero/Texas City.................. 209,950 Reduced runs to
Pasadena Refining/Pasadena......... 100,000 Normal operations
Valero/Houston..................... 83,000 Normal operations
Lyondell-Citgo/Houston............. 270,200 Restarting
Shell/Deer Park.................... 333,700 Restarting
ExxonMobil/Baytown................. 557,000 Restarting
ConocoPhillips/Sweeney............. 229,000 Normal operations.
Beaumont/Port Arthur (1,122,000 barrel/day capacity)
Total Petrochemical................ 233,500 Shutdown
Motiva............................. 285,000 Shutdown; no restart
Valero............................. 255,000 Shutdown; estimate
restart within 1
ExxonMobil......................... 348,500 Shutdown; no restart
Lake Charles (593,800 barrel/day capacity)
Citgo.............................. 324,300 Shutdown; no restart
ConocoPhillips..................... 239,400 Shutdown; estimate
restart in mid-
Calcasieu Refining................. 30,000 Shutdown
Refinery Observations/Lessons Learned
Refineries are complex. It takes more than a flip of a switch to
get a refinery back up and running. In a normal situation, once the
decision has been made that it is safe to start-up the refinery, it can
take several days before the facility is back to full operating levels.
This is because the process units and the associated equipment must be
returned to operations in a staged manner to ensure a safe and
Once a hurricane leaves the region, refinery managers assess what
impact the hurricane had on their facilities. If any damage has
occurred, repairs will need to be made before the refinery can be
brought back online. Also, any flooding--a potentially significant
problem--that has occurred will need to be dealt with before restarting
In the case of a start-up following a hurricane, other factors
could cause further delay. These factors include the availability of
crude oil, electricity to run the plant, and water used for cooling the
process units. A refinery requires electricity to operate; if it is
flooded, it cannot use electricity and cannot restart.
Refineries have been prepared with hurricane preparedness and
response plans for a very long time. Safety for neighboring communities
and employees is a top priority. It takes a few days to shut down a
refinery, and the better job done at shutdown, the more likely will be
a smooth and safe startup.
Most damage to refineries requires minor repairs, but it may take
some time to completely assess and finish those repairs. Some
refineries have been harder hit and are still awaiting power or
repairing floor damage, and it will take more time to enable them to
Employees have shown incredible dedication, working on bringing the
refineries back online. Some have lost their homes and are still
focused on getting their refineries back up and running. Our member
companies are proud of these efforts and are dedicated to finding
employees temporary housing in cases where homes are lost.
For example, ConocoPhillips' Alliance Refinery brought in two
vessels to support operations. One sleeps 700. The company is operating
the refinery like an offshore platform and sharing the vessel with some
National Guardsmen to provide them shelter as well.
Another example is at Shell's Deer Park refinery, where the company
gave one operator an emergency vehicle to join his distraught wife who
had already evacuated the area. The company filled the vehicle with
extra gasoline so he could help those whom he passed who had run out of
At ExxonMobil's Baton Rouge refinery, managers relied on creativity
and improvisation to keep the facility functioning during and after
Katrina. For example, loss of electric power shut off imports,
particularly those coming through the Louisiana Offshore Oil Port
(LOOP), which are vital to the refinery. As a stopgap, company
officials located a foreign tanker full of oil that had ridden out the
storm south of Baton Rouge and brought it to the refinery--after
quickly obtaining a waiver from the Jones Act that prohibits a foreign-
flagged vessel from traveling between two U.S. ports. The company also
created a ferry system using company barges to bring Strategic
Petroleum Reserve (SPR) oil across the river from a Port Allen,
Louisiana, refinery, which was the nearest location to which a pipeline
could bring the SPR oil.
Summary of Impact of Hurricanes Katrina and Rita
Despite the severe conditions caused by Hurricanes Katrina and
Rita, most pipelines recovered rapidly, with only limited damage done
to the pipeline system--indicating that this is a robust, durable
system capable of withstanding considerable stress. After Hurricane
Katrina, the industry worked around the clock to restore full
operations at all major crude oil and petroleum product pipelines.
However, Hurricane Rita impacted many of these pipelines again, and
several key pipelines currently are closed or operating at partial
The following is the status of hazardous liquids pipelines as
reported by the Association of Oil Pipe Lines (as of 9/27):
Capline, a major crude oil pipeline from the Gulf region to
the Midwest, is operating at 80 percent capacity.
Centennial Pipeline, which transports refined products from
Beaumont, Texas to the Midwest, is closed;
Colonial Pipeline is operating at full capacity from Krotz
Springs, Louisiana eastward, but operations are limited in its
origin pipeline segments in Houston and Pasadena, Texas;
Dixie Pipeline, a 1,300-mile propane pipeline originating in
Mont Belvieu, Texas to eastern transmission points in North
Carolina and Georgia, is operating.
Explorer Pipeline, which ships refined products from the
Houston area to the Midwest, is now undertaking partial
Longhorn Pipeline is open; a 700-mile common-carrier
pipeline, it can transport up to 72,000 barrels per day of
LOOP, the Louisiana Offshore Oil Port, has stopped
offloading tankers, but is continuing to deliver crude oil to
customers. The port facility is located in the Gulf of Mexico,
18 miles south of Grand Isle, Louisiana, in 110 feet of water.
LOOP is the only port in the U.S. capable of offloading deep
Magellan Pipeline is fully operational. Magellan is a
refined products system consisting of 8,500 miles of pipelines
supplying 13 Midwestern states.
Marathon Pipeline has portions closed; the Texas City to
Pasadena system is shut down.
Plantation Pipeline, a 3,100-mile pipeline from Baton Rouge,
Louisiana to the Washington, D.C. area, is operating.
Seaway Pipeline, from the Texas Gulf Coast to Cushing,
Oklahoma is operating.
TEPPCO Pipeline, which moves petroleum products from
Beaumont, Texas to New York, is operating at limited capacity.
API has been provided with the following additional information:
Colonial Pipeline: Colonial was able to restore service at reduced
rates on its lines from the Gulf Coast after a two-day interruption.
Colonial is currently (9/29) pumping at an average rate of 65 percent
of its normal volumes on these lines from the Gulf Coast. The
constraint on Colonial is not its capacity but the availability of
product to lift from Gulf Coast refineries and origin terminals. At
present, Colonial is without commercial power at five consecutive
pumping stations in the Beaumont, Texas-Lake Charles, Louisiana area.
Commercial power will likely not be available at some of these pumping
stations for at least two weeks.
Explorer Pipeline: The main line from Houston/Pasadena has been
ready to run at the full rate since 9/26. Explorer is currently (9/29)
running at about half of its capacity due to lack of availability of
product. The Port Arthur to Houston segment is still not operating.
Shell Pipeline Company LP: In Texas (as of 9/29), onshore crude oil
and product pipelines, stations and terminals in the Port Arthur area
are flooded and without power and onshore crude oil. Onshore crude oil
pipelines, stations and terminals in the Port Neches area are flooded
and without power. In Louisiana (as of 9/29), onshore crude oil
pipelines, stations and terminals in the Houma and Erath areas are
flooded and without power. The offshore central crude gathering system
sustained platform damage. Offshore crude systems in Eastern, Central,
and Western corridors are being assessed for damage. Some chemical
systems and delivery points in Lake Charles are without power.
Marathon Pipe Line LLC
Garyville-Zachary 20" System was shut down on 8/29/05; on 8/30/05,
power out at Zachary facility; house power only at Garyville facility;
helicopter over-flight of system showed no damage. On 8/31/05, power
and SCADA communications restored at Garyville, Plantation Junction and
Zachary; restarted 9/1/05.
St. James-Garyville 30" System was shut down on 8/28/05; on 8/29/
05, power out at St. James and Garyville; on 8/30/05, house power
restored at Garyville; helicopter over-flights showed no damage. On 8/
31/05, system remained shutdown. Power and SCADA communication restored
at St. James. Waiting on LOCAP and Garyville; restarted 9/4/05.
Offshore Gulf of Mexico Crude System was shut down on 8/28/05; on
8/30/05, helicopter over-flight of system showed damage at West Delta
Receiving Station. On 9/3/05, MPL Assessment Team traveled via boat and
completed a preliminary assessment on the West Delta Receiving Station;
platform and all station equipment submerged; no mechanical damage;
electrical gear and instrumentation destroyed; security fence
destroyed; on 9/30/05, South Pass West Delta System remains down.
Midwest Crude System, on 8/29/05, crude lines from Patola,
Illinois, terminating at Robinson, Illinois, Cattlesburg, Kentucky, and
Lima, Ohio, slowed down as a result of refinery slowdowns due to
uncertainty of crude supply. By 9/4/05, those systems were resuming
Texas City-Pasadena 16" System shut down on 9/21/05; on 9/26/05,
preliminary assessments made to Texas City and Pasadena facilities
noted no damage; restarted 9/26/05.
Centennial 28" System (Marathon operator) shut down on 9/22/05; on
9/27/05, commercial power out with 2-6 weeks repair time; preliminary
assessments indicated little or no damage at all sites; on 9/30/05,
four temporary generators in place; Entergy reports that electrical
service (at reduced levels) may return in the next few days to the
Beaumont area; on 9/30/05, remains shut down.
Offshore Gulf of Mexico Crude (operated by Marathon).
East Cameron Lateral shut down on 9/20/05; on 9/27/05, initial
reports indicated significant damage to platform facilities with
potential for involvement of underwater pipelines; undersea and riser
inspection will be required; as of 9/30/05, remains shut down.
Eugene Island Lateral shut down on 9/20/05; on 9/27/05, some
platform damage has been noted from initial aerial inspection; undersea
and riser inspections will be required; as of 9/30/05, remains shut
Vermillion Lateral shut down on 9/20/05; on 9/27/05, some platform
damage has been noted from initial aerial inspection; undersea and
riser inspections will be required; as of 9/30/05, remains shut down.
Pipeline Observations/Lessons Learned
Electricity. Commercial power availability is essential to pipeline
operation. The ability of emergency response officials at the federal,
state and local levels to facilitate, coordinate and prioritize the
response of electric power utilities is essential. In-place backup
generation equipment would be just as vulnerable as the local utility
to major storm or attack, costly and difficult to accommodate in
Communications. The lack of reliable telecommunications was a major
issue in slowing response to the storms. In many cases land lines were
out and cell coverage was spotty at best. Even when land lines were
available, A/C-powered phones were useless. Satellite communication
worked well, but the number of units available was limited. Loss of
computing services removed email as a viable communications tool,
except in some instances where personal data assistants (blackberries,
etc.) allowed personnel to keep in touch. More clearly delineated
contact points within the federal government made Rita response easier
than Katrina response--there were fewer duplicate requests for updates
and better use of designated contacts. This also made it easier to get
federal help when needed as we had much improved channels into the
Physical Security. Personnel and critical infrastructure assets
must be protected--generators and fuel supplies (to name only two)
become valuable in a natural disaster.
Aerial Reconnaissance. Many operators had difficulty getting
clearance to conduct flyovers of their facilities to assess damage and
stage repairs. It would be helpful if FAA could determine priorities
and inform companies of what they are.
Federal Fuel Waivers. The use of fuel quality waivers to allow the
allocation of available fuels appeared to be helpful.
Effects Extend Beyond Regional. Impacts can be wide ranging
Operations. A backup control center in a different building in the
same city may be suitable in the event of terrorist attack (especially
with backup generation capability), but not when dealing with a major
area-wide event like a hurricane. The New Orleans pipelines that had a
backup control center outside of the area and Houston pipelines with
the same did not experience the same upset / contingency planning
problems as did pipelines that had their backup centers in the same
In the aftermath of Hurricanes Katrina and Rita, consideration
should be given to:
Improve telecommunications and electric power contingency
operations for crude and petroleum product lines and establish
protocols for continued service and prioritized restoration of
service in emergencies.
Governments should be prepared to provide security around
critical infrastructure and military or police escorts for
response personnel, critical equipment transport, and fuel
Short-term relaxation of federal, state and local regulatory
and permit requirements in the event of natural disasters to
expedite recovery of pipeline service.
Permit streamlining with DOT's Pipeline and Hazardous
Materials Safety Administration (PHMSA) as the lead
coordinating agency for oil pipelines, would be helpful in
speeding repairs and making capacity expansion projects more
Support for industry recommendations on FERC oil pipeline
Designation of National Energy Corridors for rights-of-way
would encourage increased pipeline and electrical capacity.
FAA should determine priorities and request procedures for
flyovers to aid in assessment and repair of critical
infrastructure and better communicate those priorities.
Expedite and streamline deployment of housing for emergency
Develop an integrated refueling strategy for emergency
responders (FEMA, National Guard, state and local authorities)
and stranded motorists to minimize conflicting priorities,
prioritize short-term emergency (re)supply focus, and ensure
emergency responder refueling equipment is compatible with
industry safety standards.
Deployment of government-owned power generation and pump
Impact of Hurricanes Katrina and Rita
The Houston Ship Channel and Texas City Channel have reopened for
The Gulf Intercoastal Waterway is fully open as a result of the
operational agreements reached with the Corps of Engineers. The
flooding in the Texas/Louisiana border area temporarily shut down the
Calcasieu Locks in Calcasieu Parish, Louisiana, and the Leland Bowman
Locks in Vermillion Parish. The Gulf Intercoastal Waterway is a
critically important artery for both the oil and chemical industries.
API worked with various government entities to ensure top priority for
returning these locks to normal operations.
Marine Transportation Observations/Lessons Learned
In responding to the hurricanes, the industry has worked in close
cooperation with the U.S. Coast Guard, the Department of Energy, and
the Maritime Administration to address marine transportation concerns.
It has built on strong relationships that already existed between the
industry and government in this area.
It was helpful to the industry's efforts that the President
directed Homeland Security Secretary Chertoff to waive the Jones Act to
facilitate transportation of materials from the Gulf Coast in the
aftermath of Hurricanes Katrina and Rita. The Jones Act requires that
all vessels used to transport cargo and passengers between U.S. ports
be owned by U.S. citizens, built in U.S., shipyards, and manned by U.S.
citizen crews. The original Hurricane Katrina waiver was through
September 19; following Hurricane Rita, the waiver was extended until
October 24 for both crude oil and products.
It was also helpful that the Coast Guard gave port captains
permission to waive requirements related to Oil Spill Response Operator
requirements in the Gulf. Shippers were faced with possibly being out
of compliance with their Vessel Response Plans because of the
widespread commitment of response equipment for hurricane clean-up
INDUSTRY SECURITY/EMERGENCY RESPONSE
Impact of Hurricanes Katrina and Rita
Providing security in the aftermath of a hurricane is particularly
important and difficult. In the aftermath of Katrina and Rita, the
ranks of local law enforcement were significantly depleted as officers
elected to look after their families, which in many instances meant
leaving the area. There are, of course, a great number of other
interests competing with the need to protect critical infrastructure.
Nevertheless, refineries and other similar infrastructure are at an
elevated risk during a hurricane emergency and require protection by
local law enforcement, state police, National Guard, or other entities
that can fill the void.
In the aftermath of a hurricane, companies' priorities are to gain
access to the facility to conduct an assessment of the damage, provide
security and control access to the site, facilitate any immediate
safety and/or environmental remediation, undertake cleanup, make
repairs of critical operating elements, and initiate restart of the
The first requirement is to conduct an assessment of the site. This
necessitates access by personnel to the site. In some instances, public
sector personnel attempt to restrict access based upon the need to
maintain law and order. In the aftermath of Katrina and Rita,
roadblocks and other impediments were established to ensure that only
first responders were provided access.
However, it did pose some challenges for companies attempting to
transport necessary supplies via ground transport. Generally, these
challenges involved coordinating with law enforcement officials to
obtain permits authorizing access into affected areas.
One concern was that emergency electrical generators, gas, food,
and other necessities that companies were attempting to deliver to
their locations would be seized by local agencies. Companies made
special arrangements for materials to be carried in convoys comprising
several vehicles and escorted by local law enforcement
Industry Security/Emergency Response Lessons Learned
Housing for rescue, response and facility and infrastructure repair
personnel in the storm-affected areas can be a major bottleneck to
beginning recovery operations.
Development of a formal communications channel into governmental
response organizations/departments would be helpful.
Development of an established process to expedite access to those
areas shut down after a major disaster to begin rebuilding of critical
industries is needed.
Additional Industry Security/Emergency Response Observations
Companies report that the U.S. Coast Guard did an outstanding job
in every area and on every level in responding to Hurricanes Katrina
and Rita. Considering its diverse and demanding portfolio, which
includes search and rescue, safety and security of ports and waterways,
vessel inspections and response plans, the Coast Guard continues to
provide the necessary leadership for a comprehensive and effective
Companies provided their own officers for their facilities'
protection in the affected areas and in support of their relief
efforts; local law enforcement priority was public health and safety.
Companies provided humanitarian response for their employees and
contractors in the high impact areas due to lack of other support and
response. Support was also provided to some police and other emergency
responders from company distribution sites.
ConocoPhillips provided fuel to National Guard and local government
(including police) in storm-affected areas. The company is working with
local hotels in storm-affected areas, providing generator power to
allow them to open up prior to the power grid being restored. The
hotels are being used to lodge response and repair crews.
ConocoPhillips has been operating a toll-free phone number for
employees since before Hurricane Rita. Employees are encouraged to call
the toll-free number to update the company on their welfare and status.
The company is offering financial assistance to employees displaced by
In general, need more coordination and more timely issue of
information about the situation on the ground.
Companies need assurances that materials intended for production
and delivery of gasoline, diesel, and other fuels necessary for
operation of emergency generators and vehicles would not be diverted
from their intended purpose.
Difficulty was experienced in getting air restrictions lifted in a
timely manner to fly over affected areas and operations to assess
damage to our facilities, although government agencies were requesting
III. GASOLINE PRICES AND RELATED ISSUES
Impact of Hurricanes on Gasoline Prices
We know that the effects of Hurricanes Katrina and Rita on our
industry are having a nationwide impact. We understand how Americans
throughout the country have faced increased prices for gasoline and
other fuels. However, we believe the market is working, as prices have
moderated in recent weeks and are now well under the post-Katrina
highs. What follows is background on two key components of the price of
gasoline: crude oil price and taxes.
Crude Oil Price. Before Hurricanes Katrina and Rita struck, the
price of gasoline was rising primarily because U.S. refiners are paying
more for crude oil, the principal cost component of a gallon of
gasoline. In fact, the Federal Trade Commission noted this exact point
in a report this July: ``To understand U.S. gasoline prices over the
past three decades, including why gasoline prices rose so high and
sharply in 2004 and 2005, we must begin with crude oil. The world price
of crude oil is the most important factor in the price of gasoline.
Over the last 20 years, changes in crude oil prices have explained 85
percent of the changes in the price of gasoline in the U.S.'' The crude
oil price is set in the international oil marketplace by the forces of
supply and demand for oil worldwide.
Tax Component. While more than half the cost of gasoline is for
crude oil, every time a motorist pulls up at the pump, he or she pays
46 cents in federal and state taxes per gallon of gasoline. The
remainder is the cost to refine and market the gasoline. The average
price of a gallon of regular gasoline reached $2.81 on September 27,
according to AAA. When the price of a barrel of crude oil is $66, as it
was at the end of September, a refiner paid about $1.57 per gallon for
the crude oil in order to make a single gallon of gasoline. As noted
above, taxes average 46 cents per gallon nationwide. The remaining 78
cents per gallon includes the cost of running refineries, transporting
the finished gasoline to markets via pipelines and tank trucks, and
operating retail outlets. The cost to refine, market and distribute
gasoline has been trending downward for many years. The recent price
spikes are a direct consequence of disruptions in crude oil and
gasoline supplies. (Attached is a chart showing combined federal, state
and local gasoline taxes for each state.)*
* The chart has been retained in committee files.
Our industry has never experienced back-to-back events like
Hurricanes Katrina and Rita and their brutal aftermath. The hurricanes
hit an industry that was already stretched to its limit by an
extraordinarily tight global supply and demand balance. As the U.S.
Energy Information Administration (EIA) noted in its September Short-
Term Energy Outlook, ``Continued high crude oil prices were expected
prior to Hurricane Katrina.'' Even before Rita hit the industry, EIA
anticipated crude oil prices to average between $67 and $69 per barrel
during the fourth quarter, depending on the pace at which damaged
facilities are restarted. The damage wrought by Katrina and Rita has
clearly exacerbated the very market conditions that have led to today's
Oil and gasoline prices jumped immediately after Katrina due to the
widespread damage to energy infrastructure, but have moderated slightly
as the industry restores operations. Oil prices rose to nearly $70 per
barrel, but have moderated somewhat to around $66 per barrel.
Similarly, the average price for gasoline nationwide jumped 46 cents
per gallon in the week after Katrina hit, rising from $2.65 to $3.11
per gallon. However, as companies restarted some affected refineries
and pipelines and the damage from Rita appeared less severe than
expected, gasoline prices moderated. As of September 27, nationwide
gasoline prices averaged $2.81 per gallon. Over the past week the
average price of gasoline has increased 12 cents per gallon to $2.97
Zero Tolerance for Price Gouging
In the aftermath of Hurricanes Katrina and Rita and their effects
on gasoline prices, some accused the oil and natural gas industry of
price gouging. Let me be clear and direct: the American Petroleum
Institute and its member companies condemn price gouging. There is zero
tolerance for those who break the law.
History provides an important guide here. Our industry has been
repeatedly investigated over many decades by the Federal Trade
Commission, other federal agencies, and state attorneys-general. None
has ever found evidence that our companies have engaged in any anti-
competitive behavior to drive up fuel prices.
The gasoline marketing system has the complexity and flexibility
required to meet the varying needs of both companies and consumers.
Companies have three basic types of outlet options and may employ any
and all in their marketing strategies to maximize efficiencies and
compete in the marketplace. First, they can own and operate the retail
outlets themselves (company owned and operated outlets). The second
option is to franchise the outlet to an independent dealer and directly
supply it with gasoline. This option may have three different forms of
property ownership: The operator can lease from the refiner, lease from
a third party, or own the outlet outright. The third option is to
utilize a ``jobber,'' who gains the right to franchise the brand in a
particular area. Jobbers can choose to operate some of their outlets
with their own employees and franchise other outlets to dealers. The
mix of distribution methods varies widely across firms. Different
refiners, depending on which type is perceived as most efficient, use
different types of outlets.
Retailers are typically categorized as branded and unbranded
sellers of fuel. Those who are retailers of unbranded gasoline
generally pay lower wholesale prices for gasoline and they attract
customers with generally lower retail prices. These retailers price
gasoline at retail based on an unbranded ``rack'' price. They typically
shop around in the marketplace, without any binding long-term
contracts, in order to obtain the best price. Understanding up-front
that there is a certain degree of supply and price risk associated with
this method of petroleum retailing, gasoline purchased by an unbranded
retailer and priced off an unbranded rack price thus entails no long-
term relationship or security of supply between buyer and seller. Most
importantly, unbranded purchases do not typically allow the purchaser
the use of the supplier's brand name.
In contrast, a branded retailer is obligated by a contract to buy
branded gasoline and pay a ``dealer tank wagon'' (DTW) price, which is
generally higher than the rack price. Branded product is typically
priced somewhat higher because it offers the dealer greater security of
supply and the right to use the supplier's brand name. This makes sense
when one considers the investment in the brand name and the importance
to both the supplier and retailer of assuring reliable and
uninterrupted supply to customers.
In periods of market tightness, however, when a supplier may not
have enough product to supply all branded dealers plus the
unaffiliated, unbranded buyers, the unbranded retailers, without supply
contracts, may pay higher wholesale prices than name-brand retailers.
This typically occurs when there is a supply disruption caused by a
pipeline or refinery breakdown--such as was caused by the two recent
Gasoline Prices and the World Oil Market
As noted above, prices are rising because of the forces of supply
and demand in the global crude oil market. Supply and demand is in a
razor-thin balance in the global market. Small changes in this market
have a big impact.
World oil demand reached unprecedented levels in 2004 and continues
to grow. Strong economic growth, particularly in China and the United
States, is fueling a surge in oil demand. The U.S. Energy Information
Administration (EIA) reports that global oil demand in 2004 grew by 3.2
percent--the strongest growth since 1978--and projects growth to
increase by about 2.1 percent this year and next. By comparison, world
demand between 1993 and 2003 grew at an average rate of 1.6 percent.
At the same time, world oil spare production capacity--crude that
can be brought online quickly during a supply emergency or during
surges in demand--is at its lowest level in 30 years. Current spare
capacity is equal to about 1 percent of world demand. EIA projects
spare capacity for 2005 at just over 1 million barrels a day. Thus, the
world's oil production has lagged, forcing suppliers to struggle to
keep up with the strong growth in demand.
The delicate supply/demand balance in the global crude oil market
makes this market extremely sensitive to political and economic
uncertainty, unusual weather conditions, and other factors. Over the
past several years, we have seen how the market has reacted to such
diverse developments as dollar depreciation, cold winters, the post-war
insurgency in Iraq, hurricanes in the Gulf of Mexico, the Venezuelan
oil workers' strike in 2002-2003, uncertainty in the Russian oil patch,
ongoing ethnic and civil strife in Nigeria's key oil producing region,
and decisions by OPEC.
While consumer concern about high gasoline prices is very
understandable, we must recognize that gasoline prices mirror crude oil
prices. Crude oil costs make up more than 50 percent of the cost of
gasoline. Retail gasoline prices and crude oil prices have historically
tracked, rising and falling together. When supply is abundant and
demand is low, we see the opposite of today's situation: only six years
ago, crude oil was selling at $10 per barrel--and gasoline was selling
for less than $1.00 a gallon.
We currently import more than 60 percent of the crude oil and
petroleum products we consume. American refiners pay the world price
for crude and distributors pay the world price for imported petroleum
products. U.S. oil companies don't set crude oil prices. The world
market does. Whether a barrel is produced in Texas or Saudi Arabia, it
is sold on the world market, which is comprised of hundreds of
thousands of buyers and sellers of crude oil from around the world.
There is considerable misunderstanding about the oil and natural
gas industry's earnings and how they compare with other industries. The
oil and natural gas industry is among the world's largest industries.
Its revenues are large, but so are its costs of providing consumers
with the energy they need. Included are the costs of finding and
producing oil and natural gas and the costs of refining, distributing
and marketing it.
The energy Americans consume today is brought to us by investments
made years or even decades ago. Today's oil and natural gas industry
earnings are invested in new technology, new production, and
environmental and product quality improvements to meet tomorrow's
energy needs. Oil & Gas Journal estimates that the industry's total
U.S. spending this year will be $85.7 billion, compared with $80.7
billion in 2004 and $75.5 billion in 2003. It also estimates that
exploration and production spending in the U.S. will grow 6 percent
this year and that total upstream oil and gas spending in the U.S. will
reach nearly $66 billion.
The industry's earnings are very much in line with other industries
and often they are lower. This fact is not well understood, in part,
because the reports typically focus on only half the story--the total
earnings reported. Earnings reflect the size of an industry, but
they're not necessarily a good reflection of financial performance.
Earnings per dollar of sales (measured as net income divided by sales)
provide a more relevant and accurate measure of a company's or an
industry's health, and also provide a useful way of comparing financial
performance between industries, large and small.
For the second quarter of 2005, the oil and natural gas industry
earned 7.7 cents for every dollar of sales compared to an average of
7.9 cents for all U.S. industry.\1\ Many industries earned better
returns in the second quarter than the oil and natural gas industry.
For example, banks realized earnings of 19.6 cents on the dollar.
Pharmaceuticals reached 18.6 cents, software and services averaged 17
cents, consumer services earned 10.9 cents and insurance saw 10.7 cents
for every dollar of sales. Last year, the oil and natural gas industry
realized earnings of 7 percent compared to an average of 7.2 percent
for all U.S. industry. Over the last five years, the oil and natural
gas industry's earnings averaged 5.7 cents compared to an average for
all U.S. industry of 5.5 cents for every dollar of sales.
\1\ Earnings equal profits divided by sales calculated from
``Corporate Scorecard,'' Business Week, August 22/29, 2005; and from
company financial reports for oil and natural gas figures.
Some are calling for reinstatement of a windfall profits tax as a
response to the nation's energy challenges. However, our industry's
earnings are hardly a ``windfall.'' Strong earnings enable our industry
to remain competitive globally, benefit millions of shareholders and
enable the industry to invest in innovative technologies that improve
our environment and increase energy production to provide for America's
future energy needs. Levying new taxes would likely end up harming
consumers. As The Wall Street Journal editorialized recently, (``China
Does Carternomics,'' August 19), ``A windfall profits tax only
discourages increases in supply by disincentivizing further
According to the Congressional Research Service (CRS), the windfall
profits tax drained $79 billion in industry revenues during the 1980s
that could have been used to invest in new oil and natural gas
production. In fact, 1.6 billion fewer barrels of oil were produced
domestically due to the windfall profits tax--barrels that instead had
to be secured from foreign sources. CRS found that the tax reduced
domestic oil production from between 3 and 6 percent, and increased oil
imports from between 8 and 16 percent.
Gasoline Prices: What Can Be Done?
The solution to high gasoline prices is more supply of crude oil
and gasoline and less demand, but there is no simple strategy to make
that happen. The United States is at a critical turning point in
shaping its future energy policy. The legislation signed by the
President signals a first step in a much-needed effort to enhance
energy security and ensure the reliable delivery of affordable energy
to consumers. But much remains to be done.
The problems we face are very real: growing world demand for energy
at a time when many oil-producing countries around the world are
increasingly limiting or restricting our industry's access to new
resources; a lack of national commitment to develop our abundant
domestic energy resources and critical infrastructure; and scant
attention to energy efficiency. These factors have resulted in a tight
supply/demand balance for U.S. consumers, causing recurring price
spikes, greater market volatility, and overall strain on the nation's
energy production and delivery systems.
Energy demand continues to grow. The Energy Information
Administration (EIA) forecast that by 2025, U.S. energy consumption
will increase by 35 percent, with petroleum demand up by 39 percent and
natural gas up by 34 percent. These demand increases occur despite
expected energy efficiency improvements of 33 percent and renewable
energy supply increases of 41 percent.
Additional EIA forecasts point out our basic problem: Domestic
energy supplies are not keeping up with increased demand; and we are
relying more and more heavily on imports to meet our energy needs. EIA
projects that U.S. crude oil production will fall by 17 percent by 2025
(assuming no production from ANWR), while crude oil imports will
increase by 67 percent, and net petroleum product imports increase by
90 percent. Given these trends, it comes as no surprise that EIA
forecasts that our nation's dependency on foreign sources of petroleum
will rise from 59 percent today to 68 percent in 2025.
This increase, to the extent that it reflects import costs lower
than domestic supply costs, would represent a gain from trade which
should be encouraged. However, when we have resources that can be
developed at prices competitive to imports, and we choose not to do so,
we place a wasteful and unnecessary burden on our own consumers.
In fact, we do have an abundance of competitive domestic oil and
gas resources in the U.S. According to the latest published estimates,
there are more than 131 billion barrels of oil and more than 1000 TCF
of natural gas remaining to be discovered in the U.S.
However, 78 percent of this oil and 62 percent of this gas are
expected to be found beneath federal lands and coastal waters.
Federal restrictions on leasing put significant volumes of these
resources off limits, while post-lease restrictions on operations
effectively preclude development of both federal and non-federal
resources. The most comprehensive study of the effects of such
constraints was the 2003 National Petroleum Council study of natural
gas, which included an analysis of federal constraints on U.S. gas
supply in two key areas--the Outer Continental Shelf (OCS) and the
Rockies. The study found that in key areas of greatest supply
potential, federal policy precludes or seriously constrains
development. For instance, of the 209 TCF of estimated undiscovered gas
in the Rockies, 69 TCF is completely off limits, while another 56 TCF
is seriously constrained by federal policy. On the OCS, the entire
Atlantic, Pacific, and most of the Eastern Gulf of Mexico are off
limits to development. Furthermore, the study found that sustaining
these constraints over the next 20 years would cost U.S. consumers more
than $300 billion in increased energy costs.
We are aware that opponents of oil and natural gas development
still raise environmental concerns. However, we would point out that
history provides overwhelming evidence that our industry can find and
develop oil and natural gas resources safely and with full protection
of the environment, both on land and offshore. For example, according
to the U.S. Coast Guard, for the 1980-1999 period, 7.4 billion barrels
of oil were produced in federal offshore waters, with less than 0.001
percent spilled. That's a 99.999 percent record for clean operations--a
statistic few others can likely match or best, and far less than the
volumes of natural seeps that occur on ocean and gulf floors. The
industry's leak prevention performance in offshore production during
Hurricanes Ivan, Katrina and Rita continues this remarkable
Using advanced technology and sound operational practices, our
industry has steadily reduced the environmental impact of oil and gas
development, both onshore and offshore. The surface presence for
exploration and development wells has shrunk significantly. For
example, a drilling pad the size of Capitol Hill is all that is needed
to access any oil reserves that might exist in the entire 68.2 square
mile District of Columbia. Horizontal and directional drilling now
enables our industry to drill multiple underground wells from a single
pad, sometimes reaching sites as far away as 10 miles from the drilling
Additionally, the U.S. oil and natural gas industry is among the
most heavily regulated industries in our country. Every lease contains
a standard stipulation to protect air, water, wildlife and historic and
cultural resources, but leases may also include any number of
additional stipulations to further protect resources.
The recently enacted energy legislation takes a positive step by
requiring an inventory of OCS oil and natural gas resources. It will
not, by itself, result in new energy supplies.
We need to build on the energy legislation by encouraging the flow
of more natural gas and oil to the marketplace. And, while we must
focus on producing more energy here at home, we do not have the luxury
of ignoring the global energy situation. In the world of energy, the
U.S. operates in a global marketplace. What others do in that market
For the U.S. to secure energy for our economy, government policies
must create a level playing field for U.S. companies to ensure
international supply competitiveness. With the net effect of current
U.S. policy serving to decrease U.S. oil and gas production and to
increase our reliance on imports, this international competitiveness
point is vital. In fact, it is a matter of national security.
We can no longer wait 12 years, as we just did, to address our
nation's energy policy. The energy legislation is a foundation, but it
must be built upon. More needs to be done and more quickly,
particularly increasing access to offshore resources. We have the
ingenuity, the technology, and environmental protections. If enactment
of the energy legislation means we have a commitment to continued
action, then it will truly be a turning point in reshaping U.S. energy
We cannot understand or deal with high gasoline prices if we do not
consider the state of refineries in the United States. During the
1980s-90s, the oil industry earned relatively poor rates of return on
their investments. This was especially true in the refining sector,
which was hard hit with the need for new investment in technology and
equipment to produce cleaner burning fuels to meet clean air standards
set by the Clean Air Act of 1990. The Act had a major impact on the
operation of refineries in the U.S. and the return on investment
realized at the time.
From 1994 to 2003, the industry spent $47.4 billion to bring
refineries into compliance with environmental regulations. That
included $15.9 billion in capital costs and $31.4 billion in operations
and maintenance costs to comply with regulations covering air, water
and waste rules. Moreover, by 2010, the U.S. refining industry will
have invested upwards of $20 billion to comply with new clean fuel
regulations. This is an addition to the cost of compliance with many
dozens of other environmental, health, safety and security regulations.
All this investment severely reduces the funds available for
discretionary capacity expansion projects.
Technological advancements have helped refineries produce more from
existing facilities than they did in the past. Refineries are doing a
better job of bringing product to market for less--and the consumer has
benefited. Even though a new refinery has not been built from scratch
in 30 years, existing refineries are continually being upgraded and
reworked to improve efficiency. Inefficient process units are replaced
and new units are built to provide more fuel processing flexibility.
We can see this in the decline in the refiner/market margin
(measured as the difference between the retail price of gasoline minus
taxes and minus the refiner's composite crude oil price). Back in 1980,
the cost to refine and market and distribute gasoline averaged about 95
cents per gallon (in inflation-adjusted terms). By 1990, it averaged
more than 61 cents per gallon, and, by 2000, it was 52 cents per
gallon, which is about where it has averaged over the last five years.
Multiplying these reductions by the 330 billion gallons of petroleum
products consumed translates into billions of dollars of savings for
consumers. We all benefit every day from these improvements and
The Need to Remove Refinery Capacity Constraints
The record-high gasoline prices, while primarily caused by
increased crude oil prices and exacerbated by Hurricanes Katrina and
Rita, have underscored the fact that U.S. demand for petroleum products
has been growing faster than--and even exceeds--domestic refining
capacity. While refiners have increased the efficiency, utilization and
capacity of existing refineries, these efforts have not enabled the
U.S. refining industry to keep up with growing demand.
The fact is that--faced with increasingly more challenging fuels
regulations--only major refineries have the resources needed to expand
their capacity. Smaller refineries are increasingly unable to afford to
expand. Moreover, local opposition and not in my backyard (NIMBY)
attitudes persist and prevent new refineries from being constructed.
The U.S. refining industry has been expanding at a rate of
approximately 1 percent over the past decade--the equivalent of a mid-
size refinery. In order to create the opportunity for increasing the
growth of U.S. refinery capacity, government policies are needed to
create a climate conducive to investments to expand domestic refining
In addition, many of the steps the federal government could take to
help the refinery capacity situation are covered in the December 2004
National Petroleum Council (NPC) study, Observations on Petroleum
Product Supply--A Supplement to the NPC Reports ``U S. Petroleum
Product Supply--Inventory Dynamics, 1998'' and ``U.S. Petroleum
Refining--Assuring the Adequacy and Affordability of Cleaner Fuels,
2000.'' For example, that NPC study suggested that the federal
government should take steps to streamline the permitting process to
ensure the timely review of federal, state and local permits to expand
capacity at existing refineries.
New source review regulations could be reformed to clarify what
triggers these reviews. Some refineries may be able to increase
capacity with relatively minor adjustments, but are unsure if the
entire facility's permit review would be triggered--a burdensome and
In addition to the myriad of other issues deterring new refining
capacity investments, there are financial constraints as well.
Attracting capital for new refinery capacity has been difficult with
refining rates of return historically averaging well below the average
for S&P Industrials. Over the 10-year 1994-2003 period, the return on
investment for the refining and marketing sector was 6.2 percent or
less than half as much as the 13.5 percent for S&P Industrials. In only
one year between 1977 and 2003 did the average return of refiners
exceed the average for the S&P Industrials.
It is important to remember that the oil and natural gas industry
operates in a global marketplace. Many oil and gas companies are global
companies, whose U.S. investment decisions compete not only with
decisions as to how to allocate capital investments in the U.S. among
various sectors of the industry, but also with competing demands and
investment needs overseas. In a global marketplace, companies will make
the best economic investment decisions in order to bring affordable
petroleum products to consumers. Imports may be the more economical
option than new U.S. refineries, but that is a decision to be left to
the global marketplace. Government policies must encourage, not
interfere with, the global marketplace.
The U.S. oil and natural gas industry recognizes the catastrophic
impact that Hurricanes Katrina and Rita have had on millions of
Americans and our industry is working with government and others in the
private sector to do all we can to alleviate their suffering.
If we all do our part--industry providing supplies and repairs as
expeditiously as possible, government facilitating needed approvals,
and consumers adjusting their driving habits to consume less fuel--
Americans can overcome this challenge as we have others in our nation's
The Chairman. Thank you very much.
Let us proceed then to senior vice president of programs,
National Environmental Trust, Kevin Curtis. Thank you for
STATEMENT OF KEVIN S. CURTIS, SENIOR VICE PRESIDENT FOR
PROGRAMS, NATIONAL ENVIRONMENTAL TRUST
Mr. Curtis. Thank you very much for having me here. I have
had the pleasure of working with this committee for 25 years,
my entire career in Washington, and it is truly an honor to be
here testifying. It is also a terrible shame that the topic of
the hearing is the impact of hurricanes Katrina and Rita.
In my testimony, I will try to touch on a couple of points
related to the environmental and public health impacts of the
hurricanes and then three policy points as it relates to energy
policy. I will not even try and describe the devastation that
you have seen and that these gentlemen whose companies are
working on. They are doing a terrific job. We thank them. It
needs to be dealt with. Again, I just cannot put words to it.
What I can try to touch on, though, is from an
environmental and public health perspective, the biggest threat
facing people is from the toxics and pollutants that they will
be dealing with as they move back into the area, both the first
move back, then cleanup, and then get on with their lives.
Those pollutants will be in the air, the soil, the water, and
the fact is we simply do not know where they are yet. So I
think the appropriate governmental response in such a situation
is to go overboard in terms of providing testing and
information to people about what you know and about what you do
not know is in the air.
Fortunately, the Government has a lot of experience in this
area from Superfund, from Brown Fields, from some of the DOE
cleanup efforts that this committee has overseen over the
years, and I think those lessons should be learned from and
applied to government efforts to fund the cleanup and convince
people that it's safe to live there--not convince them, but be
assured that it is safe.
The second point I would like to make related to the
cleanup effort is there is an opportunity here. There is an
opportunity to rebuild using the best lessons learned for
energy efficiency, building smarter, and many of the other
topics that fall under the heading of sustainable development.
NET and the rest of the environmental community would strongly
encourage Congress to direct and mandate that the rebuilding
efforts incorporate these lessons so that the rebuilt gulf
region can become a model for the future rather than an example
of the many problems associated with industrial and energy
development from the past.
Now my policy recommendations.
Energy policy. This is the golden moment, if you will, for
energy efficiency and conservation. I have watched the debates
for 25-plus years, and I cannot remember an occasion when
industry, government, both Congress and the administration, and
the environmental groups are all in massive agreement about the
role of energy efficiency and conservation. It is the only
short-term tool we have available to us to help this Nation get
through this crisis.
So I think the challenge to this committee and to others,
including the environmental community, is to seize this moment
and not let it pass by, not let it simply be a 2-week PR effort
by the administration or others. The ads are great, but the ads
have to be followed up by action. They have to be followed up
by full funding of the energy conservation and renewables
efforts laid out in the act you passed a couple months ago. We
need to monitor it and this committee needs to hold the
Department of Energy accountable. Again, it is more than just
PR. It is a good start, but there are appliance efficiency
standards that need to be met. There are people that need to be
hired. That needs to happen.
For the long term, I would not be doing my job as an
environmentalist if I did not say this committee, which does
not have the jurisdiction, can lead the way in Congress to deal
with the issue of automobile fuel efficiency. 70 percent of our
Nation's oil goes to the transportation sector. It is just an
embarrassment to this country that we do not have a policy in
place that will mandate significantly higher levels of fuel
efficiency for our Nation's consumers and businesses. They will
help the farmers in Montana. They will help everybody.
The second policy point is over in the House of
Representatives, there is currently an effort to address the
refinery issue by rolling back many of the clean air laws. We
simply do not believe that is the appropriate response. This
Nation clearly does need more refinery capacity, but I think by
no means are environmental laws the reason we have not had an
increase in refinery capacity. In fact, I think business and
industry should be commended for having taken the rational
economic steps in the last 10-15 years by consolidating
operations, by becoming more efficient, by getting more
production out of a fewer number of refineries. That is
terrific. That was the right thing to do.
It is now time to build more refineries. A silver lining
for industry, if you will, out of the last 2 years is profits
are high. There is lots of money in the system. There is no
reason, I believe from an environmental group perspective, that
refineries cannot be built and should not be built, but they
should meet all existing laws and they should actually stand
out as a model for the future, involving the best technologies
and really be built with the state-of-the-art technology mind
Finally, let me just conclude by asking this committee to
be thoughtful and careful, as you always are, in your
deliberations. There is an old maxim that to go fast, you must
go slow. This is that time. Just 2 months ago, this committee
and its members participated in the signing ceremony for an
energy bill that took 5 years to pass. Two months later, many
people are talking about energy bill two. Now is not the time
to do that. Now is the time to implement that energy bill and
find some short-term efforts to work on, the one place being
energy efficiency and conservation.
Let me stop with that. Thank you.
[The prepared statement of Mr. Curtis follows:]
Prepared Statement of Kevin S. Curtis, Senior Vice President for
Programs, National Environmental Trust
Thank you very much for the opportunity to testify in front of this
committee. I first worked with this committee in the mid-1970's when I
was a very young political appointee at the newly created Department of
Energy representing the Carter administration to Congress during the
debate over the Synfuels Corporation, Windfall Profits Tax Act, Energy
Mobilization Board and the various other titles of that decade's
comprehensive energy package. Every decade since then, I have observed
and/or participated in the renewed efforts at setting national energy
policy by the administration and Congress. I have drawn as much from
that experience as from my current position with the National
Environmental Trust for this testimony.
The National Environmental Trust is a non-profit, non-partisan
organization established in 1994 to inform citizens about environmental
problems and how they affect our health and quality of life. NET's
public education campaigns use modern communication techniques and the
latest scientific studies to translate complex environmental issues for
citizens. Furthermore, NET works in states across the country to
localize the impacts of national problems, as well as to highlight
opportunities for Americans to engage in the policymaking process.
Energy policy has been an important area of focus for NET since its
inception because of its far reaching implications for the environment.
Katrina is certainly among the worst environmental catastrophes to
befall our country and its citizens. The human toll is tremendous and
the physical damage is only now starting to be truly catalogued and
understood. In other words, it is much too early to make definitive
statements about the ultimate scope of this disaster. That said, part
of my charge for this testimony was to address the environmental
impacts of the storm, which I have tried to do below with an eye
towards our nation's energy infrastructure and policies.
I would also like to make three energy policy points in my
testimony today. First, a focused commitment to energy efficiency and
conservation is the most effective and least utilized option available
to this country to deal with the short and long term energy issues
facing us. Second, waivers of existing law, including environmental
statutes, are not a trivial exercise. The cacophony of waivers being
proposed for post-Katrina energy infrastructure building and rebuilding
efforts are neither necessary nor justified. Third, don't jump on the
``Energy Bill II'' mentality that seems to be driving much of the
current debate in the House of Representatives.
brief summary of the environmental impact of the hurricanes
As noted above, Katrina ranks as one of the nation's largest
environmental catastrophes due to natural disasters. I have listed
below a few statistics and anecdotes designed to help convey the scale
of its impact:
At least seven million gallons of oil were spilled from
known, identifiable sources. Estimates add another one to three
million gallons from disparate sources. By way of comparison,
the Exxon Valdez spill released 11 million gallons.
Early estimates of the amount of debris to be disposed of
range up to 100 million cubic yards. Such an amount would be
enough to cover 1,000 football fields 50-feet deep in waste.
Up to 350,000 automobiles are estimated to have been ruined
due to the flooding.
In the flood's aftermath, the primary threats to public health are
posed by exposure to pollutants and toxic materials in the air, soil,
water as well as the general muck being cleaned up. These pollutants
come from a wide variety of sources, including energy production,
refining and infrastructure facilities.
Another potentially major source of pollution seems to be the
sediments from the bottom of various lakes, canals, and other waterways
that were stirred up and distributed by the flood waters. A
considerable amount of pollutants appears to have been stored in these
A future potential source of pollutants and toxics is likely to
arise from the ultimate disposal of the debris from the storm. Early
estimates of this waste are simply mind-boggling. Whether it is burned
or buried, there are major environmental and public health implications
and concerns that must be factored into the upcoming disposal
Given this tremendous amount of uncertainty, it strikes me that the
most prudent course of action by the government is to spend a
considerable amount of time and resources sampling and monitoring the
environment in New Orleans and the rest of the impacted Gulf region.
Furthermore, there is clearly a need for this monitoring to be done in
as transparent and inclusive a manner as possible, so that all the
citizens of the region can feel comfortable with the conclusions. The
EPA and CDC have considerable experience through the Superfund and
other programs in involving impacted citizens and communities in the
monitoring of their immediate environment for toxic and chemical
pollutants. Such a monitoring effort must also take into account the
environmental justice concerns due to the demographics of those left
most vulnerable by the region's prior chemical and petroleum industry
ENVIRONMENTAL OR ECOLOGICAL ISSUES
In addition to the storm's well publicized impact on wetlands and
the general consensus that rebuilding and restoring the wetlands is an
important part of preparing for the future, the impact on the region's
fisheries is also starting to emerge. Just this week, NOAA's Fisheries
Service declared a fishery failure for Texas and Louisiana following
Hurricane Rita, with a similar declaration made in the wake of
Hurricane Katrina extending from Pensacola, Florida to the Texas/
Louisiana border. This disaster declaration authorizes assistance to
assess the impacts and assist fishermen, but we have yet to determine
the extent of the storms' impacts on the marine ecology of the Gulf.
There are high levels of bacteria present in the water, and testing
continues to determine the extent to which oil and other toxics may be
impacting Gulf fisheries. Because some pollutants accumulate in
sediments or are persistent and tend to build up over time, it may be
months before we are aware of the full impact on the marine species in
Only extensive long-term monitoring will ensure that we have the
most accurate assessments, and it is critical that Congress considers
the cost of monitoring and assessment programs on NOAA's budget,
particularly in light of the budget cuts proposed for NOAA in the House
version of the fiscal 2006 appropriations bill.
THE PROMISE AND POTENTIAL OF ENERGY EFFICIENCY AND CONSERVATION
I will not attempt to recreate in my testimony all the information,
arguments and policy proposals in support of energy efficiency and
conservation that have been provided to this committee during the past
five years of congressional debate on energy. (Instead, please find
attached a reasonably thorough review of recent recommendations by a
variety of groups focused on energy efficiency and the environment.)
Rather, I would like to underscore the rather remarkable political
situation we find ourselves in today, where the entire range of
stakeholders in energy policy seems to be in agreement about the need
for conservation and an increased focus on energy efficiency. Just this
week, the nation's leading newspapers printed full page advertisements
from the American Petroleum Institute, Chevron Oil Company and other
major players in the oil and gas industry extolling the virtues of
conservation. On Tuesday, a headline in the Washington Post business
section announced, ``White House Renews Call for Conservation.''
Senators Domenici, Bingaman and others on this committee have all
issued public statements over the past month noting the importance of
energy efficiency and conservation. This is the moment in time to
actually turn the promise of energy efficiency and conservation into
Beginning today, you can accomplish this by using the authority of
this committee to educate the rest of Congress, the press and the
public about the immediate gains available from increased efficiency
and conservation. For the longer term, you can pursue and build the
legislative record and political support necessary to establish
additional incentives for the adoption of energy efficiency and
conservation policies. As you well know, the most fundamental challenge
facing efficiency and conservation is that the powerful array of energy
suppliers tend to view energy efficiency as a revenue loser even though
our nation's consumers and businesses would benefit from it. And while
I certainly appreciate and applaud the fact that oil companies and
their trade association are preaching conservation, I would not expect
their shareholders to encourage them to stay with that position for an
extended period of time. After all, they are in the business of
producing and selling oil and natural gas.
A very concrete way in which this committee can help promote energy
efficiency is to hold the US Department of Energy accountable for it's
track record on energy efficiency. Recent PR efforts notwithstanding,
the department's track record is rather poor in this area. Examples
include: 1) the department has so lagged in implementing the appliance
efficiency standards that it's being sued, 2) just last week, the DOE
supported rolling back energy efficiency standards for new building
construction and 3) the department was stopped from rolling back
efficiency standards for air conditioners only by court order. I would
be much more optimistic about its recent commitment to energy
efficiency if its leadership were to announce a large scale public
education campaign at the funding levels authorized by the energy bill
and it planned to hire the additional staff necessary to finalize the
pending appliance efficiency rules.
It is one thing for the administration to opposed regulations for
energy efficiency on philosophical grounds. Yet its record on energy
efficiency technology R&D is also disappointing. EOS's FY 2006 budget
request for spending is significantly lower than the amount authorized
by the new energy bill. In order to take advantage of the unique
political opportunity facing them, congress and the administration must
pursue an aggressive agenda to expand the pipeline for new energy
technologies that represent the real and long-term solutions to our
Finally, I would be remiss if I did not mention the need for
increased efficiency from our automobile and truck fleets.
Transportation accounts for approximately 70% of our nation's oil use,
and it is a national embarrassment that we have not significantly
adjusted CAFE standards for close to 20 years. Not only will adopting
significantly higher fuel efficiency standards help consumers at the
gasoline pump, but it will contribute to our national security by
reducing our reliance on imported oil. Moreover, there is ample
evidence to suggest that adopting these technologies is also key to the
survival of the U.S. auto industry. I have attached a recent NET-
sponsored study documenting the potential employment gains available to
the domestic industry by producing more fuel efficient vehicles. Now is
the time for Congress to exert leadership on this issue.
CONCERNS ABOUT H.R. 3893 AND THE LARGER ISSUE OF ENVIRONMENTAL WAIVERS
The House of Representatives is scheduled to consider this coming
Friday, a bill, H.R. 3983, that passed out of the Energy and Commerce
Committee last week. This bill, and its companion from the House
Resources Committee, represent a blatant attempt by the chairmen of
those committees to exploit the genuine public concerns about high
gasoline prices following Hurricanes Katrina and Rita to pursue
legislative goals that were rejected just months ago in the House-
Senate energy conference committee process.
Fortunately, the Resources Committee bill has already run into
political difficulties in the House, as 25 of the 27 members of the
Florida delegation objected to the offshore drilling provisions
contained in the legislation. Unfortunately, H.R. 3893 appears to be
moving ahead. While I have attached a detailed critique of the
legislation by the environmental community for your review, I would
like to touch upon a few of the more objectionable aspects of this
legislation in hopes of convincing the Senate to avoid its pitfalls.
KEY CRITICISMS OF H.R. 3983
1. Backers of the bill often suggest that environmental regulations
are to blame for our current shortfall in refining capacity. This
premise is flawed. The U.S. is facing limits on its refining capacity
largely because over the past few decades the refining industry has
been a mature, low profit-margin business. Consequently, it was
significantly more profitable to consolidate operations and increase
the output at existing refineries than to build new refineries. The
attached fact sheet documents the industry's success at increasing
production while at the same time reducing the number of refineries. It
is clearly time for industry to build new refineries, and there is no
doubt that oil companies have the financial resources to build new,
state-of-the art facilities while complying with all applicable laws.
2. The environmental waivers contained in the bill are too broad
and pose a significant public health risk. For example, the delays
contained in Section 109 (Attainment Dates for Downwind Ozone Non-
attainment Areas) will result in the following additional public health
problems, according to Abt Associates, EPA's leading air pollution
consulting firm. For each year of delay, the nation will experience an
387,000 or more asthma attacks
Almost 4,900 hospitalizations due to respiratory distress
573,000 missed school days
3. The legislation would also essentially eliminate the New Source
Review program for up to 20,000 facilities (Sec. 106); undermine the
diesel rule that was successfully negotiated between the Bush
administration, diesel engine manufacturers and the environmental
community several years ago (Sec. 108); and arbitrarily limit the
number of cleaner burning, boutique fuels to six (Sec. 108).
CONGRESS SHOULD NOT RUSH INTO A ``NATIONAL ENERGY POLICY II''
Less than three months ago the President signed the National Energy
Policy Act of 2005 into law. This legislation took over five years to
pass and contains a wide range of provisions designed to promote the
oil, gas, coal and nuclear power industries. It also contains a major
new initiative for biofuels, but provides far less support for
renewables and energy conservation. According to a recent report I
read, the legislation contains over 500 congressionally mandated
deadlines for everything ranging from studies to regulations. Nothing
in these 500 directives or the legislation as a whole, however, would
meaningfully increase in fuel efficiency standards for cars and trucks,
establish a renewable portfolio standard or address global warming. I
raise this not to cover old ground but rather to point out a new
opportunity. The ink is not even dry on the latest national energy plan
and nothing I have seen indicates that the political dynamic has
changed for the very important but politically difficult issues that
did not make it into the national energy plan, with one key exception--
energy efficiency and conservation.
Energy efficiency and conservation are now ``in.'' It would be a
major contribution by this committee to our nation's future if you were
to focus your prestige and political strength on ensuring that this
attention is not fleeting and that meaningful commitments to energy
efficiency are actually adopted.
* All attachments have been retained in committee files.
The Chairman. Thank you very much.
The president and CEO of Dow Chemical. Let me repeat we had
a very good visit. We were sorry we could not spend more time.
We want to publicly commend your company for all the work that
was done to preserve life, to take care of your workers, and to
do everything possible to maintain the facility in a method and
manner that it could be opened as soon as possible. It was also
a pleasure to see the modern facilities. Many think that the
kinds of things you do are very risky and dangerous and have
heavy pollutants. What we saw were very, very modern facilities
with all the pollution controls you could imagine. We are very
worried that with all that, you are now as good as there is in
the world, but the price of natural gas may be the negative
trump card over all those good things. We welcome your
testimony here today.
STATEMENT OF ANDREW LIVERIS, PRESIDENT AND CEO,
DOW CHEMICAL COMPANY, MIDLAND, MI
Mr. Liveris. Thank you, Chairman Domenici. I burst with
pride at your words and I will transmit them to our people.
Thank you for your visit with Senator Bingaman and Senator
As you say, I am Andrew Liveris, CEO of the Dow Chemical
Company. Dow has been in business since 1897 and is the world's
leading manufacturer of chemicals and plastics around the
world. I thank you for the opportunity to testify here on
behalf of our company, but also the American Chemistry Council
which employs 900,000 people and is responsible for $500
billion of value-add in our economy here in the United States.
We are also here testifying on behalf of the Consumers Alliance
for Affordable Energy and Natural Gas.
Let me start by saying, where the chairman left off, that
my heart and the hearts of all our people in our industry go to
the victims of Katrina and Rita. The devastation was first a
human tragedy and, second, an economic challenge for this great
Our priorities have been to help our employees and our
communities recover and to ensure that our facilities return to
safe and normal operations. Texas and Louisiana are home to 81
percent of Dow Chemical's production in the United States, and
11,500 of our people reside there, over half of our employee
base in the country.
The hurricanes' disruptions will be, indeed, short-term.
Our company will recover. Our communities will rebuild. The
American spirit is alive and well. Our industry will continue
to produce the products that are essential to the quality of
our lives. And a far greater threat, as the chairman has noted,
to the U.S. chemical industry and to the entire U.S.
manufacturing sector is the serious vulnerability that this has
posed to the Nation's energy supply.
We say it unequivocally, the United States is in a natural
gas crisis. The hurricanes have dramatically underscored the
problem, but they did not cause it. Dow, the ACC, and others
have spoken repeatedly of the supply/demand imbalance that is
at the root of this crisis, actually since the year 2000. The
price of natural gas, once $2 per million Btu, as noted, closed
yesterday at $14. If that was put in gasoline terms, the
gasoline price at the pump would be $7 a gallon right this
minute, and we are all alarmed at $3, as you well know. This
price of $14, simply put, renders the entire U.S. chemical
industry uncompetitive. And why? Because we not only use it as
a fuel, we use it as a raw material. We simply cannot compete
with the rest of the world at these prices. It undermines all
U.S. manufacturing because we supply all of U.S. manufacturing.
Today energy and raw materials in my company constitute 50
percent of my costs, the highest in our history. Even though we
have improved our energy efficiency by 42 percent since 1990,
we have raised our prices. We have shut down 23 inefficient
plants in North America since 2002. We and others are now
investing in China and the Middle East where energy is much
cheaper to our incredulity. In short, in a very short time, we
know we will rehabilitate. Our company, our industry will
continue to grow. It is simply a question of where we will
Two weeks ago, I went to Louisiana to survey our sites. I
met with our people there. Many of them lost their homes and
more to Katrina. They came back to work. They kept our plants
safe. They worked around the clock to bring them back on line.
They did the heroics. They made the products that are essential
to restore the communities and to the rebuilding of the area.
These are hardworking people. They earn wages and salaries far
higher than in any other industry, $70,000 a year on average
for every worker.
They are counting on me to secure their jobs and to retain
our strong presence in this country. As their leader, I am
going to do everything in my power to make that happen. Yet,
when faced with a choice of investing in the United States at
$14 gas versus $2 to $3 elsewhere, how can I recommend
Dow does not face this decision alone. There are 120 world-
scale chemical plants being built around the world with price
tags of $1 billion or more, only one in this country. China
alone has 50.
Congress can make America competitive again. The Energy
Policy Act of 2005 was a great start. I commend you all for it,
but more can be done.
And our policy recommendations. Four of them.
Promote environmentally responsible production in the Outer
Continental Shelf, giving coastal States a greater role, and
sharing new production revenues with them.
Two, expedite development in Sale Lease 181, at least for
areas greater than 100 miles off the Florida coast.
Three, declare a national emergency, as the Energy
Secretary did and the President did this week, that mobilizes
every American to save energy.
And four, assure that the most efficiently generated energy
is dispatched to the power grid first.
Our written testimony has many more things.
Let me say in closing that everywhere I go, the Middle
East, Asia, the government wants our industry. They want the
investments. They want the high-paying jobs that go with it.
They want the science graduates. They want the living
standards. Everywhere I go except here. This cannot be the
Tomorrow I am leaving for China where they have put in
place a sound energy policy. I urge us all to take the next
step and build on the great Energy Act of 2005 so we can keep
investing in this great Nation. Thank you, sir.
[The prepared statement of Mr. Liveris follows:]
Prepared Statement of Dow Chemical Company
SECTION I--INTRODUCTION AND EXECUTIVE SUMMARY
``After Katrina we got a call from a bottled water company in
the South scrambling to get some HDPE (high density
polyethylene plastic). His regular supplier curtailed him. He
needed the plastic to make bottles so he could supply bottled
water to FEMA. Our Louisiana plants were still restarting, gas
supply was curtailed and we were closing our TX plants in
anticipation of Rita. We couldn't help him.''
--Chemical Company Executive Located in
The Dow Chemical Company and the American Chemistry Council welcome
the opportunity to provide the Committee with an update on Hurricanes
Katrina and Rita's effects on energy infrastructure and the status of
recovery efforts in the Gulf Coast region.
This topic is of acute interest to the US chemical industry because
the Gulf Coast is home to the world's largest concentration of chemical
manufacturing capacity. The Gulf is to chemical manufacturing as Wall
Street is to finance.
The chemical industry has been operating in the Gulf for more than
seven decades. Our engineers and operators are experts in hurricane
preparedness. Plants are designed and built to withstand Category Five
storms. All members of the American Chemistry Council (ACC), under our
trademark health, safety, environment and security program, Responsible
Care', have long-established hurricane plans that operate
before, during and after storms. Facilities cooperate with local, state
and national authorities, other businesses and transportation systems,
along the path of the storms and through recovery. Companies will
evaluate and enhance those plans to incorporate learnings from Katrina
and Rita as part of their ongoing performance improvement process.
Typically, these emergency plans include the safe shutdown and
lockdown of facilities, removal of vehicles and other equipment,
evacuation and accounting of employees, and placement of emergency
``ride-out'' crews on-site, when feasible. We then carefully assess
post-storm conditions to allow facilities to resume operations safely.
Having said that, our industry has also been severely damaged by
the hurricanes. Not by the high winds and not by the storm surges and
floodwaters, but by the high cost and limited availability of natural
Natural gas is of vital importance to our industry. It heats and
powers our facilities, but it is also our most important raw material.
We process natural gas molecules into thousands of products that can be
found everywhere in the economy.
Today, most chemical plants in the Gulf Coast are closed or are
operating at reduced rates. For some, it is because they are without
power. For others, they have been cut off from their gas supply or they
are choosing not to pay today's prices. Soon the loss of chemical
manufacturing in the Gulf will ripple through the economy in the form
of shortages and higher prices.
The industry faces hard choices on how and where it will base its
operations in the future. On September 30, 2005 the wholesale spot
price of natural gas was $14.50 per MMBtu. In Europe natural gas costs
about $7.00. In China, it's less than $5.00. In Saudi Arabia, it's less
than $1.00. US manufacturers must compete in global markets. Companies
must decide where to locate production, where to locate jobs, where to
pay taxes and support communities. When US production costs two to
twenty times more than it does in the rest of the world, it is hard to
justify investing in America.
Public policy makers will exert enormous influence on how those
decisions are made. It is well documented how certain policies bid up
demand for natural gas to make electricity in the US and other policies
restrict access to supply. What is not as well known is that the
manufacturing sector pays the price for those policy decisions. In the
recent past, policy decisions costs the US chemical industry dearly.
Policy induced price gyrations between 2000 and 2005 handed overseas
chemical operations a huge competitive advantage: The US chemical
industry went from posting the largest trade surpluses in the nation's
history in the late 1990's to becoming a net importer. In that time,
the industry lost more than $50 billion in business to overseas
operations and more than 100,000 good-paying jobs in our industry have
disappeared. The National Association of Manufacturers reports that 2.9
million American manufacturing jobs disappeared in that time.
Policy makers are again in a position to influence the US
manufacturing environment. The short-term outlook for natural gas
consumers is grim. Until very recently, government officials had
severely underestimated the combined impact of the two hurricanes
(especially Rita) on the nation's energy infrastructure. As of this
writing, nearly 100 percent of the Gulf of Mexico oil production and 80
percent of natural gas output remain shut in. More than 20 natural gas
processing plants on shore are closed, some are damaged, some have no
power. Pipelines are not fully operational. Eight refineries remained
closed and eight are restarting. Power remains out in the Beaumont-Port
Arthur-Lake Charles area.
ACC is doubtful that the Gulf's energy infrastructure will be fully
restored before the winter heating season starts. There is no surplus
natural gas production capacity available to fill the void. There is
not a ``Strategic Natural Gas Reserve'' available to make up for supply
disruptions. Natural Gas will be in short supply this winter.
Natural Gas consumers will be competing for a scarce commodity.
Policy makers can cushion the blow, if swift action is taken to stretch
the supply and curb consumption. We recommend the following:
1. Send a powerful message to the markets by eliminating
barriers to energy production in the Outer Continental Shelf
(OCS) and share revenues on new production with states.
2. Expedite leasing in the area of the eastern Gulf of Mexico
known as Lease Sale 181, at least for areas greater than 100
miles from the coast of Florida.
3. Declare a national emergency before winter, shock national
awareness of supply problem and mobilize federal resources
4. Give priority to dispatching highly efficient CHP and
Natural Gas Combined Cycle generating capacity to the grid.
5. Restore service to damaged natural gas processing plants
on the Louisiana coast.
More detailed policy recommendations are contained in Section V.
If the right responses are put in place right away, tensions in the
market can be eased and gas consumers can weather the current crisis.
If prices remain at or near current levels, manufacturers will be
driven out of the market and many may not return.
SECTION II--THE US CHEMICAL INDUSTRY AT A GLANCE
The chemical industry fuels the American economy.
The chemical industry is the leading American export
industry accounting for 10% of all U.S. exports.
We generate more than half a trillion dollars to the U.S.
economy each year.
The chemical industry has created a $154 billion trade
surplus over the past ten years.
The industry directly employs more than 885,000 people, a
figure larger than the combined populations of Boston and
Chemistry dependent industries account for nearly 37 million
jobs or 26.6% of the entire workforce.
The chemical industry improves our health and keeps our families
New drugs and medicines made possible by chemistry have
increased life expectancy in the US by more than 30-years over
the past century.
A plastic bicycle helmet, one of the chemistry industry's
most popular innovations, can reduce a child's risk of head
injury by 85% according to Safe Kids USA.
98% of all U.S. public drinking water is safe to use because
According to the National Highway Traffic Safety
Administration, more than 14,000 lives have been saved thanks
to airbags, a product of chemistry.
Chemistry is essential to U.S. business and industry.
The chemical industry supplies the raw materials used by
virtually every industry from aircraft construction to zoo
More than 80% of the materials used to formulate all
medicine come from the chemistry industry.
The chemical industry is America's second largest rail
The major innovations over the past century that have
increased productivity from the phone, computer and Blackberry
exist because of chemistry.
Chemistry is at the heart of innovation, helping to make our lives
better, healthier and safer.
The chemical industry invests more than $22 billion a year
in research and development--the most of any single industry
outside of national defense.
One out of every eight new patents is awarded to the
The American chemical industry employs the highest
percentage of knowledge workers of any industry and employs
more than 80,000 chemists, scientists and engineers.
SECTION III--HURRICANE KATRINA & RITA: RIPPLE EFFECTS FROM SHORTAGES
Potential Product Shortages Following Hurricanes Katrina and Rita
Some of the most commonly used consumer and industrial products may
be in short supply in coming months due to North American chemical
capacity shut-ins following the hurricanes in the Gulf of Mexico.
Following are some examples of products for which there may be
Tires, radiator and other hoses, fan belts, and bumpers;
seals and gaskets; automotive belts and hoses, asphalt binder
and roofing. (62 percent of North American butadiene capacity,
used to make these products, is down)
Oil, milk, detergent bottles; gasoline tanks; corrugated and
drainage pipe. (55 percent of North American high density
polyethylene capacity, used to make these products, is down.)
Syringes, medical fabrics, automotive battery cases, dairy
containers, diaper coverstock, and food packaging. (55 percent
of North American polypropylene capacity used to make these
products, is down).
Diaper liners, shrink film and bread bags. (46 percent of
North American low density polyethylene capacity, used to make
these products, is down).
Plastic resins, films and bottles; automobile antifreeze
blends, including those for military vehicles, and for de-icing
runways and aircraft; fire extinguishers and sprinkler systems.
(39 percent of North American ethylene glycol capacity, used to
make these products, is down)
Source: CMAI, petrochemicals consultant (www.cmaiglobal.com)
SECTION IV--BACKGROUND: THE IMPORTANCE OF AFFORDABLE ENERGY TO THE U.S.
CHEMICAL INDUSTRY, HOW THE NATURAL GAS CRISIS DEVELOPED, AND WHAT THE
ENERGY POLICY ACT OF 2005 ACCOMPLISHES
America's chemical industry is the nation's largest energy
consumer. We use energy--especially natural gas--to heat and power our
facilities, and as a raw material to make thousands of products
consumers use every day. Chemical companies use more natural gas than
California and more electricity than the state of New York. The
chemical industry consumes enough natural gas to heat 30 million homes
a year--almost half of the nation's home heating needs
Natural gas can do amazing things. It can be used to heat and cool
a home, to make electricity and as a key ingredient in products--lots
and lots of products. These include medicines, medical equipment,
packaged goods, military applications and others. Numerous
``downstream'' industries rely on natural gas-produced chemistry
products, including agriculture, steel, aluminum, and cement.
Advances in Energy Efficiency
Fortunately, the chemical industry has made great strides in energy
efficiency. For example, we can make a pound of product with half as
much energy as it took a generation ago. But even with these efficiency
improvements, an immense amount of energy is still required for
chemical manufacturing. Chemical makers need more energy than the
entire country of Mexico, and roughly the same amount as Brazil.
Many chemistry products that are made with natural gas help make
other parts of the economy more energy efficient. Energy-saving
products such as insulation, lightweight vehicle parts, advanced window
systems and reflective coatings are all made from chemicals made from
Supply/Demand Imbalance Leads to Skyrocketing Natural Gas Costs
The problem is, America is using more and more natural gas and
producing less and less. As a result, the price of natural gas has
increased by 700 percent since the late 1990's. If the same thing
happened to gasoline, prices at the pump would be more than $7.00 a
For industries like ours, those high prices hurt. In 1999, the
chemical industry paid about $25 billion for all of its energy inputs--
fuel, power and feedstocks such as natural gas. Last year, the tab
topped $52 billion. Beginning in 2000, the industry has shelled out $80
billion more for energy than it was paying in the 1990's.
The effect of those additional costs--think of it as a huge energy
tax--has been severe. We've seen a 20 percent decline in natural gas
consumption in the chemical industry. Call it demand destruction.
Dozens of plants around the country have closed their doors and gone
away--and are never coming back.
U.S. chemical industry domestic operations lost $50 billion in
business to overseas operations since 2000. We went from posting trade
surpluses in excess of $20 billion--the most successful export industry
in the history of this nation--to becoming a net importer of chemicals.
More than 100,000 American jobs have been displaced, in large part due
to the hidden ``energy tax.''
Not long ago, Business Week noted that of the 120 large-scale
chemical plants under construction around the globe, only one is being
built in the United States. The plants under construction are located
in places where natural gas supply is abundant, reliable and
Unlike oil, natural gas is a regional commodity, not a global one.
And US natural gas prices are the highest in the world--at the moment,
US gas prices are 20 times higher than in Saudi Arabia.
Impact of Government Policies on Natural Gas Supply, Price
In the 1990's, new government regulations began driving electric
utilities to reduce air emissions by burning natural gas to make power.
An enormous amount of gas-fired power generation capacity came on line
in the past decade. Utility consumption of natural gas grew by 31
percent in a few short years.
The nation's appetite for electricity is rapidly growing and is
expected to increase by as much as 50 percent in the next 20 years.
Natural gas supply cannot meet incremental demand. The government says
that new supplies of domestically produced natural gas will only meet
30 percent of future demand growth. Quite simply, there's not enough
gas to go around. To meet this challenge, the U.S. must meet its
growing energy needs by investing in new technologies that produce
power from renewables (for example wind and solar), non-polluting
nuclear, agricultural sources of energy (sometimes called biomass) and
low-polluting coal power.
Energy Policy Act of 2005
In August of 2005, the president signed into law a sweeping new
energy bill called the Energy Policy Act of 2005. On balance, it is a
very good policy and, over the long haul, it can change the way the
nation makes and uses power. The legislation breaks new ground in the
area of energy efficiency: We will see new standards of performance for
appliances, homes and buildings as a result of the legislation's
It also makes a serious effort to diversify the energy supply--to
move away from the natural gas-is-the-answer-to-everything mentality
that dominates current policy. The legislation will launch a new
generation of technologies used to make power, including coal
gasification, renewable energy and nuclear power.
The nation's energy infrastructure will get a much-needed facelift.
The legislation will lead to new investment in gas pipelines and
storage facilities and will result in new LNG terminals.
SECTION V--UNFINISHED BUSINESS. NEW POLICIES NEEDED IN THE
Expand natural gas supplies and reduce concentration of nation's
energy infrastructure in three ways:
eliminate barriers to energy production in OCS and share
revenues on new production with states. MMS estimates that OCS
contains 406 TCF of recoverable natural gas. More than 85
percent of OCS is off-limits to use as a result of federal
policies set in place 25 years ago when NG was cheap and
increase gas production on shore by removing red tape and
accelerate and increase tax credits and guarantees for
investing in gasification technologies for the production of
fuels and feedstocks;
expedite leasing in the area of the eastern Gulf of Mexico
known as Lease Sale 181, at least for areas greater than 100
miles from the coast of Florida.
Site new LNG terminals, especially on Atlantic and Pacific
coasts. Set a goal of four new terminals (not all on Gulf
Coast) by 2010.
Restore lost gas and oil production. The government should use its
authority to speed emergency reconstruction of damaged pipelines
(Emergency Reconstruction of Interstate Pipeline ruling of 2003) and
implement other red-tape cutting measures to restore damaged drilling
rigs and production platforms. The government should also employ the
Coast Guard, Army Corps of Engineer and other federal assets as needed
to speed repairs of damaged production sites and infrastructure.
Priority should be given to restoring service to damaged natural gas
processing plants on the Louisiana coast. In addition to removing
sulfur and other impurities, these plants also remove natural gas
liquids, such as ethane and propane, primary chemical feedstocks. Three
of those damaged plants process the equivalent of three LNG terminals.
Help is needed to transport and house repair crews, pump out the
plants, restore power, repair damages and resume operations.
Encourage Efficient Consumption. To avert shortages this winter and
in future years, actions are needed now to ease the strain on natural
gas markets. In the short term emphasis should be placed on reducing
gas demand through conservation and efficiency measures. These
immediate actions are needed:
Declare a national emergency before winter, shock national
awareness of supply problem and mobilize federal resources,
including . . .
Fund in 05 the national public education campaign authorized
in Title I of EPACT05. Doing so will harness the American
people's strong desire to ``do something'' to help recovery
efforts. Little actions can achieve big results. If all
Americans turned down their thermostats by 2 degree this
winter, it would free up 3 BCF of gas per day.
Move up to Oct. 1, 2005 effective date for tax credits
authorized in EPACT05 for homeowners, builders and commercial
building owners for investment in energy efficiency.
Require up-to-date building codes in states using federal
funds to recover from the hurricanes and encourage all states
to use most current codes.
Accelerate completion of tardy appliance codes and
development of new codes authorized in the energy bill.
Expand and spotlight The Partnership for Home Energy
Efficiency (DOE, HUD, EPA).
Expand funding for weatherization programs and dispatch
crews to go into homes, audit energy consumption, and install
weatherization materials and equipment as needed.
Encourage Efficient Generation: In many parts of the country
inefficient natural gas power generators supply baseload power and
highly efficient generation is reserved for peak demand. To make power
generation more efficient, the following actions are needed:
Build new and efficient transmission capacity in order to
remove system constraints.
Retire or put in reserve inefficient single-cycle generation
Give priority to dispatching CHP and Natural Gas Combined
Cycle capacity . . . restore CHP tax incentives.
Diversify Fuel Supplies. The large build up of natural gas fired
power generation in recent years is putting an unsustainable strain on
natural gas supplies. Gas consumption for power generation increased by
25 percent this summer, driving prices up from $6.00 to nearly $10.00
per million BTU. Utilities should be encouraged to make power from
other fuel sources, by:
Accelerating coal and biomass gasification. The US has the
world's largest reserves of coal and (potentially) biomass.
Gasification technology is ready for deployment and the
government should help speed up commercial use by utilities.
Site new nuclear power. Nuclear answers environmental and
energy questions. The government should consider building new
reactors on federal lands.
Distribute energy supply and power generation. The Hurricanes
proved that the entire nation can be affected by regional disruptions
and the energy infrastructure is highly reliant on the integrity of the
electrical grid. To reduce economic and national security
vulnerabilities government should:
Create incentives for refineries, pipelines and large energy
using industrial, institutional and commercial facilities to
produce heat and power on site
Encourage all states to implement ``efficient portfolio
standards'' defined to include renewables, CHP, gasification
and other low-polluting means.
Increase Natural Gas storage capacity to make the natural gas
system more resilient. The Strategic Petroleum Reserve did its job and
restored calm to jittery oil markets. Natural gas does not have
adequate reserve capacity and that contributes to price volatility.
Additional storage capacity would help the market adjust to temporary
[Note: The following attachments have been retained in committee
files: Hurricane Katrina & Rita: Ripple Effects From Shortages (Source:
CMAI and ACC); Notable Quotes; and the Dow Chemical Company and the
U.S. Natural Gas Crisis: Update on Actions Taken to Remain Globally
The Chairman. Christopher Helms, president of the Pipeline
Group, testifying on behalf of the Interstate Natural Gas
Association of Merrillville. Where are you from, Merrillville?
STATEMENT OF CHRISTOPHER A. HELMS, PRESIDENT, PIPELINE GROUP,
NiSOURCE INC., ON BEHALF OF THE INTERSTATE NATURAL GAS
ASSOCIATION OF AMERICA, MERRILLVILLE, IN
Mr. Helms. Merrillville, Indiana, Senator, the Heartland of
the United States.
I want to thank you, Mr. Chairman and the members of the
committee, for giving us an opportunity to visit with you this
morning. The company that I am privileged to be with has
significant Gulf of Mexico pipelines, but more importantly, we
transport that gas to middle America, to the Mid-Atlantic
States, to the Northeast. We are the third largest underground
storage operator in the United States. We have over 16,000
miles of pipelines.
Like my colleagues to the right, I had the opportunity to
go to Louisiana last Friday and meet with the employees, many
of whom have lost their homes, whose parents have lost their
homes, whose brothers and sisters have lost their homes, and
they showed up to work the next morning. And they are working
to get this vital energy infrastructure back into place. I
really want to commend them for doing that. There are a number
of challenges that we have seen in getting the infrastructure
back into place.
We appreciate the opportunity to be here with you this
I am also representing the Interstate Natural Gas
Association of America, which is the association that
represents, if you will, the middle link of the energy chain.
In our association are those pipeline and storage operators
that are federally regulated. Our opportunity is to move the
gas from the point where it is produced, through the
processors, and then downstream ultimately to the consumers.
We have filed our testimony and rather than go ahead and
refer to it, I would like to make a couple points, if I can.
The first point is I believe we are going to face some very
serious challenges this winter. Now, of course, the thing that
could cooperate the most for us is that we have a mild winter,
and a mild winter will really solve some of the near-term
issues we have. If we have a normal to colder winter, however,
I think we have to be prepared for a number of significant
operational challenges, which I am more than happy to discuss
One of the other things I would like to make in my
presentation this morning is the point that the natural gas
industry is not a vertically integrated industry. We provide
but one link in the energy chain getting to the ultimate
consumer. Upstream of us are the gas processors and the
producers, and the reality is all three of us are competing for
limited resources of crews, supply boats, helicopters,
generating capability to get our infrastructure on line.
But the reality is we cannot put all of the focus on fixing
but one chain of the energy supply. If we do not have producers
bringing production back on line, if we do not do something to
process the gas when the gas gets to the beach, if we do not do
something to put the pipelines back in shape, we are not going
to be getting molecules to our customers and our consumers. And
we have got to be working together.
The issue today is we cannot afford to lose natural gas
supply, and our industry is doing everything we can to bring it
back in. We are in recovery mode, and that is really where we
are focusing right now.
The supply/demand balance is very tenuous, and we have seen
that. Today, as Mr. Cavaney pointed out, we are probably about
7 billion cubic feet short of the supply that we had pre
Katrina and pre Rita. What does that mean? What that means is
we are going to lose a certain amount of that production this
winter when we need it. The way our system works is about 65
percent of the peak-day demand is met by storage and 35 percent
is met by flowing pipeline gas. We believe that although
everybody along the chain is working very diligently to get the
production back on line, we may be facing this winter with a
significant amount of supply from the Gulf of Mexico not
flowing in the pipelines.
So what does that mean? What it means is we are going to
have a greater reliance on storage. Storage is going to have to
meet those daily demands and the real challenge is going to be
in the late winter when storage deliverability is declining and
we do not have the same amount of gas flowing.
One of the things that I think we really have to recognize
is that natural gas processing is so critical to the chain. The
natural gas that is produced offshore of Louisiana and Texas
and Alabama and Mississippi is not of what is called pipeline
quality. We cannot pipe that gas directly from a well into a
person's home. It just will not burn. There are heavy liquids
in the gas. There is CO2. There is sulfur. The gas
has to be processed.
And I want to at least alert this committee to the issue of
this winter, if people start saying, well, those natural gas
pipelines are not taking gas that is available, we really have
to point to the fact that we have to get the gas processing
infrastructure up and running. It is not that we do not want
production on. We have no interest in keeping production off
the market. We are federally regulated. Our rates are reviewed
by the FERC. Our job is to get the gas from those processing
plants to the ultimate consumer. So those are the things that
we really have to realize, that there are physical, chemical
reasons why we cannot take that gas.
As we bring the pipes back into supply, there are a couple
of things we need. One, we need some Federal coordination,
quite frankly, because we are so disaggregated, if you will. We
need an agency like DOE to be a clearinghouse for us. We really
need to start talking about where we can prioritize, repair
equipment, lay barges, those sorts of things to get our
industry back in shape. We think there are things, obviously,
you can do.
Mid-term conservation is very important to us.
We think funding for LIHEAP is going to be a very
challenging year for our fellow Americans that have low income
issues going forward.
I think as Andrew had mentioned to my right, I think access
is a real issue. We cannot ignore it. It is the elephant in the
room. We really do need to have public policies that allow us
to have access to reserves we have in this country. We are not
running out of natural gas. We are running out of the
capability to find and to develop the reserves that are in
areas that can be environmentally and economically developed.
Mr. Chairman, thank you, and I look forward to answering
questions from the committee.
[The prepared statement of Mr. Helms follows:]
Prepared Statement of Christopher A. Helms, President, Pipeline Group,
NiSource, Inc., on Behalf of the Interstate Natural Gas Association of
Mr. Chairman and Members of the Committee: Thank you for the
opportunity to testify on this important topic. My name is Chris Helms,
and I am President of the NiSource Inc. Pipeline Group. NiSource Inc.
is a fully integrated energy company engaged in natural gas
transmission, storage and distribution, as well as electric generation,
transmission and distribution. Our operating companies deliver energy
to 3.7 million customers located within the high demand energy corridor
that runs from the Gulf Coast through the Midwest to New England. One
of our pipelines, the Columbia Gulf Transmission Pipeline, operates in
the central Gulf of Mexico and brings natural gas on-shore in central
I am here today on behalf of the Interstate Natural Gas Association
of America (INGAA). INGAA is a trade organization that represents
virtually all of the interstate natural gas transmission pipeline
companies operating in the U.S., as well as comparable companies in
Canada and Mexico. Its members transport over 95 percent of the
nation's natural gas through a network of 180,000 miles of pipelines.
Many of these pipeline systems operate in the Gulf region--either off-
shore or along the coastal area that includes Texas, Louisiana,
Mississippi and Alabama.
Before discussing the recent hurricanes and their effects on our
industry, I first want to make a few points about the structure of the
natural gas industry. The natural gas industry has never been as
vertically integrated as the oil and electric power industries. Put
differently, it is the exception and not the rule for a single company
to be significantly involved in all segments of the industry. These
segments can generally be broken down into the following categories:
production, gathering and processing (also known as midstream
services), interstate pipelines, marketing, and local distribution.
Some of these segments are subject to economic (i.e., rate) regulation
at the federal or state level, while others are not subject to any rate
INGAA represents the interstate pipeline segment, which is
regulated economically by the Federal Energy Regulatory Commission
(FERC). As part of the natural gas industry restructuring that occurred
during the 1980s and early 1990s, the interstate pipeline industry gave
up its merchant role as the provider of bundled wholesale natural gas
services. Under the current industry structure, interstate pipelines
transport and store natural gas, but do not produce, purchase or sell
the commodity itself. We are analogous to a trucking company that
provides both transportation and warehousing services for goods, but
does not take title to the goods themselves. The maximum rate an
interstate pipeline may charge for transportation and storage is set on
a pipeline-by-pipeline basis by the FERC, based upon the costs incurred
by that pipeline to provide those services.
Despite the disaggregated structure of the natural gas industry,
significant interdependencies remain. This is especially true for off-
shore production in the Gulf. Generally speaking, the chain of delivery
is as follows: Natural gas is first produced at off-shore platform or
wellhead facilities; it is then gathered and transported through
smaller diameter gathering pipelines for redelivery to FERC-regulated
transmission pipelines for transportation to onshore processing plants.
There, the natural gas is processed to remove hydrocarbon liquids, such
as propane and ethane. Those liquids must be transported, via dedicated
pipeline, barge or truck, to markets for those products, such as
refineries and petrochemical facilities. Once the liquids are removed,
the natural gas is fit for consumption and is delivered into the
interstate pipeline network where it is transported to end-use
customers. All of these systems must work together in order for natural
gas to flow onshore, and from there to the millions of customers
downstream. If any link in this delivery chain is disrupted, the
remaining links in the chain will be affected in some way.
I point this out to emphasize that Hurricanes Katrina and Rita have
highlighted these interdependencies. Links in the delivery chain have
sustained major damage. In cases where multiple links have been
damaged, we cannot repair just a single link and expect natural gas
supplies to return to pre-hurricane levels. All of the links must be
working in order to achieve that result.
Mr. Chairman, I think it is safe to say that two major hurricanes
striking back-to-back at the heart of our nation's energy system have
caused an unprecedented disruption in our Gulf-based natural gas
infrastructure. As many of you know, the federal waters in the Gulf of
Mexico account for about 10 billion cubic feet (bcf) per day of natural
gas production, which is about 20 percent of total U.S. demand. As of
early this week, about 72 percent of this daily production, about 7.5
bcf per day, remained ``shut-in'' due to the storms. To place this
number in some perspective, the United States typically consumes on
average 61 bcf per day nationwide. Given the tight supply/demand
situation we were already facing before the hurricanes, this loss of
supply--even temporarily--is cause for concern as we approach the
winter heating season.
The media, and indeed most Americans, have focused on how the twin
hurricanes have affected the price and supply of gasoline. Gulf Coast
oil production and refineries are a critical part of the nation's
infrastructure for obtaining supplies of gasoline, jet fuel and fuel
oil. Nonetheless, the United States imports almost 60 percent of our
petroleum supplies from overseas. This means that a short-term increase
in imports can mitigate some portion of the impact of the hurricanes on
petroleum supplies. However, when it comes to natural gas, the United
States still produces 85 percent of the total supplies needed to meet
domestic demand, while most of the remaining supply needed to meet
demand comes from Canada. Our ability to import natural gas from
outside North America is far more limited than with petroleum, given
the limited number (5) of operational liquefied natural gas (LNG)
import terminals in the U.S. Therefore, even as the country continues
to be focused on gasoline prices, we believe the hurricanes will have a
greater and more protracted impact on natural gas prices and supplies.
I also want to challenge the notion that Hurricane Rita produced
far less damage to energy infrastructure than did Hurricane Katrina.
While this might be true with respect to the oil refinery complex in
the Gulf region, it is not the case with natural gas. In fact, for
operations in the Western Gulf including my company's pipeline, the
Columbia Gulf Transmission Pipeline, Rita had more impact than Katrina.
For example, our offshore system was able to redirect some natural gas
produced in the central Gulf that was not able to reach the shore due
to damage from Katrina. This worked well for a few weeks, but the
impacts of Rita only compounded the difficulties associated with
bringing more gas production back on line. The ``one-two punch'' nature
of these storms means that repairs will take longer than normal,
because the limited manpower and equipment resources for assessing
damage and making repairs are being stretched far beyond normal
capacity. Damage sustained during Rita that, for example, normally
might take a week or two to repair is taking much longer, due to the
limited availability of crews, boats and equipment that were already
working on Katrina-related damage.
I want to assure the Committee that we are doing all we can. The
dedication of our employees, in the face of losing their homes and
possessions and having their families uprooted, has been phenomenal.
Across the industry, people are showing up to work long hours even as
they have no place to go home to. Finding temporary housing within the
region so our employees can continue to repair critical energy
facilities is crucial to speeding the pace at which natural gas
supplies in the Gulf can be brought back online.
Let me now turn to our outlook for the winter heating season. While
assessments are continuing, there can be no doubt that, compared to
last winter, there will be less natural gas delivered from the Gulf of
Mexico region this winter. The damage is too widespread, and the amount
of repair work too great, for everything to be made right within a
month or two. The fundamentals of supply and demand in the North
American natural gas market already were tight before hurricanes
Katrina and Rita. Consequently, any loss of supply--even a relatively
small one--can have a disproportionate impact on natural gas prices
over the winter. All of this puts an extra emphasis on natural gas
While it is largely invisible to the public, the United States has
a significant amount of natural gas storage scattered throughout the
country. These storage facilities, typically located in depleted oil
and gas fields, are usually filled during the warmer months of the year
when there is excess natural gas supply and pipeline capacity to move
it. Storage fills are generally completed by November 1, which is the
beginning of the winter heating season. During the coldest winter days
which typically are the days of peak natural gas demand, storage
withdrawals can meet more than 50 percent of the daily natural gas
Prior to the hurricanes, storage fills were proceeding at total
volumes above the five year average. The hurricanes have slowed storage
fills somewhat, but volumes still remain ahead of the five-year
Still, storage is a supplement to--not a replacement for--natural
gas flowing through the interstate pipeline network. Many of the
pipelines serving the Midwest, Northeast and Southeast draw their
primary supplies from the Gulf region. If pipelines are not flowing
their full volumes of natural gas, and the winter is normal to colder-
than-normal, greater volumes of natural gas are likely to be withdrawn
from storage earlier in the winter season than is the norm. Should this
occur, storage would be depleted more quickly and there could be an
even greater dependence on flowing pipeline gas to make up the
difference. This could create significant operational challenges for
pipelines in late winter, particularly if cold weather, limited supply
availability, and low storage drive customers to attempt to take more
natural gas off a given pipeline than is available.
I should also mention the importance of returning damaged natural
gas processing facilities to service. As mentioned previously, natural
gas processing plants remove the heavier hydrocarbons entrained within
produced natural gas. These ``natural gas liquids'' include propane,
ethane and butane. Once removed, there is a separate market for these
liquids, principally in the petrochemical industry. Just as with oil
refineries in the Gulf region, however, a number of natural gas
processing plants were damaged by the hurricanes. Several of these
facilities may be out of operation during most, if not all, of the
This presents another operational challenge for pipelines. A
certain amount of unprocessed natural gas can be accepted into the
natural gas pipeline network. If the quantity of heavier hydrocarbons
in the gas stream becomes too high, these substances can ``drop out''
of the natural gas stream as liquids and collect in pipelines and end-
use equipment. This is a particular concern during the winter heating
season when the lower ambient temperatures cause the temperature of the
flowing gas to drop, increasing the amount of heavy hydrocarbons that
will convert to liquids. This phenomenon can cause safety and
operational problems as slugs of liquids work their way through
sensitive equipment. Therefore, as off-shore production facilities come
back on line, it is also important to bring corresponding processing
capacity back on line as well; otherwise, pipelines may be compelled to
limit the volumes of unprocessed natural gas that can be accepted
during the winter heating season in order to preserve the operational
integrity of the transmission and distribution pipelines and in order
to protect end-users.
How high will natural gas prices go this winter? While a number of
factors will affect the answer to this question, the most important
factor is completely outside of our control. It is the weather. The
single most significant factor in determining natural gas demand, and
therefore prices, will be the weather. Peak winter demand is driven by
space heating needs. If it is a mild winter, there will be less demand
for natural gas and prices will almost certainly moderate, even with
the effect of the hurricanes. Conversely, if the winter is normal or
colder-than-normal, then the supply disruptions caused by the
hurricanes will be reflected in higher natural gas prices.
Another factor affecting the ultimate price level will be the rate
at which demand is reduced in response to higher prices. Price
allocates supply in a demand-constrained market. At what price will a
consumer choose to conserve and reduce use of natural gas? The
industrial sector is the most price sensitive consumer of natural gas;
and at a certain price level, it can be anticipated that industrial gas
consumers will choose either to curtail production or to switch to an
alternative fuel rather than purchase natural gas. The market clearing
price for natural gas will be driven by how much a customer is willing
to pay for the last molecule of natural gas available. My colleague
from Dow Chemical, who is already facing some of these challenges, can
explain this better than any of the other witnesses at the table today.
For most residential and commercial consumers the price paid for
natural gas this winter will depend on the purchasing strategy employed
by the local natural gas distribution company (LDC) that serves their
community. For example, to what degree has the LDC hedged the price of
its natural gas purchases using either long-term purchase contracts or
financial instruments? How much natural gas does the LDC have in
storage, and at what price was that gas purchased before it was placed
into storage? The price paid by the average consumer will be a blended
price, taking into account these factors, and not just the spot price
for natural gas on a given day.
The ripple effects of higher natural gas prices will be felt across
the economy. All of us expect to pay more for natural gas this winter
to heat homes and businesses. Electricity prices also will be affected,
particularly in regions where gas-fired power plants make up a
significant part of the generating fleet. And, as I mentioned, higher
natural gas prices will affect the cost of manufactured products.
What can be done? The short-term imperative is repairing the
infrastructure as quickly as possible. That means expediting permitting
and approvals for repair work. It also means the various levels of
government should consider the value of granting individual companies
some forbearance from legal restrictions that might frustrate their
ability to coordinate assessment and repair activities. The twin
hurricanes have resulted in extraordinary damage, and extraordinary
measures are needed to get systems repaired on a timely basis
Also in the short-term, both the energy industry and the government
must educate consumers in advance so they are prepared for higher bills
and have the ability to implement strategies for conserving energy.
This is important, because unlike the gasoline price that is posted at
the local gas station, the consumer sees the price of natural gas after
the fact when he or she receives a bill for the previous month's
consumption. Many of you are already familiar with some of these
measures, including weatherization of homes, regular inspections of
furnaces and changing of filters, installing programmable thermostats
and setting them a couple of degrees cooler. The funding of the Low
Income Heating Energy Assistance (LIHEAP) program is also critical in
helping needy families cope with rising heating costs.
In the long-term, Mr. Chairman, we agree that more needs to be done
to diversify our supplies of natural gas. Katrina and Rita have clearly
demonstrated the high degree of our reliance as a nation on the Gulf
region to supply our energy needs. Other regions of the country can and
should be a part of our overall energy resource development. Yes, many
groups have complained about the environmental risks associated with
expanding offshore energy to include waters outside the western Gulf of
Mexico. After three significant hurricanes in two years, it is time to
concede that apprehensions about the environmental consequences of
offshore energy development are greatly overstated. The fact that we
have not had significant environmental incidents after Ivan, Katrina
and Rita must stand for something! Our national energy policy should
not be premised on hypothetical problems or on assumptions based on
incidents from 40 years ago.
In addition, the United States will need to build new liquefied
natural gas import terminals to keep pace with our demand for this
fuel. Most of the new terminals that have been approved by the FERC in
recent years have been located in the Gulf of Mexico. There are good
reasons why the Gulf is attractive, such as access to an extensive
pipeline network, but it is also true that the Gulf has been the ``path
of least resistance'' in terms of NIMBY-type opposition. Perhaps the
hurricanes, and the effects this winter on natural gas prices and the
larger economy, will finally convince other regions of the country of
the importance of having a geographically diverse mix of these
Finally, it is worth examining the factors that have precluded
electric generators from installing dual-fuel capability when building
a gas-fired power plant. Over the last decade, dual-fueled facilities--
facilities that can operate on both natural gas and fuel oil--have been
discouraged by emissions limits and by the difficulty in siting oil
storage facilities on site. Also, the rules in some electric power
markets provide such generators no assurances that the additional
capital cost of such facilities can be recovered in the price received
for electricity. These factors have compelled developers to build power
plants totally dependent on natural gas. Should natural gas supplies
remain tight this winter, these facilities will face the choice of
either paying huge fuel charges, or not running at all.
Before I conclude, I want to suggest some responses that should not
be undertaken. During times of crisis, it is easy to overreact in ways
that are ultimately counterproductive. The first suggestion I would
like to leave you with is this: please do not try to regulate commodity
prices. This country actually did regulate natural gas prices for many
years, resulting in artificial supply shortages and a misallocation of
resources. Similarly, the government should not attempt to pick winners
and losers in allocating scarce supplies among end-users. Some debate
has surrounded the notion of limiting the use of natural gas for
generation. Mr. Chairman, you and Senator Bingaman were present when
Congress debated the deregulation of wellhead natural gas prices and
the Fuel Use Act, so you remember the problems that existed at the
time. While it can be painful in the short run, the market really does
the best job of efficiently allocating scare resources and sending the
right price signals that will solve supply problems.
Mr. Chairman and Member of the Committee, I thank you once again
for the opportunity to testify, and I will be happy to answer your
The Chairman. Thank you very much.
Mr. Hebert, I know that you have been chairman of the FERC
in your earlier life. I had an opportunity for the first time
to talk to you about some of these problems on this visit. I
very much appreciate your helping us today. I know you wear an
industry hat, but frankly, we need good ideas. We need to
understand our problems, and from my standpoint, I am
appreciative of your thoughtfulness. Thank you for coming
today. We will probably be talking to you more in the future.
STATEMENT OF CURT HEBERT, JR., EXECUTIVE VICE PRESIDENT,
EXTERNAL AFFAIRS, ENTERGY, NEW ORLEANS, LA
Mr. Hebert. Thank you, Mr. Chairman. I am always glad to be
here and have always been happy to be at the committee's
I also want to thank this committee and your leadership as
well for the vision with the Energy Policy Act of 2005. I hate
to think of where we believe we would be in the future but for
that step forward, and it is a step forward.
But one of my colleagues put it best in the very beginning:
``once in a century.'' I think that is what this has to be
about, and I am going to wear a customer hat, if I can, today
for a little while. I am glad to answer any questions about
natural gas and where we think that may be going, why it is
where it is, what levers we can pull to aid and assist, but for
5 minutes I would like to be here for Entergy Corporation, our
CEO, Wayne Leonard, and our customers.
We have had a once-in-a-century event. That event was
actually three events almost. It was hurricane Katrina. It was
the levee that broke, and it was hurricane Rita.
As you know, Entergy Corporation has several different
operating companies. We have Entergy-New Orleans, Entergy-
Louisiana, Entergy-Mississippi, Entergy-Arkansas. We have
Texas. We also operate in New York, Vermont, Massachusetts, and
Nebraska. So we are spread out. We have 14,000 employees. We
had 1,400 basically displaced through the storm as we tried to
put it back together in the gulf south region.
What Katrina did was it basically took the center to the
east side of our service territories and it tore them apart,
leaving nothing in New Orleans, no revenues, no customers, very
little infrastructure, certainly no lights, and much less even
in other areas right outside of that in Mississippi and
Rita came and it took the west side of those service
territories, hitting the areas in Beaumont and Lake Charles,
knocking them out as well.
I do not have to tell you--it has already been covered--how
many refineries, how many platforms that we provide energy for
that have to be a priority.
But I do want to tell you this. We, like everyone else
here, put our folks on the ground. Our folks were committed. We
made an early decision at Entergy to tell all 14,000 employees
you have a job. You are going to be paid. And as important, if
you have been displaced, if you lost your home, you are going
to have something over your head and we are going to pay for
it. So do not worry about it because what is important is that
we take care of the gulf south region. What is important is
that we take care of America because this is an American
problem once in a century.
We need help for the consumers and the customers because we
lost cumulatively 1.8 million customers through those storms
and disasters. We lost 1.1 million with Katrina. We lost over
700,000 with Rita, and we leave a city called New Orleans
something less than a city.
I have a couple of exhibits up here. The first one, the out
of service, tells you what the numbers are. I am not going to
spend a lot of time on them. You can see them and I have
exhibits for you.
I am not going to read through this, Mr. Chairman. There is
a lot in here. I know how much you have to read, all these
members. I know how much is put in front of you. If you do not
read anything else this year, I hope you read this because it
will tell you what has happened and it will tell you the need
that is there.
If you look at the transmission piece, which I think is
over here, 520 transmission lines down, 6,700 miles of
transmission that had to be brought back up. The distribution I
think he is putting up now. 25,000 poles. If we could think of
you as our bosses, and telling this group of business people,
what I need you to do in the next 3 to 4 weeks is put up 25,000
utility poles, can you do that for me, I think we would all get
our heads together and, with all due respect, we would tell you
we think you had lost your mind. It cannot be done. It is
impossible. And then, Mr. Chairman, you would have to come
back. You would say, well, now, Curt, what I need you to do is
understand it is not just about 25,000 poles, but where those
poles go, there are poles already there and there is line
wrapped around it and there are trees on top of it and there
are flooded waters above that. And I need you to do it in 3 to
4 weeks' time. And, oh, and by the way, can you put the wires
back up when you are done? And by the way, can you do it
safely? And by the way, when you are done, can it be reliable
so that when people flip their switch, the light comes on? And
I would have to tell you, Mr. Chairman, I am not sure that can
be done. But it has been done.
It is incredible to see what these people do, how they can
be focused and how they can get it done when their house is
under water, when their aunts and uncles have died, their
parents. But they do it. We are focused on restoration and we
will rebuild the gulf south, my home.
The cost of that restoration is going to be as much as $1.6
billion. $1.6 billion. Just in New Orleans alone, it could be
as much as almost $500 million for the restoration costs.
The Chairman. You said in New Orleans?
Mr. Hebert. Just in New Orleans, that operating company
The bulk of our costs is transmission and distribution. We
do have some generation costs. Some of those are insurable.
Obviously, we would attempt to recover that. But we are not
certain about those numbers yet, but it could be as much as
Having said that, I know you have to ask yourself why do
you come to the Federal Government and why does the Federal
Government owe these people in New Orleans, why do they owe the
people in the gulf south, and why should they come and take
care of their needs.
Well, we are trying to do some of that ourselves, Mr.
Chairman. At Entergy-New Orleans, that operating company right
there, as you know, we had to file bankruptcy, and we had to
file bankruptcy for several reasons. One, you understand that
the SEC has borrowing limits from a short-term perspective. We
were downgraded on our credit ratings. So accessing the capital
markets was something that was very tough on us. So we filed
for bankruptcy protection, and Entergy Corporation was
obligated to spend $100 million there. We have already spent
$60 million of that in debtor-in-possession financing.
We are going to do everything we can--and that is what the
bankruptcy is all about--to make certain that the restoration
continues and that we do have electricity there so that all
these people here can do their job and so that we can do what
we can to not only take that crude, but refine it and make
certain there is as much in America as possible.
Senator Burns is right. Let me tell you when we hurt a
farmer, we hurt America. My grandmother and grandfather were
farmers. You know those farmers in the Midwest--what they do,
Senator Burns--and you know this as well as anybody--is they
take these barges and they fill them with grain and they fill
them with corn and they ship it down the Mississippi River and
they ship it to that port down in New Orleans and they put it
on ships and they send it out everywhere. That is going to be
tough to do right now.
Senator Burns. They send fertilizer back up.
Mr. Hebert. Absolutely. It goes both ways, does it not?
My point is it is an American problem. It is not just a New
Orleans problem. It is not just a Mississippi problem. It is
not just a Louisiana problem.
But as a regulated utility, what we at Entergy have to do
is have all these restoration costs go into the rate base, and
if that is done in New Orleans without assistance from the
Federal Government, their rates will double.
When we talk about these people and we look at these
customers--and I tell you that there are 1.8 million customers
that lost service during our storms--I know you think of that
as people, but I want you to think of it as meters. I want you
to think of it as maybe 4 million or 5 million people. As we
look at Entergy-New Orleans and we look at rate increases,
which by the way, double, they not only double on Boudreaux
down in the parish, but they double on small business, they
double on industry, which right now has rates they cannot
afford and be competitive in the American economy, much less a
So we need your help. America needs your help. We need the
direct assistance and we need the indirect assistance. But most
importantly, we need it as quickly as we can get it.
There are several different options here, and then I will
close out, Mr. Chairman, and answer any questions.
One, there is what is called the Airline Stabilization Act,
which was used after 9/11, and that has been recrafted into a
bill put forth by Senator Landrieu, who I know right now is on
the floor arguing for Louisiana and the gulf south region, and
Senator Vitter. It is called the Utilities Stabilization Act,
but it is modeled on what was done after 9/11 for the airlines.
There are moneys that would be put in there for direct costs
and for indirect costs. We think that is one vehicle, and we
think it is a useful vehicle. It would get us money quickly if
that legislation were passed.
Another option is the Stafford Act. I know you are all
familiar with the Stafford Act. But the problem with the
Stafford Act is the folks that I live around and the folks that
I work with, quite frankly, down in New Orleans and in parts of
Mississippi and Louisiana and Texas do not get help from FEMA
due to the Stafford Act because when the Stafford Act was put
together, since our customers are investor-owned customers, the
Stafford Act said we will give to co-ops and municipals and
public power, but we will not give to investor-owned.
And I did not understand that. I had quite an education as
I went through this process. What I learned from meeting with
folks like yourself on the Hill and your staffs, which work so
hard, is that the Stafford Act was made that way for a reason
because they said investor-owned can get insurance. And that
makes sense to me. All of a sudden, I said, well, that makes
sense. That is fair.
But what we did not understand at that time was two things.
One, you cannot get insurance, after hurricane Andrew in 1992,
on transmission and distribution. So it does not apply there.
And how important is our transmission and distribution? And for
the folks I have shared it with, they said, well, that makes
sense. We ought to be treating them the same. How do we say one
customer who lives in a rural community or lives somewhere
served by a co-op or a municipal or a public power system gets
to keep their rates low, but another customer does not keep
their rates low because they have to absorb these costs? That
is not fair. And I agree, that is not fair.
And the other side of that is this. So many of these public
power systems, certainly the co-ops and the municipals, are
transmission-dependent on investor-owned utilities like
Entergy, like CLECO, like Southern. So it does not matter how
much Federal money we give to these co-ops and municipals in
some circumstances. If they rebuild their systems, it would not
matter if they gold-plated them. And I am not saying they do
that. They certainly do not. But if our transmission line is
down because we do not get it up because our customers cannot
afford it and we cannot do it quickly enough, you cannot light
the first light bulb in those areas.
So it is important that we rethink that. A waiver of the
Stafford Act for a necessary element of our economy, like
electricity and gas, is something that I think you should
entertain. And I know you are going to say, once we waive it,
how do we waive it for anybody? Where do we draw the line? I
think you have to draw the line on energy.
I will tell you I have friends and family that are in the
medical business. Hospitals are important. They are important.
Telephone companies are important. They are very important.
Refineries, very important. But you do not pump through pumping
stations that are electric crude. You do not light up
hospitals, much less make them run, and you do not make
telephones ring unless you have electricity first. If you do
not get that right and if you do not keep that competitive and
if you tell the folks in New Orleans that their rates are going
to be doubled because they are treated differently, you are not
going to rebuild that economy. You are not going to get people
to go back in there.
There is a third alternative: community development block
The Chairman. Can I just remind you your time has expired
and would you wrap it up please?
Mr. Hebert. I will wrap up with this, Mr. Chairman. I
Community development block grants were used after 9/11.
ConEd--there was a block of money put in, about $250 million,
of which, let me say, they have only collected, $93 million,
for customers there in that region. I do not mean to compare 9/
11 and Katrina and Rita. They are certainly different events.
But for a cost analysis, I want to draw this comparison. If you
look at ConEd, that was less than 1 percent of their revenues.
It was around 12,000 customers. I have told you how many
customers we are talking about here. We would like to look at
the same opportunity for our customers. We think that is a
great way to do it.
Immediate waiver of Stafford or the Utility Stabilization
or the community development block grants would all be a way to
do it. This is a destitute city. It is empty and we are doing
everything that we can to rebuild it, but we cannot rebuild it
on the backs of folks who can least afford it. And we cannot
rebuild it on an economy that sends its crude and its refined
product everywhere throughout the United States and expect them
to absorb that cost.
Once in a century, Mr. Chairman. Thank you.
[The prepared statement of Mr. Hebert follows:]
Prepared Statement of Curt Hebert, Jr., Executive Vice President,
Good morning. I am Curt Hebert, Jr., Executive Vice President of
Entergy Corporation, and I appreciate the opportunity to appear this
morning on behalf of Entergy, its CEO Wayne Leonard, and the thousands
of Entergy employees who have been working tirelessly since late August
to respond to the destruction wrought by hurricanes Katrina and Rita.
I've never been more proud to represent Entergy than I am today. As I
sit before you, thousands of dedicated Entergy employees are basically
working non-stop to restore service to the more than 1.8 million of our
customers whose lives have been disrupted, many permanently, by Katrina
and Rita. Entergy's employees have been joined by thousands of other,
equally committed personnel from our sister utilities throughout the
region and the nation. We have come together on a scale unprecedented
in American history--as a company and as an industry--to meet this
The purpose of my testimony is three-fold. First, I summarize the
devastating effect of these catastrophic storms on our infrastructure.
Second, I summarize our efforts to date in restoring service and the
unique challenges being faced by the City of New Orleans. Finally, I
discuss what federal financial assistance is needed so that our
restoration efforts can be completed successfully.
THE EFFECTS OF THE STORMS
The two hurricanes and the flooding that resulted when the levees
in southeastern Louisiana failed were more devastating than any natural
disaster previously experienced in this country. The effects on the
energy industry and upon the utilities in the area, whose customers are
severely burdened by the loss of their jobs, homes, and property, have
been unusually severe. This emotional and financial stress will have a
damaging and long lasting effect upon the economy of the Gulf South
region, including particularly the City of New Orleans.
These unprecedented events require an immediate federal response so
that utilities such as Entergy can promptly and efficiently address the
massive damage and destruction that has occurred. This assistance must
take the form of federal legislation that provides immediate financial
aid to the electric and gas utilities affected by Katrina and Rita in
order to ensure that storm restoration and recovery occur timely and
without imposing additional financial burdens on the citizens of these
By any measure, Hurricane Katrina is the most costly and one of the
most deadly hurricanes to strike the United States in recorded history.
Hurricane Andrew, the previous benchmark, carved a much narrower path
of destruction across south Florida in 1992. During Andrew, one of the
hardest hit areas was Homestead, Florida. Of 26,000 homes in Homestead,
7,500 were destroyed completely. By comparison (and without minimizing
the impact on the good people of Homestead), all 26,000 homes in St.
Bernard Parish, Louisiana have been lost, along with the destruction of
much of the housing stock of the City of New Orleans and large segments
of the Mississippi Gulf Coast. In the area of southeast Louisiana that
Entergy serves, nearly 170,000 homes or businesses were damaged so
badly that those structures will not be able to accept electric service
for an extended period of time. This will severely restrict the long-
term recovery and economic prosperity of the region.
The effect of these hurricanes on the energy industry is a matter
of national importance that can be measured by economic barometers. In
contrast, the effect of the storms on the citizens of the Gulf Coast
region will be measured by their suffering and the loss of their
families, their belongings, their homes, their businesses, and their
jobs. Helping the people of this region rebuild must be our main focus
at this time, and I am here today to request your support of our
Katrina devastated the electric utility infrastructure across much
of the Gulf Coast region. Katrina was so large that it affected about
90,000 square miles--an area equal to the size of Great Britain. At the
height of the service outages due to Katrina, Entergy lost:
1.1 million customers in Louisiana and Mississippi (previous
Entergy customer outage record was 290,000)
Virtually all generation in southeast Louisiana was lost or
had to be isolated from the grid to protect the ability of the
equipment to return to service;
Approximately 3,000 miles of transmission lines;
30,000 miles of distribution lines;
1,560 feeder lines were damaged; and
14,500 poles were damaged or broken.
One distinguishing characteristic of Katrina was the flooding of
mammoth proportion. Although hurricanes frequently result in high winds
and heavy rain, Katrina left many areas of southeast Louisiana flooded
with several feet of water for several weeks when the levee system
failed. Although other areas of the United States are susceptible to
flooding, in the case of Katrina, the impacted area in southeast
Louisiana became an extension of the gulf for nearly a month, a
condition that has not occurred elsewhere in the U.S. during modern
On the heels of the destruction and flooding of Katrina, a strong
category four storm, Hurricane Rita, a strong category three storm,
inflicted significant additional damage to the Gulf Coast region, a
critically important natural gas producing region. At the height of the
service outages due to Rita,
An additional 766,400 customers experienced power outages in
Texas and Louisiana:
Another 3,400 MW of generation was damaged or had to be
taken out of service to protect vital equipment;
Over 3,800 miles of transmission lines were lost;
344 substations were damaged; and
11,500 utility poles were damaged or broken.
In responding to both storms, utility restoration efforts were
swift, well-planned and of a scope that is unprecedented--just as two
severe hurricanes hitting roughly the same area of the Gulf Coast
region within weeks of one another is unprecedented--just as the
pervasive submersion of large segments of southeast Louisiana for weeks
at a time is unprecedented. In response, Entergy mobilized more than
13,000 utility lineman and other workers and hundreds of millions of
dollars have and will be spent to get the lights back on as safely and
quickly as possible.
While responding to the storms, Entergy remained in daily contact
with the Department of Energy, providing daily reports and briefings.
As a result of these communications, situation reports were posted by
the U.S. Department of Energy, Office of Electricity Delivery & Energy
Reliability under Energy Emergencies: Hurricane on its website at:
While much work remains to be done, restoration efforts have been
quite successful outside of the flood zone. Many of the customers who
have lost service as a result of Katrina and who are capable of
receiving service have been restored, and more than 75 percent of the
customers who lost service as a result of Rita have been reenergized.
However, it is slow and difficult going in New Orleans and the other
hardest hit areas of the Gulf Coast, such as Beaumont and Port Arthur,
Texas, and Lake Charles, Louisiana.
Entergy has spent considerable resources to restore service to ten
refineries that it serves in the Beaumont/Port Arthur, Lake Charles and
New Orleans area. Many of these refineries suffered significant damage
to their facilities and the transmission lines and substations that
serve these facilities fared no better. However, as of early this week,
transmission paths were established to seven of these facilities and at
least one substation was energized at each of these refineries,
enabling them to take clean up/restoration power. Entergy is in
constant contact with each of these customers and stands ready to
provide power to meet site specific start-up schedules. These
refineries have an aggregate refining capacity of 2.27 million barrels
of crude per day and therefore are very important nationally as well as
Rita also caused interruption at two DOE Strategic Petroleum
Reserve sites that we successfully restored several days ago.
Similarly, Entergy quickly restored service following Katrina to
critical shipping ports, including the Port of New Orleans. In fact,
the City's Command Center in the Hyatt Hotel and the Port of New
Orleans were among the first facilities to receive power following that
As a final example, Katrina halted activity at a fuel depot in
Collins, Mississippi, which is outside of the Entergy service
territory. Because of its critical importance to the energy industry in
the region, Entergy provided immediate assistance to restore
electricity to this facility. Attached is a summary of those events
which highlight the exceptional service of the men and women on the
frontlines of the restoration battle.
Entergy's emergency response and operational restoration efforts in
the devastated region have been vital to the recovery effort. It has
given confidence and hope to citizens throughout the region that we can
rebuild. It is clear to me from seeing firsthand the commitment of the
hearts, minds and souls of these men and women directly involved in the
restoration, that our employees will do anything to help our customers
and our neighbors. The cost of these efforts has been staggering.
Entergy estimates that storm related and business continuity costs from
Katrina at between $750 million and $1.1 billion. Estimates of
restoration costs for repair or replacement of Entergy's electric
system damaged by Rita are in the range of $400 to $550 million.
the unique challenges faced by new orleans
Katrina not only presented the problems attendant to a hurricane;
its rain and wind, combined with the failure of the levee system in
southeast Louisiana, damaged as many as 170,000 homes and businesses in
the area so severely that they cannot be re-energized until some
combination of demolition, reconstruction, and inspection occurs--a
process which may take many months. The utility subsidiary that serves
New Orleans, Entergy New Orleans (``ENO''), has been especially hard
From an infrastructure perspective, ENO's electric and gas
system sustained massive damage.
From a customer perspective, due to the unprecedented
flooding, many tens of thousands of homes and businesses in the
City have been underwater for weeks. These structures cannot
simply be repaired after being submerged for so long. As a
result, the City has lost a large segment of its housing stock,
and ENO has lost the vast majority of its customer base.
From a financial perspective, current estimates of the cost
to restore ENO's system for gas and electric service range from
$325 million to $475 million--an amount that exceeds the total
amount invested to provide those utility services in New
Orleans on the day before Katrina came ashore.
Clearly, the confluence of events following Katrina caused an
immediate and severe deterioration in ENO's financial condition in the
days following Katrina. ENO's revenues, the continuity of which is
vital to pay timely fuel, purchased power, and restoration costs,
disappeared overnight. And because of ENO's relatively small size, it
quickly hit short-term borrowing limits pursuant to SEC orders, and its
debt was downgraded by rating agencies to below investment grade.
Also, ENO was unable to access capital markets to raise new debt,
because simple steps, like due diligence could not be completed timely,
ENO is unable to provide revenue projections assure a revenue source
sufficient to demonstrate its ability to service new debt given the
uncertainty surrounding the timing and size of the return of its
Faced with a severe and immediate need for cash to continue its
restoration efforts, ENO filed and obtained Chapter 11 bankruptcy
protection on September 23, 2005. This filing allowed Entergy
Corporation, ENO's parent, to provide up to $100 million in short-term,
debtor-in-possession financing so that ENO can make currently due
payments while continuing to restore service as areas of New Orleans
rebuild and recover.
But this is only a temporary stop-gap measure. It will take many
times this amount to reconstitute ENO in a manner that is able to
provide reliable service to its customers. To understand this, consider
the following comparative data:
Table 1.--ENTERGY NEW ORLEANS COMPARATIVE DATA
[All Amounts Approximate]
Pre Katrina Post Katrina % Change
Electric Customers........................................ 190,000\1\ 60,000-75,000\2\ (68)%-(60)%
Annual Non-Fuel Electric Revenues......................... $316M\1\ $90-120M\2\ (72)%-(62)%
Average Annual Storm Restoration Cost..................... $2M\3\ $325-475M 1+16,000%-
Average Annual Storm Restoration Cost per Customer........ $11\3\ $4,300-$7,900\4\ +39,000%-
\1\based on 2004 actuals
\2\estimated based on 115,000-130,000 customers unable to take service for extended period of time per September
30, 2005 press release [A process that could take many months or years]
\3\cost estimated based on last 5 years; average per customer based on 2004 customer count
\4\cost estimated based on Katrina restoration; average per customer based on post Katrina customer count
As a regulated utility that has devoted its property to public use,
Entergy operates under a cost-of-service regime. As such, ENO is not
entitled to unregulated profits, but it is entitled under well-
established law to the opportunity to recover from its customers all of
its costs, including its storm restoration costs. This traditional cost
recovery approach has been used in response to past hurricanes and ice
storms and has raised customer bills. But the magnitude of those cost
increases was manageable. That would not be the case for the level of
destruction caused by Katrina and Rita.
These storms, coming as they did one after the other, and
accompanied by massive, long-term flooding, require a different
approach. Even under the best of circumstances, it is difficult to see
how these customers, many of whom live in some of this nation's poorest
neighborhoods, could bear the loss of their belongings, homes, and
jobs, and also bear the cost of the restoration of the utility system.
This problem is particularly acute given the extent of the devastation
to hundreds of thousands of homes and businesses throughout the Gulf
Coast region. In addition to bearing that cost, the cost of restoration
will also be unprecedented.
Entergy estimates that electric rates in New Orleans would have to
more than double to keep ENO operating during the period 2006 to 2008.
This is due to a combination of the extraordinarily high restoration
costs in absolute terms (+16,000%--+24,000% higher than average for
that company over the last five years) and the fact that the customer
base among which restoration costs would be spread is significantly
lower. On a per customer basis, the cost of Katrina would be $4,300 to
$7,900, a level that is unaffordable given the below-national-average
income of citizens in New Orleans' citizens before the storms. Clearly,
the federal government must provide alternative means of funding the
restoration and the cost of rebuilding one of the exceptional areas in
the United States, the City of New Orleans and the Gulf Coast region.
Some may ask, ``Why should the federal government take a role
different from the one it has taken for years through its well-
established programs for natural disaster and emergency management?''
The answer, I believe, is four-fold:
1. Unprecedented levels of damage and destruction caused by
Hurricanes Katrina and Rita;
2. Unprecedented flooding for an unprecedented period of time
resulted from levee failures in and around the New Orleans
3. Unprecedented displacement of a large number of people for
an indeterminate period of time. This includes a very
significant portion of the population of the City of New
Orleans and virtually the entire population of St. Bernard
4. The extraordinary level of poverty among large segments of
the population of the region--citizens who would be required to
pay the cost of restoration through regulated utility rates if
federal assistance is not provided to protect them from this
In short, the potential rate effects of the enormous restoration
costs and the loss of customer base will stifle any form of economic
development--much less full recovery--if the federal government does
not intervene. In such a scenario, the rates for power services--
electricity and gas--will be so abnormally high that no industry will
locate here or bring new jobs that are the engine of economic recovery
We cannot let that happen. The City of New Orleans and the
Mississippi Gulf Coast have too much economic, social, and cultural
importance to the nation. We urge you at the federal level to do
everything that can be done to reduce the burden on customers who
already have lost so much, and to restore safe and reliable utility
THE NEED FOR FEDERAL ASSISTANCE
We must put in place immediate, direct federal assistance for
utilities serving the Gulf Coast region, particularly ENO, which,
unlike municipal utilities or cooperatives, are not eligible under the
Stafford Act for emergency financial assistance to pay for restoration
and rebuilding costs under existing federal law. There are several ways
in which the Congress can help those who were hardest hit by Katrina
For example, enactment of the Privately Owned Utility System
Restoration Act of 2005 (modeled after the post-9/11 Relief Act
provided for the Airline industry) would provide financial compensation
to electric and gas utilities to recover the direct costs resulting
from Hurricanes Katrina and Rita for plant, equipment and restoration
costs, as well as providing financial compensation through 2007 to
cover the incremental losses for those companies which have significant
and sustained loss of customers. A provision providing compensation for
direct and incremental costs is included in the Landrieu/Vitter
``Pelican Bill'' (S. 1765 & S. 1766), which was introduced in the
Senate on September 22, 2005 and referred to the Senate Committee on
We would also urge the Congress to consider other federal
legislative efforts to provide financial relief to help utilities such
as Entergy and Entergy New Orleans rebuild the Gulf Coast region.
Another approach to providing financial assistance is through the
Department of Housing and Urban Development under the Community
Development Block Grant (CDBG) program. Community Development Block
Grants appear to be a viable approach to providing direct federal
assistance to utilities. Congress used CDBG funds to provide direct
assistance to Consolidated Edison (and other utilities) following the
September 11, 2001 terrorist attacks.
These grants, if funded and dispersed on a timely basis, can
significantly mitigate costs that would otherwise be passed through to
utility customers. Entergy strongly recommends that the CDBG program be
modified to fit the extraordinary circumstances resulting from Katrina
and Rita. For instance, Entergy is recommending to Congress that the
CDBG program and funds by tailoring language to directly target
electric and gas utility companies so that there is no ``battle'' among
other service providers (phone, cable, etc.) for such grants. Funding
for these other entities should be done separately so as to not impede
financial assistance to electric and gas companies. Restoring electric
and gas service is simply too important to the City, region and the
Additionally, Congress must streamline the CDBG fund distribution
process. Entergy recommends that Congress itself must set specific
statutory timetables and periods during which the CDBG funds must be
Finally, Congress must recognize the special and unique
circumstances of New Orleans generally, and ENO specifically. As noted
earlier, New Orleans is home to some of the poorest citizens in the
country. This has always presented special challenges for ENO. That
challenge has become exponentially more difficult as a result of the
significant and perhaps sustained loss of ENO's customer base as a
result of hurricane Katrina and Rita, and the associated flooding.
Simply put, increasing electric rates to cover storm and on-going costs
would place far too great a burden on those customers remaining or
returning to the City, and is therefore not a viable alternative.
Thus, in order to recognize these unprecedented conditions, Entergy
recommends that Congress implement a means of direct federal
assistance, perhaps through CDBG funds, that can be used for those
electric and gas companies that have and will continue to suffer as
result of this dramatic and potentially sustained loss of customers.
To ensure that only those utility companies in such dire straights
are eligible for such relief, Congress must also establish specific
eligibility requirements for such federal compensation. One approach
would be to limit this relief to a company that has seen its customer
level return to no more than 80% of its pre-Katrina/Rita levels.
A third alternative for providing federal relief is through a
waiver of the Stafford Act. The Federal government has intervened with
immediate financial assistance to utilities on the north shore of Lake
Pontchartrain (electric cooperatives) that were impacted by hurricane
Katrina, but has not and cannot do so for the privately-owned utilities
on the south shore of the lake without Congressional intervention. Who
can seriously claim that customers of utilities on the north shore
deserve aid and protection against crippling rate effects, but those on
the south shore--many of whom have been commanded not to return to
their homes for the last month due to flooding--do not? In this time of
need, such disparate treatment cannot be justified.
This disparate treatment stems from the fact that privately-owned
utilities are not eligible to receive financial assistance from the
Federal Emergency Management Agency due to a statutory prohibition on
such funding in the Robert T. Stafford Disaster Relief and Emergency
Assistance Act. A waiver of this provision was included in the
``Pelican Bill'' (S. 1765 & S. 1766), and the need and basis for such a
waiver of the Stafford Act is clear in my view. This type of waiver
would provide direct assistance for infrastructure restoration of a
critical national interest and for immediate and permanent relief of
these customers who are beset with massive losses due to these storms.
The rates, terms and conditions of service to customers are heavily
regulated by state and local regulatory authorities (i.e., the
Mississippi Public Service Commission, the Louisiana Public Service
Commission and the Council of the City of New Orleans). One of the key
features of utility regulation is that the utility and its shareholders
are entitled to charge only the rates set by the government, in
exchange for which they are given the opportunity to recover all of
their costs of doing business--including their cost of capital. Without
assurance that investors will obtain a return on their investments, the
investors will not provide the funds necessary to finance the
Without direct federal assistance, the customers remaining on the
utilities' systems will face enormous rate increases. This would
cripple any hope of economic recovery for the region and discourage
people from returning as utility rates in those areas would be
unacceptably high. Such rates would initiate a regulatory ``death
spiral,'' from which there is no means of recovery. For the City of New
Orleans, this is a potential doomsday scenario. Even if there were a
foreseeable and significant customer base for ENO, something that no
reasonable person could confidently predict will occur even in three to
ten years, the rate increases to the remaining and returning customers
would be unsustainable. Without federal intervention, these costs will
cripple the City's and the region's economy for decades and render the
local utility unable to restore this vital infrastructure. We strongly
urge that Congress pass such a waiver immediately. President Bush
committed the country to rebuild the City of New Orleans in his
September 15th speech from historic Jackson Square. The ultimate
economic and social recovery of the City will be difficult and made
even harder if there is not a commercially viable local electric and
gas utility. Yet without direct federal aid, a company such as ENO that
has sustained such a significant erosion of its customer base cannot
maintain safe and reliable on-going operations and provide the
necessary foundation for the City's economic restoration and growth.
You have seen the pictures of the devastation, but this isn't about
pictures or devastation; it is about the recovery, about the future and
about hope. The City of New Orleans can only have a future if it can
obtain the federal financial assistance necessary to rebuild its
infrastructure. Obviously, that infrastructure includes that of the
electric and gas utility that serves the City and its citizens.
We ask for your assistance so that we can continue to help one of
this country's great Cities get back on its feet.
COLLINS, MS FUEL DEPOT EVENT SUMMARY
Hurricane Katrina knocked power out to millions of customers in MS
and LA. The outages impacted all classes of customers especially energy
sector facilities such as refineries, pipelines and fuel depots. This
led to a gasoline crisis in the midst of restoration efforts. One such
facility was a fuel depot located in Collins, MS in the Mississippi
Power Company (MPCo) service area. A portion of that facility is served
from the west by South Mississippi Electric Power Association (SMEPA),
but an overwhelming majority of the facility is served by MPCo from the
South. SMEPA was able to reenergize its portion a day after the storm,
but this only supplied power to a few of the facilities in this large
Mississippi Power Company's distribution facilities were brought up
in quick time, but transmission facilities that served this facility
from the South were badly damaged. MPCo, recognizing the importance of
this facility, considered providing power from a different route from
the east and immediately began work to provide this interim fix.
Four days after the storm on Friday, September 2nd, Entergy's
Transmission group received a call from Southern Company's transmission
group requesting assistance. The damage to MPCo's transmission
facilities were much worse than originally thought and it became
apparent that it would take too much time to rebuild their transmission
facilities to serve the fuel depot in Collins. While surveying the area
by helicopter the Southern Transmission group assessed a 230 kV
transmission interconnection segment south of the Mississippi border in
Louisiana just north of Bogalusa, LA that belonged to Entergy
Louisiana. Southern believed it would be quicker to repair this damaged
transmission tie and feed power into the Collins Fuel Depot by tying
into the Southern/MPCo transmission system that ran from the MS/LA
border through Hattiesburg, MS North to Collins.
In addition, EMI had received calls from MEMA, FEMA and DoE asking
if there was anyway they could help with restoring power to the fuel
depot in Collins. They identified this as a high priority in helping to
resolve the fuel crisis that was mounting in the area.
Entergy had previously assessed this transmission tie and given it
a low priority to repair since it was only an interconnection tie and
was not used to directly serve any Entergy customers. After receiving
the call Entergy recognized the importance the Collins fuel depot meant
to the growing fuel crisis and immediately began diverting resources
working on restoration in Mississippi to this very isolated
transmission tie located in Louisiana marshlands.
While the damage to these transmission facilities were less than
those experienced by MPCo, they were still significant. The
transmission line in question ran some 20 miles north of Bogalusa, LA
to the MS border. The assessment identified a dozen broken arms, three
spans of transmission lines downed and three transmission structures
along a 4 mile stretch of marshlands. Furthermore, the location of the
downed structures were in an in accessible area and after discussion
with surrounding landowners, Entergy soon realized that a two mile road
would have to be cut through dense forest to the damaged structures.
Workers also soon learned that the structures were so badly damaged it
would take weeks to reconstruct the towers so engineers began looking
for alternatives. The plan they came up with, airlift three
transmission structures from existing transmission facilities on dry
ground into the marshlands.
Work got underway on Saturday, September 3rd, first priority
cutting the two mile long road through dense forest. The next
challenges involved locating existing transmission structures and a
helicopter capable of lifting 7,000 lbs. A sky crane was located in
Oregon, but it would be a week before it was available. A call was
placed to the Mississippi National Guard who gladly provided a Chinook,
capable of lifting 10,000 lbs, to assist with the restoration.
After working through numerous resource and environmental
challenges, this team of 120 Entergy personnel and contractors
completed restoration by Saturday, September 10. An event that should
have taken weeks to complete was completed in days. Through the use of
ingenuity and creativity these individuals helped resolve a fuel supply
crisis that was hampering restoration efforts in Mississippi.
The Chairman. Thank you very much.
Senators, normally we would just proceed to Senator
Bingaman and move around, but with his permission--you have
time, do you not? I am going to waive. Is there any Senator who
has an absolutely urgent appointment somewhere else who would
like to ask, or they cannot stay? I do not want to do that
always, but it has been a very, very important hearing. Is
there anybody who must ask a few questions or they will not be
here? You are all very generous if you do not.
Senator Talent. You are tempting us all.
The Chairman. But you are all being very, very
understanding that I am being generous and you are not
accepting it. So, Senator Bingaman, you are first.
Senator Bingaman. Thank you very much, Mr. Chairman. I
thank all the witnesses for your excellent testimony.
One issue I wanted to get into relates to an amendment that
Senator Alexander offered during the markup on the energy bill,
an amendment to require efficient dispatch, as I recall it. I
supported the amendment. I thought it made sense, essentially
saying that we should use our most efficient power generation
plants first to meet our demand and our less efficient ones
should be left until they are absolutely needed.
As we are urging Americans to save and to be efficient in
their use of energy and to cut down their use of natural gas,
it seems to me eminently reasonable that we do the same thing
with regard to the electric utility industry. I am under the
impression that 23 percent of our natural gas consumption today
is essentially natural gas that is consumed by the power
industry to produce electricity. And requiring them to go ahead
and produce that from the most efficient plants that they have
available seems to me to make absolute sense. I believe, Mr.
Liveris, you had this in one of your recommendations.
I wanted to ask Mr. Hebert. One of the concerns that I have
had is that in the rebuilding that you folks undoubtedly have
to accomplish, and we want to see you accomplish, there has
been criticism of your company by the Louisiana Public Service
Commission saying that there is too much use by Entergy of old
and inefficient natural gas units and that there are more
efficient units that could be used, but your transmission
system has not been configured to take advantage of those. I
would be interested in whether you think that is a valid
criticism. Is this an opportunity?
I know all of the catastrophe that we have and that you are
faced with, and I am sympathetic to that. But if you are going
to rebuild that transmission system, is it possible for you to
reconfigure that so as to use the most efficient power
generation assets available in your region, even if those do
not belong to Entergy, even if those belong to independent
power producers? Because my understanding is that there are
some very new, more efficient plants that are not able to sell
into your system because you are just not configured to accept
their power. Any reaction you would have to that I would be
Mr. Hebert. I have a huge reaction. Senator Bingaman, you
and I have been working toward this end for a long time, and
you know I am very vocal about my opinions and certainly I will
do that here.
First, let me say that we do have a pending matter before
the FERC with regard to what you are talking about, so I will
be a bit careful. But also let me suggest to you several
We have been working with many different facets of the
Federal Government: the Nuclear Regulatory Commission, the
Federal Energy Regulatory Commission, and the Department of
Energy. As recent as last week, we had Gil Benderhal--I believe
is how you say his last name. I will apologize to him if I say
that incorrectly. But he is, I think, with the Office of
Electricity Delivery and Energy Reliability. We had them down,
and we are working in concert with the DOE and they are helping
us and providing us with some information. But they came down
and actually assessed our approach of restoration and assessed
our restoration in infrastructure.
So, having said that, I think that would be evidence to you
that we are doing anything and everything that we can to make
certain that the system that we rebuild is an operational
system that functions reliably and, yes, certainly as
efficiently as possible.
But since I have laid that foundation for you, I think
there are several other important pieces of information that
this committee needs to know about.
When you look at a generating station--and it does not
matter what kind of generating station it is, but what does
matter about it is something sometimes other than efficiency.
Efficiency is a small factor when it comes to us looking at and
deciding whether or not we use that facility. It is probably
important, if you need load following, to use load following
and combine that with efficiency. It is probably important if
you need voltage support. In other words, you have a system
here but you have got to get power over here, and if this
system is not running, you lose the voltage support. So from a
physics and engineering standpoint, you lose your ability to
transmit power. It is probably important to look at something
other than just efficiency.
Having said that, I do not want you to think that
efficiency is not on the tops of our minds. I do not have to
tell you how much we worked toward that in Entergy. You know
that. But you have to look at all the factors.
Having said that, when I was at FERC--I believe it was in
1997, and I have told this story 100 times, but I want you to
know it because I do not think I have told you and I think you
need to know it. I had a meeting with a group of merchants when
I was a FERC commissioner, and I know Mississippi and Louisiana
like the back of my hand because that is my home. I have spent
my adult life in the energy industry. I started in natural gas,
but then ended up in electricity. And I told the merchants at
that time, do not site here. It is not where the constraint is.
It is not where the bottleneck is. It is not where the
congestion is. Do not site there. It is going to cost you a lot
when you do it. The upgrades are going to be horrific. Why
would you do that?
But you have got to remember in 1997, as we talked about
gas prices, it was a very different day. In 1997, what they
were telling me is we are going to make enough money. We are
going to pay for that interconnection. Do not worry about that.
So much so that they contracted with utilities to do that very
I told them they were putting them in the wrong places. It
is going to be expensive to fix that sometimes.
But I will close with this, and I think this is
significant. Our energy needs in 2004--34 percent of the energy
we purchased from non-affiliate merchants. I think that is very
But we always look at efficiency, and I appreciate your
The Chairman. Senator Bingaman, you had a number of
questions, but you do not have any time left.
Senator Bingaman. I know that.
The Chairman. I am going to start. When we give you a
question, we are going to set a limit on how long you can take
to answer it.
Mr. Hebert. It was a difficult question, Mr. Chairman, but
it was an important question.
The Chairman. Well, it was one that seemed to stir you up
for some reason.
The Chairman. In any event, on this side we are going with
the next Senator. I think that is Senator Alexander. Senator
Thomas, you are next on this side, Senator Akaka on that side.
Senator Alexander. Thank you, Mr. Chairman. Thanks to all
of you for very helpful testimony. I am going to ask several
questions and if you could give me short answers, I can get
more questions in because this is a learning experience for all
I greatly appreciate Senator Bingaman's question about the
efficient dispatch of natural gas. We have lots of old
inefficient gas plants around and we have lots of new gas
plants around. The principal driver for demand of natural gas
is the fact that in the 1990's almost all of our new plants for
electricity were natural gas.
So, Mr. Liveris, what should we do about the efficient
dispatch of natural gas, and how much would that help in terms
of stabilizing the price of natural gas?
Mr. Liveris. Thank you, Senator Alexander.
There is no question that combined heat and power, co-gen,
facilities are the most efficient, technically proven, and they
should be given priority to dispatch into the grid. There are
also combined cycle power stations that we could actually put
in front of single fire-powered stations. So what I am really
saying is that there is a priority. There is a tier.
To be very brief, this could free up 644 bcf of gas.
Senator Alexander. How much gas is that? Can you give us
some way to imagine it? Is that a little bit or is that a whole
Mr. Liveris. Well, it is a lot. I totally agree with the
comment that this is a complex solution, and this is one part
of it. So it will not solve everything. The studies we did when
we brought this into the componency, LNG, more OCS gas, when we
put all that together, we can solve the problem. But some will
be 2 years. Some will be 5 years. Some will be 10 years.
Senator Alexander. What is the timeframe for us to deal
with the issue of automobile fuel efficiency?
Mr. Liveris. A 0-to-2-year timeframe. It will not solve the
probably immediately. Natural gas prices will stay up high for
a while, but the futures markets will start to see that we have
taken action to actually be more efficient and increase----
Senator Alexander. But there are not very many things that
are in the 0-to-2-year timeframe that make much difference. Is
that not correct?
Mr. Liveris. There are not. Correct. But your action--your
action--will signal to the futures markets. Why did it go up
instantaneously? It was basically demand destruction that is
going on. Fundamentally it is saying, go away at $14, because
it will not get any more supply anytime soon. If we work on OCS
today and we get gas in the 2-to-5-year timeframe, the futures
market will bring that price down.
Senator Alexander. You said the cost of raw material,
natural gas, was 50 percent of your cost of production today.
What was it 5 years ago?
Mr. Liveris. Twenty-five percent. It has doubled.
Senator Alexander. May I move to Mr. Cavaney with a
different point? Senator Johnson and I introduced a bill called
the Natural Gas Price Reduction Act. Senator Domenici and
Senator Bingaman and others took parts of that and added many
ideas of their own. In a way you could say that the energy bill
that we passed 2 months ago was a natural gas price reduction
act because it was conservation and then alternative energy and
then new supplies, as well as other things. Now I think we need
to have more aggressive conservation, more aggressive new
Let me ask you very specifically about one idea: Lease 181.
Lease 181 is basically a line, I believe, that could be drawn
in the Gulf of Mexico between Florida and Alabama. Is that
Mr. Cavaney. Essentially, with a few variations, yes.
Senator Alexander. Does the President today have the
authority to draw that line?
Mr. Cavaney. In concert and consultation with you all, yes,
he could do that.
Senator Alexander. So, does he need any new legislation in
order to draw that line?
Mr. Cavaney. I would have to check and get back with you. I
am not exactly sure it is precise in terms of how you interpret
it. You would have to talk to the legislative counsel here, as
well as at the White House.
Senator Alexander. Well, would you let me know what your
Mr. Cavaney. I will.
Senator Alexander. Because my opinion is that the
administration could draw the line.
Mr. Cavaney. It is our understanding it can be lifted, yes.
Senator Alexander. If the line were drawn and if it were
100 miles away from Florida, which is further away from Florida
than Cuba is, for example, how much natural gas might be found
on the Alabama side of the line?
Mr. Cavaney. We cannot be exactly that precise, but it is
known and there is enough exploration that has been done that
the eastern part of the gulf, the area you are talking about
generally, is considered to be the most gas-rich part of the
gulf. Therefore, there are some very, very rich, almost
exclusively dry gas deposits of significant size, closer in,
but that also indicates to the point--as I said, everything
over there in that area--you are talking about 181, which is
why it was so attractive when we were attempting to get it.
Senator Alexander. Can you give me any rough idea of the
dollar value or of the amount of gas? Mr. Liveris was trying to
estimate how much natural gas efficient dispatch might save.
Could you either later or now----
Mr. Cavaney. Yes. We can get that to you. We could tell you
about various elements. The closer-in gas is more significant,
but out beyond 100 miles, we can break that out.
Senator Alexander. Well, my sense is it is a huge amount of
Mr. Cavaney. A huge amount of gas.
Senator Alexander. Is it probably the first place to go to
get the largest amount of new natural gas most quickly?
Mr. Cavaney. Yes, it is because it is also closest to some
of the most attractive and needful markets.
Senator Alexander. How long would it take? This is my last
question, Mr. Chairman. How long would it take if the President
drew the line for the gas to be drilled and be into the market
and would that not have some effect on the futures market and
begin to help stabilize gas if the market knew that that gas
Mr. Cavaney. There is no question it would send a very
powerful signal. I want to associate myself with the comments
before. The signal that is being sent by public policymakers in
America is natural gas is not something you should count on at
$14. And if we do not turn this around, you are going to have
demand destruction, the likes of which we will not even to be
able to calculate. Once you move those people away, they will
not be here.
I did want to tell you that the President does have the
authority to move that through MMS. They would have to go
through their lease sale. There are already some leases along
those areas that could be used, but it is very, very important
to reinstitute that part of the lease sale. Then you could do
it and they could be up within probably 5 to 7 years.
Senator Alexander. So, Mr. Chairman, as I hear him, in
plain English, we do not have to pass a law for the President
to draw a line on 181, which would produce a huge amount of
natural gas and send a signal to the market.
The Chairman. I heard it.
Senator Smith had an observation.
But let me just say you asked them to give us the estimates
of what we could count on if this occurred. We can also get
that from the Federal Government. I think as an aftermath we
should do that. We should have that in here.
Yes, Senator Smith.
Senator Smith. Mr. Chairman, I wonder if I could ask my
colleagues--I know I am not next--if I could ask one question
to throw in the mix of this because I do have to leave now.
The Chairman. Senator Akaka, is that all right with you?
Senator Akaka. Fine.
The Chairman. All right, Senator Smith. We are going to
hold you to one question.
Senator Smith. Thank you, Senator Akaka.
Gentlemen, we talked a lot about natural gas and the
problem and how it is being used to create electricity,
frankly, rather inefficiently. But that has all been driven, in
part, by Government policy to meet the Clean Air Act. But the
Government owns many assets that are non-polluting, non-global
warming, if you will, nuclear, and specifically hydro. These
are assets that run at half speed at best.
Are any of you aware of the administration taking any
efforts to utilize these power assets to get us through this,
at least in a brief period of time?
Senator Smith. Thanks, Mr. Chairman.
The Chairman. Senator, what public assets are you talking
Senator Smith. Well, Mr. Chairman, obviously we have
capacity in hydroelectric that is limping because of
environmental restraints on it. We could light up most of the
country if these assets were utilized. I just wanted to make
that point. We are in an emergency and maybe there is a brief
period of time we ought to use what we already have to help the
American people get through this crisis.
The Chairman. As we ask questions, you might ask Mr. Curtis
what he thinks about that. That would give us an idea. We will
ask you in a while.
Mr. Curtis. At the risk of feeling like the skunk at the
party here, I----
The Chairman. Wait a second.
Mr. Curtis. I am sorry. I will wait my turn.
The Chairman. I was not going to ask you to comment now
because that is not his question. Let us go on here. That is a
question somebody is going to ask you.
Senator Akaka. Thank you very much, Mr. Chairman.
Since we are talking about natural gas, let me ask an easy
question to Mr. Helms. Some industry analysts have posed the
idea of a strategic natural gas reserve that could be used in
times of supply emergency, as we have now, and similar to the
SPR, Strategic Petroleum Reserve. What are your pros and cons
of this idea?
Mr. Helms. Senator, I think it is very important for this
country to have a robust storage backbone, if you will. The
challenges for our industry to develop that storage is the same
thing as my colleague to the right said, that it takes a
certain amount of base gas to provide the pressure to produce
the gas that you put into storage, and at $14, there are no
economics in the world that will permit you to do that. It
takes storage development from inception, through permitting
and construction, between 2 to 3 years to be able to get there.
The industry has gone through a period of deregulation over
the last 15 years where the interstate gas transmission
companies used to be the supplier of the natural gas to the
market. Today that is not the case. So the storage is held by
others, local distribution companies, and users like Dow, and
also trading and marketing companies.
So I think the issue really gets to where do you want to
have the storage, who is going to go ahead and buy the gas to
put it in storage, and then in those periods of time that you
need to allocate or withdraw from storage, what is the
mechanism or the processes and procedures to do that. And we do
have a very competitive market today.
Senator Akaka. Mr. Liveris, would you have a comment on
Mr. Liveris. I would just reinforce what Mr. Helms said.
There is no question it will be a powerful signal. More storage
will reduce volatility. But the issue is the $14 number, which
is why the 181 question and why the whole notion of releasing
OCS becomes so powerful. Increased supply will lower price in
the futures. Then you can start working on storage as a check
against future vulnerability, which is really the key. You will
never ever get there the way we have with petroleum, though.
Senator Akaka. Thank you.
Mr. Hebert, as you know, I have just returned with my
colleagues from New Orleans and Baton Rouge and was struck by
the contributions of Entergy employees during the hurricanes
and the needs and challenges facing the company to rebuild and
provide reliable electricity to the region. You have eloquently
With respect to Federal assistance, can you expand more
about the unique circumstances in your case and why Entergy in
New Orleans should receive Federal financial assistance? Are
you suggesting this kind of financial assistance be available
for any utility that suffered a severe natural disaster, or do
you see this need limited particularly to New Orleans' case?
Also, you mentioned in your testimony using community
development block grants as a way to provide Federal assistance
to utilities, citing assistance to Consolidated Edison and
other utilities as a precedent, and provided suggestions on how
to improve the block grant process. Even without a streamlined
distribution process and targeting language would financial
assistance through block grants still be a helpful form of
assistance or are other options needed?
Finally, do you have further ideas on additional mechanisms
for Federal financial assistance?
I know I have many questions here. If you choose to, you
can answer some of it because of time, and you can provide
responses for the record.
Mr. Hebert. Senator Akaka, thank you. What I will do, at
the committee's request, is answer a couple in about a minute
and then provide for the record a more detailed answer because
that is the crux of why I am here.
I think fundamentally it is an equity argument. As we look
at this--and now we understand that transmission and
distribution is something that is not insurable within any
reasonable means after hurricane Andrew--is it fair to continue
to distinguish between customers and say that customers of one
group, if you live in one area, your rates get to stay low
because you get Federal assistance; if you live in another
area, you do not? I think that should be changed. So having
said that, I think that answers the simple and easy question.
As far as Entergy-New Orleans itself, the reason it is
different is that for the first time in American history, an
American city, an entire city, an entire utility operating
company, has been taken off the map. We have no revenues. We
have nothing. We need immediate assistance there, and that is
why something like waiver of Stafford or quick legislation,
something to give an immediate cash infusion of, say, $475
million or somewhere close to that, would be sufficient.
The community development block grants would be more in
line with doing similar to what you did for ConEd after 9/11,
understanding that we do not want to raise their rates either.
So spread that among the other investor-owned utilities. I
think that would be the fair approach.
But I will give you a much more detailed answer. But I
think the bottom line is, should not all customers be treated
Senator Akaka. Thank you for your response.
The Chairman. Senator Akaka, would you yield?
Senator Akaka. Yes.
The Chairman. I do not want you to answer, Mr. Hebert, but
I just want to make an observation. I understand clearly the
unfairness or the lack of equity and have great empathy. But I
think when you tell us you have no customers, the issue then
comes, are not some of them never going to be customers? Have
they not stopped being customers in the future because of what
has been destroyed? That would have to be taken into
consideration as part of some plan. I saw it and all those
houses that are not customers now--and that is well over two-
thirds of the customers, not two-thirds of the use--many of
those are never coming back as users. I do not know what other
Mr. Hebert. Yes, sir, Mr. Chairman. The people of New
Orleans would never ask you to give them money for something
they did not do. If we do not restore an area, we certainly
would not have costs.
The Chairman. I understand, but it might lower the price
too because you might not have to do all of it.
Mr. Hebert. Let us hope so.
Senator Akaka. Mr. Chairman, my time has expired.
The Chairman. The next Senator is Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman.
Mr. Cavaney, we hear from the industry that there will be
an adequate supply of natural gas for the winter. Is that a
Mr. Cavaney. As best we can tell--and obviously, the
biggest variable is always the weather. If you get an extremely
harsh winter, there will be strains on the fuel supply that
will be exceptional. But if we have a normal winter or just
moderately colder than normal, we think that there is going to
be enough fuel available, natural gas, home heating oil and the
like, that we will be able to work our way through that.
Basically it has already been announced by EIA that the
cost of those fuels is also going to be very high, about 40
percent higher than normal. So at least the way it is right
now, we are hoping that the availability will continue. The
cost will be high.
Senator Thomas. Well, is that the relationship? Because the
availability is there, you would not--what was the cost 3
Mr. Cavaney. This projection was pretty much--you could see
Senator Thomas. What was the cost 3 months ago?
Mr. Cavaney. I do not know exactly. I can find out for you.
Senator Thomas. It was not $14.
Mr. Cavaney. No, it was not. But natural gas also interacts
with home heating oil and with propane. There is a mixture and
they all interplay with one another. So one price does not make
Senator Thomas. Well, I guess you cannot help but wonder
sometimes if there is enough of a product, why is there that
much of an increase. It begins to make you wonder a little.
Mr. Helms, maybe it has something to do with
transportation. Now, you are in the transportation business, so
obviously you want to use gas as much as possible.
Mr. Helms. We certainly want to transport it, and I will
tell you, Senator, that our people are doing everything they
possibly can to get it in.
Senator Thomas. What is the capacity to do it?
Mr. Helms. We can do it, but if we do not get the gas
processing plants at Venice, at Toka, and Wyclosky, Louisiana,
for three examples, back online, we cannot transport the gas.
So my colleagues upstream can do everything they want to get
the gas flowing, but if it is not processed, it cannot go
Senator Thomas. But he said there is going to be enough, I
believe. It means it is already processed. Now, there is some
confusion here as to whether we are short of a product or
whether there is a product there. And then you say, well, how
come the price has gone up quite as much as it has.
Mr. Helms. Sure. Senator, first, let me tell you we have no
direct economic interest in the price of the commodity. We do
not own it. We do not take title to it.
Senator Thomas. But your ability to transport it has
something to do with it. I am from the West where there is
production, and some of the reasons why more production is not
there is because we do not have the transportation to get it
Mr. Helms. Right. We have the infrastructure in place. Our
infrastructure has been damaged significantly.
Senator Thomas. Not in the West it has not.
Mr. Helms. We are working hard to put the pipes back in the
ground. The problem we have is we cannot find lay barges. I
cannot get a dive boat out to my Vermillion 245 platform
because those dive boats are being used in other sectors of the
Senator Thomas. One of the things we have to be looking at
is the future a little bit. I know, first of all, we have an
impact immediately, obviously. For instance, you talk about the
generation. You know there are some other ways to generate
electricity besides gas. Indeed, given the whole market, there
is probably a better reason to be using coal than there is gas.
We have more availability of coal. So that is one of the things
we need to be doing, making some differentials between the use
of the available energy.
So I hope that we are thinking a little bit about the
future in terms of how Dow has to have gas for some of their
manufacturing. You mentioned we have not had generation plants
built recently. We have not. And the ones that have been have
been smaller ones close to the market because we have not had
the transportation to get them there. So I guess what I am
saying is we have some obligations to look at in the future,
not just talk about gas, but the use of gas, and so on.
Mr. Liveris. If I may, Senator. 69 percent of the gas
processing capacity is down. So there is not enough gas to be
provided. So what happens is even if you say that the rigs can
pump the gas out, he cannot get the extracted gas to us. What
that means then is demand destruction. The price 3 months ago
was $8 in the futures market. Today it is $14. People were
thinking already with the cold winter, followed by a hot
summer, there would not be enough gas to supply through these
processing plants. Period. So there is true shortage upstream.
There is processing capacity down, and at $14 people are
shutting down. The plant you saw at St. Charles yesterday is
going to be kept down for 4 months through the winter. We have
no choice. I cannot get the gas.
Senator Thomas. And there is not enough gas available,
which is what we hear.
Mr. Liveris. At $14 I cannot run economically, so I have
got demand destruction. That is really the answer.
Senator Thomas. I am not talking about the price. I am
talking about the availability of the product.
Mr. Helms. Senator, 7 billion cubic feet are shut in today
as a result of the storm. It is not flowing. We cannot get our
liquid separation plant operable for another 5 weeks. It had 8
feet of salt water under it--every pump, every motor, every
electrical piece of equipment. And we are not alone. The
refineries, Entergy, my colleagues on both sides have the same
demands for the electricians----
Senator Thomas. What is the total demand in the country?
Mr. Helms. About 60 billion cubic feet.
Senator Thomas. Yours is 7. Yours is 10 percent that is
shut down for a while.
Mr. Helms. We will get some of that back on by November and
by December and January, but I would not be honest with you if
I said we will have all seven back on by November 1.
Senator Thomas. I guess I am just trying to really get a
determination as to whether this kind of a price increase is
relative to the amount of gas that is available. Frankly, I
guess that is a hard question, but we need to talk about it
Mr. Helms. It is that marginal supply. It is the
incremental supply that sets the price for the balance. Our
local distribution companies have gas in storage and they have
continued to buy at $7, $8, $9, $10, $14 to make sure that
consumers have gas this winter.
Senator Thomas. I see. Thank you.
Senator Allen. Mr. Chairman, I have conferred with Senators
Burr and Martinez. I have to be on the floor to argue on an
amendment very shortly. I thought this would move more quickly.
If I may, if I could pose my questions now.
The Chairman. Sure, you are next.
Senator Allen. All right. Thank you to my colleagues from
North Carolina and Florida.
Several things. Gentlemen, thank you all for your
testimony. It was very probative and I think very helpful, and
I think we need to move forward on a variety of these fronts.
One thing Senator Burr and I are working on has to do with
gasoline. I am going to talk about gasoline and then natural
The Government Accountability Office did a study on all the
different fuel blends we have in this country, over 100 fuel
blends. What Senator Burr--and I am sure he will talk about
this--and I are looking to do is reduce it to the, say, three
to five cleanest-burning fuels, formularies. Non-attainment
areas pick from those fuels as opposed to having 100 different
Indeed, all of this was predictable. In June 2005, the
Government Accountability Office said because of the inflated
number of fuels that we have in this country, it adds
complexity and costs at refineries. Shipping more special
gasoline blends reduces pipeline capacity and raises costs. The
special gasoline blends contribute to higher and more volatile
prices. Gasoline prices are higher now than they would be if
gasoline were closer to a single commodity.
This is something I think we need to work on. It will be
good for consumers, but it also makes sure that in non-
attainment areas they have clean-burning fuels, working with
those communities where they have non-attainment areas.
Second, natural gas. Listening to Mr. Liveris, you are
saying the same thing I say all the time. We are losing jobs
every month in this country for people who manufacture tires,
chemicals, fertilizers, masonry products, and other important
products. Natural gas permitting, as was said earlier by one of
the other questioners, in my view, needs to be used for homes
and for manufacturing. We need to be generating electricity
maybe out in the West with hydro. But we are the Saudi Arabia
of the world in coal, and we ought to be using clean coal
technology. We also need advanced nuclear, and we also ought to
learn from what the French are doing in reprocessing that spent
fuel so it is less dangerous, safer, and more efficient.
In my view, if we were able to do this, there would be less
of a demand for natural gas for electricity generation and more
available for manufacturing, so that companies are not going
overseas where they have lower prices and a more reliable and
more affordable approach. And if they leave, these chemical and
fertilizer and tire manufacturers, they are not going to come
back in here.
I know this is a controversial issue. I was Governor of
Virginia at one time and certainly respect the rights and
prerogatives of the people in the States. The fact of the
matter is on the east coast of the United States, there may be
good supplies of natural gas. It is being explored in the
Bahamas and in Nova Scotia and possibly also Cuba. Florida does
not want exploration off their coast. I support Senator
Martinez and the will of the people of Florida. However, the
people of Virginia, through their representatives, in a
bipartisan coalition would like to have exploration far off
their coasts. If Virginia or another State would like to do so,
I do not think they should be precluded.
I also believe that it is very important that we, the
Federal Government, share it with the States. My proposal is
that they use it for reducing college tuition, use it for
transportation infrastructure, and either beach replenishment
or shoreline erosion in Virginia.
I think that this crisis, as Mr. Hebert said once in 100
years, recognizes that a lot of progress was made in our energy
bill. More needs to be done. We have the platform there, but if
something is not done quickly on some of these fuels that
Senator Burr and I are working on and I think also increasing
the supply of natural gas, we are going to be hurting our
economy and jobs. We are going to clearly continue to allow our
companies to be at a less competitive advantage or have less of
a level playing field. Ladies and gentlemen, this is a national
security issue as well as jobs in our economy and
So if any of you all have any comments on these ideas, I
would like to hear from you all.
Mr. Cavaney. Senator, speaking on behalf of the refiners
and the American Petroleum Institute, we have mentioned this
and talked with Senator Burr on a number of occasions. We
strongly support a significant reduction in the number of
boutique fuels. We think that will add great fungibility to the
system. It will make fuels more readily available. We would
love to be at the table when there are discussions about this
and work in a positive way to continue to make the
environmental gains we have made with cleaner air, but also to
get the number of fuels down. We do not know what the magic
number is, but it is somewhere down in the mid single digits.
Probably realistically you can satisfy most of the individual
State needs and still get those numbers reduced.
I would like to say another thing. We support the opt out
sort of opportunities that have been promoted by some for
States that do not want to be a part of the moratoria and would
like to participate. I would like to just make one warning. We
represent the people who explore and actually produce natural
gas and the crude oil. In order to permit, obtain everything,
get the necessary stuff to do the exploratory after the
seismic, and determine whether or not you have got something
that you actually could produce on, as a company, you are
probably going to spend somewhere between $60 million to $80
million. Technology today does not allow you, in the
exploratory process through seismic, to be able to determine
whether you are going to go in gas only or whether you are
going to pick up some crude oil or gas liquids or other things.
So we just want to make sure that the people who are
promoting gas only understand that there may be a bit of a
false promise there. You could win and opt in, but with that
provision, it may be far, far too expensive and too high a risk
to have anybody to go out there and dig rigs.
What I would like to just point out is if you look at this
100-year experience that we had in the gulf here, there has not
been one single leak of crude oil into the gulf from
production, let alone natural gas. So I think we have more than
proved that we can operate in a safe kind of environment, and
we hope that we will be able to work together on this
opportunity for States that do want to opt out and have some
production off their coasts.
The Chairman. Senator Allen, I am going to let you go first
Senator Allen. All right. Mr. Curtis and Mr. Hebert.
Mr. Curtis. I would just like to touch on a couple of
The Chairman. Let us make sure I understand.
Senator Allen. They are answering my questions.
The Chairman. Yes. Is Mr. Curtis to answer your question?
Senator Allen. Yes, and then Mr. Hebert.
The Chairman. Fine. Go ahead, Mr. Curtis.
Mr. Curtis. I will be very brief.
I made my comments at the beginning and I would like to
repeat them now. Everyone supports the notion of a balanced
energy plan. We talked about energy conservation, and then for
the last 45 minutes of questions, it has all been about more
production. I would like to bring you back to the immediate
gains available from energy efficiency and conservation and
just remind people that we need to do that.
I think one of the challenges I would like to extend to the
committee is that I think one of the reasons you are hearing
this is there are no economic actors at this table who stand to
benefit from promoting energy efficiency. All these gentlemen
represent great companies that make lots of good money and do
lots of good stuff, but they do it by producing energy. There
is nobody here that makes money by producing energy efficiency
The Chairman. Mr. Curtis, we are so pleased that we started
off by saying we are together for a change, and we want to stay
Mr. Curtis. I do too.
The Chairman. So if we do not have the right people here,
it does not mean that we do not want to get the best
information. So if we need to have a different array of people
with you to tell us about this, we want them.
Mr. Curtis. That is terrific, and I look forward to working
with you and your staff to try to give you some suggestions.
The Chairman. Because we need them.
Mr. Curtis. I agree.
The Chairman. Okay.
Mr. Curtis. Let me just stop there.
Mr. Hebert. I will just jump in quickly. To answer Senator
Allen's question, I think Mr. Curtis has got some real good
merit there, and so does Red, obviously, but I think it is a
combination of all of that.
I apologize for getting a little emotional earlier, but it
is my family, it is my friends, and I am down there in the
middle of all of this, and it is a tough time. But we have kind
of learned to be gatherers again. At night you go out and you
make sure you have enough gasoline for the next day, enough
water, and enough ice, and it really makes you focus kind of on
pure economics again. As we know, the economics of price have
everything to do with the functions of supply and demand, and
you hit on that. And you are right.
But there are some easy-to-grab fruit out there for us.
Senator Burr and I have had this conversation. I had it with
Senator Domenici as well. At the Nuclear Regulatory Commission
right now, if you want to ease some burden on natural gas--like
our Vermont Yankee plant right now. We have already
reconfigured our fuel. We have 95 megawatts of up-rate capacity
that within 3 or 4 days I could have flipped on. You could
relieve that pressure on some of these gas systems. I do not
know how much is at the NRC now. I told, I think, Senator Burr
the other day around 500. Some think there could be as many as
1,000 megawatts of up-rate capacity at the NRC, and as long as
that is done safely and securely--I have every reason to
believe it is--that is something that we could get out there
quickly and could help us on these gas prices. So I would
submit that to you.
[The following was submitted for the record:]
In the question and answer session at the end of the hearing, the
discussion shifted to higher natural gas prices and the importance of
nuclear energy in providing an alternative to natural gas in the
future. I mentioned the reactor upgrades pending at the Nuclear
Regulatory Commission and the hope that those upgrades would be
approved in a timely manner to help deal with high natural gas prices,
particularly in the Northeast. I am happy to report to you that the NRC
has approved a 20% upgrade in the operating capacity at our Vermont
Yankee Plant, saving approximately 7 million MMbtu's of natural gas a
year. This will save the Vermont consumers over $70 million a year.
Senator Allen. Thank you.
The Chairman. What we need to do is we need something from
you. That may not be something for us. It may be something for
somebody else who is holding it up, the States or something. We
need to know whether we should be involved. So would you let us
Mr. Hebert. Yes, sir. I am certainly not blaming the NRC. I
think it is resource agencies and things of that sort.
The Chairman. But if it is so, this is not the time to have
Mr. Hebert. Correct.
Mr. Liveris. Mr. Chairman, if I can. Senator Allen, I think
you did a great job summarizing all the components of a multi-
dimensional energy plan on top of the energy act that was
passed 2-3 months ago. If I add support--and I think we are
together, Mr. Chairman--to Mr. Curtis's conservation point,
which is a here and now, I think you have all the components we
need. What you said plus conservation, we will get a solution
for America's problems and keep jobs here.
Senator Allen. Thank you, sir. Thank you all.
The Chairman. I have been at this hearing for all the time,
but I stepped out and I did not hear the distinguished Senator.
So he just discussed the solutions.
The Chairman. I am very sorry. I am not part of the
Senator Allen. Mr. Chairman, we cannot do it without you.
The Chairman. I know that. I am quite sure that we cannot
have a meeting without me, but that is the only reason I am
The Chairman. In any event, let us move along here. Who is
next? Senator Salazar is not here, so we have Senator Burr.
Senator Burr. Thank you, Mr. Chairman.
So much has already been said, but I think all of you
alluded to the fact that predictability is the No. 1 challenge
for us. I take us backward just a little bit to remind you that
we did pass an energy bill, and I think the focus of that
energy bill was to make the future short-term more predictable
for business, for producers, for environmentalists. My belief
is that we can move forward. We can move forward with
conservation. We can move forward with new supply. And both can
be done in a complementary way. We can live by the rules that
are out there. The only thing it needs is coordination. I
think, in its own weird way, disasters bring people together
where we communicate for once versus all staying in our little
Mr. Cavaney, I appreciate the comments on the boutique fuel
issue, and we will continue to work with you to try to refine
I received an email this week that disturbed me from one of
my gasoline retailers in Winston-Salem. He is considered an
unbranded retailer. In his email, he described to me a scenario
where we have gone through a period of time where unbranded
retailers have paid as much as 50 cents a gallon more for gas
than branded retailers. I think you referred to that in your
testimony as price inversion.
I guess my question is quite simple. Can you explain to us
why price inversion occurs? Describe for me, if a supplier
supplies their name stations 50 cents cheaper than they supply
a station that does not have their name on it, why that is not
Mr. Cavaney. But you have to look at each circumstance. The
first question you have to ask is usually--usually, not
always--what happens is the branded stations operate under a
contract. They have a contract, which means at a certain price,
which is flexible to some metric that they have set. They can
be pretty assured of having a supply. Many unbranded do not
operate under contract. They work off the spot market, and when
there is plenty of fuel available, they actually have a good
deal and they can go many, many years actually being able to
purchase gasoline at a lower cost than somebody who is under
contract often, and that is their competitive advantage.
But it works the other way when prices invert and they go
high, and it is economics 101. What you are now talking about
is you are getting sparse supply, and therefore the price to
bid up that incremental gallon of gasoline can go literally
through the roof.
So we try and point out--and I have testified to this
effect--just because two gas stations are across the street
from one another and one guy's price is 60 cents per gallon
higher than another does not automatically mean that that
person is gouging. He may well be trying to collect just as
much overhead as the other person and being able to try to
recover his costs. So it is a function of what choice the
independent businessman or woman actually makes.
The owned and operated, which means by the refineries, we
own the station and we operate them, are well less than 10
percent. So over 90 percent of the decisions that are made on
how I want to purchase my gas and under what terms is made by
independent businessmen and women. So you cannot generalize on
this, but this covers I think, Senator, most of the cases.
Senator Burr. I hope you understand the purpose of asking
the question. I think if this were 10 cents or 12 cents--50
cents is huge. I think this retailer has a reason to question
it. I think the American public has a reason, when there is a
50 cent difference from one station to another, to pick up the
phone, call their attorney general, and say there is a guy here
up on the corner that is price gouging. Our job is to try to
make sure that, in fact, that is not happening.
Again, I think everybody alluded. This is a once-in-a-
century type of deal. We have certainly had some shortages
before. We did not see that drastic a move, and clearly we did
not see it as fast. If there is a better way for the system to
set up--I am not sure that it is necessarily responding to the
market. It is responding to whatever contracts existed before.
We had the reverse of that in California as it related to an
electricity shortage, and it was not existing contracts. It was
the one that California went out and negotiated in the midst,
and it caused a back-end problem.
But I thank you and I appreciate your willingness to look
Let me make a comment, if I could, in the time that I have
left about the rigs in the gulf. It was, I think, a pleasant
thing for all of us to see, that the technology that we have
been told about worked, that the rigs themselves did not leak
at the platform or at the wellhead. I think this is something
that has not gotten enough press on. As a matter of fact, I
have seen some press accounts of a certain number of gallons
having polluted with no explanation that that came from onshore
storage and not from platform destruction. I hope the industry
will get that word out there.
Mr. Cavaney. Yes, sir, Senator. There are over 33,000 miles
of pipeline on the seabed of the Gulf of Mexico, and every bit
of it held together. So that is even more important.
I think one of the things we will be finding, though, is
already several companies have talked about absorbing huge
amounts of write-offs that they are going to have to do to
replace all this and the costs. So we are just beginning the
exploratory process of finding out the cost side of what all
this has done. We are not asking for the Government to help
fund or do anything. This is our stuff. We are going to pay for
it. We took the risk with our insurance companies.
So it is a great story and hopefully it will give comfort
to these opportunities to look to other areas on OCS and
elsewhere we think we can operate in an environmentally
Senator Burr. I thank all of you.
The Chairman. Now, with the Senators' permission and
consent, I passed over myself, so I am going to use a couple of
minutes, and then I will get back to the next Senator, which I
think is Senator Martinez.
But I will first say, Senator Martinez, there has been a
lot of discussion about things very dear to you here today. We
welcome you on the committee so you can be a voice, but we
think we have heard that we have got to do something about
offshore drilling. We will share what we plan to do with you,
obviously. But there is no question that things are at a crisis
and something must be done.
Now, let me make first an observation. Mr. Liveris, I am so
both impressed and frightened about your testimony that I can
only wish, which is only going to be a wish, that somehow
opinion makers could hear what you had to say. We are a small
group of opinion makers. We speak so much in this country about
losing jobs in the past and in the future because of
competition overseas, and here we have right in front of us one
of the huge remaining industries that hire and pay people big
wages that is dependent upon natural gas that cannot save any
more. We speak of conservation. Mr. Curtis has told us, and he
is right. But in your statement, you said you have already
increased efficiency to the tune of 40 percent, and the
problems remain as you discussed them. Right?
Now, frankly, I am very, very worried because I do not
know, first, whether our country understands. I do not know
what we can do about it, and I am not sure that when we try
that we are going to get it done.
So could I ask you to recap one more time? And then I will
move right along. You gave us four suggestions. Would you make
them again please?
Mr. Liveris. Thank you, Mr. Chairman. You said in your
statement there something that I did want to actually make sure
that it was understood. We profit from efficiency.
The Chairman. Oh, I understand.
Mr. Liveris. The 42 percent of savings that we have
generated is through efficiency. We have done what we can.
So the four things we are suggesting that should be done,
which are really very, very key here, is that we absolutely,
totally find a way to increase natural gas supply.
The Chairman. Right.
Mr. Liveris. And the Outer Continental Shelf--Senator
Alexander and others have spoken very eloquently. State rights
is the way to do it, and it allows Florida and elsewhere to get
what they need to get for their constituencies. It is very
critical. The redrawing of Sale Lease 181 we believe can be
done without legislation. We think it can be done through
Presidential intervention, and I think it is something that is
within your hands.
We have got some numbers. We can share them with you later.
It is in our testimony. But if we released the area that is
available and that is known, it will power 25 million homes for
15 years. Available today.
The third is conservation and we need to declare a national
crisis. We need to do it. I think the start has happened in the
Energy Act. The President, Secretary Bodman, all of us. It is
serious. Two degrees down on the thermostat, three LNG
terminals. We talk about permitting LNG terminals and how long
it will take. two degrees down on the thermostat for every
American this winter, three LNG terminals saved or not needed
to be constructed in the timeframe they need to be constructed.
That is the 0 to 2 years impact of conservation. Very, very
And then the efficient dispatch of electricity, which was
referenced by Senator Bingaman. I think that needs a lot of
investigation. I think our friends from the utility sector have
a lot to say about it. I think we need deep drills--forgive the
pun--to understand tier one of efficiency on the combined heat
and power cycle, followed by tier two, followed by tier three.
Those four things.
The Chairman. Now, Mr. Curtis, the suggestion by Senator
Smith about hydro. A brief answer, if you can. What would you
think about it and what is right or wrong about it?
Mr. Curtis. The brief answer is I do not know enough about
what he proposed to give an informed answer, so I will get back
to you. So let me just stop there.
The Chairman. I am not being facetious. Can we expect the
same real open-mindedness that you have given us here today? We
need to know that this is an emergency.
Mr. Curtis. It is an emergency. You will not get a knee-
jerk environmental response. You will get a thoughtful one.
The Chairman. That is terrific.
Mr. Curtis. Sometimes they are the same.
The Chairman. Look, you are so good at it that we are not
going to know the difference.
The Chairman. Mr. Helms, in your remarks you suggested, I
think, better ``coordination,'' which was the word you used, is
needed in the restoration of gas production to help ensure
adequate supplies this winter. Could you tell us how this
coordination can be improved? We would like to help with that.
How is it to be done?
Mr. Helms. I think really at this point, Mr. Chairman,
there is a question about the interaction and sharing of
information and prioritization of equipment between the
upstream producers, the gatherers, processors, and the
interstate transmission companies. Under the legislation which
was passed, which was landmark and I think is good for this
country, there was the imposition of civil penalties of up to
$1 million a day for violation of the Natural Gas Act. I can
assure you there are people in my organization that are very
sensitive to that issue, and quite frankly, that has acted as
an impediment in the short term for people sharing information.
They are worried that they are violating the FERC regulations,
and we had the opportunity to visit with the chairman of the
FERC last week and raised that issue. We are beginning to get
that dialog going.
What we are finding is the producers cannot, for antitrust
reasons, sit in the same room with each other to start talking
about, well, where is my production, how long will it take to
get my production in. And I think quite frankly, 4 weeks now
after both of the hurricanes, we are beginning to hear some of
the major producers disclose what production is shut in. It is
very difficult at this point without having, if you will, a
Federal agency as a clearinghouse to allow us to get in the
room and say, I need a lay barge at Vermillion 245. That will
get 400 million cubic feet of gas back into the system in 4
weeks. One of the things we need to do.
Senator, I would be remiss if I did not raise this one
point. One of my members, who is a western company, mentioned
to me yesterday that if there was a relaxation on the drilling
moratorium in the Rockies from November through March, that the
industry could probably provide a billion cubic feet of
deliverability by March of next year. That is an issue that I
think needs to be raised and I think we need to take a look at
it. That is something that can be done I believe
The Chairman. Okay, if the staff can get that comment. Why
is there a moratorium? Environmentally?
Mr. Helms. It is environmental issues, Senator.
The Chairman. So we ought to take that up with the
environmental community also in terms of no knee-jerk response.
Do you want to answer right quick?
Mr. Curtis. No, I do not.
The Chairman. You are being tremendous today. Thank you.
The Chairman. Let me just ask any of you. We discussed this
issue of economic dispatch. Is there not a problem with that,
that the State PUC's, public utility commissions, have been the
ones principally involved in that and we would have to in some
way overtake them or take authority from them? Does somebody
know the answer? Quickly. I do not want a long discussion.
Mr. Hebert. Mr. Chairman, that is part of the answer.
Obviously, there are things such as regional transmission
organizations are filing to basically do the same through our
independent coordinator of transmission, which is before the
FERC right now, that we would hope we would get final approval
of pretty soon, and we have every reason to believe we are
going to do that. It is going to make for more opportunities
through the bidding process to try to get them to bid more into
the system. So that is part of the answer, yes, sir.
The Chairman. One last question. You know that chart you
had up there with all the drilling activities out there in that
area with two circles.
Mr. Cavaney. Yes, sir.
The Chairman. Can you put that up there? I want to ask you
just a dumb favor. Maybe your people have the technical skills.
If not, maybe you could go to one of the laboratories, Sandia
or Los Alamos. But I wonder if you could have somebody produce
a new one and assume today's drilling technology and tell us
what that would look like with today's technology.
Mr. Cavaney. Okay.
The Chairman. I think it is possible and I think it would
be terrific to be able to show that when we go to these other
States, this is not going to be the case because it cannot be.
One of those holes is going to take 20 wells and 30 wells. Can
you do that?
Mr. Cavaney. We can. We will.
The Chairman. If you have to spend a little money, spend
it. I think we should see that. You have got a lot of money to
spend. That is what it is for. Do not come up here and ask us.
Mr. Cavaney. We will do it.
The Chairman. Now we are going to go to the next Senator
here, Senator Martinez.
Senator Martinez. Mr. Chairman, thank you very much. You
are so perceptive because that is exactly the picture I have
been focusing on. I must tell you that to see that off the
coast of Florida and the eastern gulf scares me to death. I
think it scares Floridians to death. If a picture in today's
technology would look dramatically different from that, I think
that would be instructive and interesting and good to know.
Let me just make a couple of comments and then I will have
a question or two. But, Mr. Hebert, I want to just tell you how
much I appreciate that dramatic picture you have of those
linemen getting people back in service. I very much appreciate
the work that those people do, that they have done over the
years oftentimes in the middle of the night with a spotlight
trying to get service back, not in dramatic circumstances like
Katrina, but just in everyday Florida thunderstorms in the
afternoon or evening. A tree limb falls and there they are, and
folks never even know, except for the blinking light on their
alarm clocks, that the lights were out for a period of time
while they were out there working. It is a dramatic thing to
see how many people were out of power.
Something I will point out is that I believe last year
during the horrible series of hurricanes that we had in
Florida, there were more customers out in Florida last year
than there were this year as a result of Katrina and Rita. I
think that is very telling that, again, with the cooperation
and the help of linemen from South Carolina, from Georgia, from
North Carolina, from Texas, from everywhere, and probably
Louisiana as well, they responded to Florida and helped us get
through our crises. I know the favor has been returned. It is a
fraternity that works together and it is a very impressive
thing to see. I can not only understand but appreciate your
emotion as you talk about that.
I had a question for you, Mr. Curtis. You mentioned in your
testimony there were 7 million gallons of oil spilled as a
result of the storms. Then I heard the chairman's questions on
the rigs, and I understand that they were not impacted by any
spills. Please state clearly today where those spills occurred,
how did they occur, and whether you can tell us too how it
might be avoided in the future. It is a pretty dramatic amount
Mr. Curtis. It is a lot of oil that was spilled, and I
think by point of reference, I think the Valdez was 11 million
and this was 7 million. It is my understanding--and I will
double check it and provide it back for the record--it came
from about 11 different major identified sites. It was storage
on the land, and I think it happened at a bunch of different
Senator Martinez. I think the other point to talk about,
though, is I heard you describe that there was not one leakage
from the OCS. I have never heard that before. They are honest,
but it is skeptical. I would like to go take a look. But there
are lots of leakages that occur as a result of energy
production, and it is not just at the well. It is through the
whole infrastructure. I think as people talk about exploring in
other parts of the Outer Continental Shelf or elsewhere, you
have to look at the whole thing, not just the drilling. It is
the transport. It is the storage and all that. That is where I
believe a lot of the leakage came from.
Mr. Cavaney. I can comment on both parts of that. To speak
to the latter, using government figures, the amount of leaks in
the aggregate over about a 12-year period is less from the
industry than the natural seeps in the gulf area. So it is
The leaks that occurred were all onshore. Essentially what
they were, they were tanks that were hit or punctured, whatever
the case may be, and the leakage occurred in what are called
secondary storage, all in the facility. So there are large
berms that captured all of this. What happened was with the
amount of water, storm surge rising and all that, it was so
much, it came over these berms and actually displaced the oil
and pushed it out into other facilities. Obviously, we can see
this and we have been cleaning it up since them. But it does
require us to take a look at and work with the Government on
new approaches to this because the old system, even though it
was once in a hundred years--we have never seen this happen
before--it did happen here, and we do not like that kind of
experience any more than the next person.
So as we did with Ivan, which was the fierce storm of last
year that you had mentioned happened down in Florida, we worked
together with the MMS part of the DOI and the Government to
have a lessons learned conference, and we will make available
to the committee, if you would like, all the things we were
trying to implement. Our problem was that Katrina and Rita came
within about 60 days of that conference, and so there was
little you could do.
But one of the take-aways here is very clearly we need to
look at the secondary berms and how we are going to be able to
protect against this problem if we have another experience like
Senator Martinez. Mr. Curtis, then Mr. Helms.
Mr. Helms. Senator Martinez, thank you. I would like to
make two observations. The first is the chart that you have
referred to. That is a record of 50 years of offshore
development and production off the coast of Louisiana, and the
technologies have changed dramatically.
My second observation is the network of gas pipelines,
particularly the natural gas transmission lines, have had an
exemplary environmental record. Quite frankly, I would like to
see the facts and the figures and the empirical evidence that
there has been an environmental failure of those pipelines and
those plants in south Louisiana by either hurricane Ivan last
year or Katrina or Rita. I think the facts will speak for
Senator Martinez. Mr. Curtis, do you have something else?
Mr. Curtis. One point I want to make is kind of the
assumptions everybody is making in listening to this testimony,
that it is a once-upon-a-century occurrence. It will not happen
again for another 100 years is the implication. I sure hope so,
but we cannot count on that. We cannot count on that at all.
Industry should not plan on that. Government should not allow
industry to plan on that.
Whatever you believe about global warming--and this is not
a global warming hearing--there is a lot of evidence from
scientists and people that the ocean waters are warmer, storms
will be more severe. There is a natural 20- to 40-year cycle
going on. That may be very well compounded--I believe, but
others can disagree--and exaggerated by global warming. All
that is happening.
Senator Martinez. The science does not agree with you on
that one. I am with you, but the science does not agree. I do
not think we should link the two.
Mr. Curtis. But as we plan for the future, that should be,
I think, one of the assumptions people look at.
Senator Martinez. I agree with the underlying premise. I
just do not think that we can----
Mr. Curtis. I agree. I am not trying to take you there.
Senator Martinez. Mr. Chairman, may I have just one brief
I would like to ask you, Mr. Cavaney, and maybe the others.
Feel free to chime in. I have heard you allude to the crisis of
the moment. Katrina was the trigger point of this. The part I
do not understand is how drilling in the Outer Continental
Shelf for either gas or oil relates to the current problem,
which seems to deal with refinery capacity and transmission
issues. I do not know how the people that are under salt water
and are being replaced have a whole lot to do with what we do
in the Outer Continental Shelf to avoid the crisis of the
moment. When someone goes to a gas station tomorrow and they
are paying $3 a gallon, the fact is--and I would like for you
to agree or disagree--that that will not be impacted for any
period of time in the foreseeable future by any exploration in
Mr. Cavaney. Senator, we have fully agreed. Energy is very
long-lived and has a long planning cycle in order for anything
to happen. So there is almost without exception very, very
little that can be done in the near term to change the dynamic.
It will not, in and of itself, change the price at the pump or
Now, what it will do is there is a lot of activity in what
we call the futures market, in other words people hedging,
speculation, looking at various kinds of things, and they try
to factor in all the future risks and back that into a price in
What we have done as a country is we have basically taken
off the table all the attractive places where natural gas can
be gained within our country. So the signal we are sending is
that we do not want natural gas. So as a result, people who are
factoring in risk run up the price, particularly when you run
into short-term problems like this.
So my point that I wanted to make is we need to begin
planning today so that if a circumstance similar to this occurs
in the future, we will at least have in place more tools to
deal with it and more flexibility than we have today.
Senator Martinez. But we could all agree that OCS drilling
will not impact the current crisis we are in and, further, that
conservation measures, as frankly we have already seen over the
last several days, could in fact impact immediately what is
taking place in the marketplace.
Mr. Cavaney. Absolutely. The most powerful thing we could
do today is to have everyone ramp up their efforts at
conservation and energy efficiency. No question.
Senator Martinez. So our focus for the immediate crisis
ought to be at conservation, not OCS drilling.
Mr. Cavaney. We should have the discussion on OCS drilling
because if we never talk about it----
Senator Martinez. I understand that. But my question is
simple. The current crisis is more easily resolved by
conservation than drilling on the OCS.
Mr. Cavaney. To affect today, conservation is the quickest
thing we can do.
Senator Martinez. We are here on Katrina, and if we are
dealing with Katrina, the issues relating to Katrina really can
much better be solved by conservation.
Mr. Cavaney. Absolutely.
Senator Martinez. Thank you.
The Chairman. Mr. Liveris.
Mr. Liveris. Demand destruction is part of conservation,
Senator, and I think the answer to that question on the short
term. Katrina just showed the issue that has been around for 5
to 7 years.
Senator Martinez. I understand there are some underlying
problems in our energy supply, in the refinery capacity,
frankly in long-term conservation, diversification of fuels.
There are lots of problems in the energy front. When we talk
about Katrina, we can limit the discussion to the issues that
will impact and resolve Katrina issues.
Mr. Liveris. It is very unfortunate that a hurricane showed
the shortfall of the Energy Policy Act of 2005, which I am a
big fan of. But frankly, the OCS supply issue should have been
tagged onto that bill, as I think the chairman was trying to do
and others were trying to do. Available gas in this country is
there. There are 406 tcf gas available. Why are we importing it
from the Middle East?
The Chairman. I do not think this is the place for me to
engage in a debate predicated by the questions asked by my good
friend from the State of Florida. But you cannot isolate
Katrina and say we are here to solve Katrina. We are hearing
testimony here today about the short-term impact of natural gas
shortages on Dow Chemical. That is not 5 years from now. You
may be in trouble during the recovery and you are certainly in
trouble after the recovery if we do not have some solutions to
this problem. Am I correct in that statement?
Mr. Liveris. Yes, Mr. Chairman, you are very correct.
The Chairman. Now, having said that, I want to get to
Senator Talent and then Senator Murkowski.
Senator Talent. Thank you, Mr. Chairman. You took the words
out of my mouth, Mr. Chairman. If this were just the hurricane
and a crisis induced by that, of course, that would be bad
enough, but what the hurricane did was exacerbate conditions
already in place. If this crisis has done nothing else, it has
concentrated energy and attention on this issue, and that at
least is a good thing.
Most of my questions have been asked. Mr. Liveris, let me
just ask you specifically. In your judgment, to keep Dow and
other industries in the United States, what do we need to do
legislatively to increase the natural gas supply? Can you give
us an idea of what price of natural gas you would like to see
long term? Obviously, as low as possible, but give us some
I think you discussed this some before, but what would be
the effect of just an announcement that we were going to open
up Lease 181? Would that be sufficient by itself? You are
probably going to say no. It is terrible when you answer the
questions at the same time you are asking them, is it not?
Senator Talent. But it would be a big deal, would it not?
Just comment on these questions.
Mr. Liveris. I think that is a great way to phrase the
question. Your answers are actually not correct. I would say
they would be a stabilization factor. I think we have heard the
uncertainty point. The volatility point is our greatest enemy
as much as the absolute supply. The two are working together.
Senator Talent. Because the price today reflects not only
supply today and demand today, but the market's estimation of
unpredictability in the future.
Mr. Liveris. Correct, Senator.
Senator Talent. So when you take that unpredictability out
or you lower that risk, it affects price.
Mr. Liveris. Absolutely. If you couple that with a
conservation message, the two things together will stabilize a
lot of the volatility.
Now, the other question you asked. The well price of LNG,
which has not yet appeared--LNG or gas is still a very regional
business. LNG trade around the world is long-term contracts.
They are to support the huge capital infrastructure that has to
be put in place, including the ships. It sits between $4 and
$5, depending on where it comes from, landed somewhere.
Although China did a deal with my home country of Australia
that lands natural gas from remote Australia to China at $3.20.
So we used to have $2 here in this country. Obviously, ``as
low as possible'' is the right answer, but I am a realist. All
we need is the certainty of supply, i.e., lack of volatility,
and a world price or less that enables me to serve the domestic
sector. It would be great if the American chemical industry can
once again be an exporter. We used to export over $20 billion a
year, second only to aviation. $154 billion of trade surplus
over the last 10 years gone. All that has disappeared on us
because we no longer have the $2 price. If we can get the world
price, we can at least compete against foreigners importing
into this country.
Senator Talent. Sure, because before the hurricane, you
were paying prices elevated compared to your competitors.
Mr. Liveris. Since 2000-2001, we have been living with
prices bouncing around. It is unbelievable that a technology-
rich industry like ours, with college graduates as our primary
work force, suffers because of the weather. We go by hot
summers and cold winters, or the other way around, and that is
our input cost. So we live and die by the weather. It is
unbelievable that chemical engineers and scientists and Ph.D.'s
and people do not have jobs because of the weather forecast. It
Senator Talent. Mr. Chairman, there is a win-win that you
and I have talked about with all this. An adequate and diverse
energy supply with lower prices means much stronger economic
growth and risk taken out of the economy. And economic growth,
because of the marvelous productivity of the American people,
produces wealth on the basis of which we can enhance
technology, enhance conservation efforts, improve the
environment, take care of our coasts. So we end up with the
growth, the jobs, the industry, the exports, and a better
environment and a better community all at the same time, and we
do it by having faith and confidence in the productivity and
the decent instincts of the American people. That is what you
We have seen those instincts on display in response, just
an immediate, gut-level response to this crisis, and we will
see it again. Really all they need us to do is to unshackle
them a little bit, and they will go out and get us out of this.
I really believe it.
I thank you all. This has been a very good hearing. The
chairman walked over to me before and said that, and I think he
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Murkowski, there is a vote up but you have time for
Senator Murkowski. Thank you, Mr. Chairman, and thank you
to the members of the panel. I am sorry that I missed most of
your testimony. I was presiding and I was listening to the
comments of Senator Landrieu from Louisiana who was speaking to
the devastation in her region and spent a great deal of time
talking about how the gulf region is the area of commerce not
just for the region, but truly for the whole world. We
recognize and appreciate the contributions offshore and onshore
that the region has made and continues to make and will
continue to make to the energy needs of this country.
I sit so frustrated and we all know why. It is the whole
access issue. We have got the resources and we have it so many
times over and whether it is off of our shores or whether it is
up in Alaska, we have it. We just do not allow ourselves to go
there. In the meantime, what happens is our companies, our
businesses are suffering. I was just commenting to the chairman
here. We are no different than the times back in the age of
Mesopotamia when the rivers flooded and everybody had to move.
You would like to think that our technology gets us beyond
being controlled by the weather, but it should serve to be a
very humbling reminder to all of us that we are not in charge.
So what is it that we can do? I am real concerned about my
constituents up home who are panicked about home heating costs
this winter. They are already looking to how they are going to
make it financially through the winter and pay their bills and
keep their homes warm. I do not know how they are going to do
it, quite honestly.
A couple different questions for probably you, Mr. Cavaney,
on the prices that we are seeing now with natural gas and the
doubling that we have seen just from last year. We recognize
this one-in-a-100-year crisis that we have been hit with. Where
do you see the price of natural gas going?
Mr. Cavaney. Senator, we had the problem with natural gas
really before the hurricanes. All the hurricanes did was just
draw undue attention and take it up to the next level. For a
number of years, really about the last 15 to 20 years, our
growth here in the United States was supported by Canadian gas
that we imported, and they kept growing sufficiently. As they
have developed their oil sands up in Alberta, what has happened
is they had to re-route their gas growth in order to make the
oil up there. So we have lost that growth capacity.
What that did several years ago was underscore the fact
that we were not producing enough here to make up for the very
steep declines in the U.S. fields because we were not getting
the access to the attractive new fields where you could go.
So again to complement Mr. Liveris, back in the year 2000,
this started to become very much in evidence and it is just
regrettable that it took this long for people to understand. I
applaud the committee and particularly Senator Alexander for
drawing attention to natural gas. Because it is a regional fuel
and not a global fuel like crude oil, we do not have the
options of trying to bring in substitutes when we run into
periods like we are right now.
Senator Murkowski. So where do you see it going? We are at
Mr. Cavaney. Well, I think the most important thing is we
need to get a signal from the policymakers that you recognize
the problem is here and we are going to do something about it.
I agree, I think the markets will show some relief and that may
well be the point where you start to see the corner being
Senator Murkowski. Let us talk about the Alaska project for
just a second here. We are trying our darnedest to make that
project come to fruition. And it is so frustrating that for
years the price has not been there, and then boom, the price
takes off like that. The fact of the matter is it takes 7-8
years to bring that gas down and to supplant what we have been
getting from Canada. So if we move forward with that project,
even though it is 8 years down the road, recognizing the
incredible potential that we have up there in supplying this
country, is that enough of a signal to the market, even though
it is years off, to provide some assistance?
Mr. Cavaney. It is definitely going to help. These people
look at future risks and then they factor it in in prices
today. So anything that sends signals about the opportunity for
more natural gas or a more positive environment for people to
take risks I think is going to have to help in today's market.
Senator Murkowski. So we need to have a flow chart or a
time line saying Alaska gas comes on here. In the interim, we
can loosen some restrictions in the Rockies.
Mr. Cavaney. LNG is a very important intermediate help.
Access and LNG, Senator, are the two things that will help us
significantly fill the gap, along with conservation again I
want to underscore. Those three things will help us get there
until the northern gas can get in here and take its place.
Senator Murkowski. But we have got to have the northern
Mr. Cavaney. Yes.
Senator Murkowski. And this is the point that I want to
bring home to everybody. Right now we do not have that northern
gas. We do not have those producers signed onto a deal. If they
think that they need more subsidies than they are getting now,
it is wrong, wrong, wrong.
Mr. Cavaney. I understand that this is a commercial
venture, but that is not what their problem is. They are just
trying to go through the process of ensuring that they can get
the supplies and they work with the State. We are very pleased
to see that the State of Alaska has shown an interest in
becoming an equity partner, and I think that makes for a good
Senator Murkowski. We want to be able to supply it.
Thank you, Mr. Chairman.
The Chairman. Senator, you wanted to comment.
Senator Alexander. I just wanted to express my thanks to
Mr. Hebert for the people of Tennessee for the extra efforts
your company made to get the electricity back on so the
Colonial pipeline would work. That helped us avoid a very
And I wanted to invite you and anyone else who wants to
suggest to the chairman and Senator Bingaman and me ways to
make efficient dispatch work. We would like to have them in the
next few days.
The Chairman. All right. We know we have to go, but they
are going to hold up for us for a minute. I want to just say
once again thanks to all of you. It was terrific. I am just
sorry that more people do not get a chance to hear what was
said. That is not possible. We have to do a better job.
Mr. Curtis, I want to say we clearly did not intend to
The Chairman. But we are very pleased. I think the issue I
want to place before you is we have always been versus the
environmental and conservation community--we have been faced
with the proposition that they want conservation and savings
and others want production. Therefore, a stalemate occurs
because those who want efficiency saying we are not on with the
business of efficiency, so we do not want more production.
Production is saying we want more production.
Now, we are saying we want both. But the problem is how do
we get them to work in tandem with credibility. Most of the
time you can put two eggs and two eggs and you have got
credibility. It is two and two, and when you add one, you have
three and three. But one is very intangible and the other one
is very tangible. We have to find some modus operandi where
when we start efficiencies, they are credible so they are not
saying you are not doing efficiency, so we do not support
supply. We have to find some way to measure that, and I hope we
Mr. Curtis. I completely agree, and I look forward to
working with you and whomever to try to help make that happen.
The Chairman. Last, we did not ask any of you, but let me
see if I can summarize. Those from the coast, from the area
affected, told us that the Federal Government, in terms of
their agencies and Secretaries, had been terrific in their
response to requests for assistance, modification of rules,
expeditious handling from DOE to EPA to Commerce. Is that a
correct statement? Was the Federal Government responsive?
Quickly, could we just say, Mr. Hebert?
Mr. Hebert. Very favored. NRC, FERC, and DOE were great for
us to work with and helped us restore quickly. Absolutely.
The Chairman. Mr. Helms?
Mr. Helms. We found it all the way through, Senator. We
have had tremendous cooperation.
The Chairman. Mr. Liveris?
Mr. Liveris. Absolutely, yes.
Mr. Cavaney. Absolutely. It could not have been better.
The Chairman. Now, Mr. Curtis.
Mr. Curtis. From the community groups we work with and
interact down in the gulf, EPA and the other agencies were
The Chairman. Okay. It looks, for once, we had something on
our side go right.
The Chairman. Everybody says everything was right except
something happened that was not. Maybe it was just the storm.
I wanted to say, Mr. Curtis, with reference to the
pollution in the ecosystem and water, we were amazed yesterday
to hear from the Corps of Engineers at the top level that they
are in the business of measuring pollution all the time
everywhere very scientifically. They said that there was not
any. Do you believe it? There had been no big, serious bacteria
in the environment that was dangerous. Now, that does not mean
anything yet. I mean, I could not believe it. I said, are you
kidding? And they said, no, no, not so.
So I do not know what it means. But somebody is going to do
it right. But it may be that there is some kind of a cleansing
mechanism that we do not know about in terms of water-related
products. But I just wanted that in the record. I know you are
looking at me with furrows in your brow.
The Chairman. I am only repeating what they told me. I do
not believe it either.
The Chairman. But I thought we should say it here.
We need you to go with me somewhere, Mr. Chairman, Mr.
President. Which do they call you in your company?
Mr. Liveris. Andrew.
The Chairman. Okay. If you will join me outside, I need to
use you for something.
Thank you, everybody.
[Whereupon, at 12:25 p.m., the hearing was recessed, to be
reconvened on October 27, 2005.]
HURRICANES KATRINA AND RITA
THURSDAY, OCTOBER 27, 2005
Committee on Energy and Natural Resources,
The committee met, pursuant to notice, at 10:35 a.m. in
room SH-216, Hart Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. Good morning. First of all, to our
distinguished witnesses, I want to apologize for the lateness
of the event. But the Senate doesn't ask the committees when
the Senate will vote; they tell us.
First, for the Senators and the witnesses, there is a
Senate resolution which authorizes the Senate chambers and the
Senate office buildings be filmed for use in the Capitol
Visitor Center. Members should know that that production
company might--will spend a few minutes during this hearing
obtaining footage for the educational video to be shown in the
Capitol Visitor Center. So, if you want to make sure you're at
your prettiest, be aware.
First, I want to thank both Secretaries for being with us
today. This hearing is the fourth hearing that we've had to
discuss the impacts of the devastating hurricanes in the gulf
and the general energy state of the country. The people of
Florida have suffered again, just this week, with Hurricane
Wilma. It's been a very difficult season. I hope it's over,
but--who knows? There's a level of frustration with the energy
industry, due to high prices, record profits, and perceived
lack of investment, that has taken center stage in the public
arena. There is also a level of fear about the energy supply,
possible transportation bottlenecks and shortages that will
make the winter particularly hard, especially if it's a cold
Over and over, the experts that this committee has invited
have told us that there are no quick fixes to our energy
challenges. All have stressed the need for conservation as our
most effective short-term tool to deal with this crisis,
especially the crisis in natural gas, which is, sort of, the
unseen crisis at this point.
We're all advocating that Americans encourage--and
encouraging Americans--in trying to persuade them to take
conscious steps to reduce energy consumption. So are you,
particularly Secretary Bodman, and I want to thank you and
indicate that I think you're on the right track with some of
the things you're doing in that regard. I wish that program,
nationally, could get bigger and more persuasive, but that's
not all in your hands.
The list of saving tips with multiple resources, like local
utilities companies are talking about, big oil companies are
beginning to advertise about, they're showing some significant
interest, and the public is, I believe, getting the message. I
think everybody knows that the lighting of our homes, as
Senator Bingaman has been talking about for some time, can
represent 20 percent of the home electricity bills, and there
are some real areas of savings that can occur there. If the
public were to change a light to an ENERGY STAR one, together
we'd save enough energy to light seven million homes. That's up
to the people of the country, not up to us, but, still, we'd
better talk about it. Same thing applies to light fixtures.
There are models of ENERGY STAR for energy efficiency that
could save substantial amounts.
On the transportation front, consumers can take a number of
steps. We know about them. Perhaps we can ask you about them,
Mr. Secretary, or you, Madam Secretary. So, as part of this
hearing we're encouraging consumers to take action--drive less,
when possible, replace an old furnace, keep your tires inflated
properly, change light bulbs, all those things we've been
So, I think conservation is like a diet on our demand, but
without sufficient supply our economy will end up very skinny,
in any event. So, I know that supply is one of the topics that
several members want to talk about here today, and I would say
to both of you, while it might not be the subject matter of
Katrina and Rita, Lease Sale 181 will be brought up and
discussed, I'm sure. I'm going to save for the questions a
discussion of Lease 181, other than to say it is a very, very
energy-laden lease, and to discuss the fact that it is not
really subject to a moratorium. And we will proceed from that
point on with asking the Secretary of the Interior, in
particular, about that issue.
[The prepared statements of Senators Bunning, Corzine,
Salazar, and Talent follow:]
Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
Even though my home state of Kentucky is situated far enough away
from the gulf coast to avoid the brunt of these recent storms,
Hurricanes Katrina and Rita really hurt us, and the rest of America, at
the gas pump. These natural disasters have shown that in many ways, the
federal government has been sleeping at the switch. But perhaps Katrina
and Rita's biggest wake up call goes to the energy industry which has
failed to diversify.
Katrina and Rita were able to cause such a large disruption because
so much of our production and refining capabilities are concentrated in
the Gulf of Mexico. We must diversify this capability. Right now we are
working to open up ANWR, which will finally allow us to tap a vast oil
resource in Alaska. But there is more we can do--with Kentucky coal,
Western natural gas and offshore drilling. We will remain vulnerable to
continued price spikes unless we explore new areas domestically to
produce and process fuel.
We have also seen ineffective regional energy markets that, when
faced with disaster, are unable to quickly shift resources and
capabilities to areas in need. Much of this inability is caused by
overly-complicated federal regulations. For example, government
policies have been a roadblock to oil refinery construction. It has
been nearly 30 years since the last one was built. We must take a hard
look at federal regulations and ensure that they are not needlessly
constraining the energy marketplace.
Even after addressing these issues, at the end of the day we need
to diversify our sources of energy beyond oil. I have long talked about
the benefits of coal, particularly new clean coal technologies, and how
coal can replace more expensive oil and natural gas electric plants.
From synthetic fuel production to FutureGen, coal can and will play a
more important role in America's energy future. I also believe we can
displace gasoline demand with biofuels made from corn, soybeans and
even recycled cooking grease. We have many new technologies under
development and we should encourage this continued fuel source
I am hopeful that today's hearing will explore the potential impact
of the recently passed Energy Bill, what additional government policies
are needed to stimulate diversification and what lessons we have
learned from this tragedy. Secretary Norton, I would like to hear from
you how we can best access the untapped sources of oil, coal and
natural gas here in America. And Secretary Bodman, I look forward to
hearing from you how we can better stimulate the energy industry to
diversify and use new technologies so we can achieve lower prices and
energy independence. Thank you for your testimony before the Committee
Prepared Statement of Hon. Jon S. Corzine, U.S. Senator From New Jersey
I would like to thank Senator Domenici and Senator Bingaman for
calling this hearing to address the Hurricane Recovery Efforts.
Hurricane Wilma once again highlighted our nation's vulnerability to
the devastation that can be caused by hurricanes and my thoughts and
prayers are with those who now have to rebuild their lives.
I would also like to thank Secretary Norton and Secretary Bodman
for being here today to testify. In order to establish a comprehensive
recovery plan that will restore our full energy system, as well as make
improvements that will reduce the damage that hurricanes and other
natural disasters have on our energy infrastructure, efforts must be
coordinated among all of our government agencies. These ongoing
discussions on hurricane recovery efforts are vital not only to the
short term revitalization of our energy system and the mitigation of
the burden on consumers, but also to our nation's future energy
Mr. Chairman, one of the most immediate ways to help Americans
dealing with the high energy costs is the Low Income Home Energy
Assistance Program (LIHEAP). I am deeply disappointed that the Senate
continues to underfund this vital program. Energy costs place a severe
and continuing burden on household budgets. In many cases, families are
forced to choose which bills to pay and which necessities to survive
Of course, Mr. Chairman, it is not just low-income families that
will be affected. In fact, the Department of Energy estimates that
Americans will spend over $200 billion more on energy this year than
they did last year.
Meanwhile, big oil companies are making record profits. In fact,
the combined total quarterly profits for the top five oil companies are
$32.88 billion. I implore the oil companies to do their part to ease
the energy cost burden on consumers. How can oil companies sit back
while their profits, even in the wake of the hurricanes, are increasing
at such astronomical rates--all while American families are being
squeezed by skyrocketing home heating costs and gasoline prices?
Yet, instead of dipping into their own profits, these oil companies
are calling for the expansion of drilling in the Arctic National
Wildlife Refuge (ANWR) and off our shores, claiming that this will ease
prices. I'm disappointed that some of my colleagues are giving in to
them. I have been clear about my opposition to such proposals and am
deeply disappointed that this Committee included opening ANWR in its
portion of the reconciliation bill. In addition, I am greatly concerned
that the House Resources Committee just approved legislation that not
only opens ANWR to drilling, but also allows states to opt out of the
decades-old Congressional moratoria on oil and gas leasing in the Outer
Continental Shelf--which will damage my State's economy, as well the
economies of other states that depend so heavily on the cleanliness of
their beaches and oceans.
I urge my colleagues to avoid this knee-jerk reaction. We should
instead be discussing more effective policies to reducing our
dependence on oil and strengthening our energy security such as
reducing CAFE standards and investing in renewable energy.
Again, I thank the witnesses for being here today and I look
forward to hearing about the status of hurricane recovery efforts at
the Department of the Interior and the Department of Energy. I hope
that both Secretaries offer recommendations for the short and long term
and make progress toward fortifying our energy system and reducing the
damage that hurricanes and other natural disasters have on our energy
Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado
Good morning. Thank you, Mr. Chairman, for holding this hearing.
During the August recess I began a tour of Colorado that took me to all
64 counties. I just finished this tour last week and I can report that
in every county the biggest concern was high energy prices. It is
important to note that I began the tour before the hurricanes came
through the Gulf of Mexico and hit the gulf coast where much of our
energy production is based. High energy prices were the greatest
concern even before the hurricanes. The hurricanes ramped up already
high prices as well as increased the frustration Coloradans are
Mr. Chairman, I share that frustration. I know I am new to this
body. While I am proud that I had some small hand as helping to craft
our nation's long-term Energy policy this past summer, I nevertheless
feel we are missing an opportunity--actually, failing in our
obligation, to take immediate steps to address our near-term energy
crisis. Since we returned to Washington immediately following Katrina,
the Senate has failed. The Senate has failed to take action to address
high energy prices, period.
I have offered 5 bills to address the problems the country faces
regarding high energy prices. I would like to talk briefly about each
ACCELERATING EFFICIENCY CREDITS
The first bill I have offered is S. 1850, the Rapid Efficiency
Credit Act of 2005. Under the energy bill signed into law in August,
tax credits are available to consumers and businesses for purchases of
energy efficient products (such as energy efficient windows, air
conditioners and furnaces, solar power collectors, fuel cells and
hybrid vehicles), as well as expanded ethanol fuel refueling
But these tax credits do not go into effect until January 1, 2006.
People in Colorado and across America want to know what they can do now
in order to prepare for high heating and electricity costs this winter.
These tax credits would have a positive impact if they went into effect
now. Why are we waiting?
In an effort to promote energy efficiency in vehicles and buildings
sooner, my legislation would accelerate some of those credits to become
effective upon enactment of this legislation.
This legislation also adds a new provision for energy efficiency.
Consumers will be eligible for a 30% tax credit for the purchase of
compact fluorescent bulbs, which take the place of traditional
incandescent bulbs, save significant amounts of energy, and save
consumers real money.
My second bill has to deal with vehicle tire efficiency. S. 1851
would require replacement tires to meet the same standards as new
vehicle tires, including fuel economy requirements. If you go to buy
new tires today, you can't find out how those tires will affect your
But the truth is that replacement tires are in general between two
and four percent less efficient than the original tires that come with
the vehicle. Two percent may not seem like much, but it ends up costing
the buyer as much as $150 over the life of the tires. And it also means
we use more foreign oil as a nation.
GAS GUZZLERS TAX LOOPHOLE
My next bill, S. 1852, addresses a specific tax loophole that
encourages gas guzzling. Currently the tax code effectively punishes,
through smaller deductions, those small businesses that purchase
vehicles that get good gas mileage. At the same time, the current tax
code actually rewards small businesses that purchase bigger, heavier
vehicles--those over 6,000 pounds.
Businesses purchasing vehicles that consume more fuel are rewarded
with markedly larger and accelerated deductions.
I am not saying that we should tell small businesses to purchase
one class of vehicle or another. What I am saying is that the playing
field must be level for all vehicles, so small businesses can purchase
the vehicles of their choice without being unnecessarily pushed into
bigger, heavier vehicles. That is what my bill does: it levels the
FEDERAL GOVERNMENT FUEL SAVINGS
To address saving energy used by the federal government, I have
introduced bill S. 1853, the ``Reduce Government Fuel Consumption
Act.'' This bill directs federal agencies to try to achieve a target of
10% reduction in fuel consumption over the next year. For obvious
reasons, it specifically excludes any fuel consumed for military use.
However, it is important that the federal government practice what it
Finally, Mr. President, I have offered a bill that addresses price
gouging. It may come as a surprise or even a shock to most Americans,
but there is no federal law against price gouging. My proposal, S.
1854, changes that by establishing a law stating that price gouging may
exist when prices rise by ten percent as a result of an emergency
compared to the same point one month before.
My bill allows for both the U.S. Attorney General as well as the
state Attorneys General to file a price gouging lawsuit in state or
federal court. My bill requires the U.S. Department of Justice to
cooperate with states on anti-gouging efforts.
I am sure there are other measures that would provide small doses
of relief, but we have not advanced them.
So, there it is, I am frustrated at the Senate's inaction. Today, I
am sure that we will discuss policies that may provide relief in 2-20
years, but I am more concerned about this winter. Many of America's
families, farmers, ranchers, and small businesses are on a financial
cliff, and they need action to pull them back from that edge.
Prepared Statement of Hon. James M. Talent, U.S. Senator From Missouri
Mr. Chairman, we've spent over four years working to get an energy
bill, and even after passing that bill into law, we find ourselves
facing a fundamental problem--energy prices are too high because supply
is not keeping pace with demand.
We've tried for years to work around these fundamentals, but now we
are to the point where, if we do nothing, the problem will solve itself
in a way we cannot afford: energy prices will chase industry and jobs
away to countries where prices are more reasonable. That's no solution;
it is a disaster, it is real, and it is coming unless we do something
Dow Chemical CEO Andrew Liveris provided just one example of a
business that no longer finds it economic to produce in the United
He noted the huge disparity in natural gas costs that existed even
pre-Katrina and will be a problem even after the gulf recovers from the
hurricanes, unless we do something.
Natural gas prices set a record of $14.50 per MMBtu last month (9/
30/95), double the already high $7 per MMbtu price from last year at
this time. (API) In Europe, it's about $7.00 today, China less than
$5.00 and in Saudi Arabia it's less than $1.00. This is largely the
reason that, between 2000 and 2005, more than 2.9 million American
manufacturing jobs disappeared. (Dow Chemical) I think that we can all
agree that this cannot continue.
Likewise, gasoline prices, while largely down from their post-
Katrina peak over $3.00 per gallon, are still almost a dollar higher
than a year ago, and even then it wasn't cheap. Our airlines are
teetering on the brink of bankruptcy, in part due to the high cost of
What will bring these prices down to sustainable levels? Not
conservation alone. Certainly not new taxes on oil companies or
regulations on industry.
Mr. Chairman, a first year economics student could tell you the
answer--when demand is increasing, supply must increase as much or more
to keep prices down. And we've got the supply. The untapped portion of
Lease 181 in the Gulf of Mexico, 100 miles offshore, has enough natural
gas to heat 6 million homes for 15 years. Alaska and the Western
Mountains have an estimated 1,450 trillion cubic feet of natural gas,
enough to meet current U.S. demand for more than 60 years, according to
the Natural Gas Supply Association.
ANWR has enough oil to produce 900,000 barrels per day, or 4.5
percent of current U.S. consumption, for thirty years.
This is an important hearing on rebuilding our nation's
infrastructure and planning for our energy future. I am hopeful that
our witnesses will discuss how we are working together to find ways to
overcome obstacles and tap into these vital resources that drive
economic growth in this nation.
To that end, I sponsored a letter, signed by 11 of my colleagues,
to President Bush asking that he direct Secretary Norton to include the
remaining portion of the Lease Sale 181 area in the 2007-2012 five year
leasing plan on the Outer Continental Shelf.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you very much. Thank you, Mr.
Chairman, for having this hearing. And, as you point out, it's
one of a series of hearings that we've had.
The two issues that I hope we can explore are what the two
Departments see as their roles in post-Katrina reconstruction,
and any recommendations that they have on avoiding future
damage to the energy infrastructure and critical infrastructure
in these hurricane-prone regions of our country. The second, of
course, is probably the nearest to the hearts of most
Americans, and that is what the Secretaries can tell us about
how we can propose to address these very high energy costs and
prices that we are faced with, what actions have been taken,
and what actions may be taken.
I have an industry alert here, put out by Deutsche Bank,
dated yesterday, which says that the White House is close to
sending a series of oil recommendations to the Hill for
legislative action; two key proposals. First, a 5-day regional
reserve for gasoline, diesel, and jet fuel, and, second, a tax
on the oil industry to fund the Low Income Home Energy
Assistance Program. It goes on to say that, while at first
glance, this looks--this 5 percent profit haircut that these
proposals represent are arguably bullish in the view of
Deutsche Bank, they're arguably bullish for the industry,
because they would reduce the pressure from more severe and
troublesome windfall profits taxes, and, second, they can be
passed along to the consumer. That doesn't sound like a very
good arrangement, the way I'm generally thinking of it.
So, at any rate, those are issues I would like very much to
explore when we get into the questions.
Thank you very much, Mr. Chairman.
The Chairman. Thank you very much, Senator.
Now we're going to proceed. We're going to start with our
witnesses, and we're going to take Secretary Norton first, and
then Secretary Bodman.
Would you please proceed, Madam Secretary?
STATEMENT OF HON. GALE A. NORTON, SECRETARY,
DEPARTMENT OF THE INTERIOR
Secretary Norton. Thank you.
Good morning, Mr. Chairman and members of the committee. I
appreciate the opportunity to be here today to share with you
our experiences from the hurricanes and what we can learn from
Hurricanes Katrina and Rita clearly demonstrated the need
for diversification of our energy supply. President Bush
recognized, in his national energy policy, that we need to
increase our energy supply and invest in our energy
infrastructure. Diversification is a key goal for this
administration and must remain a top priority for our Nation's
economic and national security.
Achieving a goal of secure, affordable, and environmentally
sound energy will require diligent, concerted efforts on both
the supply and demand sides of the energy equation.
I'm pleased to be here today with Secretary Bodman. One of
the things that we have learned very dramatically during this
experience is how interconnected our energy supply is, how much
offshore production depends on onshore facilities. We have had
the opportunity to work together very closely, and even to
visit the gulf region together to see the impacts.
Now, let me begin by explaining what happened to our
offshore energy infrastructure as the hurricanes came through.
This map--and you have been provided with copies of that--the
map in your packets--the map shows the path of the two
hurricanes. The key point is that three-fourths of our offshore
platforms were in the path of one or another of the hurricanes.
Of 4,000 platforms, 2,900 were in the path. One platform
reportedly clocked sustained winds of 170 miles an hour for 5
to 6 hours, with gusts over 200 miles an hour during Katrina.
As Hurricane Rita came through, although, fortunately, it had
subsided by the time it reached ground, it was still category 4
as it hit some of our offshore platforms. Coming so close
together, these storms created an unprecedented challenge for
We have a few charts that show both gas production and oil
production from the hurricanes, and the top green line on each
of these goes back to last year. That is the pattern that we
saw for Hurricane Ivan in 2004. What you can see from Hurricane
Ivan, which, similarly, had a significant effect offshore, is a
fairly quick recovery. We see stages of recovery. Essentially,
the first stage is checking to see if there is damage to
facilities. If there's no damage, restoring those quickly,
getting people back on the platforms. The next phase is dealing
with minor damage, and restoring those things. And then you
have a longer time of restoring the more significant damage,
and that results in a--more gradual parts of the recovery
process. When you look at the bottom blue line on each of these
charts--one shows oil, one shows gas, but the pattern is
basically the same--the blue line shows what happened with
Katrina, and then with Rita. After Katrina, we had a slower
path of recovery than we had with Ivan, because the damage was
more severe. And then, with Hurricane Rita, we have seen an
even slower path of recovery.
All together, between Hurricanes Rita and Katrina, we had
over a hundred offshore platforms destroyed. Many of those were
small, old platforms, but those were destroyed. In the
recovery, we have now seen getting back to about two-thirds of
our oil production continuing to be shut in. And that's our
current situation. Wilma caused a brief blip on that, but
essentially caused no additional damage. But we remain with
two-thirds of our gulf oil production not producing, and 53
percent of natural gas production shut-in.
The Department of the Interior has been taking active
measures to help get production back online. We tried to cut
through red tape and be practical in our application whenever
possible. We've been streamlining the processes for various
permit approvals to resume production. We've expedited the
reviews of requests for temporary barging of oil until
pipelines could be repaired. We've accelerated the process to
approve pipeline repairs.
One of the key things that we have seen in this whole
experience is the effect of our environmental protection
measures. As we saw these two huge hurricanes roll through with
so much of an impact, one might have expected the entire Gulf
of Mexico to be blackened by oil spills. The reality is that
even with over a hundred platforms destroyed, there were no
significant spills from any of our wells.
What we see in these two charts are the valves that protect
the wellheads. And the--Tom, if you could point to where the
wellhead shutoff valves would be, they are 100 feet below the
sea-floor level, which means that each well is protected by a
valve that will prevent that well from leaking into the water,
even if the entire platform is destroyed. What we found was
that, in each and every case, those valves operated correctly.
We had no spill from any of our wells. The National Oceanic and
Atmospheric Administration recently announced the results of a
study they did with samples from fish and other marine life,
and found that there were no elevated levels of hydrocarbon
contaminants in those fish populations, which indicates that--
again, that our oil-spill prevention measures worked.
There is no official estimate, but the damages in repair
costs will be in the billions of dollars. We recognize that
this is a complex system, companies need to be checking
platforms, they need to be dealing with pipeline damage, with
onshore facility damage. We've had to respond in a variety of
ways. We're working closely with the Department of Energy and
with the Coast Guard in the Department of Homeland Security on
our recovery efforts.
Some of the reasons for slow recovery include limited
amounts of repair equipment and skilled personnel that have to
be divided in many more directions than has been the case in
the past as a result of past hurricanes. So, know that our
employees are working hard. The industry is working hard, and
there is a lot of repair work that needs to be done. That's
going to take many more months before we see a full recovery.
Let me run through a few of the lessons that we have
learned from this.
First of all, we learned that our upgraded design standards
for platforms worked well. Of all of the platforms that were
destroyed, only one was built after 1988. And so--certainly, at
least, of any significant platform--our current standards
worked very well. The one exception is shown in this set of
charts, the chart that is headed ``Mini-Tension Leg Platform''
shows the typhoon facility owned by Chevron. It was one of the
newest facilities in the Gulf of Mexico and was producing
28,000 barrels of oil a day. We are investigating the cause of
this, but there may have been a collision between this facility
and another--possibly drilling units--in the midst of the
hurricane. But, unfortunately, the after-photo is what you see
over there. That is the upside-down version of the platform--
view of the platform. We found it floating about 30 miles away
from where it was supposed to be located. Other than that,
perhaps collision causing damage, all of our other major
platforms performed fairly well. There were some areas of
damage on the platforms, but the overall structures survived.
One area that we did find where our standards need to be
reviewed is on mobile offshore drilling units. And this is an
example of one of those units. Those are moored in place, and
we found, unfortunately, those moorings did not hold. We found
some of that with Hurricane Ivan, and the Minerals Management
Service had already initiated a study to see how those should
be strengthened. We found that 19 of these drilling rigs were
knocked loose from their moorings during the hurricanes, and
some of them dragged anchors. That caused pipeline damage. And
so, we have learned that is an area we need to focus on.
I have called for a conference with the energy industry on
November 17, to discuss what we need to do to strengthen those
moorings and where we need to go in a future regulatory stance.
The hurricanes have shown us the importance of diversifying
our energy supply. We have been working on that issue in a
number of ways. The Minerals Management Service is looking at
its 5-year plan for the leasing of offshore areas from 2007 to
2012. We have had the first round of public comment on that,
and we will then be doing environmental impact reviews.
Of all the comments received to date on the 5-year plan,
there were 8,998 comments in support of opening additional
areas, and 2,276 against.
The Chairman. Would you repeat that one?
Secretary Norton. Yes. We had close to 9,000 comments----
The Chairman. What was the issue?
Secretary Norton. This is on the areas that should be
opened for leasing, between 2007 and 2012, in the Outer
The Chairman. Thank you.
Secretary Norton. It was 8,998 for, 2,276 against.
The House, last night, as you're probably aware, included
an OCS provision in its budget reconciliation. We're still
reviewing that. We do not have an official position yet. We're
pleased that Chairman Pombo has worked with Governor Bush to
try to resolve some of the issues of concern to Florida
Very briefly, we are looking at other areas. ANWR is one
that I have talked with this committee about before. We
continue to consider that an important part of our energy plan
and our diversification. We've been working onshore, through
the Bureau of Land Management, to process applications for
permits to drill. And, as a result of the provisions in the
energy bill that you all recently passed, we have additional
funding to process APDs, and we're moving quickly to get
additional personnel in place. You have also passed some
categorical exclusions from NEPA that do very straightforward
things, like saying if you drill two wells from the same
drilling pad, you don't need to go through the whole process
for the second well being placed on the same pad. Those kinds
of things are very helpful to us, and we anticipate being able
to move more quickly as a result of those things.
I will stop at this point, but thank you very much for your
[The prepared statement of Secretary Norton follows:]
Prepared Statement of Hon. Gale A. Norton, Secretary,
Department of the Interior
Mr. Chairman and Members of the Committee, thank you for the
opportunity to appear today to discuss energy policy and hurricane
recovery, especially the Department of the Interior's activities and
responsibilities in bringing the offshore oil and gas production in the
Gulf of Mexico back on line.
Hurricanes Katrina and Rita clearly demonstrated we have no margin
to mitigate the impacts of natural disasters on our energy supply. The
wake-up call being sounded for the past decade has reached the point
where it must be heard. The President recognized, in his National
Energy Policy, that we need to increase our energy supply and invest in
our energy infrastructure. The President's National Energy Policy
report envisioned a long-term energy strategy. As the report stated
``America's energy challenge begins with our expanding economy, growing
population, and rising standard of living. Our prosperity and way of
life are sustained by energy use. America has the technological know-
how and environmentally sound 21st century technologies needed to meet
the principal energy challenges we face: promoting energy conservation,
repairing and modernizing our energy infrastructure, and increasing our
energy supplies in ways that protect and improve the environment.
Meeting each of these challenges is critical to expanding our economy,
meeting the needs of a growing population, and raising the American
standard of living.'' In fact, in recent testimony presented to the
Senate Interior Appropriations Subcommittee by the Industrial Energy
Consumers of America stated that ``[s]ince 2001, natural gas prices
have significantly contributed to the loss of 3.0 million manufacturing
jobs and the shifting of future investment overseas.''
Therefore, we must not lose sight of this fact: Diversification of
our Nation's energy supply is a key goal for this Administration and
must remain a top priority for our Nation's economic and national
security. Achieving the goal of secure, affordable and environmentally
sound energy will require diligent, concerted efforts on many fronts on
both the supply and demand sides of the energy equation.
HURRICANE KATRINA AND RITA RECOVERY
The oil and gas produced from the Gulf of Mexico are vital to the
American economy and way of life. Production from the Gulf of Mexico
provides 27% of oil and 20% of natural gas produced domestically.
However, it took two major hurricanes back-to-back to drive home the
importance of this region to our Nation's energy security. As a country
we face tightening oil and gas supplies and higher prices. It is time
to take a closer look at the full impact of Hurricanes Katrina and
The attached map* shows that Hurricanes Katrina and Rita moved
through a core area of offshore operations. Of the approximately 4,000
platforms, 2,900 were in the path of Katrina and Rita. One platform in
the path of Katrina clocked sustained winds of 170 mph for 5-6 hours
with gusts of over 200 mph. At Rita's peak on September 25, 100% of
daily oil production and 80% of daily gas production in the Gulf was
shut-in. Prior to Hurricane Katrina, the Gulf of Mexico produced
approximately 1.5 million barrels of oil per day, and 10 billion cubic
feet of natural gas per day. In the wake of these two devastating
hurricanes, a significant portion of our Gulf production has been
curtailed: as of October 21, 2005, some 65 million barrels of oil and
327 billion cubic feet of natural gas have not been produced due to
shut-in wells. We do, however, want to note that additional facilities
were shut-in due to Hurricane Wilma, resulting in an approximately four
percent increase in shut-in production. These facilities did not
sustain any damage and therefore, are expected to come back on line in
the next few days.
* All attachments have been retained in committee files.
There is good news regarding offshore operations. Katrina and
Rita--both reaching Category 5 strength as they spun through the Gulf
and the heart of the offshore energy production--caused no loss of life
among offshore industry personnel or significant spills from any
offshore wells on the Outer Continental Shelf (OCS). This bears
repeating: We faced down two of the most devastating hurricanes ever to
hit the Gulf of Mexico without one significant spill from any offshore
well on the Outer Continental Shelf. Although there were some minor
pollution events from lines or equipment, all subsurface safety valves
installed beneath the seafloor successfully prevented uncontrolled
releases of hydrocarbons into the Gulf of Mexico.
The Department of Commerce's National Oceanic and Atmospheric
Administration (NOAA) has been collecting fish samples in the aftermath
of the hurricanes to determine exposure to contaminates resulting from
the storms. On September 29, 2005, NOAA announced the results of the
first sample tests of Gulf of Mexico fish two weeks after Hurricane
Katrina. The latest tests found no elevated exposure to hydrocarbon
contaminants, which can be present at elevated levels in marine life
after exposure to oil spills. The first round of samples were from
Pensacola, Florida, along the coastlines of Alabama and Mississippi and
then around the southern tip of Louisiana at the mouth of the
Mississippi River and back. NOAA has advised that samples from two
subsequent cruises are currently being analyzed and NOAA will continue
to assess impacts throughout the year. The Department's Minerals
Management Service (MMS) regulates all exploration, development and
production activities on over 8,000 leases in the Gulf of Mexico alone.
Since human and environmental safety are two of MMS's major goals, we
are very pleased with this result.
At the same time, significant damage has been reported regarding
facilities in the OCS. Katrina destroyed 47 platforms and 4 drilling
rigs; extensively damaged 20 platforms and 9 drilling rigs; and shut in
95% of Gulf oil production and 88% of Gulf natural gas production.
Production had not fully recovered post Katrina when Rita hit the Gulf.
Rita destroyed an additional 66 platforms and 4 drilling rigs;
extensively damaged 32 platforms and 10 drilling rigs; and shut in 100%
of Gulf oil production and 80% of Gulf natural gas production.
Today, we are seeing incremental progress in the Gulf oil and gas
production. As of October 21, 2005 shut-in numbers are 66% of the oil
and 53% of the natural gas production. Again, these percentages are
slightly higher post Hurricane Wilma but we expect that portion of
production to resume quickly. It is fair to say, however, that oil
production in the Gulf of Mexico will not be back to 100% for many
months. Recovery is dependent on repairs to onshore facilities,
offshore and onshore pipelines transportation systems, and offshore
platforms. Generally Industry must conduct the necessary inspections of
these networks, determine the repairs required, and then perform any
necessary repairs. It is evident from reports received from Industry to
date that this work will take approximately several months to a year.
For example, we estimate, based on Industry reports, that approximately
30 percent of pipelines have not been leak tested and approximately 60
percent of underwater/riser inspections have not been completed.
Industry has reported billions of dollars in damage and we expect
the figure to grow as inspections are complete. The oil and gas
industry continues to use all available resources to board, assess
damage, re-man and begin repair of OCS facilities, concentrating on the
high-producing operations first. Even as production repairs are made,
however, problems with dislocated employees, onshore support
facilities, terminals, refineries and pipelines could delay the
resumption of supply to market.
The industry is exploring various alternatives to restore
transmission of oil and gas from the OCS while repairs are being
carried out on pipelines and onshore facilities. Concerning pipelines
in the area impacted by Katrina and Rita, we estimate that 45 percent
of the pipelines are operational, 30 percent need repair, and 25
percent are undamaged but cannot flow due to downstream problems. In
some cases, oil is being barged to shore until pipelines and other
facilities can be repaired, inspected and judged safe for operation.
The MMS, along with the U.S. Coast Guard, has approved these requests
resulting in 33,000 barrels of oil per day being brought back online
that had been shut in due to downstream refinery problems. The MMS is
evaluating such applications on a case by case basis.
Both onshore natural gas processing facilities and oil refineries
suffered extensive damage from the storms. In fact, some onshore
production in the states of New Mexico and Texas was also shut-in due
to the lack of refining capacity. Following Katrina, the Mont Belvieu
plant could not accommodate any refinery product from the Dukes plant
in New Mexico, where some of the natural gas produced from federal oil
and gas leases in New Mexico is sent for processing. Consequently, the
Dukes plant could not accommodate any raw product for approximately 24
hours resulting in some production having to be shut in. This example
serves as an illustration of the ripple effect that occurred oil and
gas production and refining. It will take multiple months to repair
A number of variables are impacting this restoration process.
Industry personnel, for both offshore and onshore operations, have been
and continue to be affected by the storms and must ensure their
families' well-being and safety first. Onshore infrastructures suffered
significant damage. For example, 16 natural gas processing plants in
Louisiana and Texas are inoperable due damaged from the hurricanes.
As directed by the MMS's Continuity of Operations Plan (COOP), the
Gulf of Mexico Regional Office, which is located in the New Orleans
area moved its COOP team to Houston, Texas, in advance of the
evacuation triggered by Katrina. As Hurricane Rita bore down on
Houston, the COOP team evacuated once more to the MMS's offices in
Herndon, Virginia, and continued collecting and evaluating data on the
status of operations in the Gulf. In addition, the MMS also moved its
Lake Charles District Office operations to other district office sites
in the region.
In September Johnnie Burton, the Director of the Minerals
Management Service, and I visited our New Orleans staff recently
relocated to Houston where we witnessed the dedicated employees hard at
work to bring facilities back on line and resume normal operations. The
dedication of these public servants--many of whom had their homes
destroyed or severely damaged--is beyond words.
The MMS has notified all 530 MMS Region employees that they will be
back to work on October 31, 2005, at one of four office sites, three in
the New Orleans area and one in Houston. The top five floors of the
Region's headquarters building were severely damaged and are being
renovated. The bottom five floors are habitable and employees will be
using this space as of October 31, 2005. All administrative and health
procedures have been put in place to ensure our employees will be
working in a safe and healthy environment.
The Department is also taking other actions to help bring
production back online. After Katrina, it was apparent that there was
massive disruption to not only the producing, transporting and
processing infrastructure, but also the supporting infrastructure
including the companies' land-based operations essential to repairing
damage. Hurricane Rita amplified this impact by disrupting operations
which had been recently reconstituted after Katrina and significantly
expanded the coastal area that was disrupted. The culmination of the
two storms created Herculean challenges for the industry and based on
prior experience, the MMS immediately began the following:
1) streamlining processes for various permit approvals to
2) expediting reviews of requests for the temporary barging
of oil until pipelines are repaired, and
3) accelerating the process to approve pipeline repairs.
MMS is also providing regulatory relief to those companies hardest
hit by Hurricanes Katrina and Rita. This relief eliminates undue
burdens on companies at a time when the focus must be maintained on
repairing and restoring infrastructure. For example, MMS extended the
time to report and pay royalties for companies that certify that they
cannot report or pay due to the hurricanes' impact on their offices and
staff. Finally, the effective dates for two regulations have been
extended in order that we do not place additional burdens on industry
at this time.
Gulf oil and gas operations account for a significant portion of
our domestic production and the Department is determined to bring
production back on line as quickly as possible. This is truly a vital
issue, which we are pursuing every day. MMS is always striving to
ensure that appropriate technology is used in the design and operation
of offshore facilities and MMS assesses all potential improvements for
withstanding hurricane-force wind and waves. I have been working
closely with Energy Secretary Bodman and Transportation Secretary
Mineta on these important issues.
Damage reports post-Rita have highlighted a problem with Mobile
Offshore Drilling Units (MODU). Nineteen MODU's broke loose from their
moorings and were set adrift; some causing damage to pipelines as
anchors dragged along the ocean floor. To address this issue, I have
called for a Conference on Mobile Offshore Drilling Units to be held at
the Department, here in Washington, D.C. on November 17, 2005. During
this conference we will assess lessons learned and we will define a
What lessons have we learned from the past month? Major new
facilities, constructed to meet MMS's 1988 updated design standards,
fared much better than their older counterparts. Typhoon was the only
platform built under the 1988 standards that was destroyed. I have
asked MMS to work together with the U.S. Coast Guard to investigate the
destruction of the Typhoon tension leg platform. The MMS has
commissioned studies that are assessing the actual wind, wave and
current forces that were present in Hurricane Ivan, analyzing the
consequential damage to structures and pipelines, determining the
effectiveness of current design standards and pollution-prevention
systems and developing recommendations for changes to industry
standards and MMS regulations. If funding permits and it is practical
to do so, these studies will be expanded to include information from
Hurricanes Katrina and Rita.
Hurricanes Katrina and Rita confirmed that our offshore oil and gas
industry produces environmentally safe energy for America. Even in the
face of two back-to-back major hurricanes, all subsurface safety valves
held on the OCS and there was no significant spill from production. The
small amounts of oil observed in the water surrounding platforms may
have come from damaged pipelines or petroleum supplies for running
platform machinery, but, as stated, it did not come from OCS production
In addition, the Katrina/Rita scenario has confirmed that our
domestic offshore oil and gas resources are key components in the
energy mix which provide some of the basic necessities Americans have
come to expect--gasoline for our cars, heating fuel for our homes,
natural gas to cook our meals, to power our factories, and to generate
the electricity that is critical to our way of life and critical to
powering our advanced economy. At present, more than 25% of America's
total domestic oil and natural gas production comes from only 10% of
the total OCS acreage.
ENERGY DEVELOPMENT AND DIVERSIFICATION
President Bush's National Energy Policy report laid out a
comprehensive, long-term energy strategy for securing America's energy
future. That strategy recognized that to reduce our rising dependence
on imported oil and gas, we must also increase domestic production
while pursuing conservation and development of alternative and
renewable energy sources. The President proposes to open a small
portion of the Arctic National Wildlife Refuge (ANWR) to
environmentally responsible oil and gas exploration using newly
available, environmentally friendly technology. ANWR is by far the
largest potential untapped source of onshore resources in the country.
Had ANWR been opened in 1995, it is possible that today we could have
oil from the area, which may have helped mitigate the effects of the
hurricanes. I would like to thank you and the rest of the Congress for
taking up this important issue as we continue to try to provide
additional energy resources in an environmentally responsible way.
OCS 5-year plan
Under the OCS Lands Act, the MMS is required to prepare a new 5-
year leasing plan that specifies the size, timing and location of areas
to be considered for Federal offshore natural gas and oil leasing. The
5-year planning process provides several opportunities for MMS to work
with stakeholders, including Federal and State agencies, local
communities, private industry, and the general public to develop a
program that offers access in an environmentally responsible manner to
those areas with potential for discovery of natural gas and oil. Not
every area analyzed in a 5-year plan is recommended for leasing
consideration. In addition, public participation through input and
comments is an integral part of preparing the environmental impact
statement (EIS) in conjunction with the 5-year program, and there are
multiple opportunities for public comment during the EIS process as
The MMS announced in late August that it is seeking initial public
comment on the development of its 2007-2012 five-year leasing plan for
energy development on the Outer Continental Shelf (OCS) and
accompanying environmental impact statement.
In seeking public comment, MMS asked the public to comment
specifically on whether the existing withdrawals or moratoria should be
modified or expanded to include other areas in the OCS; and whether the
Interior Department should work with Congress to develop gas-only
leases. Throughout the process of developing a new 5-year program, MMS
requests comments from states, local and tribal governments, American
Indian and Native Alaskan organizations, the oil and gas industry,
Federal agencies, environmental and other interest organizations, as
well as the general public. Consultation with affected parties also
occurs at the local level through MMS regional offices. Of all of the
comments received to date on the 5-year plan, MMS has received 8,998
comments for opening additional areas of the OCS and 2,276 against.
We have received several letters from senior citizens expressing
their ``strong support'' for opening additional areas of the OCS. One
senior citizen wrote ``I'm writing to express my strong support for
developing more domestic oil and natural gas resources off our coasts--
in the country's Outer Continental Shelf (OCS)--by providing for more
acreage for lease in the government's next five-year leasing program
for 2007-2012 . . . Higher energy prices of the past two years have
forced me to make hard choices. And I worry that high energy prices
will harm our economy affecting the value of pensions and making it
more difficult for Social Security to help make ends meet.''
We have also received several letters from Chambers of Commerce
throughout the country. The Indiana Chamber of Commerce wrote ``The
Indiana Chamber of Commerce and our members are experiencing high
energy costs, resulting in a negative impact on production and
transportation in Indiana.'' The Arkansas Chamber of Commerce stated
``Over the last five years the price of natural gas has risen 140%.
There is no doubt this increase has played a role in the reduction of
manufacturing jobs available to Arkansans.''
Onshore Mineral Development
The Bureau of Land Management (BLM), an agency within the U.S.
Department of the Interior, administers 261 million surface acres of
public lands, located primarily in 12 Western States. The BLM sustains
the health, diversity, and productivity of the public lands for the use
and enjoyment of present and future generations. The BLM continues to
balance the energy needs of the country while working within its
multiple use framework and is mindful of alternative uses of the land
Within areas designated for appropriate mineral development, the
BLM has been making a concerted effort to help bring additional oil and
gas supplies to the market. Domestic production of natural gas has been
increasing over the last three years. In Fiscal Year 2002, 2.1 trillion
cubic feet (Tcf) of natural gas and 107.5 million barrels of oil (bbl)
were produced from Federal (non-Indian) lands. In Fiscal Years 2003 and
2004, 2.2 Tcf and 3.1 Tcf and 101 million bbl and 98.2 million bbl,
respectively, were produced. In addition to the Federal onshore leases,
the BLM supervises the operational activities of 3,700 producing Indian
oil and gas leases.
Permitting and Leasing
Processing Applications for Permits to Drill (APDs) and operating
an efficient federal oil and gas leasing program continues to be a
major priority for the BLM. Increased funding provided by Congress and
management improvements have enabled the BLM to make significant
progress in responding to the greatly increased number of APDs being
submitted by industry. In FY 2004, the BLM processed 7,351 APDs,
approving 6,452 (on both Federal and Indian lands). In FY 2005, the BLM
had processed approximately 7,736 APDs (about 400 ahead of FY-2004's
pace), approved 7,018 APDs (about 600 ahead of FY-2004's pace).
Also, as directed by the Energy Policy Act of 2005, BLM is
implementing a pilot project to better coordinate APD processing. The
BLM has entered into a Memorandum of Understanding with the Fish and
Wildlife Service, Bureau of Indian Affairs, Army Corps of Engineers,
Environmental Protection Agency, and United States Forest Service to
provide staff and expertise to better coordinate activities in order to
improve efficiency while maintaining environmental protection. The
pilot offices will be aggressive and innovative in finding better and
more efficient ways to manage the oil and gas program and within 18
months, we will have identified best management practices that can be
implemented bureau wide. New money from rental revenue will help BLM
accomplish this task. With more efficient processes and additional
funds, we anticipate BLM could process more than 9,600 permits in FY 06
and 11,400 permits in FY 07.
The Energy Policy Act of 2005 also gives us a valuable tool for
improving our NEPA compliance related to the exploration or development
of oil and gas by providing a legislative determination that a set of
defined and very minor development activities do not need further site
specific NEPA review and if proposals meet certain conditions, they
should be deemed to be categorically excluded from further NEPA review.
It is important to note the dramatic increase in the number of
protests that the BLM has experienced in recent years, which create
processing delays. For example, in 1999, approximately 4.5 percent of
leases offered were protested; BLM received approximately 166 protests
on 3,628 leases offered. In 2005, 50 percent were protested; 1,291
protests on 2,342 leases offered. The State of Utah provides a clear
illustration of the impact of protests on the oil and gas program. In
2004, every lease sold in Utah was protested resulting in delays in
issuing them of up to 18 months. The real challenge for BLM is that the
same personnel who process protests also process APDs, conduct leasing,
inspection and enforcement, land use planning, and a range of other
National Petroleum Reserve Alaska (NPR-A)
BLM is also working to make oil and gas resources in Alaska
available through its leasing, exploration and development activities
in the NPR-A, an area covering more than 23 million acres in the
northwest corner of the state. Development of these oil and gas
resources is an important component of the President's National Energy
Policy. It is estimated that NPR-A contains 10.6 bbl and 61.4 Tcf
undiscovered resources for the entire assessment area. The first
significant commercial production from the NPR-A is expected as early
The United States holds significant oil shale resources underlying
a total area of 16,000 square miles. This represents the largest known
concentration of oil shale in the world and could contain the
equivalent of 2.6 trillion barrels of oil. More than 70 percent of
American oil shale is on Federal land, primarily in Colorado, Utah, and
Wyoming. The Energy Policy Act directs that public lands in these three
States be made available for research, development, and demonstration
(RD&D) leasing within six months of the measure becoming law. In
response to its announcement of an oil shale RD&D program, the BLM has
received 20 nominations for parcels of public land to be leased in
Colorado, Utah, and Wyoming. BLM intends to offer RD&D leases for the
viable nominations early in 2006. BLM will also be conducting a
programmatic Environmental Impact Statement and will develop a
commercial leasing program by mid 2007.
The BLM is doing its part to ensure that the Nation has an
efficient, affordable, and reliable domestic energy supply of coal.
Bonus bids are up 177%; existing lease production is up nearly 24%; and
the royalty and estimated rent income is up nearly 33%. During this
time period, 2001-2004, nearly 1.8 billion tons of coal were produced
from Federal leases. In addition, the Energy Policy Act of 2005 gives
the Department the authority to increase the number of acres per lease,
which we are working on implementing.
The Office of Surface Mining Regulation and Enforcement (OSM) works
with coal operators to ensure that land that has been mined is restored
to its previous condition. OSM has a successful working relationship
with the States and mining industry to ensure sites are properly
reclaimed. OSM brings a level of regulatory stability to the benefit of
Conservation and Renewable Energy
Fossil fuel development is only apart of the solution to our
Nation's energy issues. We also must increase energy conservation and
the use of alternative and renewable resources. The Department echoes
Secretary Bodman's call for an increase in conservation measures. Most
media coverage of the President's National Energy Policy and the
recently enacted Energy Policy Act of 2005 focused on the parts dealing
with production of traditional energy. However, both call for increased
energy conservation and alternative and renewable sources as critical
components to a balanced energy program. Good stewardship of resources
dictates that we use energy efficiently and conserve resources.
Americans have already made great strides in using energy more
efficiently. Since 1973, the United States economy has grown nearly
three times faster than energy use, in part due to more efficient use
of energy. Efforts over the past 20 years have proven that simple
conservation actions by individuals and businesses can yield impressive
results in demand reduction.
Alternative and renewable sources of energy can also play an
important role in helping meet our increased energy needs. To this end,
the President and the Energy Policy Act of 2005 encourage development
of a cleaner, more diverse portfolio of domestic energy supplies, and
include measures to aid in the development and expansion of renewable
energy technologies in use today, including geothermal, wind, solar,
and biomass, as well as continued research into using hydrogen as an
alternative energy carrier. Such diversity helps to ensure that
Americans will continue to have access to the energy they need.
With that in mind, the Department has been working hard to
establish conditions that will permit the development of renewable
sources both on and offshore. We are proud of our record of results. We
are increasing permitting, improving land use planning, and
establishing policies that emphasize the use of renewables. In fact,
since 2000, we have approved 200 geothermal leases and 92 wind energy
permits. To further encourage wind energy development, the BLM has
prepared a national EIS, which will assist the BLM in expediting wind
energy permitting across our public lands. In addition, offshore we are
developing a process to implement new authority provided for in the
Energy Policy Act of 2005 that allows MMS to permit alternative energy-
related uses such as wind, current, and wave technology on the OCS.
Hydropower is also a key renewable energy source. The Bureau of
Reclamation's 58 power plants make it the 10th largest producer of
electricity in the Nation. Those plants have an exemplary record of
reliability, with a forced outage rate of about one-half of the
industry standard. We are continually expanding generation at our
facilities by upgrading turbines. In addition, the Fish and Wildlife
Service is involved with Federal Energy Regulatory Commission licensing
of private hydroelectric facilities. We are working to make that
process more streamlined, predictable and effective.
For solar energy, last fall the BLM issued a solar energy
development policy, which, among other things, establishes the
authority and procedures for BLM field offices to use when processing
applications for solar projects. It helps establish solar markets by
encouraging BLM field offices to consider the use of solar power for
BLM facilities and field stations. More than 650 facilities owned and
operated by the Department are equipped with solar systems. These
include office buildings and remote systems such as weather stations
and water pumps. Many other Federal agencies often use solar for power
at isolated facilities as well.
Finally, the Department of the Interior continues to explore ways
to encourage the use of wood biomass created as a result of wildfire
prevention and healthy forest treatments. Most people think of ethanol
from corn when they think of bioenergy, but wood is the source for 72
percent of all U.S. bioenergy production. Two Presidential initiatives,
one to prevent catastrophic wildfires and the other to restore
rangeland and forest health, encourage the removal of excess or
diseased wood debris from forests and rangelands. This wood debris can
be used as a renewable source of biomass energy.
The Department is working to reduce regulatory barriers and
encourage the development of markets for the material produced from
biomass and are actively working with other stakeholders on ways to use
this resource. For instance, we will be hosting, along with the
Departments of Agriculture and Energy, a conference on bioenergy. The
Department will also provide training to local communities in biomass
Hurricanes Katrina and Rita brought devastation and destruction to
a wide area of our Nation. The road to recovery after these storms will
be long and, at times, very difficult. However, it is in these
instances more than ever that humanity comes together as one to begin
the journey toward recovery, rebuilding, and restoration. I am proud of
the commitment and dedication shown by the employees of the Department
of the Interior during this difficult period. Our resolve to assist in
recovery and restoration activities remains strong. We will do all that
we can to assist those affected by these storms as they begin the
process of rebuilding. Our agency is not alone in this endeavor. We are
working shoulder to shoulder with other Federal, State, local agencies,
and industry in these efforts.
The disruption to our energy production in the Gulf is significant
but we have learned lessons that will serve us well into the future.
Most importantly, we have learned that the systems in place have
worked. Modern oil and gas production techniques are effective and
environmentally sound even in the most challenging and unpredictable of
Thank you for the opportunity to be here today to discuss the
Department's role in hurricane recovery and energy development. I will
be happy to answer any questions members of the Committee may have for
The Chairman. Thank you, Secretary Norton.
I would note, just in passing, for you and for the record,
that I'm working very hard to get Lynn Scarlett released here
in the Senate. And I commented last night, and I did talk to
the leader and the Democratic leader about it. I know you need
every additional expert in your staff that you can get, and I'm
trying my very best.
Secretary Norton. I'd greatly appreciate that.
The Chairman. I will soon solicit the help of Senator
Bingaman on that. I haven't asked him yet, but I think he won't
object to helping me.
Senator Bingaman. I'd be glad to help.
The Chairman. We don't even know who's holding her up. It's
not my side now, but it took me 6 months for my side, so it's
not--I'm not complaining.
STATEMENT OF HON. SAMUEL W. BODMAN, SECRETARY,
DEPARTMENT OF ENERGY
Secretary Bodman. Mr. Chairman, Senator Bingaman, members
of the committee, I'm very pleased to have the opportunity of
being here. I'm particularly pleased to be here with Secretary
Norton, with whom I have been working even more closely than
before, following these hurricanes.
The Department of Energy's Office of Electricity Delivery
and Energy Reliability has been the center point of much of
what we have done as a consequence of these hurricanes. They
have put together a very succinct chronology of every action
that was taken by the Department with respect to the
hurricanes. This timeline covers a 2-month period from when
Katrina first struck south Florida, as a matter of fact, on
August 25, and that chronology is up through this current week.
It notes actions that were taken not just by the Energy
Department, but by the White House, the Department of Homeland
Security, Department of the Interior, Transportation, EPA,
Coast Guard, and the International Energy Agency, among others.
So, it's fairly comprehensive.
I would like to ask, Mr. Chairman, that that be included in
The Chairman. Yes.
Secretary Bodman. And I would refer all of you to this
document, as well as to the daily situation reports, which have
been sent to congressional offices from the Department since
Hurricane Katrina made landfall.
Let me just highlight a couple of the points that are
spelled out in that chronology.
Hurricane Katrina struck the gulf coast on August 29,
several days after first landing in south Florida. It left an
unprecedented amount of destruction and an area that totaled
90,000 square miles. A total of 2.7 million people lost their
electricity, 11 petroleum refineries were shut down, which
represented 2\1/2\ million barrels a day of capacity, or nearly
one-sixth of our refining capacity.
With Katrina, more than a quarter of U.S. crude oil
production, 1.4 million barrels a day, was shut in. Nearly nine
million cubic feet a day of natural gas production, as is shown
on the charts the Secretary just showed you, was shut in,
representing 17 percent of U.S. gas production. There were
additional production losses occurring in areas on land in
Louisiana Offshore Oil Port was shut down, as were a number
of major oil and gas pipelines. As a consequence, pipeline
deliveries of gasoline, diesel, jet fuel, and propane supplies
to the east coast and Southeastern United States were halted in
The administration responded quite well, in my judgment,
and took several critical actions. Prior to the storms'
landfall, our Department dispatched employees to the Emergency
Response Centers in the Southeastern United States, where they
assisted utilities and coordinated with the power restoration
efforts. Our job is really a matter of collecting the
information and trying to provide coordination and getting
barriers out of the way. We worked closely with State and local
officials, first-responders, and power companies to assist in
coordinating their efforts to begin restoring power and fuel
supplies as quickly as possible.
We engaged with Entergy, the local utility, electric
utility and other utilities, to help coordinate the work of
over 13,000 utility crew personnel from all over the United
States and Canada to restore electric power. We arranged for a
shipment of fuel to two companies that manufactured electricity
poles, a move which was absolutely critical in order to get
their production going.
These efforts were very successful in reestablishing and
helping to reestablish electricity throughout the affected
areas. Within 2 weeks, the number of customers without
electricity fell from 2.7 million to under a half a million.
We also took a number of crucial measures to minimize the
impact of the storm on the Nation's energy supply. We worked to
get power to the interstate pipelines. That was essential to
ensuring adequate supply of refined products to the Southeast
and east coast. We authorized loans from the Strategic
Petroleum Reserve to refiners in the gulf region and the
Midwest whose scheduled deliveries had been disrupted by the
The President authorized the sale of oil from the Strategic
Petroleum Reserve to help keep markets well supplied at a time
when there were widespread fears of looming shortages. We
reached an agreement with the International Energy Agency,
which is located in Paris, for its membership to release an
additional 30 million barrels of crude oil and refined products
to world markets. The EPA provided temporary waivers, allowing
the early use of winter-blend gasoline. The Department of
Homeland Security rescinded legal restrictions on tanker
transportation of fuel supplies. The Department of the
Interior's Minerals Management Service immediately began to
streamline processes for various permit approvals to resume
production and expedited reviews of requests for temporary
barging of oil until pipelines could be repaired.
The Treasury Department increased the supply of diesel fuel
available for use on the highway by waiving penalties for the
highway use of so-called ``dyed'' diesel fuel. The Navy and
Coast Guard worked to clear shipping channels. We worked with
our European allies to provide extra cargo tankers, as well as
refined product, to help supply the American gasoline market.
These steps had a very positive effect and helped calm the
And then came Rita. That storm made landfall on September
24 and did even greater harm to our Nation's energy markets
than Katrina. After Rita, 19 refineries were shut down,
representing a third of the U.S. refining capacity. In the
Federal Gulf of Mexico, virtually all crude production and 80
percent of natural gas production was shut in. Twenty-seven
natural gas processing facilities were shuttered, representing
half the gulf coast natural gas processing capability. Offshore
rigs and platforms suffered great damage, as you just heard
about. The LOOP facility, the offshore oil port, was shut down
once again, along with a number of major pipelines.
An extraordinary situation was brought on by the one-two
punch of Katrina and Rita. Energy markets have taken a big hit,
and consumers will continue to face high prices for gasoline,
natural gas, and home heating materials this winter. However,
many of the steps which we took after Katrina have helped us
deal with the supply crunch caused by Rita, such as making
crude oil from the Strategic Petroleum Reserve available to the
The administration has launched an energy efficiency and
conservation campaign that the chairman took note of. That is
aimed at educating consumers on steps that they can take to
reduce their utility bills. This is the major effort that I
think will be effective in dealing with this forthcoming
winter. There is a copy of the Energy Saver's Guide, that we've
provided for each of you, that we have been distributing
throughout the country.
I have been traveling, along with senior Department
officials, encouraging these conservation efforts. We're also
working with energy intensive businesses and industries on ways
to conserve. The President has called on the Federal Government
to lead by example and conserve its own energy use, and we're
working on that, as well.
Both the President and I have encouraged Federal agencies
and employees to use these reference guides in their daily
activities. Many members have requested copies for their
constituents, and an online version has been mailed to each of
Mr. Chairman, Senator Bingaman, this concludes my
statement. I'd be happy to take questions.
[The prepared statement of Secretary Bodman follows:]
Prepared Statement of Hon. Samuel W. Bodman, Secretary,
Department of Energy
Chairman Domenici . . . Senator Bingaman . . . members of the
Committee . . . I want to thank you for the invitation to appear today.
I am pleased to be joined by Secretary Norton and appreciate the
opportunity to talk with you about the Administration's response to
Hurricanes Katrina and Rita.
The Department of Energy's Office of Electricity Delivery and
Energy Reliability has put together a very succinct chronology of every
action taken in this regard.* This timeline covers the two month period
from when Hurricane Katrina first struck south Florida, on August 25,
up to the present week. It notes actions taken not just by my
Department, but by the White House, the Department of Homeland
Security, the Department of the Interior, the Department of
Transportation, the Environmental Protection Agency, the U.S. Coast
Guard, the International Energy Agency and others.
* The chronology has been retained in committee files.
I ask that this be included in the record, and refer Senators to
this document as well as the daily situation reports which have been
sent to Congressional offices from the Department since Hurricane
Katrina made landfall.
Mr. Chairman, I would like to highlight just a few of the points
spelled out in that chronology.
Hurricane Katrina struck the Gulf Coast on August 29, several days
after first landing in south Florida. It left an unprecedented amount
of destruction in an area totaling 90,000 square miles.
A total of 2.7 million electricity customers lost power.
Eleven petroleum refineries were shut down, representing 2.5
million barrels per day--or nearly one-sixth--of U.S. refining
With Katrina, more than a quarter of U.S. crude oil production--1.4
million barrels per day--was shut in.
Nearly 9 billion cubic feet per day of natural gas production in
the federal Gulf of Mexico was shut in, representing 17 percent of U.S.
gas production with additional production losses occurring in areas
under Louisiana's jurisdiction.
The Louisiana Offshore Oil Port (LOOP) was shut down, as were a
number of major oil and gas pipelines. As a consequence, pipeline
deliveries of gasoline, diesel, jet fuel, and propane supplies to the
east coast and southeastern states were halted.
The Administration responded immediately by taking several critical
Prior to the storm's landfall, the Department of Energy dispatched
employees to emergency response centers throughout the southeastern
United States to assist utilities as they coordinated power restoration
We worked closely with state and local officials, first responders,
and power companies to assist in coordinating their efforts to begin
restoring power and fuel supplies as quickly as possible, wherever
We engaged with Entergy and other utilities to help coordinate the
work of over 13,000 utility crew personnel from all over the U.S. and
Canada to restore power.
We arranged for a shipment of fuel to two companies that
manufactured electricity poles, a move which was absolutely critical to
efforts to restore power throughout the region.
Those efforts were very successful in re-establishing electricity
throughout tie affected areas. Within 2 weeks, the number of customers
without electricity fell from 2.7 million to under half a million.
We also took a number of crucial measures to minimize the impact of
the storm on the nation's energy supply.
We worked to get power to the interstate pipelines that were
essential to ensuring adequate supplies of refined products to the
southeast and east coast.
We authorized loans from the Strategic Petroleum Reserve to
refiners in the Gulf region and the Midwest whose scheduled deliveries
had been disrupted.
The President authorized the sale of oil from the Strategic
Petroleum Reserve to help keep markets well supplied at a time when
there were widespread fears of looming shortages.
We reached an agreement with the International Energy Agency for
its members to release an additional 30 million barrels of crude oil
and refined products to world markets.
The Environmental Protection Agency provided temporary waivers
allowing the early use of winter blend gasoline.
The Department of Homeland Security rescinded legal restrictions on
tanker transportation of fuel supplies.
The Department of the Interior's Minerals Management Service
immediately began to streamline processes for various permit approvals
to resume production and expedited reviews of requests for temporary
barging of oil until pipelines could be repaired.
The Treasury Department increased the supply of diesel fuel
available for use on the highway by waiving penalties for highway use
of ``dyed'' diesel fuel.
The Navy and Coast Guard worked to clear shipping channels in the
Gulf and the Lower Mississippi River.
And we worked with European allies to provide extra cargo tankers,
as well as refined product to help supply the American gasoline market.
These steps had a positive effect and helped calm the markets.
Though gasoline prices spiked in the immediate aftermath of Katrina,
they quickly eased in the weeks following.
And then came Rita.
That storm made landfall on September 24, and did even greater harm
to our nation's energy markets than Katrina. After Hurricane Rita, 19
refineries were shut down, representing nearly a third of U.S. refining
capacity. In the federal Gulf of Mexico, virtually all crude production
and eighty percent of natural gas production was shut in. 27 natural
gas processing facilities were shuttered--representing half of Gulf
Coast natural gas processing capability. Offshore rigs and platforms
suffered damage. The LOOP was shut down once again, along with a number
of major pipelines.
An extraordinary situation was brought on by the one-two punch of
Katrina and Rita. Energy markets have taken a big hit and consumers
will continue to face high prices for gasoline, natural gas, and home
heating oil this winter. However, many of the steps we took after
Hurricane Katrina have helped us deal with the supply crunch caused by
Hurricane Rita, such as making crude oil from the Strategic Petroleum
Reserve available to the market.
The Administration has launched an energy efficiency and
conservation campaign aimed at educating consumers on steps they can
take to reduce their utility bills. I have been traveling the country,
along with other senior Department officials, encouraging consumer
conservation efforts. We are also working with energy-intensive
businesses and industries on ways to conserve. And the President has
called on the Federal government to lead by example and conserve its
own energy use.
Additionally, in front of you, please find a copy of the
Department's Energy Saver$ booklet; an informative guide for your
constituents with helpful tips on saving energy and money at home. Both
the President and I have encouraged Federal agencies and employees to
use these reference guides in their daily activities. Many Members have
requested copies for their constituents and an on-line version has been
emailed to your offices.
Mr. Chairman . . . Senator Bingaman . . . this concludes my
statement. I'll be happy to answer your questions.
The Chairman. Thank you very much.
I'm aware that a lot of Senators come to these hearings,
and I know they all want to ask questions. I know witnesses
think we're all here to hear them. We are. But many of you want
to get your questions in. I have many, but I'm going to start
another way and see if I can come along a little later.
So, Senator Bingaman, with your permission, I'm going to go
to Senator Craig, then to you and--Senator Craig, you take my
position, at this point.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
Senator Craig. Well, thank you, Mr. Chairman. And to both
Secretaries, thank you for your overview and your summary. And
I think no one understands the magnitude yet of the damage,
except those of us who look at it and those of you who deal
with it and what you've had to do, in an extraordinary way.
And, as you said, Secretary Bodman, the one-two punch almost
took us down. And so, that's a reality that is being faced at
the moment. And thank goodness gas at the pump is dropping
again now. But natural gas, of course, remains extremely high.
Diesel is high, hasn't moved. There's irregularities in the
market there. And it's terribly frustrating.
Having said that, let me move on. That was then, this is
now. And the national media is reporting, this morning,
``gushing profits'' from the major oil companies. And I believe
the consumer is increasingly feeling that they've been taken
for a ride, or very frustrated about their inability to do
something about it. And what is now important is for us to
focus on what we can do in the short term while we're doing
things in the long term to resolve and get us through this
period of time. Obviously, what you've said here is important.
Can it get into the hands of every consumer? Probably not.
Should it? Yes. Can it be presented in a different, less
comprehensive, more detailed way, or action way? Probably can.
You've asked for $10 million more. We ought to provide it. You
need to be on television, you need to be talking about it. I
suggested maybe we could put the President in a sweater and put
him on television. And then somebody said, ``But remember,
Jimmy Carter did that?'' And yet, in a hearing last week, we
know that if the American consumer turns their thermostat down
two degrees with the demand destruction that's going on in the
petrochemical industry and the less of use of high gas there,
we can get through the winter and gas prices could fall if that
were to happen. But that needs to be communicated, and how you
do that, in ways that it's capable of doing.
So, we ought to help you there. You ought to be very vocal
to us where you need any additional resource. We're also going
to track very closely with you, especially Secretary Bodman,
but also with Department of the Interior. Now that you've got
an energy bill in your hands, don't take 3 years to write the
regs. I hope this committee comes back to you on a quarterly
basis. We're going to mark you and move you along the chart.
You were here, now you're here. How long is it going to take
you to get here? How much can we move into the market very
quickly to get things happening out there?
Having said that--and I'm cognizant of the time--this week,
we had Kathleen Clarke before the Subcommittee on Energy, in
Approps, and I made a misstatement, but it was a misstatement
that I want to bring into context, because it's an important
context for us to understand and maybe for you to do things. I
referred to less APDs or drilling permits versus leases, and I
compared it with Clinton, and I was wrong. Clinton released--
Clinton leased more acres, but you have, on a large factor, 70
percent more--gotten more drilling permits out to the field, in
the overthrust especially, and in the West. And those are very
interesting and important figures, because we've incentivized
you through the bill. I know you're doing those pilot programs
out there now to see how we can expedite the process of leasing
to get out to where the gas is. There's a trillion cubic feet
out there inside the infrastructure today, if we can get to it.
But we are restricted. The thing that is most interesting to me
is that while you have accelerated dramatically the effort and
need--and more needs to be done, comparatively speaking, with
leases, there are now 664 percent more protests and lawsuits
filed against the effort to lease gas in the Bush years than in
the Clinton years. And so, those who still don't want us to
produce are out there fighting us. And somehow we need to work
with them to get through this process. And that's going to be
Also, the automatic shutdown in the middle of the winter.
We did these land-use plans 10 or 15 years ago, and it was an
easy way to get around the wildlife problem, just say we won't
drill during the winter. But we do know we can drill during the
winter, and we don't hurt wildlife, and we ought to revisit
that. The idea of this fits-and-starts, stops-and-starts kind
of things where you drill for a little while and you pull your
rig out because the snow is falling, and you don't go back
until midsummer--we can bring capacity online very, very
quickly. We need to help you there. When you ask us how to
help. Thank you for doing what you've done. We're going to
track you very closely. There is no reason for the bureaucracy
to grind on at the moment of a crisis. We ought to expedite
everywhere we can, as quickly as we can. As fast as you've all
worked with Katrina and Rita, we ought to be doing the same
thing for the next 3 to 5 years to get us out from under this
We'll work with you. We'll monitor you closely. You've got
to be held accountable. We need to be held accountable. And we
can get through this.
Thank you, Mr. Chairman.
The Chairman. Thank you, Larry. Thank you, Senator Craig.
Senator Bingaman. Thank you very much.
Let me ask Secretary Norton about Lease Sale 181. That area
was put off limits to energy development earlier in this
administration. Is there a reconsideration of that going on in
the administration right now? Is there a possibility that that
will be open to lease? What is your position on that?
Secretary Norton. We are actively, in our preparation of
our 5-year plan, looking at the Lease Sale 181 area, and that
is an area, as we know, is not subject to moratoria or to
withdrawal. And so, that is an area we are seeking comment on
as we move forward with that. It does not include the area
within a hundred miles of the Florida coastline.
Senator Bingaman. Well, I certainly encourage you in that
regard. And I know that most--probably many members, at least
of this committee, and of the Senate--agree with that. I know
that there have been letters sent to you. And I believe I'm
sending a letter along those same lines in the very near
future. So, I encourage you--I think when you look at where the
potential is for substantial increases in natural gas
production, that seems to be No. 1 on the list, as far as I am
informed. I mean, a lot of other ideas are out there, but they
are more speculative than 181 is, as I understand it.
The Chairman. Senator, would you yield?
Senator Bingaman. Certainly.
The Chairman. I think that, Madam Secretary, Senator
Bingaman is being very mild on this issue. I believe 181 has to
be done. And I don't believe 5-year plans and all of that
business are very important. We've been told that it is the
single most significant act that can be taken to stabilize and/
or possibly reduce the cost of the price of natural gas. You're
aware of that, right?
Secretary Norton. I'm aware it is an area with very
significant--especially natural gas reserves----
The Chairman. Yes. I said natural gas. I didn't say crude
Secretary Norton. Right.
The Chairman. Well, we have actually had an expert witness,
more than one, tell us what I just said, that it--because it is
so big and so timely, that it might be seen as an actual
addition to available reserves, and that would have an impact.
So, I'd not only join--I've been telling you all, and I don't
know how to get through any more--that this shouldn't be
delayed. And you don't need anything from us. You keep talking
about us. You don't need anything from us.
Secretary Norton. Well, actually, Mr. Chairman, under the
process set up under the Outer Continental Shelf Lands Act,
that is operated on a 5-year program. And clearly, we know a
lot today that we did not know when we made the decisions for
the program 2002 to 2007. For one thing, we have now seen the
toughest test of our offshore safety, and we know that we can
do a lot to alleviate any concerns about oil spills, and that
has been proven today. That was not proven at the time we made
the first round of decisions. But in order to move ahead, we'd
need to go through all of the environmental planning and so
forth, which really, under our administrative capabilities,
puts us on the schedule of completing our 5-year plan and
looking at 2007, the latter half of 2007, before a lease sale
would take place.
The Chairman. All right.
Senator Bingaman, I apologize.
Senator Bingaman. No, that's fine.
Let me just follow up. Tell me if this is wrong, but my
understanding is that Lease Sale 181 was part of the 5-year
plan adopted by the Clinton administration for the years 1997
through 2002. And then a judgment was made early in this
administration that it would not be permitted to be drilled, or
that parts of it would not be. And so, now we're talking about
a 5-year plan for 2007 through 2012. So, we've essentially lost
a decade, as I understand the numbers. Am I right about that?
Secretary Norton. It is correct that that area was approved
by the Clinton administration as an area to be leased, and that
this administration made a determination to reduce the area of
the sale. We anticipate that if the area were subject to sale,
it would take about 5 years for production to actually commence
in that area.
Senator Bingaman. Let me ask Secretary Bodman just a
question about this item I referred to in my opening statement,
the suggestion that the administration may urge Congress to
adopt a tax on the oil industry to fund the Low Income Home
Energy Assistance Program, or LIHEAP. I'd be interested in any
insight you could give us about that, but also the suggestion
that this is--would be somewhat welcome by the industry,
because these are costs that could then be passed on to the
consumer. I mean, are we in a circumstance here where we're
going to pay for low income home energy assistance--largely
natural gas, I would think, and home heating oil--by adding a
price to what people have to pay at the pump? Is that the
Secretary Bodman. I don't know what the suggestion is. I'm
unfamiliar with the suggestion. If your question, Senator, is
directed at what my feelings are about having the oil companies
pay for LIHEAP, that is not something that I would be in favor
of. It is the equivalent of a windfall profits tax, it strikes
me, and we have proven, I thought, to our general satisfaction,
back in the 1970's and 1980's, that that didn't work when we
last had a windfall profits tax. I should also mention that the
LIHEAP program does not reside in the Energy Department or in
the Interior Department, but is in HHS, and so that questions
about how that is funded and what the initiatives are should be
directed to Secretary Leavitt. But my own views, however, are
as they are.
I can tell you that the LIHEAP program is one of a number
of initiatives that is being discussed at the current time by
the White House, and Secretary Norton and I have joined in and
made our views known on it. And I would expect their views and
proposals, if any, to be coming forward in the relatively near
Senator Bingaman. Let me just ask one other question. On
this public campaign for conservation, I commend you on it. I
think it's a good thing. I think it's something we should have
been doing each year for a long time, but it's good that we're
doing it now. How much additional funding should we be
providing to you? I keep thinking that if we were spending
about a third as much on this as is spent every year on
promoting use of Viagra or something, we would really solve
this energy problem. Do you have a figure you could tell us?
Secretary Bodman. No, sir.
Senator Bingaman. I fear that this is terribly underfunded.
It's a nice gesture. It's nice to get these brochures. I mean,
I think all of us who hang around inside the Beltway are well
aware of it. But I don't know that the people in my State are
that focused on this campaign to encourage conservation.
Secretary Bodman. We have made every effort of the senior
leadership of the Department to get out to, largely, the States
that are most affected by the winter fuel issues. All States
will be, to one degree or another, but we're particularly
concerned about the Northeast and the Midwest. And so, we have
covered--we've been in 11 States, and----
Senator Bingaman. But you need to be on television, right?
That costs money.
Secretary Bodman. I can't speak to that, other than we're
doing, I think, an effective job, given the resources that we
have. We have not put together a budget for any expansion, and
we would be happy to work with you and your staff to develop
what ideas we think--and to make a determination of how much
additional funding we could effectively put to use. We simply
haven't done the work on that.
Senator Bingaman. That would be a very useful thing, from
my perspective. Thank you.
Senator Craig [presiding]. Thank you very much.
Senator Alexander. Thank you, Mr. Chairman.
Following Senator Bingaman's line of questioning, I notice
that the beer companies over the years, who are very good at
advertising, now spend a lot of money encouraging people not to
drink when they drive, and to drink moderately. I wonder if a
good use of all of these big oil profits might not be to let
the American people know that if we actually turn down our
thermostats two degrees, that we could get through the winter
with a lot less hardship. That might be a good use of those
profits, without the Government having to require a single
thing. It might be a good corporate gesture by companies that
are making a whole lot of money at a time when a lot of people
Secretary Bodman. Is that a question, sir?
Senator Alexander. Well, I was hoping to elicit a comment.
Secretary Bodman. My comment would be that the oil
companies seem to be individually advertising--I see newspaper
advertising--talking about conservation. And so, I would agree
with the general thrust of your idea, and would take note that
they seem to have pursued it with some vigor.
Senator Alexander. Secretary Norton, back on Lease 181,
just so we understand, this is the largest area in the Gulf of
Mexico where drilling is not banned that could be leased for
gas. Am I correct about that?
Secretary Norton. It's certainly the area that is closest
to infrastructure. And, of course, you know, there are areas in
Alaska, but we have no natural gas pipeline yet, so----
Senator Alexander. But within the Gulf of Mexico, it's----
Secretary Norton. It is an area that has very significant
reserves and is very close to existing production; and so,
could come online very quickly.
Senator Alexander. My information is that there is enough
gas there, even if we stay a hundred miles away from Florida,
or 125 miles away from Florida, to heat six million homes for
15 years, which would be a couple of cities the size of Los
Angeles and Houston. So, we're talking about lots of gas, and
enough gas--we've heard in our testimony here, that it's so
much that just the act of doing it might tend to stabilize the
price of gas and send a signal that the price should come down.
So, I want to pin down a comment you made. If you follow your
present course, and if you were to conclude, after all the
appropriate studies, that Lease 181 ought to be a part of the
lease plan in the next 5-year plan, when would you lease 181?
Secretary Norton. We would anticipate that would be one
that would come up very early in our leasing cycle. We have not
made any decisions yet. It would be predecisional for us to say
that area would be in, and it would be leased at a particular
Senator Alexander. When does the leasing cycle begin?
Secretary Norton. It begins in July 2007.
Senator Alexander. July 2000. So the earliest would be in
the second half of 2007 that you could actually put it out for
Secretary Norton. That is correct, under our administrative
Senator Alexander. And the public decision wouldn't be made
and announced much earlier than that, would it? Or would it?
Secretary Norton. That's correct, yes. But we would take
into account, as we make those decisions, the input on what
areas had the most benefits the most quickly. And, obviously,
what we're hearing is that there is a lot of benefit quickly.
Senator Alexander. So, we're talking about a huge amount of
gas, and we're in late 2005, and it would be early 2007, if you
should decide to do this, before the markets would know that
this big amount of gas might be coming--might be coming
Secretary Norton. That's generally correct. We make those
decisions earlier in the calendar year of 2007.
Senator Alexander. Now, given the fact that natural gas
prices, when we were debating the energy bill last year, or
earlier this year, were at $4 or $5 or $6, and now they're at
$13 or $14, and that hundreds of thousands of jobs might move
overseas as a result of that, wouldn't it make sense to
accelerate that? And let me be specific in that. Senator
Johnson and I offered legislation a year ago, when natural gas
prices were a third of what they are today, that would
basically order the Department to lease 181 within a year. If
the Congress were to do that today, is there any administrative
reason you couldn't get that done? If we were to order you to
do that within a year, could you actually accomplish it?
Secretary Norton. Assuming the language gave us the ability
do that, obviously we would move forward, according to that
statutory language, to do a sale in 2006.
Senator Alexander. And, Secretary Bodman, might it not be
possible, if I may shift to you for this, although, Secretary
Norton, you may--and this will be my last question, Mr.
Chairman--if the Congress were to decide to do that, and the
President should sign the law, and the signal would go out that
we would suddenly be leasing 181 within the next year, might
not that be a signal to the markets that would help to
stabilize the gas prices during this winter, rather than
waiting until 2007?
Secretary Bodman. It certainly would be a signal.
Quantitatively, how it would be interpreted is hard to judge,
sir, but it would certainly be a signal.
Senator Alexander. Thank you.
Senator Craig. Senator Landrieu.
Senator Landrieu. Thank you.
Let me begin by saying, on the record, that I was both
relieved and felt somewhat vindicated, Secretaries, when we had
minimal, if any, oil spills offshore, as a strong advocate of
the new technologies that are available to provide more energy
independence for the Nation. So, while there was destruction to
the rigs, as you mentioned, and you were accurate in your
testimony, we were relieved, and those of us supporting it,
vindicated, in our arguments over the years that this could be
However, I am aware that there were quite a few pretty
disastrous spills at refineries onshore that have left some of
our communities completely uninhabitable. People--thousands of
people--unable to return within miles of their neighborhoods.
So, what are you, Madam Secretary and Secretary Bodman, doing
to work with our local governments, particularly Murphy
Refinery that had the worst spill, and other onshore
refineries, to help provide technical assistance and specific
financial resources to help our areas recover?
Secretary Norton. I am aware of the Murphy Refinery spill,
and it truly was a terrible situation for that neighborhood.
But the Department of the Interior doesn't really have the
onshore jurisdiction to be addressing that, so I would defer to
Secretary Bodman. I would think that the role of the Energy
Department, as I described in my testimony, Senator, really is
one of working with the private sector to facilitate getting
things back up and functioning. I, too, am aware of the damage
done by the Murphy Refinery, in particular. I assume that's
what you're referring to, particularly. And the Department
doesn't really have the technical skill, it's not in our skill
set. I would think the EPA, that's what their program would be,
so I can't speak to the financial resources that might be
Senator Landrieu. Well, I might suggest, if we're going to
continue to promote responsible energy development, that both
the Secretary and the Department of the Interior and the
Secretary and the Department of Energy might come up with a
coordinated plan with the Department of the Environment, so
that when we promise people that we can produce energy safely
and securely, that we can actually deliver on that promise. So,
I'm going to be submitting some suggestions that I hope would
be included in any legislation that promotes new development
anywhere, so we can really be accurate in our projections and
promises made to the people of this country.
No. 2, Secretary Bodman, the--our State, which is still--of
course, our economy has been devastated in Louisiana. We're the
heart of the energy coast. And we still are devastated, with a
lot of talk and little action. And while the independent and
private sector is trying their best to stand up with not very
much help, despite the testimony that's been given today on the
part of the Federal Government--what role and what are you
proposing to stop the real culprit, which was the shutdown of
the electric system, which basically shut down the refineries,
despite the workers being there, despite the bravery of the
people on the ground? We just suffered so much, not just
locally, but nationally, because of the failure and collapse of
the electricity system. So, what are you proposing, so that we
can weather a storm better, either in terms of backup
generators or more fuel available or--what are your
recommendations? Quickly, because I've got one more question.
Secretary Bodman. Senator, there again, I don't have
specific recommendations. The reconstruction of the
transmission lines, which was the major problem that caused the
electricity to be lost, particularly in western Louisiana, when
they are reconstructed, they will be done at higher standards,
at a higher level, at higher codes, thereby improving things.
But that, again, is not what we do.
Senator Landrieu. Well, let me just suggest that we all
start doing that a little bit better, because this is a very
integrated system, Mr. Chairman. And what I'm suggesting here
is that you can't produce energy independently. It is all
integrated with the environment, with coastal protection, with
navigation, with electricity. And we found ourselves, in this
Nation, quite vulnerable. So, you could have the most
sophisticated platforms in the world, you could have the
greatest technology in the world, and because we haven't spent
2 minutes thinking about how we get energy to these platforms
in the middle of either a terrorist attack, God forbid, or
another hurricane, which we most certainly will have, we will
not have made any progress.
My third question is this: In 1998, the Republican chairman
of the House Energy Committee, my colleague Mr. Tauzin, and I
introduced the first revenue sharing bill in 1998. It's now
2005. This bill suggested that, as this country pursued more
aggressive drilling policies, that we might share a portion of
those revenues with those States that would step up and do so.
That was during the former administration and unfortunately,
nothing was done. I have a letter from May 2003 here. President
Bush came to our State in 2000 to campaign--and I will provide
this for the record--and promised that he would be willing to
share revenue with coastal producing States during the
campaign. However, I'm going to submit to the record that, in
May 2003. ``The administration would object to any coastal
impact payments such as those authorized by the bill. Under
current law, more than one billion already goes . . . ''--the
one billion goes, really, to States that don't produce, not to
the States that do. The record will reflect that.
In July 2004, ``We recognized the importance of investing
in coastal conservation. However, rather than establish new and
complicated processes.'' We can't do it.
June 2005, right before this hurricane, ``We oppose
significant new funding authorizations and diversion of OCS
revenues.'' We can't do it.
July 15, a month before the hurricane, ``The administration
strongly opposes provisions in the House and Senate.''
My question is: Do you two Secretaries think the
administration will ever change their views that would allow
coastal producing States to receive a portion of offshore oil
and gas revenues? Very quickly, yes or no?
Secretary Norton. Senator, we have taken an additional look
at that approach in one of our most--our most recent statement
of administration position----
Senator Landrieu. What is it?
Secretary Norton [continuing]. Did indicate that we would
be willing to discuss the issue of revenue-sharing. While that
is, obviously, a sensitive issue, because many of those funds
have already been spent by the Federal budget, we are
interested in looking at the sharing of revenues with States,
in an appropriate way.
Senator Landrieu. And, Mr. Secretary, real quickly.
Secretary Bodman. Yes.
Senator Landrieu. I have one final comment.
Let me go on record to my colleagues, Republicans and
Democrats, here. I have been a strong and long proponent of
access of production. I will vigorously and aggressively oppose
any opening of Lease Sale 181, or any new openings, unless
there is a substantial and aggressive revenue-sharing provision
for States based on the production or based on some fair share
that we would establish.
It is inconceivable to this Senator from Louisiana, having
gone through the devastation that we are still living through--
I wish we had thermometers to turn down. I wish we had a house
to send energy to. The energy coast is flat on its back. And
for this Congress to consider opening up new areas of
production without providing the current States of Texas,
Mississippi, Louisiana, and Alabama, who have borne the brunt,
for 60 years, of the production for this Nation, to even begin
to talk about that is really an insult to the people of my
So, let me just go on record. I will vigorously oppose any
opening unless there's more than talk, but delivery, on a fair
share of revenues to be spent appropriately, transparently, and
accountably for the environment and for the people who happen
to live there, digging the ditches, producing the oil, digging
the channels, and helping this country become energy
Thank you, Mr. Chairman.
The Chairman [presiding]. Thank you very much.
Senator Craig. No, Senator Thomas.
The Chairman. Senator Thomas.
Are you going to be here for a while?
Senator Landrieu. I will be back.
The Chairman. Well, Senator, would you yield for a minute?
Let me say, Senator, I know your State's going through a
very difficult time, and I know how much you are fighting for
it, and we all appreciate the circumstances you're in. But I
don't believe that those of us on this committee, who have been
working to help your State, deserve the comments you've just
Senator Landrieu. I didn't direct them at you, Mr.
The Chairman. Well, we ought to direct them--you ought to
be fair. You ought to also say a giant step has been taken.
Senator Landrieu. A giant step has been taken.
The Chairman. We gave you $350 million a year for 5 years.
Senator Landrieu. You gave us a billion dollars. A billion
dollars. And, Mr. Chairman----
The Chairman. How much to your State?
Senator Landrieu [continuing.] And, Mr. Chairman, without
you, it would not have happened.
The Chairman. Well, I'm----
Senator Landrieu. And without Senator Bingaman, it would
not have happened. But----
The Chairman. Yes, but I'm suggesting that to say nobody's
been doing anything about it.
Senator Landrieu. I did not say that, Mr. Chairman.
The Chairman. We have been.
Senator Landrieu. I have been extremely grateful. I have
said that the administration, both the previous and current----
The Chairman. Okay, now let me finish.
Senator Landrieu. Thank goodness for these Senators----
The Chairman. Excuse me.
Senator Landrieu [continuing]. Because we wouldn't be
anywhere without them.
The Chairman. May I--you talked, and I want to finish. The
Senator from Wyoming is being patient.
We are having difficulty talking about the existing--the
States that are producing, getting additional revenue, when we
speak about revenues for new leases, because there's a big
budgetary difference. And I'm trying to solve that budgetary
difference. And you're aware of it. The new ones don't count
against the budget. The old ones do. So, every time we think
about giving you increases, there's a huge budgetary cost, and
we can't fit it in a bill. So, if we introduce a bill helping
you, it does the other--it's immediately subject to all kinds
of points of order, so we just leave it aside. But we're not
intending to leave it aside. This Senator intends to do
something about it.
Senator Landrieu. And you already have, Mr. Chairman.
The Chairman. I intend to insist that we equalize the
royalties. If we are going to add royalties to new, then we
must add royalties to old. Now, that's the end of my
conversation. And I don't think we need any threats. We need
your help. And you need our help.
Having said that, we'll yield to the Senator from Wyoming.
Senator Thomas. Thank you, sir. I wish you'd make yourself
a little more clear about the way you feel, but----
Senator Thomas. If we were to, kind of, define where we
are, which do you think was the problem that had more impact,
the refining aspect or the production aspect?
Secretary Norton. Mr. Chairman and Senator Thomas, there
were a number of offshore platforms that could have produced,
were it not for the problems at the onshore facilities. And,
although there were some others that went the other direction,
from the offshore perspective we found that there were a great
many onshore problems that prevented it.
Senator Thomas. But what we hear all the time is that
generally the increased demand for gasoline, for example, is
not a product of not having enough oil, it's a refining
restriction, which, in this instance, that--in the short term--
and this is the second point I want to make, is, we've been
working for a long time with all of you, and you've been
working well, but more on a long-term energy policy. Now we're
looking more at a very short-term policy, and--to try and deal
with an issue. So, is it refining you think is more--has more
impact on our prices and on our capacity than--or oil?
Secretary Bodman. I think at least my understanding of the
situation is, it depends on what the timeframe is, Senator. The
refineries are expected to be back up and functioning by the
end of this calendar year. At the current time, there are five
refineries that are up. We expect one back this week, two at
the end of November, two at the end of December. And,
therefore, the refineries, as such, will be back and, under
normal circumstances, will be functioning. My guess is that the
offshore production of oil is going to take longer, because
it's going to--it will require construction of new platforms,
in some instances, and that will be a longer-term thing.
Senator Thomas. That's really not my question. I understand
what you're saying, but I'm talking about the impact on
consumers. Which one has the more impact, the limit on----
Secretary Bodman. I think it's fair to say that the
refineries have a greater impact on consumers. We've had crude
oil available. It's been made available out of the Strategic
Senator Thomas. So, really, if we had to focus priorities,
it really ought to be on getting the refining capacity back in
Secretary Bodman. Well, the priorities--I think that's yes,
but it's being done. It's--and the refineries will be back in
shape. The issue is expansion. I think that Speaker----
Senator Thomas. And even putting these pack in shape
doesn't resolve the problem that we had before this ever
Secretary Bodman. I agree with that.
Senator Thomas. I'm talking about refining capacity before
this hurricane ever came.
Secretary Bodman. I agree with that.
Senator Thomas. And part of that has been the difficulty in
the restrictions on expanding and developing new refineries.
Secretary Bodman. That is also true.
Senator Thomas. And so, it seems to me that's one of the
things that's--and I'm really interested in this short-term/
long-term thing. For example, Secretary Norton, offshore leases
are going to take a while to produce.
Secretary Norton. Yes.
Senator Thomas. On the other hand, we have some
availability of gas and oil in the West that is held up largely
because of approval of permits and all those kinds of things.
If you were really going to focus on the short-term impact,
where would you get the most change the quickest?
Secretary Norton. We, obviously, have a significant impact
in two places. One is getting the offshore capacity back up and
running again. And that is being done----
Senator Thomas. 181 leases----
Secretary Norton [continuing]. And we're working on that.
Senator Thomas [continuing]. Don't have anything to do with
getting that up.
Secretary Norton. No, I'm sorry, the existing facilities.
Senator Thomas. All right.
Secretary Norton. But, you're correct that onshore is very
significant in the short term for getting things going again.
And we appreciate the additional funding that was provided
through the energy bill. And we are working very quickly to
implement the provisions from that bill in our pilot offices,
and we anticipate that, with that additional funding, we would
be able to get increases of production up to a trillion cubic
feet over the space of a year, and that is very significant.
That is more than our current loss from the offshore, and that
would be as the result of processing more quickly, under the
current standards, the applications for permits to drill.
Senator Thomas. Just to interrupt you a little bit. I see
some reports--this is, kind of, a bureaucratic thing--where you
have big increases in some offices, and less in another. So, I
would hope you'd take a little look at what can be done to get
a little more oomph out of a few of those offices.
Secretary Norton. We've created an Energy Coordinating
Council within the Department that allows us to look not just
at what BLM is doing, but to make sure that moves quickly, but
also to make sure we've got Fish and Wildlife Service people
onboard. We've moved 2 weeks ahead of the statutory schedule to
get an MOU signed with all of the other relevant Federal
departments on working together on processing applications for
permits to drill in those pilot offices.
Senator Thomas. Okay. Just as an observation on your last
comment, as we look to the future, you talk about offshore
drilling and all these things, and then you keep talking
about--many people do--of the gulf. We ought to pick--does it
make any difference--if you're going to develop offshore,
should it be in hurricane--where the hurricanes generally come,
or should we be looking somewhere else?
Secretary Norton. I think that diversity is important. We
are hearing interest from some States--for example, Virginia--
that is not an area where production has occurred in the past.
They're interested, if there is revenue-sharing, in looking at
natural gas production.
Senator Thomas. I've heard quite a little bit, you know,
about the concentration of energy development in this area that
is subject to these kinds of disasters. And I should think, as
we look long term, we ought to be giving that some attention.
I'm sure you have.
Senator Craig [presiding]. Thank you.
Senator Akaka. Thank you very much, Mr. Chairman.
I would like to ask that the full statement that I have be
included in the record.
Senator Craig. Without objection.
[The prepared statement of Senator Akaka follows:]
Prepared Statement of Hon. Daniel K. Akaka, U.S. Senator From Hawaii
Thank you, Mr. Chairman, for holding this hearing today. As you
know, I also serve on the Homeland Security and Governmental Affairs
Committee, which is conducting an investigation into the federal,
state, and local government's response to Hurricane Katrina. I welcome
this opportunity to build upon the HSGAC investigation and review the
impact of Katrina and Rita on energy infrastructure.
On October 6th, the Energy Committee held a hearing on energy
infrastructure and recovery. I remarked then, and continue to note,
that we have a national crisis on our hands. The repeated hammering by
hurricanes has exposed significant weaknesses in the nation's energy
infrastructure and is sending us warning signs about our vulnerability
during next year's hurricane season.
The price shock waves that rippled across the nation have pushed up
prices on the mainland and in Hawaii. Gasoline prices went sky-high,
but also the costs of materials, transportation, petrochemical
products, and food prices--almost everything has been touched by the
impact on our energy infrastructure.
Climate experts predict that hurricanes will hit our coasts with
greater intensity when they do hit, so it is critical to ensure
adequate and durable infrastructure on our coasts. Hurricanes Katrina
and Rita shut down 20 Gulf Coast refineries at one point and a total of
4.8 million barrels a day, or 28 percent of the U.S. refining capacity.
The most recent hurricane, Wilma, will leave the east coast of Florida
without electricity for days, in a much smaller repeat of the losses in
New Orleans and the Gulf. Collectively, the hurricanes have exposed
significant weaknesses in the nation's energy infrastructure and
significant effects on consumer prices across a broad range of goods
I look forward the testimony of the witnesses and I have some
questions I would like to ask Secretaries Bodman and Norton about their
agencies' role in hurricane recovery.
Senator Akaka. I want to add my welcome to the Secretaries
here as we talk about this great disaster.
Hurricanes Katrina and Rita highlighted the vulnerability
of our energy infrastructure, particularly--and I'm so glad my
fellow Senator has raised the question about refineries--and
particularly in refining capacity and capability. After
Hurricane Rita, we lost almost one-third of the U.S. refining
capacity, as you noted in your testimony. However, even when
Katrina hit our gulf coast region, the Nation's refineries were
already running at 98 percent capacity to meet demand. Yet, no
new crude oil refinery has been constructed in the United
States since 1976, for 30 years. And that was indicated. It is
estimated that it could take up to 10 years to build a refinery
in the United States. So, my question is: Why is it that oil
companies have not taken the initiative to bring more refining
capacity online in the United States, given the expected
announcement of third-quarter profits of as much as $28
billion? Why have they not done that? And, to continue, what
does the Department of Energy see as the shortfall in current
policy that perpetuates the lack of domestic refineries? What
policies would you suggest that could be initiated by the
Department of Energy to correct this, beyond tax incentives?
Secretary Bodman. First of all, Senator, the reason that is
usually given by the oil companies is that they have not found
it profitable to invest in refining capacity. I think the
Speaker got it about right yesterday, when he--I think it was
yesterday--when he had his press conference, that these
companies are turning in record profits, that they have a
responsibility to increase refining capacity, that the American
public expects that and should see that. And I believe that,
that I do think that there is a--every possibility that we
would--that we will see an expansion of capacity. But I think,
as I said, the Speaker got it about right, until we get a sense
that there is a concerted and broad-based effort to do that, we
should continue to speak publicly about it. And I will continue
to do that, both publicly and privately.
You asked a second question, Senator?
Senator Akaka. Yes, I asked about the tax--beyond tax
incentives, what policies would you suggest?
Secretary Bodman. Yes, what the policies are. You know, the
issue there has really been one, I think, that you will find in
talking to both the large oil companies, as well as the
companies that specialize in refining, that we have a
significant problem with respect to siting new refineries.
People want the energy, but don't want to have the facility
that creates the energy in their backyard or in their
neighborhood. And so, there is a difference, in terms of siting
coordination between the Federal and State and local
authorities. We did favor and support Mr. Barton's bill, which
sought to deal with that matter. And so I think those sorts of
approaches of trying to improve the siting, the permit
issuance, is something that would help materially. I think it's
also true that, with the increase in gasoline prices that we've
seen, that the margins in the refining side of the business are
quite strong, and very much would support at least increasing
the capacity of the refineries that already exist, as well as
creating new refining capacities, new refineries.
Senator Akaka. A final fast question. My time is expired.
What is your view of the idea of a Strategic Refinery Reserve,
similar to the Strategic Petroleum Reserve, as discussed in the
Environment and Public Works Committee only yesterday?
Secretary Bodman. Right. That is one of the subjects that
is being talked about by our colleagues at the White House,
including the Secretary and myself, who participate in it. I
will tell you that it's a complicated matter. Gasoline has a
limited shelf life. It starts to lose its performance
characteristics after 2 or 3 months, typically. And so, it has
to be constantly turned over. So, if you were to set up a
reserve, you have to take that into account. We also have to
remember that we have--I think it's 15 different types of
gasoline, then all the different States that have various
requirements under the Clean Air Act. And, therefore, which
grade are you going to put in the reserve, and where? So, there
are issues there that need consideration, but there are many
who are intelligent, and who observe this industry as it
operates, that think a reserve of refined products is something
that we should have. And it's being looked at, as best I can
tell, quite closely.
Senator Akaka. Thank you, Mr. Chairman.
Senator Craig. Thank you, Danny.
Senator Salazar came first, but Senator Cantwell stayed
Senator Craig. Senator Cantwell. I flipped a coin. She won.
Senator Craig. All right? Thank you. Appreciate it, your
courtesy. Please proceed.
Senator Cantwell. Thank you, Mr. Chairman.
Senator Salazar did come back, and he has a pressing--I'm
happy to defer to him so that he can get his question in.
The Chairman [presiding]. Go ahead, Senator Salazar.
Senator Salazar. Let me just ask this question, Secretary
Bodman. One of the conversations I've had with Chairman
Domenici and Ranking Member Bingaman and others of the
committee has to do with your statement that the only real
short-term action we can take for this winter is conservation.
Secretary Bodman. Yes.
Senator Salazar. And there are two concepts that I included
in legislation that I've been talking to my colleagues about,
and I want your reaction to them. One would be to have a
Federal law that essentially would mandate the Federal
Government to reduce its consumption of energy by some
percentage. I don't know whether that would be 2 percent or 5
percent, but that way the Federal Government could lead, if you
will, by example, in terms of conservation. The second concept
has been to accelerate the parts of the energy bill, which we
passed, to provide the tax credit for--tax credits for energy
efficiency to kick in earlier than they are now scheduled to
kick in under the bill. And my thought has been that, given the
high prices of natural gas and heating oil and the like, is
that you would have consumers that would be incentivized to put
in the new furnaces or the new water heaters or the more energy
efficient windows if we had that tax credit, that tax incentive
for them to do it. And so, one of the ideas that I've thought
about is moving that time for the implementation of those tax
credits up to, say, December 1, as opposed to when they kick in
later in the bill.
What's your reaction to those concepts? And, also, do you
think that there might be something that we should be doing
here in the Congress, and out of this committee, with respect
to some kind of emergency conservation legislation for this
Secretary Bodman. First of all, we are working very hard--
we, in the Energy Department, and with our colleagues
throughout the executive branch--on energy-saving programs.
We're just pulling it all together and getting feedback as to
what everybody's efforts are. I don't have any quantitative
numbers to give you. When you start mandating certain energy
savings, you get into the very situation that you mentioned:
What percent, and how do you do it? Because some departments
are much more energy intensive than others, and some activities
are more energy intensive than others. And so, when one starts
to mandate, one gets, I think--it may well interfere with the
functioning of the very departments that you want functioning
well. And so, we will pull together and make available the
information that we are currently--under the current program,
In terms of advancing the tax incentives, I think most of
those incentives start January 1. It's a matter of, would there
be an advantage in having it take effect December 1? I think
there would be some. And therefore, depending on what's
involved in getting it done and getting it passed, I would
think that that would help, in terms of the conservation
I think it would be a mistake to assume that it would be a
big effect, because you're talking only, I think, about 30
days, because I think that the tax incentives for ENERGY STAR
appliances and that sort of thing start January 1, sir, I
Senator Salazar. Right. Secretary Bodman, my only comment
on that is that I do think, following up on many of the
questions and comments of my colleagues, that part of it is
educating the Nation, as a whole, about energy conservation.
And if we look at this as the kind of crisis that we're in, and
we're taking action, even though it may only--it may only help
us, in terms of providing a 30-day window in December, that it
may be part of just elevating the consciousness of the country
Secretary Bodman. It could well be. Yes, it could well be.
That's not my long suit, is, you know, trying to make a--you
know, a public-relations sort of judgment on that. I do want to
emphasize that this initiative goes beyond just the little
booklet in working with consumers. We are working with
consumers, and we've done public-service announcements, to get
this information out to some, I think, 4,000 radio stations
throughout the country. We're also working with industry, as
well as with the Government. We have teams of people that come
from the energy-efficiency part of the Department of Energy who
are working with the 200 largest energy users in industry and
also are working with our colleagues in the Federal Government
at devising methods of reducing energy use.
Senator Salazar. Just one other quick question. In terms of
the status of DOE's regulations that would implement the
conservation measures that were passed in the energy bill,
including the tax credits, how are those coming along?
Secretary Bodman. We have literally hundreds of different
reports and initiatives that we have been charged with doing. I
think we're doing well--we're managing it in terms of the
equipment--the appliance regulations that were in the energy
bill. I think there were some 15 or 16 different appliances.
Those have already been done. They've been published and
they're in the Federal Register. We did that about a week ago.
Senator Salazar. Let me just say I--I've often said this to
Chairman Domenici--and that is that I think that the work that
you have in your hands on energy for our country is probably
the most important domestic agenda, and I look, very much,
forward to working with you on these issues in the future.
Thank you very much.
Secretary Bodman. Thank you, sir.
The Chairman. Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman, Secretary
Norton, Secretary Bodman.
Secretary Norton, it's good to see you. Last time I saw you
was at the U.S. Geological Office in Vancouver, Washington,
when you were concerned about Mount St. Helens erupting. And at
least we can say that's one natural disaster that didn't
happen, we didn't have to worry about.
Secretary Bodman, I wanted to follow up on a couple of
things that my colleagues brought up. I actually have two
subjects I wanted to see if I could get your input on. In the
energy bill, we've put in a new section dealing with the sale
of electricity and transmission, that basically says, ``Let's
not have any manipulative or deceptive conveyances or
devices.'' That was our way of getting at what had transpired
in the electricity markets. Do you think we need that kind of
authority, at the Federal level, to make sure that there isn't
price gouging going on?
Secretary Bodman. That's a complicated question. It's
really a legal question, I think, Senator. My own view of it is
that we have what I would characterize as a reasonably
effective outreach for identifying citizens who indicate that
there are gouging problems in their neighborhood. We've got
both a Website and have had a toll-free number to identify
those. We pull the information together, we make it available
to the Federal Trade Commission, and they work with individual
States. As I'm sure you know, each State has its own definition
of just exactly what gouging is, and----
Senator Cantwell. We don't have any Federal authority
Secretary Bodman. No, we don't. And when one gets to
superceding what has traditionally been, you know, local legal
authority, I would be very careful about doing that, that's
Senator Cantwell. So, the Department doesn't have an
official position on way or another, at this point?
Secretary Bodman. It's not something that we have sought,
Senator Cantwell. Perhaps we could send you legislation,
and you can give us comments on that?
Secretary Bodman. Be happy to do that.
Senator Cantwell. Okay, great, thank you.
On this strategic reserve issue, I think the Europeans have
done something on jet fuel. Is that something we should
Secretary Bodman. Yes, it's--the strategic--the Strategic
Reserve looks at any distilled product. I think the Europeans
do that. And they--each country there has its own procedure.
Many of them put the maintenance of the strategic reserve of
refined products in the hands of industry, because industry is
the one that's constantly dealing with this, and that way, you
overcome the question of maintaining the freshness of the
product, where if you--a government were to get into that
business, let's say, you're then constantly in the business of
having to turn over the inventory and getting it moved out.
Senator Cantwell. But is that something you think we should
Secretary Bodman. I think that it's something that ought to
be considered. It's not going to help, near term, for sure, but
it is something that needs to be considered. I just would
repeat, we have a variety of grades of these different
materials. And so, when you talk about refined products, you're
not talking about three or four things, you're talking about
20, or some large number--I don't know what the different
grades are--of jet fuel, for example. But I'll bet they're--
that they've--it varies----
Senator Cantwell. Somehow, the Europeans have figured that
Secretary Bodman. Somehow, the Europeans have figured that
out. And, apparently, it works there.
Senator Cantwell. Okay. I'm curious about your thoughts
about whether we should do that on some of these new areas of
alternative fuels that we're looking at, but I'll save that,
because, while I know this hearing is about energy costs, I
wanted to ask if you had seen the IG report on the audit of
tank waste retrieval at Hanford, if you had had a chance to see
that report? I think it came out a week or so ago.
Secretary Bodman. I have not read it, Senator, but I'm
generally aware of the contents.
Senator Cantwell. Are you concerned about meeting the
milestones for cleanup at the Hanford site?
Secretary Bodman. Absolutely. As you're well aware, we have
looked very hard at the entire Hanford effort, and I have made
a determination that we are going to miss some of those
milestones. Your office, as you know, was informed. Your
colleague's office, Mr. Hastings, who----
Senator Cantwell. Were we informed that they were going to
Secretary Bodman [continuing]. The Congressman from the
area, as well as the Governor. So, everybody's been informed.
Senator Cantwell. I think we were informed that they might
be missed. And so, you're saying that they will be missed.
Secretary Bodman. Best we can tell at this point in time,
they're going to be missed, yes, ma'am.
Senator Cantwell. Okay. So, what do you think we do about
that, given that there are, you know, 67 single-shelled tanks
that are either confirmed leaking or suspected leaking?
Secretary Bodman. We are very committed to the cleanup of
the Hanford site. The issues that will--we're going to miss
milestones relate to the vit plant, to the so-called vit plant,
and getting that started on time.
Senator Cantwell. This is about tank waste, though. This
report is about tank waste.
Secretary Bodman. Okay. Well----
Senator Cantwell. In fact, the budget is going to double.
The original estimates by the Department were way off, and now,
the cost is going to double.
Secretary Bodman. I haven't seen it, but I'm not surprised
Senator Cantwell. Okay. Well, we're obviously very
concerned about it.
Secretary Bodman. No, I understand. I understand. We're
very committed to cleaning up that site, and we're doing our
level best to try to accomplish that. But what I don't want to
do, and will refuse to do, is to--as best I am able to--is to
make commitments we can't keep. And that has been the case in
this project in the past, where we have made commitments in
terms of what the various cost levels were going to be. And the
Government is very good at buying highways, buying bridges,
buying things that are of that type, because we do it all the
time. I'm a chemical engineer and it is very difficult, I will
tell you, to accurately estimate in advance what things are
going to cost. Everybody has to understand that there are very
wide bands, in terms of precision, on this. And so, it's a real
Senator Cantwell. I don't know if you remember, Secretary
Bodman or Mr. Chairman, but before this committee, I did
recommend that you become Secretary of Energy for life, or
until Hanford cleaned up, because I do think it is a very, very
complex project and it needs the oversight of somebody who
understands that complexity. But we certainly feel that the
budget shortfall there needs to be addressed. And so, we'll be
working with you and the chairman and others to try to address
what has been a larger projection for cost than was originally
estimated. And, again, the fact that the tank waste is reaching
toward the Columbia River has got all of us very concerned.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
Frankly, after all the Secretary has to put up with, I'm
not sure he wants to be Secretary for life.
The Chairman. But I haven't asked him yet.
Senator, I'm going--I haven't asked any questions.
Senator Talent. Sure. Can I just say, Mr. Chairman, I might
almost think of that as a life sentence, rather than life
The Chairman. Same for the Secretary of the Interior. It's
the same thing.
Well, first, Secretary Bodman, I'm very sorry that the
hearings have not quite been as extensively on the subject of
the hurricanes as it might have been, but you can tell there's
a high, high degree of frustration about our inability to get
our arms around this energy problem, which is bigger than
Katrina and Rita, obviously. So, I want to ask, with reference
to Katrina and Rita and the fact that we have so much energy--
of our energy assets there, are you looking at lessons to be
learned? I'm not asking that you disclose them all, but----
Secretary Bodman. Yes. Yes. Yes, we are.
The Chairman. I would think that there's got to be some
things that come out of that. For instance, the pipelines just
told us, when we were down there--that one little visit of
Senator Bingaman and Senator Akaka and I--that they're looking
very, very diligently at the possibility of having a dual
pipeline system in an area so that they have an extra capacity
when problems occur. That'll come up later, but I would think
that there ought to be some possibilities that we could prevent
the shutdown of industries and utilities because most of it's
not coming from being destroyed, most of it's coming from not
having any electricity.
Secretary Bodman. Yes, sir. But it's not obvious to me how
putting in two lines would help.
The Chairman. I understand.
Secretary Bodman. I mean, trying to put in electric power
and have the electric power delivered with greater degree--with
greater reliability would help.
The Chairman. But maybe it's some real effort at backup
that's targeted. I'm just saying it's--I think it's incumbent
on the industry and your Department to really work at that. And
somebody has to spend some resources on it. It would be
resources well spent.
Secretary Bodman. Thank you, sir.
The Chairman. Second, Secretary Bodman, it seems to me that
this is a new day, in terms of the public versus energy, and
that they will accept and go along with things that they might
have not gone along with in the past on the side of supply. And
I just urge, as a general proposition, that you not be bound
by, you know, ideas about what you could and couldn't do 5
years ago. And I don't know whether that applies to you or not
in any specifics, but I really think the public--for instance,
on ANWR, the public polls show an incredible change in the last
2 or 3 years, most of which has occurred in 6 months, in terms
And that leads me from the Secretary to you, Madam
Secretary. First, I apologize for any pushing on you about 181.
But I want to tell you, and state for the record, and then I'll
ask you some specifics, you know, if the United States of
America, believe it or not, were going to put all its eggs in
one basket on its natural gas future--sorry, Alaska--the eggs
would be put in offshore drilling of natural gas. It is, all by
itself, more than enough natural gas for all of America's needs
for as far as we can see.
Now, part of it's impossible, as I guess it's impossible to
do it off the shore of California, no matter how far out you
go. But I want these numbers in the record. We are using 22.9
trillion cubic feet per year. It is now estimated, under old
estimates, that the entire offshore has 420 trillion cubic feet
of natural gas.
Now, I understand how we have been--tied ourselves in knots
about doing anything about it in the past, but I submit to you
that the knots are coming apart, and we can sit by and worry
about them, or we can decide we're going to hurry up and take
them apart. And it's in that context that I urge that you look
at the Outer Continental Shelf with a new, new vision.
I applaud the House. They're doing some very, very terrific
things. In fact, the Peterson approach was thought to be, kind
of, wild--it might get a lot of votes in the House--for us to
just open them, instead of the opt-in/opt-out, and give them a
very extensive and new royalty. I did not ask you what you
think about it, and I won't ask you, but I'm letting you--
leaving you with that thought.
Well, maybe I will. What do you think about what I've just
Secretary Norton. Mr. Chairman, you are correct, there are
vast resources offshore. I also should point out that in your
own State, as well as the rest of the Rocky Mountain region, we
do have 139 trillion cubic feet there, as well.
The Chairman. Right.
Secretary Norton. And so, we need to look both onshore and
The one point I'll make on the natural-gas-only leasing,
which is the Peterson amendment, there are some technical
issues as to that. We have asked for comments in our 5-year
plan on the technical aspects of that, so we should have some
additional information for you.
The Chairman. I understand. Now, we're going to talk about
onshore for a minute, very precise and specific with you. I've
been informed that, in just one area of Wyoming, Pinedale, we
are on a winter no-drilling rest-of-the-year drilling. Now, for
everybody listening, that sounds neat, right? But, you
understand, that's a terrific problem. Secretary Bodman, you
understand, you know, you put a drilling rig in, and you drill,
and then you've got to move it, or shut it down, and 6 months
later, bring it back--I mean, that's a very, very onerous--you
know, but for something unusual, it's rather impractical, to
say the least.
I am told that if just that area, Pinedale, were put on
year-round, it would yield as much natural gas as is needed for
one-third of all of Los Angeles' needs. They're always
comparing and saying, ``It doesn't matter much.'' I'm beginning
to try to compare locally, so, when they say, ``It doesn't
matter much, it's only one-tenth of 1 percent of America's''--I
say, ``Well, how many counties in New Mexico?'' or, ``How many
of my major cities?'' It turns out a little different.
So, I want to ask you to do this for us. I want you to
respond to us very precisely in writing, What is the problem--
legally, administratively--with lifting, changing, or
substantially altering the winter prohibitions? Would you do
Secretary Norton. Mr. Chairman, we'd be happy to do that.
I will note, we have approved some winter drilling
proposals in that area, and the ones I'm aware of total 54
billion cubic feet that will be brought online by allowing the
winter drilling, which is a very significant amount. That was
done with mitigation--it's largely dealing with big game animal
populations--but with mitigation and with some steps taken to
be sure that the environment is protected at the same time.
The Chairman. Okay. Now, on 181, I would like you to tell
us, in writing, with your lawyers--you're a lawyer, also--but
go through with us exactly what is the most expeditious way,
and what are the impediments, to proceeding with 181, in whole
or in part, and give us--don't do this on the basis of assuming
that every problem is one that's not doable. Assume, quite to
the contrary, that, unless they're absolutely legal, that the
time has come to do some of them. Can you do that for us?
Secretary Norton. We'd be happy to look at what would need
to be done administratively as well as what legislation might
be able to do it.
The Chairman. And I would really urge that you have the
best people you can do that, and not people who are looking for
every--you know, every fly in the ointment, but, rather, that
this is something very important to the American people. This
could be taken to them very easily, in terms of, Are you
worried enough about this or not? Especially if you do a
hundred miles out.
I would add to that the request that you do it also if we
move a hundred miles away from the coast. Give us your
I don't think it's going to be any different, because I
think you can draw the line wherever you'd like. But I'm not
sure of that.
Secretary Norton. Thank you, Mr. Chairman.
The Chairman. Will you also give us the estimate of natural
gas that we currently think would be on 181? And then what
would be there if we start a hundred miles out. Do you know
Secretary Norton. I actually can give you that, assuming we
start a hundred miles out, so everything that's more than a
hundred miles from shore, the area that has not been leased in
Lease Sale 181 contains 6.03 trillion cubic feet of gas, which
translates to providing enough gas for 4.3 million households
for 20 years.
The Chairman. Now, see, this is not just a little field.
This is pretty big stuff for America and our future.
Now, Secretary Bodman, with reference to the energy bill--
This is my wrap-up, and I'll go to you and--the Senator
wants a second round. If you can stay a minute and let him do
that--okay, well, anybody that comes back, we don't want to
keep these Secretaries too long, they'd better get back pretty
Secretary Bodman, you're overwhelmed with many things,
including the crisis of the hurricanes, but I think it's really
important that we not let a whole year go by in analyzing the
energy bill in terms of resource needs to accomplish some of
the goals, and also administrative needs on your part.
Madam Secretary, there are a number of them for you, also.
I would ask that you inform us on what kind of a timetable
you have for getting these--you pick the most important ones.
What's the timeframe for you to get them done?
And then I'm going to ask you informally--and this, you
shouldn't do on the record, but I'm just going to lay it before
you--I think it's important that the administration know, as
they produce their budget, in these times of constraints and
everybody wanting to cut, that we really--you know, we just did
a bill which was lauded, but if you look at it, you've got to
do some things to make the praise bear fruit, right? Some of
it's not automatic.
Secretary Bodman. Most of it, sir, I think, is not
The Chairman. Not.
Secretary Bodman. No.
The Chairman. You know, for instance, even nuclear, we're
all proud of it, but you've got to draw some rules for the
Secretary Bodman. Right.
The Chairman. I mean, for the insurance.
Secretary Bodman. Right.
The Chairman. And you're doing that, right?
Secretary Bodman. Yes, we are.
The Chairman. So, I think I would like to be helpful, in
terms of advising the administration of five or six important
funding areas, maybe some on your end, without which we're not
going to get any of the fruits, then they'll say the bill
didn't work. So, I would ask both of you if you might
informally share that kind of thing with me, if you feel
If it's something you don't think you can do, because of
your relationship to OMB, then we'll do it over a cup of coffee
and nobody will know we did it.
Secretary Bodman. We'll find a way, sir.
The Chairman. Now, what I'm going to do is yield to you,
Senator Talent. I'll just take a minute.
The Chairman. And then Senator Murkowski--is this your
Senator Murkowski. Yes, sir.
The Chairman. You go, and then Senator Akaka. And will you
stay here for a while?
Senator Murkowski. I will. Thank you.
The Chairman. Thank you very much, Secretaries. How about
your time? You're okay?
Secretary Bodman. Yes, sir.
The Chairman. Other than getting hungry, I guess you're
okay. Thank you for your time.
Senator Talent. They need some fuel, too, I guess, Mr.
Chairman, don't they?
Thank you, Mr. Chairman. And I can be brief, in part,
because you went into a lot of the areas I was going to go
You know, I want to say that I think we have a tremendous
opportunity now to move ahead, in terms of supply. And I hope
you will both, for your portfolios, just take the attitude that
any energy package that does not contain a substantial supply
component is just a nonstarter. And I'm talking about supply of
natural gas, oil, traditional fuels, which, in the short term,
we're going to need. Yes, then conservation, on top of that.
That's great. We should do that. And, of course, we should find
the supply in environmentally sensitive ways. But this is the
time to do supply. I think that's what the people are looking
for. The chairman was mentioning that, and I think he's right.
If we just look at natural gas, demand is going to increase,
over the next 20 years, about three times that the projected
supply is going to increase. And that's when prices are already
intolerably high. So, we have got to increase supply.
Let me add a question to the chairman's, and you can
respond later on this. But I'd like to know--and I'm not sure
he asked it exactly this way. What areas, onshore or offshore,
hold the most promise? And which of those areas are the easiest
to access, both in terms of readily available pipeline and
processing infrastructure and in terms of overcoming legal
impediments to get natural gas? In other words, Madam
Secretary, I think it would be useful if you looked at the
areas which contain reserves that you guys control, looked at
which ones were the easiest to get at, in terms of practical
impediments, which would be pipeline processing, and then
looked at the ones that are most difficult, in terms of legal
impediments, and then maybe did a cross to see which of the
ones that are the easiest to get at practically and the easiest
to get at legally and maybe supply us with a sense--a set of
priorities on that.
I don't like you to have to go away with a bunch of
information requests, but I sure would like to know what are
the easiest to get at from both standpoints. Maybe we can
remove some of those legal impediments.
And then just--the chairman asked about Lease 181. I'm very
interested in that, but I won't go into that.
Let me just ask you both to opine on one subject, and then
I'll yield to my colleagues. How will the natural gas supply
and price forecast change if we were able to move ahead, let's
say, with Clear Skies if we were able to make coal more readily
available, either through Clear Skies or perhaps some kind of
coal gasification program, so that we could take some of the
burden off of natural gas as an electricity-generating fuel?
Secretary Bodman. Why don't I talk about that. First,
neither of these are going to deal with this winter, sir, as
you're well aware. And so, that's why our focus has really been
on conservation, and that's what we're out trying to make known
to the American people. Certainly, clean coal technology will
make a huge difference. Nuclear power will make a huge
difference by removing the pressure on natural gas. The natural
gas situation is even more difficult than the gasoline
situation today, because we don't have any ready means of
importing product. We have LNG, but it's only 2 percent or 3
percent of what our needs are. And it's a major problem.
I am very much committed to working on the clean coal
technology, working on nuclear power in order to try to
accomplish that. In order to give you a price forecast, I can't
do that off the top of my head, but we'd be happy to have our
folks at EIA looking at what we might be able to accomplish.
Looking long term and what the impact would be on natural gas,
we'd be happy to make that available to you.
Senator Talent. I agree with what you're saying about this
winter. I just think the conservation medicine will go down a
lot easier if people know that supply is on the way.
Secretary Bodman. Well, sure.
Senator Talent. And I would encourage you to link those as
you talk about them, while making clear that the supply is not
going to produce more in the next, you know, 3 or 4 months.
Secretary Bodman. Right.
Senator Talent. But we've already done a lot in the bill,
and I'm glad you mention that, with regard to LNG. With
renewables for oil and gas--and we're working on ANWR, and
hopeful that we can get that. So, I think some help is on the
way. But the more that we can do, the better. And I would
encourage you both to talk about it, in terms of increasing
supply. The chairman is right, people are not only ready for
that, they're expecting it.
Secretary Bodman. Thank you.
Secretary Norton. And, Senator Talent, we are looking at
what we can do in the short term, as well as in the long term,
in terms of our access to supply.
Senator Talent. Thank you, Madam Secretary.
Thank you, Madam Chairman.
Senator Murkowski [presiding]. Thank you. And it's--you
know, it's great to be talking about ``Help is on the way.''
And we always say, ``Alaska stands ready.'' We are just itching
to help you out. Whether it's oil or natural gas or coal
gasification or wind or geothermal or ocean energy, we've got
it all. We just can't get it to you. And this is the concern
that I have. Recognizing how much potential we do have up
north, and in other parts of the country that we just haven't
been able to get at, we, as a country, certainly when it comes
to our oil supplies, have chosen to look overseas, have chosen
to look abroad. And that's why we are approaching about 60
percent--between 58-60 percent dependency on foreign sources of
I am so concerned--and I raise this at every opportunity--
that we're going, potentially, in the same direction when it
comes to natural gas. We've all heard the statistics, we all
know that the supply is just so far outstripping--and what
we're talking about are these projects that are longer term,
whether it is the coal gasification--we've got a project in
Alaska that we're looking at that's just kind of right on the
edge of coming together, in terms of possibilities. We're very
excited about it, but we recognize that the window on that is
Our natural gas pipeline, I want to talk to you a little
bit about that this morning, because there's a great deal of
frustration that we haven't been able to get at least two of
the three major producers to come online with a project that
we, in this country, have said, ``We want Alaska's natural
gas,'' we, in the Congress, have said, ``We want it, and we're
willing to put taxpayer dollars to help with incentives''--we
did that last year, and we still can't get two of the three to
commit. And so, we're at that situation where, because we can't
establish to the markets that it's here for the short term,
it's going to be available in the short term, we look offshore,
we look to Indonesia, we look to Qatar, we look overseas. We
sign these 25-year contracts. We set up the LNG siting
facilities to receive it. But what are we doing here in this
country? And I get very nervous about--in a quest to meet the
short term, we're making long-term commitments, without making
the commitment to develop it here.
And I want to get back to--to my--now I'll make it a
question, on the gas line. Press reports that the Governor and
his administration have pretty much come to agreement with
ConocoPhillips, one of the three major producers in the State,
for agreement on a gas line. Exxon and BP have not yet come to
the table, are not yet participating. And I am not privy to the
details. The public is not. But we know that we can't even
discuss the issue of a natural gas pipeline before our
legislature to approve it unless and until we've got a--
producers out there that are willing to make it happen.
Now, some of my colleagues here earlier were beating up a
little bit on the oil companies and saying, ``Look, they're
facing major profits this year, and it's a growing trend, and
that we expect the trend to continue.'' What it is that we have
to do to move this project further? We have, last year, as you
very well know, moved forward with some fiscal incentives at
the Federal level that we were told, ``Boy, if we can get
those, gas is coming from Alaska.'' Given where we are and what
you know, what can you advise?
Secretary Norton. Senator, I know that each of us has had
conversations urging the companies to move forward with the
pipeline and getting that constructed and emphasized the
importance to the country of having that pipeline constructed.
As you know, at this point it is largely in the hands of that
negotiation for a proposal to emerge in which the Federal
Government would then be taking action to handle that proposal.
Senator Murkowski. Secretary.
Secretary Bodman. I wish I had a good answer for you. I
would certainly associate myself with what Secretary Norton
just said. I think while you were out, Senator, I made the
statement that I think Speaker Hastert had it about right in
his press conference, that these companies are showing record
profits, they're doing very well, and it's time for them to
demonstrate to the American public that they're going to be
responsible in running, you know, our collective energy
business, our country's energy business. And that involves
increasing refining capacity, and it involves dealing with this
pipeline, because my information is, we're, you know, up to
four billion cubic feet a day of gas that can come out of this
pipeline. We only use 60 or 61 billion cubic feet. It's a
massive injection of gas into our economy that we desperately
need. And I think the Speaker had it about right.
Senator Murkowski. When I think whatever we can do, at a
public level and at higher levels, to remind the companies that
the country needs this and that it is as much an issue of
energy security as economic and national security. And I think
the more that we can do to impress that, it's very important
for us. So, I would appreciate your assistance in that.
One very quick question. There was a comment made by Red
Cavaney of the American Petroleum Institute. And Mr. Cavaney
indicated that when it comes to refineries, it may not be so
much construction of new refineries that is needed as much as
expansion of the existing refineries that we have. I haven't
had a chance to speak directly with him about that to see what
it is that we can do, at the congressional level, at the
Federal level, to help facilitate the further expansion. Any
comments or thoughts, Secretary Bodman?
Secretary Bodman. Well, I think the reason that there seems
to be greater interest in expansion rather than building a new
greenfield facility is, one, it's easier to get it permitted,
because you already have a site there; and so, therefore,
getting the expansion done, it's proven to be a couple of
years, rather than 3 or 4 years. You're looking at big
differences in at least the historical timeframe. Second, by
expanding, you already have available, presumably, at a refiner
that already exists, crude oil supply. You have a way of
getting crude to the facility, so you can expand that. And you
also have customers and places you can put it, whether it's the
chemical industry, whether it's retail consumers, by access to
a pipeline that gets the product eventually. So, there are a
number of reasons, both financial and from the standpoint of
getting the approvals done, that encourage that.
I think it's useful to look at either one. I think that
it's useful to think about additional refining capacity. If you
look at a map of refineries, there are a lot of refineries all
over America. They're scattered pretty well. They're much less
concentrated, in terms of individual units, than I once
thought. It's true, the larger refineries are down in the gulf
coast and in New Jersey, New York area, as well as in Los
Angeles. That tends to be where the concentrations are. So, the
additional refining capacity will help. But I just think we
also should be encouraging the greenfield or grassroots type
Senator Murkowski. Thank you both, Secretary Norton,
Senator Akaka. Madam Chairman, may I ask two fast
questions? And I didn't want to leave without asking Secretary
Norton a question. But this has to do with what we're just
discussing now, and that is pipelines and delivery of energy.
Secretary Norton, under section 368 of the Energy Policy
Act of 2005, several agencies are required to identify energy
corridors for oil, gas, and hydrogen pipelines, and electricity
in 11 Western States. I understand that the Bureau of Land
Management and Forest Service recently began holding public
meetings to gather comments that will be considered in
designating new energy right-of-way corridors on Federal lands
across the West. One question, of two, is, Can you elaborate on
the anticipated increase in energy transmission that the
corridors will provide to growing areas? And I understand that
the corridors will not cross national parks lands or wilderness
areas. Is that correct?
Secretary Norton. Senator, yes. I'm not aware of any
proposals that would do that. And that was not included in the
legislation. So, we're focusing on our multiple-use lands.
Senator Akaka. And what about the national monuments on
Bureau of Land Management lands? And what about National
Landscape Conservation Lands, which have been designated as
uniquely important landscapes? And so, my second question is,
Will the transmission corridors cross those lands?
Secretary Norton. There are some specific things that are
included under the statutes. The monuments that are BLM
monuments are not. One would have to look at the purposes
outlined in the monuments' designation. A number of those do
include existing rights-of-way in existing corridors. We are
going through a process, working with the Western Governors
Association, to try to identify desirable rights-of-way. And
those kinds of factors would certainly be considered as we
would be looking at which areas make the most sense for having
Senator Akaka. Yes. And my first question was if you would
elaborate on the anticipated increase in energy transmission
that the corridors will provide for.
Secretary Norton. I'll have to provide that for the record.
Senator Akaka. Fine.
[The information follows:]
The BLM has begun its efforts to identify energy corridors pursuant
to section 368 of the Energy Policy Act of 2005. The public scoping
period for the West-wide Energy Corridor Programmatic EIS began on
September 28, 2005 and concluded on November 28, 2005. At this point in
the process we are unable to quantify an anticipated increase in energy
transmission capacity. We anticipate an estimate will be possible as we
continue through the EIS process. We will be happy to update you as
information becomes available.
Senator Akaka. Thank you very much, Madam Chairman.
And thank you for your responses.
Senator Murkowski. Thank you, Senator Akaka. And thank you,
again, to both of you, for giving us as much time as you have
this morning and for your work on behalf of the country.
And, with that, we're adjourned.
[Whereupon, at 12:40 p.m., the hearing was adjourned.]
Responses to Additional Questions
The Dow Chemical Company,
October 25, 2005.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Dear Senator Domenici: Thank you once again for inviting me to
testify before your committee on October 6 on the subject of the
effects of the recent hurricanes on our nation's energy infrastructure.
Thank you as well for your words of praise for the people of my company
that you met during your visit to Saint Charles, Louisiana.
Enclosed per your request of October 11 are my written responses to
the questions posed by Senators Akaka and Feinstein. Should you or your
staff have any additional questions, please do not hesitate to contact
me, or Dow's Vice President of Government Affairs, Peter Molinaro, at
Very truly yours,
Andrew N. Liveris,
President and CEO.
Question From Senator Akaka
Question 1. Mr. Liveris, thank you for your testimony. I appreciate
all that your company, and other petrochemical companies, do to keep us
supplied with a wide array of products for everyday use. I am concerned
about the ripple effects that are being reported throughout the
economy. We are seeing price spikes of key raw materials for
manufacturing. How long do you expect these prices to continue, and
what do you as an industry expect the ultimate effect will be?
Answer. Prior to hurricanes Katrina and Rita, the chemical industry
was experiencing increasing sales volumes as the inventory de-stocking
activity of the 1st half of 2005 (the result of the soft-patch in
global manufacturing) was ending and as orders improved. This was
pushing operating rates (or capacity utilization) for many polymers up
to the 91% to 94% range. Hurricanes Katrina and Rita resulted in the
unavailability of as much as 60% of North American capacity for a
number of key petrochemicals, petrochemical derivatives and polymers.
With already tight markets, this pushed operating rates for available
capacity up to 100%. Although much of the capacity has now returned to
service, according to CMAI, a leading industry consultant, for example,
9% of high density polyethylene (HDPE) capacity and 6% of polypropylene
capacity remains shut-down. The reduced polypropylene capacity is now
running at a 100% rate Given current demand, this is placing upward
pressure on prices.
Most energy, industrial, and chemical products have a low price
elasticity so even minor supply disruptions have large effects on
prices paid for products in short supply. These price effects are now
working their way through the supply chain. Prices for polymers (e.g.
polyethylene) are highly correlated with monomer prices (e.g.
ethylene), which in turn are highly related to feedstock prices (e.g.
ethane), which in turn are highly correlated to natural gas prices.
Chemistry accounts for a high degree of materials value of many
household items we take for granted. The chemistry share of the
materials value of a bottle of shampoo, for example, is 100%. For tires
it is 62%. For semiconductors it's 30%. Even for paper cups it's 22%.
Higher prices for key industrial supplies and materials will now begin
filtering through the value chain to other manufactured goods and
ultimately to the consumer. These price effects and shortages are now
being witnessed in the most recent import price report released by the
Bureau of Labor Statistics, which indicated the largest increase in
non-petroleum import prices since monthly publication of the report
began in December 1988. The rise in non-petroleum industrial supplies
and materials prices was led by a jump in natural gas prices, although
higher prices for chemicals, building materials, and some metals were
also contributing factors. This will next show up in producer prices
and then the CPI. As inflationary pressures intensify, central banks
will tighten, resulting in higher interest rates, which at some point
reach a tipping point for the economy, resulting in the next downturn.
Future economic historians may very well talk about the recession of
2006-7 as being engendered by higher natural gas costs as a
What follows is a sampling of products that have or will rise in
price or be in short supply because of high natural gas costs that are
driving up the cost of chemicals used to make finished goods. We have
already seen news accounts that tire companies (dependent on butadiene
chemistry), carpet makers (dependent on nylon chemistry) and furniture
companies (dependent on polyurethane chemistry) are paying far higher
costs or are unable to obtain raw materials because of gas costs and
Natural Gas Propane* Propylene
Acrylic acid acrylate esters super absorbent
* Where Propane appears, propane can also be derived from petroleum
refining as well as from natural gas processing. About 45% of US
propane supply is derived from natural gas. Another 47% comes from oil
refining (crude distillation, cat cracking, hydrocracking, catalytic
reforming, and thermal processes) with the remaining 3% of propane
Petroleum Propylene Polypropylene (liners)
Natural Gas Propane Propylene
Natural Gas Ethylene polyethylene glycol
Sorbitan Laurate (primarily baby shampoos)
Natural Gas Ethylene-polyethylene glycol
Ammonium Lauryl Sulfate
Natural Gas Ethylene High-density polyethylene
Natural Gas Propane Propylene Allyl
Chloride Epichlorihyrdin Glycerin
Natural Gas Ethane Ethylene High-
density polyethylene (HDPE) packaging
Natural Gas Propane Propylene Allyl
Chloride Epichlorihyrdin Glycerin
Natural Gas Ethane Ethylene High-
density polyethylene (HDPE) packaging
Natural Gas Ethane Ethylene High-
density polyethylene (HDPE) packaging
Natural Gas Ethane Ethylene linear
alpha olefins alcohol ethoxylates [liquid detergent raw
Natural Gas Ethane Ethylene linear
alpha olefins alcohol ether sulfates [liquid detergent raw
Natural Gas Ethane Ethylene linear
alpha olefins alcohol sulfates [liquid detergent raw
Petroleum benzene linear alkylbenzene
linear alkylbenzene sulfonate (LAS) [liquid and powder detergent raw
Natural Gas Ethane Ethylene High-
density polyethylene (HDPE)
Natural Gas Ethane Ethylene linear
alpha olefins alcohol ether sulfates [detergent raw material]
Petroleum benzene linear alkylbenzene
linear alkylbenzene sulfonate (LAS) [detergent raw material]
Natural Gas Ethane Ethylene High-
density polyethylene (HDPE)
Yogurt/Sour Cream/Cream Cheese/Margarine Containers
Natural Gas Propane Propylene
Bottles for Mustard/Honey/Salad Dressing/Peanut Butter/Jelly
Natural Gas Ethylene Low-density polyethylene
Natural Gas Ethylene Polyethylene Terepthalate
(PET or PETE)
Water Bottles (5 gallon)
Petroleum Benzene Cumene Phenol
Misphenol A Polycarbonate
Water/soft drink/juice bottles
Natural Gas Ethylene Polyethylene Terepthalate
(PET or PETE)
Plastic Wrap for Food Packaging
Vinyl chloride film--commercial use
Vinylidene chloride--home use
Natural Gas Ethane Ethylene Ethylene
Dichloride VCM PVC
Expandable polystyrene packaging
Natural Gas Ethane Ethylene
Ethylbenzene Styrene Polystyrene
Prepared food packaging (i.e., rotisserie chickens, sushi)
Natural Gas Ethane Ethylene
Ethylbenzene Styrene Oriented Polystyrene
Natural Gas Ethane Ethylene Low-
density polyethylene (LDPE)
Trash can liners
Natural Gas Ethane Ethylene Low-
density polyethylene (LDPE)
Fast Food packaging
Crystal polystyrene--fast food service cold drink cups, cutlery
Expandable polystyrene packaging--hot beverage cups
Natural Gas Ethane Ethylene
Ethylbenzene Styrene Polystyrene
Epoxy coatings on the interior of food cans to protect food from
contamination with dissolved metal
Petroleum Benzene Cumene Phenol
Bisphenol A Epoxy resins
PVC plumbing pipe
Natural Gas Ethane Ethylene Ethylene
Dichloride VCM PVC
Vinyl siding, doors, and windows
Natural Gas Ethane Ethylene Ethylene
Dichloride VCM PVC
Kitchen cabinets/countertop laminates
Natural Gas Methanol Formaldehyde
Natural Gas Ethane Ethylene Vinyl
Petroleum Propylene Acrylic acid
Natural Gas Ethane Ethylene Ethyl
glycol Ethyl acrylate paints
Petroleum Propylene n-Butyl acrylate
Natural Gas Methanol Methyl methacrylate
Petroleum Benzene Phenol or Cyclohexane
Caprolactam Nylon 6
Petroleum Benzene Cyclohexane Adipic
acid Nylon 6,6 fibers
Petroleum Propylene Polypropylene
Polyether Polyols flexible polyurethane foam carpet
Petroleum Toluene Toluene diisocynate
flexible polyurethane foam carpet cushion
Natural Gas Ethane Ethylene