U.S. Senate Committee on Commerce, Science and Transportation and U.S. Senate Committee on Energy and Natural Resources Hold a Joint Hearing on Energy Pricing and Profits

Courtesy FCDH e-Media
Wednesday, November 9, 2005; 1:07 PM

NOVEMBER 9, 2005









































































STEVENS: If I may, a question's been raised before we start the hearing. The question whether Senator Domenici and I should administer oaths to these witnesses at today's hearings was raised by a letter that I received this morning at 8:10 a.m., after it was delivered to the press.

As a matter of fact, there's as story in the Seattle paper about the request having been denied already.

I remind the witnesses as well as the members of these committees, federal law makes it a crime to provide false testimony, specifically Section 1001 of Title XVIII provides in pertinent part, "whoever in any matter within the jurisdiction of the legislative branch of the government of the United States knowingly or willfully makes any materially false, fictitious or fraudulent statement or representation shall be fined under this title or be imprisoned not more than five years or both."

I have reviewed the rules of the Senate and the rules of the Commerce and Energy Committees in effect in this Congress and the relevant provisions of Title II of the United States Code. There is nothing in the standing rules of our committee rules or the Senate which requires witnesses to be sworn. The statute has the position that everyone appearing before the Congress is, in fact, under oaths.

These witnesses excepted the invitation to appear before our committees voluntarily. They are aware that making false statements and testimony is a violation of federal law, whether or not an oath has been administered.

I shall not administer an oath today.

CANTWELL: Mr. Chairman?

STEVENS: And we look forward to questions.

Senator Cantwell?

CANTWELL: Mr. Chairman, I did send you a letter co-signed by eight of my colleagues, and asking that the witnesses be sworn in.

This rare joint hearing...

STEVENS: I did not yield to make a statement. We're ready to go. We have a statement process...

CANTWELL: Mr. Chairman, I would like the committee to vote on whether we swear in...

STEVENS: There will be no vote. That's not an order at all. It's not part of the rules that any vote can be taken to administer an oath. It's the decision of the chairman, and I have made that decision.

CANTWELL: Mr. Chairman, I move that we swear in the witnesses.

STEVENS: And I rule that out of order.

BOXER (?): I second the motion.

STEVENS: Thanks very much. That's the last we're going to hear about that because it's out of order.

BOXER (?): Mr. Chairman? Mr. Chairman, could I just ask just for a little clarification here?

BOXER (?): If a senator makes this request and there's a second, why wouldn't we have a vote on that?

STEVENS: Because you can't vote to put in the rules something that's not there.

BOXER (?): Mr. Chairman...

STEVENS: This is not a business meeting. There's no way to put this into the rules. This is a matter for the chairman to decide and I've made the decision.

(UNKNOWN): Mr. Chairman, I wanted to say I'm...

STEVENS: Pardon me.

It specifically says in the rules, "The president of the Senate, speaker of the House or a chairman of any committee" can make the decision.

(UNKNOWN): And, Mr. Chairman, I concur.

STEVENS: Now, if we could come to order, and I would hope that we'd have -- I do believe that we do not wish to have standing room only in this. There's plenty of seats. Please take seats.

This is a joint committee meeting, gentlemen. And we have, together, determined that myself and Senate Domenici, Senator Inouye and Senator Bingaman will make opening statements. And after that time we will listen to the witnesses. And following that time, senators will be recognized by the early bird rule on each committee. And we encourage the witnesses to limit their statements to 10 minutes each, if that's agreeable; I think it has been.

And we shall have a limit, according to an agreement between chairmen and ranking members of each committee, to five minutes each on opening statements.

Over the last two years, energy prices have tripled, the cost of oil has risen at least once to $70 a barrel. All Americans know now that the cost of energy is going up. But in the wake of the Hurricanes Katrina, Rita and Wilma, there's fear about how sharply these prices have risen.

STEVENS: Americans are now concerned whether they should be paying so much more for energy when our energy companies are recording record profits.

Today, we're going to hear testimony from Lee Raymond, chairman and CEO of the Exxon Mobil Corporation; David O'Reilly, chairman and CEO of the Chevron Corporation; James Mulva, chairman and CEO of ConocoPhillips; Ross Pillari, chairman and CEO of British Petroleum of America; and John Hofmeister, president and U.S. country chair, Shell Oil Company.

We thank you, gentlemen, for coming to appear before us today voluntarily. This hearing's an opportunity for your companies, the major energy companies of our country, to address these concerns.

We do sincerely want to listen to your thoughts.

This is a joint hearing. The members of each committee are here today. And as I indicated, each senator will be entitled to ask questions for five minutes.

I urge that witnesses be succinct in their answers as possible and that witnesses observe the timer clock, which should be visible to all concerned.

In my judgment, these hearings should be a respectful discussion about our nation's energy prices. I intend to be respectful of the position that these gentlemen hold.

In turn, I know that each of you as witnesses understands that those of us at this table have a duty to our constituents and to all Americans to seek the information we will seek today.

Specifically, we want you to discuss the steps your industry planned to take to alleviate price concerns, and we need to gain your perspective on some of the initiatives members of Congress have proposed that aim to assist communities in meeting these increased costs.

I now yield to Chairman Domenici.

DOMENICI: Thank you very much, Mr. Chairman.

Fellow senators and witnesses, let me first say that I want to thank Leader Frist for requesting this joint hearing. And thank all the senators who are here to participate.

I think all of you know that we represent constituents. Added all up, we represent the American people.

Every day that we are in office and every day that we go home, we hear what our people and what the American people are worried about and what concerns them.

Americans have been experiencing painfully high prices at the pump. Whether you think so or not, they think so. Americans are facing dramatically increased winter heating fuel prices, especially of natural gas. You see a story on the front page of the Post today about aluminum company, because of the natural gas prices being so high, may indeed close up.

DOMENICI: Most Americans in most of the polls show that our people have a growing suspicion that the oil companies are taking unfair advantage of the current market conditions to line their coffers with excess profits.

Now, I am telling you what we are hearing and what Americans are saying.

Some senators are proposing a windfall profits tax. From all I know, it didn't work before; it probably won't work again.

Still, I expect the oil companies' witnesses to provide some assurances about how you plan to use your recent profits to provide a stable source of energy to the United States and to pursue, to the maximum extent possible, lower oil prices and lower gas prices.

The oil companies' witnesses owe the company an explanation, and they owe it to us as those who represent the people. I expect the witnesses to answer whether you think your current profits are excessive and to talk about what they intend to do with the reserves and the profit accumulations that they have.

This may not, in past times, be relevant as you think of it. But it is relevant to the American people at this point, and I believe you have to tell us about it.

Now, there are a variety of factors that have pointed to the reasons for the high prices. Some say exports to China, India, increased geopolitical risks and, of course, the hurricanes in the Gulf. Some of these factors are out of your control. But we hope you will explain, nonetheless, why the prices are so high.

There are other factors, however, such as the lack of refining capacity, which the American people believe is urgent. I say to all of you that time is urgent, that we address these issues, like expanding refining capacity, increasing production here at home, and providing some balance in the supply-demand internationally, so we might expect the stabilization of prices of crude oil and, thus, gasoline and derivatives at least, if not causing them to go down substantially.

Things look a little better this week than they did three or four weeks ago. We'd like to know what you think about that trend. Is it going to continue or is it just a spurt?

We know gasoline has come down dramatically. What do you think about the future?

With that, I thank you for coming here and I thank all the senators for attending.

Mr. Chairman, it's a privilege to co-chair this with you. I think, before the day's out, we might get the American people some answers.

Thank you.

STEVENS: I'll next call on Senator Inouye, co-chair of the Commerce Committee.

INOUYE: Thank you, Mr. Chairman.

The past several weeks have been very painful for the people of the United States. It has been the time of Katrina. It has been a time of suffering, of death. It has been a time when hospitals were destroyed. Americans were called upon to make record-breaking contributions.

INOUYE: Sacrifices were made in every quarter. And yet at the same time, we saw Americans lined up at gas pumps, waiting to pay $3 and much more for their gasoline. And I think Americans are concerned.

Then, suddenly, they have thrust upon them headlines saying, record-breaking profits -- in the midst of suffering, in the midst of sacrifice, record-breaking profits.

I have nothing against making profits. After all, it makes capitalism live.

Mr. Chairman, I think, although the rules are very clear that the chair has the responsibility to decide whether to have witnesses sworn before they testify, if I were a witness, I would prefer to be sworn in so that the American people be assured that the testimony that we're about to give would be the honest truth and nothing but the truth. And if I were a witness, I would demand that I be put under oath.

STEVENS: The next statement will be by Mr. Bingaman.

Senator Bingaman is recognized.

BINGAMAN: Thank you very much.

I welcome the witnesses, thank them for being here and look forward to learning all I can at this hearing.

It strikes me that the focus of the hearing is on the high price of gas that people are paying at the pump, on the high price of natural gas and home heating oil for our homes this winter as the temperatures drop.

I'm sorry, frankly, that we were not able to accommodate the request I made to have a representative of one of the consumer groups on one of the panels today. I think that would have added to our discussion.

I do believe that there are some concrete steps that we need to discuss and I hope the witnesses will be able to address these. Let me mention a few.

Number one, there are eight different bills pending here in the Senate that relate to this issue of price-gouging and whether we should have a federal statute similar to the state statutes that exist.

It is my view that that would be an appropriate thing for us to do.

BINGAMAN: I would like to see us pass such a statute before we adjourn here in the next few weeks, adjourn this session of Congress.

A second concrete idea is the Low-Income Home Energy Assistance Program. We need to fund that at the fully authorized level. We have tried to do that now several times. We had a floor vote on the 5th of October, another on the 20th of October, another on the 26th of October. Each time, that's been turned down.

I think, again, we need to fully fund that program before Congress adjourns this session.

Third proposal that I would have is that we need a high-profile national public education campaign to encourage conservation. And this is something that everyone seems to think is a good idea, but no one's willing to pay for. The federal government has not committed the funds to pay for this. As far as I know, the industry has not either.

And I'll refer to that again in just a moment.

A fourth item is I believe we need to go ahead with the lease sale 181. That clearly is something that should have been done some time ago. It was on track to be done when this administration came into office. For political reasons, for reasons related to the politics of Florida, frankly, it was put off.

And there is no legislative action required in order for this to be accomplished; it is strictly an administration decision. And I wish they would make the decision to go ahead with that lease sale.

Fourth item, I believe we should, once again, get back to increased fuel efficiency in cars, trucks and SUVs in this country. That's a subject we tried to deal with in the energy bill. We were unsuccessful.

I hope we can take some action on that. Over the long term that would do a great deal of good, I believe, for our country.

Two specific things that I would just ask the witnesses to respond to: What can your companies, what can the oil and gas industry itself do, to help with this public education campaign for conservation? I think that clearly much more is needed there.

And secondly, what help can be provided to these LIHEAP programs around the country?

Thank you very much.

STEVENS: Thank you very much.

Senator, we did have, in our committee, two days, two separate hearings on price-gouging -- two sessions, that is, on price-gouging. We've had such hearings already.

Now we're going to turn to the witnesses. The first witness will be Mr. Lee Raymond of Exxon Mobil.

Mr. Raymond?

Pardon me: I hope all members will look at the clocks in front of them and keep track of their own time, please.

RAYMOND: Thank you, Mr. Chairman.

Chairmen Domenici and Stevens, Co-chairman Inouye, Ranking Member Bingaman and committee members, thank you for the opportunity to discuss the important issues being raised about Exxon Mobil and the industry.

RAYMOND: The increases in energy prices following Hurricanes Katrina and Rita have put a strain on Americans' household budgets. We recognize that.

After all, our customers are your constituents. And we recognize our responsibility to make energy available to them at competitive costs.

It is also our responsibility to engage in an open, honest, informed debate on our energy future: grounded in reality, focused on the long term, and intent on finding viable solutions.

I would like to make three points in my allotted time.

First, given the scale and long-term nature of the energy industry, there are no quick fixes and there are no short-term solutions.

Second, petroleum company earnings go up and down, since prices for the openly and globally traded commodities in which we deal are volatile. But our ongoing investment programs do not, and they cannot, if we are to meet growing energy demand.

And third, as the response to Hurricanes Katrina and Rita have proved, markets work, even under the most extraordinary circumstances. Permitting them to function properly is the kind of leadership required to meet the future energy challenges that we all face.

Let me elaborate on each point in turn.

Currently, the world's consumers use the equivalent of 230 million barrels of oil equivalent every day from all energy sources. That's 400 million gallons an hour, or 67 billion gallons a week. Because of the size and strength of the U.S. economy, Americans consume a fifth of this total: more than any other country.

At current market prices, the bill for the world's petroleum consumption is more than $2.5 trillion a year. That's greater than the U.S. government's entire annual budget.

The petroleum companies represented here today help meet that enormous demand, but we are a relatively small part.

Consider this: Exxon Mobil is the world's largest nongovernment petroleum company, with a market capitalization of about $350 billion and operations in 200 countries and territories.

RAYMOND: Almost three-quarters of our business is outside of the United States.

On an average day, we produce over 4 million oil-equivalent barrels. That's about 3 percent of the world's daily oil and gas appetite.

It is also important to keep in mind the long-term timelines in which we operate. In politics, time is measured in two, four or six years based on the election cycle. In the energy industry, time in measured in decades based on the life cycles of our projects.

For example, Exxon Mobil just announced the first oil and gas production from our Sakhalin-1 project in Russia's far east. We began work on the project over 10 years ago when prices were very low. And we expect it to produce for over 40 years.

All told, that's more than 50 years for one project. Fifty years is 25 Congresses and 12 presidential terms. Fifty years ago, Dwight Eisenhower was president of the United States.

So what does that mean for policy-making? It means, given the scale and long-term nature of our business, effective policies must be stable, predictable and long-term in their focus.

History teach us that punitive measures hastily crafted in reaction to short-term market fluctuations will likely have unintended negative consequences, including creating disincentives for investment in domestic projects.

Think back to the 1970s when we were all in an energy crisis here in this country. First, price controls, then punitive taxes were tried to manage petroleum markets. They contributed to record prices, shortages and gasoline lines.

As the government withdrew from attempting to manage the markets, prices began to come down. In fact, net of taxes, prices in real terms for petroleum products like gasoline, diesel fuel, heating oil and jet fuel have actually declined over the last 25 years.

Which brings me to my second point: The petroleum industry's earnings are at historic highs today, but when you look at our earnings per dollar of revenue, a true apples-to-apples comparison, we are in line with the average of all U.S. industry. Our numbers are huge because the scale of our industry is huge.

RAYMOND: How are these earnings used? We invest to run our global operations, to develop future supply, to advance energy- producing and -saving technologies, and to meet our obligations to millions of our shareholders.

Last year with $40 a barrel oil and high earnings, Exxon invested almost $15 billion in new capital expenditures and more than $600 million in research and development.

And in 1998, when crude prices were as low as $10 a barrel, our earnings were lower, at about $8 billion, but we invested $15 billion in capital expenditures that year as well.

In fact, over the last 10 years, Exxon Mobil's cumulative capital and exploration expenditures exceeded our cumulative annual earnings. So we keep investing in the future when earnings are high as well as when they are low.

The current discussion on building new grassroots refineries is interesting. Building a new refinery from scratch takes years, even if regulatory requirements are streamlined. Current refining economics are almost irrelevant to that decision.

For us, a faster and more practical way to add capacity has been to expand our existing refineries. It is much more efficient because the basic infrastructure is already in place.

Over the last 10 years, Exxon Mobil alone has built the equivalent of three average-sized refineries through expansions and efficiency gains at existing U.S. refineries.

I should add that we would also like to invest even more in this country, especially in exploring for and producing new supplies of oil and natural gas, if there were attractive economic opportunities to do so. But the fact is that the United States is a mature oil province. Domestic production is declining. And limited opportunities for new investments that have been made available to us.

Finally, my third point: Markets work, if we let them. Hurricanes Katrina and Rita were a one-two punch to the petroleum industry as well as to many of your constituents. At one point, some 29 percent of U.S. refining capacity was shut down. The Congressional Budget Office estimates the hurricanes caused between $18 billion and $30 billion in energy sector infrastructure losses.

But we are recovering. Our diligent and dedicated employees went above and beyond to repair the damage and get back to work.

Credit also goes to the federal government, whose release of the crude from the SPR, temporary easing of regulations such as gasoline specification and the Jones Act enabled us to reallocate resources effectively and efficiently.

RAYMOND: But most importantly, credit goes to our free market system. The hurricanes showed that markets work even under the most extraordinary conditions.

Prices for products did increase, of course, but there was no panic and no widespread shortages. Retailers responded to the short- term supply disruption, consumption decreased and imports increased to make up for the shortfall.

In a word: Markets worked.

And letting markets work will enable us to meet our future energy challenges. In just 25 years, global energy demand is expected to increase nearly 50 percent, with oil and natural gas needed to meet the majority of that demand.

The energy industry is meeting this challenge. Government can best help by promoting a stable and predictable investment environment, reinforcing market principles, promoting global trade and the efficient use of energy, and implementing and enforcing rational regulatory regimes based on sound science and cost-benefit analysis.

It is this kind of leadership that is required of all of us to meet the future energy challenges we all face.

Thank you, Mr. Chairman.

STEVENS: Our next witness is Mr. O'Reilly.

Happy to have your testimony, Mr. O'Reilly.

You're the chairman of Chevron.

O'REILLY: Thank you, Senator.

Thank you, Chairmen Domenici and Stevens, Ranking Member Bingaman and Co-Chair Inouye, and committee members.

I'm here today representing 55,000 Chevron employees as well as millions of shareholders who have put their trust and confidence in our company. And I welcome the opportunity to talk together about working to deliver reliable energy supplies at reasonable cost to all Americans.

I would like to make several points today.

O'REILLY: First, we've seen a situation of tight supplies and growing demand for energy for several years. The recent hurricanes in the Gulf Coast magnified that situation.

Secondly, Chevron is investing aggressively to increase energy supplies. Since 2002, we have invested what we've earned.

Thirdly, conflicting government policies and restricted access to opportunities make it difficult to invest here in the United States.

And finally, I will make a few brief suggestions as how I believe we can work together to create a more robust climate for U.S. energy investment.

Let me provide some context which will illustrate my first point.

We are here today to talk about energy prices, which came to the forefront following the hurricanes that devastated the Gulf Coast region, including the oil and gas industry. They disrupted oil and gas production, our pipeline network and our refining and distribution operations.

I personally visited our operations in the aftermath of the storm, and it is difficult to appreciate the devastation in the Gulf Coast unless you have visited it firsthand.

We were fortunate that no Chevron employees lost their lives, but many hundreds lost their homes and their possessions. But nonetheless, these same employees continue to work around the clock to resume normal operations, to get supplies to market. And I could not be prouder of their heroic performance in the face of unimaginable adversity.

Clearly we experienced price volatility in the wake of the hurricanes. These price fluctuations reflected the fact that the storms shut in one-third of U.S. oil and gas production and one-fourth of U.S. refining capacity. Price volatility was also driven by localized panic buying, which led to temporary shortages of gasoline.

And as we began to normalize distribution and production in the days and weeks that followed, prices began to moderate.

But the most important issue is that we have been operating in a tighter supply situation for some time now. And I've been talking about this for the last year and a half and I'm happy to discuss it with the committees today.

Today's energy markets are being shaped by several forces: growing demand for energy, particularly in Asia -- for example, China and India -- but also here in the United States has resulted in decreased spare capacity in global crude oil supplies and the global refining system.

Oil production in mature basins, particularly in Europe and North America, has been declining. New developments are occurring, but in challenging and capital-intensive locations outside of OPEC countries, such as the deep water, the Arctic and oil sands.

Meanwhile, OPEC production has increased, but is now approaching its current capacity to deliver.

And that brings me to my second point: Chevron is doing everything we can to expand and diversify the world's energy resources.

O'REILLY: We're doing it at huge costs and significant risk in some of the most challenging areas. We're doing it to ensure supplies to our customers while providing a reasonable return to our investors.

Since 2002, our company has invested $32 billion in our business. During the same time period, our earnings were $32 billion. In other words, we invested what we earned.

Our investments flowed to the areas of greatest opportunity and long-term return.

And in the U.S., for example, 90 percent -- that's 90 percent -- of our capital program for oil and gas production is focused in the Gulf of Mexico because it is open for investment.

While our investment in the U.S. is significant, it's important to note that about two-thirds of our capital program -- that's 65 percent -- is outside the United States because of the relatively limited opportunities here at home.

Investments in energy projects outside the U.S. also benefit U.S. consumers because they increase global supplies. However, let me give you an example of the type of inefficiencies that can occur when U.S. investment is discouraged.

In our search for natural gas in the U.S., we have found many promising areas off-limits to development. For example, in the late 1980s, we made a significant discovery of natural gas in an area of the eastern Gulf of Mexico called Destin Dome, approximately 25 miles off the coast of Florida.

At the time, it was estimated that Destin Dome held enough natural gas to supply 1 million -- that's 1 million -- American households for 30 years. Chevron and its partners could not get the permits to develop the field because of opposition at the local level in Florida, as well as a maze of regulatory and administrative barriers at the federal level.

We reluctantly relinquished the leases as part of a settlement reached with the government in 2002.

So what actions are we taking now to supply natural gas to this market? We are co-leading a project to produce and liquefy natural gas in Angola, shipping it to an import facility in the U.S. Gulf Coast and then piping it to the market. The customers will be the same customers who could have been supplied by natural gas just miles off the coast of Florida.

O'REILLY: This brings me to my final point: How can we create a policy environment that stimulates more investment in energy production and allows those investments to be made more efficiently?

As I've stated, the industry cannot pursue its potential in the U.S. without the right government policies in place. The energy bill passed earlier this year was a start, but there is more we can do.

And I've offered a detailed list of policy recommendations in my written testimony, so I want to just quickly summarize four of them here.

First, the U.S. government should open areas currently off-limits for the environmentally responsible exploration and development of oil and gas.

Secondly, there is a critical need to rationalize regulations that create barriers to the efficient development and operation of energy infrastructure; for example, the siting of LNG terminals and expansion of refineries. And there's also a need to reduce the number of boutique fuels.

Thirdly, we need to continue effective public-private partnerships that stimulate energy efficiency and research and development of potential new energy sources.

And, finally, the government should look at all of its policies, environmental, trade and foreign policy, and ensure that they are aligned toward achieving strategic energy objectives.

Senators, I believe that if the U.S. government can work with our industry as partners to eliminate barriers to investment, investment will follow.

It is clear that the policy choices we've made in the past have had consequences. So too will the policy decisions made from this point forward.

It's important that Congress and the American people recognize the choices that face us, understand their implications and plot a constructive path forward.

Thank you for the opportunity to comment. I appreciate it.

STEVENS: Thank you, Mr. O'Reilly.

Our next witness is the chairman and CEO of ConocoPhillips, James Mulva.

MULVA: Good morning.

I welcome this opportunity to demonstrate what our company, ConocoPhillips, is doing now and what we are committed to doing in the future to help the United States achieve greater energy security at an affordable cost.

Today's higher prices are a function of longer-term supply and demand trends and lost energy production during the recent hurricanes.

While ConocoPhillips doesn't expect the prices we see today to continue, we do want to give you an appreciation of the challenges that I had in supplying the United States and the world's energy needs.

For example, exploration and development projects typically cost several billion dollars but have no revenues for seven, eight, sometimes 10 years. And they have substantial technical, capital, political and price risks.

Our industry is experiencing rapid cost increases due to high steel prices and service industry costs and also because host governments, including the United States, limit access to reserves or make the terms too unattractive.

Thus the opportunities that are available for us tend to be the more remote, complex and higher-cost-type projects.

The fragile balance of world energy supply and demand was brought into sharp focus when Hurricanes Katrina and Rita disabled a major portion of America's productive capacity.

Given the amounts of devastation, we believe that the energy industry did a commendable job of resuming operations as fast as humanly possible and redistributing supplies from other regions and countries, thereby avoiding a much larger supply disruption.

MULVA: As a testament to the industry's success, AAA reported on November 2nd that gasoline prices have declined for the 26th consecutive day, to a level below where they were prior to the hurricanes.

ConocoPhillips lost one-third of its domestic refining capacity as a result of the shutdown of three of our refineries. One of our refineries was down for a week, another for 45 days, and the last is expected to resume partial operations by year's end.

To increase gasoline supplies to affected areas, our company redirected supply from some of our other refineries in the United States, we deferred turn-around work at three of our other company refineries and imported gasoline from Europe. And we worked around the clock to resume and restore our operations.

Immediately after Katrina and Rita's arrival, our company froze gasoline prices in the impacted states at all of our company-owned stations and convenience stores for several days and then lagged price increases in the spot market by nearly 50 percent.

Essentially all of our company's gasoline marketing is done through independent marketers. And although antitrust laws prevent us from giving them specific guidance on pricing, we urged all of them to use restraint in setting their prices.

ConocoPhillips is and has always been against any form of price- gouging. If we become aware that any of our independent marketers were doing this, that would be grounds for revoking our branded name from that dealer.

We know that many state attorneys general are requesting reviews. And we are ready to open our records to them to show that we do not conduct, condone or tolerate price-gouging.

ConocoPhillips reported third quarter 2005 net income of $3.8 billion, which is up 89 percent from the same quarter last year. With respect to U.S. refining and marketing income, this segment accounts for about 33 percent of the 89 percent increase.

Translating this increase in U.S. refining and marketing earnings to earnings per gallon sold, earnings were up 4 cents per gallon from last year. That is, from 5 cents per gallon in the third quarter of 2004 to 9 cents per gallon in the third quarter of 2005.

So how is this possible when the industry average retail price for gasoline went up 67 cents per gallon from the third quarter of 2004 to the third quarter of 2005? Let me explain what happened to the 67 cent increase from one year to the next.

MULVA: Fifty-four cents per gallon went for higher crude oil and feedstock costs that we must pay to run through our refineries. The oil that we purchased usually represents 85 percent to 90 percent of the total costs of running our refineries.

Operating and marketing costs remain flat on a per-gallon basis, while taxes increased 3 cents per gallon due to the higher earnings.

In addition, 6 cents per gallon represents retail industry taxes and margins that our company is not exposed to because our U.S. marketing operations are predominantly wholesale activities.

That leaves us with 4 cents per gallon additional profit, which is 6 percent of the total increase in gasoline prices from one year to the next.

Based on ConocoPhillips' third quarter revenues of about $50 billion, the $3.8 billion of income represents a profit margin of 7.7 cents per dollar of sales: near or below the average of all U.S. industry.

But this level of profit in the highest price environment our industry has experienced in 22 years after adjusting for inflation, we do not see this as a windfall.

At ConocoPhillips, we've ramped up our investment significantly in recent years, from $6 billion of investment in 2003 to $9.5 billion in 2004 to more than $11 billion expected this year.

For 2006, we are forecasting $12 billion in capital investment.

Over the last three years, our company delivered about $26 billion of earnings, but as we invested over $26 billion right back into the business to expand capacity in terms of production and refining capacity.

In 2005, our company has earnings of about $10 billion year-to- date, or about $1 billion a month. But our capital investments are also close to $1 billion a month.

ConocoPhillips has been at the forefront in recent years in growing its refining capacity. Over the past five years, we spent $4 billion in worldwide refining, of which $3.2 billion was primarily spent to expand and modernize our refineries in the United States.

Before the two hurricanes, we announced an incremental investment program. This is now $4 billion to $5 billion on top of our maintenance and other refinery investments of $1 billion to $2 billion per year aimed at growing our U.S. refining capacity.

With these expansions and improvements, we expect to be producing 15 percent more clean fuels, such as gasoline, diesel and heating oil, by the end of this decade. That's the equivalent of adding at least one world-scale refinery to our domestic refining system.

As the largest energy producer in Alaska, we are working closely with the state of Alaska and others to bring North Slope natural gas to the lower 48 market through a new pipeline expected to cost $20 billion. The line will add as much as 4.5 billion cubic feet per day to the nation's gas supply. This represents about 8 percent of current U.S. production.

ConocoPhillips recently agreed in principle to the base fiscal terms with the governor of Alaska, which is a significant step in moving this important project forward.

We are also investing aggressively in bringing liquefied natural gas, LNG, to the U.S. market. We are progressing LNG projects in Qatar, Nigeria and aggressively pursuing projects in Russia, Venezuela and Australia. These are all multibillion dollar projects.

Our country sorely needs additional refining capacity, pipelines and other critical energy infrastructure, including LNG-receiving terminals.

The private sector will make these investments without need of any new government incentives. However, the industry needs governments at all levels to streamline permitting and environmental review processes so we can make these investments and add to our energy supplies.

We also encourage you to give more serious consideration to the issue of resources access. With the entire East and West Coast and eastern Gulf of Mexico and key areas in Alaska all closed to entry, it's understandable why the supply-demand balance is tight.

We also want to express support for the development of all energy sources -- coal, nuclear, alternative energy -- as well as conservation and efficiency standards. We will need to include all of these to diversify our supply sources and put some extra capacity back into our energy system.

MULVA: We caution against advancing short-term proposals that will restrict the industry's ability to reinvest its funds on finding and producing more energy.

While these make powerful headlines, the fact remains that such proposals invariably reduce investment and supplies.

In addition, these proposals would hurt the competitiveness of the U.S. energy companies as we seek to compete for resources around the world.

That completes my prepared remarks.

Thank you, Mr. Chairman.

STEVENS: Thank you very much.

Our next witness is Mr. Ross Pillari, chairman and chief executive officer of British Petroleum of America.

Mr. Pillari?

PILLARI: Thank you.

Good morning, Chairman Domenici and Stevens and members of both committees.

As I've submitted testimony for the record, I will summarize the key points in my oral comments this morning.

BP America employs 40,000 people in the United States, and we're a major producer of crude oil and natural gas. We operate five refineries and supply gasoline and distillate fuels in 35 states.

As you've already heard, 2005 has been an unusual and challenging year for our industry and company, both in the United States and around the world.

We've experienced very tight supply demand in global crude oil markets, resulting in high crude oil prices. This tightness reflects strong economic growth and increased demand throughout the world, particularly in the Far East.

Combined with reduced production from Iraq and Venezuela at times this year, the overall impact on crude supply was a reduction in the historical excess crude oil capacity by nearly two-thirds, to less than 1 million barrels per day, significantly impacting the price of crude oil.

In the second half of the year, the refined products supply- demand picture was also affected by a series of natural disasters in the world, including Hurricanes Katrina and Rita here in the United States.

These disruptions to refinery production and logistics infrastructure resulted in a sharp increase in finished product prices. Markets with disrupted supply sources sought to attract supply from unaffected areas of the United States and the world product markets.

There has been extensive media coverage and analysis of the impacts the hurricanes have had on the communities in the Gulf Coast region. The difficulties faced by these areas and the recovery continues to be a concern for all of us.

BP operations in the affected areas, particularly in Texas and Louisiana, were also severely impacted. Producing platforms, pipelines and terminals in the Gulf of Mexico were shut down during the most severe periods of the storms, suffering damage and lost production.

On-shore distribution facilities were damaged by both storms, resulting in an interruption to logistics infrastructure and refinery supply. Refineries had to be shut down or curtailed, and thousands of employees were displaced from their homes.

We estimate that our loss production was nearly 135,000 barrels per day in the third quarter and nearly 160,000 barrels a day of oil equivalent in the fourth quarter, and that damage to our facilities will clearly be in the tens of millions of dollars.

We do expect most of the BP operated production facilities to be back on stream by year end.

Importantly, the severe impact of these storms made it impossible to respond as quickly as we would have liked to the immediate needs of many of our customers and communities.

PILLARI: Displaced staff, utility outages, damaged equipment and the inability to operate terminals and refineries in many of the affected areas hampered initial recovery efforts.

In the face of these unusual external conditions, the market response was what you would expect in a global commodity market. Available product supplies were bid up as demand exceeded supply. Geographic areas not affected by the hurricanes experienced increased demand from buyers looking to move supply to the storm-damaged areas, causing upward price movement in both the storm-damaged and the unaffected areas.

Product prices in Europe also increased, as domestic marketers began importing product immediately to meet demands in the United States.

Consequently, while consumers experienced difficult and rapid increases in prices throughout the country, these same increases resulted in a market that was able to attract supply.

We recognized these effects are not desirable for our customers, and we made every effort to increase supplies and minimize the extent of these disruptions. We regret any continuing problems and are working diligently to solve them.

In recent weeks, fuel prices have dropped dramatically, down to levels similar to last spring, reflecting the increased supplies arriving from unaffected areas including the global markets.

Additional supplies will reach the market as Gulf Coast refinery operations return to normal, and we would expect the market to react again.

Specific actions taken by BP in response to the storms included providing housing, transportation and temporary relocation for employees and their families displaced by the storms.

We prioritized fuel deliveries to emergency service and health organizations; contributed to date over $12 million to relief agencies in all of the effected areas.

We have imported over 30 million barrels of gasoline, diesel and jet fuel for delivery into markets in the Northeast, Florida and the Gulf Coast.

We have reversed a pipeline at our Texas City Refinery dock to accept marine shipments and deliver important products into the Colonial Pipeline.

We have arranged offshore loading from platforms to permit delivery of crude oil while awaiting the start-up of pipeline operations.

I would like to note that recovery of offshore operations was greatly aided by government respond to requests for expedited permits and waivers. At retail, the government support of temporary fuel spec waivers allowed us to redistribute available fuels to the most distressed areas. We're very grateful for this support.

In recent months, our efforts have been focused on repairing our facilities and returning to normal operations. In the future, we look forward to continuing to invest and build on our extensive U.S. asset base.

In the last five years, the BP Group has averaged $13 billion to $15 billion each year in new capital investment.

PILLARI: The largest single placement of that investment, approximately $31 billion, or roughly half of our global total investment, has been here in the United States.

Our non-U.S. investment is also important to the United States, as it provides secure options for incremental supply. This is particularly important in times of market disruptions, as seen recently with the hurricanes.

For example, BP was able to quickly bring fuel from our Rotterdam refinery to the East and Gulf Coast markets immediately following the storms.

Our U.S. investments have included continued expenditures in mature operations, such as $700 million per year in Alaskan North Slope fields; a 30 percent increase in lower 48 natural gas investment over the last two years to nearly $1.5 billion already this year; and over $650 million per year in refinery investments.

For the future, we see continued opportunities to invest in the United States. Projects currently announced include $2 billion for new development and in-fill drilling in the Wamsutter natural gas field in Wyoming, increasing U.S. natural gas supplies.

Two proposed LNG projects, one on the East Coast and one on the Gulf Coast at a cost of nearly $1.2 billion. These projects will allow us to further access our natural gas position in Trinidad and elsewhere in the world and bring this product to the United States.

Nearly $2 billion plan to spend to increase the use of Canadian heavy oil and improve our upgrading capability in BP's refineries here in the United States, which also provides a secure North American source of crude oil supply.

We plan to invest over $2 billion per year over the rest of the decade as part of our continuing program to invest a total of over $15 billion in exploration and production in the Gulf of Mexico.

We also plan to invest in our share of the nearly $20 billion Alaskan natural gas pipeline to bring Alaskan gas to the lower 48.

Also, outside of the normal oil and gas area, over the past five years, we have invested more than $500 million in our solar and alternative energy business and continue to see this as a growing area of importance for our company and the country.

In closing, we believe the events of 2005 reflect unusual challenges to the global markets for oil and gas. We know we have a responsibility to help meet these challenges and we have been working hard to fulfill that role.

BP has a long history of business activity and significant investments in the United States.

PILLARI: We will continue to offer quality products, enhance energy options, and continue to invest in support of our customers and the energy needs of the nation.

Thank you, Mr. Chairman.

STEVENS: Thank you very much, Mr. Pillari.

Our next witness is John Hofmeister, president and chair of Shell Oil Company of America.

HOFMEISTER: Mr. Chairman, members of the committee, thank you for the opportunity to be here. I would like to discuss the energy issues of concern to you, to Shell and to the American people.

We face serious energy challenges here and also around the world, for which there are no perfect solutions or easy alternatives.

Every avenue -- increasing crude supplies, building refinery capacity, repairing hurricane damage, developing new technologies -- presents a challenge and requires a significant and sustained investment.

Basically, demand for energy around the world is growing, thanks to strong economies. In fact, I fear the alternative.

Consequently, there is a fragile supply-demand balance leading to current energy prices. And, yes, industry profits are large in total dollars, but they represent an average return on sales in cross- industry comparisons.

Shell earned $9 billion in the third quarter of this year: a 50 percent improvement for three quarters of the year. But three points I would make about those profits.

First, they are determined largely by the price of crude, and the price of crude is set on world markets. We do not set or control the price of crude.

Second, as profits rise, so do our tax payments. Shell's global tax payments are up 55 percent this year, totaling more than $14 billion.

Third, where do these profits go? They go back into the business.

Over the past five years, Shell has reinvested the equivalent of 100 percent of our U.S. profits in U.S. energy projects. And future investments of billions of dollars will be required to meet future energy demand.

Energy projects are becoming more complex, more costly, more technologically demanding, and many take a decade or longer to reach fruition.

The EIA estimates $20 trillion -- that's $20 trillion -- will be needed by 2030 to develop the necessary supplies and infrastructure to meet global demand in the future.

HOFMEISTER: The surge in demand has had a dramatic impact on the costs of doing business. The cost of an onshore rig in this country this year has more than doubled. The cost of a deepwater rig is now up to or over $300,000 or more per day. The cost to develop a deepwater field reaching $2 billion.

The cost to build or expand a refinery -- for example, a 200,000 to 300,000-barrel-per-day refinery costs in the range of $3 billion to $3.5 billion.

The cost to build a major green field LNG facility can be in the range of $5 billion to $6 billion.

But these investments are critical if the energy needs of today and tomorrow are to be met.

At Shell, we're making those investments and we're making them here in the United States.

In the offshore, Shell will continue to be an industry leader in the deepwater Gulf of Mexico, a frontier we pioneered more than a decade ago. In the past five years, we've produced nearly 1 billion barrels of oil and invested more than $7 billion just in the Gulf.

On shore, Shell has new natural gas prospects, both conventional and unconventional, under way in Washington, North Dakota, Texas and across other regions of the United States.

In Alaska, we just invested $45 million to acquire 84 licenses this year to develop Alaska's vast resources -- and we're working on additional opportunities.

In the oil sands, Shell Canada's major Athabasca oil sand project is unlocking significant resources, and plans to expand this project will require many billions of dollars.

Oil shale: We have an exciting project in Colorado, where we're testing a unique process designed to release huge oil shale resources. Shell's technology has the potential to recover more than 10 times per acre as much as traditional retort technologies, and in a more environmentally sensitive way.

Coal: I'm in discussions with 10 or more states about how to tap the nation's abundant coal resources using our coal gasification process to efficiently and cleanly convert goal to power, gas, chemical feedstock, liquid fuel and hydrogen.

LNG: Shell is investing to bring more LNG to the U.S. We currently have LNG import capacity at two existing LNG terminals and have proposed to build two additional LNG projects, one in the Gulf and one in the Northeast, to serve U.S. markets.

In refining, our joint venture company, Motiva Enterprises, is considering a major investment to increase capacity at one or more of its Gulf region refineries. Expansion projects are being considered in the range of 100,000 to 325,000 barrels per day.

In pipelines, in Louisiana, Shell is investing $100 million in an intrastate pipeline to help transport refined product to markets in Southeastern, mid-Atlantic and Northeastern states.

And in renewables, Shell Hydrogen is a leader in pursuing realization of a hydrogen future. Shell Wind has nearly 700 megawatts of power in the U.S., a figure we expect to grow.

We're investing hundreds of millions in alternative energy and alternative fuels each year, and we're committed to continuing these investments in the future.

HOFMEISTER: But I cannot talk about Shell's investments in the United States without mention of the tremendous costs involved in recovering from recent hurricanes.

Hurricanes Dennis, Katrina, Rita and Wilma and others brought into sharp focus the fact that the nation's energy supply-demand balance is fragile.

Katrina and Rita tore through the Gulf of Mexico production sites, blasted the refinery belt in the Southeast and roughed up the terminal and pipeline networks that feed products to half the country. Key parts of the nation's energy infrastructure were brought to a standstill.

Recovery costs are estimated between $18 billion and $31 billion to the industry and Shell bears its share of that cost.

But it is Shell people and their response that I'd like to tell you about in this instance.

Nearly one-fourth of Shell's U.S. staff was directly affected by the storms: about 5,000 people and their families. Despite their own losses -- losses in some instances horrific -- these dedicated professionals returned to work only hours after the storms passed.

We had employees lifted from their roofs in New Orleans and we had employees in the convention center. But these employees returned to work and have been there 24 hours a day, seven days a week, fixing damaged platforms, refineries, pipelines, terminals and service stations.

They did so efficiently and safely. I commend them and I thank them.

We continue the task of bringing our facilities back on-line. And just this week, I'm pleased to say that we announced our commitment to return full well to New Orleans, a city that we admire, in early 2006 to bring 1,400 staff back to their offices in central New Orleans.

Let me close with a comment about how we see ways policy-makers can help the industry and help secure an energy future.

Congress might consider policies that will, in the first instance, allow responsible access to more domestic resources; secondly, to encourage conservation; third, to streamline regulatory requirements to speed the delivery of projects; and fourth, the educate the workforce of the future, to train the next generation of energy professionals, men and women who will develop future energy resources, future energy innovations and future energy solutions.

The facts are, we have in this country the natural resources, the financial capacity and the human capability to secure our energy future. The long-term success of American energy development can and should be predicated on government enabling a responsible industry to work on behalf of American energy requirements.

Thank you, Mr. Chairman.

STEVENS: Now, we'll enter a period for questions.

And, at the beginning, I'm going to yield to Senator Domenici and Senator Bingaman to start the questioning.

DOMENICI: Thank you very much, Mr. Chairman.

For the senators, let me suggest that we both decided on the rules for how we're going to do this. We're going to follow a, kind of, modified early-bird rule, meaning we're going to go back and forth between Republican and Democrat. As I have it on my side, so you will know, I'm first, Senator Bingaman, Alexander, Dorgan, Murkowski, Wyden, Feinstein, Martinez, Salazar, and we'll go on from there.

DOMENICI: But I think we both have agreed on a second proposition: If your turn comes up under the early bird and you are not here, then you will go to the bottom of the list and start over again. Now, we have to do it that way or else we're not going to know where we are and senators are not going to know when they have to be here.

Now, that's not counted against my time, I assume, because I don't have very much time.


First of all, I did want to say something that would maybe make you smile. I hope you will, you witnesses.

We're glad to hear the constructive suggestions you made. I'm very hopeful -- you must know we know most of them. You are repeating what we have heard. Most of them ought to be done. We'll try in the future to see what we can do together to implement them.

But, obviously, we have some very serious questions to ask you, because our people are asking us.

I will tell all of you, I come from an energy state, but in almost every occasion upon my return to New Mexico, the first person that puts out their hand and says, "Hello, Pete," or "Hello, Senator," follows up with a question: "Why don't you bring the price of crude oil down, Pete? What's happening? Who's setting the price of that oil?"

So my first question is, since most of my people and I believe most Americans that we hear from want to know how is the price of oil set? Who sets it? Why does it go up? How does it come down?

Actually, my constituents -- and I believe most Americans -- think that somebody rigs these prices, that in the process somebody is getting ripped off. And they think it's them, the constituents who ask me and the constituents of America who ask this question.

So I want to ask you -- and please, in the few minutes you have, somebody describe in detail how the price of oil is set, because I close by saying, if that is not rational, then are you rigging the price of oil? Or is somebody rigging the price?

Who chooses to answer the question first?

No volunteers? We'll go the way we started.

Mr. Raymond?

RAYMOND: I'll volunteer.

DOMENICI: Thank you. That's called an involuntary volunteerism.


RAYMOND: Now, Senator, that's an extraordinarily complex question that you've just asked.

I think, as I made in the comments I made, the U.S. companies that are represented here, in terms of the total amount of production that they have that they contribute to the world's supply, is relatively modest. Our own company is less than 3 percent, and we're the largest producer.

The facts are that the world's supply pool, many, many countries contribute to that, and many companies operate in those countries. But, obviously, the big actors in the equation are Russia and the Middle East countries and OPEC.

DOMENICI: Now, Mr. Raymond, let me interrupt. I want to know something as simple as this.

Oil comes out of the ground. It's either put in a boat or put in a pipeline. It then moves. At some point somebody buys it. At some point it assumes a price. That price may be only fixed one time or it may be fixed a number of times. Then it goes to another place and gets refined.

I need to know from you, tell me from the time it comes out of the ground, how is the price set?

RAYMOND: Well, let's talk for a moment -- probably the easiest place to talk about is Saudi Arabia.


RAYMOND: A month before the month in which we're going to lift the crude the Saudis tell us what the crude price will be for that month. And we have the alternative of either saying we'll nominate, and they'll tell us we can lift, we can lift that crude.

If we lift that crude, we're going to pay the price that they've said what you have to pay in order to buy that crude oil.

DOMENICI: What does "lift" mean?

RAYMOND: To have a ship show up and take it away.

DOMENICI: Be ready to take it.

RAYMOND: That's exactly right. I mean, at this point there are no pipelines out of Saudi Arabia, so it all goes out by ship.

And they basically say, "Here's the price." And the alternative we have is to buy it or not buy it.

Now, how they determine what the price is that they're going to set, that would only be speculation on my part, but I would have to say, when you look at that data, that the prices they set for the forthcoming month generally are very reflective of world market conditions, apparently as they see it.

DOMENICI: What does that mean, "world market conditions"?

RAYMOND: Well, they look around the world and see what people are willing to pay for a barrel of crude oil. It's traded in the North Sea. It's traded in Singapore. It's traded all over the world.

DOMENICI: So if the price is short, they can ask high prices and they'll get it; is that right?

RAYMOND: That's exactly right.

DOMENICI: OK. Now, when we heard the word "speculators purchase it" or it's bought in bidding, where does that occur?

RAYMOND: Well, that happens basically on the mercantile exchanges.

RAYMOND: That could happen in New York. It can happen in Singapore. It can happen in London. Those exchanges, those markets, Senator, are open 24 hours a day all around the world.

DOMENICI: But, Mr. Raymond, what we'd like to know is: What does that mean? Do they also respond to Saudi Arabia, or did they bid up the price afterwards?

RAYMOND: They bid up the price afterwards.

To be specific about the Saudis, the Saudis will only sell to end users. That is to say, the Saudis will only sell to refiners. The Saudis have never had any interest in being involved in I'll call it the speculative market.

And as a matter of fact, if we were to contract -- we have a long-term contract with the Saudis. If we buy crude oil from them, if for some reason -- say, for example, we had a hurricane, had to shut down the Baytown refinery, we have some crude oil, we don't know what to do with it -- before we could sell it to somebody else, we would have to go back to the Saudis and tell them that we intend to sell it to someone else and who that other party is, because they want to make sure they sell only to end users.

DOMENICI: Mr. Raymond, let me interrupt now.

Why don't you do this for me? Put yourself in my shoes. I'm there talking to that person and they say, "How is the price of oil set?" And I'll say -- if you don't want to do this in one minute, I'll ask anybody to -- how do I answer that person?

RAYMOND: The price is set on the world market by willing buyers and sellers, as to what willing sellers are willing to sell it for and willing buyers are willing to pay for it.

DOMENICI: All right.

Now, who makes the profit in that -- I don't think my constituent would understand that, nonetheless.

RAYMOND: OK. Well, let's stay on the example that we're on.

The Saudis set the price. At that point, that establishes the price over the Saudi government. In the case, say, we bought the cargo of crude oil, we'll take it to a refinery. We run it through the refinery, and the product markets then determine what the margin was in the refinery.

But we bought the crude oil at world market price.

DOMENICI: All right. Thank you very much.

My time has expired. I'm not sure my constituent is pleased with the answer. But nonetheless -- not unpleased; they don't understand it.

Senator Bingaman?

BINGAMAN: Thank you again for being here.

I wanted to ask about what can be done over the next six months, particularly as we go through this winter, to deal with the high prices that consumers are going to be faced with, both at the pump and in heating their homes.

It strikes me that not a whole lot more can be done, other than what is being done, to affect supply over that period, being the next six months. But a significant amount could be done on the demand side to encourage conservation.

BINGAMAN: I think each of you have indicated that you believe that the government has a legitimate role on conservation.

I've been urging the secretary of energy to have a high-profile public education campaign to encourage conservation over these next several months. And it occurs to me that each of you and your corporations have substantial advertising budgets.

Would it make sense, and would you be willing to participate in a public-private partnership that would try to put on this kind of public information campaign for the American people to assist, to the extent possible, in reducing demand over this period?

Let me ask you, Mr. Raymond, and just down the line if people have responses.

RAYMOND: Well, Senator, I think it's fair to say, as best I can recollect, every person that is a member of this panel, in one form or another over the last couple of years, have made a lot of public statements about the need for America and the world -- not only America -- to become more efficient in its use of energy. And I think all of us feel very strongly about that.

And through the API, of course, we continue to support programs to do that. And I think that's the appropriate vehicle for the industry to deal with the question that you've just raised.

In terms of whether there can be a viable a corporate and/or API industry relationship with the government through the secretary of energy, I would think that that's something that we ought to look at very, very carefully and see if there can be a constructive role.

BINGAMAN: Thank you very much.

Any of the rest of you have thoughts on that?

O'REILLY: Senator, I agree. Energy conservation is probably the most -- one of the cheapest sources of additional supply that we can generate in the near term. Our company is running advertising currently, and we are also participating with API and would be interested in working with the DOE to the extent that something constructive can be done.

I think it's important that we look at both the demand side and the supply side, however, and I wouldn't want to lose -- each side is important here. We need to be conservation-minded but we also need to recognize that supply is an important factor.

Thank you.

BINGAMAN: Mr. Mulva?

MULVA: Senator, with respect to supply, first on the refineries, we've got to get them up and running -- the ones that are down as a result of the hurricane. So we need to make sure that we do everything we can, and we are, to restore that capacity, because that adds supply.

I know all the companies, including our own, will be looking at how can we import additional supplies, because maybe in one part of the world, in Europe, maybe there it's a warmer winter or whatever, that we could take supply from one part of the world and bring it in and add supply.

MULVA: With respect to conservation and more efficient use of energy, we certainly support it. And your ideas, as a company and I'm sure as an industry, we're very willing to explore just those concepts of working together with the government to see what we can do to really work on conservation and more efficient use of energy.

BINGAMAN: Mr. Pillari?

PILLARI: Senator, I won't repeat the comments on supply. We're working very hard to get it there.

On the conservation message, I think, yes, we would be willing to explore what we might be able to do. I don't think it's enough. I think each one of us -- certainly in our company we believe there are things that we should do, particularly in those markets where we are very active.

So in California, for example, this year we will have several million dollars in a program called A+ for Energy, which is about teaching conservation in secondary high schools. And I think those kinds of programs need to continue.

BINGAMAN: Yes, sir?

HOFMEISTER: Senator, as soon as we saw the production shutdowns in the Gulf of Mexico, we launched a conservation communication program with our 17,000 stations around the nation. And we believe in that quite firmly. And very specific steps that Americans can take.

And I would support Mr. Mulva's comments on improving imports in order to meet supply requirements.

BINGAMAN: Let me ask one other question before my time expires.

Most of the growth in demand for oil in this country is in the transportation sector. Would you agree with me that it's time that we go ahead and raise fuel economy standards on vehicles in this country, Mr. Raymond?

RAYMOND: I don't want to get into the political aspects of that. I think that's more appropriately in your bailiwick.

But I think the general proposition that we have to find ways to make the transportation system in this country more efficient in the use of energy is one that I would strongly support.

BINGAMAN: Thank you very much.

Anybody else want to comment on that?

If not, I've gone through my five minutes.

Thank you, Mr. Chairman.

DOMENICI: Senator Stevens?

STEVENS: Thank you very much.

I have a letter, gentlemen, from the American Petroleum Institute, referring to the request from the chairman of the Senate Finance Committee to determine whether the industry would contribute to the program we call LIHEAP.

I don't know if you've seen the response, but in it, Red Cavaney points out that the estimated cost to restore all of the industry assets that were affected by the storms in the Gulf -- as you mentioned, some $18 billion to $31 billion -- will all be shouldered without government assistance.

But I don't find that it has really taken a position with regard to whether, at this time, the industry has in mind being willing to take any action that might assist in terms of this Low-Income Home Energy Assistance Program, that is really growing considerably.

Is it possible that your industry would join at least to the extent of helping to find ways to make it more efficient? I mean, it just seems we have this program every year and the impact of the LIHEAP expenditures don't reduce the cost. I mean, they don't bring about more efficiency.

Could you go together and help design ways that that program could, in effect, use less energy in order to help people meet the costs?

Anyone that's been involved in this?

I hate to do it, Jim, but you're the chairman of the board.

MULVA: Mr. Senator, first of all, as an American, I can say that we all feel very much for those who are less fortunate; that with respect to heating bills and whatever we want to make sure that they get the energy and what they need.

MULVA: But as an industry, we feel that it's not a very good precedent to be looking at one industry to help fund necessarily a government program as such. We think that's more in the realm of the government should be doing that.

What we need to be doing as an industry, though, is what we've been talking about, and that is spending all of our money to add capacity and be pushing very, very hard on energy efficiency.

One of the things that I would see is certainly we support the government programs with the LIHEAP program, but singling out an industry is not necessarily a good precedent.

For our company, we'd like to see that what we can be doing to helping more than what we have already done over the short period of time, but the medium and the long period of time is helping the Gulf Coast areas where we have our facilities, our employees and constituencies and residents and stakeholders so we can help them recover from the hurricanes.

So we want to do all these things, but we also want to do what we can with respect to energy efficiency over time so we can reduce the cost or have more affordable energy for all consumers.

STEVENS: Hopefully, I'll be back with other questions, but addressing BP, I was amazed to find recently that there's a provision in the Marine Mammal Act that provides that the refinery in the state of Washington is prohibited -- all government agency prohibited from doing anything to assist in the refinery there to refine oil other than for consumption in the state of Washington.

Now, Idaho has no refinery, Oregon has no refinery, and the oil from our state goes right by there. If we repeal that, would that assist the area by having increased refinery capacity for those Northwest states?

PILLARI: Yes, it would, Senator. As you know, we're supportive of doing that.

Currently, the way the Magnuson Act works, if there are not changes made there, we will have to reduce our gasoline production by about 10 percent at our Cherry Point refinery, which would reduce the amount of gasoline that would go to Oregon, Washington and California.

And I think the second point would be, with that kind of a restriction, a refinery like Cherry Point, which has good options for expansion, those options would just not be able to be taken up.

STEVENS: If we repeal that section there would be a possibility that that Bellingham refinery could be enlarged, particularly if we can get more oil back in the pipeline from production in ANWR; is that right?

PILLARI: We would like to take a look at expanding that refinery if this is removed, yes.

STEVENS: Very well.

I have later questions.

Senator Inouye?

INOUYE: Thank you very much.

Two months ago, on September the 9th, AAA Mid-Atlantic issued the following press statement: "A growing chorus of Exxon dealers in the Washington metro area are raising their voices and accusing the world's largest oil company, Exxon Mobil, of profiting from the exorbitant prices at the pump in the wake of Hurricane Katrina, a spokesman for AAA Mid-Atlantic confirmed today. In candid conversations with AAA Mid-Atlantic, a handful of local dealers accused the oil giant of raising the wholesale price to service stations by 24 cents in a 24-hour period."

Since then, two members of this panel have introduced measures to prevent price-gouging, and they define price-gouging as "unconscionably excessive."

Mr. Raymond, would you consider 24 cents in a 24-hour period as being unconscionably excessive?

RAYMOND: I think, Senator, first you need to realize that I'm sure all of those stations -- or nearly all of them -- we have nothing to say about the price that's at the pump.

RAYMOND: That's the individual dealer who makes that decision.

It's only in our company-operated retail stores, which in the United States is only about 7 percent of the stores that bear the Exxon logo, do we actually control the price. In all the rest of the stores, the dealer individually decides what to do with that price.

And in terms of what happened to the wholesale price of gasoline at the beginning of Katrina, I can only comment to you the directive that our people had, which was that in the directly affected hurricane areas, which we really had difficulty with operations simply because we had no electricity so stations can't operate -- the roads weren't passable, so you couldn't get trucks on the roads to deliver gasoline, anyway -- that outside of that area, the directive was to minimize the increase in price while at the same time recognizing if we kept the price too low, we would quickly run out at the service stations and have shortages.

So it's a tough balancing act because we were not interested in ever having our stations be in the position where it appeared that there would be a shortage because we all remembered very clearly what happened in the 1970s when that happened.

So whether the number you have, in fact, is accurate, I don't know. But I can tell you the philosophy we had was related not at all to the concept of gouging.

The concept we had was to try and maintain orderly supply wherever we could around the country.

INOUYE: Would you suggest that the local dealers who accused you of raising the wholesale prices to service stations by 24 cents in a 24-hour period -- they were not being quite honest?

RAYMOND: I don't know if they're being honest. I just don't know if that data's accurate, frankly.

But I can tell you what the philosophy that the company had in terms of trying to deal with the issue we had after the hurricanes.

INOUYE: When your company heard about this press release by AAA, did you respond?

RAYMOND: As a matter of fact, I think, as I recall -- and this is a long way from Dallas, Texas, but as I recall, the comment was made that a couple of our people in the company did have conversations with AAA and did talk with the dealers.

INOUYE: I gather that all of you are in favor of alternative sources of fuel such as hydrogen and you would be in favor of improving CAFE standards?

RAYMOND: Again, I don't want to get into the politics; that's in your bailiwick.

But I am and I have been supportive for a long time of having the transportation sector become more efficient. Whether that's CAFE standards or some other way to do that, that's a political decision you have to deal with.

INOUYE: I thank you all very much.

STEVENS: Thank you.

We'll now turn to a period of individual members being recognized under the early-bird rule. And the Energy Committee will go first.

DOMENICI: Senator Alexander, you are next, and then Senator Dorgan.

ALEXANDER: Thank you, Mr. Chairman.

STEVENS: For five minutes each, gentlemen.

ALEXANDER: Mr. Hofmeister, the focus of hearings like this always seems to be on gasoline, which is a big problem. But, to my way of thinking, natural gas prices are a bigger problem for our country. If gasoline prices had gone up recently as fast as natural gas prices have, gasoline would be at $6 or $7 a gallon.

And we hear many statistics about tens of thousands of good blue- collar jobs moving overseas. One is that at the moment there are 50 new chemical plants being built in China, where natural gas as a raw material much cheaper than it is here; one new chemical plant being built in the United States.

Now, all of you have something to do with natural gas. And, Mr. Hofmeister, I believe, Shell, even helps make electricity from natural gas, which is increasingly a way we've been using natural gas in this country.

My question is, as a way of reducing the price of natural gas for homeowners, farmers and manufacturers, so we can keep more jobs in the country, would it not make sense to require that the newer natural gas plants, which are twice as efficient as the old natural plants -- would it not make common sense to require in this emergency that we use the newer natural gas plants to make electricity rather than the old ones or instead of the old ones or before the old ones?

ALEXANDER: We call that the more efficient dispatch of natural gas.

I understand there's some issues on the other side. But help us come up with a common-sense way to use these natural gas plants that are twice as efficient as the old ones as a way of bringing down prices.

The estimates we have are that, if we were to do that, it would lower retail natural gas prices by 5 percent within a few years and it would save enough natural gas to equal 600,000 homes, which is homes the size of the city of Memphis or the size of the city of Fort Worth.

HOFMEISTER: Senator, I think the expertise that we have on this subject is on the supply side.

I do agree with you that natural gas is perhaps the single most critical energy issue that the nation is facing. And in part it is directly related to the hurricanes.

In the case of our own platforms producing natural gas -- offshore, Gulf of Mexico -- we have a serious pipeline damage problem which came about from the drifting of oil rigs due to the force of the storms, in which some of these oil rigs, which are temporary structures and move around the Gulf, actually were forced by the storm to drag their anchors, and their anchor is attached to our pipelines, seriously damaging our pipelines.

ALEXANDER: Well, we had big problems with natural gas long before the hurricanes, and we had new natural gas plants that we could have been using instead of old ones.

So do you not have some of these new ones?

HOFMEISTER: We are actually in the gas distribution business, not in the gas usage business. So the utilities would probably be more expert on this, to your specific question.

But the real supply-side issues, I think, are access to more gas fields, in which we have been working with members of Congress to try to achieve more access, but also LNG.

ALEXANDER: Sir, I understand all that and I have a limited amount of time. But you do not believe that using new, more efficient natural gas plants would make common sense rather than older, less efficient natural gas plants, as a way of lowering the price?

HOFMEISTER: I think my point is that's a question for the utilities, which are using our gas, not for the supplier.

ALEXANDER: OK. So you don't know the answer to that?


ALEXANDER: All right.

Mr. O'Reilly, when I talk to auto company executives -- Toyota, General Motors, Nissan -- they're investing hundreds of millions of dollars in fuel cell vehicles, in hydrogen. And some of them give surprisingly optimistic views about how soon they'll be able to produce a commercial vehicle at a price people can afford and drive, which will go a long way toward reducing the demand for oil and, therefore, hopefully stabilizing or reducing the price of gasoline.

I'm interested in what any of you can tell us, starting with Mr. O'Reilly, about whether your companies, in effect, are turning from oil companies into energy companies. And I start with Mr. O'Reilly because I know you've been interested in hydrogen.

And assuming one of the automobile companies does produce such a fuel cell vehicle at a competitive price, how soon will one of our large companies or some other company be able to do with hydrogen what we do now with gasoline, take it from the place it's produced to the automobile itself?

O'REILLY: Senator, we are working on hydrogen distribution and hydrogen manufacture as part of a DOE-auto company combination experiment in California.

The challenge of hydrogen is how do you distribute it efficiently to the automobiles, so we're looking at distributed hydrogen production at service stations and loading facilities at the service station as well as commercial refueling centers in California; as I say, with the cooperation of DOE and, in this case, Hyundai.

The issue, I think, is distribution, and then one has to remember that at the source we still have to make hydrogen. And we're making hydrogen today in California from natural gas. So it, kind of, comes back in a full circle to natural gas supply and then learning how to distribute hydrogen.

If we can overcome those two with time there will be hydrogen vehicles on the road. But I think it's a little way off.

The near term, I think, the hybrid vehicle is a more pragmatic solution, and they are already in the markets; much more efficient than conventional automobiles. And, of course, we're working in that area, particularly with the long-life battery that will support those automobiles.

So we're working on these areas. There are some challenges to be overcome.

STEVENS: Senator, your time is up.

O'REILLY: I think we're on track.

ALEXANDER: Thank you very much.

STEVENS: Thank you, Senator.

Senator Dorgan?

DORGAN: Mr. Chairman, thank you.

Thank the witnesses for being here today.

Mr. Raymond, you and others said that, and I quote you, "increases in oil prices following the hurricanes have put a strain." The fact is the oil prices were well above $60 before the hurricanes formed up, isn't that the case?

RAYMOND: Senator, the facts are -- and I've said this publicly for a long time -- the oil prices have been moving steadily up for the last two years. And I think I have been very clear in saying that I don't think that the fundamentals of supply-demand, at least as we have traditionally looked at it, has supported the price structure that's there.

DORGAN: I understand that. But my point was you all seemed to make the case -- and you started with it -- that somehow this oil price problem is a result of hurricanes. I understand the dislocation of...

RAYMOND: No, I think the point I would make is that the hurricanes aggravated whatever problem was there to begin with.

DORGAN: That's certainly true. And the price of oil was over $60 a barrel before we heard the news of hurricanes, that's true as well. And I think an important point, because it relates to the question of price and supply and demand.

Second, I would ask the question that Senator Inouye asked of you and your answer to him about this issue of the AAA and 24 cent- increase in 24 hours of Exxon's wholesale price, which angered your local dealers. You, obviously, didn't investigate that, because you don't know about it.

I wonder why you would not investigate something like that. That's the sort of thing that would make notice here of people trying to evaluate what's going on, and your own brand of dealers are complaining. Why would you not investigate that?

RAYMOND: As a matter of fact, my point, I think, to the senator was that the people who are in charge of that, which are over here in Fairfax, did look into that. I think the comment that they made back to us was that what was done -- and I'm not sure that 24 cents is the right number; that's the point I'm making -- was consistent with the directive that we had made in terms of trying to moderate the pricing but at the same time maintain continuity of supply.

DORGAN: I understand your answer. My point is, when you see these kinds of things, I would expect they would be investigated with some great concern.

You know, there are people here -- I think Senator Inouye talked about legislation with respect to gouging. None of us know much about what is happening with respect to pricing. We see the pain of the consumers; we see the gain of the companies.

And let me ask, if I can, something that Senator Domenici tried to illicit from you: how you respond to a consumer.

DORGAN: The notion with most challenges in this country is that we're all in this together. But with respect to this challenge, for consumers at least, it seems to be we're all in this alone.

Because on the one side you have those that have the energy exhibiting substantial pricing capability and the consumers having to pay substantial prices.

And I think Senator Domenici was asking -- I don't mean to paraphrase him -- but a consumer says to us, "You know, Mr. and Mrs. Politician, what I see are big economic interests getting rich here." Your profits are very handsome; in fact, your individual compensation is very substantial, you're doing really well.

On the other hand, there is dramatic pain for consumers. In my part of the country, people going into the winter -- understand, heating your home is not a luxury, it's a necessity -- and going to pay a substantial amount more to heat their homes this winter, while they open the paper and they say, "Boy, it's nirvana for you all, personally and for the companies."

How do you respond to those consumers in a way that says to them, "Well, this is the right thing and this is a fair thing"?

Mr. Raymond, you want to answer that?

RAYMOND: I think, Senator, the point is, when you say, "We're all in this together," I would broaden that to a worldview: We're all in this together everywhere in the world. And the United States, as has been demonstrated by the hurricanes, is just one of many players on the world stage that affect petroleum prices. If tomorrow a number of refineries were to go down in Europe, the price of heating oil in your state would go up. That's the reality that we're in.

And our job, I think, is first of all to make sure that the customers, in fact, do have supply. As all of us who have been around a long time remember, shortage is a disaster, and we don't want to go there.

That means we're going to have to pay the world market price for these products, no matter where they come from.

And in doing that, we recognize that consumers in the United States sometimes are going to have difficulty realizing that they're part of that world, but, in fact, they are. And our job is to get it to the at them at the most competitive price we can.

DORGAN: Mr. Raymond, you've used the term "world market" many times. I notice you didn't use free market, because when I heard you describe the price you pay to the Saudis, you pull up to the Saudi pump, they say, "Here's what it's going to be to." That's not a free market. And it's a longer discussion we ought to have at some point.

But I think the consumers bear the brunt of a market that is not free, and your companies, at this point, are experiencing very substantial profits as a result of it. I think most consumers find it terribly unfair. And talk is cheap. They're saying to Congress, "We want some action."

DOMENICI: Senator, your time has expired.

STEVENS: Thank you very much.

DOMENICI: I want to go to Senator Stevens for his side now.

STEVENS: We'll now recognize Senator Burns, followed by Senator Boxer, for five minutes each.

BURNS: Thank you very much for coming today. And I will tell you that my number one concern right now is the business of agriculture.

We cannot increase the price of our product off of the farm. We can't pass along our costs. And I want you to write this down: It costs a bushel of wheat to buy one gallon of diesel. Gasoline has come down; diesel has not.

Then we get our product to the market, and we're charged a surcharge from the rails and the trucks, which further depresses our price on the farm, and it takes us out of our ability to compete with our product on the world market.

BURNS: I understand what you're saying, Mr. Raymond, because I come out of the auction business. And I know when you go to an auction, that's the truest form of supply and demand: Who wants it and how bad do they want it?

So my concern now is the diversity of supply. We've heard of no new refineries being built in the past 30 years. Reasons -- we're not going to go into that.

Are oil companies willing to invest in the use and/or expanding the refinement of biofuels or coal-to-fuel, that's gasification, technologies? And if not, why not?

And anybody can take a swing at that that can pick up a bat.

RAYMOND: Well, I'll take a quick swing at it, Senator.

First of all, I think some comments I made earlier, in fact, while there has not been the construction of what we could call a new grassroots refinery, there has been continual expansion of the refining industry.

As I commented, effectively in this country in the last 10 years we've built, in essence, three new refineries. They're inside the fence where refineries already were, and as a result they're much more efficient than if we had gone off in some greenfield site and tried to do it.

In terms of are we willing to look at biofuels, we're willing to look at any feedstock that would enable us to be able to provide competitive supplies.

In terms of coal gasification, we had projects on that 20, 30 years ago. The problem with them is that they are not economically competitive with traditional oil and gas supplies.

BURNS: Now, a follow-up question on that, and I'll let somebody else.

RAYMOND: Please.

BURNS: Are refineries and biofuels or gasification plants treated the same as far as policy, taxation? Do they work under the same definitions as far as policy is concerned?

Mr. O'Reilly?

O'REILLY: Senator, biofuels, and if you include ethanol, obviously, have additional tax incentives for manufacturers. So they're not quite under the same policy.

As far as I know the underlying structure, other than the tax incentives themselves, are similar.

BURNS: I just think that somewhere along the line our policy up here has not put them both on the same level, so that the investments not only could flow to refinery capacity but also into the use of more diverse areas of our supply. Am I going down the wrong road here?

Mr. Mulva?

MULVA: No, Senator, I do not think you're going down the road. Anything that can support diversity and expanding of refining capacity is really something that we need to do and should do.

MULVA: I will come back to your initial question, though, with respect to diesel. In our own company, we lost three refineries as a result of the hurricane. They're coming back on-stream, but we lost 200,000 barrels a day of diesel capacity.

To put it in perspective, I think the state of Mississippi uses about 40,000 barrels a day of diesel.

We can't really import it from Europe like we can gasoline, because Europe has moved into you might say dieselization. So we can't bring it in in the form of export from Europe imported into the U.S.

So what's really absolutely important for us is to get our capacity in the refineries back on-stream. The best thing we can do is adding supply by efficiently running our refineries and getting them back on-stream. It's going to be the best thing we can do to get diesel prices down.

BURNS: Let the American people understand: Agriculture is going to get shut down. We're not going to turn on one tractor to produce food and fiber for this country under these kind of conditions. We have to do something different.

And I thank the chairman.

STEVENS: Senator Boxer, recognized for five minutes.

BOXER: Thank you, Mr. Chairman.

I would like to put in the record a copy of a front-page story in The Washington Post, Tuesday, January 22nd, 1974, given to me by Senator Cantwell showing Senator Scoop Jackson swearing in oil company executives. The headline: "Firms say oil crisis is real. Deny holding supplies back from the market."

And I'd like to put this in the record as a reminder of the way things used to be done around here.

STEVENS: I have no objection, but we don't submit photographs in the record in...

BOXER: All right. Well, we can describe it then. Fine.

Mr. Chairman, today's hearing in the mind of most of my constituents is about shared sacrifices in tough times versus big oil company greed.

And, gentlemen, to all of you, I hope I can give you a bit of a reality check. Working people struggle with high gas prices and your sacrifice, gentlemen, appears to be nothing.

And I want to get to a very simple thing that everyday people can understand, and that's oil executive bonus versus average U.S. salaries. I have a chart. And I don't go into all of you because some of you work for companies that don't have to file this information.

In 2004, Mr. Raymond, your bonus was over $3.6 million. This was on top of your salary of $3.2 million, and stock gains and other compensation of $19 million.

Mr. O'Reilly, your bonus was almost $4 million in addition to a salary of $1.5 million and stock gains and other compensation of $11.2 million.

Mr. Mulva, your bonus was a little over $4 million on top of your $1.5 million salary, and $2.7 million stock gains and other compensation.

Gentlemen, this compares to an average American who makes $23,276 per year. Each of your bonuses was more than 155 times greater than the typical American's yearly salary.

BOXER: And compare your bonuses to a worker on minimum wage, which Congress hasn't raised in nine long years, that minimum wage workers makes $10,713 per year. Each of your bonuses -- forget the rest of it -- each of your bonuses was more than 300 times greater than a minimum wage worker's annual pay.

So let me just ask you a question here: Will you consider making a major personal contribution and major corporate contributions from record profits to a charitable fund set up, hopefully with your efforts and community effort, to help America's working families get relief from higher home heating oil prices or higher gas prices? Just a "yes" or a "no" if you would consider this.

STEVENS: We'll stop the clock right here for you, Senator.

We're permitted to have charts to show information that pertains to our issue. This chart is really publicity.

And I want you to know we're going to have a question about that later in our business discussion. But I would urge senators to bring charts that demonstrate some information that's necessary for the consideration of the subjects before us. This does not seem to be that case.

BOXER: Well, Mr. Chairman, if I could have 30 seconds without it being taken it away, since you interrupted my train of thought, let me just tell you something: I think that this is very much on point. People in our country are concerned about fairness and justice at a time of sacrifice, but that's a difference between us. But we shouldn't try to stop each other from saying what we want to say, but we'll discuss that. Because I know at the end of the day, you're a fair person.

Now, if I could have a second question, and Mr. Hofmeister, it's to you. Two years ago this month, your company, Shell, announced it was closing its oil refinery in Bakersfield, California, an oil refinery that supplied 2 percent of our state's gas.

We already had some of the highest gas prices in the country and the community was up in arms.

In the end, the refinery was sold, not closed, but only because of elected officials, in particular the attorney general of California.

Now, today is your chance to please let us know why you told the people a number of falsities -- and I want to say "your company," not you personally, your company.

You said that the refinery wasn't making money.

Continue to Part 2 of the transcript.

Courtesy FCDH e-Media

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