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Senator Pete V. Domenici
Hurricane Recovery Hearing
Thursday, October 6th 10:00am
Yesterday, Senator Bingaman, Senator Akaka and I returned from Baton Rogue.
We went down to see and learn first-hand about Hurricane Katrina and Rita damage to the energy infrastructure.
We spent time at Exxon Mobil’s Baton Rogue Refinery, the second largest in the country with a capacity of 500,000 barrels a day.
Although that refinery did not itself sustain major damage in the storms, its access to oil and its ability to move products was severely harmed. In addition, loss of electricity set the refinery back. Many times throughout the trip, we heard about the need to ensure a redundant and robust power grid.
We met with Colonial pipeline, which is a 5,500 mile interstate pipeline that originates in Houston and terminates at New York Harbor and delivers millions of gallons of gasoline, home heating oil, aviation fuel and other refined petroleum products.
Right now, Colonial is operating at about 70% of its normal, mainline capacity from Houston. Lack of supply and lack of commercial power due to both of the storms are major impediments to getting that pipeline back to 100%.
We went to DOW’s St. Charles’ petrochemical complex and talked about how high natural gas prices are hurting our chemical industry.
Just at that single DOW facility, every $1 increase in the cost of natural gas means an additional $35 million a year in fuel costs.
At each of these energy facilities, I was impressed by the employees’ dedication and the companies’ concerns for their employees’ well-being.
There is a great deal of work to be done, and there is a great deal of courage and confidence that it can be done.
The complex and intertwined nature of our nation’s energy infrastructure is very evident in light of the two Hurricanes.
Hurricanes Katrina and Rita did not just hit the Gulf Coast region – those natural disasters impacted our entire energy chain in all regions of the country.
The ripple effects of the hurricanes are going to affect many parts of our economy.
We need to have realistic expectations about how long we should expect high prices and we need to prepare for potential shortages.
Earlier this week, Secretary Norton said that substantial portions of the oil and gas production in the Gulf Coast affected by Hurricanes Katrina and Rita could take several months to resume, with major repairs extending into the next year. She also noted that some of the hurricane’s most significant energy impacts were to onshore natural gas processing facilities.
Natural gas prices closed above $14 yesterday and uncertainty about supplies may keep those prices painfully high.
The storm impacts have also affected our inventories. Yesterday, the EIA reported that total motor gasoline inventories fell by 4.3 million barrels last week and distillate fuel inventories, like diesel, fell by 5.6 million barrels last week. Although our inventories are still within the average range for this time of the year, these kinds of drops cannot be sustained.
Our purpose today is to hear from some of the industries that have been impacted by the Hurricanes. They will tell us about damage assessments and recovery efforts.
In addition to learning about the physical damage, this Committee will told hearings on the economic effects of the hurricanes and price expectations for consumers this winter.
I am also planning on convening a hearing where we can hear from Administration witnesses, like DOE and Interior, about emergency preparation and response as well as steps they can take to improve the supply demand picture.
I am pleased that Secretary Bodman has launched a campaign to highlight how American families, businesses and the federal government can save energy in response to rising winter energy costs.
The President has made it clear that conservation is going to be one of our most effective tools to deal with the present crisis. I agree with that and hope we can continue our bipartisan efforts to strengthen conservation in the short and long term.
I thank our witnesses for being with us today. We have --
• Mr. Red Cavaney, President and CEO of the American Petroleum Institute.
• Mr. Christopher Helms, President, Pipeline Group, NiSource, Inc. on behalf of the Interstate Natural Gas Association of America.
• Mr. Andrew Liveris, President and CEO of Dow Chemical.
• Mr. Kevin Curtis, Senior Vice President for Programs, National Environmental Trust.
• Mr. Curtis Hebert, Executive Vice President, External Affairs, Entergy.
Witness Panel 1
Mr. Red Cavaney
Statement of Red Cavaney, President and CEO,
American Petroleum Institute, before the
Senate Energy and Natural Resources Committee
October 6, 2005
I am Red Cavaney, President and CEO of the American Petroleum Institute -- the national trade association for the U.S. oil and natural gas industry, representing all sectors of the industry, including companies that make, transport, and market gasoline.
The oil and natural gas industry recognizes the catastrophic impact of Hurricanes Katrina and Rita on millions of Americans, and our industry has been working around the clock with all levels of government and the private sector to restore operations and ensure that consumers have adequate fuel supplies.
As I will explain, our companies have made much progress in recovering from the hurricanes, but much remains to be done. While many refineries, pipelines, and other facilities are back in operation, or are about to be, some facilities remain damaged and out of service. Fuels are flowing to consumers nationwide, but not at the normal levels. Thus, our companies are facing a more difficult challenge in keeping up with demand for gasoline and other products. We are facing tight supplies, making it all the more important to heed the President’s recent call for consumers to use energy wisely.
Energy conservation and efficiency in this time of tight supply are crucial – as important as our efforts to bolster supply. Companies are working 24/7 to get fuels to where they are needed in the quantities they are needed. And they are supplementing domestic production with increased imports of gasoline to help alleviate tight supplies.
API has run full page ads in major metropolitan newspapers across the nation urging industry and consumers to use available supplies wisely. We have urged these steps:
• Plan trips carefully. Combine multiple trips into one to do your errands. Minimize stop-and-go driving by avoiding rush hours. Consider car pooling.
• Maintain your car. Under-inflated tires can rob up to one mile per gallon from fuel economy.
• Drive efficiently. Unnecessary speedups and slowdowns can decrease fuel economy by up to two miles per gallon. Accelerate slowly and avoid engine idling.
• Slow down. Typically the faster you drive, the more fuel you use.
• Use energy wisely at home. Turn down thermostats, seal window and door leaks, clean furnace filters and replace less-efficient furnaces and hot water heaters.
The Gulf Coast is the very heartland of our industry. We are not just responding to this disaster, we are living it. Thousands of our employees and their families and friends are also suffering the hardships of living in this devastated region they call home. In concert with fire and police officials, neighbors, suppliers, and government authorities, our companies are restoring the production, bringing the refineries back online, and restarting the pipelines – while at the same time grieving over the loss of homes, neighborhoods, and even loved ones.
The Gulf Coast region includes some 4,000 offshore platforms in federal waters, dozens of refineries, and hundreds of production, transportation and marketing facilities. These federal waters account for nearly 30 percent of the nation’s crude oil production and approximately 20 percent of the natural gas production. There is a reason for this geographic concentration in a high-risk weather area. Government policies have largely limited offshore exploration and production to the Central and Western Gulf – and our onshore facilities, including refineries, have been welcomed in communities in the region. Unfortunately, offshore oil and natural gas development has been barred elsewhere – including the eastern half of the Gulf and the entire Atlantic and Pacific Coasts. Onshore construction has been held back by government restrictions, permitting delays, and not-in-my-backyard (NIMBY) sentiments.
It is ironic that we talk so much about diversifying the sources of our energy supplies from abroad, yet we have done so little to geographically diversify our oil and natural gas industry here at home.
An area of much recent concern is the need to bring additional clean-burning natural gas to industries and consumers nationwide. Yet, efforts to increase domestic natural gas production, both in the Rocky Mountain West and offshore, have been stymied – and efforts to build more terminals outside the Gulf region to permit increased imports of liquefied natural gas (LNG) have also been largely blocked.
II. THE IMPACT OF HURRICANES KATRINA AND RITA ON THE U.S. OIL AND NATURAL GAS INDUSTRY
I know that I speak for every one of our member companies when I say that our first concern – from the moment it becomes evident that a hurricane is approaching the Gulf – is for the well-being and safety of the thousands of men and women from across the country who work on offshore facilities, on the vessels that serve them, and in the refineries, distribution networks, and retail outlets around the Gulf coast.
Equally as important is the welfare and recovery of the communities in the Gulf region. Millions of people in the area are experiencing firsthand the physical and emotional hardship of the death and devastation caused by these two hurricanes, and our hearts and our prayers are with them.
API is working with the American Red Cross to facilitate U.S. oil and natural gas industry efforts to help people throughout the Gulf region. Our member companies are helping relief efforts through corporate contributions and by encouraging customer and employee contributions.
The companies are donating millions of dollars to humanitarian relief efforts to assist evacuees and help rebuild lives and communities. They are supporting national, state and local initiatives in recovery and relief through contributions of products, services, and technology. API and its members, in conjunction with the Gulf Coast Workforce Board and the U.S. Department of Labor, are working with employers in Texas and the surrounding states to help people displaced by the hurricanes to find new jobs.
We want to thank President Bush for making available more than 24 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) to help offset supply shortfalls after Katrina and Rita -- truly a circumstance for which the SPR was intended -- and we appreciate the International Energy Agency (IEA) member nations’ contributions of additional strategic reserves. We are also grateful that the Environmental Protection Agency (EPA) and the Department of Transportation, in conjunction with the involved states, have granted waivers to expedite the flow of fuels, particularly to emergency responders – an action that is very helpful at a time when logistics and distribution of fuels are extremely difficult and critical.
In addition, the Department of Homeland Security’s waivers of the Jones Act have helped to provide fuel supplies by enabling foreign as well as U.S. vessels to transport crude oil and refined petroleum products between domestic ports. And, through both hurricanes, the Department of Energy has played a central and invaluable role in leading and coordinating overall efforts by all levels of government to respond to the energy impacts of Katrina and Rita.
These and other positive steps by government are most helpful in dealing with this catastrophe. We also believe it is particularly important for government officials at the federal, state and local levels to urge citizens nationwide to use energy wisely, particularly in terms of not hoarding gasoline and not “topping off” their vehicle tanks. We welcomed the President’s recent comments on the need to use fuel wisely and avoid unnecessary travel.
In attempting to meet the challenges we face, it is also most important to do no harm. The worst thing Congress could do in these challenging times would be to repeat the mistakes of some past energy policies by overriding the structures of the free marketplace. Imposing new controls, allocation schemes, new taxes on industry, or other obstacles will only serve to make the situation much worse -- for the very individuals who are being relied upon to bring our energy systems back to full operating order.
Effects of Hurricanes Katrina and Rita on Industry Facilities
While our companies are still assessing the full effects of the hurricanes on production, refining, and pipeline facilities in the Gulf region, the storms clearly had a significant and widespread impact on our operations. Thanks to the around-the-clock work of company employees and contractors, facilities are coming back online and fuel is flowing from refineries through pipelines to consumers.
While I will attempt to provide you with the latest information we have, I would caution you that the situation can change markedly from day to day, from the standpoint of what we know and what actual progress has been made.
Our latest information from the Department of Energy (DOE), the Minerals Management Service (MMS), the Association of Oil Pipe Lines (AOPL), and member companies on the status of our industry and its facilities is as follows:
-- Summary of Impact of Hurricanes Katrina and Rita
Recent hurricanes have reinforced the important role domestic energy supplies play in our economy. Shut-in oil and natural gas production from Hurricanes Ivan (2004) and Katrina and Rita this year, combined with growing demand for petroleum products and natural gas, have increased costs for all energy consumers. And, the tight supply/demand balance has made energy markets more volatile.
It had taken almost a year for the last of the offshore facilities to near recovery from Hurricane Ivan, when Katrina struck. Cumulative shut-in production from Ivan was 40 million barrels of oil and 160 billion cubic feet of natural gas. Ironically, API, along with the Minerals Management Service and Coast Guard, had just convened a workshop at the end of July to evaluate the experiences of Hurricane Ivan and examine whether new policies/practices should be considered.
Hurricane Katrina initially shut in virtually all oil production (about 1.5 million barrels per day) from the Gulf of Mexico (GOM) and 88 percent (about 8.8 billion cubic feet per day) of the Gulf’s natural gas production. Just prior to Hurricane Rita’s entry into the region, oil production had recovered with about 55.8 percent (837.6 MMB/D) still shut in and about 33.7 percent of GOM natural gas shut in (3.375 billion cubic feet per day).
The advent of Hurricane Rita forced offshore facilities to shut down again to protect employees. It has been estimated that about 75 percent of the offshore facilities in the Gulf were in the path of Hurricane Rita. Once again, as of 9/30/05, virtually all (97.8 percent) GOM oil production was offline (1.47 million barrels per day) and about 80 percent of the natural gas (7.9 billion cubic feet per day). This situation has begun to improve slowly. As of 10/3, shut-in oil production was equivalent to 92.8 percent (1.39 MMB/D) of daily Gulf production and almost 75 percent (about 7.5 billion cubic feet per day) of natural gas production. The cumulative production shut-in from both Katrina and Rita (8/26/05 – 10/3/05) is 45.1 million barrels of oil (about 8.2 percent of yearly GOM production and almost 219.6 billion cubic feet of natural gas, which is about 6 percent of yearly production.
At present, this situation continues as companies diligently assess their platforms and subsea production and delivery systems to assess damage and ensure that it is safe for employees to return to offshore structures and that production can resume without any environmental impacts. Considering the magnitude of the hurricane and its path, damage to offshore platforms seems less than anticipated. However, while damage reports are still being collected, we do know that Chevron’s Typhoon platform was severed from its moorings and suffered severe damage. According to news reports, Typhoon produced about 40MB/D of oil and 600 million cubic feet per day of natural gas.
Recovery from Hurricane Rita in terms of offshore oil and gas production will be dependent on the other vital parts of the supply chain downstream of the production site. Subsea gathering pipelines and delivery systems must be operable. For natural gas, onshore processing plants must be up and running before that gas can be placed in pipelines for delivery to consumers. For crude oil, pipelines and terminals associated with shipping the oil must be working – not to mention the refineries that will transform the oil into products like gasoline, heating oil and jet fuel as well as the pipelines that will deliver those products to consumers.
It may seem self-evident, but it is worth remembering that every hurricane is unique and their impacts can differ substantially. Last year, Hurricane Ivan’s impacts were most notable on the seafloor, as it triggered undersea mudslides. Hurricane Katrina seemed to have its greatest impacts onshore, although it did damage deepwater facilities serving the Mars, Ursa, Cognac and West Delta 143 fields. Shell had indicated that production from these fields may not be feasible the rest of this year. According to Bloomberg News, Mars produced 220 MB/D of oil and 220 million cubic feet per day of natural gas. Prior to Hurricane Rita, Shell had indicated that about 60 percent of total production would be restored to pre-Katrina level within the fourth quarter.
Katrina’s impact was also notable in terms of damage to older facilities operating in shallower waters. These were mostly low-volume producing wells. Overall, Katrina destroyed about 45 producing structures and 20 structures incurred extensive damage.
While the industry is working around the clock to restore production, damage from Hurricane Rita is still being assessed. And, damage to the drilling fleet and platforms may turn out to be somewhat greater than initially thought.
In all of the hurricanes, drilling rigs were impacted – often photographs of drifting rigs were the most visible impact in terms of news coverage. Putting this in perspective, during Ivan, five rigs went adrift; six during Katrina; and eight during Rita. In terms of damage, Katrina destroyed four drilling rigs, while nine incurred extensive damage. Based on preliminary reports, Rita inflicted major damage on five drilling rigs and minor damage on 10. [Source: Reports from Rigzone.com]
Offshore Production Observations/Lessons Learned
• It is important to remember that the offshore infrastructure (4,000 platforms and 33,000 miles of pipeline) is sturdy and has weathered three powerful storms in the last 13 months without widespread major damage or environmental pollution. The majority of structures damaged by these hurricanes were older, lower volume producing facilities in shallower waters.
• Not only is resumption of production dependent on the downstream oil and gas supply chain, all parts of our infrastructure depend on other critical links such as electrical power. We must continue to make recovery of all parts of this critical infrastructure a primary priority.
• Additional attention should be placed on securing and tracking drilling rigs. We will incorporate the lessons of Katrina and Rita in our ongoing work initiated to assess and learn from Ivan. We will continue to work cooperatively with government to find ways to improve performance.
• Communication and coordination between government at all levels and industry is vital to recovery. Prompt actions by government to, where necessary, temporarily remove regulatory obstacles have proved essential.
As a nation, we also must confront our energy needs and take the necessary steps to enhance domestic production of oil and natural gas. We can no longer afford to place “off limits” vast areas of the Eastern Gulf of Mexico, off the Atlantic and Pacific coasts, and offshore Alaska. Similarly, we cannot afford to deny Americans consumers the benefits that will come from opening the Arctic National Wildlife Refuge and from improving and expediting approval processed for developing the substantial resources on federal, multi-use lands in the West.
For example, there are about 300 trillion cubic feet of natural gas and 50 billion barrels of oil (technically recoverable resources) on the federal Outer Continental Shelf (OCS) off the lower 48 states with additional resources on the Alaskan OCS of 122 TCF of natural gas and 25 billion barrels of oil. Thus, the total recoverable with today’s technology is equivalent to the oil resources of Canada and Mexico combined and nearly three times the natural gas resources of these two countries. Yet, these estimates may be conservative since these areas are largely unexplored. Generally, the more an area is explored, the more its resource estimates grow. For example, the U.S. Geological Survey (USGS) estimates of undiscovered oil resources in the Central and Western Gulf of Mexico increased from 6.32 billion barrels of oil in 1995 to 33.39 billion barrels in 2003 – an increase of more than 400 percent. And, USGS estimates of undiscovered natural gas resources in those same areas increased from 88.1 TCF to 180.2 TCF over the same time period – an increase of more than 100 percent.
-- Natural Gas
The natural gas situation deserves special attention due to its key role in so many sectors of our economy and especially given its importance in heating homes throughout the nation. More than 60 million homes rely on natural gas. On September 29, natural gas prices set a record. Although they have settled down a bit ($14.017 per MMbtu on October 4 – down 28.4 cents from the record), natural gas prices are more than double what they were this time last year -- $7.15 above last year. And, winter has yet to arrive.
Unlike petroleum products where increased imports can help enhance available supplies, the ability to do that for natural gas is limited. Hurricanes Katrina and Rita have not only shut in a significant portion of the nation’s natural gas supplies, the hurricanes have damaged natural gas processing plants which must be restored. Major issues affecting repairs and start-up of these plants include: access to facilities (standing water remains; some roads are not open); access to materials needed for repairs; and manpower issues.
Facilities in and near Houston do not appear to have sustained much damage. The Mont Belvieu area (about 25 miles east of Houston) is in the process of restarting. Natural gas liquid import/export facilities around the Houston Ship Channel have returned to service. Overall, Texas natural gas processing plants seem to have incurred little damage although some remain closed due to lack of electricity.
The area most impacted from a gas processing standpoint is Louisiana. A number of these plants were just recovering from damage due to Hurricane Katrina when Rita approached. Even those that did not sustain additional damage have been affected by the mandatory evacuations and other issues (e.g, access to Cameron Parish) related to Hurricane Rita. Repairs are resuming as conditions allow workers to return. In Alabama and Mississippi, plants in Mobile Bay and Pascagoula have been at heavily reduced recovery levels since the Tri-States pipeline has been out of service since Hurricane Katrina. This line crosses Lake Pontchartrain and many problems have been encountered in trying to return this line to service.
-- Summary of Impact of Hurricanes Katrina and Rita
Based on the latest assessments (as of 10/4), 24.4 percent of U.S. refining capacity remains off-line or is restarting in the aftermath of Hurricanes Katrina and Rita. This includes 5 percent of U.S. refining capacity that remains off-line because of damage caused by Katrina in Louisiana and Mississippi. Refineries with approximately 6.8 percent of U.S. refining capacity are in the process of restarting operations, while refineries with approximately 12.6 percent of U.S. refining capacity are still awaiting power, continuing to assess damages, or making necessary repairs. The following is the latest information we have on Texas/Louisiana refineries:
Houston area (2,291,850 barrel/day capacity)
BP/Texas City 437,000 Shutdown; no restart date estimate
Marathon/Texas City 72,000 Normal operations
Valero/Texas City 209,950
Reduced runs to 203,000 b/d
83,000 Normal operations
Lyondell-Citgo/Houston 270,200 Restarting
Shell/Deer Park 333,700 Restarting
ExxonMobil/Baytown 557,000 Restarting
ConocoPhillips/Sweeney 229,000 Normal operations.
Beaumont / Port Arthur (1,122,000 barrel/day capacity)
Total Petrochemical 233,500 Shutdown
Motiva 285,000 Shutdown; no restart date estimate
Valero 255,000 Shutdown; estimate restart within 1 month
ExxonMobil 348,500 Shutdown; no restart date estimate
Lake Charles (593,800 barrel/day capacity)
Citgo 324,300 Shutdown; no restart date estimate
ConocoPhillips 239,400 Shutdown; estimate restart in mid-October
Calcasieu Refining 30,000 Shutdown
Refinery Observations/Lessons Learned
• Refineries are complex. It takes more than a flip of a switch to get a refinery back up and running. In a normal situation, once the decision has been made that it is safe to start-up the refinery, it can take several days before the facility is back to full operating levels. This is because the process units and the associated equipment must be returned to operations in a staged manner to ensure a safe and successful start-up.
• Once a hurricane leaves the region, refinery managers assess what impact the hurricane had on their facilities. If any damage has occurred, repairs will need to be made before the refinery can be brought back online. Also, any flooding – a potentially significant problem – that has occurred will need to be dealt with before restarting the refinery.
• In the case of a start-up following a hurricane, other factors could cause further delay. These factors include the availability of crude oil, electricity to run the plant, and water used for cooling the process units. A refinery requires electricity to operate; if it is flooded, it cannot use electricity and cannot restart.
• Refineries have been prepared with hurricane preparedness and response plans for a very long time. Safety for neighboring communities and employees is a top priority. It takes a few days to shut down a refinery, and the better job done at shutdown, the more likely will be a smooth and safe startup.
• Most damage to refineries requires minor repairs, but it may take some time to completely assess and finish those repairs. Some refineries have been harder hit and are still awaiting power or repairing floor damage, and it will take more time to enable them to safely restart.
• Employees have shown incredible dedication, working on bringing the refineries back online. Some have lost their homes and are still focused on getting their refineries back up and running. Our member companies are proud of these efforts and are dedicated to finding employees temporary housing in cases where homes are lost.
• For example, ConocoPhillips’ Alliance Refinery brought in two vessels to support operations. One sleeps 700. The company is operating the refinery like an offshore platform and sharing the vessel with some National Guardsmen to provide them shelter as well.
• Another example, is at Shell’s Deer Park refinery, where the company gave one operator an emergency vehicle to join his distraught wife who had already evacuated the area. The company filled the vehicle with extra gasoline so he could help those whom he passed who had run out of gasoline.
• At ExxonMobil’s Baton Rouge refinery, managers relied on creativity and improvisation to keep the facility functioning during and after Katrina. For example, loss of electric power shut off imports, particularly those coming through the Louisiana Offshore Oil Port (LOOP), which are vital to the refinery. As a stopgap, company officials located a foreign tanker full of oil that had ridden out the storm south of Baton Rouge and brought it to the refinery -- after quickly obtaining a waiver from the Jones Act that prohibits a foreign-flagged vessel from traveling between two U.S. ports. The company also created a ferry system using company barges to bring Strategic Petroleum Reserve (SPR) oil across the river from a Port Allen, Louisiana, refinery, which was the nearest location to which a pipeline could bring the SPR oil.
-- Summary of Impact of Hurricanes Katrina and Rita
Despite the severe conditions caused by Hurricanes Katrina and Rita, most pipelines recovered rapidly, with only limited damage done to the pipeline system – indicating that this is a robust, durable system capable of withstanding considerable stress. After Hurricane Katrina, the industry worked around the clock to restore full operations at all major crude oil and petroleum product pipelines. However, Hurricane Rita impacted many of these pipelines again, and several key pipelines currently are closed or operating at partial capacity.
The following is the status of hazardous liquids pipelines as reported by the Association of Oil Pipe Lines (as of 9/27):
• Capline, a major crude oil pipeline from the Gulf region to the Midwest, is operating at 80 percent capacity.
• Centennial Pipeline, which transports refined products from Beaumont, Texas to the Midwest, is closed;
• Colonial Pipeline is operating at full capacity from Krotz Springs, Louisiana eastward, but operations are limited in its origin pipeline segments in Houston and Pasadena, Texas;
• Dixie Pipeline, a 1,300-mile propane pipeline originating in Mont Belvieu, Texas to eastern transmission points in North Carolina and Georgia, is operating.
• Explorer Pipeline, which ships refined products from the Houston area to the Midwest, is now undertaking partial operations;
• Longhorn Pipeline is open; a 700-mile common-carrier pipeline, it can transport up to 72,000 barrels per day of refined products.
• LOOP, the Louisiana Offshore Oil Port, has stopped offloading tankers, but is continuing to deliver crude oil to customers. The port facility is located in the Gulf of Mexico, 18 miles south of Grand Isle, Louisiana, in 110 feet of water. LOOP is the only port in the U.S. capable of offloading deep draft tankers.
• Magellan Pipeline is fully operational. Magellan is a refined products system consisting of 8,500 miles of pipelines supplying 13 Midwestern states.
• Marathon Pipeline has portions closed; the Texas City to Pasadena system is shut down.
• Plantation Pipeline, a 3,100-mile pipeline from Baton Rouge, Louisiana to the Washington, D.C. area, is operating.
• Seaway Pipeline, from the Texas Gulf Coast to Cushing, Oklahoma is operating.
• TEPPCO Pipeline, which moves petroleum products from Beaumont, Texas to New York, is operating at limited capacity.
API has been provided with the following additional information:
Colonial Pipeline: Colonial was able to restore service at reduced rates on its lines from the Gulf Coast after a two-day interruption. Colonial is currently (9/29) pumping at an average rate of 65 percent of its normal volumes on these lines from the Gulf Coast. The constraint on Colonial is not its capacity but the availability of product to lift from Gulf Coast refineries and origin terminals. At present, Colonial is without commercial power at five consecutive pumping stations in the Beaumont, Texas-Lake Charles, Louisiana area. Commercial power will likely not be available at some of these pumping stations for at least two weeks.
Explorer Pipeline: The main line from Houston/Pasadena has been ready to run at the full rate since 9/26. Explorer is currently (9/29) running at about half of its capacity due to lack of availability of product. The Port Arthur to Houston segment is still not operating.
Shell Pipeline Company LP: In Texas (as of 9/29), onshore crude oil and product pipelines, stations and terminals in the Port Arthur area are flooded and without power and onshore crude oil. Onshore crude oil pipelines, stations and terminals in the Port Neches area are flooded and without power. In Louisiana (as of 9/29), onshore crude oil pipelines, stations and terminals in the Houma and Erath areas are flooded and without power. The offshore central crude gathering system sustained platform damage. Offshore crude systems in Eastern, Central, and Western corridors are being assessed for damage. Some chemical systems and delivery points in Lake Charles are without power.
Marathon Pipe Line LLC:
-- Hurricane Katrina:
Garyville-Zachary 20” System was shut down on 8/29/05; on 8/30/05, power out at Zachary facility; house power only at Garyville facility; helicopter over-flight of system showed no damage. On 8/31/05, power and SCADA communications restored at Garyville, Plantation Junction and Zachary; restarted 9/1/05.
St. James-Garyville 30” System was shut down on 8/28/05; on 8/29/05, power out at St. James and Garyville; on 8/30/05, house power restored at Garyville; helicopter over-flights showed no damage. On 8/31/05, system remained shutdown. Power and SCADA communication restored at St. James. Waiting on LOCAP and Garyville; restarted 9/4/05.
Offshore Gulf of Mexico Crude System was shut down on 8/28/05; on 8/30/05, helicopter over-flight of system showed damage at West Delta Receiving Station. On 9/3/05, MPL Assessment Team traveled via boat and completed a preliminary assessment on the West Delta Receiving Station; platform and all station equipment submerged; no mechanical damage; electrical gear and instrumentation destroyed; security fence destroyed; on 9/30/05, South Pass West Delta System remains down.
Midwest Crude System, on 8/29/05, crude lines from Patola, Illinois, terminating at Robinson, Illinois, Cattlesburg, Kentucky, and Lima, Ohio, slowed down as a result of refinery slowdowns due to uncertainty of crude supply. By 9/4/05, those systems were resuming normal operations.
-- Hurricane Rita:
Texas City-Pasadena 16” System shut down on 9/21/05; on 9/26/05, preliminary assessments made to Texas City and Pasadena facilities noted no damage; restarted 9/26/05.
Centennial 28” System (Marathon operator) shut down on 9/22/05; on 9/27/05, commercial power out with 2-6 weeks repair time; preliminary assessments indicated little or no damage at all sites; on 9/30/05, four temporary generators in place; Entergy reports that electrical service (at reduced levels) may return in the next few days to the Beaumont area; on 9/30/05, remains shut down.
Offshore Gulf of Mexico Crude (operated by Marathon).
East Cameron Lateral shut down on 9/20/05; on 9/27/05, initial reports indicated significant damage to platform facilities with potential for involvement of underwater pipelines; undersea and riser inspection will be required; as of 9/30/05, remains shut down.
Eugene Island Lateral shut down on 9/20/05; on 9/27/05, some platform damage has been noted from initial aerial inspection; undersea and riser inspections will be required; as of 9/30/05, remains shut down.
Vermillion Lateral shut down on 9/20/05; on 9/27/05, some platform damage has been noted from initial aerial inspection; undersea and riser inspections will be required; as of 9/30/05, remains shut down.
-- Pipeline Observations/Lessons Learned
• Electricity. Commercial power availability is essential to pipeline operation. The ability of emergency response officials at the federal, state and local levels to facilitate, coordinate and prioritize the response of electric power utilities is essential. In-place backup generation equipment would be just as vulnerable as the local utility to major storm or attack, costly and difficult to accommodate in pipeline facilities.
• Communications. The lack of reliable telecommunications was a major issue in slowing response to the storms. In many cases land lines were out and cell coverage was spotty at best. Even when land lines were available, A/C-powered phones were useless. Satellite communication worked well, but the number of units available was limited. Loss of computing services removed email as a viable communications tool, except in some instances where personal data assistants (blackberries, etc.) allowed personnel to keep in touch. More clearly delineated contact points within the federal government made Rita response easier than Katrina response – there were fewer duplicate requests for updates and better use of designated contacts. This also made it easier to get federal help when needed as we had much improved channels into the government.
• Physical Security. Personnel and critical infrastructure assets must be protected -- generators and fuel supplies (to name only two) become valuable in a natural disaster.
• Aerial Reconnaissance. Many operators had difficulty getting clearance to conduct flyovers of their facilities to assess damage and stage repairs. It would be helpful if FAA could determine priorities and inform companies of what they are.
• Federal Fuel Waivers. The use of fuel quality waivers to allow the allocation of available fuels appeared to be helpful.
• Effects Extend Beyond Regional. Impacts can be wide ranging
• Operations. A backup control center in a different building in the same city may be suitable in the event of terrorist attack (especially with backup generation capability), but not when dealing with a major area-wide event like a hurricane. The New Orleans pipelines that had a backup control center outside of the area and Houston pipelines with the same did not experience the same upset / contingency planning problems as did pipelines that had their backup centers in the same city.
-- Government-related Issues
In the aftermath of Hurricanes Katrina and Rita, consideration should be given to:
• Improve telecommunications and electric power contingency operations for crude and petroleum product lines and establish protocols for continued service and prioritized restoration of service in emergencies.
• Governments should be prepared to provide security around critical infrastructure and military or police escorts for response personnel, critical equipment transport, and fuel delivery.
• Short-term relaxation of federal, state and local regulatory and permit requirements in the event of natural disasters to expedite recovery of pipeline service.
• Permit streamlining with DOT’s Pipeline and Hazardous Materials Safety Administration (PHMSA) as the lead coordinating agency for oil pipelines, would be helpful in speeding repairs and making capacity expansion projects more attractive.
• Support for industry recommendations on FERC oil pipeline rates.
• Designation of National Energy Corridors for rights-of-way would encourage increased pipeline and electrical capacity.
• FAA should determine priorities and request procedures for flyovers to aid in assessment and repair of critical infrastructure and better communicate those priorities.
• Expedite and streamline deployment of housing for emergency responders.
• Develop an integrated refueling strategy for emergency responders (FEMA, National Guard, state and local authorities) and stranded motorists to minimize conflicting priorities, prioritize short-term emergency (re)supply focus, and ensure emergency responder refueling equipment is compatible with industry safety standards.
• Deployment of government-owned power generation and pump units.
-- Impact of Hurricanes Katrina and Rita
The Houston Ship Channel and Texas City Channel have reopened for 24-hour navigation.
The Gulf Intercoastal Waterway is fully open as a result of the operational agreements reached with the Corps of Engineers. The flooding in the Texas/Louisiana border area temporarily shut down the Calcasieu Locks in Calcasieu Parish, Louisiana, and the Leland Bowman Locks in Vermillion Parish. The Gulf Intercoastal Waterway is a critically important artery for both the oil and chemical industries. API worked with various government entities to ensure top priority for returning these locks to normal operations.
-- Marine Transportation Observations/Lessons Learned
In responding to the hurricanes, the industry has worked in close cooperation with the U.S. Coast Guard, the Department of Energy, and the Maritime Administration to address marine transportation concerns. It has built on strong relationships that already existed between the industry and government in this area.
-- Government-related Issues
• It was helpful to the industry’s efforts that the President directed Homeland Security Secretary Chertoff to waive the Jones Act to facilitate transportation of materials from the Gulf Coast in the aftermath of Hurricanes Katrina and Rita. The Jones Act requires that all vessels used to transport cargo and passengers between U.S. ports be owned by U.S. citizens, built in U.S, shipyards, and manned by U.S. citizen crews. The original Hurricane Katrina waiver was through September 19; following Hurricane Rita, the waiver was extended until October 24 for both crude oil and products.
• It was also helpful that the Coast Guard gave port captains permission to waive requirements related to Oil Spill Response Operator requirements in the Gulf. Shippers were faced with possibly being out of compliance with their Vessel Response Plans because of the widespread commitment of response equipment for hurricane clean-up operations.
INDUSTRY SECURITY/EMERGENCY RESPONSE
-- Impact of Hurricanes Katrina and Rita
Providing security in the aftermath of a hurricane is particularly important and difficult. In the aftermath of Katrina and Rita, the ranks of local law enforcement were significantly depleted as officers elected to look after their families, which in many instances meant leaving the area. There are, of course, a great number of other interests competing with the need to protect critical infrastructure. Nevertheless, refineries and other similar infrastructure are at an elevated risk during a hurricane emergency and require protection by local law enforcement, state police, National Guard, or other entities that can fill the void.
In the aftermath of a hurricane, companies’ priorities are to gain access to the facility to conduct an assessment of the damage, provide security and control access to the site, facilitate any immediate safety and/or environmental remediation, undertake cleanup, make repairs of critical operating elements, and initiate restart of the facility.
The first requirement is to conduct an assessment of the site. This necessitates access by personnel to the site. In some instances, public sector personnel attempt to restrict access based upon the need to maintain law and order. In the aftermath of Katrina and Rita, roadblocks and other impediments were established to ensure that only first responders were provided access. However, it did pose some challenges for companies attempting to transport necessary supplies via ground transport. Generally, these challenges involved coordinating with law enforcement officials to obtain permits authorizing access into affected areas.
One concern was that emergency electrical generators, gas, food, and other necessities that companies were attempting to deliver to their locations would be seized by local agencies. Companies made special arrangements for materials to be carried in convoys comprising several vehicles and escorted by local law enforcement
-- Industry Security/Emergency Response Lessons Learned
• Housing for rescue, response and facility and infrastructure repair personnel in the storm-affected areas can be a major bottleneck to beginning recovery operations.
• Development of a formal communications channel into governmental response organizations/departments would be helpful.
• Development of an established process to expedite access to those areas shut down after a major disaster to begin rebuilding of critical industries is needed.
Additional Industry Security/Emergency Response Observations
• Companies report that the U.S. Coast Guard did an outstanding job in every area and on every level in responding to Hurricanes Katrina and Rita. Considering its diverse and demanding portfolio, which includes search and rescue, safety and security of ports and waterways, vessel inspections and response plans, the Coast Guard continues to provide the necessary leadership for a comprehensive and effective response.
• Companies provided their own officers for their facilities’ protection in the affected areas and in support of their relief efforts; local law enforcement priority was public health and safety.
• Companies provided humanitarian response for their employees and contractors in the high impact areas due to lack of other support and response. Support was also provided to some police and other emergency responders from company distribution sites.
• ConocoPhillips provided fuel to National Guard and local government (including police) in storm-affected areas. The company is working with local hotels in storm-affected areas, providing generator power to allow them to open up prior to the power grid being restored. The hotels are being used to lodge response and repair crews.
• ConocoPhillips has been operating a toll-free phone number for employees since before Hurricane Rita. Employees are encouraged to call the toll-free number to update the company on their welfare and status. The company is offering financial assistance to employees displaced by Rita.
-- Government-related Issues
• In general, need more coordination and more timely issue of information about the situation on the ground.
• Companies need assurances that materials intended for production and delivery of gasoline, diesel, and other fuels necessary for operation of emergency generators and vehicles would not be diverted from their intended purpose.
• Difficulty was experienced in getting air restrictions lifted in a timely manner to fly over affected areas and operations to assess damage to our facilities, although government agencies were requesting information.
III. GASOLINE PRICES AND RELATED ISSUES
Impact of Hurricanes on Gasoline Prices
We know that the effects of Hurricanes Katrina and Rita on our industry are having a nationwide impact. We understand how Americans throughout the country have faced increased prices for gasoline and other fuels. However, we believe the market is working, as prices have moderated in recent weeks and are now well under the post-Katrina highs. What follows is background on two key components of the price of gasoline: crude oil price and taxes.
Crude Oil Price. Before Hurricanes Katrina and Rita struck, the price of gasoline was rising primarily because U.S. refiners are paying more for crude oil, the principal cost component of a gallon of gasoline. In fact, the Federal Trade Commission noted this exact point in a report this July: “To understand U.S. gasoline prices over the past three decades, including why gasoline prices rose so high and sharply in 2004 and 2005, we must begin with crude oil. The world price of crude oil is the most important factor in the price of gasoline. Over the last 20 years, changes in crude oil prices have explained 85 percent of the changes in the price of gasoline in the U.S.” The crude oil price is set in the international oil marketplace by the forces of supply and demand for oil worldwide.
Tax Component. While more than half the cost of gasoline is for crude oil, every time a motorist pulls up at the pump, he or she pays 46 cents in federal and state taxes per gallon of gasoline. The remainder is the cost to refine and market the gasoline. The average price of a gallon of regular gasoline reached $2.81 on September 27, according to AAA. When the price of a barrel of crude oil is $66, as it was at the end of September, a refiner paid about $1.57 per gallon for the crude oil in order to make a single gallon of gasoline. As noted above, taxes average 46 cents per gallon nationwide. The remaining 78 cents per gallon includes the cost of running refineries, transporting the finished gasoline to markets via pipelines and tank trucks, and operating retail outlets. The cost to refine, market and distribute gasoline has been trending downward for many years. The recent price spikes are a direct consequence of disruptions in crude oil and gasoline supplies. (Attached is a chart showing combined federal, state and local gasoline taxes for each state.)
Our industry has never experienced back-to-back events like Hurricanes Katrina and Rita and their brutal aftermath. The hurricanes hit an industry that was already stretched to its limit by an extraordinarily tight global supply and demand balance. As the U.S. Energy Information Administration (EIA) noted in its September Short-Term Energy Outlook, “Continued high crude oil prices were expected prior to Hurricane Katrina.” Even before Rita hit the industry, EIA anticipated crude oil prices to average between $67 and $69 per barrel during the fourth quarter, depending on the pace at which damaged facilities are restarted. The damage wrought by Katrina and Rita has clearly exacerbated the very market conditions that have led to today’s higher prices.
Oil and gasoline prices jumped immediately after Katrina due to the widespread damage to energy infrastructure, but have moderated slightly as the industry restores operations. Oil prices rose to nearly $70 per barrel, but have moderated somewhat to around $66 per barrel. Similarly, the average price for gasoline nationwide jumped 46 cents per gallon in the week after Katrina hit, rising from $2.65 to $3.11 per gallon. However, as companies restarted some affected refineries and pipelines and the damage from Rita appeared less severe than expected, gasoline prices moderated. As of September 27, nationwide gasoline prices averaged $2.81 per gallon. Over the past week the average price of gasoline has increased 12 cents per gallon to $2.97 per gallon.
Zero Tolerance for Price Gouging
In the aftermath of Hurricanes Katrina and Rita and their effects on gasoline prices, some accused the oil and natural gas industry of price gouging. Let me be clear and direct: the American Petroleum Institute and its member companies condemn price gouging. There is zero tolerance for those who break the law.
History provides an important guide here. Our industry has been repeatedly investigated over many decades by the Federal Trade Commission, other federal agencies, and state attorneys-general. None has ever found evidence that our companies have engaged in any anti-competitive behavior to drive up fuel prices.
The gasoline marketing system has the complexity and flexibility required to meet the varying needs of both companies and consumers. Companies have three basic types of outlet options and may employ any and all in their marketing strategies to maximize efficiencies and compete in the marketplace. First, they can own and operate the retail outlets themselves (company owned and operated outlets). The second option is to franchise the outlet to an independent dealer and directly supply it with gasoline. This option may have three different forms of property ownership: The operator can lease from the refiner, lease from a third party, or own the outlet outright. The third option is to utilize a “jobber,” who gains the right to franchise the brand in a particular area. Jobbers can choose to operate some of their outlets with their own employees and franchise other outlets to dealers. The mix of distribution methods varies widely across firms. Different refiners, depending on which type is perceived as most efficient, use different types of outlets.
Retailers are typically categorized as branded and unbranded sellers of fuel. Those who are retailers of unbranded gasoline generally pay lower wholesale prices for gasoline and they attract customers with generally lower retail prices. These retailers price gasoline at retail based on an unbranded “rack” price. They typically shop around in the marketplace, without any binding long-term contracts, in order to obtain the best price. Understanding up-front that there is a certain degree of supply and price risk associated with this method of petroleum retailing, gasoline purchased by an unbranded retailer and priced off an unbranded rack price thus entails no long-term relationship or security of supply between buyer and seller. Most importantly, unbranded purchases do not typically allow the purchaser the use of the supplier’s brand name.
In contrast, a branded retailer is obligated by a contract to buy branded gasoline and pay a “dealer tank wagon” (DTW) price, which is generally higher than the rack price. Branded product is typically priced somewhat higher because it offers the dealer greater security of supply and the right to use the supplier’s brand name. This makes sense when one considers the investment in the brand name and the importance to both the supplier and retailer of assuring reliable and uninterrupted supply to customers.
In periods of market tightness, however, when a supplier may not have enough product to supply all branded dealers plus the unaffiliated, unbranded buyers, the unbranded retailers, without supply contracts, may pay higher wholesale prices than name-brand retailers. This typically occurs when there is a supply disruption caused by a pipeline or refinery breakdown – such as was caused by the two recent hurricanes.
Gasoline Prices and the World Oil Market
As noted above, prices are rising because of the forces of supply and demand in the global crude oil market. Supply and demand is in a razor-thin balance in the global market. Small changes in this market have a big impact.
World oil demand reached unprecedented levels in 2004 and continues to grow. Strong economic growth, particularly in China and the United States, is fueling a surge in oil demand. The U.S. Energy Information Administration (EIA) reports that global oil demand in 2004 grew by 3.2 percent – the strongest growth since 1978 – and projects growth to increase by about 2.1 percent this year and next. By comparison, world demand between 1993 and 2003 grew at an average rate of 1.6 percent.
At the same time, world oil spare production capacity -- crude that can be brought online quickly during a supply emergency or during surges in demand -- is at its lowest level in 30 years. Current spare capacity is equal to about 1 percent of world demand. EIA projects spare capacity for 2005 at just over 1 million barrels a day. Thus, the world’s oil production has lagged, forcing suppliers to struggle to keep up with the strong growth in demand.
The delicate supply/demand balance in the global crude oil market makes this market extremely sensitive to political and economic uncertainty, unusual weather conditions, and other factors. Over the past several years, we have seen how the market has reacted to such diverse developments as dollar depreciation, cold winters, the post-war insurgency in Iraq, hurricanes in the Gulf of Mexico, the Venezuelan oil workers’ strike in 2002-2003, uncertainty in the Russian oil patch, ongoing ethnic and civil strife in Nigeria’s key oil producing region, and decisions by OPEC.
While consumer concern about high gasoline prices is very understandable, we must recognize that gasoline prices mirror crude oil prices. Crude oil costs make up more than 50 percent of the cost of gasoline. Retail gasoline prices and crude oil prices have historically tracked, rising and falling together. When supply is abundant and demand is low, we see the opposite of today’s situation: only six years ago, crude oil was selling at $10 per barrel – and gasoline was selling for less than $1.00 a gallon.
We currently import more than 60 percent of the crude oil and petroleum products we consume. American refiners pay the world price for crude and distributors pay the world price for imported petroleum products. U.S. oil companies don’t set crude oil prices. The world market does. Whether a barrel is produced in Texas or Saudi Arabia, it is sold on the world market, which is comprised of hundreds of thousands of buyers and sellers of crude oil from around the world.
There is considerable misunderstanding about the oil and natural gas industry’s earnings and how they compare with other industries. The oil and natural gas industry is among the world’s largest industries. Its revenues are large, but so are its costs of providing consumers with the energy they need. Included are the costs of finding and producing oil and natural gas and the costs of refining, distributing and marketing it.
The energy Americans consume today is brought to us by investments made years or even decades ago. Today’s oil and natural gas industry earnings are invested in new technology, new production, and environmental and product quality improvements to meet tomorrow’s energy needs. Oil & Gas Journal estimates that the industry’s total U.S. spending this year will be $85.7 billion, compared with $80.7 billion in 2004 and $75.5 billion in 2003. It also estimates that exploration and production spending in the U.S. will grow 6 percent this year and that total upstream oil and gas spending in the U.S. will reach nearly $66 billion.
The industry’s earnings are very much in line with other industries and often they are lower. This fact is not well understood, in part, because the reports typically focus on only half the story – the total earnings reported. Earnings reflect the size of an industry, but they’re not necessarily a good reflection of financial performance. Earnings per dollar of sales (measured as net income divided by sales) provide a more relevant and accurate measure of a company’s or an industry’s health, and also provide a useful way of comparing financial performance between industries, large and small.
For the second quarter of 2005, the oil and natural gas industry earned 7.7 cents for every dollar of sales compared to an average of 7.9 cents for all U.S. industry. Many industries earned better returns in the second quarter than the oil and natural gas industry. For example, banks realized earnings of 19.6 cents on the dollar. Pharmaceuticals reached 18.6 cents, software and services averaged 17 cents, consumer services earned 10.9 cents and insurance saw 10.7 cents for every dollar of sales. Last year, the oil and natural gas industry realized earnings of 7 percent compared to an average of 7.2 percent for all U.S. industry. Over the last five years, the oil and natural gas industry’s earnings averaged 5.7 cents compared to an average for all U.S. industry of 5.5 cents for every dollar of sales.
Some are calling for reinstatement of a windfall profits tax as a response to the nation’s energy challenges. However, our industry’s earnings are hardly a “windfall.” Strong earnings enable our industry to remain competitive globally, benefit millions of shareholders and enable the industry to invest in innovative technologies that improve our environment and increase energy production to provide for America’s future energy needs. Levying new taxes would likely end up harming consumers. As The Wall Street Journal editorialized recently, (“China Does Carternomics,” August 19), “A windfall profits tax only discourages increases in supply by disincentivizing further production.”
According to the Congressional Research Service (CRS), the windfall profits tax drained $79 billion in industry revenues during the 1980s that could have been used to invest in new oil and natural gas production. In fact, 1.6 billion fewer barrels of oil were produced domestically due to the windfall profits tax – barrels that instead had to be secured from foreign sources. CRS found that the tax reduced domestic oil production from between 3 and 6 percent, and increased oil imports from between 8 and 16 percent.
Gasoline Prices: What Can Be Done?
The solution to high gasoline prices is more supply of crude oil and gasoline and less demand, but there is no simple strategy to make that happen. The United States is at a critical turning point in shaping its future energy policy. The legislation signed by the President signals a first step in a much-needed effort to enhance energy security and ensure the reliable delivery of affordable energy to consumers. But much remains to be done.
The problems we face are very real: growing world demand for energy at a time when many oil-producing countries around the world are increasingly limiting or restricting our industry’s access to new resources; a lack of national commitment to develop our abundant domestic energy resources and critical infrastructure; and scant attention to energy efficiency. These factors have resulted in a tight supply/demand balance for U.S. consumers, causing recurring price spikes, greater market volatility, and overall strain on the nation’s energy production and delivery systems.
Energy demand continues to grow. The Energy Information Administration (EIA) forecast that by 2025, U.S. energy consumption will increase by 35 percent, with petroleum demand up by 39 percent and natural gas up by 34 percent. These demand increases occur despite expected energy efficiency improvements of 33 percent and renewable energy supply increases of 41 percent.
Additional EIA forecasts point out our basic problem: Domestic energy supplies are not keeping up with increased demand; and we are relying more and more heavily on imports to meet our energy needs. EIA projects that U.S. crude oil production will fall by 17 percent by 2025 (assuming no production from ANWR), while crude oil imports will increase by 67 percent, and net petroleum product imports increase by 90 percent. Given these trends, it comes as no surprise that EIA forecasts that our nation’s dependency on foreign sources of petroleum will rise from 59 percent today to 68 percent in 2025.
This increase, to the extent that it reflects import costs lower than domestic supply costs, would represent a gain from trade which should be encouraged. However, when we have resources that can be developed at prices competitive to imports, and we choose not to do so, we place a wasteful and unnecessary burden on our own consumers.
In fact, we do have an abundance of competitive domestic oil and gas resources in the U.S. According to the latest published estimates, there are more than 131 billion barrels of oil and more than 1000 TCF of natural gas remaining to be discovered in the U.S.
However, 78 percent of this oil and 62 percent of this gas are expected to be found beneath federal lands and coastal waters.
Federal restrictions on leasing put significant volumes of these resources off limits, while post-lease restrictions on operations effectively preclude development of both federal and non-federal resources. The most comprehensive study of the effects of such constraints was the 2003 National Petroleum Council study of natural gas, which included an analysis of federal constraints on U.S. gas supply in two key areas – the Outer Continental Shelf (OCS) and the Rockies. The study found that in key areas of greatest supply potential, federal policy precludes or seriously constrains development. For instance, of the 209 TCF of estimated undiscovered gas in the Rockies, 69 TCF is completely off limits, while another 56 TCF is seriously constrained by federal policy. On the OCS, the entire Atlantic, Pacific, and most of the Eastern Gulf of Mexico are off limits to development. Furthermore, the study found that sustaining these constraints over the next 20 years would cost U.S. consumers more than $300 billion in increased energy costs.
We are aware that opponents of oil and natural gas development still raise environmental concerns. However, we would point out that history provides overwhelming evidence that our industry can find and develop oil and natural gas resources safely and with full protection of the environment, both on land and offshore. For example, according to the U.S. Coast Guard, for the 1980-1999 period, 7.4 billion barrels of oil were produced in federal offshore waters, with less than 0.001 percent spilled. That’s a 99.999 percent record for clean operations – a statistic few others can likely match or best, and far less than the volumes of natural seeps that occur on ocean and gulf floors. The industry’s leak prevention performance in offshore production during Hurricanes Ivan, Katrina and Rita continues this remarkable environmental record.
Using advanced technology and sound operational practices, our industry has steadily reduced the environmental impact of oil and gas development, both onshore and offshore. The surface presence for exploration and development wells has shrunk significantly. For example, a drilling pad the size of Capitol Hill is all that is needed to access any oil reserves that might exist in the entire 68.2 square mile District of Columbia. Horizontal and directional drilling now enables our industry to drill multiple underground wells from a single pad, sometimes reaching sites as far away as 10 miles from the drilling pad.
Additionally, the U.S. oil and natural gas industry is among the most heavily regulated industries in our country. Every lease contains a standard stipulation to protect air, water, wildlife and historic and cultural resources, but leases may also include any number of additional stipulations to further protect resources.
The recently enacted energy legislation takes a positive step by requiring an inventory of OCS oil and natural gas resources. It will not, by itself, result in new energy supplies.
We need to build on the energy legislation by encouraging the flow of more natural gas and oil to the marketplace. And, while we must focus on producing more energy here at home, we do not have the luxury of ignoring the global energy situation. In the world of energy, the U.S. operates in a global marketplace. What others do in that market matters greatly.
For the U.S. to secure energy for our economy, government policies must create a level playing field for U.S. companies to ensure international supply competitiveness. With the net effect of current U.S. policy serving to decrease U.S. oil and gas production and to increase our reliance on imports, this international competitiveness point is vital. In fact, it is a matter of national security.
We can no longer wait 12 years, as we just did, to address our nation’s energy policy. The energy legislation is a foundation, but it must be built upon. More needs to be done and more quickly, particularly increasing access to offshore resources. We have the ingenuity, the technology, and environmental protections. If enactment of the energy legislation means we have a commitment to continued action, then it will truly be a turning point in reshaping U.S. energy policy.
We cannot understand or deal with high gasoline prices if we do not consider the state of refineries in the United States. During the 1980s-90s, the oil industry earned relatively poor rates of return on their investments. This was especially true in the refining sector, which was hard hit with the need for new investment in technology and equipment to produce cleaner burning fuels to meet clean air standards set by the Clean Air Act of 1990. The Act had a major impact on the operation of refineries in the U.S. and the return on investment realized at the time.
From 1994 to 2003, the industry spent $47.4 billion to bring refineries into compliance with environmental regulations. That included $15.9 billion in capital costs and $31.4 billion in operations and maintenance costs to comply with regulations covering air, water and waste rules. Moreover, by 2010, the U.S. refining industry will have invested upwards of $20 billion to comply with new clean fuel regulations. This is in addition to the cost of compliance with many dozens of other environmental, health, safety and security regulations. All this investment severely reduces the funds available for discretionary capacity expansion projects.
Technological advancements have helped refineries produce more from existing facilities than they did in the past. Refineries are doing a better job of bringing product to market for less – and the consumer has benefited. Even though a new refinery has not been built from scratch in 30 years, existing refineries are continually being upgraded and reworked to improve efficiency. Inefficient process units are replaced and new units are built to provide more fuel processing flexibility.
We can see this in the decline in the refiner/market margin (measured as the difference between the retail price of gasoline minus taxes and minus the refiner’s composite crude oil price). Back in 1980, the cost to refine and market and distribute gasoline averaged about 95 cents per gallon (in inflation-adjusted terms). By 1990, it averaged more than 61 cents per gallon, and, by 2000, it was 52 cents per gallon, which is about where it has averaged over the last five years. Multiplying these reductions by the 330 billion gallons of petroleum products consumed translates into billions of dollars of savings for consumers. We all benefit every day from these improvements and efficiency gains.
The Need to Remove Refinery Capacity Constraints
The record-high gasoline prices, while primarily caused by increased crude oil prices and exacerbated by Hurricanes Katrina and Rita, have underscored the fact that U.S. demand for petroleum products has been growing faster than – and even exceeds – domestic refining capacity. While refiners have increased the efficiency, utilization and capacity of existing refineries, these efforts have not enabled the U.S. refining industry to keep up with growing demand.
The fact is that -- faced with increasingly more challenging fuels regulations -- only major refineries have the resources needed to expand their capacity. Smaller refineries are increasingly unable to afford to expand. Moreover, local opposition and not in my backyard (NIMBY) attitudes persist and prevent new refineries from being constructed.
The U.S. refining industry has been expanding at a rate of approximately 1 percent over the past decade – the equivalent of a mid-size refinery. In order to create the opportunity for increasing the growth of U.S. refinery capacity, government policies are needed to create a climate conducive to investments to expand domestic refining capacity.
In addition, many of the steps the federal government could take to help the refinery capacity situation are covered in the December 2004 National Petroleum Council (NPC) study, Observations on Petroleum Product Supply – A Supplement to the NPC Reports “U.S. Petroleum Product Supply – Inventory Dynamics, 1998” and ‘U.S. Petroleum Refining – Assuring the Adequacy and Affordability of Cleaner Fuels, 2000.” For example, that NPC study suggested that the federal government should take steps to streamline the permitting process to ensure the timely review of federal, state and local permits to expand capacity at existing refineries.
New source review regulations could be reformed to clarify what triggers these reviews. Some refineries may be able to increase capacity with relatively minor adjustments, but are unsure if the entire facility’s permit review would be triggered – a burdensome and time-consuming process.
In addition to the myriad of other issues deterring new refining capacity investments, there are financial constraints as well. Attracting capital for new refinery capacity has been difficult with refining rates of return historically averaging well below the average for S&P Industrials. Over the 10-year 1994-2003 period, the return on investment for the refining and marketing sector was 6.2 percent or less than half as much as the 13.5 percent for S&P Industrials. In only one year between 1977 and 2003 did the average return of refiners exceed the average for the S&P Industrials.
It is important to remember that the oil and natural gas industry operates in a global marketplace. Many oil and gas companies are global companies, whose U.S. investment decisions compete not only with decisions as to how to allocate capital investments in the U.S. among various sectors of the industry, but also with competing demands and investment needs overseas. In a global marketplace, companies will make the best economic investment decisions in order to bring affordable petroleum products to consumers. Imports may be the more economical option than new U.S. refineries, but that is a decision to be left to the global marketplace. Government policies must encourage, not interfere with, the global marketplace.
The U.S. oil and natural gas industry recognizes the catastrophic impact that Hurricanes Katrina and Rita have had on millions of Americans and our industry is working with government and others in the private sector to do all we can to alleviate their suffering.
If we all do our part – industry providing supplies and repairs as expeditiously as possible, government facilitating needed approvals, and consumers adjusting their driving habits to consume less fuel – Americans can overcome this challenge as we have others in our nation’s history.
Mr. Christopher Helms
CHRISTOPHER A. HELMS
PRESIDENT, PIPELINE GROUP
ON BEHALF OF THE
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA
COMMITTEE ON ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
HURRICANES KATRINA AND RITA’S EFFECTS ON ENERGY
INFRASTRUCTURE AND THE STATUS OF RECOVERY EFFORTS IN THE
GULF COAST REGION
OCTOBER 6, 2005
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to testify on this important topic. My name is Chris
Helms, and I am President of the Nisource Inc. Pipeline Group. NiSource Inc. is a fully
integrated energy company engaged in natural gas transmission, storage and distribution,
as well as electric generation, transmission and distribution. Our operating companies
deliver energy to 3.7 million customers located within the high demand energy corridor
that runs from the Gulf Coast through the Midwest to New England. One of our
pipelines, the Columbia Gulf Transmission Pipeline, operates in the central Gulf of
Mexico and brings natural gas on-shore in central Louisiana.
I am here today on behalf of the Interstate Natural Gas Association of America (INGAA).
INGAA is a trade organization that represents virtually all of the interstate natural gas
transmission pipeline companies operating in the U.S., as well as comparable companies
in Canada and Mexico. Its members transport over 95 percent of the nation's natural gas
through a network of 180,000 miles of pipelines. Many of these pipeline systems operate
in the Gulf region – either off-shore or along the coastal area that includes Texas,
Louisiana, Mississippi and Alabama.
Before discussing the recent hurricanes and their effects on our industry, I first want to
make a few points about the structure of the natural gas industry. The natural gas
industry has never been as vertically integrated as the oil and electric power industries.
Put differently, it is the exception and not the rule for a single company to be
significantly involved in all segments of the industry. These segments can generally be
broken down into the following categories: production, gathering and processing (also
known as midstream services), interstate pipelines, marketing, and local distribution.
Some of these segments are subject to economic (i.e., rate) regulation at the federal or
state level, while others are not subject to any rate regulation.
INGAA represents the interstate pipeline segment, which is regulated economically by
the Federal Energy Regulatory Commission (FERC). As part of the natural gas industry
restructuring that occurred during the 1980s and early 1990s, the interstate pipeline
industry gave up its merchant role as the provider of bundled wholesale natural gas
services. Under the current industry structure, interstate pipelines transport and store
natural gas, but do not produce, purchase or sell the commodity itself. We are analogous
to a trucking company that provides both transportation and warehousing services for
goods, but does not take title to the goods themselves. The maximum rate an interstate
pipeline may charge for transportation and storage is set on a pipeline-by-pipeline basis
by the FERC, based upon the costs incurred by that pipeline to provide those services.
Despite the disaggregated structure of the natural gas industry, significant
interdependencies remain. This is especially true for off-shore production in the Gulf.
Generally speaking, the chain of delivery is as follows: Natural gas is first produced at
off-shore platform or wellhead facilities; it is then gathered and transported through
smaller diameter gathering pipelines for redelivery to FERC-regulated transmission
pipelines for transportation to onshore processing plants. There, the natural gas is
processed to remove hydrocarbon liquids, such as propane and ethane. Those liquids
must be transported, via dedicated pipeline, barge or truck, to markets for those products,
such as refineries and petrochemical facilities. Once the liquids are removed, the natural
gas is fit for consumption and is delivered into the interstate pipeline network where it is
transported to end-use customers. All of these systems must work together in order for
natural gas to flow onshore, and from there to the millions of customers downstream. If
any link in this delivery chain is disrupted, the remaining links in the chain will be
affected in some way.
I point this out to emphasize that Hurricanes Katrina and Rita have highlighted these
interdependencies. Links in the delivery chain have sustained major damage. In cases
where multiple links have been damaged, we cannot repair just a single link and expect
natural gas supplies to return to pre-hurricane levels. All of the links must be working in
order to achieve that result.
Mr. Chairman, I think it is safe to say that two major hurricanes striking back-to-back at
the heart of our nation’s energy system have caused an unprecedented disruption in our
Gulf-based natural gas infrastructure. As many of you know, the federal waters in the
Gulf of Mexico account for about 10 billion cubic feet (bcf) per day of natural gas
production, which is about 20 percent of total U.S. demand. As of early this week, about
72 percent of this daily production, about 7.5 bcf per day, remained “shut-in” due to the
storms. To place this number in some perspective, the United States typically consumes
on average 61 bcf per day nationwide. Given the tight supply/demand situation we were
already facing before the hurricanes, this loss of supply – even temporarily – is cause for
concern as we approach the winter heating season.
The media, and indeed most Americans, have focused on how the twin hurricanes have
affected the price and supply of gasoline. Gulf Coast oil production and refineries are a
critical part of the nation’s infrastructure for obtaining supplies of gasoline, jet fuel and
fuel oil. Nonetheless, the United States imports almost 60 percent of our petroleum
supplies from overseas. This means that a short-term increase in imports can mitigate
some portion of the impact of the hurricanes on petroleum supplies. However, when it
comes to natural gas, the United States still produces 85 percent of the total supplies
needed to meet domestic demand, while most of the remaining supply needed to meet
demand comes from Canada. Our ability to import natural gas from outside North
America is far more limited than with petroleum, given the limited number (5) of
operational liquefied natural gas (LNG) import terminals in the U.S. Therefore, even as
the country continues to be focused on gasoline prices, we believe the hurricanes will
have a greater and more protracted impact on natural gas prices and supplies.
I also want to challenge the notion that Hurricane Rita produced far less damage to
energy infrastructure than did Hurricane Katrina. While this might be true with respect to
the oil refinery complex in the Gulf region, it is not the case with natural gas. In fact, for
operations in the Western Gulf including my company’s pipeline, the Columbia Gulf
Transmission Pipeline, Rita had more impact than Katrina. For example, our offshore
system was able to redirect some natural gas produced in the central Gulf that was not
able to reach the shore due to damage from Katrina. This worked well for a few weeks,
but the impacts of Rita only compounded the difficulties associated with bringing more
gas production back on line. The “one-two punch” nature of these storms means that
repairs will take longer than normal, because the limited manpower and equipment
resources for assessing damage and making repairs are being stretched far beyond normal
capacity. Damage sustained during Rita that, for example, normally might take a week or
two to repair is taking much longer, due to the limited availability of crews, boats and
equipment that were already working on Katrina-related damage.
I want to assure the Committee that we are doing all we can. The dedication of our
employees, in the face of losing their homes and possessions and having their families
uprooted, has been phenomenal. Across the industry, people are showing up to work
long hours even as they have no place to go home to. Finding temporary housing within
the region so our employees can continue to repair critical energy facilities is crucial to
speeding the pace at which natural gas supplies in the Gulf can be brought back online.
Let me now turn to our outlook for the winter heating season. While assessments are
continuing, there can be no doubt that, compared to last winter, there will be less natural
gas delivered from the Gulf of Mexico region this winter. The damage is too widespread,
and the amount of repair work too great, for everything to be made right within a month
or two. The fundamentals of supply and demand in the North American natural gas
market already were tight before hurricanes Katrina and Rita. Consequently, any loss of
supply – even a relatively small one – can have a disproportionate impact on natural gas
prices over the winter. All of this puts an extra emphasis on natural gas storage levels.
While it is largely invisible to the public, the United States has a significant amount of
natural gas storage scattered throughout the country. These storage facilities, typically
located in depleted oil and gas fields, are usually filled during the warmer months of the
year when there is excess natural gas supply and pipeline capacity to move it. Storage
fills are generally completed by November 1, which is the beginning of the winter
heating season. During the coldest winter days which typically are the days of peak
natural gas demand, storage withdrawals can meet more than 50 percent of the daily
natural gas load.
Prior to the hurricanes, storage fills were proceeding at total volumes above the five year
average. The hurricanes have slowed storage fills somewhat, but volumes still remain
ahead of the five-year average.
Still, storage is a supplement to – not a replacement for – natural gas flowing through the
interstate pipeline network. Many of the pipelines serving the Midwest, Northeast and
Southeast draw their primary supplies from the Gulf region. If pipelines are not flowing
their full volumes of natural gas, and the winter is normal to colder-than-normal, greater
volumes of natural gas are likely to be withdrawn from storage earlier in the winter
season than is the norm. Should this occur, storage would be depleted more quickly and
there could be an even greater dependence on flowing pipeline gas to make up the
difference. This could create significant operational challenges for pipelines in late
winter, particularly if cold weather, limited supply availability, and low storage drive
customers to attempt to take more natural gas off a given pipeline than is available.
I should also mention the importance of returning damaged natural gas processing
facilities to service. As mentioned previously, natural gas processing plants remove the
heavier hydrocarbons entrained within produced natural gas. These “natural gas liquids”
include propane, ethane and butane. Once removed, there is a separate market for these
liquids, principally in the petrochemical industry. Just as with oil refineries in the Gulf
region, however, a number of natural gas processing plants were damaged by the
hurricanes. Several of these facilities may be out of operation during most, if not all, of
This presents another operational challenge for pipelines. A certain amount of
unprocessed natural gas can be accepted into the natural gas pipeline network. If the
quantity of heavier hydrocarbons in the gas stream becomes too high, these substances
can “drop out” of the natural gas stream as liquids and collect in pipelines and end-use
equipment. This is a particular concern during the winter heating season when the lower
ambient temperatures cause the temperature of the flowing gas to drop, increasing the
amount of heavy hydrocarbons that will convert to liquids. This phenomenon can cause
safety and operational problems as slugs of liquids work their way through sensitive
equipment. Therefore, as off-shore production facilities come back on line, it is also
important to bring corresponding processing capacity back on line as well; otherwise,
pipelines may be compelled to limit the volumes of unprocessed natural gas that can be
accepted during the winter heating season in order to preserve the operational integrity of
the transmission and distribution pipelines and in order to protect end-users.
How high will natural gas prices go this winter? While a number of factors will affect
the answer to this question, the most important factor is completely outside of our
control. It is the weather. The single most significant factor in determining natural gas
demand, and therefore prices, will be the weather. Peak winter demand is driven by
space heating needs. If it is a mild winter, there will be less demand for natural gas and
prices will almost certainly moderate, even with the effect of the hurricanes. Conversely,
if the winter is normal or colder-than-normal, then the supply disruptions caused by the
hurricanes will be reflected in higher natural gas prices.
Another factor affecting the ultimate price level will be the rate at which demand is
reduced in response to higher prices. Price allocates supply in a demand-constrained
market. At what price will a consumer choose to conserve and reduce use of natural gas?
The industrial sector is the most price sensitive consumer of natural gas; and at a certain
price level, it can be anticipated that industrial gas consumers will choose either to curtail
production or to switch to an alternative fuel rather than purchase natural gas. The
market clearing price for natural gas will be driven by how much a customer is willing to
pay for the last molecule of natural gas available. My colleague from Dow Chemical,
who is already facing some of these challenges, can explain this better than any of the
other witnesses at the table today.
For most residential and commercial consumers the price paid for natural gas this winter
will depend on the purchasing strategy employed by the local natural gas distribution
company (LDC) that serves their community. For example, to what degree has the LDC
hedged the price of its natural gas purchases using either long-term purchase contracts or
financial instruments? How much natural gas does the LDC have in storage, and at what
price was that gas purchased before it was placed into storage? The price paid by the
average consumer will be a blended price, taking into account these factors, and not just
the spot price for natural gas on a given day.
The ripple effects of higher natural gas prices will be felt across the economy. All of us
expect to pay more for natural gas this winter to heat homes and businesses. Electricity
prices also will be affected, particularly in regions where gas-fired power plants make up
a significant part of the generating fleet. And, as I mentioned, higher natural gas prices
will affect the cost of manufactured products.
What can be done? The short-term imperative is repairing the infrastructure as quickly as
possible. That means expediting permitting and approvals for repair work. It also means
the various levels of government should consider the value of granting individual
companies some forbearance from legal restrictions that might frustrate their ability to
coordinate assessment and repair activities. The twin hurricanes have resulted in
extraordinary damage, and extraordinary measures are needed to get systems repaired on
a timely basis
Also in the short-term, both the energy industry and the government must educate
consumers in advance so they are prepared for higher bills and have the ability to
implement strategies for conserving energy. This is important, because unlike the
gasoline price that is posted at the local gas station, the consumer sees the price of natural
gas after the fact when he or she receives a bill for the previous month’s consumption.
Many of you are already familiar with some of these measures, including weatherization
of homes, regular inspections of furnaces and changing of filters, installing
programmable thermostats and setting them a couple of degrees cooler. The funding of
the Low Income Heating Energy Assistance (LIHEAP) program is also critical in helping
needy families cope with rising heating costs.
In the long-term, Mr. Chairman, we agree that more needs to be done to diversify our
supplies of natural gas. Katrina and Rita have clearly demonstrated the high degree of
our reliance as a nation on the Gulf region to supply our energy needs. Other regions of
the country can and should be a part of our overall energy resource development. Yes,
many groups have complained about the environmental risks associated with expanding
offshore energy to include waters outside the western Gulf of Mexico. After three
significant hurricanes in two years, it is time to concede that apprehensions about the
environmental consequences of offshore energy development are greatly overstated. The
fact that we have not had significant environmental incidents after Ivan, Katrina and Rita
must stand for something! Our national energy policy should not be premised on
hypothetical problems or on assumptions based on incidents from 40 years ago.
In addition, the United States will need to build new liquefied natural gas import
terminals to keep pace with our demand for this fuel. Most of the new terminals that
have been approved by the FERC in recent years have been located in the Gulf of
Mexico. There are good reasons why the Gulf is attractive, such as access to an extensive
pipeline network, but it is also true that the Gulf has been the “path of least resistance” in
terms of NIMBY-type opposition. Perhaps the hurricanes, and the effects this winter on
natural gas prices and the larger economy, will finally convince other regions of the
country of the importance of having a geographically diverse mix of these facilities.
Finally, it is worth examining the factors that have precluded electric generators from
installing dual-fuel capability when building a gas-fired power plant. Over the last
decade, dual-fueled facilities – facilities that can operate on both natural gas and fuel oil –
have been discouraged by emissions limits and by the difficulty in siting oil storage
facilities on site. Also, the rules in some electric power markets provide such generators
no assurances that the additional capital cost of such facilities can be recovered in the
price received for electricity. These factors have compelled developers to build power
plants totally dependent on natural gas. Should natural gas supplies remain tight this
winter, these facilities will face the choice of either paying huge fuel charges, or not
running at all.
Before I conclude, I want to suggest some responses that should not be undertaken.
During times of crisis, it is easy to overreact in ways that are ultimately
counterproductive. The first suggestion I would like to leave you with is this: please do
not try to regulate commodity prices. This country actually did regulate natural gas
prices for many years, resulting in artificial supply shortages and a misallocation of
resources. Similarly, the government should not attempt to pick winners and losers in
allocating scarce supplies among end-users. Some debate has surrounded the notion of
limiting the use of natural gas for generation. Mr. Chairman, you and Senator Bingaman
were present when Congress debated the deregulation of wellhead natural gas prices and
the Fuel Use Act, so you remember the problems that existed at the time. While it can be
painful in the short run, the market really does the best job of efficiently allocating scare
resources and sending the right price signals that will solve supply problems.
Mr. Chairman and Member of the Committee, I thank you once again for the opportunity
to testify, and I will be happy to answer your questions.
Mr. Kevin Curtis
Testimony of Kevin S. Curtis
Senior Vice President for Programs
National Environmental Trust
Senate Energy and Natural Resources Committee
October 6, 2005
Thank you very much for the opportunity to testify in front of this committee. I first worked with this committee in the mid-1970’s when I was a very young political appointee at the newly created Department of Energy representing the Carter administration to Congress during the debate over the Synfuels Corporation, Windfall Profits Tax Act, Energy Mobilization Board and the various other titles of that decade’s comprehensive energy package. Every decade since then, I have observed and/or participated in the renewed efforts at setting national energy policy by the administration and Congress. I have drawn as much from that experience as from my current position with the National Environmental Trust for this testimony.
The National Environmental Trust is a non-profit, non-partisan organization established in 1994 to inform citizens about environmental problems and how they affect our health and quality of life. NET's public education campaigns use modern communication techniques and the latest scientific studies to translate complex environmental issues for citizens. Furthermore, NET works in states across the country to localize the impacts of national problems, as well as to highlight opportunities for Americans to engage in the policymaking process. Energy policy has been an important area of focus for NET since its inception because of its far reaching implications for the environment.
Katrina is certainly among the worst environmental catastrophes to befall our country and its citizens. The human toll is tremendous and the physical damage is only now starting to be truly catalogued and understood. In other words, it is much too early to make definitive statements about the ultimate scope of this disaster. That said, part of my charge for this testimony was to address the environmental impacts of the storm, which I have tried to do below with an eye towards our nation’s energy infrastructure and policies.
I would also like to make three energy policy points in my testimony today. First, a focused commitment to energy efficiency and conservation is the most effective and least utilized option available to this country to deal with the short and long term energy issues facing us. Second, waivers of existing law, including environmental statutes, are not a trivial exercise. The cacophony of waivers being proposed for post-Katrina energy infrastructure building and rebuilding efforts are neither necessary nor justified. Third, don’t jump on the “Energy Bill II” mentality that seems to be driving much of the current debate in the House of Representatives.
Brief summary of the Environmental Impact of the Hurricanes
As noted above, Katrina ranks as one of the nation’s largest environmental catastrophes due to natural disasters. I have listed below a few statistics and anecdotes designed to help convey the scale of its impact:
• At least seven million gallons of oil were spilled from known, identifiable sources. Estimates add another one to three million gallons from disparate sources. By way of comparison, the Exxon Valdez spill released 11 million gallons.
• Early estimates of the amount of debris to be disposed of range up to 100 million cubic yards. Such an amount would be enough to cover 1,000 football fields 50-feet deep in waste.
• Up to 350,000 automobiles are estimated to have been ruined due to the flooding.
In the flood’s aftermath, the primary threats to public health are posed by exposure to pollutants and toxic materials in the air, soil, water as well as the general muck being cleaned up. These pollutants come from a wide variety of sources, including energy production, refining and infrastructure facilities.
Another potentially major source of pollution seems to be the sediments from the bottom of various lakes, canals, and other waterways that were stirred up and distributed by the flood waters. A considerable amount of pollutants appears to have been stored in these sediments.
A future potential source of pollutants and toxics is likely to arise from the ultimate disposal of the debris from the storm. Early estimates of this waste are simply mind-boggling. Whether it is burned or buried, there are major environmental and public health implications and concerns that must be factored into the upcoming disposal decisions.
Given this tremendous amount of uncertainty, it strikes me that the most prudent course of action by the government is to spend a considerable amount of time and resources sampling and monitoring the environment in New Orleans and the rest of the impacted Gulf region. Furthermore, there is clearly a need for this monitoring to be done in as transparent and inclusive a manner as possible, so that all the citizens of the region can feel comfortable with the conclusions. The EPA and CDC have considerable experience through the Superfund and other programs in involving impacted citizens and communities in the monitoring of their immediate environment for toxic and chemical pollutants. Such a monitoring effort must also take into account the environmental justice concerns due to the demographics of those left most vulnerable by the region’s prior chemical and petroleum industry development.
Environmental or ecological issues
In addition to the storm’s well publicized impact on wetlands and the general consensus that rebuilding and restoring the wetlands is an important part of preparing for the future, the impact on the region’s fisheries is also starting to emerge. Just this week, NOAA’s Fisheries Service declared a fishery failure for Texas and Louisiana following Hurricane Rita, with a similar declaration made in the wake of Hurricane Katrina extending from Pensacola, Florida to the Texas/Louisiana border. This disaster declaration authorizes assistance to assess the impacts and assist fishermen, but we have yet to determine the extent of the storms’ impacts on the marine ecology of the Gulf.
There are high levels of bacteria present in the water, and testing continues to determine the extent to which oil and other toxics may be impacting Gulf fisheries. Because some pollutants accumulate in sediments or are persistent and tend to build up over time, it may be months before we are aware of the full impact on the marine species in the region.
Only extensive long-term monitoring will ensure that we have the most accurate assessments, and it is critical that Congress considers the cost of monitoring and assessment programs on NOAA’s budget, particularly in light of the budget cuts proposed for NOAA in the House version of the fiscal 2006 appropriations bill.
The Promise and Potential of Energy Efficiency and Conservation
I will not attempt to recreate in my testimony all the information, arguments and policy proposals in support of energy efficiency and conservation that have been provided to this committee during the past five years of congressional debate on energy. (Instead, please find attached a reasonably thorough review of recent recommendations by a variety of groups focused on energy efficiency and the environment.) Rather, I would like to underscore the rather remarkable political situation we find ourselves in today, where the entire range of stakeholders in energy policy seems to be in agreement about the need for conservation and an increased focus on energy efficiency. Just this week, the nation’s leading newspapers printed full page advertisements from the American Petroleum Institute, Chevron Oil Company and other major players in the oil and gas industry extolling the virtues of conservation. On Tuesday, a headline in the Washington Post business section announced, “White House Renews Call for Conservation.” Senators Domenici, Bingaman and others on this committee have all issued public statements over the past month noting the importance of energy efficiency and conservation. This is the moment in time to actually turn the promise of energy efficiency and conservation into reality.
Beginning today, you can accomplish this by using the authority of this committee to educate the rest of Congress, the press and the public about the immediate gains available from increased efficiency and conservation. For the longer term, you can pursue and build the legislative record and political support necessary to establish additional incentives for the adoption of energy efficiency and conservation policies. As you well know, the most fundamental challenge facing efficiency and conservation is that the powerful array of energy suppliers tend to view energy efficiency as a revenue loser even though our nation’s consumers and businesses would benefit from it. And while I certainly appreciate and applaud the fact that oil companies and their trade association are preaching conservation, I would not expect their shareholders to encourage them to stay with that position for an extended period of time. After all, they are in the business of producing and selling oil and natural gas.
A very concrete way in which this committee can help promote energy efficiency is to hold the US Department of Energy accountable for it’s track record on energy efficiency. Recent PR efforts notwithstanding, the department’s track record is rather poor in this area. Examples include: 1) the department has so lagged in implementing the appliance efficiency standards that it’s being sued, 2) just last week, the DOE supported rolling back energy efficiency standards for new building construction and 3) the department was stopped from rolling back efficiency standards for air conditioners only by court order. I would be much more optimistic about its recent commitment to energy efficiency if its leadership were to announce a large scale public education campaign at the funding levels authorized by the energy bill and it planned to hire the additional staff necessary to finalize the pending appliance efficiency rules.
It is one thing for the administration to opposed regulations for energy efficiency on philosophical grounds. Yet its record on energy efficiency technology R&D is also disappointing. EOS’s FY 2006 budget request for spending is significantly lower than the amount authorized by the new energy bill. In order to take advantage of the unique political opportunity facing them, congress and the administration must pursue an aggressive agenda to expand the pipeline for new energy technologies that represent the real and long-term solutions to our energy problems.
Finally, I would be remiss if I did not mention the need for increased efficiency from our automobile and truck fleets. Transportation accounts for approximately 70% of our nation’s oil use, and it is a national embarrassment that we have not significantly adjusted CAFE standards for close to 20 years. Not only will adopting significantly higher fuel efficiency standards help consumers at the gasoline pump, but it will contribute to our national security by reducing our reliance on imported oil. Moreover, there is ample evidence to suggest that adopting these technologies is also key to the survival of the U.S. auto industry. I have attached a recent NET-sponsored study documenting the potential employment gains available to the domestic industry by producing more fuel efficient vehicles. Now is the time for Congress to exert leadership on this issue.
Concerns about H.R. 3893 bill and the larger issue of environmental waivers
The House of Representatives is scheduled to consider this coming Friday, a bill, H.R. 3983, that passed out of the Energy and Commerce Committee last week. This bill, and its companion from the House Resources Committee, represent a blatant attempt by the chairmen of those committees to exploit the genuine public concerns about high gasoline prices following Hurricanes Katrina and Rita to pursue legislative goals that were rejected just months ago in the House-Senate energy conference committee process. Fortunately, the Resources Committee bill has already run into political difficulties in the House, as 25 of the 27 members of the Florida delegation objected to the offshore drilling provisions contained in the legislation. Unfortunately, HR 3893 appears to be moving ahead. While I have attached a detailed critique of the legislation by the environmental community for your review, I would like to touch upon a few of the more objectionable aspects of this legislation in hopes of convincing the Senate to avoid its pitfalls.
Key criticisms of H.R. 3983
1. Backers of the bill often suggest that environmental regulations are to blame for our current shortfall in refining capacity. This premise is flawed. The U.S. is facing limits on its refining capacity largely because over the past few decades the refining industry has been a mature, low profit-margin business. Consequently, it was significantly more profitable to consolidate operations and increase the output at existing refineries than to build new refineries. The attached fact sheet documents the industry’s success at increasing production while at the same time reducing the number of refineries. It is clearly time for industry to build new refineries, and there is no doubt that oil companies have the financial resources to build new, state-of-the art facilities while complying with all applicable laws.
2. The environmental waivers contained in the bill are too broad and pose a significant public health risk. For example, the delays contained in Section 109 (Attainment Dates for Downwind Ozone Nonattainment Areas) will result in the following additional public health problems, according to Abt Associates, EPA’s leading air pollution consulting firm. For each year of delay, the nation will experience an additional:
• 387,000 or more asthma attacks
• Almost 4,900 hospitalizations due to respiratory distress
• 573,000 missed school days
3. The legislation would also essentially eliminate the New Source Review program for up to 20,000 facilities (Sec. 106); undermine the diesel rule that was successfully negotiated between the Bush administration, diesel engine manufacturers and the environmental community several years ago (Sec. 108); and arbitrarily limit the number of cleaner burning, boutique fuels to six (Sec. 108).
Congress should not rush into a “National Energy Policy II”
Less than three months ago the President signed the National Energy Policy Act of 2005 into law. This legislation took over five years to pass and contains a wide range of provisions designed to promote the oil, gas, coal and nuclear power industries. It also contains a major new initiative for biofuels, but provides far less support for renewables and energy conservation. According to a recent report I read, the legislation contains over 500 congressionally mandated deadlines for everything ranging from studies to regulations. Nothing in these 500 directives or the legislation as a whole, however, would meaningfully increase in fuel efficiency standards for cars and trucks, establish a renewable portfolio standard or address global warming. I raise this not to cover old ground but rather to point out a new opportunity. The ink is not even dry on the latest national energy plan and nothing I have seen indicates that the political dynamic has changed for the very important but politically difficult issues that did not make it into the national energy plan, with one key exception – energy efficiency and conservation.
Energy efficiency and conservation are now “in.” It would be a major contribution by this committee to our nation’s future if you were to focus your prestige and political strength on ensuring that this attention is not fleeting and that meaningful commitments to energy efficiency are actually adopted.
Policy recommendations in support of energy efficiency and conservation
• American Council for an Energy-Efficient Economy (separate document “ACEEE Katrina White Paper)
Collected in “Enviro Katrina Energy Conservation”
• Alliance to Save Energy
• Natural Resources Defense Council
• Union of Concerned Scientists
• Sierra Club
Criticisms of H.R. 3893
• NET Fact sheet on HR 3893 (separate document)
Collected in “Local Organization Opposition to HR 3893”
• STAPPA-ALAPCO letter
• National Conference of State Legislatures Letter
• National Association of Counties Press Release
• National League of Cities Press Release
• National Conference of State Legislatures, US Conference of Mayors, National Association of Counties, National League of Cities, International City/County Management Association, and the Council of State Governments Letter
Editorial Board Opinion on Energy
• Editorials Supporting Conservation and Fuel Efficiency
• Editorials Opposing Reckless Energy Policy
Mr. Curtis Hebert
CURT HÉBERT, JR.
EXECUTIVE VICE PRESIDENT
COMMITTEE OF ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
OCTOBER 6, 2005
Good morning. I am Curt Hébert, Jr., Executive Vice President of Entergy Corporation, and I appreciate the opportunity to appear this morning on behalf of Entergy, its CEO Wayne Leonard, and the thousands of Entergy employees who have been working tirelessly since late August to respond to the destruction wrought by hurricanes Katrina and Rita. I've never been more proud to represent Entergy than I am today. As I sit before you, thousands of dedicated Entergy employees are basically working non-stop to restore service to the more than 1.8 million of our customers whose lives have been disrupted, many permanently, by Katrina and Rita. Entergy's employees have been joined by thousands of other, equally committed personnel from our sister utilities throughout the region and the nation. We have come together on a scale unprecedented in American history -- as a company and as an industry -- to meet this challenge.
The purpose of my testimony is three-fold. First, I summarize the devastating effect of these catastrophic storms on our infrastructure. Second, I summarize our efforts to date in restoring service and the unique challenges being faced by the City of New Orleans. Finally, I discuss what federal financial assistance is needed so that our restoration efforts can be completed successfully.
The Effects of the Storms
The two hurricanes and the flooding that resulted when the levees in southeastern Louisiana failed were more devastating than any natural disaster previously experienced in this country. The effects on the energy industry and upon the utilities in the area, whose customers are severely burdened by the loss of their jobs, homes, and property, have been unusually severe. This emotional and financial stress will have a damaging and long lasting effect upon the economy of the Gulf South region, including particularly the City of New Orleans.
These unprecedented events require an immediate federal response so that utilities such as Entergy can promptly and efficiently address the massive damage and destruction that has occurred. This assistance must take the form of federal legislation that provides immediate financial aid to the electric and gas utilities affected by Katrina and Rita in order to ensure that storm restoration and recovery occur timely and without imposing additional financial burdens on the citizens of these areas.
By any measure, Hurricane Katrina is the most costly and one of the most deadly hurricanes to strike the United States in recorded history. Hurricane Andrew, the previous benchmark, carved a much narrower path of destruction across south Florida in 1992. During Andrew, one of the hardest hit areas was Homestead, Florida. Of 26,000 homes in Homestead, 7,500 were destroyed completely. By comparison (and without minimizing the impact on the good people of Homestead), all 26,000 homes in St. Bernard Parish, Louisiana have been lost, along with the destruction of much of the housing stock of the City of New Orleans and large segments of the Mississippi Gulf Coast. In the area of southeast Louisiana that Entergy serves, nearly 170,000 homes or businesses were damaged so badly that those structures will not be able to accept electric service for an extended period of time. This will severely restrict the long-term recovery and economic prosperity of the region.
The effect of these hurricanes on the energy industry is a matter of national importance that can be measured by economic barometers. In contrast, the effect of the storms on the citizens of the Gulf Coast region will be measured by their suffering and the loss of their families, their belongings, their homes, their businesses, and their jobs. Helping the people of this region rebuild must be our main focus at this time, and I am here today to request your support of our efforts.
Katrina devastated the electric utility infrastructure across much of the Gulf Coast region. Katrina was so large that it affected about 90,000 square miles – an area equal to the size of Great Britain. At the height of the service outages due to Katrina, Entergy lost:
• 1.1 million customers in Louisiana and Mississippi (previous Entergy customer outage record was 290,000)
• Virtually all generation in southeast Louisiana was lost or had to be isolated from the grid to protect the ability of the equipment to return to service;
• Approximately 3,000 miles of transmission lines;
• 30,000 miles of distribution lines;
• 263 substations;
• 1,560 feeder lines were damaged; and
• 14,500 poles were damaged or broken.
One distinguishing characteristic of Katrina was the flooding of mammoth proportion. Although hurricanes frequently result in high winds and heavy rain, Katrina left many areas of southeast Louisiana flooded with several feet of water for several weeks when the levee system failed. Although other areas of the United States are susceptible to flooding, in the case of Katrina, the impacted area in southeast Louisiana became an extension of the gulf for nearly a month, a condition that has not occurred elsewhere in the U.S. during modern times.
On the heels of the destruction and flooding of Katrina, a strong category four storm, Hurricane Rita, a strong category three storm, inflicted significant additional damage to the Gulf Coast region, a critically important natural gas producing region. At the height of the service outages due to Rita,
• An additional 766,400 customers experienced power outages in Texas and Louisiana:
• Another 3,400 MW of generation was damaged or had to be taken out of service to protect vital equipment;
• Over 3,800 miles of transmission lines were lost;
• 344 substations were damaged; and
• 11,500 utility poles were damaged or broken.
In responding to both storms, utility restoration efforts were swift, well-planned and of a scope that is unprecedented – just as two severe hurricanes hitting roughly the same area of the Gulf Coast region within weeks of one another is unprecedented – just as the pervasive submersion of large segments of southeast Louisiana for weeks at a time is unprecedented. In response, Entergy mobilized more than 13,000 utility lineman and other workers and hundreds of millions of dollars have and will be spent to get the lights back on as safely and quickly as possible.
While responding to the storms, Entergy remained in daily contact with the Department of Energy, providing daily reports and briefings. As a result of these communications, situation reports were posted by the U.S. Department of Energy, Office of Electricity Delivery & Energy Reliability under Energy Emergencies: Hurricane on its website at: www.electricity.doe.gov/program/electric_oat.cfm?section=divisions&level2=home.
While much work remains to be done, restoration efforts have been quite successful outside of the flood zone. Many of the customers who have lost service as a result of Katrina and who are capable of receiving service have been restored, and more than 75 percent of the customers who lost service as a result of Rita have been reenergized. However, it is slow and difficult going in New Orleans and the other hardest hit areas of the Gulf Coast, such as Beaumont and Port Arthur, Texas, and Lake Charles, Louisiana.
Entergy has spent considerable resources to restore service to ten refineries that it serves in the Beaumont/Port Arthur, Lake Charles and New Orleans area. Many of these refineries suffered significant damage to their facilities and the transmission lines and substations that serve these facilities fared no better. However, as of early this week, transmission paths were established to seven of these facilities and at least one substation was energized at each of these refineries, enabling them to take clean up/restoration power. Entergy is in constant contact with each of these customers and stands ready to provide power to meet site specific start-up schedules. These refineries have an aggregate refining capacity of 2.27 million barrels of crude per day and therefore are very important nationally as well as regionally.
Rita also caused interruption at two DOE Strategic Petroleum Reserve sites that we successfully restored several days ago. Similarly, Entergy quickly restored service following Katrina to critical shipping ports, including the Port of New Orleans. In fact, the City’s Command Center in the Hyatt Hotel and the Port of New Orleans were among the first facilities to receive power following that storm’s landfall.
As a final example, Katrina halted activity at a fuel depot in Collins, Mississippi, which is outside of the Entergy service territory. Because of its critical importance to the energy industry in the region, Entergy provided immediate assistance to restore electricity to this facility. Attached is a summary of those events which highlight the exceptional service of the men and women on the frontlines of the restoration battle.
Entergy’s emergency response and operational restoration efforts in the devastated region have been vital to the recovery effort. It has given confidence and hope to citizens throughout the region that we can rebuild. It is clear to me from seeing firsthand the commitment of the hearts, minds and souls of these men and women directly involved in the restoration, that our employees will do anything to help our customers and our neighbors. The cost of these efforts has been staggering. Entergy estimates that storm related and business continuity costs from Katrina at between $750 million and $1.1 billion. Estimates of restoration costs for repair or replacement of Entergy’s electric system damaged by Rita are in the range of $400 to $550 million.
The Unique Challenges Faced by New Orleans
Katrina not only presented the problems attendant to a hurricane; its rain and wind, combined with the failure of the levee system in southeast Louisiana, damaged as many as 170,000 homes and businesses in the area so severely that they cannot be re-energized until some combination of demolition, reconstruction, and inspection occurs – a process which may take many months. The utility subsidiary that serves New Orleans, Entergy New Orleans ("ENO"), has been especially hard hit:
• From an infrastructure perspective, ENO’s electric and gas system sustained massive damage.
• From a customer perspective, due to the unprecedented flooding, many tens of thousands of homes and businesses in the City have been underwater for weeks. These structures cannot simply be repaired after being submerged for so long. As a result, the City has lost a large segment of its housing stock, and ENO has lost the vast majority of its customer base.
• From a financial perspective, current estimates of the cost to restore ENO’s system for gas and electric service range from $325 million to $475 million – an amount that exceeds the total amount invested to provide those utility services in New Orleans on the day before Katrina came ashore.
Clearly, the confluence of events following Katrina caused an immediate and severe deterioration in ENO’s financial condition in the days following Katrina. ENO’s revenues, the continuity of which is vital to pay timely fuel, purchased power, and restoration costs, disappeared overnight. And because of ENO’s relatively small size, it quickly hit short-term borrowing limits pursuant to SEC orders, and its debt was downgraded by rating agencies to below investment grade.
Also, ENO was unable to access capital markets to raise new debt, because simple steps, like due diligence could not be completed timely, ENO is unable to provide revenue projections assure a revenue source sufficient to demonstrate its ability to service new debt given the uncertainty surrounding the timing and size of the return of its customer base.
Faced with a severe and immediate need for cash to continue its restoration efforts, ENO filed and obtained Chapter 11 bankruptcy protection on September 23, 2005. This filing allowed Entergy Corporation, ENO’s parent, to provide up to $100 million in short-term, debtor-in-possession financing so that ENO can make currently due payments while continuing to restore service as areas of New Orleans rebuild and recover.
But this is only a temporary stop-gap measure. It will take many times this amount to reconstitute ENO in a manner that is able to provide reliable service to its customers. To understand this, consider the following comparative data:
Table 1. Entergy New Orleans Comparative Data – All Amounts Approximate
Pre Katrina Post Katrina % Change
Electric Customers 190,000(1) 60,000 - 75,000(2) (68)% - (60)%
Annual Non-Fuel Electric Revenues $316M(1) $90-120M(2) (72)% - (62)%
Average Annual Storm Restoration Cost $2M(3) $325-475M +16,000% - +24,000%
Average Annual Storm Restoration Cost per Customer $11(3) $4,300- $7,900(4) +39,000% - +72,000%
(1)based on 2004 actuals
(2)estimated based on 115,000-130,000 customers unable to take service for extended period of time per September 30, 2005 press release [A process that could take many months or years]
(3)cost estimated based on last 5 years; average per customer based on 2004 customer count
(4)cost estimated based on Katrina restoration; average per customer based on post Katrina customer count
As a regulated utility that has devoted its property to public use, Entergy operates under a cost-of-service regime. As such, ENO is not entitled to unregulated profits, but it is entitled under well-established law to the opportunity to recover from its customers all of its costs, including its storm restoration costs. This traditional cost recovery approach has been used in response to past hurricanes and ice storms and has raised customer bills. But the magnitude of those cost increases was manageable. That would not be the case for the level of destruction caused by Katrina and Rita.
These storms, coming as they did one after the other, and accompanied by massive, long-term flooding, require a different approach. Even under the best of circumstances, it is difficult to see how these customers, many of whom live in some of this nation's poorest neighborhoods, could bear the loss of their belongings, homes, and jobs, and also bear the cost of the restoration of the utility system. This problem is particularly acute given the extent of the devastation to hundreds of thousands of homes and businesses throughout the Gulf Coast region. In addition to bearing that cost, the cost of restoration will also be unprecedented.
Entergy estimates that electric rates in New Orleans would have to more than double to keep ENO operating during the period 2006 to 2008. This is due to a combination of the extraordinarily high restoration costs in absolute terms (+16,000% - +24,000% higher than average for that company over the last five years) and the fact that the customer base among which restoration costs would be spread is significantly lower. On a per customer basis, the cost of Katrina would be $4,300 to $7,900, a level that is unaffordable given the below-national-average income of citizens in New Orleans’ citizens before the storms. Clearly, the federal government must provide alternative means of funding the restoration and the cost of rebuilding one of the exceptional areas in the United States, the City of New Orleans and the Gulf Coast region.
Some may ask, “Why should the federal government take a role different from the one it has taken for years through its well-established programs for natural disaster and emergency management?” The answer, I believe, is four-fold:
1. Unprecedented levels of damage and destruction caused by Hurricanes Katrina and Rita;
2. Unprecedented flooding for an unprecedented period of time resulted from levee failures in and around the New Orleans area;
3. Unprecedented displacement of a large number of people for an indeterminate period of time. This includes a very significant portion of the population of the City of New Orleans and virtually the entire population of St. Bernard Parish.
4. The extraordinary level of poverty among large segments of the population of the region – citizens who would be required to pay the cost of restoration through regulated utility rates if federal assistance is not provided to protect them from this unaffordable burden.
In short, the potential rate effects of the enormous restoration costs and the loss of customer base will stifle any form of economic development – much less full recovery -- if the federal government does not intervene. In such a scenario, the rates for power services – electricity and gas – will be so abnormally high that no industry will locate here or bring new jobs that are the engine of economic recovery and growth.
We cannot let that happen. The City of New Orleans and the Mississippi Gulf Coast have too much economic, social, and cultural importance to the nation. We urge you at the federal level to do everything that can be done to reduce the burden on customers who already have lost so much, and to restore safe and reliable utility service.
The Need for Federal Assistance
We must put in place immediate, direct federal assistance for utilities serving the Gulf Coast region, particularly ENO, which, unlike municipal utilities or cooperatives, are not eligible under the Stafford Act for emergency financial assistance to pay for restoration and rebuilding costs under existing federal law. There are several ways in which the Congress can help those who were hardest hit by Katrina and Rita.
For example, enactment of the Privately Owned Utility System Restoration Act of 2005 (modeled after the post-9/11 Relief Act provided for the Airline industry ) would provide financial compensation to electric and gas utilities to recover the direct costs resulting from Hurricanes Katrina and Rita for plant, equipment and restoration costs, as well as providing financial compensation through 2007 to cover the incremental losses for those companies which have significant and sustained loss of customers. A provision providing compensation for direct and incremental costs is included in the Landrieu/Vitter “Pelican Bill” (S.1765 & S.1766), which was introduced in the Senate on September 22, 2005 and referred to the Senate Committee on Finance.
We would also urge the Congress to consider other federal legislative efforts to provide financial relief to help utilities such as Entergy and Entergy New Orleans rebuild the Gulf Coast region.
Another approach to providing financial assistance is through the Department of Housing and Urban Development under the Community Development Block Grant (CDBG) program. Community Development Block Grants appear to be a viable approach to providing direct federal assistance to utilities. Congress used CDBG funds to provide direct assistance to Consolidated Edison (and other utilities) following the September 11, 2001 terrorist attacks.
These grants, if funded and dispersed on a timely basis, can significantly mitigate costs that would otherwise be passed through to utility customers. Entergy strongly recommends that the CDBG program be modified to fit the extraordinary circumstances resulting from Katrina and Rita. For instance, Entergy is recommending to Congress that the CDBG program and funds by tailoring language to directly target electric and gas utility companies so that there is no "battle" among other service providers (phone, cable, etc) for such grants. Funding for these other entities should be done separately so as to not impede financial assistance to electric and gas companies. Restoring electric and gas service is simply too important to the City, region and the national economy.
Additionally, Congress must streamline the CDBG fund distribution process. Entergy recommends that Congress itself must set specific statutory timetables and periods during which the CDBG funds must be distributed.
Finally, Congress must recognize the special and unique circumstances of New Orleans generally, and ENO specifically. As noted earlier, New Orleans is home to some of the poorest citizens in the country. This has always presented special challenges for ENO. That challenge has become exponentially more difficult as a result of the significant and perhaps sustained loss of ENO’s customer base as a result of hurricane Katrina and Rita, and the associated flooding. Simply put, increasing electric rates to cover storm and on-going costs would place far too great a burden on those customers remaining or returning to the City, and is therefore not a viable alternative.
Thus, in order to recognize these unprecedented conditions, Entergy recommends that Congress implement a means of direct federal assistance, perhaps through CDBG funds, that can be used for those electric and gas companies that have and will continue to suffer as result of this dramatic and potentially sustained loss of customers.
To ensure that only those utility companies in such dire straights are eligible for such relief, Congress must also establish specific eligibility requirements for such federal compensation. One approach would be to limit this relief to a company that has seen its customer level return to no more than 80% of its pre-Katrina/Rita levels.
A third alternative for providing federal relief is through a waiver of the Stafford Act. The Federal government has intervened with immediate financial assistance to utilities on the north shore of Lake Pontchartrain (electric cooperatives) that were impacted by hurricane Katrina, but has not and cannot do so for the privately-owned utilities on the south shore of the lake without Congressional intervention. Who can seriously claim that customers of utilities on the north shore deserve aid and protection against crippling rate effects, but those on the south shore – many of whom have been commanded not to return to their homes for the last month due to flooding – do not? In this time of need, such disparate treatment cannot be justified.
This disparate treatment stems from the fact that privately-owned utilities are not eligible to receive financial assistance from the Federal Emergency Management Agency due to a statutory prohibition on such funding in the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A waiver of this provision was included in the “Pelican Bill” (S.1765 & S.1766), and the need and basis for such a waiver of the Stafford Act is clear in my view. This type of waiver would provide direct assistance for infrastructure restoration of a critical national interest and for immediate and permanent relief of these customers who are beset with massive losses due to these storms. The rates, terms and conditions of service to customers are heavily regulated by state and local regulatory authorities (i.e. the Mississippi Public Service Commission, the Louisiana Public Service Commission and the Council of the City of New Orleans). One of the key features of utility regulation is that the utility and its shareholders are entitled to charge only the rates set by the government, in exchange for which they are given the opportunity to recover all of their costs of doing business – including their cost of capital. Without assurance that investors will obtain a return on their investments, the investors will not provide the funds necessary to finance the restoration.
Without direct federal assistance, the customers remaining on the utilities’ systems will face enormous rate increases. This would cripple any hope of economic recovery for the region and discourage people from returning as utility rates in those areas would be unacceptably high. Such rates would initiate a regulatory “death spiral,” from which there is no means of recovery. For the City of New Orleans, this is a potential doomsday scenario. Even if there were a foreseeable and significant customer base for ENO, something that no reasonable person could confidently predict will occur even in three to ten years, the rate increases to the remaining and returning customers would be unsustainable. Without federal intervention, these costs will cripple the City’s and the region’s economy for decades and render the local utility unable to restore this vital infrastructure. We strongly urge that Congress pass such a waiver immediately. President Bush committed the country to rebuild the City of New Orleans in his September 15th speech from historic Jackson Square. The ultimate economic and social recovery of the City will be difficult and made even harder if there is not a commercially viable local electric and gas utility. Yet without direct federal aid, a company such as ENO that has sustained such a significant erosion of its customer base cannot maintain safe and reliable on-going operations and provide the necessary foundation for the City's economic restoration and growth.
You have seen the pictures of the devastation, but this isn’t about pictures or devastation; it is about the recovery, about the future and about hope. The City of New Orleans can only have a future if it can obtain the federal financial assistance necessary to rebuild its infrastructure. Obviously, that infrastructure includes that of the electric and gas utility that serves the City and its citizens.
We ask for your assistance so that we can continue to help one of this country's great Cities get back on its feet.
Collins, MS Fuel Depot Event Summary
Hurricane Katrina knocked power out to millions of customers in MS and LA. The outages impacted all classes of customers especially energy sector facilities such as refineries, pipelines and fuel depots. This led to a gasoline crisis in the midst of restoration efforts. One such facility was a fuel depot located in Collins, MS in the Mississippi Power Company (MPCo) service area. A portion of that facility is served from the west by South Mississippi Electric Power Association (SMEPA), but an overwhelming majority of the facility is served by MPCo from the South. SMEPA was able to reenergize its portion a day after the storm, but this only supplied power to a few of the facilities in this large complex.
Mississippi Power Company’s distribution facilities were brought up in quick time, but transmission facilities that served this facility from the South were badly damaged. MPCo, recognizing the importance of this facility, considered providing power from a different route from the east and immediately began work to provide this interim fix.
Four days after the storm on Friday, September 2nd, Entergy’s Transmission group received a call from Southern Company’s transmission group requesting assistance. The damage to MPCo’s transmission facilities were much worse than originally thought and it became apparent that it would take too much time to rebuild their transmission facilities to serve the fuel depot in Collins. While surveying the area by helicopter the Southern Transmission group assessed a 230 kV transmission interconnection segment south of the Mississippi border in Louisiana just north of Bogalusa, LA that belonged to Entergy Louisiana. Southern believed it would be quicker to repair this damaged transmission tie and feed power into the Collins Fuel Depot by tying into the Southern/MPCo transmission system that ran from the MS/LA border through Hattiesburg, MS North to Collins.
In addition, EMI had received calls from MEMA, FEMA and DoE asking if there was anyway they could help with restoring power to the fuel depot in Collins. They identified this as a high priority in helping to resolve the fuel crisis that was mounting in the area.
Entergy had previously assessed this transmission tie and given it a low priority to repair since it was only an interconnection tie and was not used to directly serve any Entergy customers. After receiving the call Entergy recognized the importance the Collins fuel depot meant to the growing fuel crisis and immediately began diverting resources working on restoration in Mississippi to this very isolated transmission tie located in Louisiana marshlands.
While the damage to these transmission facilities were less than those experienced by MPCo, they were still significant. The transmission line in question ran some 20 miles north of Bogalusa, LA to the MS border. The assessment identified a dozen broken arms, three spans of transmission lines downed and three transmission structures along a 4 mile stretch of marshlands. Furthermore, the location of the downed structures were in an in accessible area and after discussion with surrounding landowners, Entergy soon realized that a two mile road would have to be cut through dense forest to the damaged structures. Workers also soon learned that the structures were so badly damaged it would take weeks to reconstruct the towers so engineers began looking for alternatives. The plan they came up with, airlift three transmission structures from existing transmission facilities on dry ground into the marshlands.
Work got underway on Saturday, September 3rd, first priority cutting the two mile long road through dense forest. The next challenges involved locating existing transmission structures and a helicopter capable of lifting 7,000 lbs. A sky crane was located in Oregon, but it would be a week before it was available. A call was placed to the Mississippi National Guard who gladly provided a Chinook, capable of lifting 10,000 lbs, to assist with the restoration.
After working through numerous resource and environmental challenges, this team of 120 Entergy personnel and contractors completed restoration by Saturday, September 10. An event that should have taken weeks to complete was completed in days. Through the use of ingenuity and creativity these individuals helped resolve a fuel supply crisis that was hampering restoration efforts in Mississippi.
Mississippi Section of
Adams Creek – Hattiesburg
Mr. Andrew Liveris
October 6, 2005
Dow Chemical Company
American Chemistry Council
STATEMENT FOR THE RECORD
SENATE ENERGY AND NATURAL RESOURCES COMMITTEE
Hurricanes Katrina and Rita’s effects on energy infrastructure and the status of recovery efforts in the Gulf Coast region.
SECTION I Introduction and Executive Summary
“After Katrina we got a call from a bottled water company in the South
scrambling to get some HDPE(high density polyethylene plastic). His regular supplier curtailed him. He needed the plastic to make bottles so he could supply bottled water to FEMA. Our Louisiana plants were still restarting, gas supply was curtailed and we were closing our TX plants in anticipation of Rita. We couldn't help him.”
Chemical Company Executive Located in Hurricane Zone
The Dow Chemical Company and the American Chemistry Council welcome the opportunity to provide the Committee with an update on Hurricanes Katrina and Rita’s effects on energy infrastructure and the status of recovery efforts in the Gulf Coast region.
This topic is of acute interest to the US chemical industry because the Gulf Coast is home to the world’s largest concentration of chemical manufacturing capacity. The Gulf is to chemical manufacturing as Wall Street is to finance.
The chemical industry has been operating in the Gulf for more than seven decades. Our engineers and operators are experts in hurricane preparedness. Plants are designed and built to withstand Category Five storms. All members of the American Chemistry Council (ACC), under our trademark health, safety, environment and security program, Responsible Care®, have long-established hurricane plans that operate before, during and after storms. Facilities cooperate with local, state and national authorities, other businesses and transportation systems, along the path of the storms and through recovery. Companies will evaluate and enhance those plans to incorporate learnings from Katrina and Rita as part of their ongoing performance improvement process.
Typically, these emergency plans include the safe shutdown and lockdown of facilities, removal of vehicles and other equipment, evacuation and accounting of employees, and placement of emergency “ride-out” crews on-site, when feasible. We then carefully assess post-storm conditions to allow facilities to resume operations safely.
Having said that, our industry has also been severely damaged by the hurricanes. Not by the high winds and not by the storm surges and floodwaters, but by the high cost and limited availability of natural gas.
Natural gas is of vital importance to our industry. It heats and powers our facilities, but it is also our most important raw material. We process natural gas molecules into thousands of products that can be found everywhere in the economy.
Today, most chemical plants in the Gulf Coast are closed or are operating at reduced rates. For some, it is because they are without power. For others, they have been cut off from their gas supply or they are choosing not to pay today’s prices. Soon the loss of chemical manufacturing in the Gulf will ripple through the economy in the form of shortages and higher prices.
The industry faces hard choices on how and where it will base its operations in the future. On September 30, 2005 the wholesale spot price of natural gas was $14.50 per MMBtu. In Europe natural gas costs about $7.00. In China, it’s less than $5.00. In Saudi Arabia, it’s less than $1.00. US manufacturers must compete in global markets. Companies must decide where to locate production, where to locate jobs, where to pay taxes and support communities. When US production costs two to twenty times more than it does in the rest of the world, it is hard to justify investing in America.
Public policy makers will exert enormous influence on how those decisions are made. It is well documented how certain policies bid up demand for natural gas to make electricity in the US and other policies restrict access to supply. What is not as well known is that the manufacturing sector pays the price for those policy decisions. In the recent past, policy decisions costs the US chemical industry dearly. Policy induced price gyrations between 2000 and 2005 handed overseas chemical operations a huge competitive advantage: The US chemical industry went from posting the largest trade surpluses in the nation’s history in the late 1990’s to becoming a net importer. In that time, the industry lost more than $50 billion in business to overseas operations and more than 100,000 good-paying jobs in our industry have disappeared. The National Association of Manufacturers reports that 2.9 million American manufacturing jobs disappeared in that time.
Policy makers are again in a position to influence the US manufacturing environment. The short-term outlook for natural gas consumers is grim. Until very recently, government officials had severely underestimated the combined impact of the two hurricanes (especially Rita) on the nation’s energy infrastructure. As of this writing, nearly 100 percent of the Gulf of Mexico oil production and 80 percent of natural gas output remain shut in. More than 20 natural gas processing plants on shore are closed, some are damaged, some have no power. Pipelines are not fully operational. Eight refineries remained closed and eight are restarting. Power remains out in the Beaumont-Port Arthur-Lake Charles area.
ACC is doubtful that the Gulf’s energy infrastructure will be fully restored before the winter heating season starts. There is no surplus natural gas production capacity available to fill the void. There is not a “Strategic Natural Gas Reserve” available to make up for supply disruptions. Natural Gas will be in short supply this winter.
Natural Gas consumers will be competing for a scarce commodity. Policy makers can cushion the blow, if swift action is taken to stretch the supply and curb consumption. We recommend the following:
1. Send a powerful message to the markets by eliminating barriers to energy production in the Outer Continental Shelf (OCS) and share revenues on new production with states.
2. Expedite leasing in the area of the eastern Gulf of Mexico known as Lease Sale 181, at least for areas greater than 100 miles from the coast of Florida.
3. Declare a national emergency before winter, shock national awareness of supply problem and mobilize federal resources
4. Give priority to dispatching highly efficient CHP and Natural Gas Combined Cycle generating capacity to the grid.
5. Restore service to damaged natural gas processing plants on the Louisiana coast.
More detailed policy recommendations are contained in Section V
If the right responses are put in place right away, tensions in the market can be eased and gas consumers can weather the current crisis. If prices remain at or near current levels, manufacturers will be driven out of the market and many may not return.
SECTION II The US Chemical Industry at a Glance
The chemical industry fuels the American economy.
• The chemical industry is the leading American export industry accounting for 10% of all U.S. exports.
• We generate more than half a trillion dollars to the U.S. economy each year.
• The chemical industry has created a $154 billion trade surplus over the past ten years.
• The industry directly employs more than 885,000 people, a figure larger than the combined populations of Boston and Buffalo.
• Chemistry dependent industries account for nearly 37 million jobs or 26.6% of the entire workforce.
The chemical industry improves our health and keeps our families safe.
• New drugs and medicines made possible by chemistry have increased life expectancy in the US by more than 30-years over the past century.
• A plastic bicycle helmet, one of the chemistry industry’s most popular innovations, can reduce a child’s risk of head injury by 85% according to Safe Kids USA.
• 98% of all U.S. public drinking water is safe to use because of chemistry.
• According to the National Highway Traffic Safety Administration, more than 14,000 lives have been saved thanks to airbags, a product of chemistry.
Chemistry is essential to U.S. business and industry.
• The chemical industry supplies the raw materials used by virtually every industry from aircraft construction to zoo management.
• More than 80% of the materials used to formulate all medicine come from the chemistry industry.
• The chemical industry is America’s second largest rail shipper.
• The major innovations over the past century that have increased productivity from the phone, computer and Blackberry exist because of chemistry.
Chemistry is at the heart of innovation, helping to make our lives better, healthier and safer.
• The chemical industry invests more than $22 billion a year in research and development – the most of any single industry outside of national defense.
• One out of every eight new patents is awarded to the chemistry industry.
• The American chemical industry employs the highest percentage of knowledge workers of any industry and employs more than 80,000 chemists, scientists and engineers.
SECTION III Hurricane Katrina & Rita: Ripple Effects from Shortages
Potential Product Shortages Following Hurricanes Katrina and Rita
Some of the most commonly used consumer and industrial products may be in short supply in coming months due to North American chemical capacity shut-ins following the hurricanes in the Gulf of Mexico. Following are some examples of products for which there may be shortages.
• Tires, radiator and other hoses, fan belts, and bumpers; seals and gaskets; automotive belts and hoses, asphalt binder and roofing. (62 percent of North American butadiene capacity, used to make these products, is down)
• Oil, milk, detergent bottles; gasoline tanks; corrugated and drainage pipe. (55 percent of North American high density polyethylene capacity, used to make these products, is down.)
• Syringes, medical fabrics, automotive battery cases, dairy containers, diaper coverstock, and food packaging. (55 percent of North American polypropylene capacity used to make these products, is down).
• Diaper liners, shrink film and bread bags. (46 percent of North American low density polyethylene capacity, used to make these products, is down).
• Plastic resins, films and bottles; automobile antifreeze blends, including those for military vehicles, and for de-icing runways and aircraft; fire extinguishers and sprinkler systems. (39 percent of North American ethylene glycol capacity, used to make these products, is down)
Source: CMAI, petrochemicals consultant (www.cmaiglobal.com)
SECTION IV Background: The importance of affordable energy to the US Chemical Industry, How the natural gas crisis developed, and what the Energy Policy Act of 2005 accomplishes
America’s chemical industry is the nation’s largest energy consumer. We use energy – especially natural gas – to heat and power our facilities, and as a raw material to make thousands of products consumers use every day. Chemical companies use more natural gas than California and more electricity than the state of New York. The chemical industry consumes enough natural gas to heat 30 million homes a year – almost half of the nation’s home heating needs
Natural gas can do amazing things. It can be used to heat and cool a home, to make electricity and as a key ingredient in products – lots and lots of products. These include medicines, medical equipment, packaged goods, military applications and others. Numerous “downstream” industries rely on natural gas-produced chemistry products, including agriculture, steel, aluminum, and cement.
Advances in Energy Efficiency
Fortunately, the chemical industry has made great strides in energy efficiency. For example, we can make a pound of product with half as much energy as it took a generation ago. But even with these efficiency improvements, an immense amount of energy is still required for chemical manufacturing. Chemical makers need more energy than the entire country of Mexico, and roughly the same amount as Brazil.
Many chemistry products that are made with natural gas help make other parts of the economy more energy efficient. Energy-saving products such as insulation, lightweight vehicle parts, advanced window systems and reflective coatings are all made from chemicals made from natural gas.
Supply/Demand Imbalance Leads to Skyrocketing Natural Gas Costs
The problem is, America is using more and more natural gas and producing less and less. As a result, the price of natural gas has increased by 700 percent since the late 1990’s. If the same thing happened to gasoline, prices at the pump would be more than $7.00 a gallon.
For industries like ours, those high prices hurt. In 1999, the chemical industry paid about $25 billion for all of its energy inputs – fuel, power and feedstocks such as natural gas. Last year, the tab topped $52 billion. Beginning in 2000, the industry has shelled out $80 billion more for energy than it was paying in the 1990’s.
The effect of those additional costs – think of it as a huge energy tax – has been severe. We’ve seen a 20 percent decline in natural gas consumption in the chemical industry. Call it demand destruction. Dozens of plants around the country have closed their doors and gone away – and are never coming back.
US chemical industry domestic operations lost $50 billion in business to overseas operations since 2000. We went from posting trade surpluses in excess of $20 billion – the most successful export industry in the history of this nation – to becoming a net importer of chemicals. More than 100,000 American jobs have been displaced, in large part due to the hidden “energy tax.”
Not long ago, Business Week noted that of the 120 large-scale chemical plants under construction around the globe, only one is being built in the United States. The plants under construction are located in places where natural gas supply is abundant, reliable and affordable.
Unlike oil, natural gas is a regional commodity, not a global one. And US natural gas prices are the highest in the world – at the moment, US gas prices are 20 times higher than in Saudi Arabia.
Impact of Government Policies on Natural Gas Supply, Price
In the 1990’s, new government regulations began driving electric utilities to reduce air emissions by burning natural gas to make power. An enormous amount of gas-fired power generation capacity came on line in the past decade. Utility consumption of natural gas grew by 31 percent in a few short years.
The nation’s appetite for electricity is rapidly growing and is expected to increase by as much as 50 percent in the next 20 years. Natural gas supply cannot meet incremental demand. The government says that new supplies of domestically produced natural gas will only meet 30 percent of future demand growth. Quite simply, there’s not enough gas to go around. To meet this challenge, the U.S. must meet its growing energy needs by investing in new technologies that produce power from renewables (for example wind and solar), non-polluting nuclear, agricultural sources of energy (sometimes called biomass) and low-polluting coal power.
Energy Policy Act of 2005
In August of 2005, the president signed into law a sweeping new energy bill called the Energy Policy Act of 2005. On balance, it is a very good policy and, over the long haul, it can change the way the nation makes and uses power. The legislation breaks new ground in the area of energy efficiency: We will see new standards of performance for appliances, homes and buildings as a result of the legislation’s efficiency measures.
It also makes a serious effort to diversify the energy supply – to move away from the natural gas-is-the-answer-to-everything mentality that dominates current policy. The legislation will launch a new generation of technologies used to make power, including coal gasification, renewable energy and nuclear power.
The nation’s energy infrastructure will get a much-needed facelift. The legislation will lead to new investment in gas pipelines and storage facilities and will result in new LNG terminals.
SECTION V: Unfinished Business. New policies needed in the post- Hurricane period
Expand natural gas supplies and reduce concentration of nation’s energy infrastructure in three ways:
• eliminate barriers to energy production in OCS and share revenues on new production with states. MMS estimates that OCS contains 406 TCF of recoverable natural gas. More than 85 percent of OCS is off-limits to use as a result of federal policies set in place 25 years ago when NG was cheap and plentiful;
• increase gas production on shore by removing red tape and seasonal restrictions;
• accelerate and increase tax credits and guarantees for investing in gasification technologies for the production of fuels and feedstocks;
• expedite leasing in the area of the eastern Gulf of Mexico known as Lease Sale 181, at least for areas greater than 100 miles from the coast of Florida.
• Site new LNG terminals, especially on Atlantic and Pacific coasts. Set a goal of four new terminals (not all on Gulf Coast) by 2010.
Restore lost gas and oil production. The government should use its authority to speed emergency reconstruction of damaged pipelines (Emergency Reconstruction of Interstate Pipeline ruling of 2003) and implement other red-tape cutting measures to restore damaged drilling rigs and production platforms. The government should also employ the Coast Guard, Army Corps of Engineer and other federal assets as needed to speed repairs of damaged production sites and infrastructure. Priority should be given to restoring service to damaged natural gas processing plants on the Louisiana coast. In addition to removing sulfur and other impurities, these plants also remove natural gas liquids, such as ethane and propane, primary chemical feedstocks. Three of those damaged plants process the equivalent of three LNG terminals. Help is needed to transport and house repair crews, pump out the plants, restore power, repair damages and resume operations.
Encourage Efficient Consumption. To avert shortages this winter and in future years, actions are needed now to ease the strain on natural gas markets. In the short term emphasis should be placed on reducing gas demand through conservation and efficiency measures. These immediate actions are needed:
• Declare a national emergency before winter, shock national awareness of supply problem and mobilize federal resources, including…
• Fund in 05 the national public education campaign authorized in Title I of EPACT05. Doing so will harness the American people’s strong desire to “do something” to help recovery efforts. Little actions can achieve big results. If all Americans turned down their thermostats by 2 degree this winter, it would free up 3 BCF of gas per day.
• Move up to Oct. 1, 2005 effective date for tax credits authorized in EPACT05 for homeowners, builders and commercial building owners for investment in energy efficiency.
• Require up-to-date building codes in states using federal funds to recover from the hurricanes and encourage all states to use most current codes.
• Accelerate completion of tardy appliance codes and development of new codes authorized in the energy bill.
• Expand and spotlight The Partnership for Home Energy Efficiency (DOE,HUD,EPA).
• Expand funding for weatherization programs and dispatch crews to go into homes, audit energy consumption, and install weatherization materials and equipment as needed.
Encourage Efficient Generation: In many parts of the country inefficient natural gas power generators supply baseload power and highly efficient generation is reserved for peak demand. To make power generation more efficient, the following actions are needed:
• Build new and efficient transmission capacity in order to remove system constraints.
• Retire or put in reserve inefficient single-cycle generation capacity
• Give priority to dispatching CHP and Natural Gas Combined Cycle capacity … restore CHP tax incentives.
Diversify Fuel Supplies. The large build up of natural gas fired power generation in recent years is putting an unsustainable strain on natural gas supplies. Gas consumption for power generation increased by 25 percent this summer, driving prices up from $6.00 to nearly $10.00 per million BTU. Utilities should be encouraged to make power from other fuel sources, by:
• Accelerating coal and biomass gasification. The US has the world’s largest reserves of coal and (potentially) biomass. Gasification technology is ready for deployment and the government should help speed up commercial use by utilities.
• Site new nuclear power. Nuclear answers environmental and energy questions. The government should consider building new reactors on federal lands.
Distribute energy supply and power generation. The Hurricanes proved that the entire nation can be affected by regional disruptions and the energy infrastructure is highly reliant on the integrity of the electrical grid. To reduce economic and national security vulnerabilities government should:
• Create incentives for refineries, pipelines and large energy using industrial, institutional and commercial facilities to produce heat and power on site
• Encourage all states to implement “efficient portfolio standards” defined to include renewables, CHP, gasification and other low-polluting means.
Increase Natural Gas storage capacity to make the natural gas system more resilient. The Strategic Petroleum Reserve did its job and restored calm to jittery oil markets. Natural gas does not have adequate reserve capacity and that contributes to price volatility. Additional storage capacity would help the market adjust to temporary supply shortages.
Hurricane Katrina & Rita: Ripple Effects from Shortages
(Source: CMAI and ACC)
Acrylonitrile –, 55% of North American acrylonitrile capacity is down. It is used to manufacture ABS resins for automotive trim, irrigation, and office equipment, telecommunications and appliance housings and to manufacture SAN resins used in medical housings and industrial batteries, among other applications.
Butadiene - 62% of North American butadiene capacity is down. It is the primary olefin used to make a variety of synthetic elastomers including: styrene-butadiene used in tires, radiator and other hoses, fan belts, and bumpers; polybutadiene used in seals and gaskets, belts, and tires; and polychloroprene used in automotive belts and hoses, asphalt binder, and roofing.
Chlorine – 16% of North American chlorine capacity is down.
It is used directly in water treatment, paper manufacturing, and in the production of certain lightweight metals (titanium and magnesium) used in aircraft. Indirectly, it is used to make a variety of important building-block chemicals, such as trichloroethylene, phosgene, chlorinated hydrocarbons, neoprene, polyvinyl chloride (PVC), hydrogen chloride, and ethylene dichloride. In turn, these are used to ultimately produce thousands of industrial and consumer products. Some indirect applications include the production of pharmaceuticals, wool, flame retardant materials, and special batteries (lithium and zinc). Chlorine is also used in the processing of fish, meat, vegetables, and fruit. The largest end uses of chlorine include the making of ethylene dichloride, vinyl chloride monomer, and PVC resins (used to make a variety of products such as medical bags and tubing, adhesives, protective clothing, pipes, siding for homes, and raincoats).
Caustic soda is co-produced with chlorine and a similar share is down. Caustic soda is used in glass making and variety of products. It’s used in epichlorohydrin used in glycerin for food products as well as epoxy resins for coatings, aircraft composites, dry toner resin, electronic encapsulants, automotive leaf springs, printed circuit boards, etc. Caustic soda is used to manufacture carbomethylcellulose for oil drilling muds, food processing, and pharmaceuticals. Caustic soda is used to manufacture sodium citrate used as a food conditioning agent in cheese and meat as well as in detergents. Caustic soda is used to manufacture polycarbonate used for eyeglass lenses, helmets, computers, and CDs.
Cyclohexane – 80% of North American cyclohexane capacity is down. It is used to manufacture nylon resins used in electrical and automotive components, wire jackets, non-textile monofilament, and tool housing as well as nylon fibers used in parachutes and other textile applications.
Ethylene Glycol - 39% of North American ethylene glycol capacity is down. Most ethylene glycol produced is use to make polyethylene terephthalate (PET), which is used to make plastic resins, films, and bottles. The other major end use is as a coolant in automobile antifreeze blends, including for military vehicles. It is used in de-icing runways and aircraft. It is also used in fire extinguishers and in sprinkler systems. Army boot soles are derived from ethylene glycol.
Ethylene Oxide – 43% of North American ethylene oxide capacity is down. The largest share is used to make ethylene glycol (which is used to make polyester fibers/resins and antifreeze). The next largest application is in the making of surfactants and detergents. This chemical is also used to make other chemicals, such as ethanolamines (used for gas conditioning and soap production) and glycol ethers (used to make paint, brake fluids, aircraft fuel additives). Ethylene oxide is also used as a petroleum demulsifier, as a fumigant, in the making of rocket propellant, and as a sterilizing agent for industrial applications.
HDPE – 55% of North American HDPE (high density polyethylene) capacity is down. Important products made from HDPE include oil, milk, and detergent bottles, as well as conduit, gasoline tanks, and corrugated and drainage pipe.
LDPE – 46% of North American LDPE (low density polyethylene) capacity is down. Important products made from LDPE include diaper liners, shrink film, and bread bags.
LLDPE – 73% of North American LDPE (linear low density polyethylene) capacity is down. Important products made from LLDPE include chemical tanks, trash bags, pallet wrap, produce bags, food storage bags, and landfill liners.
Methyl Methacrylate - 69% of North American methyl methacrylate capacity is down. This is used to manufacture acrylic paints as well as acrylic resins used in disposable and reusable medical devices, especially in the area of drug delivery components and diagnostics. Other resin applications include automotive tail lights, instrument cluster lenses, optical disks, glazing, and safety signs.
Phenol - 38% of North American phenol capacity is down. It is used to manufacture bisphenol-A which is used to manufacture polycarbonbate resins (eyeglass lenses, safety helmets, etc.) and caprolactum used to manufacture nylon resins (fan blades, brake reservoirs, etc.) Phenol is also used to manufacture phenolic resins used in structural panels for reconstruction.
Polybutadiene - 84% of North American polybutadiene capacity is down. It is used in seals and gaskets, conveyor belts, and the tread for automotive tires.
Polypropylene – 55% of North American polypropylene capacity is down. Important products made from polypropylene include syringes, medical fabrics, automotive battery cases, dairy containers, diaper coverstock, and food packaging.
PVC – 21% of North American PVC capacity is down. PVC resins are used in pipe, conduit, siding and other construction products needed for re-building after Katrina and Rita. Vinyl resins are also used in IV and other medical tubing and bags.
Styrene - 85% of North American styrene capacity is down. Styrene is used to manufacture polystyrene, ABS & other styrenic resins, SB latex used in carpeting, unsaturated polyester, and SBR elastomers. The latter is the key elastomer for tires, radiator hoses, and fan belts
Styrene-Butadiene Rubber (SBR) - 55% of North American SBR capacity is down. It is the key elastomer for tires (it provides abrasion resistance), radiator hoses, and fan belts
“’Chemical companies have been under assault for several years’, said Robert Koort, an analyst at Goldman Sachs who has an attractive rating on the chemical sector.”
“As Natural Gas Prices Rise, So Do the Costs of Things Made With Chemicals,” The New York Times, September 28, 2005
“The chemical industry also has been slugged with rising fossil fuel prices, in the form of natural gas. Now its customers must deal with potential shortages.”
“Spikes and Shortages Go Far Beyond Gas,” The Washington Post, September 2, 2005
“While there is concern about high gasoline prices, a more serious impact may be felt this winter with regards to natural gas, with sky-high winter utility bills looming. On an ominous note, natural gas prices on the New York Mercantile Exchange closed Thursday at the highest level since 1990.”
“Rita Adds to Gulf Gas Woes as Shut-ins Mount in Wake of Storm,” Natural Gas Week, Sept. 26, 2005
“Natural gas prices set a record yesterday, pointing to sharply higher heating bills for a majority of Americans this winter and soaring costs for makers of plastics and chemicals, which use natural gas as their main fuel and raw material.”
“Heat Costs Expected to Surge: Natural Gas Price Continues Climb,” The New York Times, Sept. 30, 2005
“Natural gas not only fuels chemical plants, but it is used to extract chemical ingredients…Natural gas prices, which were already high, soared after Katrina. They have more than doubled in the last year. The complications from Rita are expected to boost prices on a whole range of products from milk containers to computers to pharmaceuticals.”
The Nightly Business Report, PBS, Sept. 23, 2005
“American industry consumes a third of the country’s natural gas, while residential use is less than a quarter. As a result of the current supply crunch, prices for all sorts of goods are likely to rise, some products may be in short supply and the flow of U.S. jobs to overseas plants may increase.”
“The Other Gas Crisis: Katrina’s Blow to Natural Gas Will Pinch Chemical Makers, Cost Jobs and Raise Prices for Cars and Shampoo,” CQ Weekly, Sept. 19, 2005.
“The Institute for Supply Management, which issues a monthly report on the U.S. industrial sector, reported this week that prices manufacturers are paying for goods surged in August. Rising energy costs pushed a key index measuring prices to 62.5 from July’s 48.5.”
“Cost of Warm, Stocked House Surges; Household Goods’ Raw Materials Scarcer,” The Baltimore Sun, September 3, 2005.
“Industry groups, including the American Chemistry Council, argue it is important to find more natural gas to get prices down. The fuel, which has increased five-fold in recent years, not only is used widely to heat homes and for electric power but also in the making of fertilizer and other chemical products.”
“Katrina Spurs New Debate on Energy Policy,” Associated Press, September 12, 2005
“Although not as prominent as oil – its fossil fuel cousin – natural gas is used for heating and cooking in over 61 million homes, according to the U.S. Energy Information Administration. Nearly 25 percent of the country’s electricity comes from gas.”
“Natural Gas Prices Put U.S. Jobs and Businesses At Risk,” CQ Green Sheets, Sept. 22, 2005
“The U.S. Energy Information Administration estimates natural gas prices could rise by 71 percent in the Midwest and an average of 50 percent nationwide. And Mother Nature may yet again make the problem worse…If we have a particularly cold winter, an unusually cold winter, the market will be even then much tighter.”
The Today Show, NBC News, Sept. 29, 2005
“The Energy Information Administration predicts that natural gas prices will remain above $10 per million cubic feet throughout peak winter demand. EIA analysts estimate that the average Midwestern household will pay between 71 percent and 77 percent more for natural gas this winter compared to last year.”
“Bingaman Says Agencies Must Immediately Implement Energy Law,” EnergyWashington Week, Sept. 28, 2005
“The U.S. Interior Department reported that as of September 29, 2005…shut-in [natural] gas production [in the Gulf of Mexico, following the hurricanes] is 7,979 cubic feet (79.79 percent of the daily production.)”
“Hurricane Update,” CMAI, petrochemicals consultant, Sept. 29, 2005
“Marshall Steeves, energy analyst at Refco in New York,..said [natural] gas traders are worried about the amount of supply affected by the recent hurricane. A US government report this week raised the amount of natural gas production shut down in the US Gulf of Mexico from 78 to 80 per cent. ‘The market has been looking for more gas to come back into production. Instead there appears to be more output affected than we first thought,’ he said.”
“Natural Gas Prices Rise to Record High,” Financial Times, Sept. 30, 2005
“[Senator Jeff] Bingaman's letter to Energy Secretary Samuel Bodman urges the [Dept. of Energy] to take action to reduce natural gas demand by consulting with states, consumers and industry to develop an action plan. The first step would be to initiate a public outreach similar to the one employed in California during the 2000-01 energy crisis. The Energy Policy Act of 2005 authorizes $90 million a year for DOE to implement a conservation campaign. ‘I urge you to initiate a public outreach program targeted at natural gas this fall,’ wrote Bingaman.”
“Bingaman Says Agencies Must Immediately Implement Energy Law,” EnergyWashington Week, Sept. 28, 2005
“Natural gas again hit record highs Wednesday as the delay in restarting production in the Gulf of Mexico worries investors that damage may be more severe than expected… …The hurricanes boosted prices for natural gas more than for other commodities because the country cannot import enough gas to make up for possible deficiencies. Moving natural gas long distances involves liquefying the gas, and the country has limited facilities to process such gas. ‘Industry is starting to realize that natural gas is scarce. There's no such thing as a strategic natural gas reserve. We're on our own,’ said Walter Otstott, a trader with Dallas Commodity Co.”
“Natural Gas Hits Record: Production Delays Spur Fears That Rita Damage Is Worse Than Expected,” The Dallas Morning News, Sept. 29, 2005
The Dow Chemical Company and the U.S. Natural Gas Crisis:
Update on Actions Taken to Remain Globally Competitive
Over the past six years, inflated and volatile domestic natural gas prices have wrought havoc on the U.S. manufacturing sector, including our nation’s price-sensitive chemical industry, which depends on natural gas as both a fuel source and a critical raw material. The Dow Chemical Company, in an effort to offset the extreme negative impact of skyrocketing U.S. natural gas prices -- and to remain globally competitive -- has already been forced to:
• implement an aggressive cost-reduction plan, which involves the elimination of manufacturing jobs
• shift some production overseas to countries such as Kuwait, Argentina, Malaysia, Germany and the Netherlands -- where energy prices are far more competitive.
• shut down underutilized and non-competitive plants across the U.S.
• form partnerships to build an LNG import terminal in Texas
• raise product prices to counteract the margin squeeze caused by inflated energy and feedstock costs
• implement aggressive energy conservation and efficiency programs
Below is an update on specific actions taken by Dow, as a result of the U.S. natural gas crisis:
Implementing Aggressive Cost-Reduction Plans and Eliminating Jobs
In 2003 Dow introduced an aggressive cost-reduction plan, which called for the elimination of approximately 6,500 jobs worldwide through 2004. These job cuts represented a painful 15% reduction in the company’s already very lean workforce. While there were other factors that contributed to our need to eliminate these jobs, the driving force behind this global streamlining effort was the need to offset rising costs in order to remain globally competitive and meet our customers’ needs. U.S. energy and feedstock prices remain our most significant external costs.
Planning for Growth Overseas – Where Energy Prices are More Competitive
Dow fully expects to realize our share of the projected 4% annual volume growth in the global chemical industry. However, that growth will not be seen in the U.S. Dow’s future growth strategy is heavily influenced by the prospect that U.S. natural gas prices will remain the highest in the world. If natural gas prices remain structurally high and volatile, Dow will be unable to serve export markets with basic chemicals and plastics made in the U.S. We will instead continue to seek growth opportunities in parts of the world where natural gas is cheaper. For example, over the next five years, more than 50% of Dow’s new capacity investment in ethylene plants will be in the Middle East. There are currently no new ethylene plants planned in the U.S. Dow has announced several new joint ventures and planned investments in the Middle East and China – where energy prices are lower than in the U.S.:
• In August 2005, Dow announced plans to build a new Dow Center, comprising a state-of-the-art Research & Development facility and a global information technology center, in Shanghai, China
• In March 2005, Dow and Petrochemical Industries Company (PIC) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, completed a groundbreaking ceremony for their new ethylene and derivatives complex in Shuaiba, Kuwait. This project was announced in May 2003.
• In July 2004, Dow announced a new joint venture project to design, build and operate a petrochemical complex in Oman.
• In June 2004, Dow announced the formation of two new joint ventures with PIC, our Kuwaiti partner.
Further, Dow’s customers are generally manufacturers of consumer goods, such as automobiles, appliances, electronics, and pharmaceuticals. These industries are now feeling the ripple effect of high U.S. natural gas prices and are increasingly factoring these costs into their long-term investment decisions.
Shutting Down Plants in the U.S.
Since 2002, Dow and the Union Carbide Corporation, a wholly owned subsidiary of Dow, have been forced to shut down 23 inefficient production plants in North America, at manufacturing sites such as:
• LaPorte, TX
• Texas City, TX
• Seadrift, TX
• Sheldon Road, TX
• Midland, MI
• Institute, WV
• South Charleston, WV
• Nashua, NH
• Elizabethtown, KY
• Somerset, NJ
• Boundbrook, NJ
Forming Partnerships to Import LNG
In December 2004, Dow subsidiary Texas LNG Holdings LLC purchased a 15 percent ownership interest in Freeport LNG Development, LP, an organization that is now building an LNG receiving terminal in Freeport, TX. In June 2004 Dow announced an agreement for the long-term use of this terminal. These dramatic steps are part of Dow’s effort to bring a reliable supply of affordable natural gas to Texas – to help fuel growing consumer demand.
Exploring Alternative and Renewable Fuel Sources
Dow today is an industry leader in exploring alternative and renewable energy sources:
• On January 17, 2005 World Energy. Inc. announced an exclusive production agreement with Dow Haltermann Custom Processing (DHCP), a Dow business unit comprised of operations within The Dow Chemical Company and Johann Haltermann, Ltd., to produce biodiesel fuel from vegetable oil. In May 2003, Dow announced an agreement to test fuel cells from General Motors– and to use those fuel cells to convert byproduct hydrogen into electricity that can be used at our Texas Operations site.
• In July 2003, Dow joined 11 other U.S. businesses in the World Resources Institute’s Green Power Market Development Group, to explore the use of renewable and clean energy sources to save money, protect the environment, and reduce our nation’s dependence on conventional fuels. Dow is currently evaluating a project in Dalton, Georgia to produce steam for manufacturing -- from landfill gas.
Dow continues to look for niche opportunities to utilize renewables, and the company understands the opportunities provided by these alternatives. However, to meet our nation’s energy needs, consumers must have access to larger-scale, conventional, competitive energy sources, such as cleaner coal and nuclear power.
Implementing Aggressive Energy Conservation & Efficiency Programs
Dow has taken significant, proactive steps to reduce our energy demand, improving our energy efficiency by 42% since 1990. We recently exceeded our publicly stated goal of improving energy efficiency by 20 percent by the year 2005 from 1994. By year-end 2004, Dow had already achieved a 21% energy intensity improvement vs. 1994. In 2004, alone, we reduced our energy intensity by 5.4% vs. 2003. We are now setting a new aggressive goal to continue our energy efficiency drive through 2015. Within the chemical industry, Dow is a leader in efficient energy use. We use cogeneration to generate 95% of the power and heat needed to run our processes in the U.S. and 75% of that needed globally. Cogeneration is 20-40% more efficient than producing power and steam separately.
Reaching the Limits of What We Can Do without Help From Our Government
As detailed above, Dow is doing everything within the company’s power to help reduce our demand for U.S. natural gas and to offset the extreme negative impact of inflated and volatile energy and feedstock costs on our company and our industry. However, we’re reaching the limits of what we can do without help from Congress and the Administration.
Calling for Government Help to Resolve the U.S. Natural Gas Policy Imbalance
The situation in the U.S. has been several years in the making. Natural gas has been positioned and promoted by the natural gas industry, the U.S. government and the environmental community as the "growth fuel" for the electric power industry. However, this was destined for failure from the start due to the enormous size and growth rate of the power sector – and the relatively smaller and declining natural gas production sector. The domestic supply of natural gas has not only failed to meet the resultant increase in demand but has actually declined despite five years of record high prices. Production declined again in 2004. The imbalance between supply and demand has resulted in enormous domestic price increases, hurting our nation’s residential, commercial, agricultural and industrial consumers.
The U.S. Government Must Act Now to Create a Balanced Energy Future
The Energy Policy Act of 2005 was a good start toward addressing the supply-demand problem that drives the U.S. natural gas crisis, and it contained many important provisions related to energy efficiency & conservation, improved infrastructure, and fuel diversity – including clean coal and advanced nuclear power. However Congress must take further action now – to fully close the projected supply/demand gap -- and increase the nation’s energy supply:
• Promote environmentally responsible energy production in the Outer Continental Shelf – giving coastal states a greater role, and sharing revenues from new production with them;
• Expedite leasing in Lease Sale 181– at least for areas greater than 100 miles from the Florida coast;
• Declare a national energy emergency right now -- and mobilize every American to save energy;
• Assure that the most efficiently generated energy is dispatched to the power grid first.