[Senate Hearing 109-307]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 109-307
 
                       ENERGY PRICES AND PROFITS

=======================================================================

                             JOINT HEARING

                               before the

                              COMMITTEE ON
                 COMMERCE, SCIENCE, AND TRANSPORTATION

                                and the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               ----------                              

                            NOVEMBER 9, 2005

                               ----------                              

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation



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                                                        S. Hrg. 109-307

                       ENERGY PRICES AND PROFITS

=======================================================================

                             JOINT HEARING

                               before the

                              COMMITTEE ON
                 COMMERCE, SCIENCE, AND TRANSPORTATION

                                and the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 9, 2005

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation


                       ENERGY PRICES AND PROFITS

                       ENERGY PRICES AND PROFITS
           COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii
CONRAD BURNS, Montana                JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              BYRON L. DORGAN, North Dakota
GORDON H. SMITH, Oregon              BARBARA BOXER, California
JOHN ENSIGN, Nevada                  BILL NELSON, Florida
GEORGE ALLEN, Virginia               MARIA CANTWELL, Washington
JOHN E. SUNUNU, New Hampshire        FRANK R. LAUTENBERG, New Jersey
JIM DeMINT, South Carolina           E. BENJAMIN NELSON, Nebraska
DAVID VITTER, Louisiana              MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
                David Russell, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho                JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee           BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
RICHARD BURR, North Carolina         TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida                MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               JON S. CORZINE, New Jersey
GORDON SMITH, Oregon                 KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
                       Alex Flint, Staff Director
                   Judith K. Pensabene, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                         Lisa Epifani, Counsel
                   Deborah Estes, Democratic Counsel
         Jennifer Michael, Democratic Professional Staff Member


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Statement of Senator Alexander...................................    51
Statement of Senator Allen.......................................    86
Statement of Senator Bingaman....................................     5
Statement of Senator Boxer.......................................    57
Statement of Senator Burns.......................................    55
Statement of Senator Burr........................................    88
Statement of Senator Cantwell....................................    68
Statement of Senator Craig.......................................    90
Statement of Senator Domenici....................................     3
Statement of Senator Dorgan......................................    53
Statement of Senator Feinstein...................................    72
Statement of Senator Hutchison...................................    74
Statement of Senator Inouye......................................     4
    Prepared statement...........................................     5
Statement of Senator Landrieu....................................    79
    Prepared statement...........................................    81
Statement of Senator Lautenberg..................................    94
Statement of Senator Martinez....................................    70
Statement of Senator Murkowski...................................    61
Statement of Senator Bill Nelson.................................    84
Statement of Senator Pryor.......................................    75
Statement of Senator Salazar.....................................   131
    Prepared statement...........................................   133
Statement of Senator Smith.......................................    65
    Prepared statement...........................................    67
Statement of Senator Snowe.......................................    89
Statement of Senator Stevens.....................................     1
Statement of Senator Sununu......................................    83
Statement of Senator Talent......................................    92
    Prepared statement...........................................    94
Statement of Senator Thomas......................................    77
Statement of Senator Wyden.......................................    62

                               Witnesses

Goddard, Terry, Attorney General, State of Arizona...............   108
    Prepared statement...........................................   111
Harvey, Peter C., Attorney General, State of New Jersey..........    98
    Prepared statement...........................................   101
Hofmeister, John, President, Shell Oil Company...................    36
    Prepared statement...........................................    38
Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission..   115
    Prepared statement...........................................   118
McMaster, Henry, Attorney General, State of South Carolina.......   103
    Prepared statement...........................................   106
Mulva, James J., Chairman and Chief Executive Officer, 
  ConocoPhillips.................................................    20
    Prepared statement...........................................    23
O'Reilly, David J., Chairman and Chief Executive Officer, Chevron 
  Corporation....................................................    12
    Prepared statement...........................................    14
Pillari, Ross J., President and Chief Executive Officer, BP 
  America, Inc...................................................    31
    Prepared statement...........................................    33
Raymond, Lee R., Chairman and Chief Executive Officer, Exxon 
  Mobil Corporation..............................................     6
    Prepared statement...........................................     9

                                Appendix

Akaka, Hon. Daniel K., U.S. Senator From Hawaii, prepared 
  statement......................................................   145
Cavaney, Red, President and CEO, American Petroleum Institute, 
  prepared statement.............................................   341
Response to written questions submitted to Terry Goddard by:
    Hon. Olympia J. Snowe........................................   336
Response to written questions submitted to Peter C. Harvey by:
    Hon. Olympia J. Snowe........................................   190
Response to written questions submitted to John Hofmeister by:
    Hon. Jeff Bingaman...........................................   229
    Hon. Jim Bunning.............................................   225
    Hon. Maria Cantwell..........................................   236
    Hon. Pete V. Domenici........................................   224
    Hon. Frank R. Lautenberg.....................................   246
    Hon. Ken Salazar.............................................   241
    Hon. Gordon H. Smith.........................................   229
    Hon. Olympia J. Snowe........................................   243
    Hon. James M. Talent.........................................   228
    Hon. Ron Wyden...............................................   236
Response to written questions submitted to Hon. Deborah Platt 
  Majoras by:
    Hon. Frank R. Lautenberg.....................................   151
    Hon. Ted Stevens.............................................   146
    Hon. Ron Wyden...............................................   153
Response to written questions submitted to Henry McMaster by:
    Hon. Ted Stevens.............................................   338
Response to written questions submitted to James J. Mulva by:
    Hon. Jeff Bingaman...........................................   252
    Hon. Jim Bunning.............................................   274
    Hon. Maria Cantwell..........................................   287
    Hon. Pete V. Domenici........................................   281
    Hon. Frank R. Lautenberg.....................................   301
    Hon. Lisa Murkowski..........................................   285
    Hon. Ken Salazar.............................................   298
    Hon. Gordon H. Smith.........................................   273
    Hon. Olympia J. Snowe........................................   246
    Hon. James M. Talent.........................................   271
    Hon. Ron Wyden...............................................   286
Response to written questions submitted to David J. O'Reilly by:
    Hon. George Allen............................................   189
    Hon. Daniel K. Akaka.........................................   179
    Hon. Jeff Bingaman...........................................   169
    Hon. Jim Bunning.............................................   167
    Hon. Maria Cantwell..........................................   181
    Hon. Pete V. Domenici........................................   162
    Hon. Frank R. Lautenberg.....................................   189
    Hon. Mel Martinez............................................   188
    Hon. Lisa Murkowski..........................................   164
    Hon. Ken Salazar.............................................   187
    Hon. Gordon H. Smith.........................................   166
    Hon. Ted Stevens.............................................   159
    Hon. James M. Talent.........................................   164
    Hon. Ron Wyden...............................................   180
Response to written questions submitted to Ross J. Pillari by:
    Hon. Jeff Bingaman...........................................   199
    Hon. Jim Bunning.............................................   196
    Hon. Maria Cantwell..........................................   210
    Hon. Pete V. Domenici........................................   192
    Hon. Frank R. Lautenberg.....................................   224
    Hon. Lisa Murkowski..........................................   193
    Hon. Ken Salazar.............................................   219
    Hon. Gordon H. Smith.........................................   196
    Hon. Olympia J. Snowe........................................   221
    Hon. James M. Talent.........................................   195
    Hon. Ron Wyden...............................................   209
Response to written questions submitted to Lee R. Raymond by:
    Hon. Jeff Bingaman...........................................   313
    Hon. Jim Bunning.............................................   310
    Hon. Maria Cantwell..........................................   325
    Hon. Pete V. Domenici........................................   305
    Hon. Frank R. Lautenberg.....................................   332
    Hon. Lisa Murkowski..........................................   307
    Hon. Ken Salazar.............................................   331
    Hon. Gordon H. Smith.........................................   310
    Hon. Olympia J. Snowe........................................   302
    Hon. James M. Talent.........................................   308
    Hon. Ron Wyden...............................................   325
Richardson, Hon. Bill, Governor, State of New Mexico, prepared 
  statement......................................................   339
Rockefeller IV, Hon. John D., U.S. Senator From West Virginia, 
  prepared statement.............................................   145


                       ENERGY PRICES AND PROFITS

                              ----------                              


                      WEDNESDAY, NOVEMBER 9, 2005

                           U.S. Senate,    
            Committee on Commerce, Science,
                        and Transportation, and the
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The Committees met jointly, pursuant to notice, at 9:27 
a.m. in room SD-106, Dirksen Senate Office Building, Hon. Ted 
Stevens, Chairman, Committee on Commerce, Science, and 
Transportation and Hon. Pete V. Domenici, Chairman, Committee 
on Energy and Natural Resources, presiding.

            OPENING STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Chairman Stevens. If I may, there is a question that has 
been raised before we start the hearing. The question whether 
Senator Domenici and I should administer oaths to these 
witnesses at today's hearing was raised by a letter that I 
received this morning at 8:10 a.m., after it was delivered to 
the press. As a matter of fact, there is a story in the Seattle 
paper about the request having been denied already.
    I remind the witnesses as well as the members of these 
committees, Federal law makes it a crime to provide false 
testimony. Specifically, section 1001 of title 18 provides in 
pertinent part: ``Whoever in any matter within the jurisdiction 
of the legislative branch of the Government of the United 
States knowingly or willfully makes any material false, 
fictitious, or fraudulent statement or representation shall be 
fined under this title or be imprisoned not more than 5 years 
or both.''
    I have reviewed the rules of the Senate and the rules of 
the Commerce and Energy Committees in effect in this Congress 
and the relevant provisions of title 2 of the U.S. Code. There 
is--could we have quiet, please. There is nothing in the 
standing rules of our committee rules or the Senate which 
requires witnesses to be sworn. The statute has the position 
that everyone before, appearing before the Congress, is in fact 
under oath.
    These witnesses accepted the invitation to appear before 
our committees voluntarily. They are aware that making false 
statements and testimony is a violation of Federal law whether 
or not an oath has been administered.
    I shall not administer an oath today.
    Senator Boxer. Mr. Chairman.
    Chairman Stevens. And we look forward to questions.
    Senator Cantwell.
    Senator Cantwell. Mr. Chairman, I did send you a letter co-
signed by eight of my colleagues asking that the witnesses be 
sworn in. This rare joint hearing----
    Chairman Stevens. I did not yield to make a statement. We 
are ready to go. We have a statement process. Do you have any--
--
    Senator Boxer. Mr. Chairman, I would like the committee to 
vote on whether we swear----
    Chairman Stevens. There will be no vote. It is not in order 
at all. It is not part of the rules that any vote can be taken 
to administer an oath. It is the decision of the chairman and I 
have made that decision.
    Senator Boxer. Mr. Chairman, I move that we swear in the 
witnesses.
    Chairman Stevens. And I rule that out of order.
    Senator Cantwell. I second the motion.
    Chairman Stevens. Thank you very much. That is the last we 
are going to hear about that because it is out of order.
    Senator Boxer. Mr. Chairman, Mr. Chairman. Could I just ask 
for a little clarification here? If the Senator makes this 
request and there is a second, why would we not have a vote on 
that?
    Chairman Stevens. Because you cannot vote to put in the 
rules something that is not there.
    Senator Cantwell. Mr. Chairman.
    Chairman Stevens. This is not a business meeting. There is 
no way to put this into the rules. This is a matter for the 
chairman to decide and I have made the decision.
    Chairman Domenici. Mr. Chairman, I want to say----
    Chairman Stevens. Pardon me. It specifically says in the 
rules the President of the Senate, Speaker of the House, or a 
chairman of any committee can make the decision.
    Chairman Domenici. And Mr. Chairman, I concur.
    Chairman Stevens. Now, if we could come to order, and I 
would hope that we would have--I do believe that we do not wish 
to have standing room only in this. There are plenty of seats. 
Please take your seats.
    This is a joint committee meeting, gentlemen, and we have 
together determined that myself and Senator Domenici and 
Senator Inouye and Senator Bingaman will make opening 
statements, and after that time we will listen to the 
witnesses, and following that time Senators will be recognized 
by the early bird on each committee.
    We encourage the witnesses to limit their statements to 10 
minutes each if that is agreeable. I think it has been. We 
shall have a limit according to an agreement between the 
chairmen and ranking members of each committee to 5 minutes 
each on opening statements.
    Over the last 2 years, energy prices have tripled, the cost 
of oil has risen at least once to $70 a barrel. All Americans 
know now that the cost of energy is going up. But in the wake 
of the Hurricanes Katrina, Rita, and Wilma there is fear about 
how sharply these prices have risen. Americans are now 
concerned whether they should be paying so much more for energy 
when our energy companies are recording record profits.
    Today we are going to hear testimony from: Lee Raymond, 
chairman and CEO of the Exxon Mobil Corporation; David 
O'Reilly, chairman and CEO of the Chevron Corporation; James 
Mulva, chairman and CEO of ConocoPhillips; Ross Pillari, 
chairman and CEO of British Petroleum of America; and John 
Hofmeister, president and U.S. Country Chair of Shell Oil 
Company.
    We thank you gentlemen for coming to appear before us today 
voluntarily. This hearing is an opportunity for your companies, 
the major energy companies of our country, to address these 
concerns. We do sincerely want to listen to your thoughts.
    This is a joint hearing. The members of each committee are 
here today and, as I indicated, each Senator will be entitled 
to ask questions for 5 minutes. I urge that the witnesses be 
succinct in their answers as possible and that witnesses 
observe the timer clocks which should be visible to all 
concerned.
    In my judgment these hearings should be a respectful 
discussion about our Nation's energy prices. I intend to be 
respectful of the positions these gentlemen hold. In turn, I 
know that each of you as witnesses understand that those of us 
at this table have a duty to our constituents and to all 
Americans to seek the information we will seek today.
    Specifically, we want you to discuss the steps your 
industry plans to take to alleviate price concerns and we need 
to gain your perspective on some of the initiatives Members of 
Congress have proposed that aim to assist communities in 
meeting these increased costs.
    I now yield to Chairman Domenici.

              STATEMENT OF HON. PETE V. DOMENICI, 
                  U.S. SENATOR FROM NEW MEXICO

    Chairman Domenici. Thank you very much, Mr. Chairman.
    Fellow Senators and witnesses: Let me first say that I want 
to thank Majority Leader Frist for requesting this joint 
hearing and thank all the Senators who are here to participate. 
I think all of you know that we represent constituents--added 
all up, we represent the American people. Every day that we are 
in office and every day that we go home, we hear what our 
people and what the American people are worried about and what 
concerns them.
    Americans have been experiencing painfully high prices at 
the pump. Whether you think so or not, they think so. Americans 
are facing dramatically increased winter heating fuel prices, 
especially of natural gas. You see a story on the front page of 
the Post today about an aluminum company, because of natural 
gas prices being so high, may indeed close up.
    Most Americans in most of the polls show that our people 
have a growing suspicion that the oil companies are taking 
unfair advantage of the current market conditions to line their 
coffers with excess profits. Now, I am telling you what we are 
hearing and what Americans are saying. Some Senators are 
proposing a windfall profits tax. From all I know, it did not 
work before; it probably will not work again.
    Still, I expect the oil companies' witnesses to provide 
some assurances about how you plan to use your recent profits 
to provide a stable source of energy to the United States and 
to pursue to the maximum extent possible lower oil prices and 
lower gas prices. The oil companies' witnesses owe the company 
an explanation and they owe it to us as those who represent the 
people.
    I expect the witnesses to answer whether you think your 
current profits are excessive and to talk about what they 
intend to do with the reserves and the profit accumulations 
that they have. This may not in past times be relevant as you 
think of it, but it is relevant to the American people at this 
point, and I believe you have to tell us about it.
    Now, there are a variety of factors that have pointed to 
the reasons for the high prices. Some weigh exports to China, 
India; increased geopolitical risks; and of course the 
hurricanes in the Gulf. Some of these factors are out of your 
control, but we hope you will explain nonetheless why the 
prices are so high.
    There are other factors, however, such as the lack of 
refining capacity, which the American people believe is urgent. 
I say to all of you that time is urgent, that we address these 
issues, like expanding refining capacity, increasing production 
here at home, and providing some balance in the supply-demand 
internationally so we might expect a stabilization of prices of 
crude oil and thus gasoline and derivatives at least, if not 
causing them to go down substantially.
    Things look a little better this week than they did 3 or 4 
weeks ago. We would like to know what you think about that 
trend. Is it going to continue or is it just a spurt? We know 
gasoline has come down dramatically. What do you think about 
the future?
    With that, I thank you for coming here and I thank all the 
Senators for attending. Mr. Chairman, it is a privilege to co-
chair this with you. I think before the day is out we might get 
the American people some answers. Thank you.
    Chairman Stevens. I will next call on Senator Inouye, co-
chair of the Commerce Committee.

              STATEMENT OF HON. DANIEL K. INOUYE, 
                    U.S. SENATOR FROM HAWAII

    Senator Inouye. Thank you, Mr. Chairman.
    The past several weeks have been very painful for the 
people of the United States. It has been the time of Katrina, 
it has been a time of suffering, of death. It has been a time 
when hospitals were destroyed. Americans were called upon to 
make record-breaking contributions. Sacrifices were made in 
every quarter.
    Yet at the same time, we saw Americans lined up at gas 
pumps waiting to pay $3 and much more for their gasoline. I 
think Americans are concerned. Then suddenly they have thrust 
upon them headlines saying ``Record-Breaking Profits.'' In the 
midst of suffering, in the midst of sacrifice, record-breaking 
profits.
    I have nothing against making profits. After all, it makes 
capitalism live.
    Mr. Chairman, I think, although the rules are very clear 
that the chair has the responsibility to decide whether to have 
witnesses sworn before they testify. If I were a witness I 
would prefer to be sworn in so that the American people can be 
assured that the testimony that we are about to give would be 
the honest truth and nothing but the truth. If I were a 
witness, I would demand that I be put under oath.
    [The prepared statement of Senator Inouye follows:]

 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator From Hawaii

    The recent record-setting gas prices created two story lines that 
many of us find difficult to reconcile. While many Americans described 
their struggle to make ends meet, your companies were reporting 
windfall profits. I have little doubt that you will present a spirited 
defense of your record earnings, but you can understand why our 
Committees are concerned.
    While our colleagues on the Energy Committee oversee oil production 
and supply, we on Commerce oversee factors that effect pricing and 
demand. We have three principal areas of jurisdiction in this 
discussion: price gouging and the role of the Federal Trade Commission, 
vehicle standards, and the science of energy and fuel efficiency.
    In the short term effort to understand the high gas prices, I 
believe the FTC should play a more active role and it has the authority 
to do so. If it continues to pursue its role more narrowly, then 
Congress needs to provide further guidance and legislation defining 
specific authorities. As such, I am an enthusiastic, original co-
sponsor of Sen. Cantwell's legislation on price gouging, and I am 
hopeful that our Committee will examine it soon.
    Over the long term, we must address our national oil demand, which 
is a well-known and urgent economic vulnerability. One of the most 
immediate and effective steps we can take to remedy our dependence on 
oil is to increase the fuel efficiency standards of our cars, SUVs, and 
light trucks in a meaningful way. By affecting the demand side of the 
equation, we can help bring down the prices.
    Our Committee oversees the nation's science priorities, and we can 
help target them towards a solution to this problem. As many experts 
have recommended, we can help our automakers transition, in part, 
through our national scientific investments. Through the research and 
development of advanced, lightweight, strong, composite materials as 
well as alternative energy sources, we can work together to create the 
vehicles of the future that meet--if not exceed--the new efficiency 
standards without sacrificing safety.
    We know that oil is a finite resource, and we know that India and 
China's oil consumption is growing exponentially and will, at some 
point, exceed our own. We are all rapidly headed to the bottom of the 
barrel, and it is my hope that, together, we wisely prepare for this 
reality.
    I recognize that energy independence cannot be achieved overnight, 
but I find it troubling that the energy companies exhibit an 
unmistakable reluctance to lead the nation toward an energy independent 
future. We do not expect you to put yourselves out of business, but we 
do expect you to be innovators and leaders in the effort to help create 
a sustainable energy future for our country.

    Chairman Stevens. The next statement will be by Senator 
Bingaman.
    Senator Bingaman is recognized.

               STATEMENT OF HON. JEFF BINGAMAN, 
                  U.S. SENATOR FROM NEW MEXICO

    Senator Bingaman. Thank you very much. I welcome the 
witnesses, thank them for being here, and I look forward to 
learning all I can at this hearing.
    It strikes me that the focus of the hearing is on the high 
price of gas that people are paying at the pump, on the high 
price of natural gas and home heating oil for our homes this 
winter as the temperatures drop. I am sorry, frankly, that we 
were not able to accommodate the request I made to have a 
consumer representative, a representative of one of the 
consumer groups, on one of the panels today. I think that would 
have added to our discussion.
    I do believe that there are some concrete steps that we 
need to discuss and I hope the witnesses will be able to 
address these. Let me mention a few. No. 1, there are eight 
different bills pending here in the Senate that relate to this 
issue of price-gouging and whether we should have a Federal 
statute similar to what the State statutes that exist. It is my 
view that that would be an appropriate thing for us to do. I 
would like to see us pass such a statute before we adjourn here 
in the next few weeks, this session of Congress.
    A second concrete idea is the Low Income Home Energy 
Assistance Program. We need to fund that at the fully 
authorized level. We have tried to do that now several times. 
We had a floor vote on October 5, another on October 20, and 
another on October 26. Each time that has been turned down. I 
think again we need to fully fund that program before Congress 
adjourns this session.
    The third proposal that I would have is that we need a 
high-profile national public education campaign to encourage 
conservation. This is something that everyone seems to think is 
a good idea, but no one is willing to pay for. The Federal 
Government has not committed the funds to pay for this. As far 
as I know, the industry has not either. I will refer to that 
again in just a moment.
    A fourth item I believe we need to go ahead with is the 
Lease Sale 181. That clearly is something that should have been 
done some time ago. It was on track to be done when this 
Administration came into office. For political reasons, for 
reasons related to the politics of Florida, frankly, it was put 
off. There is no legislative action required in order for this 
to be accomplished. It is strictly an administration decision 
and I wish they would make the decision to go ahead with that 
lease sale.
    A fifth item, I believe we should once again get back to 
increased fuel efficiency in cars, trucks, and SUVs in this 
country. That is a subject we tried to deal with in the energy 
bill. We were unsuccessful. I hope we can take some action on 
that. Over the long term that would do a great deal of good, I 
believe, for our country.
    Two specific things that I would just ask the witnesses to 
respond to: What can your companies, what can the oil and gas 
industry itself, do to help with this public education campaign 
for conservation? I think that clearly much more is needed 
there. Second, what help can be provided to these LIHEAP 
programs around the country?
    Thank you very much.
    Chairman Stevens. Thank you very much.
    Senator, we did have in our committee, two separate 
hearings on price-gouging. We have had such hearings already.
    Now we are going to turn to the witnesses. The first 
witness will be Mr. Lee Raymond of ExxonMobil. Mr. Raymond--
pardon me.
    I hope all members will look at the clocks in front of them 
and keep track of their own time, please.

   STATEMENT OF LEE R. RAYMOND, CHAIRMAN AND CHIEF EXECUTIVE 
                OFFICER, EXXON MOBIL CORPORATION

    Mr. Raymond. Thank you, Mr. Chairman. Chairmen Domenici and 
Stevens, Co-Chairman Inouye, and ranking member Bingaman, and 
committee members: Thank you for the opportunity to discuss the 
important issues being raised about ExxonMobil and the 
industry.
    The increases in energy prices following Hurricanes Katrina 
and Rita have put a strain on Americans' household budgets. We 
recognize that. After all, our customers are your constituents. 
And we recognize our responsibility to make energy available to 
them at competitive costs. It is also our responsibility to 
engage in an open, honest, informed debate on our energy 
future, grounded in reality, focused on the long term, and 
intent on finding viable solutions.
    I would like to make three points in my allotted time. 
First, given the scale and long-term nature of the energy 
industry, there are no quick fixes and there are no short-term 
solutions. Second, petroleum company earnings go up and down 
since prices for the openly and globally traded commodities in 
which we deal are volatile, but our ongoing investment programs 
do not and they cannot if we are to meet growing energy demand. 
Third, as the response to Hurricanes Katrina and Rita have 
proved, markets work even under the most extraordinary 
circumstances. Permitting them to function properly is the kind 
of leadership required to meet the future energy challenges 
that we all face.
    Let me elaborate on each point in turn. Currently, the 
world's consumers use the equivalent of 230 million barrels of 
oil equivalent every day from all energy sources. That is 400 
million gallons an hour or 67 billion gallons a week. Because 
of the size and strength of the U.S. economy, Americans consume 
a fifth of this total, more than any other country. At current 
market prices, the bill for the world's petroleum consumption 
is more than $2.5 trillion a year. That is greater than the 
U.S. Government's entire annual budget.
    The petroleum companies represented here today help meet 
that enormous demand, but we are a relatively small part. 
Consider this. ExxonMobil is the world's largest nongovernment 
petroleum company, with a market capitalization of about $350 
billion and operations in 200 countries and territories. Almost 
three-quarters of our business is outside of the United States. 
On an average day we produce over 4 million oil equivalent 
barrels. That is about 3 percent of the world's daily oil and 
gas appetite.
    It is also important to keep in mind the long-term time 
lines in which we operate. In politics time is measured in 2, 
4, or 6 years based on the election cycle. In the energy 
industry time is measured in decades based on the life cycles 
of our projects. For example, ExxonMobil just announced first 
oil and gas production from our Sakhalin-1 project in Russia's 
Far East. We began work on the project over 10 years ago when 
prices were very low, and we expect it to produce for over 40 
years. All told, that is more than 50 years for one project. 50 
years is 25 Congresses and 12 presidential terms. 50 years ago 
Dwight Eisenhower was President of the United States.
    So what does that mean for policymaking? It means, given 
the scale and long-term nature of our business, effective 
policies must be stable, predictable, and long-term in their 
focus. History teaches us that punitive measures hastily 
crafted in reaction to short-term market fluctuations will 
likely have unintended negative consequences, including 
creating disincentives for investment in domestic projects.
    Think back to the 1970s, when we were all in an energy 
crisis here in this country. First price controls, then 
punitive taxes were tried to manage petroleum markets. They 
contributed to record prices, shortages, and gasoline lines. As 
the Government withdrew from attempting to manage the markets, 
prices began to come down. In fact, net of taxes, prices in 
real terms for petroleum products like gasoline, diesel fuel, 
heating oil, and jet fuel have actually declined over the last 
25 years.
    Which brings me to my second point: The petroleum 
industry's earnings are at historic highs today, but when you 
look at our earnings per dollar of revenue, a true apples to 
apples comparison, we are in line with the average of all U.S. 
industry. Our numbers are huge because the scale of our 
industry is huge.
    How are these earnings used? We invest to run our global 
operations, to develop future supply, to advance energy-
producing and saving technologies, and to meet our obligations 
to millions of our shareholders. Last year, with $40 a barrel 
oil and high earnings, Exxon invested almost $15 billion in new 
capital expenditures and more than $600 million in research and 
development. In 1998, when crude prices were as low as $10 a 
barrel, our earnings were lower, at about $8 billion, but we 
invested $15 billion in capital expenditures that year as well.
    In fact, over the last 10 years ExxonMobil's cumulative 
capital and exploration expenditures exceeded our cumulative 
annual earnings. So when we keep investing in the future when 
earnings are high as well as when they are low.
    The current discussion on building new grassroots 
refineries is interesting. Building a new refinery from scratch 
takes years, even if regulatory requirements are streamlined. 
Current refining economics are almost irrelevant to that 
decision. For us, a faster and more practical way to add 
capacity has been to expand our existing refineries. It is much 
more efficient because the basic infrastructure is already in 
place. Over the last 10 years, ExxonMobil alone has built the 
equivalent of three average-sized refineries through expansions 
in efficiency gains at existing U.S. refineries.
    I should add that we would also like to invest even more in 
this country, especially in exploring for and producing new 
supplies of oil and natural gas, if there were attractive 
economic opportunities to do so. But the fact is that the 
United States is a mature oil province, domestic production is 
declining, and limited opportunities for new investments that 
have been made available to us.
    Finally, my third point: Markets work if we let them. 
Hurricanes Katrina and Rita were a one-two punch to the 
petroleum industry as well as to many of your constituents. At 
one point some 29 percent of U.S. refining capacity was shut 
down. The Congressional Budget Office estimates the hurricanes 
caused between $18 and $30 billion in energy sector 
infrastructure losses.
    But we are recovering. Our diligent and dedicated employees 
went above and beyond to repair the damage and get back to 
work. Credit also goes to the Federal Government. Release of 
the crude from the SPR, temporary easing of regulations such as 
gasoline specification and the Jones Act enabled us to 
reallocate resources effectively and efficiently.
    But most importantly, credit goes to our free market 
system. The hurricanes showed that markets work even under the 
most extraordinary conditions. Prices for products did 
increase, of course, but there was no panic and no widespread 
shortages. Retailers responded to the short-term supply 
disruption, consumption decreased, and imports increased to 
make up the shortfall. In a word, markets worked. And letting 
markets work will enable us to meet our future energy 
challenges.
    In just 25 years, global energy demand is expected to 
increase nearly 50 percent, with oil and natural gas needed to 
meet the majority of that demand. The energy industry is 
meeting this challenge. Government can best help by promoting a 
stable and predictable investment environment, reinforcing 
market principles, promoting global trade and efficient use of 
energy, and implementing and enforcing rational regulatory 
regimes based on sound science and cost-benefit analysis.
    It is this kind of leadership that is required of all of us 
to meet the future energy challenges we all face.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Raymond follows:]

  Prepared Statement of Lee R. Raymond, Chairman and Chief Executive 
                    Officer, Exxon Mobil Corporation

    Chairmen Domenici and Stevens, Co-Chairman Inouye, Ranking Member 
Bingaman, and Committee Members. Thank you for the opportunity to 
discuss the important issues being raised about ExxonMobil and the 
industry.
    The increases in energy prices following Hurricanes Katrina and 
Rita have put a strain on Americans' household budgets. We recognize 
that. After all, our customers are your constituents. And we recognize 
our responsibility to make energy available to them at competitive 
costs.
    It is our responsibility to engage in an open, honest, informed 
debate about our energy future . . . grounded in reality . . . focused 
on the long-term . . . and intent on finding viable solutions.
    In that spirit, I would like to make three points during my 
allotted time.
    First, given the scale and long-term nature of the energy industry, 
there are no quick fixes or short-term solutions.
    Second, petroleum company earnings go up and down with the 
volatility in the openly and globally traded commodities in which we 
deal, but our ongoing investment programs do not--and they cannot, if 
we are to meet growing energy demand.
    And third, as the response to Hurricanes Katrina and Rita proved, 
markets work, even under the most extraordinary circumstances. 
Permitting them to function properly is the kind of leadership required 
to meet the future energy challenges we all face.
    Let me elaborate on each point in turn.

                  ENERGY INDUSTRY SCALE AND TIMELINES

    As you consider energy policy--just as when we consider corporate 
strategy--it is essential to understand the sheer size of the petroleum 
industry and the extended timelines in which we operate.
    Currently, the world's consumers use the equivalent of 230 million 
barrels of oil every day from all energy sources.\1\ That's 400 million 
gallons an hour, or 67 billion gallons a week. Because of the size and 
strength of the U.S. economy, Americans consume a fifth of this total, 
more than any other country.
---------------------------------------------------------------------------
    \1\ ExxonMobil Energy Outlook.
---------------------------------------------------------------------------
    You are accustomed to dealing in large budget figures, so let me 
try putting it in those terms. At current market prices, the bill for 
the world's petroleum consumption is more than $2.5 trillion a year. 
That's greater than the U.S. government's entire annual budget.
    The petroleum companies represented here today help meet that 
enormous demand--but we are a relatively small part.
    Consider this. ExxonMobil is the world's largest, non-government 
petroleum company, with over 86,000 employees, a market capitalization 
of about $350 billion, and operations in 200 countries and territories. 
In fact, almost three-quarters of our business is outside the United 
States.
    On an average day, we produce over 4 million oil equivalent 
barrels. That is about 3 percent of the world's daily oil and gas 
appetite.
    Now, in addition to the energy industry's enormous scale, it is 
also important to keep in mind the long-term timelines in which we 
operate.
    In politics, time is measured in 2, 4 or 6 years, based on the 
election cycle.
    In the energy industry, time is measured in decades, based on the 
lifecycles of our projects.
    For example, ExxonMobil just announced first oil and gas production 
from our Sakhalin-1 project in Russia's Far East. We began work on the 
project over 10 years ago when prices were very low, and we expect it 
to produce for over 40 years. All told, that's more than 50 years for 
one project.
    Fifty years is 25 Congresses and 12 Presidential terms. It is 
longer than any Senator has served in the history of this body. Or 
think of it this way--50 years ago, Dwight Eisenhower was President.
    So what does this mean for policymaking? It means, given the scale 
and long-term nature of our business, effective policies must be 
stable, predictable and long-term in their focus.
    History teaches us that punitive measures, hastily crafted in 
reaction to short term market fluctuations, will likely have unintended 
negative consequences--including creating disincentives for investment 
in domestic projects.
    Think back to the 1970s--when we were in an energy crisis in the 
U.S.
    First price controls and then punitive taxes were tried to manage 
petroleum markets. In addition to contributing to the record gasoline 
prices consumers were paying by March 1981, they contributed to 
shortages and gasoline lines. As the government gradually withdrew from 
trying to actively manage petroleum markets, prices began to come down. 
In fact, if you exclude the effect of state and federal taxes, prices 
in real terms for petroleum products like gasoline, diesel fuel, 
heating oil and jet fuel have actually declined over the last 25 
years.\2\ Today's higher prices are still less than the prices that 
resulted from government controls in the early 1980s.
---------------------------------------------------------------------------
    \2\ See also: Appendixes A and B,* Price Increase of Consumer 
Goods, and Commodity Price Increases, respectively.
    * Appendixes A-F have been retained in committee files.
---------------------------------------------------------------------------
    Which brings me to my second point.

                        EARNINGS AND INVESTMENTS

    The petroleum industry's earnings are at historic highs today. But 
when you look at our earnings per dollar of revenue--a true apples-to-
apples comparison--we are in line with the average of all U.S. 
industries.\3\ Our numbers are huge because the scale of our industry 
is huge.
---------------------------------------------------------------------------
    \3\ See, Appendix C, How Do Oil Industry Earnings Compare to Other 
Industries?
---------------------------------------------------------------------------
    How are these earnings used?
    We invest to run our global operations, to develop future supply, 
to advance energy-producing and energy-saving technologies, and to meet 
our obligations to our millions of shareholders.
    Last year, when oil prices averaged a little under $40 a barrel and 
earnings were high, ExxonMobil invested almost $15 billion in new 
capital expenditures and more than $600 million in research and 
development.
    And in 1998, when crude oil prices were much lower--as low as $10 a 
barrel for a time--so were our earnings, about $8 billion. But we 
invested $15 billion in capital expenditures that year as well.
    In fact, over the last 10 years, ExxonMobil's cumulative capital 
and exploration expenditures have exceeded our cumulative annual 
earnings.\4\
---------------------------------------------------------------------------
    \4\ See, Appendix D, ExxonMobil Long-Term Earnings and Investment 
History.
---------------------------------------------------------------------------
    So, we keep investing in the future when earnings are high as well 
as when they are low.
    If we are to continue to serve our consumers and your constituents, 
corporate and government leaders alike cannot afford to simply follow 
the ups and downs of energy prices.
    We must take a longer-term view.
    The current debate on building new grassroots refineries is a good 
example. Building a new refinery from scratch takes years--even if 
regulatory requirements are streamlined.
    Current refining economics are almost irrelevant. And once a 
refinery begins operations, it takes years more for that refinery to 
pay back its investment.
    For us, a faster, more practical and economical way to add capacity 
has been to expand our existing refineries. It is much more efficient 
because the basic infrastructure is already in place. We have invested 
$3.3 billion over the last five years in our U.S. refining and supply 
system.
    Over the last ten years, ExxonMobil alone has built the equivalent 
of three average-sized refineries through expansions and efficiency 
gains at existing U.S. refineries.
    And industry-wide, while the number of refineries in the United 
States has been cut in half since 1981, total output from U.S. 
refineries is up by 27 percent over this same period, a percentage 
which almost exactly matches the rise in overall product demand.\5\
---------------------------------------------------------------------------
    \5\ See, Appendix E, How Do Fewer U.S. Refineries Affect Supply?
---------------------------------------------------------------------------
    I should add that we would like to invest even more in this 
country, especially in exploring for and producing new supplies of oil 
and natural gas--if there were attractive, economic opportunities to do 
so. But the fact is the United States is a mature oil province, 
domestic production is declining from those areas that are accessible 
to the industry, and limited opportunities for new investment have been 
made available to us.

                           MARKET LEADERSHIP

    Finally, my third point. Markets work--if we let them.
    The response to Hurricanes Katrina and Rita proved the point. These 
storms were a one-two punch, to the petroleum industry as well as to 
many of your constituents. At one point, almost 29 percent of our 
domestic refining capacity was shut down, and all told, the 
Congressional Budget Office estimates the hurricanes caused somewhere 
between $18 billion and $30 billion in energy sector infrastructure 
losses.\6\
---------------------------------------------------------------------------
    \6\ Statement of Douglas Holtz-Eakin, Congressional Budget Office, 
``Macroeconomic and Budgetary Effects of Hurricanes Katrina and Rita,'' 
before the House Committee on the Budget (October 6, 2005).
---------------------------------------------------------------------------
    But we are recovering. Crude oil supply was quickly rerouted, 
refineries rapidly came back on-line, investors kept cool-headed, and 
production in the Gulf has been gradually restored.
    Credit for this goes, in part, to the energy industry, especially 
our diligent and dedicated employees who went above and beyond to 
repair the damage and to get back to work.
    Credit also goes to the Federal Government. Release of crude from 
the Strategic Petroleum Reserve and the temporary easing of regulations 
such as gasoline specifications and the Jones Act enabled us to 
reallocate resources effectively and efficiently. That helped.
    But most importantly, credit goes to our free market system. The 
hurricanes showed that markets work, even under the most extraordinary 
conditions.
    Even before the hurricanes made landfall, shippers rerouted 
tankers, refiners recalibrated output, traders reallocated resources, 
investors moved capital, and consumers began to change their 
consumption patterns.
    Prices for products did increase, of course, but there was no panic 
and no widespread shortage. Retailers responded to the short-term 
supply disruption, consumption decreased, and imports increased to make 
up for the shortfall.
    The remarkable recovery would not have been possible had the 
millions of Americans impacted by the storms--energy producers, 
refiners, suppliers, retailers and consumers--not had a free hand to 
respond. Markets enabled them to do so.
    And letting markets work will enable us to meet our future energy 
challenges.
    In just twenty-five years, global energy demand is expected to 
increase nearly 50 percent, with oil and natural gas needed to continue 
to meet a majority of that demand.\7\
---------------------------------------------------------------------------
    \7\ See, Appendix F, Will Energy Demand Continue to Increase?
---------------------------------------------------------------------------
    An estimated 100 million barrels of oil equivalent in new 
production is required during this time frame, as well as an estimated 
$17 trillion in new investment.\8\
---------------------------------------------------------------------------
    \8\ International Energy Agency, World Energy Outlook (2005).
---------------------------------------------------------------------------
    To be sure, much of future demand growth will be in developing 
countries like China and India. But because oil is a global commodity--
like corn or copper--failing to meet demand abroad means higher prices 
for Americans at home.
    The energy industry is meeting this challenge, and will continue to 
do so. Government can best help by promoting a stable and predictable 
investment environment, reinforcing market principles, promoting global 
trade, promoting the efficient use of energy, and implementing and 
enforcing rational regulatory regimes based on sound science and cost/
benefit analyses.
    It is this kind of leadership that is required of all of us to meet 
the future energy challenges we all face.
    Thank you.

    Chairman Stevens. Thank you very much.
    Our next witness is Mr. O'Reilly. I am looking for your 
title. We are happy to have your testimony, Mr. O'Reilly. You 
are chairman of Chevron.

 STATEMENT OF DAVID J. O'REILLY, CHAIRMAN AND CHIEF EXECUTIVE 
                  OFFICER, CHEVRON CORPORATION

    Mr. O'Reilly. Thank you, Senator. Thank you, Chairmen 
Domenici and Stevens, ranking member Bingaman, and Co-Chair 
Inouye, and committee members.
    I am here today representing 53,000 Chevron employees as 
well as millions of shareholders who have put their trust and 
confidence in our company, and I welcome the opportunity to 
talk together about working to deliver reliable energy supplies 
at reasonable costs to all Americans.
    I would like to make several points today. First, we have 
seen a situation of tight supplies and growing demand for 
energy for several years. The recent hurricanes in the Gulf 
Coast magnified that situation. Secondly, Chevron is investing 
aggressively to increase energy supplies. Since 2002 we have 
invested what we have earned. Thirdly, conflicting government 
policies and restricted access to opportunities make it 
difficult to invest here in the United States. Finally, I will 
make a few brief suggestions as to how I believe we can work 
together to create a more robust climate for U.S. energy 
investment.
    Let me provide some context which will illustrate my first 
point. We are here today to talk about energy prices, which 
came to the forefront following the hurricanes that devastated 
the Gulf Coast region, including the oil and gas industry. They 
disrupted oil and gas production, our pipeline network, and our 
refining and distribution operations. I personally visited our 
operations in the aftermath of the storm and it is difficult to 
appreciate the devastation in the Gulf Coast unless you have 
visited it firsthand.
    We were fortunate that no Chevron employees lost their 
lives, but many hundreds lost their homes and their 
possessions. Nonetheless, these same employees continue to work 
around the clock to resume normal operations, to get supplies 
to market. I could not be prouder of their heroic performance 
in the face of unimaginable adversity.
    Clearly, we experienced price volatility in the wake of the 
hurricanes. These price fluctuations reflected the fact that 
the storms shut in one-third of U.S. oil and gas production and 
one-fourth of U.S. refining capacity. Price volatility was also 
driven by localized panic buying, which led to temporary 
shortages of gasoline. As we began to normalize distribution 
and production in the days and weeks that followed, prices 
began to moderate.
    But the more important issue is that we have been operating 
in a tighter supply situation for some time now. I have been 
talking about this for the last year and a half, but I am happy 
to discuss it with the committees today. Today's energy markets 
are being shaped by several forces. Growing demand for energy, 
particularly in Asia, for example China and India, but also 
here in the United States, has resulted in decreased spare 
capacity in global crude oil supplies and the global refining 
system.
    Oil production in mature basins, particularly in Europe and 
North America, has been declining. New developments are 
occurring, but in challenging and capital-intensive locations 
outside of OPEC countries, such as the deep water, the Arctic, 
and oil sands. Meanwhile, OPEC production has increased, but is 
now approaching its current capacity to deliver.
    That brings me to my second point: Chevron is doing 
everything we can to expand and diversify the world's energy 
resources. We are doing it at huge cost and significant risk in 
some of the most challenging areas. We are doing it to assure 
supplies to our customers while providing a reasonable return 
to our investors. Since 2002 our company has invested $32 
billion in our business. During the same time period our 
earnings were $32 billion. In other words, we invested what we 
earned.
    Our investments flow to the areas of greatest opportunity 
and long-term return. In the United States, for example, 90 
percent--that is 90 percent--of our capital program for oil and 
gas production is focused in the Gulf of Mexico because it is 
open for investment. While our investment in the United States 
is significant, it is important to note that about two-thirds 
of our capital program--that is 65 percent--is outside the 
United States because of the relatively limited opportunities 
here at home.
    Investments in energy projects outside the United States 
also benefit U.S. consumers because they increase global 
supplies. However, let me give you an example of the type of 
inefficiencies that can occur when U.S. investment is 
discouraged. In our search for natural gas in the United States 
we have found many promising areas off-limits to development. 
For example, in the late 1980s we made a significant discovery 
of natural gas in an area of the eastern Gulf of Mexico called 
Destin Dome, approximately 25 miles off the coast of Florida. 
At the time it was estimated that Destin Dome held enough 
natural gas to supply one million--that is one million--
American households for 30 years.
    Chevron and its partners could not get the permits to 
develop the field because of opposition at the local level in 
Florida as well as a maze of regulatory and administrative 
barriers at the Federal level. We reluctantly relinquished the 
leases as part of a settlement reached with the Government in 
2002.
    So what actions are we taking now to supply natural gas to 
this market? We are co-leading a project to produce and liquefy 
natural gas in Angola, shipping it to an import facility in the 
U.S. Gulf Coast, and then piping it to the market. The 
customers will be the same customers who could have been 
supplied by natural gas just miles off the coast of Florida.
    This brings me to my final point. How can we create a 
policy environment that stimulates more investment in energy 
production and allows those investments to be made more 
efficiently? As I have stated, the industry cannot pursue its 
potential in the United States without the right government 
policies in place. The energy bill passed earlier this year was 
a start, but there is more we can do. I have offered a detailed 
list of policy recommendations in my written testimony, so I 
want to just quickly summarize four of them here.
    First, the U.S. Government should open areas currently off-
limits for the environmentally responsible exploration and 
development of oil and gas.
    Second, there is a critical need to rationalize regulations 
that create barriers to the efficient development and operation 
of energy infrastructure, for example siting of LNG terminals 
and expansion of refineries. There is also a need to reduce the 
number of boutique fuels.
    Third, we need to continue effective public-private 
partnerships that stimulate energy efficiency and research and 
development of potential new energy sources.
    Finally, the Government should look at all of its 
policies--environmental, trade, and foreign policy--and ensure 
that they are aligned towards achieving strategic energy 
objectives.
    Senators, I believe that if the U.S. Government can work 
with our industry as partners to eliminate barriers to 
investment, investment will follow. It is clear that the policy 
choices we have made in the past have had consequences. So too 
will the policy decisions made from this point forward. It is 
important that Congress and the American people recognize the 
choices that face us, understand their implications, and plot a 
constructive path forward.
    Thank you for the opportunity to comment. I appreciate it.
    [The prepared statement of Mr. O'Reilly follows:]

 Prepared Statement of David J. O'Reilly, Chairman and Chief Executive 
                      Officer, Chevron Corporation

                              INTRODUCTION

    Thank you, Chairmen Domenici and Stevens, Senators Bingaman and 
Inouye, and Committee Members. My name is Dave O'Reilly, and I am 
Chairman and CEO of Chevron Corporation. I am here today representing 
Chevron employees as well as the shareholders who have put their trust 
and confidence in our company.
    I welcome this opportunity to talk about working together more 
effectively to enhance our country's energy security and deliver 
reliable supplies of energy at a reasonable cost to all Americans. 
There are few industries more central to the vitality of the United 
States, or that touch more American households, than the oil and gas 
industry. Chevron takes this responsibility very seriously and I hope 
the information that I will share with you today will help you better 
understand the challenges we face--and the value that our industry 
provides to American consumers and the American economy.
    Chevron is a global energy company whose roots go back 126 years to 
the Pacific Refining Co. in California. We are the second-largest oil 
and gas company based in the United States, with approximately 53,000 
employees worldwide and a presence in more than 180 countries around 
the world. We are involved in virtually every aspect of the energy 
industry--from crude oil and natural gas exploration and production to 
the refining, marketing and transportation of petroleum products. We 
also have interests in petrochemicals and power generation assets and 
are working to develop and commercialize future energy technologies.
    Let me start by providing some context. We are here today to talk 
about energy prices, which came to the forefront following Hurricanes 
Katrina, Rita and Wilma. These hurricanes were devastating to the 
entire Gulf Coast region, including the oil and gas industry. They 
disrupted oil and gas production in the Gulf of Mexico, the network of 
pipelines in the region and many refining operations. I personally 
visited our operations in the aftermath of the storms. It is difficult 
to appreciate the devastation created by the hurricanes until you stand 
on the ground in south Louisiana and Mississippi. We were fortunate 
that no employees of Chevron lost their lives during the hurricanes, 
but many hundreds of our employees lost their homes and prized 
possessions. Despite this huge personal loss and tremendous family 
disruptions, those very same employees have been working around the 
clock to resume normal operations as quickly as possible to get 
supplies to market (Attachment A;* Chevron's response). I could not be 
prouder of their heroic performance in the face of almost unimaginable 
adversity.
---------------------------------------------------------------------------
    * Attachments A-D have been retained in committee files.
---------------------------------------------------------------------------
    The hurricanes had a clearly recognized dramatic impact on the 
domestic energy supply infrastructure. The storms temporarily shut in 
almost one-third of U.S. oil and gas production and one-fourth of U.S. 
refining capacity. This resulted in higher prices and volatility. Price 
volatility at the retail pump was also driven by localized panic buying 
of gasoline supplies, which led to temporary shortages. Every oil and 
gas company in the region had difficulty resupplying the market in 
those first days following the storms because power outages had shut 
down pipeline infrastructure, crippling the ability to move supplies 
into impacted areas. The temporary supply shortages had ripple effects 
elsewhere in the United States, and in the European and Asian markets, 
reflecting the interdependence of global energy markets. As 
distribution and production began to normalize in the weeks that 
followed, the market began to reflect that in moderating prices 
(Attachment B, regular gasoline prices). However, although most of the 
refining capacity has been restored, as of last week approximately one 
million barrels per day of crude oil and five billion cubic feet per 
day of natural gas remained shut in while repairs to facilities 
severely damaged by the storms are being made. I can assure you that my 
company continues to do everything we can to resume normal operations 
on the Gulf Coast as rapidly as possible.
    However, the larger and more important issue we need to address is 
that we have been operating in a tighter supply situation for some time 
now, brought about by fundamental changes in the energy equation. 
Growing global demand for energy, particularly from China and India but 
also in the United States, has resulted in decreased spare capacity in 
global crude oil supplies and the global refining system. Oil 
production in mature areas, particularly in Europe and North America, 
has been declining. New developments are occurring, but in challenging 
and capital-intensive locations, such as the deepwater, the Arctic, and 
oil sands in Canada and extra heavy oil in Venezuela. Meanwhile, OPEC 
production has been increased, but is now approaching its current 
capacity to deliver.
    Fundamentally, today's energy prices are a reflection of the 
current interplay between supply and demand, as well as complex 
regulatory and geopolitical forces. The hurricanes magnified this 
underlying trend and showed how vulnerable supplies are to disruptions. 
These impacts were felt not only in the United States, where the 
hurricanes occurred, but in energy markets around the world. The 
tightness of supply, and global energy interdependence, are issues that 
I have been discussing for the past year-and-a-half with a variety of 
our stakeholders. I have been urging fresh new policy prescriptions in 
response (Attachment C, select speeches).
    The aftermath of the hurricanes also highlighted challenges that 
are specific to the U.S. energy market--the concentration of oil and 
gas production in the Gulf of Mexico, the lack of spare refining 
capacity in the U.S. refining network (Attachment D, spare refining 
capacity) and the complexity of transporting numerous blends of 
gasoline from one part of the country to another under the current 
system of fuel specifications. The temporary waivers of those 
specifications by the Environmental Protection Agency (EPA), and 
numerous states, were some of the most effective actions government 
took following the hurricanes. This played a constructive role in 
alleviating regional gasoline shortages, and provided a glimpse of how 
regulatory reform can make markets work more efficiently.
    Chevron is investing aggressively in the development of new energy 
supplies for American businesses and consumers and will continue to do 
so. We believe that the increased awareness of energy issues facing the 
United States provides a good framework for a discussion of steps that 
the industry and government can take together to create a climate for 
enhanced investment that promotes economic and environmentally sound 
production of energy supplies.

                          HOW DID WE GET HERE?

    The energy situation in the United States today reflects a number 
of factors, most notably the increasing demand for transportation fuels 
and natural gas. But it also reflects the increasing complexity of the 
regulatory and permitting processes governing the industry. Numerous 
laws and regulations passed during the last 35 years have affected the 
petroleum industry. The early 1970s witnessed the passage of 
significant environmental legislation, the creation of the EPA, and a 
growing public resistance to development, i.e. ``not in my backyard'' 
(NIMBY). These were well-intentioned initiatives that created 
significant benefits for the environment. But over time, even as the 
oil and gas industry made great advances in its environmental 
stewardship capabilities, these pieces of legislation promulgated 
hundreds of federal, state and local collateral regulations--many of 
which have had the consequence of limiting energy production.
    The balance between regulatory benefits and economic benefits in 
our industry has been lost and it is time to look at ways we can 
restore that equilibrium.
    Moratoria, for instance, have closed off access to vast areas of 
our offshore exploration. In the 1980s, increasing public opposition to 
leasing led to Congressional pressure for annual moratoria in specific 
areas. By 1990, individual moratoria were so numerous that President 
H.W. Bush declared a blanket moratorium that applied to virtually the 
entire United States' coastline, except for a few locations. In 1998, 
President Clinton extended the ban for an additional 10 years to 2012. 
Federal offshore drilling is currently only allowed in Mississippi, 
Alabama, Louisiana, Texas and parts of Alaska.
    At the same time, regulatory hurdles have hindered onshore oil and 
gas development. The Bureau of Land Management (BLM) manages about one-
eighth of U.S. land. Projects on federally-managed lands supply about 
34 percent of total U.S. natural gas and 35 percent of total U.S. oil 
production. The majority of this land is in the western states, 
including Alaska. The Federal Land Policy and Management Act of 1976 
(FLPMA) is the guiding legislation for BLM's management of public lands 
and mineral estates--the purpose being to balance a variety of 
competing land uses including cattle grazing, recreational use, 
resource development and environmental protection. Existing 
environmental regulations and BLM processes for oil and gas regulations 
make obtaining leases and permits to produce difficult. The Arctic 
National Wildlife Refuge (ANWR) is another area currently ``off-
limits'' and the debate on whether to open it up for drilling has been 
going on for many years. As a result of government policies, 
responsible oil and gas development has been channeled away from 
Alaska, the Rocky Mountains, and offshore regions toward the more 
accessible areas along the Alabama, Mississippi, Louisiana and Texas 
coasts. For these same reasons, investment has been channeled outside 
the United States as well.
    The refining sector too has undergone many changes as it has 
responded to a need to become more efficient and to comply with 
environmental laws. No refineries have been built since 1976 and their 
number has dwindled substantially, from 325 in 1981 to 148 today. 
Despite that drop, the overall capacity of the U.S. refining system has 
been steadily increasing since 1994. Current capacity stands at around 
17 million barrels per day, up from 14.5 million in 1994. Refineries 
today are extremely efficient, operating at almost maximum capacity--
nearly 95 percent. But a variety of factors make it challenging to 
expand current refining infrastructure:

   Historically low economic returns in the refining business.
   Timing and cumulative impact of environmental rules 
        resulting in high costs for building new equipment.
   Delays in obtaining permits and NIMBY challenges.
   Multiple regulatory requirements to make a variety of 
        cleaner burning gasolines, which has resulted in a 
        proliferation of boutique fuels.
   Regulatory uncertainty regarding alternative fuels.

    Together, limited access to domestic supplies and constrained 
refining capacity in the United States have created a situation in 
which the United States has become increasingly dependent on imports of 
all forms of petroleum. Today, the United States imports 58 percent of 
its crude oil requirements and 15 percent of its natural gas--compared 
to 42 percent of its crude oil, and eight percent of its natural gas in 
1990. Imports of gasoline, jet fuel and diesel have risen from 12 
percent of consumption in 1990 to 22 percent today.
    At the same time, the American Petroleum Institute estimates that 
there are more than 131 billion barrels of oil (enough to produce 
gasoline for 73 million cars and fuel oil for 30 million homes for 60 
years) and more than 1,027 trillion cubic feet of natural gas (enough 
to heat 125 million homes for 120 years) remaining to be discovered in 
the United States. Much of the area where this exploration and 
subsequent production could occur is currently off-limits.

          WHAT CHEVRON IS DOING TO MEET AMERICA'S ENERGY NEEDS

    Now, let me turn to what Chevron is doing to increase energy 
production. Where we can, we are investing aggressively all across the 
energy value chain. Since 2002, Chevron has invested $32 billion in 
capital expenditures worldwide--compared with $31.6 billion in earnings 
for the same period. In other words, we invested more than we earned.
    This year alone, Chevron's capital investment program is estimated 
to exceed $10 billion worldwide. This is a 20 percent increase over our 
spending last year.
    Highlights of our current and planned investments in the United 
States include:

   The $3.5 billion Tahiti project, one of the Gulf of Mexico's 
        largest deepwater discoveries. We have begun construction of 
        the floating production facility to be installed there. When 
        complete, the facility will have a capacity of 125,000 barrels 
        per day of oil and 70 million cubic feet per day of natural 
        gas. It is scheduled to begin production in 2008.
   A $900 million project to develop the Blind Faith Field in 
        the deepwater Gulf of Mexico. This field is expected to provide 
        30,000 barrels of oil per day and 30 million cubic feet of 
        natural gas per day. It is scheduled to begin production in 
        2008.
   Continuing evaluation work on several deepwater Gulf of 
        Mexico discoveries (e.g., Great White, Tonga, Sturgis, Tubular 
        Bells), which have the potential to become significant 
        investment opportunities in the future, with direct benefits 
        for U.S. consumers.
   Stepping up to the technical challenges presented by 
        deepwater operations in the Gulf of Mexico. In November of 
        2003, Transocean and Chevron announced what was at the time a 
        new world water-depth drilling record for a well in 10,011 feet 
        of water in the Gulf of Mexico. Also, our successful Tahiti 
        well test completed in September 2004 in 4100 feet of water and 
        at 25,812 feet subsea was the deepest successful well test in 
        the history of the Gulf of Mexico.
   Proceeding with significant investments in our U.S. 
        refineries. Since 2001, including 2005 estimates, we will have 
        invested over $1.5 billion in our U.S. refineries to meet 
        various clean fuels requirements, comply with environmental 
        regulations, maintain safe and reliable operations and increase 
        capacity. Of that, about $900 million was invested in our two 
        California refineries (El Segundo and Richmond) and almost $500 
        million in our Mississippi refinery (Pascagoula).
   Recent investments in our El Segundo refinery will enable us 
        to increase gasoline production by about 10 percent. We also 
        have begun the permitting process at our Richmond refinery to 
        improve utilization. We expect these projects to increase our 
        gasoline production by about seven percent at this refinery. 
        Likewise, we have announced a significant investment for 
        expansion at our Pascagoula refinery that will also enable 
        increased gasoline production.
   Building Liquefied Natural Gas (LNG) projects in countries 
        in the Atlantic and Pacific ``basins'', which will result in 
        needed additional natural gas supplies for the U.S. market. To 
        accommodate these new supplies, Chevron is pursuing a portfolio 
        of options for LNG import terminals in North America. For 
        example, in Mississippi we have an application with Federal 
        Energy Regulatory Commission (FERC) to own, construct and 
        operate an LNG import terminal near our Pascagoula refinery.
   In addition, we have committed for terminal capacity of 700 
        million cubic feet per day at the Sabine Pass LNG import 
        facility currently being built in Cameron Parish, Louisiana. 
        This is a terminal use agreement for the next 20 years.

    While U.S. spending is significant, nearly 65 percent of our 
capital and exploratory expenditures have been directed towards 
investment opportunities outside the United States. As with any well-
run company in any industry, our investments have gone to areas where 
there is opportunity to invest and earn reasonable, long-term returns 
for the risks taken.
    But, it is inaccurate to think that investments in energy projects 
outside the United States do not benefit U.S. consumers. They do. Since 
oil is a globally-traded commodity, any investment anywhere in the 
world that adds to supplies tends to benefit all consumers, including 
those in the United States. And, while natural gas is not yet a 
globally-traded commodity, industry investments are rapidly moving us 
in that direction. Likewise, investments in global refinery capacity 
are generating additional supplies of petroleum products which benefit 
U.S. markets.
    Outside the United States Chevron is investing significantly in 
exploration and development projects in, for example: Nigeria (oil and 
natural gas); Kazakhstan (oil); Angola (oil and natural gas); Australia 
(natural gas); Indonesia (oil and natural gas); Thailand (natural gas); 
Venezuela (oil and natural gas); the United Kingdom (oil and natural 
gas); Canada (oil); and gas-to-liquids (GTL) facilities in Nigeria, 
which will use natural gas to develop ultra-clean diesel fuels that 
will be available for world markets.
    Chevron is expanding its natural gas business, which is very 
capital-intensive. Unless natural gas is consumed near where it is 
produced (and then pipelined to market), the gas must be liquefied, 
shipped, re-gasified, and then transported via pipeline to consumers. 
We have three very large projects in this category--in Angola, Nigeria 
and Australia--that we are working on to bring natural gas resources 
found outside the United States to American markets.
    In our search for natural gas in the United States, we have 
identified many promising areas currently off-limits to development. 
For example, in the late 1980s, we made a significant discovery of 
natural gas in the Eastern Gulf of Mexico called Destin Dome, 
approximately 25 miles off the coast of Florida. At the time, it was 
estimated that Destin Dome held enough natural gas to supply one 
million American households for 30 years.
    Chevron and its partners could not get permits to develop the field 
because of opposition in Florida and a maze of regulatory and 
administrative barriers at the federal level. After a long, expensive 
and frustrating effort to move forward, we relinquished the leases as 
part of a settlement reached with the government in 2002.
    So, what actions are we taking now to supply natural gas to this 
market? We are co-leading a project to produce and liquefy natural gas 
in Angola, ship it across the Atlantic Ocean to a regasification 
facility in the U.S. Gulf Coast, and transport it via pipeline to the 
market. The customers will be those same customers in Florida and the 
Southeast who could have been supplied by natural gas just miles off 
the shore of Florida.
    This is clearly not an efficient and economic use of resources for 
the United States, or the rest of the world for that matter. Yet it is 
the direct result of our historical energy policies.
    Similarly, U.S. energy policies have required significant 
investments in refining and marketing operations in order to meet 
environmental and new fuel specifications. From a U.S. energy policy 
perspective, the focus has been on environmental and fuels investments, 
not on investments that add to production capacity.
    Over the past decade, we have made substantial investments in 
projects to meet fuel specification and environmental objectives. We 
have invested in reformulated fuels for the California market and to 
prepare for additional blending of ethanol. We have invested to meet 
changing gasoline sulfur specifications, and new ultra-low sulfur 
diesel specifications to meet the requirements of new diesel engines.
    Even then, meeting these requirements has not always been easy or 
without risk. For example, the state of Georgia and the EPA delayed 
implementing new fuel specifications for the city of Atlanta after our 
Pascagoula refinery had already invested in facilities to meet the new 
requirements. As another example, it took us nearly 12 months just to 
get the local permit to build an ethanol blending tank at our Richmond 
refinery in California to meet a combination of federal and state fuel 
requirements.
    Chevron has also invested to increase the efficiency, reliability 
and capacity of our refining operations in the United States. In some 
instances, when we have debottlenecked and have added to capacity, we 
have had to pay severe penalties to do so. Because of the lack of 
clarity surrounding permitting rules, our company, along with most 
other majors in the industry, has had to reach settlements with the EPA 
over whether such routine maintenance, repair and replacement 
activities trigger the New Source Review permitting requirements.
    In addition to the investments I have just outlined, Chevron has 
spent more than $1 billion since 2000 on the next generation of energy 
by focusing on the pragmatic development of renewable and alternative 
energy sources, and the creation of more efficient ways of using the 
energy we already have.
    Since 1992, Chevron has taken steps that have reduced companywide 
energy use per unit of output by 24 percent. This is the result of 
having strong energy efficiency strategies, and business units that 
develop, share and adopt energy best practices across the corporation.
    Chevron has also made a successful business of developing energy 
efficiency solutions for the external market. Our subsidiary, Chevron 
Energy Solutions, is a $200 million business that has developed energy 
efficiency and renewable projects for large-scale facilities operated 
by the U.S. Postal Service, the Department of Defense, hospitals and 
public schools.
    Chevron is the world's largest producer of geothermal energy and we 
are investing sensibly but aggressively in the development of 
alternative fuel sources. In 2004, the U.S. Department of Energy 
selected Chevron to lead a consortium that will demonstrate hydrogen 
infrastructure and fuel-cell vehicles. Over a five-year period, the 
consortium will build up to six hydrogen energy service stations with 
fueling facilities for small fleets of fuel-cell vehicles and capacity 
to generate high-quality electrical power from stationary fuel cells.
    Chevron is 50 percent owner of Cobasys, a manufacturer of 
environmentally friendly advanced batteries for applications such as 
hybrid electric vehicles and stationery power applications. We have 
made significant investments in this venture, including the 
construction of a factory, to help meet the growing demand for 
batteries in these applications. Cobasys has received battery pack 
purchase orders from customers for upcoming hybrid electric vehicle 
production programs.
    Chevron has one of the largest solar photovoltaic installations in 
the United States, a 500 kw solar array, at our Bakersfield, California 
production location.

                    THE ROLE OF THE U.S. GOVERNMENT

    Even with the investments we are making now, more is required to 
meet future demand for energy.
    We acknowledge the work of the Congress in passing the Energy 
Policy Act of 2005, a start toward securing America's energy future. We 
believe, however, that there are additional steps that must be taken by 
Congress and the Administration:

   First, impediments to access for exploration should be 
        removed. This would include ANWR, areas in the Rocky Mountain 
        region, and Continental shelves.
   Second, the permitting process for LNG facilities, 
        refineries, and other energy infrastructure should continue to 
        be streamlined. There should be a coordinated, integrated and 
        expeditious review. There should be a clearly defined and 
        simple process with specific deadlines. One agency should be 
        designated as accountable for meeting overall guidelines. 
        Overlapping authority and conflicting or redundant processes 
        should be eliminated. Also, the Federal Government should help 
        educate state and local government, as well as the public, 
        about the need for these facilities.
   Third, there is a need to rationalize the proliferation of 
        boutique gasolines. The recently passed legislation by the 
        House of Representatives contains provisions that would limit 
        the number of boutique fuels. Rationalizing the current slate 
        of boutique fuels is critical to improving the current supply 
        situation by bringing fuel specifications into alignment with 
        the regional manufacturing, supply and distribution systems. 
        Additionally, granting EPA authority to temporarily waive and 
        pre-empt state fuel requirements in situations like we just 
        experienced will result in quicker response to such 
        emergencies.
   Fourth, as with the U.S. Department of Energy's leadership 
        and support of hydrogen projects, the Federal Government should 
        continue to support joint ventures with private enterprise to 
        advance technology and develop alternative energy supplies.
   Fifth, Congress and the Administration should continue to 
        support development of clean coal and nuclear power as 
        important sources of additional energy supplies.
   Sixth, the government should recognize the growing 
        interdependence of energy markets and work actively with other 
        countries to provide additional secure sources of energy and to 
        ensure a level investment playing field across national 
        boundaries.

                             THE ROAD AHEAD

    Clearly, we face a significant challenge. But I would suggest that 
when it comes to energy policy, we should acknowledge the new equation 
we face and work together to develop new solutions.
    Today, energy markets are globally interdependent. As a nation, we 
import an increasing percentage of our energy from abroad. Clearly, in 
the wake of this year's hurricanes, the importance of our ability to 
get energy supplies from abroad was critical to our recovery. In moving 
forward, we should recognize this interdependence as we pursue energy 
policies.
    Historical divisions are irrelevant in the energy equation we now 
face. When a single hurricane can knock out nearly 10 percent of our 
nation's gasoline supplies, it is clear that a new approach to dealing 
with energy issues is needed. This is no time for a divisive, business-
as-usual energy debate. The time for pragmatic and unified action is 
here.
    The good news is that energy goals advanced by well-meaning 
advocates on both the supply and production side, as well as the 
conservation and alternative-energy side, do not have to be at odds. We 
saw some evidence of this when the long-awaited 2005 energy bill was 
signed into law by the President earlier this summer. It was a start. 
But the hurricanes have shown that in many respects it did not go far 
enough.
    We need to shift the framework of the national energy dialogue to 
acknowledge that improving America's access to oil and natural gas, 
investing in new energy sources such as hydrogen fuel cells and 
renewables, and developing clean coal and nuclear power sources are, in 
fact, complementary goals that can help create affordable, reliable 
energy supplies. The American public has shown in the past that when 
they know the facts, they will cast aside partisanship in favor of 
pragmatic solutions. Given the state of the country's current energy 
situation--constrained supplies and volatile prices--Americans deserve 
that kind of discussion.
    So let's begin now to reframe the debate. Here are three ideas that 
can help guide a new national dialogue:
    First, we need to begin viewing energy as an asset to be optimized, 
not a liability to be managed. We need to let go of the old paradigm 
that energy development and environmental stewardship cannot co-exist. 
If we use the assets we have more effectively, while also seeking to 
diversify our energy supply, our nation will be well on its way toward 
greater energy security.
    Second, we need to rationalize the complex thicket of regulations 
and permitting requirements that is acting as a bottleneck to the 
efficient development and operation of energy infrastructure, 
particularly in the refining sector.
    Third, we need to broaden the goal of energy efficiency beyond 
individual actions such as turning down the thermostat, as effective as 
they can be. The next generation of energy efficiency, which will be 
driven by human ingenuity and technology, must target enterprise 
solutions such as ``smart'' buildings, hybrid vehicles and the 
development of ultra-clean diesel fuels from natural gas. The Federal 
Government can play a constructive role in enabling increased 
investment in energy efficiency, as it did earlier this year by 
renewing the Energy Savings Performance Contracting Program, which 
enables businesses to make their facilities more efficient and then 
recoup the capital investment with the money saved from lower energy 
use.
    We can do all these things. Having seen our employees respond to 
the hurricanes, I know Chevron is up to the challenge of helping to 
meet our future energy needs. America is equally up to that challenge. 
But it will require crossing hardened political and ideological lines 
toward a new national consensus on energy policy.
    The interrelationship of such a policy with our national security, 
trade, economic, and environmental policies will have to be clearly 
recognized, and the necessary balances examined, debated and resolved 
with the understanding and support of the American public. This will 
require significant skill and leadership from our government.
    For too long, Americans have been led to believe they can enjoy low 
oil and gasoline prices with less exploration and refining. The 
hurricanes have shown that this equation is not sustainable. As we move 
forward, let's not default to quick fixes, partisan solutions, or 
unrealistic goals. Let's be clear-headed and pragmatic. A bi-partisan, 
public-private commitment to these goals will help protect America from 
the next energy crisis, and safeguard America's quality of life.
    Thank you.

    Chairman Stevens. Thank you very much, Mr. O'Reilly.
    Our next witness is the chairman and CEO of ConocoPhillips, 
James Mulva.

   STATEMENT OF JAMES J. MULVA, CHAIRMAN AND CHIEF EXECUTIVE 
                    OFFICER, ConocoPhillips

    Mr. Mulva. Good morning. I welcome this opportunity to 
demonstrate what our company, ConocoPhillips, is doing now and 
what we are committed to doing in the future to help the United 
States achieve greater energy system at an affordable cost.
    Today's higher prices are a function of longer term supply 
and demand trends and lost energy production during the recent 
hurricanes. While ConocoPhillips does not expect the prices we 
see today to continue, we do want to give you an appreciation 
of the challenges that lie ahead in supplying the United States 
and the world's energy needs.
    For example, exploration and development projects typically 
cost several billion dollars, but have no revenues for 7, 8, 
sometimes 10 years, and they have substantial technical, 
capital, political, and price risk. Our industry is 
experiencing rapid cost increases due to high steel prices and 
service industry costs, and also because host governments, 
including the United States, limit access to reserves or make 
the terms too unattractive. Thus the opportunities that are 
available for us tend to be the more remote, complex, and 
higher cost type projects.
    The fragile balance of world energy supply and demand was 
brought into sharp focus when Hurricanes Katrina and Rita 
disabled a major portion of America's productive capacity. 
Given the amounts of devastation, we believe that the energy 
industry did a commendable job of resuming operations as fast 
as humanly possible and redistributing supplies from other 
regions and countries, thereby avoiding a much larger supply 
disruption. As a testament to the industry's success, AAA 
reported on November 2 that gasoline prices have declined for 
the 26th consecutive day, to a level below where they were 
prior to the hurricanes.
    ConocoPhillips lost one-third of its domestic refining 
capacity as a result of the shutdown of three of our 
refineries. One of our refineries is down for a week, another 
for 45 days, and the last is expected to resume partial 
operations by year's end. To increase gasoline supplies to 
affected areas, our company redirected supply from some of our 
other refineries in the United States, we deferred turn-around 
work at three of our other countries refineries, and imported 
gasoline from Europe, and we worked around the clock to resume 
and restore our operations.
    Immediately after Katrina's and Rita's arrival, our company 
froze gasoline prices in the impacted States at all of our 
company-owned stations and convenience stores for several days 
and then lagged price increases in the spot market by nearly 50 
percent. Essentially all of our company's gasoline marketing is 
done through independent marketers and, although antitrust laws 
prevent us from giving them specific guidance on pricing, we 
urged all of them to use restraint in setting their prices.
    ConocoPhillips is and has always been against any form of 
price-gouging. If we become aware that any of our independent 
marketers were doing this, that would be grounds for revoking 
our branded name from that dealer. We know that many State 
attorneys general are requesting reviews and we are ready to 
open our records to them to show that we do not conduct, 
condone, or tolerate price-gouging.
    ConocoPhillips reported third quarter 2005 net income of 
$3.8 billion, which is up 89 percent from the same quarter last 
year. With respect to U.S. refining and marketing income, this 
segment accounts for about 33 percent of the 89 percent 
increase. Now, translating this increase in U.S. refining and 
marketing earnings to earnings per gallon sold, earnings were 
up 4 cents per gallon from last year, that is from 5 cents per 
gallon in the third quarter of 2004 to 9 cents per gallon in 
the third quarter of 2005.
    So how is this possible when the industry average retail 
price for gasoline went up 67 cents per gallon from the third 
quarter of 2004 to the third quarter of 2005? So let me explain 
what happened with the 67-cent increase from one year to the 
next. 54 cents per gallon went for higher crude oil and 
feedstock costs that we must pay to run through our refineries. 
The oil that we purchase usually represents 85 to 90 percent of 
the total cost of running our refineries.
    Operating and marketing costs remained flat on a per-gallon 
basis, while taxes increased 3 cents per gallon due to the 
higher earnings. In addition, 6 cents per gallon represents 
retail industry taxes and margins that our company is not 
exposed to because our U.S. marketing operations are 
predominantly wholesale activities. That leaves us with 4 cents 
per gallon additional profit, which is 6 percent of the total 
increase in gasoline prices from 1 year to the next.
    Based on ConocoPhillips's third quarter revenues of about 
$50 billion, the $3.8 billion of income represents a profit 
margin of 7.7 cents per dollar of sales, near or below the 
average of all U.S. industry. With this level of profit in the 
highest price environment our industry has experienced in 22 
years after adjusting for inflation, we do not see this as a 
windfall.
    At ConocoPhillips we have ramped up our investment 
significantly in recent years, from $6 billion of investment in 
2003 to $9.5 billion in 2004 to more than $11 billion expected 
this year. For 2006 we are forecasting $12 billion in capital 
investment. Over the last 3 years our company delivered about 
$26 billion of earnings, but has reinvested over $26 billion 
right back into the business to expand capacity in terms of 
production and refining capacity. In 2005 our company has 
earnings of about $10 billion year to date, or about a billion 
dollars a month, but our capital investments are also close to 
one billion dollars a month.
    ConocoPhillips has been at the forefront in recent years in 
growing its refining capacity. Over the past 5 years we spent 
$4 billion in worldwide refining, of which $3.2 billion was 
primarily spent to expand and modernize our refineries in the 
United States. Before the two hurricanes, we announced an 
incremental investment program. This is now $4 to $5 billion on 
top of our maintenance and other refinery investments of $1 to 
$2 billion per year aimed at growing our U.S. refining 
capacity. With these expansions and improvements, we expect to 
be producing 15 percent more clean fuels, such as gasoline, 
diesel, and heating oil, by the end of this decade. That is the 
equivalent of adding at least one world-scale refinery to our 
domestic refining system.
    As the largest energy producer in Alaska, we are working 
closely with the State of Alaska and others to bring North 
Slope natural gas to the lower 48 market through a new pipeline 
expected to cost $20 billion. The line will add as much as 4.5 
billion cubic feet per day to the Nation's gas supply. This 
represents about 8 percent of current U.S. production. 
ConocoPhillips recently agreed in principle to the basic fiscal 
terms with the governor of Alaska, which is a significant step 
in moving this important project forward.
    We are also investing aggressively in bringing liquefied 
natural gas, LNG, to the U.S. market. We are progressing LNG 
projects in Qatar, Nigeria, and aggressively pursuing projects 
in Russia, Venezuela, and Australia. These are all multi-
billion dollar projects.
    Our country sorely needs additional refining capacity, 
pipelines, and other critical energy infrastructure, including 
LNG receiving terminals. The private sector will make these 
investments without need of any new government incentives. 
However, the industry needs governments at all levels to 
streamline permitting and environmental review processes so we 
can make these investments and add to our energy supplies.
    We also encourage you to give more serious consideration to 
the issue of resources access. With the entire east and west 
coast and the eastern Gulf of Mexico and key areas in Alaska 
all closed to entry, it is understandable why the supply-demand 
balance is tight.
    We also want to express support for the development of all 
energy sources--coal, nuclear, alternative energy--as well as 
conservation and efficiency standards. We will need to include 
all of these to diversify our supply sources and put some extra 
capacity back into our energy system.
    We caution against advancing short-term proposals that will 
restrict the industry's ability to re-invest its funds on 
finding and producing more energy. While these make powerful 
headlines, the fact remains that such proposals invariably 
reduce investment and supplies. In addition, these proposals 
would hurt the competitiveness of the U.S. energy companies as 
we seek to compete for resources around the world.
    That completes my prepared remarks. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Mulva follows:]

  Prepared Statement of James J. Mulva, Chairman and Chief Executive 
                        Officer, ConocoPhillips

                              INTRODUCTION

    Good morning, members of the energy and commerce committees. My 
name is James Mulva, and I serve as chairman and chief executive 
officer of ConocoPhillips. ConocoPhillips currently serves as chair of 
the American Petroleum Institute but my comments today reflect only the 
views of ConocoPhillips.
    ConocoPhillips appreciates the invitation to testify and respond to 
your questions regarding the energy situation facing the United States 
today. ConocoPhillips fully appreciates your and the American public's 
concerns regarding supply availability and cost. In fact, we welcome 
the opportunity to demonstrate what ConocoPhillips has accomplished, 
and what we will continue to achieve to supply the energy required in 
the market place.
    In this statement and when answering your questions to the best of 
my ability, I will from time to time express my opinions, beliefs and 
predictions about future events. As I'm sure you appreciate these 
future events are subject to risks and uncertainties, many of which are 
described in our public filings, which I refer you to.
    Let me begin by giving you a brief description of our company. 
ConocoPhillips is an international, integrated energy company, 
headquartered in Houston, Texas and operating in 40 different countries 
with year-to-date September 2005 annualized revenues of $175 billion 
and assets of $104 billion. We are the third largest integrated energy 
company in the United States, based on market capitalization, oil and 
gas proved reserves and production, and the second largest refiner in 
the United States. But a company is more than its revenues and assets--
it is its employees, shareholders and the communities it touches. We 
are comprised of approximately 35,800 employees, who own about 5 
percent of our shares through company-sponsored benefit plans. 
Approximately 83 percent of ConocoPhillips' stock is owned by more than 
2,000 different mutual funds, representing investments by a wide array 
of individuals and businesses, as well as numerous private and public 
pension plans.
    Our investors expect a combination of growth and returns from our 
company. Our job is to meet these expectations by operating our 
facilities well and holding costs down when markets are strong or soft, 
and by expanding our investments when markets signal that new supplies 
are needed. For the last 20 years, the petroleum industry has had sub-
par returns, which limited the capital available for investment. Within 
the past two years, the price signals have encouraged the industry to 
recalibrate the investment dial to higher, more aggressive levels of 
spending. Until recently, accelerated levels of investment were not 
encouraged because growing global demand could be met largely from 
spare oil production capacity in Russia and in OPEC countries, and by 
taking advantage of spare global refining capacity and spare capacity 
in oilfield services and supplies. That situation has changed, and 
today the industry can offer the prospects of profitable growth as it 
steps up its investment in huge, complex energy projects around the 
world. We feel confident that this response will lead to a moderation 
of prices and increased energy security.

                GLOBAL ENERGY CHALLENGES--SUPPLY/DEMAND

    You have asked us here today to explain the record high prices 
recently observed at the gasoline pump as well as prices of other fuels 
such as natural gas and home heating oil. The higher prices we see 
today were many years in the making.
    Crude oil prices are the main driver of gasoline and other product 
prices, as noted in a recent Federal Trade Commission report. The 
report indicated that over the last 20 years, changes in crude oil 
prices have explained 85 percent of the changes in the price of 
gasoline in the United States. Crude oil prices are determined in the 
international market by thousands of entities based on the market 
conditions that day.
    Global crude prices have been rising since 2002 as a result of the 
U.S.-led global economic recovery, leading to exceptional oil demand 
growth and rapid industrial growth in the developing economies of Asia. 
Over the last decade, oil demand in China and India doubled, and is 
expected to double again by 2020. Strong U.S. and global economic 
growth are certainly desirable but the consequence of strong growth is 
a rise in the demand for commodities, including oil. If incremental 
supplies are not immediately forthcoming, then prices rise to encourage 
new investments, and prices have indeed risen for most commodities, 
including oil, in recent years.
    This exceptional demand growth over the last few years has left 
little surplus crude oil production capacity available in the world 
today. Concern about geopolitical risk in various oil-producing 
countries in the face of limited spare production capacity has helped 
drive oil prices higher. While ConocoPhillips doesn't expect the prices 
we see today to be sustained, we do want to give you an appreciation of 
the challenges that lie ahead in supplying the U.S. and the world's 
energy needs.
    Our typical exploration and development project costs several 
billion dollars up front and does not generate production or revenues 
for 7-8 years. Our projects also have high technical, capital, 
political and price risks. Commodity prices have always been cyclical 
in nature and we can't invest based on the assumption that the present 
price situation will persist when our projects often last for 30 years. 
So the first challenge is investing these large sums in an atmosphere 
of great price uncertainty.
    Another challenge is that it takes an ever increasing amount of 
capital to keep production in the mature oil and gas fields in the 
United States and the north sea from declining. We will eventually lose 
this battle.
    After two decades of declining costs, our industry has experienced 
rapid cost increases over the last five years. Some of this increase is 
a reflection of high steel prices and the high level of industry 
spending, with the oil services industry struggling to keep pace. 
However, costs also are rising because international oil companies 
don't have access to low-cost reserves, primarily because host 
governments, including the United States, don't allow access to 
reserves or make the terms too unattractive. The opportunities 
available to us tend to be more remote, complex, or involve lower 
quality crude oil that requires higher prices to be economically 
produced.
    Resource access is a particular problem for natural gas in the 
United States, since the most highly prospective areas are off limits 
for drilling or the permitting requirements are so onerous that the 
prospect becomes uneconomic. Given industry decline rates of 30 percent 
per year in existing lower 48 natural gas wells, and the long lead 
times in liquefied natural gas (LNG) and arctic gas pipelines, the 
United States will be short of gas in the near-term. The only way to 
solve this problem is by making more acreage available, especially in 
the eastern Gulf of Mexico.
    Another challenge is that much of the investment required in energy 
today is for energy infrastructure in consuming countries, such as 
refineries, liquefied natural gas receiving terminals, and pipelines. 
In the United States, nimby (not-in-my-back-yard) sentiments have 
caused costly delays and even the abandonment of these important 
infrastructure projects.
    The final challenge I would like to raise is that the petroleum 
industry for the last 20 years has had sub-par returns, which limited 
the capital available for investment. Between the difficult years of 
1990 and 2002, the average return on equity for the petroleum industry 
was 11.3 percent, lower on average than the 12.6 percent return for the 
S&P 500. The refining & marketing sector has an even lower historical 
return on capital than the total petroleum sector. Between 1990 and 
2002, the refining and marketing sector had a return on capital 
employed of 5.0 percent versus 7.1 percent for the total petroleum 
industry.
    The refining sector has been particularly challenged because so 
much of the capital spending has been directed toward on site 
environmental needs and the production of clean fuels. In addition to 
investing heavily to meet federally mandated fuel specifications, 
refineries have put substantial capital into addressing state and local 
boutique fuel requirements, which have added to the cost of producing 
gasoline and reduced the fungibility of product.
    We also cannot ignore the negative impact that federal and state 
regulatory processes have had on discouraging new grass roots 
refineries. The process for siting and securing the many permits 
necessary for a refinery are lengthy and difficult. We have found this 
to be the case in our on-going efforts to expand refinery capacity at 
existing locations. Historically, there has been substantial excess 
refining capacity outside of the United States, allowing for relatively 
low-priced product imports. Given strong demand growth of recent years, 
the amount of excess capacity has been reduced, which is sending price 
signals globally to expand capacity. Governments also need to recognize 
the importance of international trade in our industry, and should avoid 
doing anything that might impede the free flow of crude oil, refined 
products, capital and people.
    Given the enormous size and risk of the investments our industry is 
contemplating, we need an adequate return to bring these investments to 
fruition. Unfortunately, returns in our industry are highly cyclical. 
Today, we are in an up-cycle but we saw our last down-cycle as recently 
as 1998 when crude oil prices fell to $11 per barrel. There will 
undoubtedly be another down cycle in the future, and we have to build 
the financial strength to withstand these even as we increase 
substantially our capital employed in this sector.
    We want you to know that despite these enormous challenges our 
industry has collectively invested nearly $380 billion in energy 
supplies and infrastructure over the last five years.

                          IMPACT OF HURRICANES

    Much has been written about the devastation of Hurricanes Katrina 
and Rita and how they disrupted peoples' lives. The storms also 
provided a wake up call on the fragile balance in global energy supply 
and demand and the vulnerability of this country's energy 
infrastructure in the Gulf Coast area. The Office of Management and 
Budget recently estimated that the energy industry will spend somewhere 
between $18 billion and $31 billion to bring operations back on line.
    Heavy damage from the two hurricanes all but closed down the 
refinery infrastructure in the region. Immediately after the storms, 
about a third of total U.S. refining capacity was not in production. 
Today, about 800 thousand barrels per day, or about 5 percent of total 
U.S. refining capacity, is still not operating. That includes some 
247,000 barrels per day from ConocoPhillips' Alliance refinery, south 
of New Orleans, which suffered severe flooding. We expect to see 
Alliance back up in partial operation by year's end.
    Some 100 offshore production platforms were destroyed by the 
storms. After hurricane Rita, nearly all of the crude oil production in 
the Gulf of Mexico was shut in, as was 75 percent of the industry's 
natural gas production. Today about 800 thousand barrels per day or 
about half of federal Gulf of Mexico crude oil production, and 4.7 
billion cubic feet per day, or nearly half of the natural gas 
production remain shut in. Additionally, many other sectors of energy, 
including utilities and pipelines suffered significant damage from 
these storms. We are pleased to report that ConocoPhillips was able to 
restore 100 percent of its operated production within five days after 
Hurricane Katrina made landfall, and 97 percent of its operated 
production within 10 days after Hurricane Rita made landfall.
    Right now, the focus of attention is supply security and price but 
when we look back, it will be recognized that the energy industry did a 
commendable job in getting the infrastructure back on its feet in a 
hurry, and that we avoided what could have been a much larger supply 
disruption. Despite the fact that the 1,100 ConocoPhillips employees 
were personally impacted by the hurricanes, many were immediately back 
working on returning our facilities to production as rapidly as 
possible. As a testament to industry's success in bringing in new 
supplies after the hurricanes, AAA reported on November 2 that gasoline 
prices have declined for the 26 consecutive day, and the U.S. average 
price, and prices in most states, are lower than they were prior to the 
hurricanes. The data also shows that retail prices in the Gulf Coast 
rose by a much smaller percentage than spot gasoline prices after both 
storms, demonstrating pricing restraint by the industry.
    While gasoline prices were on the front page prior to the 
hurricanes, there is little doubt that the back-to-back storms greatly 
exacerbated price increases, especially in the impacted states. As a 
result of massive refinery shutdowns, there was an immediate increase 
in the spot price of gasoline. This price rise encouraged gasoline 
supplies from around the world to be diverted to the United States. 
Gasoline imports from the beginning of September through the end of 
October were 35 percent higher than they were during the same period 
last year. With increased supply, prices then readjusted downwards 
rapidly. This demonstrates that the market works.
    Diesel supplies have proved to be more difficult to import than 
gasoline supplies because of the tight global diesel supply/demand 
balance, and particularly strong demand for diesel fuel in Europe, 
which prevented some product from being diverted to the United States. 
This also demonstrates the risks of biasing consumers towards one fuel 
over another. Diesel has benefited from advantageous tax treatment for 
decades in several European countries. As a result, diesel demand now 
exceeds gasoline demand, prices are rising and U.S. customers who use 
the same product as heating oil are paying more. Diesel market 
tightness in the U.S. has also been exacerbated by refineries 
maximizing gasoline versus diesel production to meet immediate consumer 
gasoline needs. As the refining industry prepares to meet the 
congressionally-mandated deadline for producing low-sulfur diesel by 
June 1, 2006, you may continue to observe erratic pricing in diesel 
markets next year.
    There continue to be concerns about home heating oil and natural 
gas as we enter the winter months. Weather, and its impact on demand, 
will determine how prices react. The problem with natural gas is that 
there is still 9 percent of U.S. supply shut in and there is little 
additional liquefied natural gas supply available for import this 
winter. In fact, there have been reports of several European and Asian 
buyers paying U.S. price levels of $12 per million British thermal 
units for spot LNG cargoes so that the cargoes wouldn't be redirected 
to the United States. Thus, it is important that governments at all 
levels encourage consumers to conserve natural gas this winter.
    There will be substantial new supplies of LNG starting in 2008-
2009, when the first slate of LNG projects dedicated to U.S. markets 
comes on line. However, it should be noted that virtually all of the 
LNG receiving terminals currently being constructed are in the western 
Gulf of Mexico. Given our recent experiences with hurricanes, it would 
seem prudent to also build some of the LNG terminals on the east and 
west coasts.

          OUR RESPONSE--HURRICANE IMPACTED SUPPLIES AND PRICES

    ConocoPhillips, one of the largest refiners in the United States, 
temporarily lost one-third of its domestic capacity as the result of 
the shutdown of three refineries. Of the three refineries, one was down 
for about one week, another for 45 days and the alliance refinery 
mentioned previously is expected to be back up in partial operation by 
year end.
    I am proud of the performance of our employees as they handled this 
supply short fall. We carefully managed our limited, available gasoline 
and diesel inventories to ensure that local and federal emergency 
responders were given top supply priority within the areas impacted by 
the hurricanes.
    To increase gasoline supplies to affected areas, ConocoPhillips 
redirected supply from some of its other refineries, deferred 
turnaround work at three other company refineries, imported gasoline 
from Europe, and worked around the clock to safely restore operations. 
Affected ConocoPhillips plants worked diligently to restore temporary 
power and operations that allowed rapid blending and shipping of all 
available products stranded in storage just prior to the hurricanes.
    With respect to diesel, when all three of our refineries were down, 
we lost 200,000 barrels per day of diesel production. This created a 
shortage and severely limited our ability to supply our normal spot and 
term diesel customers in Texas, the Southeast and Oklahoma. We couldn't 
import a significant volume of diesel fuel because of the strong demand 
in Europe, and because of the limited import capability on the Gulf 
Coast. To help balance available supply with demand, ConocoPhillips had 
to discontinue all discretionary spot sales and purchase additional 
supplies on the spot market to fulfill all of our term contracts.
    Getting two 100-year hurricanes in four weeks that temporarily shut 
down 30 percent of the nation's refining capacity led to product price 
increases in the physical and financial markets. But immediately after 
Katrina's and Rita's arrival, ConocoPhillips froze gasoline prices in 
the impacted states at all company-owned stations and convenience 
stores for a few days, and then lagged price increases in the spot 
market by nearly 50 percent. We also requested our independent 
marketers to use restraint in setting prices and not to do anything to 
tarnish our branded name. Essentially all of ConocoPhillips' branded 
sales are done through independent marketers. Anti-trust laws prevent 
us from giving our independent marketers any specific guidance on 
pricing. We only own 350 outlets in the United States, which represents 
three percent of ConocoPhillips' refining capacity. At no time did we 
lead price increases; we showed restraint and intentionally lagged 
behind prices in the financial and physical markets.
    The petroleum industry has routinely been accused of price gouging 
whenever there are sudden changes in oil and natural gas prices. In a 
report published earlier this year, the Federal Trade Commission stated 
that the vast majority of its investigations have revealed market 
factors to be the primary drivers of both price increases and price 
spikes. ConocoPhillips is and has always been against any form of price 
gouging. If we became aware that any of our independent marketers were 
doing this, that would be grounds for revoking our branded name from 
that dealer. We know that many state attorney generals are requesting 
reviews, and we are ready to open our records to them to show that we 
do not conduct, condone or tolerate price gouging.

                        EARNINGS AND INVESTMENTS

    Since there has been a lot of focus on energy company earnings in 
the third quarter, we want to explain our earnings and how much of them 
we have reinvested.
    COP reported third-quarter 2005 net income of $3.8 billion, up 89 
percent from this quarter last year. 48 percent of this increase comes 
from our worldwide oil and gas exploration and production operations, 
38 percent of this increase comes from our worldwide refining and 
marketing operations and 15 percent comes from our strategic alliance 
with LUKOIL, which we entered into during the fourth quarter of 2004.
    With respect to U.S. refining & marketing income, this income 
represents 33 percent of the 89 percent increase. Earnings from our 
U.S. refining and marketing operations were about $1.1 billion in the 
third quarter of 2005, compared with $505 million a year ago. Earnings 
per gallon sold were only up 4 cents per gallon from last year, from 5 
cents per gallon in third-quarter 2004 to 9 cents per gallon in third-
quarter 2005.
    The industry average retail price for gasoline went up 67 cents per 
gallon from third quarter 2004 to third quarter 2005 ($1.93 per gallon 
to $2.60 per gallon). Contrasting the retail price increase with 
ConocoPhillips' 4 cent per gallon increase, begs the question:
    Where did all of this difference go?

   54 cents per gallon went for higher crude oil and feedstock 
        costs that we must pay to run through our refineries. Normally, 
        the oil that we purchase represents 85 to 90 percent of the 
        total cost of running our refineries.
   operating and marketing costs remained flat on a per gallon 
        basis, while taxes increased 3 cents per gallon due to higher 
        earnings.
   in addition, 6 cents per gallon represents retail industry 
        taxes and margins that ConocoPhillips is not exposed to because 
        our U.S. marketing operations are predominately wholesale 
        activities.
   that leaves 4 cents per gallon profit or 6 percent total 
        increase in the gasoline price.

    ConocoPhillips' third-quarter revenues of about $50 billion 
generated about $3.8 billion of income. This represents a profit margin 
of 7.7 cents per dollar of sales, near or below the average of all 
industries. With this level of profit in the highest price environment 
our industry has experienced in 22 years, adjusted for inflation, we 
don't see a windfall.
    We also fear that people are mistaking the size of our earnings for 
a windfall, not realizing the enormous levels of investment required to 
achieve those earnings and bring new energy supplies to the market.
    Let me tell you how much ConocoPhillips is investing, and the rate 
which spending has ramped up in recent years. ConocoPhillips invested 
about $6 billion in 2003, growing to $9.5 billion in 2004, an estimated 
$11.4 billion in 2005 (annualized year-to-date third-quarter actuals) 
and $12 billion forecasted in 2006, which is double the 2003 level.
    ConocoPhillips has been investing its earnings back into 
maintaining and expanding supplies. We have had 2005 earnings of about 
$10 billion year-to-date--about $1 billion a month, but our capital 
investments are also close to $1 billion a month. In fact, over a 
three-year timeframe, using 2003-2004 reported results and 2005 
annualized year-to-date third-quarter actuals, ConocoPhillips earnings 
are about $26 billion but investments are just over $26 billion. In 
2006, we intend to increase our capital spending despite the fact that 
we expect to have a lower price environment, increased cost pressure 
and lower earnings.

                          OUR INVESTMENT STORY

    ConocoPhillips has been aggressively investing in refining, and in 
developing new natural gas supplies for the United States. The projects 
described below are all very large and will require significant capital 
expenditures in the future.
    Industry analysts, some of whom questioned the economics of our 
decisions, will tell you that we have been at the forefront in recent 
years in growing the company's refining business when most of our 
competitors were focusing on exploration and production. Over the past 
five years, ConocoPhillips has spent $4.0 billion worldwide, of which 
$3.2 billion was spent domestically, to expand and modernize our 
refineries and upgrade marketing operations.
    Going forward, we are planning an expanded incremental investment 
program, whereby we expect to invest $4-5 billion, on top of our 
maintenance and other refinery investments of $1-2 billion per year. 
This investment program is aimed at growing our U.S. refining capacity 
by about 11 percent and improving our capability of handling lower 
quality oils in order to make 15 percent more clean fuels such as 
gasoline, diesel and heating oil by 2011. These expansions will add 
enough clean fuels product to be the equivalent of adding one world 
scale refinery to our domestic refining system.
    ConocoPhillips will continue to be proactive and we applaud 
industry efforts to expand capacity and add new refineries. We do not 
need any new government incentives to make these investments. However, 
we do need thorough--but expedited--permitting and regulatory 
environmental reviews so we can quickly make the investments, thereby 
adding capacity and refined product supply.
    ConocoPhillips is making major investments in North American arctic 
natural gas through the Mackenzie Delta pipeline and Alaskan North 
Slope pipelines. The initial development of the Mackenzie Delta will 
access 6 trillion cubic feet of gas, which is expected to come on 
stream in 2011 at approximately 1 billion cubic feet per day. As other 
fields are added, the pipeline will have the capacity to be expanded to 
1.8 billion cubic feet per day. The total cost of this pipeline is 
estimated to be at least $6 billion.
    The Alaskan North Slope presently has an estimated 35 trillion 
cubic feet of natural gas, which would increase total U.S. gas reserves 
by approximately 20 percent. When the pipeline connecting this gas with 
the lower 48 market is completed, about 4.0-4.5 billion cubic feet per 
day will be added to natural gas supplies. This equates to about 8 
percent of present U.S. natural gas production. This project 
exemplifies what we have been saying about capital intensive projects 
that require many years before we see a return on the investment. The 
Alaska pipeline alone is expected to cost about $20 billion and take 
ten years before the first cubic foot of gas is sold on the market. Two 
weeks ago, ConocoPhillips joined Governor Murkowski of Alaska in 
announcing that we have reached an agreement in principle on terms and 
conditions that would move the Alaskan natural gas pipeline closer to 
reality. Once agreement is completed by all gas owners, the Alaska 
legislature will, hopefully, act on that agreement, passing it quickly. 
While it is not a short term solution, gas from Alaska will, 
eventually, make a sizable contribution in addressing the market 
problems we are anticipating for natural gas.
    ConocoPhillips is also investing aggressively in bringing liquefied 
natural gas (LNG) to the U.S. market. We are progressing LNG projects 
in Qatar and Nigeria and aggressively pursuing projects in Russia, 
Venezuela and Australia. These are all multi-billion dollar projects. 
We will bring our first cargo of Qatari gas to the United States in 
2009. We are also developing an LNG supertanker to bring gas to the 
United States. We are participating in the construction of an LNG 
regasification facility at Freeport, Texas. We are pursuing a second 
LNG regasification terminal in Compass Port, offshore Alabama, although 
it is currently bogged down in the permitting process. We are committed 
to making the investments in these two facilities, which total over 
$1.5 billion. We are also pursuing permitting of regasification 
facilities on the east and west coasts as well as an additional Gulf 
Coast terminal.
    To bolster U.S. and global oil supplies, ConocoPhillips is 
expanding conventional crude production in Venezuela, Russia and the 
Far East. There is likely to be a bridge of unconventional heavy oil 
and natural gas before the world transitions to alternative fuels in a 
large way. ConocoPhillips has invested and continues to invest heavily 
in unconventional heavy oil production in Venezuela and Canada. Our 
company announced just last week that we will be partnering with a 
Canadian company to develop the $2.1 billion Keystone pipeline, which 
will bring over 400 thousand barrels per day of much needed Canadian 
heavy oil production to our U.S. mid-continent refineries.
    There is an estimated 7 trillion barrels of unconventional heavy 
oil in place versus conventional estimates of 3 trillion barrels. 
Technology improvement will be important in raising the present low 
recovery rates of unconventional heavy oil. We are also building 
additional upgrading capacity in our refineries to process 
unconventional heavy crude. We have also developed technology for 
turning natural gas into a slate of clean refined oil products, which 
will enhance clean diesel supplies.
    As for alternative energy sources, ConocoPhillips is presently 
focused more on research and development and monitoring versus making 
large capital investments, given the tremendous uncertainty about which 
technologies will be accepted in the market place and how much their 
cost can be reduced so they can compete with conventional forms of 
energy. However, we recently had a successful experiment with renewable 
diesel, and we are conducting other tests to evaluate technologies to 
produce gasoline and other liquid fuels from non-petroleum feedstock. 
We are cognizant of U.S. Department of Energy and International Energy 
Agency projections that the market share of renewable fuels, including 
hydropower, will likely be less than 14 percent by 2025-2030 due to the 
technological, economic and environmental challenges of most of these 
alternatives.

           AVOIDING FUTURE SUPPLY DISRUPTIONS & PRICE RUN UPS

    Before we get to solutions for supply and price issues, we would 
like to point out that you can not completely avoid supply disruptions 
and price run ups when you have incidents such as two 100-year back-to-
back hurricanes and massive shutdowns of energy infrastructure. 
However, the industry and markets do respond rapidly, although never as 
quickly as the consumer would like. And even after these devastating 
hurricanes, prices are now below where they were before the storms. 
Market forces work and interfering with the market would exacerbate 
supply short falls and stifle investment. And representing a company 
who participates in the market every day, I can't say it more 
emphatically--ConocoPhillips will not condone or tolerate price 
gouging.
    What this country sorely needs is additional refining capacity, 
pipelines, and other critical energy infrastructure. The private sector 
will likely make these investments without need of any new government 
incentives. However, the industry does need governments at all levels 
to be thorough--but at the same time--to streamline permitting and 
environmental review processes so we can make these investments and add 
energy supplies.
    Our company would also support moving away from ``boutique'' fuels 
to more standardization of refined products. This will make it easier 
to redistribute products during times of shortage and should reduce 
price volatility in normal market conditions.
    Our company is particularly concerned about permitting and the 
NIMBY issues associated with building new LNG receiving terminals. LNG 
offers the most promising option for meeting the growing natural gas 
needs of American consumers in the near term. ConocoPhillips and other 
companies here today have searched the four corners of the globe to 
find and contract for new sources of LNG to bring to the U.S. market. 
We have made these arrangements on the premise that there will be 
regasification terminals built and ready when the gas arrives. But, the 
permitting and approval of new regasification terminals is occurring 
significantly slower than we expected and many are being delayed or may 
be cancelled, altogether, due to the ``NIMBY'' or ``not in my back 
yard'' attitude that exists in many communities where they are planned.
    The siting of LNG terminals was addressed in earlier energy policy 
legislation. However, Washington, the states and the individual 
localities where these facilities are planned need to have continued 
dialogue and cooperation on siting issues. There also needs to be 
better cooperation among the various federal agencies charged with 
evaluating and permitting these facilities. If America does not secure 
these badly-needed supplies, you can be sure that companies 
representing other nations that are hungry for new energy supplies will 
step in and secure available LNG supplies in the not-too-distant 
future.
    If you asked us what you could do that would have the greatest 
positive impact on supplies, it would be to give more serious 
consideration to the issue of access to resources. Let me emphasize 
that ConocoPhillips is not pursuing the opening of national parks, the 
Everglades and other such sensitive areas to energy development. But 
with the entire east and west coasts, the eastern Gulf of Mexico and 
key areas in Alaska all closed to entry, it is understandable why 
supply/demand is tight. The industry's only access to new offshore 
development remains the central and western Gulf of Mexico. Immediately 
after the hurricanes, industry was criticized by some members of 
Congress for concentrating too much of its resources in the Gulf 
region. We are concentrated there because that is where the available 
resources are and that is where policies from Congress have kept us.
    The eastern Gulf of Mexico probably has more natural gas potential 
for consumers than about any place in the lower 48 states. When Outer 
Continental Shelf Lease Sale 181 was withdrawn from development, 
another key prospect for finding badly-needed natural gas reserves was 
removed from consideration. We would encourage the Senate to consider 
reinstating that sale and revisiting access in other areas. Our 
industry has the technological know-how and the track record necessary 
to protect Florida's treasures and, at the same time, explore and 
produce in the eastern gulf in a safe and environmentally-responsible 
manner.
    The Rocky Mountain region of the country is another area where new 
natural gas production can make a difference. But the leasing and 
permitting process has hampered development in areas such as the San 
Juan basin of New Mexico and the Powder River basin to the north. 
Funding and staffing appears to be improving but continues to be a key 
problem in these areas. Local BLM personnel are doing a commendable job 
with what they have but more funding for permitting and related 
staffing must be directed to those areas.
    The last area that we wanted to express support for was the 
development of all energy sources--coal, nuclear, alternative energy 
with appropriate environmental safeguards--as well as conservation and 
efficiency standards. We will need to include all of these to diversify 
supply sources and put some needed slack back in our system.
    These are the areas where we need your help to better enable us to 
meet the energy demands of America and help our country continue to 
grow. What we do not need are ideas that sound good to some but have 
never worked and invariably reduce investment and supplies. We are 
against windfall profit taxes, price controls and mandatory 
allocations.
    According to a 1990 report of the Congressional Research Service, 
the windfall profits tax that was signed into law in 1980 and repealed 
in 1988 drained $79 billion in industry revenues during the 1980s that 
could have been used to invest in new oil production--leading to 1.6 
billion fewer barrels of oil being produced in the U.S. from 1980-1988. 
The tax reduced domestic oil production as much as 6 percent, and 
increased oil imports as much as 16 percent. In addition, this tax 
would not take into account the significantly higher costs the industry 
is facing today.
    Finally, any tax that drains investment dollars from U.S. oil 
companies reduces their ability to compete with foreign companies. Of 
the world's currently known conventional oil and gas reserves, only 7 
percent is held by the international oil companies. This means 
America's energy companies face a tremendous challenge in gaining 
access to large, reliable sources of oil and gas around the world. 
Federal tax policies that jeopardize the competitive strength of 
America's energy representatives could weaken our ability to meet the 
nation's needs now, and for years to come.
    We are not in favor of any special taxes levied on our industry to 
support the Low Income Home Energy Assistance Program (LIHEAP). While 
we believe this is a very worthy program, we think it is a bad 
precedent to have private industry support a federally-funded program. 
In addition, this will reduce the level of investment we will be able 
to make, thereby reducing the development of new supplies.
    We agree there is a need for added supply and we want to 
participate in providing it. Levying additional taxes will obstruct our 
ability to do that. There is a direct correlation between energy 
investment and energy supply.
    Our company and the industry are fully aware of the public distrust 
and concern about the rapid rise in energy prices. However, the higher 
prices were caused in part by sub-par returns that led to under-
investment in the energy sector for several decades. Only now are 
returns approaching levels that economically justify a major step up in 
energy investments, and there is no guarantee that current return 
levels will persist over the life of the investment. We are making the 
necessary investments in added production and refining capacity but are 
concerned that proposed legislation will hinder our ability to make 
future investments.

                               CONCLUSION

    Meeting U.S. and global energy needs over the next 30 years will 
require a tremendous amount of investment. The International Energy 
Agency calculated that $16 trillion would be required to meet global 
energy needs and $3.5 trillion would be needed to meet U.S. energy 
needs. We need to work together to meet such an enormous challenge. Our 
industry should do what we do best--finding new energy supplies and 
bringing them to the market. We ask that you do what you do best . . . 
help American companies stay strong competitors in the global energy 
market . . . and streamline the regulatory processes and remove other 
barriers that discourage energy investment at home.
    I would like to commend Chairmen Domenici and Stevens for your 
committees' tireless efforts over the past few years to address energy 
policy. The legislation that has been enacted, thus far, is a notable 
start in addressing the energy needs of this country. But there is more 
work to be done in removing barriers to investment.
    We need to have better communication and work more closely in a 
transparent way with key stakeholders--governments and consumers--to 
develop a sound long-term energy program, which we have not had for 
many decades. This program needs to stress investment, supply 
expansion, conservation and alternative energy sources. Our company 
plans to play a proactive role in meeting U.S. and global energy 
challenges and looks forward to working with you to achieve this mutual 
goal.

    Chairman Stevens. Thank you very much.
    Our next witness is Mr. Ross Pillari, chairman and chief 
executive officer of British Petroleum America.
    Mr. Pillari.

 STATEMENT OF ROSS J. PILLARI, PRESIDENT AND CEO, BP AMERICA, 
                              INC.

    Mr. Pillari. Thank you. Good morning, Chairmen Stevens and 
Domenici and members of both committees. As I have submitted my 
written comments for the record, I will just summarize the key 
points in my oral comments this morning.
    BP America employs 40,000 people in the United States and 
we are a major producer of crude oil and natural gas. We 
operate five refineries and supply gasoline and distillate 
fuels in 35 States.
    As you have already heard, 2005 has been an unusual and 
challenging year for our industry and company, both in the 
United States and around the world. We have experienced very 
tight supply-demand in global crude oil markets, resulting in 
high crude oil prices. This tightness reflects strong economic 
growth and increased demand throughout the world, particularly 
in the Far East.
    Combined with reduced production from Iraq and Venezuela at 
times this year, the overall impact on crude supply was a 
reduction in the historical excess crude oil capacity by nearly 
two-thirds, to less than one million barrels per day, 
significantly impacting the price of crude oil.
    In the second half of the year, the refined product supply-
demand picture was also affected by a series of natural 
disasters in the world, including Hurricanes Katrina and Rita 
here in the United States. These disruptions to refinery 
production and logistics infrastructure resulted in a sharp 
increase in finished product prices. Markets with disrupted 
supply sources sought to attract supply from unaffected areas 
of the United States and the world product markets.
    There has been extensive media coverage and analysis of the 
impact the hurricanes have had on the communities in the Gulf 
Coast region. The difficulties faced by these areas in the 
recovery continues to be a concern for all of us. BP operations 
in the affected areas, particularly in Texas and Louisiana, 
were also severely impacted. Producing platforms, pipelines, 
and terminals in the Gulf of Mexico were shut down during the 
most severe periods of the storms, suffering damage and lost 
production. Onshore distribution facilities were damaged by 
both storms, resulting in an interruption to logistics, 
infrastructure, and refinery supply.
    Refineries had to be shut down or curtailed and thousands 
of employees were displaced from their homes. We estimate that 
our lost production was nearly 135,000 barrels per day in the 
third quarter and nearly 160,000 barrels a day of oil 
equivalent in the fourth quarter, and that damage to our 
facilities will clearly be in the tens of millions of dollars.
    We do expect most of the BP-operated production facilities 
to be back onstream by year end. Importantly, the severe impact 
of these storms made it impossible to respond as quickly as we 
would have liked to the immediate needs of many of our 
customers and communities. Displaced staff, utility outages, 
damaged equipment, and the inability to operate terminals and 
refineries in many of the affected areas hampered initial 
recovery efforts.
    In the face of these unusual external conditions, the 
market response was what you would expect in a global commodity 
market. Available product supplies were bid up as demand 
exceeded supply. Geographic areas not affected by the 
hurricanes experienced increased demand from buyers looking to 
move supply to the storm-damaged areas, causing upward price 
movement in both the storm-damaged and the unaffected areas. 
Product prices in Europe also increased as domestic marketers 
began importing product immediately to meet demand in the 
United States.
    Consequently, while consumers experienced difficult and 
rapid increases in prices throughout the country, these same 
increases resulted in a market that was able to attract supply.
    We recognized these effects are not desirable for our 
customers and we made every effort to increase supplies and 
minimize the extent of these disruptions. We regret any 
continuing problems and are working diligently to solve them.
    In recent weeks, fuel prices have dropped dramatically, 
down to levels similar to last spring, reflecting the increased 
supplies arriving from unaffected areas, including the global 
markets. Additional supplies will reach the market as Gulf 
Coast refinery operations return to normal and we would expect 
the market to react again.
    Specific actions taken by BP in response to the storms 
included: providing housing, transportation, and temporary 
relocation for employees and their families displaced by the 
storms; we prioritized fuel deliveries to emergency service and 
health organizations; contributed to date over $12 million to 
relief agencies in all of the affected areas; we have imported 
over 30 million barrels of gasoline, diesel, and jet fuel for 
delivery into markets in the Northeast, Florida, and the Gulf 
Coast. We have reversed the pipeline at our Texas City refinery 
dock to accept marine shipments and deliver imported product 
into the Colonial pipeline. We have arranged offshore loading 
from platforms to permit delivery of crude oil while awaiting 
the startup of pipeline operations.
    I would like to note that recovery of offshore operations 
was greatly aided by government response to requests for 
expedited permits and waivers. At retail, the Government 
support of temporary fuel spec waivers allowed us to 
redistribute available fuels to the most distressed areas. We 
are very grateful for this support.
    In recent months, our efforts have been focused on 
repairing our facilities and returning to normal operations. In 
the future we look forward to continuing to invest and build on 
our extensive U.S. asset base. In the last 5 years, the BP 
group has averaged $13 to $15 billion each year in new capital 
investment. The largest single placement of that investment, 
approximately $31 billion or roughly half of our global total 
investment, has been here in the United States.
    Our non-U.S. investment is also important to the United 
States as it provides secure options for incremental supply. 
This is particularly important in times of market disruptions, 
as seen recently with the hurricanes. For example, BP was able 
to quickly bring fuel from our Rotterdam refinery to the East 
and Gulf Coast markets immediately following the storms.
    Our U.S. investments have included continued expenditures 
in mature operations, such as $700 million per year in Alaskan 
North Slope field, a 30 percent increase in lower 48 natural 
gas investment over the last 2 years to nearly $1.5 billion 
already this year, and over $650 million per year in refinery 
investment.
    For the future, we see continued opportunities to invest in 
the United States. Projects currently announced include: $2 
billion for new development and infill drilling in the 
Wamsutter natural gas field in Wyoming, increases U.S. natural 
gas supplies; two proposed LNG projects, one on the east coast 
and one on the Gulf Coast, at a cost of nearly $1.2 billion. 
These projects will allow us to further access our natural gas 
position in Trinidad and elsewhere in the world and bring this 
product to the United States. Nearly $2 billion planned spend 
to increase the use of Canadian heavy oil and improve our 
upgrading capability in BP's refineries here in the United 
States, which also provides a secure North American source of 
crude oil supply.
    We plan to invest over $2 billion per year over the rest of 
the decade as part of our continuing program to invest a total 
of over $15 billion in exploration and production in the Gulf 
of Mexico. We also plan to invest in our share of the nearly 
$20 billion Alaska natural gas pipeline to bring Alaskan gas to 
the lower 48.
    Also, outside of the normal oil and gas area, over the past 
5 years we have invested more than $500 million in our solar 
and alternative energy business and continue to see this as a 
growing area of importance for our company and the country.
    In closing, we believe the events of 2005 reflect unusual 
challenges to the global markets for oil and gas. We know we 
have a responsibility to help meet these challenges and we have 
been working hard to fulfil that role. BP has a long history of 
business activity and significant investments in the United 
States. We will continue to offer quality products, enhanced 
energy options, and continue to invest in support of our 
customers and the energy needs of the Nation.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Pillari follows:]

 Prepared Statement of Ross J. Pillari, President and CEO, BP America, 
                                  Inc.

    My name is Ross Pillari and I am President and CEO of BP America. 
BP America is the U.S. holding company for the BP Group. BP America 
employs 40,000 people and produces 666,000 barrels of crude oil and 2.7 
billion cubic feet of natural gas per day. We operate five refineries 
that process nearly 1.5 million barrels a day of crude oil, and a 
system of pipelines and terminals throughout the United States that 
supply over 70 million gallons per day of gasoline and distillate fuels 
to customers in 35 states.
    2005 has been an unusual and challenging year for our industry, 
both in the United States and around the world. We have experienced 
very tight supply/demand in global crude oil markets resulting in high 
crude oil prices. The tightness reflects the continued growth in demand 
in the Far East combined with strong global economic growth. Together 
with reduced supply from Iraq and Venezuela, the overall impact on 
crude supply in 2005 was a reduction in the historical excess crude oil 
capacity by nearly two thirds to less than one million barrels per day. 
During the year, crude oil prices ranged from $45 per barrel WTI early 
in the year to nearly $70 per barrel WTI in the third quarter and are 
now again near $60 per barrel WTI as supplies are more in balance with 
demand.
    In the second half of the year, the refined product supply/demand 
picture was also affected by a series of natural disasters in the world 
including Hurricanes Katrina and Rita here in the United States. These 
disruptions to refinery production and logistics infrastructure 
resulted in a sharp increase in finished product prices as markets with 
disrupted supply sources sought to attract supply from unaffected areas 
of the United States and the world product markets.
    There has been extensive media coverage and analysis of the impacts 
the hurricanes have had on the communities in the Gulf Coast Region. 
The difficulties faced by these areas, and their recovery continues to 
be a concern for all of us.
    Many BP employees were directly affected by the storms including 
the need to evacuate, and in many cases the loss of their homes and 
property. BP operations in the affected areas, particularly Texas and 
Louisiana were severely impacted. Producing platforms for both oil and 
gas in the Gulf of Mexico were shut down during the most severe periods 
of the storms, suffering damage and lost production. Underwater 
pipelines and onshore distribution facilities were damaged by both 
storms resulting in a logistical interruption to refinery supply. 
Refineries had to be shut down or curtailed and thousands of employees 
were temporarily displaced from their homes.
    The impact of these extraordinary storms on our operations has not 
yet been fully determined but we estimate that lost production was 
nearly 135 thousand barrels of oil equivalent a day during the third 
quarter and nearly 160 thousand barrels a day of oil equivalent in the 
fourth quarter, and that damage to our facilities will be in the 
millions of dollars. We expect most of the BP operated production 
facilities to be back on stream by year end.
    More importantly, the severe impact of these storms made it 
impossible to respond as quickly as we would have liked to the 
immediate needs of many of our customers and communities. Displaced 
staff, utility outages, damaged equipment and the inability to operate 
terminals and refineries in many of the affected areas hampered initial 
recovery efforts.
    In the face of these unusual external conditions, the market 
response was what you would expect in a global commodity market. 
Available product supplies were bid up as demand exceeded supply. 
Geographic areas not affected by the hurricanes experienced increased 
demand from buyers looking to move supply to the affected areas causing 
upward price movement in both the storm damaged and the unaffected 
areas. The rest of the world was also impacted. Product prices in 
Europe increased as domestic marketers began importing product to meet 
demand in the United States.
    Consequently, while consumers experienced difficult and rapid 
increases in prices throughout the country, these same increases 
resulted in a market that was able to attract supply and minimize large 
scale supply disruption. We recognize these affects are not desirable 
for us or our customers, and we made every effort to increase supplies 
and minimize the extent of the disruptions. We regret any continuing 
problems and are working diligently to solve them.
    In recent weeks, fuel prices have dropped down to levels similar to 
last spring, as the market has shown the balancing effect expected when 
supply moves to meet demand. The market has attracted increased 
supplies from unaffected areas including the global markets and the 
price has fallen to reflect the market driven supply/demand 
equilibrium. Additional supplies will reach the market as Gulf Coast 
refinery operations return to normal.
    In addition to the expected workings of the market, the industry 
responded to the crisis by adjusting its operations to meet the 
circumstances and restrictions created by the storms.
    Specific actions taken by BP in response to these conditions 
include:

   Provided housing, transportation and temporary relocation 
        for employees and their families displaced by the storms.
   Identified emergency service and health organizations and 
        prioritized fuel deliveries to meet their needs.
   Contributed, to date, over $12 million to relief agencies in 
        all of the affected areas (from BP, employees and branded 
        partners).
   Imported over 30 million barrels of gasoline, diesel and jet 
        fuel for delivery into markets in the Northeast, Florida and 
        the Gulf Coast.
   Reversed a pipeline at our Texas City refinery dock to 
        accept marine shipments and deliver product into the Colonial 
        Pipeline while the refinery recovers from the storm damage.
   Optimized the use of available supplies of boutique fuels 
        through waivers of fuel content requirements to help meet the 
        needs of highly impacted areas.
   Arranged offshore loading from platforms to permit delivery 
        of crude oil in the face of pipeline interruption.

    Recovery of offshore operations was greatly aided by government 
response to requests for expedited permits and waivers. On the 
downstream side, the government's support of temporary waivers of fuel 
specifications allowed us to redistribute available fuels to the most 
distressed areas.
    While some areas continue to have tight supplies, including 
unfortunately, occasional runouts, the supply situation is returning to 
normal and as noted above, prices at the wholesale and retail level are 
returning to levels similar to earlier this year.
    In recent months, our efforts have been focused on repairing our 
facilities and returning to normal operations. But, it is important to 
recognize that BP has continued to maintain and grow a significant base 
of United States production and refining assets.
    In the last five years, the BP Group has averaged $13 to $15 
billion each year (excluding acquisitions) in new capital investment. 
The largest single placement of that investment, approximately $31 
billion or roughly half of our global total investment, has been here 
in the United States.
    It is important to recognize the global nature of oil markets, 
means that investment outside of the United States significantly 
affects our nations crude and product availability by creating secure 
options for supply. This is particularly important in times of market 
disruptions as seen recently with the hurricanes. For example, BP was 
able to quickly bring fuels from our Rotterdam Refinery in the 
Netherlands to the East and Gulf Coast markets.
    Our investments in the United States, of $6 billion per year, have 
included continued expenditures in mature operations such as $700 
million per year in Alaskan North Slope fields, a 30 percent increase 
in lower-48 natural gas fields over the last two years to $1.5 billion 
this year, and over $650 million per year in refinery investments. 
Additional investments have also been made to maintain terminal and 
pipeline capability and to meet new regulations affecting distribution 
and marketing.
    For the future, we see continued opportunities to invest in the 
United States. Projects currently announced include:

   $2 billion for new development and infill drilling in the 
        Wamsutter natural gas field in Wyoming. This investment is 
        expected to double BP's net production to 250 million standard 
        cubic feet by the end of the decade.
   Two proposed LNG projects, one on the East Coast and one on 
        the Gulf Coast at a cost of $1.2 billion. These projects will 
        allow us to access our natural gas position in Trinidad and 
        elsewhere in the world; and if approved, potentially add 2.4 
        billion cubic feet send out capacity to supply markets in the 
        United States.
   $2 billion planned spend, to increase the use of Canadian 
        heavy oil and improve our upgrading capability in BP's 
        refineries, also securing a North American source of crude oil 
        supply.
   $2 billion per year sanctioned investment through the rest 
        of the decade as a part of our continuing program to invest 
        over $15 billion in exploration and production in the Gulf of 
        Mexico.
   BP has publicly announced its intention to participate in 
        the nearly $20 billion Alaskan Natural Gas Pipeline to bring 
        Alaskan gas to the lower 48. We, together with other interested 
        parties, are nearing completion of a commercial agreement with 
        the State of Alaska.
   Over the past five years, we have invested more than $500 
        million in our solar and alternative energy business and 
        continue to see this as a growing area of importance.

    In closing, we believe the events of 2005 reflect unusual 
challenges to the global markets for oil and gas. We know we have a 
responsibility to help meet these challenges and we are working hard to 
fulfill the role we play in helping the nation recover from these 
extraordinary events.
    BP has a long history of business activity and significant 
investments in the United States. We will continue to offer quality 
products, enhanced energy options and invest in support of our 
customers and the energy needs of the nation.

    Chairman Stevens. Thank you very much, Mr. Pillari.
    Our next witness is John Hofmeister, president and chair of 
the Shell Oil Company of America.

   STATEMENT OF JOHN HOFMEISTER, PRESIDENT, SHELL OIL COMPANY

    Mr. Hofmeister. Mr. Chairman, members of the committee: 
Thank you for the opportunity to be here. I would like to 
discuss the energy issues of concern to you, to Shell, and to 
the American people.
    We face serious energy challenges here and also around the 
world, for which there are no perfect solutions or easy 
alternatives. Every avenue--increasing crude supplies, building 
refinery capacity, repairing hurricane damage, developing new 
technologies--presents a challenge and requires a significant 
and sustained investment. Basically, demand for energy around 
the world is growing, thanks to strong economies. In fact, I 
fear the alternative.
    Consequently, there is a fragile supply-demand balance, 
leading to current energy prices. And yes, industry profits are 
large in total dollars, but they represent an average return on 
sales in cross-industry comparisons. Shell earned $9 billion in 
the third quarter of this year, a 50 percent improvement, for 
three quarters of the year. But three points I would make about 
those profits.
    First, they are determined largely by the price of crude 
and the price of crude is set on world markets. We do not set 
or control the price of crude.
    Second, as profits rise so do our tax payments. Shell's 
global tax payments are up 55 percent this year, totaling more 
than $14 billion.
    Third, where do these profits go? They go back into the 
business. Over the past 5 years Shell has reinvested the 
equivalent of 100 percent of our U.S. profits in U.S. energy 
projects. And future investments of billions of dollars will be 
required to meet future energy demand.
    Energy projects are becoming more complex, more costly, 
more technologically demanding, and many take a decade or 
longer to reach fruition. The EIA estimates $20 trillion--that 
is $20 trillion--will be needed by 2030 to develop the 
necessary supplies and infrastructure to meet global demand in 
the future.
    The surge in demand has had a dramatic impact on the costs 
of doing business. The cost of an onshore rig in this country 
this year has more than doubled. The cost of a deep water rig 
is now up to or over $300,000 or more per day. The cost to 
develop a deep water field, reaching $2 billion. The cost to 
build or expand a refinery, for example a 200,000 to 300,000 
barrel per day refinery, costs in the range of $3 to $3.5 
billion. The cost to build a major greenfield LNG facility can 
be in the range of $5 to $6 billion.
    But these investments are critical if the energy needs of 
today and tomorrow are to be met. At Shell we are making those 
investments and we are making them here in the United States. 
In the offshore, Shell will continue to be an industry leader 
in the deep water Gulf of Mexico, a frontier we pioneered more 
than a decade ago. In the past 5 years we have produced nearly 
one billion barrels of oil and invested more than $7 billion 
just in the Gulf.
    Onshore, Shell has new natural gas prospects, both 
conventional and unconventional, under way in Washington, North 
Dakota, Texas, and across other regions of the United States. 
In Alaska we just invested $45 million to acquire 84 licenses 
this year to develop Alaska's vast resources and we are working 
on additional opportunities.
    In the oil sands, Shell Canada's major Athabasca oil sand 
project is unlocking significant resources and plans to expand 
this project will require many billions of dollars.
    Oil shale. We have an exciting project in Colorado where we 
are testing a unique process designed to release huge oil shale 
resources. Shell's technology has the potential to recover more 
than ten times per acre as much as traditional retort 
technologies and in a more environmentally sensitive way.
    Coal. I am in discussions with ten or more States about how 
to tap the Nation's abundant coal resources using our coal 
gasification process to efficiently and cleanly convert coal to 
power, gas, chemical feedstocks, liquid fuel, and hydrogen.
    LNG. Shell is investing to bring more LNG to the United 
States. We currently have LNG import capacity at two existing 
LNG terminals and have proposed to build two additional LNG 
projects, one in the Gulf and one in the Northeast, to serve 
U.S. markets.
    In refining, our joint venture company, Motiva Enterprises, 
is considering a major investment to increase capacity at one 
or more of its Gulf region refineries. Expansion projects are 
being considered in the range of 100,000 to 325,000 barrels per 
day.
    In pipelines, in Louisiana, Shell is investing $100 million 
in an interstate pipeline to help transport refined product to 
markets in southeastern, mid-Atlantic, and Northeastern States.
    In renewables, Shell Hydrogen is a leader in pursuing 
realization of a hydrogen future. Shell Wind has nearly 700 
megawatts of power in the United States, a figure we expect to 
grow. We are investing hundreds of millions in alternative 
energy and alternative fuels each year and we are committed to 
continuing these investments in the future.
    But I cannot talk about Shell's investments in the United 
States without mention of the tremendous costs involved in 
recovering from recent hurricanes. Hurricanes Dennis, Katrina, 
Rita, and Wilma and others brought into sharp focus the fact 
that the Nation's energy supply-demand balance is fragile. 
Katrina and Rita tore through the Gulf of Mexico production 
sites, blasted the refinery belt in the Southeast, and roughed 
up the terminal and pipeline networks that feed products to 
half the country. Key parts of the Nation's energy 
infrastructure were brought to a standstill. Recovery costs are 
estimated between $18 and $31 billion to the industry, and 
Shell bears its share of that cost.
    But it is Shell people and their response that I would like 
to tell you about in this instance. Nearly one-fourth of 
Shell's U.S. staff was directly affected by the storms, about 
5,000 people and their families. Despite their own losses, 
losses in some instances horrific, these dedicated 
professionals returned to work only hours after the storms 
passed. We had employees lifted from their roofs in New Orleans 
and we had employees in the convention center. But these 
employees returned to work and have been there 24 hours a day 7 
days a week, fixing damaged platforms, refineries, pipelines, 
terminals, and service stations. They did so efficiently and 
safely. I commend them and I thank them.
    We continue the task of bringing our facilities back on 
line. Just this week, I am pleased to say that we announced our 
commitment to return full well to New Orleans, a city that we 
admire, in early 2006, to bring 1,400 staff back to their 
offices in central New Orleans.
    Let me close with a comment about how we see ways 
policymakers can help the industry and help secure an energy 
future. Congress might consider policies that will in the first 
instance allow responsible access to more domestic resources; 
secondly, to encourage conservation; third, to streamline 
regulatory requirements to speed the delivery of projects; and 
fourth, to educate the work force of the future, to train the 
next generation of energy professionals, men and women who will 
develop future energy resources, future energy innovations, and 
future energy solutions.
    The facts are we have in this country the natural 
resources, the financial capacity, and the human capability to 
secure our energy future. The long-term success of American 
energy development can and should be predicated on government 
enabling a responsible industry to work on behalf of American 
energy requirements.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hofmeister follows:]

  Prepared Statement of John Hofmeister, President, Shell Oil Company

    I am John Hofmeister, President of Shell Oil Company. I appreciate 
the opportunity to appear before you today to discuss the energy issues 
important to the Congress, to America's energy providers and to 
consumers.
    Shell Oil Company is an affiliate of the Shell Group, which 
operates in more than 140 counties and employs more than 112,000 people 
worldwide. About 22,000 people work for Shell in the United States in a 
diverse range of energy activities:

   Shell produces approximately 700,000 gross boe/d (Shell 
        gross) of oil and natural gas in the U.S.
   Shell operates or has an interest in seven U.S. refineries 
        with a capacity of more than 1.6 million barrels per day.
   Seventy-five percent of Americans live within five miles of 
        one of our approximately 17,500 retail sites (Shell-branded 
        gasoline stations and Jiffy Lube facilities) in the U.S., where 
        an average of more than six million customers are served per 
        day.
   We operate five chemical plants in the U.S., which focus on 
        the production of bulk petrochemicals and their delivery to 
        large industrial customers who, in turn, use them to make many 
        of the essential materials of our modern world.
   We are a key capacity holder at two of the nation's existing 
        Liquefied Natural Gas (LNG) facilities, Cove Point and Elba 
        Island, and have announced proposals to build two additional, 
        large LNG receiving terminals in the U.S., which will be 
        critical in meeting the nation's growing need for natural gas 
        with potentially lower-cost global supply sources.
   Shell Trading Gas & Power, through Coral Energy, has more 
        than 5,000 megawatts of electricity capacity in the U.S.
   Shell WindEnergy has interests in more than 630 megawatts of 
        clean, renewable wind power capacity in the U.S., and we have 
        just announced a major wind project in West Virginia.
   Shell Solar Industries, based in California, manufactures 
        solar photovoltaics in the U.S.
   Shell Hydrogen opened the nation's first hydrogen fuel 
        dispenser at a Shell retail station. It's about 10 minutes from 
        the Capitol and I invite you to visit to experience what we 
        hope will be a common retail experience in the future. More 
        hydrogen dispensing sites are under development.
   Shell is leading the way on other fuels of the future with 
        its investments in biofuels, cellulosic ethanol and gas-to-
        liquids fuels.

    I would like to use my time this morning to discuss four areas of 
interest:

          1. The economics of the energy business and the growing 
        demand/supply challenges;
          2. The impact of hurricanes Katrina, Rita and Wilma on our 
        business and on the price of energy;
          3. What Shell is doing to increase energy production in this 
        country and abroad; and
          4. Initiatives Congress might take to help address the energy 
        concerns that are becoming increasingly apparent and urgent.

    My primary message is that we face fundamental and pressing energy 
challenges. There is no soft option or soft landing. Every route 
forward has significant economic, environmental and technological 
challenges. Every solution will require significant investment.

                    ECONOMICS OF THE ENERGY BUSINESS

    Mr. Chairman, high energy prices and industry profits are matters 
of concern to Congress, to your constituents and to our customers. Our 
industry is extremely cyclical, and what goes up, almost always comes 
down. That dynamic has proven to be true time and time again. For 
example, the U.S. Energy Information Administration (EIA) reported that 
only three years ago (in 2002), returns on investment for U.S. 
petroleum companies were only 6.5 percent, and refining and marketing 
returns were negative. The challenge is to manage our business in the 
face of these severe price fluctuations.
    As to profits, oil and gas industry earnings per dollar of sales 
are in line with all U.S. industry during the second quarter of 2005. 
The energy industry overall earned 7.6 cents for every dollar of sales, 
compared to an average of 7.9 cents for all U.S. industry. True, the 
total dollar numbers are large, but so are the billions of dollars that 
petroleum companies have invested to supply energy to U.S. consumers--
and will need in order to re-invest to meet future demand in a safe and 
environmentally sustainable way. It is this re-investment potential 
that is critical.
    Shell companies are in business to create economic value through 
the reinvestment of earnings in new technology, new production, 
refining and product distribution infrastructure and environmental and 
product quality improvements. As such, we continue to build our 
portfolio of integrated gas, unconventional resources and material oil 
projects. Recognizing that the energy consumed today is made possible 
by investments made years or even decades ago, we continue to reinvest 
earnings to help ensure a secure energy future. For example, over the 
past five years, Shell companies have invested approximately 100 
percent of U.S. after-tax earnings in U.S. projects to meet the future 
needs of consumers. Investments of this magnitude require long-term 
fiscal stability.
    The prices of oil and natural gas--which are set on the world 
market--fluctuate substantially and dramatically. Today we have $60 
per-barrel oil; just six years ago oil was under $20. Similarly, we 
have recently experienced $12 per mmbtu natural gas; just six years 
ago, natural gas was under $3, while unleaded gasoline was averaging 
less than $1.20 per gallon, including taxes. In fact, with warm weather 
and the return of supply lost to the hurricanes, the price of natural 
gas dropped $3 per mmbtu last week (week of 10/31/05).
    Even further, the first hearing of the Senate Energy and Natural 
Resources Committee held during the 106th Congress just six years ago 
related to the low-price environment and the state of the petroleum 
industry. The Committee recognized the potential impact of the low-
price environment--noting, for example, the number of wells being shut 
in and the drop in rig counts across the country.
    These low prices were largely attributed to two factors. First, the 
return of Iraqi crude oil to global markets caused an increase in 
supply, driving prices down by $5-6 dollars per barrel, according to 
the EIA. Second, the Asian financial crisis caused a drop in demand, 
again affecting price.
    Today, the market forces of supply and demand are driving prices 
up. Oil prices reached an all-time high last year, an average of more 
than $41 a barrel for West Texas Intermediate (WTI). So far this year 
the average is over $50, with prices rising to around $70.
    The U.S. is not self-sufficient in energy, importing more than 60 
percent of its raw energy materials from other countries. The U.S. has 
to compete for oil in world markets. For crude oil, it competes with 
large refining centers such as Rotterdam and Singapore. For petroleum 
fuels such as gasoline, diesel and heating oil it competes with 
Germany, Japan, China, India and others.
    The prices for many fuels are determined in the global marketplace. 
Buyers and sellers of fuels--energy companies, marketers, futures 
traders--continually compete via auctions or other transparent 
mechanisms to balance their needs. Auctions and fuel trading take place 
around the globe, but there are major centers in London, Singapore and 
New York. Fuel prices move up and down based on world demand and supply 
pressures.
    For example, brownouts in China last summer raised the demand for 
diesel fuel to run generators, which in turn bid up the price of 
diesel. Asian buyers were successful bidders for cargoes, but diesel 
prices were higher around the globe. A drought in Spain this summer 
increased LNG requirements to run generators. To obtain additional LNG, 
Spain bid for excess cargoes and the result was higher LNG prices 
around the globe.
    The September hurricanes created shortages of gasoline and other 
fuels, resulting in higher prices in all global trading markets. In the 
aftermath, Shell imported gasoline and other fuels--purchased at prices 
that were set in the global marketplace--to compensate for lost 
production from our damaged Gulf Coast refineries.
    Similarly, natural gas prices in most markets in the United States 
are determined by the interaction of many buyers and sellers. The shut-
in gas production during the past two months has averaged over 10 
percent of total U.S. output. This production loss raised the fear of 
not meeting appropriate start-of-winter storage levels. As a result, 
the market bid up gas prices to levels that encouraged switching and 
averted a storage shortfall.
    As in the late 1970s and early 1980s, we expect that high prices 
will stimulate supply and reduce demand. But these responses take time. 
There are indications that Americans have reduced demand for vehicle 
fuels. Yet on a global basis, high economic growth is stimulating 
global energy-demand growth in spite of high prices, particularly in 
major emerging economies like China.
    On the supply side, large projects can take a decade or longer to 
reach fruition and the projects are riskier and require higher capital 
investment. Industry investments in oil and gas production, refining 
and LNG facilities are accelerating.
    As we look to the future, there are major challenges. Global demand 
for primary energy is likely to continue to grow, and for the 
foreseeable future, must largely be met by oil, gas and coal. Keeping 
pace with this growth will be challenging. IEA estimates that some $16 
trillion will be needed by 2030 to develop supplies and build energy 
infrastructure. It will require very large investments in complex, 
costly and technologically demanding projects.
    This demand is already placing upward pressure on costs:

   An onshore rig that cost $9,000 per day one year ago costs 
        $15,000 per day today. In the deepwater, the cost of floating 
        rigs has doubled to $300,000 per day. The cost to develop a 
        major deepwater field is between $1.5 and $2 billion.
   On the refining side of our business, building a new 
        refinery or greatly expanding capacity at existing refineries 
        is a multi-billion-dollar proposition. The American Petroleum 
        Institute (API) has estimated that a 200,000 to 300,000 barrel-
        per-day greenfield refinery could cost up to $3 billion to 
        build in the U.S.
   To develop one Bcf/d of LNG requires an investment of $5-6 
        billion, which would mean, according to the U.S. ETA, that the 
        industry would have to invest $50-60 billion if U.S. LNG 
        imports grow by approximately 10 Bcf/d in the next 10 years.

    So, while energy prices are high, the cost of energy projects is 
also rising in tight markets for equipment and skills. We must foster 
and fund technological innovation in an atmosphere of uncertainty. We 
must work to maximize recovery from existing fields, access more 
difficult and unconventional resources, develop more efficient ways of 
producing energy and cleaner fuels, and curb emissions from energy 
processes.

                     HURRICANE IMPACT AND RECOVERY

    Shell and Motiva People. The landfall of Hurricane Katrina and the 
subsequent devastation of New Orleans and surrounding Gulf Coast 
communities affected some of our key facilities and nearly 4,600 of our 
staff and their families. Our first priority immediately following the 
storms was ensuring our staff and their families were safe and 
providing assistance to them so they could return to work as soon as 
possible to assess damage, begin repairs and restart facilities.
    We invested heavily in locating and ensuring the safety of our 
staff and their families--including going door-to-door, when necessary, 
to make sure everyone was okay. Following Hurricane Rita, we moved 
quickly to locate our nearly 1,000 employees who work and live near our 
Motiva Port Arthur refinery. All told, during the course of the 
hurricanes, we had nearly a quarter of our U.S. staff directly affected 
by the storms.
    After Hurricane Katrina, we began a large-scale temporary movement 
of staff from New Orleans to Houston and surrounding facilities. We 
moved rapidly to gain adequate accommodations in and around the 
impacted facilities or the new temporary work sites. I am very pleased 
to share that on Monday of this week (11/7/05), Shell Exploration and 
Production announced its commitment to return to its New Orleans 
office. We expect to have a substantial number of currently displaced 
New Orleans Shell employees back home and back at work in the city we 
cherish early next year and expect almost all to return within the 
first half of 2006. We also have offered to the Governor and the Mayor 
some of the best minds in the world to assist with a successful, 
transparent and integrated rebuilding program that will help New 
Orleans.
    More than 4,400 pay, loan, employee assistance and payroll re-
direct requests have been implemented to date in association with these 
disasters, totaling nearly $23 million. These requests consist of 2,360 
employee interest-free loans for $20.7 million, and 1,642 assistance 
payments of $250 each--totaling $407,000--for employees who have been 
housing displaced friends and family, and 190 relocation supplements 
totaling $1.4 million.
    Shell and Motiva Operations. A fragile supply/demand balance and 
vulnerable energy infrastructure were facts prior to the hurricanes. 
But the devastating impact of the storms on the energy industry gave 
these facts visibility and sharper focus. Like all of the companies 
represented here this morning, Shell plans and invests for the long 
term, but we live in the present, and we must deal with major 
dislocations such as those caused by hurricanes Katrina, Rita and 
Wilma.
    Hurricanes Katrina and Rita tore through the heart of the Gulf's 
oil and gas producing areas, through the Gulf Coast refinery belt, and 
through the heart of the industry's terminal and pipeline networks that 
feed products to half the country. Our Mars platform withstood winds of 
175 miles per hour for four hours; it was damaged, but the damage is 
repairable and it will be back in service again.
    As of today (11/09/05) Shell has restored Gulf of Mexico production 
to more than 200,000 boe per day (Shell share) of the approximately 
450,000 boe per day (Shell share) prior to Hurricane Katrina (operated 
and non-operated). Good progress continues to be made on key assets, 
including Ursa, Mensa and the Auger pipeline and an additional 150,000 
boe per day (Shell share) is expected to return to production during 
fourth quarter 2005. Approximately 15 million barrels (Shell share) 
were deferred in third quarter 2005 and approximately 18 million 
barrels are expected to be deferred in fourth quarter 2005. Production 
from the Mars platform is expected to resume in the second half of 
2006.
    To give you an idea of the enormity of the challenge ahead of us, I 
can tell you that one of our tasks is to examine every foot of pipeline 
3,000 feet below the surface of the Gulf of Mexico--something that has 
never been done before. The Congressional Budget Office has estimated 
that Hurricanes Katrina and Rita inflicted losses on the energy sector 
estimated at $18 to $31 billion--and Shell certainly bore its share of 
that damage.
    Critical operations continued while our employees, retailers and 
wholesalers suffered from the same devastation as their neighbors. I am 
extremely proud to represent these dedicated professionals who began to 
return to our manufacturing sites, pipelines, distribution terminals 
and service stations only hours after the storms passed. Despite their 
own losses, they continued to work to bring our critical facilities 
back on line for the American people--and that they did so without 
incurring any health, safety or environmental incidents.

                    MEETING FUTURE ENERGY CHALLENGES

    Today's profits will finance re-investments and new projects that 
will lay the foundation for greater energy supplies. As in the past, 
both energy prices and costs are expected to be cyclical, but Shell is 
committed to providing growing energy supplies. As stated, developing 
these energy resources will require a tremendous capital investment by 
our company, year in and year out, in periods of prices high and low. 
Let me highlight some of our plans and projects.
    North America Exploration and Production. Shell's Exploration & 
Production (E&P) North American businesses are dedicated to growing the 
North American energy supply. Our commitment is underpinned by a 
history of investing billions of dollars every year in the development 
of future domestic energy sources and defining new frontiers. Years of 
investment in technology and people enabled Shell to lead the industry 
into the Deepwater Gulf of Mexico, beginning with the development of 
our Auger field more than a decade ago. Over the past five years in the 
Gulf of Mexico alone, Shell gross production has been nearly one 
billion barrels of oil equivalent, and over the same period Shell has 
reinvested almost $7 billion in new offshore supply capacity. That same 
level of determination and commitment continues today.
    Shell is aggressively pursuing natural gas prospects in a number of 
onshore North American basins. It is our goal to build new supply 
positions by developing both conventional and unconventional gas 
resources. Today Shell is drilling for new natural gas supplies in the 
Gulf of Mexico, Washington state, North Dakota, Texas, and the US. and 
Canadian Rockies.
    Alaska Gas Pipeline. Alaska holds vast resources of natural gas 
that can be brought to market in the Lower 48. Shell is making 
significant investments in Alaska in the search for more supply. This 
year alone we have spent $45 million purchasing leases in the Federal 
waters of the Beaufort Sea and the recent State's sale in the Bristol 
Bay area. Shell is excited about the opportunities that exist in 
Alaska.
    Unconventional Resources. Shell is making significant investments 
in unconventional resources--oil sands, oil shale and coal. By 2010, 
EIA estimates that unconventional gas reserves will account for more 
than 50 percent of total U.S. reserves, up from 46 percent in 2002.
    We have a major oil sands resource project in Athabasca, Canada, 
with bitumen from the Muskeg River mine piped 500 kilometers south to 
be turned into synthetic crude in the world's largest hydro-upgrader 
adjacent to Shell's Scotford refinery. Most bitumen is upgraded by 
coking. The Scotford upgrader is the only one based exclusively on 
adding hydrogen--enabling it to provide a 103 percent yield rather than 
the normal 85 percent. The plan now is to expand capacity from the 
present 155,000 barrels a day to more than 500,000 by 2015. This will 
require many billions of dollars of further investment in mining and 
upgrading facilities.
    Shell is investing in oil shale in Colorado, where we are testing a 
process to unlock very large oil shale resources by conversion in the 
ground--using electric heaters to gradually heat the rock formation to 
release light oil and gas. This technology has the potential to recover 
more than 10 times per acre as much as traditional retort technologies, 
in a more environmentally sensitive way.
    In order to meet growing U.S. energy needs, the entire portfolio of 
domestic fuels will be required. Given the abundant coal resources in 
the U.S., Shell also is looking at technologically sophisticated ways 
to use coal more efficiently and cleanly. Given the very large 
remaining coal resources--particularly here in the United States--it is 
important to make these technologies viable. Currently, Shell is 
working with 12 states--including New York, Pennsylvania, West 
Virginia, Ohio, Indiana, Montana, Colorado, Wyoming, Utah, California, 
Arizona and Texas--on the opportunities that exist with coal.
    Coal gasification offers an efficient way of using coal for power, 
town gas, chemical feedstock, liquid fuel and hydrogen. New technology 
has made coal gasification cleaner and more efficient. The Shell 
process provides more than 99 percent carbon conversion efficiency. 
Integrated coal gasification combined cycle power--IGCC--produces 10 to 
15 percent less carbon dioxide emissions than the best conventional 
coal generation. It should be as cost-effective as traditional coal-
fired generation with full modern environmental clean-up equipment.
    In the U.S., for example, new IGCC offers an attractive way to use 
coal with the added advantage of the potential to capture the carbon 
dioxide--produced as a high-pressure concentrated stream in the 
gasification process--for sequestering underground. We are working with 
the Queensland government in Australia on the feasibility of building 
an IGCC power plant with 85 percent of the carbon dioxide sequestered 
in this way. The aim is to have it in operation by 2010. Coal 
gasification for power generation is likely to expand significantly in 
the coming years.
    Liquefied Natural Gas (LNG). It is clear to Federal and state 
government that clean-burning natural gas is critical as an energy 
bridge to future renewable and other energy resources, and LNG is a key 
component of this fuel portfolio, even with northern frontier gas. LNG 
is safe with a proven track record, easy to handle, clean burning with 
low carbon emissions and utilizes environmentally friendly operations 
in which to provide energy.
    According to the EIA, today the U.S. consumes one-quarter of the 
world's natural gas and is forecasted to outpace other major markets in 
year-over-year LNG import growth. World demand is estimated to increase 
from 6.4 tcf in 2004 to 22.4 tcf by 2020, with the U.S. making up 15 to 
20 percent of the total forecasted LNG demand.
    As a global industry leader, at Shell we are committed to 
leveraging our strong global supply position and industry experience to 
rise to the challenge of providing imported LNG as a critical 
supplement to domestic gas and other fuel sources in order to meet the 
country's growing energy needs--because we believe it is right for 
America. We are proceeding with the Broadwater project in Long Island 
Sound and the Gulf Landing project for offshore Louisiana.
    Given the opportunity through approval of proposed facilities in 
the U.S., LNG can be a significant source of the North American gas 
supply, as it represents the potential to provide approximately 10 
percent of the North American natural gas supply by 2010. In fact, by 
2010, we estimate that Shell's projects alone could result in 2 to 3 
Bcf/d of LNG import capacity to serve U.S. markets, growing to 4 or 5 
later in the next decade. However, this fuel source opportunity for the 
American public represents a significant, long-term capital investment 
for many energy companies, including Shell.
    Downstream/Refining. Our joint venture refining company, Motiva 
Enterprises LLC, is considering a capital investment strategy to 
increase refining capacity at one or more of its Gulf region 
facilities. Expansion projects being considered range from 100,000-
325,000 barrels per day. In Louisiana, we are investing in a $100 
million intrastate pipeline project to facilitate the transportation of 
refined product into existing interstate pipelines that serve markets 
in Southeastern, mid-Atlantic and Northeastern states.

                      WHAT SHOULD POLICYMAKERS DO?

    Let me address the role that policy initiatives might play in 
increasing domestic production and refining capacity to enable us to 
meet the increasing demand for natural gas.
    Outer Continental Shelf (OCS) Access. Given the sustained high 
energy demand in the U.S. and globally, the key driver impacting oil 
and gas prices is supply. Although our company is actively exploring 
for oil and gas in all the areas in North America currently available, 
we are doing this with one hand tied behind our back, as most of the 
Outer Continental Shelf (OCS) is off the table for exploration and 
development.
    The U.S. Government estimates that there are about 300 trillion 
cubic feet of natural gas and more than 50 billion barrels of oil yet 
to be discovered on the OCS surrounding the Lower 48. When you then add 
the Alaska OCS, you contribute the potential for another 122 trillion 
cubic feet of natural gas and 25 billion barrels of oil. If Congress 
wants to address high oil prices, they must address domestic supply 
issues, such as the limited access to oil and gas exploration off our 
coastlines.
    U.S. dependence on the Gulf Coast for domestic oil and gas supply 
and refining capacity became obvious to every American in the aftermath 
of Hurricanes Katrina and Rita. The strategic importance of the Gulf of 
Mexico production and refinery capacity was highlighted after Katrina 
shut in 92 percent of the Gulfs oil output and 83 percent of its 
natural gas production. For years, the Gulf of Mexico has shouldered 
the burden of the U.S. offshore energy production. Urgent action is 
needed to broaden the U.S. oil and gas production base to other parts 
of the country if we are to ensure reliable and adequate energy 
supplies for all Americans in the future.
    A step in the right direction for Congress would be to pass OCS 
revenue-sharing legislation to provide funds, needed by states and 
communities with production off their coasts, to mitigate the impacts 
of offshore development.
    Earlier I mentioned Shell's interest in Alaska. In order for us to 
continue to grow in this area, two things need to occur:

          1. Ensure fair and equitable access to the proposed natural 
        gas pipeline; and
          2. Continue to provide new opportunities for exploration 
        leasing.

    Streamline Government Processes. Governments at all levels--
federal, state, local--should take the initiative to remove unnecessary 
bureaucratic barriers that inhibit investment. If the bureaucracy is 
too slow or too uncertain, investments will go elsewhere. Permit 
streamlining is an admirable goal, one that should be pursued to 
attract needed investment, not as a tactic to avoid responsible 
environmental behavior.
    Conservation. Energy efficiency and conservation dearly affect 
demand and that, in turn, affects the market. The political viability 
of conservation policies is unclear. I will just note that at Shell, we 
have found significant cost savings in our own facilities from energy 
conservation. I would encourage all industries, governments and 
individuals to stress the need for conservation and efficiency in daily 
operations and activities.
    Workforce. We welcome Congressional initiatives that will help 
secure a future energy workforce. Today, nearly 50 percent of all oil 
and gas industry workers are over the age of 50. Only 15 percent are in 
the age range of 20s to mid-30s. The available skilled workforce is 
aging, and interest in energy-related educational opportunities is 
shrinking. University enrollment in petroleum engineering is down from 
11,000 students in 1993 to 1,700 today. And the number of universities 
with petroleum engineering degrees has fallen from 34 to 17.
    It is the engineers, scientists, inventors, drillers, geologists 
and skilled trades people who will actually do the work needed to meet 
our energy needs. To this end, Shell has funded a number of 
initiatives, including two training facilities--one in Wyoming and one 
in Louisiana--that will train returning veterans and others.
    Finally, we respectfully request that Congress ``do no harm'' by 
distorting markets or seeking punitive taxes on an industry working 
hard to respond to high prices and supply shortfalls.

                               CONCLUSION

    In conclusion, the world faces fundamental and pressing energy 
challenges. Demand is likely to be robust despite high prices. The 
investment necessary to meet this demand will be significant. Prices 
are high, but input costs are rising everywhere, driven by tight 
capacity along the supply chain. As I said in my opening remarks, every 
route forward has major challenges--economic, environmental and 
technological. I trust that my remarks have given you a sense of how we 
can meet these challenges.
    Thank you.

    Chairman Stevens. Now we will enter a period for questions. 
In the beginning I am going to yield to Senator Domenici and 
Senator Bingaman to start the questions.
    Chairman Domenici. Thank you very much, Mr. Chairman.
    For the Senators, let me suggest that we both decided on 
the rules for how we are going to do this. We are going to 
follow a kind of modified early bird rule, meaning we are going 
to go back and forth between Republican and Democrat. As I have 
it on my side, so you will know, I am first, followed by 
Senators Bingaman, Alexander, Dorgan, Murkowski, Wyden, Craig, 
Feinstein, Martinez and Salazar, and we will go on from there.
    But I think we both have agreed on a second proposition. If 
your turn comes up under the early bird and you are not here, 
then you will go to the bottom of the list and start over 
again. Now, we have to do it that way or else we are not going 
to know where we are and Senators are not going to know when 
they have to be here.
    Now, that is not counted against my time, I assume, because 
I do not have very much time.
    First of all, I did want to say something--I did want to 
say something that would maybe make you smile, and I hope 
witnesses will. We are glad to hear the constructive 
suggestions you have made. I am very hopeful. You must know we 
know most of them. You are repeating what we have heard. Most 
of them ought to be done. We will try in the future to see what 
we can do together to implement them.
    But obviously we have some very serious questions to ask 
you because our people are asking us. I will tell all of you, I 
come from an energy State, but in almost every occasion upon my 
return to New Mexico the first person that puts out their hand 
and says, hello, Pete, or hello, Senator, follows up with a 
question: Why don't you bring the price of crude oil down, 
Pete? What is happening? Who is setting the price of that oil?
    So my first question is, since most of my people and I 
believe most Americans that we hear from want to know, how is 
the price of oil set? Who sets it? Why does it go up? How does 
it come down?
    Actually, my constituents and I believe most Americans 
think that somebody rigs these prices, that in the process 
somebody is getting ripped off, and they think it is them, the 
constituents who have asked me and the constituents of America 
who ask this question.
    So I want to ask you, and please, in the few minutes you 
have, somebody describe in detail how the price of oil is set, 
because I close by saying if that is not rational, then are you 
rigging the price of oil or is somebody rigging the price? Who 
chooses to answer the question first?
    [No response.]
    Chairman Domenici. No volunteers? We will go the way we 
started. Mr. Raymond?
    Mr. Raymond. I will volunteer.
    Chairman Domenici. Thank you. That is called an involuntary 
volunteer.
    Mr. Raymond. Senator, that is an extraordinarily complex 
question that you have just asked. I think, as I made in my 
comment, in the comments I made, the U.S. companies that are 
represented here in terms of the total amount of production 
that they have, that they contribute to the world supply, is 
relatively modest. Our own company is less than 3 percent and 
we are the largest producer.
    The facts are that the world supply pool, many, many 
countries contribute to that and many companies operate in 
those countries. But obviously the big actors in the equation 
are Russia and the Middle East countries and OPEC.
    Chairman Domenici. Now, Mr. Raymond, let me interrupt. I 
want to know something as simple as this. Oil comes out of the 
ground. It is either put in a boat or put in a pipeline. It 
then moves. At some point somebody buys it. At some point it 
assumes a price. That price may be only fixed one time or it 
may be fixed a number of times. Then it goes to another place 
and gets refined.
    I need to know from you, tell me from the time it comes out 
of the ground, how is the price set?
    Mr. Raymond. Well, let us talk for a moment about the 
easiest place to talk about is Saudi Arabia.
    Chairman Domenici. Okay.
    Mr. Raymond. A month before the month in which we are going 
to lift the crude, the Saudis tell us what the crude price will 
be for that month, and we have the alternative of either saying 
we will nominate and they will tell us we can lift, we can lift 
that crude. If we lift that crude, we are going to pay the 
price that they have said what you have to pay in order to buy 
that crude oil.
    Chairman Domenici. What does ``lift'' mean?
    Mr. Raymond. To have a ship show up and take it away.
    Chairman Domenici. Be ready to take it.
    Mr. Raymond. That is exactly right. At this point there are 
no pipelines out of Saudi Arabia, so it all goes out by ship.
    They say, here is the price, and the alternative we have is 
to buy it or not buy it.
    Chairman Domenici. Okay.
    Mr. Raymond. Now, how they determine what that price, what 
the price is that they are going to set would only be 
speculation on my part, but I would have to say when you look 
at that data that the prices they set for the forthcoming month 
generally are very reflective of world market conditions 
apparently as they see them.
    Chairman Domenici. What does that mean, world market 
conditions?
    Mr. Raymond. Well, they look around the world and see what 
people are willing to pay per barrel of crude oil. It is traded 
in the North Sea, it is traded in Singapore, it is traded all 
over the world.
    Chairman Domenici. So if the price is short they can ask 
high prices and they will get it; is that right?
    Mr. Raymond. That is exactly right.
    Chairman Domenici. Okay. Now, when we hear the word 
``speculators'' purchase it or it is bought in bidding, where 
does that occur?
    Mr. Raymond. Well, that happens basically on the mercantile 
exchanges. That could happen in New York, it could happen in 
Singapore, it can happen in London. Those exchanges, those 
markets, Senator, are open 24 hours a day all around the world.
    Chairman Domenici. But Mr. Raymond, what we would like to 
know is what does that mean? Do they also respond to Saudi 
Arabia or do they bid up the price afterwards?
    Mr. Raymond. They bid up the price afterwards. The Saudis--
to be specific about the Saudis, the Saudis will only sell to 
end users. That is to say, the Saudis will only sell to 
refiners. The Saudis have never had any interest in being 
involved in, I will call it, the speculative market. As a 
matter of fact, if we were to contract--we have a long-term 
contract with the Saudis. If we buy crude oil from them, if for 
some reason, say for example we had a hurricane, had to shut 
down the Baytown refinery, we have some crude oil, we do not 
know what to do with it, before we could sell it to somebody 
else we would have to go back to the Saudis and tell them that 
we intend to sell it to someone else and who that other party 
is, because they want to make sure they sell only to end users.
    Chairman Domenici. Mr. Raymond, let me interrupt now. Why 
don't you do this for me. Put yourself in my shoes. I am there 
talking to that person and they say: How is the price of oil 
set? How do I answer that person?
    Mr. Raymond. The price is set on the world market by 
willing buyers and sellers as to what willing sellers are 
willing to sell it for and willing buyers are willing to pay 
for it.
    Chairman Domenici. All right. Now, who makes the profit in 
that, in that--I do not think my constituent would understand 
that, nevertheless.
    Mr. Raymond. Well, okay. Well, let's stay on the example 
that we are on. The Saudis set the price. At that point that 
establishes the price for Saudi Aramco or the Saudi government. 
We then, in the case say we bought the cargo of crude oil, we 
will take it to a refinery. We run it through the refinery and 
the product markets then determine what the margin was in the 
refinery. But we bought the crude oil at world market price.
    Chairman Domenici. All right. Thank you very much. My time 
has expired. I am not sure my constituent is pleased with the 
answer, but nonetheless. Not unpleased; they do not understand 
it.
    Senator Bingaman.
    Senator Bingaman. Thank you again for being here. I wanted 
to ask about what can be done over the next 6 months, 
particularly as we go through this winter, to deal with the 
high prices that consumers are going to be faced with, both at 
the pump and in heating their homes. It strikes me that not a 
whole lot more can be done other than what is being done to 
affect supply over that period, being the next 6 months, but a 
significant amount could be done on the demand side to 
encourage conservation. I think each of you have indicated that 
you believe that the Government has a legitimate role in 
conservation.
    I have been urging the Secretary of Energy to have a high 
profile public education campaign to encourage conservation 
over these next several months, and it occurs to me that each 
of you and your corporations have substantial advertising 
budgets. Would it make sense and would you be willing to 
participate in a public-private partnership that would try to 
put on this kind of a public information campaign for the 
American people to assist to the extent possible in reducing 
demand over this period?
    Let me ask you, Mr. Raymond, and just down the line if 
people have responses?
    Mr. Raymond. Well, Senator, I think it is fair to say as 
best I can recollect every person that is a member of this 
panel in one form or another over the last couple of years have 
made a lot of public statements about the need for America and 
the world, not only America, to become more efficient in its 
use of energy. I think all of us feel very strongly about that, 
and through the API of course we continue to support programs 
to do that. I think that is the appropriate vehicle for the 
industry to deal with the question that you have just raised.
    In terms of whether there can be a viable corporate and/or 
API, industry relationship with the Government through the 
Secretary of Energy, I would think that that is something that 
we ought to look at very, very carefully and see if there can 
be a constructive role.
    Senator Bingaman. Thank you very much.
    Any of the rest of you have thoughts on that?
    Mr. O'Reilly. Senator, I agree, energy conservation is 
probably one of the cheapest sources of additional supply that 
we can generate in the near term. Our company is running 
advertising currently and we are also participating with API 
and would be interested in working with the DOE to the extent 
that something constructive can be done.
    I think it is important that we look at both the demand 
side and the supply side, however, and I would not want to 
lose--each side is important here. We need to be conservation-
minded, but we also need to recognize that supply is an 
important factor.
    Thank you.
    Senator Bingaman. Mr. Mulva.
    Mr. Mulva. Senator, with respect to supply, first on the 
refineries, we have to get them up and running, the ones that 
are down as a result of the hurricane. So we need to make sure 
we do everything we can, and we are, to restore that capacity 
because that adds supply. I know all the companies, including 
our own, will be looking at how can we import additional 
supplies because it may be in one part of the world, in Europe, 
it may be it is a warmer winter or whatever, that we can take 
some supply from one part of the world and bring it in and add 
supply.
    With respect to conservation and more efficient use of 
energy, we certainly have supported your ideas as a company and 
I am sure as an industry we are very willing to explore just 
those concepts of working together with the government to see 
what we can do to really work on conservation and more 
efficient use of energy.
    Senator Bingaman. Mr. Pillari.
    Mr. Pillari. Senator, I will not repeat the comments on 
supply. We are working very hard to get it there. On the 
conservation message, I think, yes, we would be willing to 
explore what we might be able to do. I do not think it is 
enough. I think each one of us--certainly in our company we 
believe that there are things that we should do, particularly 
in those markets where we are very active. So in California, 
for example, this year we will have several million dollars in 
a program called A-Plus For Energy, which is about teaching 
conservation in secondary high schools. I believe those kinds 
of programs need to continue.
    Mr. Hofmeister. Senator, as soon as we saw the production 
shutdowns in the Gulf of Mexico we launched a conservation 
communication program with our 17,000 stations around the 
Nation. We believe in that quite firmly. Very specific steps 
that Americans can take.
    Then I would support Mr. Mulva's comments on improving 
imports in order to meet supply requirements.
    Senator Bingaman. Let me ask one other question before my 
time expires. Most of the growth in demand for oil in this 
country is in the transportation sector. Would you agree with 
me that it is time that we go ahead and raise fuel economy 
standards on vehicles in this country?
    Mr. Raymond.
    Mr. Raymond. Well, I do not want to get into the political 
aspects of that. I think that is more appropriately in your 
bailiwick. But I think the general proposition that we have to 
find ways to make the transportation system in this country 
more efficient in the use of energy is one that I would 
strongly support.
    Senator Bingaman. Thank you very much.
    Anybody else want to comment on that? If not, I have gone 
through my 5 minutes.
    [No response.]
    Senator Bingaman. Thank you, Mr. Chairman.
    Chairman Domenici. Senator Stevens.
    Chairman Stevens. Thank you very much.
    I have a letter,* gentlemen, from the American Petroleum 
Institute referring to the request from the chairman of the 
Senate Finance Committee to determine whether the industry 
would contribute to the program we call LIHEAP. In it--I do not 
know if you have seen the response, but in it Red Kavenny 
points out that the estimated cost to restore all of the 
industry assets that were affected by the storms in the Gulf, 
as you mentioned, some $18 to $31 billion, will all be 
shouldered without government assistance.
---------------------------------------------------------------------------
    * The letter can be found in the appendix.
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    But I do not find that it has really taken a position with 
regard to whether at this time the industry has in mind being 
willing to take any action that might assist in terms of this 
Low Income Housing Home Energy Assistance Program that is 
really growing considerably.
    Is it possible that your industry would join, at least to 
the extent of helping to find ways to make it more efficient? 
It just seems we have this program every year and the impact of 
the LIHEAP expenditures do not reduce the costs. They do not 
bring about more efficiency. Could you go together and help 
design ways that that program could in effect use less energy 
in order to help people meet the costs? Anyone been involved in 
this?
    [No response.]
    Chairman Stevens. I hate to do it, Jim, but you are the 
chairman of the board.
    Mr. Mulva. Mr. Senator, first of all, as an American I can 
say that we all feel very much for those who are less fortunate 
with respect to heating bills and whatever. We want to make 
sure that they get the energy and what they need. But as an 
industry we feel that it is not a very good precedent to be 
looking at one industry to help fund necessarily those, 
government programs as such. We think that is more in the realm 
of the Government should be doing that.
    What we need to be doing as an industry, though, is what we 
have been talking about, and that is spending all of our money 
to add capacity and be pushing very, very hard on energy 
efficiency. One of the things that I would see is certainly we 
support the Government programs, the LIHEAP program, but not as 
an industry--it is not necessarily a good precedent.
    For our company, we would like to see what we can be doing 
to help more than what we have already done over the short 
period of time, but the medium and the long period of time, is 
helping the Gulf Coast areas where we have our facilities, our 
employees and constituencies and residents and stakeholders, so 
we can help them recover from the hurricanes.
    So we want to do all these things, but we also want to do 
what we can with respect to energy efficiency over time so we 
can reduce the cost or have more affordable energy for all 
consumers.
    Chairman Stevens. Hopefully I will be back with other 
questions, but, addressing BP, I was amazed to find recently 
that there is a provision in the Marine Mammal Act that 
provides that the refinery in the State of Washington is 
prohibited--all government agencies are prohibited from doing 
anything to assist the refinery there to refine oil other than 
for consumption in the State of Washington.
    Now, Idaho has no refinery. Oregon has no refinery, and the 
oil from our State goes right by there. If we repeal that, 
would that assist the area by having increased refinery 
capacity for the Northwest States?
    Mr. Pillari. Yes, it would, Senator. As you know, we are 
supportive of doing that. Currently the way the Magnuson Act 
works, if there are not changes made there we will have to 
reduce our gasoline production by about 10 percent at our 
Cherry Point refinery, which would reduce the amount of 
gasoline that would go to Oregon, Washington, and California.
    I think the second point would be, with that kind of a 
restriction, a refinery like Cherry Point, which has good 
options for expansion, those options would just not be able to 
be taken up.
    Chairman Stevens. If we repeal that section there would be 
a possibility that that Billingham refinery could be enlarged, 
particularly if we can get more oil back in the pipeline from 
production in ANWR, is that right?
    Mr. Pillari. We would like to take a look at expanding that 
refinery if this is removed, yes.
    Chairman Stevens. Very well.
    I will have later questions.
    Senator Inouye.
    Senator Inouye. Thank you very much.
    Two months ago on September 9, AAA Mid-Atlantic issued the 
following press statement: ``A growing chorus of Exxon dealers 
in the Washington metro area are raising their voices and 
accusing the world's largest oil company, ExxonMobil, of 
profiting from the exorbitant prices at the pump in the wake of 
Hurricane Katrina, a spokesman for AAA Mid-Atlantic confirmed 
today. In candid conversations with AAA Mid-Atlantic, a handful 
of local dealers accused the oil giant of raising the wholesale 
price to service stations by 24 cents in a 24-hour period.''
    Since then, two members of this panel have introduced 
measures to prevent price-gouging. They define price-gouging as 
``unconscionably excessive.'' Mr. Raymond, would you consider 
24 cents in a 24-hour period as being unconscionably excessive?
    Mr. Raymond. Well, I think, Senator, first you need to 
realize that I am sure all of those stations or nearly all of 
them, we have nothing to say about the price that is at the 
pump. That is the individual dealer who makes that decision. It 
is only in our company-operated retail stores, which in the 
United States is only about 7 percent of the stores that bear 
the Exxon logo, do we actually control the price. In all the 
rest of the stores, the dealer individually decides what to do 
with that price.
    Now, in terms of what happened to the wholesale price of 
gasoline at the end of--or at the beginning really of Katrina, 
I can only comment to you the directive that our people had, 
which was that in the directly affected hurricane areas, which 
we really had difficulty with operations simply because we had 
no electricity, so stations cannot operate, the roads were not 
passable so you could not get trucks on the roads to deliver 
gasoline anyway--but outside of that area, the directive was to 
minimize the increase in price while at the same time 
recognizing if we kept the price too low we would quickly run 
out at the service stations and have shortages.
    So it is a tough balancing act, because we were not 
interested in ever having our stations be in the position where 
it appeared that there would be a shortage, because we all 
remembered very clearly what happened in the 1970s when that 
happened.
    So whether the number you have in fact is accurate I do not 
know. But I can tell you the philosophy we had was related not 
at all to the concept of gouging. The concept we had was to try 
and maintain orderly supply wherever we could around the 
country.
    Senator Inouye. Would you suggest that the local dealers 
who accused you of raising their wholesale prices to service 
stations by 24 cents in a 24-hour period, they were not being 
quite honest?
    Mr. Raymond. I do not know if they are being honest. I just 
do not know if that data is accurate, frankly. But I can tell 
you what the philosophy that the company had in terms of trying 
to deal with the issue we had after the hurricanes.
    Senator Inouye. When your company heard about this press 
release by the AAA, did you respond?
    Mr. Raymond. As a matter of fact, I think as I recall--this 
is a long way from Dallas, Texas. But as I recall, the comment 
was made that a couple of our people in the company did have 
conversations with the AAA and did talk with the dealers.
    Senator Inouye. I gather that all of you are in favor of 
alternative sources of fuel, such as hydrogen, and you would be 
in favor of improving CAFE standards?
    Mr. Raymond. I think for me my comment has been again, I do 
not want to get into the politics of that. That is in your 
bailiwick, but I am and I have been supportive for a long time 
of having the transportation sector become more efficient. 
Whether that is CAFE standards or some other way to do that, 
that is a decision, I think a political decision you have to 
deal with.
    Senator Inouye. Thank you all very much.
    Chairman Stevens. Thank you.
    We will now come to a period of individual members being 
recognized under the early bird rule, and the Energy Committee 
will go first.
    Chairman Domenici. Senator Alexander, you are next, then 
Senator Dorgan.
    Chairman Stevens. For 5 minutes each, gentlemen.
    Chairman Domenici. Right, 5 minutes each.

              STATEMENT OF HON. LAMAR ALEXANDER, 
                  U.S. SENATOR FROM TENNESSEE

    Senator Alexander. Mr. Hofmeister, the focus of these 
hearings like this always seems to be on gasoline, which is a 
big problem. But to my way of thinking natural gas prices are a 
bigger problem for our country. If gasoline prices had gone up 
recently as fast as natural gas prices have, gasoline would be 
at $6 or $7 a gallon. We hear many statistics about tens of 
thousands of good blue-collar jobs moving overseas. At the 
moment there are 50 new chemical plants being built in China, 
where natural gas as a raw material is much cheaper than it is 
here; one new chemical plant being built in the United States.
    Now, all of you have something to do with natural gas. Mr. 
Hofmeister, I believe Shell even helps make electricity from 
natural gas, which is increasingly a way we have been using 
natural gas in this country. My question is, as a way of 
reducing the price of natural gas for homeowners, farmers, and 
manufacturers so we can keep more jobs in this country, would 
it not make sense to require that the newer natural gas plants, 
which use about half as much--which are twice as efficient as 
the old natural gas plants--would it not make common sense to 
require in this emergency that we use the newer natural gas 
plants to make electricity rather than the old ones or instead 
of the old ones or before the old ones? We call that the more 
efficient dispatch of natural gas.
    I understand there are some issues on the other side. But 
help us come up with a common sense way to use these natural 
gas plants that are twice as efficient as the old ones as a way 
of bringing down prices. The estimates we have are that if we 
were to do that it would save enough--it would lower retail 
natural gas prices by 5 percent within a few years and it would 
save enough natural gas to equal 600,000 homes, which is the 
size of the city of Memphis or the size of the city of Fort 
Worth.
    Mr. Hofmeister. Senator, I think the expertise that we have 
on this subject is on the supply side. I do agree with you that 
natural gas is perhaps the single most critical energy issue 
that the Nation is facing. In part it is directly related to 
the hurricanes. In the case of our own platforms producing 
natural gas offshore Gulf of Mexico, we have a serious pipeline 
damage problem which came about from the drifting of oil rigs 
due to the force of the storms, in which some of these oil 
rigs, which are temporary structures and move around the Gulf, 
actually were forced by the storm to drag their anchors and 
their anchors attached to our pipelines, seriously damaging our 
pipelines.
    Senator Alexander. We had big problems in natural gas long 
before the hurricanes, and we had new natural gas plants that 
we could have been using instead of old ones. Don't you have 
some of these new ones?
    Mr. Hofmeister. We are actually not in the gas--we are in 
the gas distribution business, not in the gas usage business. 
So the utilities would probably be more expert in this, to your 
specific question.
    But the real supply side issues I think are access to more 
gas fields, in which we have been working with members of 
Congress to try to achieve more access, but also LNG. LNG is--
--
    Senator Alexander. Sir, I understand all that and I have a 
limited amount of time. But you do not believe that using new, 
more efficient natural gas plants would make common sense 
rather than older, less efficient natural gas plants as a way 
of lowering the price?
    Mr. Hofmeister. I think my point is that is a question for 
the utilities which are using our gas, not for the suppliers.
    Senator Alexander. So you do not know the answer to that?
    Mr. Hofmeister. Correct.
    Senator Alexander. Mr. O'Reilly, when I talked to auto 
company executives--Toyota, General Motors, Nissan--they are 
investing hundreds of millions of dollars in fuel cell vehicles 
and hydrogen. Some of them give surprisingly optimistic views 
about how soon they will be able to produce a commercial 
vehicle at a price people can afford and drive, which will go a 
long way toward reducing demand for oil and therefore hopefully 
stabilizing or reducing the price of gasoline.
    I am interested in what any of you can tell us, starting 
with Mr. O'Reilly, about whether your companies in effect are 
turning from oil companies into energy companies? I start with 
Mr. O'Reilly because I know you have been interested in 
hydrogen. How soon--assuming one of the automobile companies 
does produce such a fuel cell vehicle at a competitive price, 
how soon will one of our large companies or some other company 
be able to do with hydrogen what we do now with gasoline, take 
it from the place it is produced to the automobile itself?
    Mr. O'Reilly. Senator, we are working on hydrogen 
distribution and hydrogen manufacture as part of a DOE-auto 
company combination experiment in California. We see the 
challenges of hydrogen as how do you distribute it efficiently 
to the automobiles. So we are looking at distributed hydrogen 
production at service stations and loading facilities at the 
service station as well as commercial refueling centers in 
California, as I say, with the cooperation of DOE and in this 
case Hyundai.
    The issue I think is distribution, and then one has to 
remember that at the source we still have to make hydrogen. We 
are making hydrogen today in California from natural gas. So it 
kind of comes back in a full circle to natural gas supply and 
then learning how to distribute hydrogen. If we can overcome 
those two, with time there will be hydrogen vehicles on the 
road.
    But I think it is a little way off. The near term, I think 
the hybrid vehicle is a more pragmatic solution, and they are 
already in the markets, much more efficient than conventional 
automobiles. Of course, we are working in that area, 
particularly with the long-lived batteries that will support 
those automobiles. So we are working on these areas. There are 
some challenges to be overcome.
    Chairman Domenici. Senator, your time is up.
    Mr. O'Reilly. But I think we are on track.
    Chairman Domenici. Thank you very much.
    Senator Alexander. Thank you, Mr. O'Reilly.
    Chairman Domenici. Thank you, Senator.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, thank you.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    I thank the witnesses for being here today. Mr. Raymond, 
you and others said, and I quote you, ``Increases in oil prices 
following the hurricanes have put a strain.'' The fact is that 
oil prices were well above $60 before the hurricanes formed up; 
is that not the case?
    Mr. Raymond. Yes, Senator. The facts are--and I have said 
this publicly for a long time--the oil prices have been moving 
steadily up for the last 2 years, and I think I have been very 
clear in saying that I do not think that the fundamentals of 
supply/demand, at least as we have traditionally looked at it, 
have supported the price structure that is there.
    Senator Dorgan. I understand that, but my point was you all 
seemed to make the case, and you started with it, that somehow 
this oil price problem is a result of hurricanes. I understand 
the dislocations of the hurricanes----
    Mr. Raymond. No, I think the point I would make is that the 
hurricanes aggravated whatever problem was there to begin with.
    Senator Dorgan. That is certainly true, and the price of 
oil was over $60 a barrel before we heard the news of 
hurricanes. That is true as well, and I think an important 
point because it relates to the question of price and supply 
and demand.
    Second, I would ask the question Senator Inouye asked of 
you. Your answer to him about this issue of the AAA and a 24-
cent increase in 24 hours of Exxon's wholesale price, which 
angered your local dealers, you obviously did not investigate 
that because you do not know about it. I wonder why you would 
not investigate something like that. That is the sort of thing 
that would make notice here of people trying to evaluate what 
is going on. Your own branded dealers are complaining. Why 
would you not investigate that?
    Mr. Raymond. As a matter of fact, my point I think to the 
Senator was that the people who are in charge of that, which 
are over here in Fairfax, did look into that. I think the 
comment that they have made back to us was that what was done--
and I am not sure that 24 is the right number; that is the 
point I am making--was consistent with the directive that we 
had made in terms of trying to moderate the pricing, but at the 
same time maintain continuity of supply.
    Senator Dorgan. Well, I understand your answer. My point is 
when you see these kinds of things I would expect they would be 
investigated with some great concern. But there are people 
here--I think Senator Inouye talked about oil and gas with 
respect to gouging. None of us know much about what is 
happening with respect to pricing. We see the pain of the 
consumers, we see the gain of the companies.
    Let me ask, if I can, something that Senator Domenici tried 
to elicit from you. How do you respond to a consumer--you know, 
the notion with most challenges in this country is that we are 
all in this together. But with respect to this challenge, for 
consumers at least, it seems to be we are all in this alone, 
because on the one side you have those that have the energy 
exhibiting substantial pricing capability and the consumers 
having to pay substantial prices.
    I think Senator Domenici was asking--I do not mean to 
paraphrase him, but--a consumer says to us, you know, Mr. and 
Mrs. Politician, what I see are big economic interests getting 
rich here. Your profits are very handsome. In fact, your 
individual compensation is very substantial. You are doing 
really well. On the other hand, there is dramatic pain for 
consumers.
    In my part of the country, people going into the winter 
understand heating your home is not a luxury, it is a 
necessity, and they are going to pay a substantial amount more 
to heat their homes this winter, while they open the paper and 
they say: Boy, it is nirvana for you all, personally and for 
the companies.
    How do you respond to those consumers in a way that says to 
them, well, this is the right thing and this is a fair thing? 
Anyone? Mr. Raymond, you want to answer that?
    Mr. Raymond. I think, Senator, the point is when you say we 
are all in this together, I would broaden that to a world view: 
We are all in this together everywhere in the world. And the 
United States, as has been demonstrated by the hurricanes, is 
just one of many players on the world stage that affect 
petroleum prices.
    If tomorrow a number of refineries were to go down in 
Europe, the price of heating oil in your State would go up. 
That is the reality that we are in. And our job I think is 
first of all to make sure that the customers in fact do have 
supply. As all of us who have been around a long time remember, 
shortage is a disaster, and we do not want to go there.
    That means we are going to have to pay the world market 
price for these products, no matter where they come from. In 
doing that, we recognize the consumers in the United States 
sometimes are going to have difficulty realizing that they are 
part of that world. But in fact they are, and our job is to get 
it to them at the most competitive price we can.
    Senator Dorgan. Mr. Raymond, you have used the term ``world 
market'' many times. I notice you did not use ``free market,'' 
because when I heard you describe the price you pay to the 
Saudis, you pull up to the Saudi pump, they say here is what it 
is going to be. That is not a free market. It is a longer 
discussion we ought to have at some point, but I think the 
consumers bear the brunt of a market that is not free, and your 
companies at this point are experiencing very substantial 
profits as a result of it. I think most consumers find it 
terribly unfair. Talk is cheap. They are saying to Congress: We 
want some action.
    Chairman Domenici. Senator, your time has expired.
    Senator Dorgan. Thank you very much.
    Chairman Domenici. We will go to Senator Stevens for his 
side now.
    Chairman Stevens. We will now recognize Senator Burns, 
followed by Senator Boxer, for 5 minutes each.

                STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. Thank you very much for coming today, and I 
will tell you that my number one concern right now is the 
business of agriculture. We cannot increase the price of our 
product off of the farm. We cannot pass along our costs. I want 
you to write this down: It costs a bushel of wheat to buy one 
gallon of diesel. Gasoline has come down, diesel has not.
    Then we get our product to the market and we are charged a 
surcharge from the rails and the trucks, which further 
depresses our price on the farm and it takes us out of our 
ability to compete with our product on the world market.
    I understand what you are saying, Mr. Raymond, because I 
come out of the auction business and I know when you go to an 
auction that is the truest form of supply and demand. Who wants 
it and how bad do they want it?
    So my concern now is the diversity of supply. We have heard 
of no new refineries being built in the past 30 years. Reason, 
we are not going to go into that. Are oil companies willing to 
invest in the use and/or expanding the refinement of biofuels 
or coal to fuels, that is gasification technologies? And if 
not, why not? Anybody can take a swing at that that can pick up 
a bat.
    Mr. Raymond. Well, I will take a quick swing at it, 
Senator. First of all, I think, as the comments I made earlier, 
in fact while there has not been the construction of what we 
would call a new grassroots refinery, there has been continual 
expansion of the refining industry. As I commented, effectively 
in this country in the last 10 years we have built in essence 
three new refineries. They are inside the fence where 
refineries already were, and as a result they are much more 
efficient than if we had gone off in some greenfield site and 
tried to do it.
    In terms of are we willing to look at biofuels, we are 
willing to look at any feedstock that would enable us to be 
able to provide competitive supplies. In terms of coal 
gasification, we had projects on that 20, 30 years ago. The 
problem with them is that they are not economically competitive 
with traditional oil and gas supplies.
    Senator Burns. Now, I have a follow-up question on that and 
then I will let somebody else.
    Mr. Raymond. Please.
    Senator Burns. Are refineries and biofuels or gasification 
plants treated the same as far as policy, taxation? Do they 
work under the same definitions as far as policy is concerned?
    Mr. O'Reilly.
    Mr. O'Reilly. Senator, biofuels, and if you include ethanol 
in that, obviously have additional tax incentives for 
manufacture. So they are not quite under the same policy. As 
far as I know, the underlying structure other than the tax 
incentives themselves are similar.
    Senator Burns. I just think that somewhere along the line 
our policy up here does not put them both on the same level so 
that the investments not only could flow to refinery capacity, 
but also into the use of more diverse areas of our supply. Am I 
going down the wrong road here, Mr. Mulva?
    Mr. Mulva. No, Senator, I do not think you are going down 
the road. Anything that can support diversity and expansion of 
refining capacity is really something that we need to do and 
should do.
    I will come back to your initial question, though, with 
respect to diesel. In our own company we lost three refineries 
as a result of the hurricane. They are coming back on stream. 
But we lost 200,000 barrels a day of diesel capacity. To put it 
in perspective, I think the State of Mississippi uses about 
40,000 barrels a day of diesel.
    We cannot really import it from Europe like we can gasoline 
because Europe has moved into, you might say, dieselization. So 
we cannot bring it in in the form of export from Europe 
imported into the United States. So what is really absolutely 
important for us is to get our capacity and our refineries back 
on stream. The best thing we can do is adding supply by 
efficiently running our refineries and getting them back on 
stream. It is going to be the best thing we can do to get 
diesel prices down.
    Senator Burns. Let the American people understand: 
Agriculture is going to get shut down. We are not going to turn 
on one tractor to produce food and fiber for this country under 
these kind of conditions. We have to do something different.
    I thank the chairman.
    Chairman Stevens. Senator Boxer is recognized for 5 
minutes.
    Senator Boxer. Thank you, Mr. Chairman.

               STATEMENT OF HON. BARBARA BOXER, 
                  U.S. SENATOR FROM CALIFORNIA

    I would like to put into the record a copy of a front page 
story in the Washington Post Tuesday, January 22, 1974, given 
to me by Senator Cantwell, showing Senator Scoop Jackson 
swearing in oil company executives. The headline: ``Firms Say 
Oil Crisis Is Real, Deny Holding Supplies Back From the 
Market.'' I would like to put this in the record as a reminder 
of the way things used to be done around here, if I might.*
---------------------------------------------------------------------------
    * The article has been retained in committee files.
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    Chairman Stevens. The chair has no objection, but we do not 
print photographs in the record.
    Senator Boxer. Well, we can describe it then. That is fine.
    Mr. Chairman, today's hearing in the mind of most of my 
constituents is about shared sacrifices in tough times versus 
big oil company greed.
    Gentlemen, to all of you, I hope I can give you a bit of a 
reality check. Working people struggle with high gas prices and 
your sacrifice, gentlemen, appears to be nothing. I want to get 
to a very simple thing that everyday people can understand, and 
that is oil executive bonuses versus average U.S. salaries. I 
have a chart, and I do not go into all of you because some of 
you work for companies that do not have to file this 
information.
    [Chart.]
    In 2004, Mr. Raymond, your bonus was over $3.6 million. 
This was on top of your salary of $3.2 million and stock gains 
and other compensation of $19 million.
    Mr. O'Reilly, your bonus was almost $4 million, in addition 
to a salary of $1.5 million and stock gains and other 
compensation of $11.2 million.
    Mr. Mulva, your bonus was a little over $4 million, on top 
of your $1.5 million salary and $2.7 million in stock gains and 
other compensation.
    Gentlemen, this compares to an average American who makes 
$23,276 per year. Each of your bonuses was more than 155 times 
greater than the typical American's yearly salary. And compare 
your bonuses to a worker on minimum wage, which Congress has 
not raised in 9 long years. That minimum wage worker makes 
$10,713 per year. Each of your bonuses--forget the rest of it--
each of your bonuses was more than 300 times greater than a 
minimum wage worker's annual pay.
    So let me just ask you a question here. Will you consider 
making a major personal contribution and major corporate 
contributions from record profits to a charitable fund set up, 
hopefully with your efforts and community efforts, to help 
America's working families get relief from higher home heating 
oil prices or higher gas prices? Just a yes or no, if you would 
consider this.
    Chairman Stevens. We will stop the clock right here for 
you, Senator. We are permitted to have charts to show 
information that pertains to our issue. This chart is really 
publicity. I want you to know we are going to have a question 
about that later in our business discussion. But I would urge 
Senators to bring charts that demonstrate some information that 
is necessary for the consideration of the subjects before us. 
This does not seem to be that case.
    Senator Boxer. Well, Mr. Chairman, if I could have 30 
seconds without it being taken away since you interrupted my 
train of thought, let me just tell you something. I think that 
this is very much on point. People in our country are concerned 
about fairness and justice at a time of sacrifice.
    But that is a difference between us, we should not try to 
stop each other from saying what we want to say. But we will 
discuss that, because I know at the end of the day you are a 
fair person.
    Now, if I could have a second question and, Mr. Hofmeister, 
it is to you. Two years ago this month, your company Shell 
announced it was closing its oil refinery in Bakersfield, 
California, an oil refinery that supplied 2 percent of our 
State's gasoline. We already had some of the highest gasoline 
prices in the country and the community was up in arms.
    In the end the refinery was sold, not closed, but only 
because of elected officials, in particular the attorney 
general of California. Now, today is your chance to please let 
us know why you told the people a number of falsities. And I 
want to say your company, not you personally, your company. You 
said that the refinery was not making money. You said it was 
not economically viable.
    It was not true. Internal documents showed Bakersfield 
refinery was making about 55 cents profit per gallon, the 
biggest marginal profit of any Shell refinery in the country. 
The truth is it also was the most reliable Shell refinery in 
the country for 2003.
    I ask consent to put those documents in the record that 
prove what I am saying is accurate. I ask consent to put those 
documents in the record, Mr. Chairman.
    Chairman Stevens. What documents?
    Senator Boxer. If I could have a moment to explain the 
documents without it coming off my time, please.
    Chairman Stevens. If they are official documents----
    Senator Boxer. They are official documents.
    Chairman Stevens. Without objection.
    [The material referred to follows:]

                                     Shell Oil Products US,
                                       Houston, TX, April 13, 2004.
Hon. Barbara Boxer,
U.S. Senator, Hart Senate Office Building, Suite 112, Washington, DC.
    Dear Senator Boxer: Thank you for your letter of April 9 regarding 
Shell's decision to close the Bakersfield refinery by October of this 
year. We appreciate your seeking information from Shell on this matter.
    Shell has always been and remains willing to entertain any credible 
offers for the Bakersfield refinery. Shell has received nine inquiries 
from prospective buyers, but none of them has resulted in a credible 
offer to date. One inquiry came from an oil company, but they have 
indicated that they will not pursue further. Seven inquiries came from 
energy-related companies or other concerns, and another inquiry came 
from a company that was not interested in running the refinery as an 
ongoing concern. Out of all the inquiries, we have received only one 
written expression of interest thus far. In our view, a credible offer 
would begin with a written expression of interest and information 
showing adequate financial capability. While we are sharing information 
with this one party, it has not resulted in a credible offer to date.
    As Shell representatives informed your staff during a briefing in 
Washington, D.C. last month, the decision to close the refinery is 
based on the fact that the refinery is not economically viable due to 
the continual decline of the crude which supplies this land-locked 
facility. And we believe potential buyers would reach the same 
conclusion that we have about its economic viability. For this reason, 
we have not expended time or resources in an attempt to find a buyer 
and do not intend to do so. We will, however, continue to respond 
diligently to all inquiries and are prepared to negotiate with any 
credible potential buyers.
    To give you a better understanding of how we reached our decision, 
let me share with you some facts. The Bakersfield refinery is 
configured to process San Joaquin Valley heavy crude, which it only 
gets from the Kern River Field, upon which the refinery has sat since 
1932. Production from the Kern River Field declined by 6.4 percent in 
2002 alone, according to production reports published by the California 
Department of Conservation. Transmission pipelines take San Joaquin 
Valley heavy crude away from the Kern River Field to several other 
refineries, including Shell's larger Martinez refinery near San 
Francisco, but there are no transmission pipelines or other economical 
means to bring crude to the Bakersfield refinery from other San Joaquin 
Valley fields.
    Declining access to economic crude for this facility is a financial 
drain. The Bakersfield refinery lost $24 million in 2001 and lost $33 
million in 2002. It made only $4.7 million in 2003, which is an 
inadequate return on investment given Shell's investment of over $200 
million in the refinery. The refinery was projected to lose $5.7 
million in 2004. Even if the refinery is slightly profitable in 2004, 
we will not achieve an acceptable rate of return to justify continued 
investment in the facility. Furthermore, in February of this year, even 
with rising margins, we could utilize only 64 percent of the refinery's 
capacity largely due to our limited access to crude. Thus, with the low 
utilization rates projected to continue due to lack of access to enough 
crude, Shell cannot justify continuing to make investments in this 
facility.
    Shell announced this closure decision eleven months in advance in 
order to give its employees, customers, the city of Bakersfield, the 
market, and other concerned parties as much time as possible to plan 
for the closure. As noted above, we remain receptive to any credible 
offers that we may receive over the next several months. But given what 
we believe to be the inevitable--the closing of the refinery based on 
economic reality--it would be a disservice to now introduce uncertainty 
into this process by delaying or indefinitely postponing the closing of 
the facility. Therefore, we do not intend to postpone closing the 
refinery.
    I thank you again for your correspondence. Please feel free to 
contact me if you have any additional questions.
            Sincerely,
                                         Lynn L. Elsenhans,
                                         President and CEO.
                                 ______
                                 
Base Oils Manufacturing
    Port Arthur--Operations are running well.

Refining Margins
    Wow.

----------------------------------------------------------------------------------------------------------------
                                                                                   Difference from plan
                                                                         ---------------------------------------
               Location                         As of            Margin                            Last    Last
                                                                          Latest   7 day    MTD    month    qtr
----------------------------------------------------------------------------------------------------------------
Norco................................  2-Apr..................     9.18     4.75    5.88    4.90    3.97    4.90
Port Arthur..........................  2-Apr..................     7.85     3.81    4.46    3.92    3.15    3.92
Convent..............................  2-Apr..................    10.19     5.41    6.08    5.49    4.56    5.49
Delaware City........................  2-Apr..................     7.19     2.82    3.56    2.98    2.77    2.98
----------------------------------------------------------------------------------------------------------------
Bakersfield..........................  2-Apr..................    23.01    16.78   10.79   16.45    3.54   16.45
Los Angeles..........................  2-Apr..................    22.93    17.54   11.06   16.91    3.81   16.91
Martinez.............................  2-Apr..................    21.82    15.95   10.04   15.75    2.11   15.75
Puget Sound..........................  2-Apr..................    14.96    10.94    5.73   10.47    0.92   10.47
----------------------------------------------------------------------------------------------------------------

                                 ______
                                 
Fellow Bakersfield Refinery Employee,
    My best wishes to you and your loved ones this holiday season. May 
you experience the joy and promise this time of year represents.
    As we have discussed before, we turned in excellent operational 
performance this year. We are the most reliable Shell U.S. refinery in 
2003, and achieved world-class performance two years in row now. We 
have made quantum step improvements in our environmental compliance, 
finishing well under our target again for the second straight year. We 
have reduced the expenses we control 15+ percent year over year, and 
have been one of the few Shell U.S. refineries to turn a profit. And, 
while we struggled with our attention to safety in a difficult first 
quarter, we've stepped forward and created a new culture and attitude 
for protecting ourselves and our coworkers; reducing injuries over 
threefold in the last half of the year.
    We've done all this with the lowest personnel index in Shell 
refining in the country, making us comparatively the most productive 
and effective workforce in the system. All in all, an outstanding year 
by an exceptional group of people. Great, great job and I thank you for 
your contributions to this success.
    As you well know, 2004 will bring its fair share of challenge and 
life change for us. Yet despite the level of difficulty, I am convinced 
there is no better group of people to face it with. I look forward to 
positive outcomes for all of us as we navigate the new year.
            Sincerely,
                                                       Jeff Krafue.

    Senator Boxer. Thank you.
    At the end of the day there was a credible buyer. The 
refinery is up and running. So could you please explain why 
your company put out that word? That there were no buyers, that 
was not true. That the refinery was not reliable, that was not 
true. That the refinery was not making money, that was not 
true.
    Was it because you wanted to control the supply of gasoline 
and make gasoline even more expensive to my people in 
California?
    Mr. Hofmeister. Senator, I would like to thank you and the 
attorney general for the help that you gave us ultimately in 
the sale of that refinery.
    Senator Boxer. Well, you were not happy when we intervened 
initially, but I am happy you are happy now.
    Mr. Hofmeister. And the refinery is up and operating and 
Shell continues to support the new owners of that refinery in 
its technical requirements and in a smooth handover from one 
owner to the next.
    Fundamentally, we had shopped the refinery around 
unofficially, but did not find buyers. We then decided to close 
it. The reason for closing it is that this is a refinery that 
is one of the oldest in the country, it is one of the smallest 
in the Shell system, and it is on multiple sites. So in other 
words, the refinery is not contiguous. It operates in different 
plots of land in the city of Bakersfield. So in terms of future 
investments as we look at the need for world-scale large 
manufacturing operations, what we really require are world-
scale factories, and this was not going to get to world scale. 
It was impossible to expand it. It was impossible to link it up 
in the way in which refineries are to be linked up to meet our 
investment criteria.
    So in the end it was sold. It is operating. We are 
delighted that the employees are still employed.
    Senator Boxer. Well, Mr. Chairman, if I just might say this 
to you. This was a struggle to get Shell to cooperate with us. 
The attorney general had to force them, in essence, to open up 
their books. I just would say to you, I am very happy that you 
now think it was a good thing. At the time the people in charge 
there were not happy with us. It seemed to us and in retrospect 
still does that there was a desire to short the market even 
more.
    Mr. Chairman, thank you.
    Chairman Stevens. Thank you very much.
    Senator Domenici will yield now to his committee.
    Chairman Domenici. On our side, Senator Murkowski and 
Senator Wyden.

               STATEMENT OF HON. LISA MURKOWSKI, 
                    U.S. SENATOR FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman, and welcome to 
the members of the panel here this afternoon or this morning.
    I would like to talk a little bit about the natural gas 
situation, following up on Senator Alexander's comments. People 
were shocked with the hit in the price of gas at the pump, but 
I think it is fair to say that this winter people across the 
country are going to be shocked when they look at their natural 
gas bills that we anticipate all across the country.
    As we all know, Alaska has 35 trillion cubic feet of known 
natural gas reserves just waiting for a means and a mechanism 
to get to the market. Now, for about the past year or so the 
gas owners, Exxon, BP, ConocoPhillips, have been in 
negotiations with the other owner of the gas, the State of 
Alaska, to work a deal so that we can get the gas moving. Mr. 
Mulva, I appreciate your comments here this morning insofar as 
the tentative agreement that ConocoPhillips has reached with 
the State and we appreciate that.
    Now, given that the third quarter profits that we have seen 
from the three companies that I just mentioned exceed the 
estimated $20 billion cost of the entire pipeline project, I 
would like to direct a question to you, Mr. Raymond, and you, 
Mr. Pillari. What is holding Exxon up, what is holding BP up, 
from reaching a firm agreement with Alaska and actually 
committing to build this very vitally needed pipeline? 
Gentlemen?
    Mr. Raymond. Well, Senator, I think we have been involved 
with the State of Alaska in discussing the building of a gas 
pipeline now for some 30 years. Fortunately, we did not do it 
earlier because it would have been an economic disaster for 
both the companies and the State.
    The comment about the structure of the natural gas market I 
think is one that we are all concerned about, and the National 
Petroleum Council 3 years ago had an exhaustive report on that 
and it was updated a year ago. Frankly, the position that the 
country is in in natural gas is exactly what the NPC said was 
going to be the case.
    In terms of our current discussions with the State and with 
the Governor, I am told by our people that we continue to make 
progress. The specific issues that are out there I think are 
more appropriately handled between the Governor and the people 
up there who are trying to negotiate it. I think the intent is, 
as we have had for a long time, is to come to a successful 
conclusion. But I think we have to recognize that it would 
probably be the largest single private project anywhere in the 
world, and therefore it is absolutely critical from our point 
of view that all the elements of the agreement be clear and the 
interaction between the gas operation and the oil operation at 
Prudhoe Bay also be clear.
    Senator Murkowski. Mr. Pillari.
    Mr. Pillari. The only thing I would add to that is I think 
progress has been made. We would like to see this pipeline 
built. My understanding is people are working 7 days a week to 
get the details done. I think every company approaches a 
negotiation a different way. We would like to see all the 
details resolved before we agree to go forward, but we believe 
this project is a good project and we believe it will get done 
shortly.
    Senator Murkowski. I appreciate that air of optimism from 
you, Mr. Pillari. We do not want to be sitting here 30 years 
from now--as you point out, Mr. Raymond, it has been 30 years 
in the making already. And I appreciate the confidentiality of 
the terms of the agreement and the effort that has been made. 
But I think we need to be aware that there will come a point 
when the American consumer is going to say: Well, wait a 
minute; you have got all the gas up there, you have been trying 
to get this line going; is it these companies that are trying 
now to manipulate the price of natural gas and holding off and 
not moving forward with the project?
    It may cause us here in Congress to question or revisit 
some of the incentives that we moved forward just last year to 
help facilitate this project. So I want to just put that on the 
record, that we do not want to be sitting here in another 
hearing a year or two from now saying, what happened, why have 
you not participated.
    I just have a couple seconds remaining here. I want to put 
out also the issue of access to a natural gas pipeline and what 
it would mean under the FERC order that covered the gas line. 
There are some parameters to ensure access to others so that we 
guarantee line expansion in an equitable and an economic way, 
and I would just like to know that you would be willing to work 
with the State, essentially guarantee that access to expansion 
to the line. If I can have either Mr. Raymond or Mr. Pillari 
speak to that.
    Mr. Raymond. If I may, Senator, I think the issue of access 
to the expansion of the line, while it is an interesting 
question, is not really the key question right now. The key 
question is to build the line to begin with. The question is 
not access to expansion.
    The facts are--and I think people need to realize it--that 
even if we come to an agreement with the State on the 
construction of the line, it will be probably 10 years from now 
before that gas flows. The issue of natural gas in this 
country, while that can make a significant contribution years 
down the road, the more important question is in the near to 
medium term when we have to start dealing with imports of gas 
through LNG terminals. The facts are, Senator, we need to do it 
all.
    Senator Murkowski. We need to do it all and I understand 
from your full-page advertisement a couple days ago that you 
have got a $14 billion commitment over in Qatar to assist with 
that LNG facility. We would just like to do what we can 
domestically. We recognize that it takes a while to get the 
Alaska gas on line, but we have got to get moving sooner than 
later.
    Thank you, Mr. Chairman.
    Mr. Raymond. I do not disagree with that.
    Chairman Stevens. Senator Wyden is recognized for 5 
minutes.
    Senator Wyden. Thank you, Mr. Chairman.

                 STATEMENT OF HON. RON WYDEN, 
                    U.S. SENATOR FROM OREGON

    Gentlemen, the President said, and I quote: ``With $55 oil, 
we do not need incentives to oil and gas companies to explore. 
There are plenty of incentives.'' Now, today the price of oil 
is above $55 per barrel. Is the President wrong when he says we 
do not need incentives for oil and gas exploration?
    If I could just have a yes or no answer, going right down 
the row beginning with you, Mr. Raymond.
    Mr. Raymond. No, I do not think our company has asked for 
any incentives for exploration.
    Senator Wyden. Sir?
    Mr. O'Reilly. Agreed.
    Mr. Mulva. In my oral comments I said we do not need. What 
we do need, though, is access----
    Senator Wyden. Just a yes or no.
    Mr. Mulva. Yes.
    Senator Wyden. Sir? The President is correct?
    Mr. Pillari. He is correct.
    Senator Wyden. Sir?
    Mr. Hofmeister. Yes, he is.
    Senator Wyden. All right. Now, your companies have been 
charging record prices and getting record profits, but also 
getting record tax breaks. Now, the President says they are not 
needed. You have just told me they are not needed. But Congress 
just a couple of months ago gave you several billion dollars in 
new tax breaks on top of the tax breaks you already get.
    My question to you is, why shouldn't Congress take back the 
billions of dollars in brand-new tax breaks, breaks that you 
have just told me are not needed, and use that money to help 
people who are hurting in our country? Mr. Raymond, your 
response?
    Mr. Raymond. I have heard that comment made many times 
since the passage of that legislation and I have asked my 
people many times if they could identify what so-called tax 
breaks are in that legislation that would apply to ExxonMobil. 
The answer they come back with is, when you add it all up, that 
energy legislation is zero in terms of how it affects 
ExxonMobil.
    Now, how it affects the industry, some other people can 
respond to.
    Senator Wyden. So you would have no problem, because I am 
on the Finance Committee and I am going to offer an amendment 
to take back the $2.6 billion of brand-new tax breaks and use 
that money to help people who are hurting. You said you are not 
getting any?
    Mr. Raymond. As far as my company is concerned, it does not 
make any difference whether it is there or not.
    Senator Wyden. Good, I am glad you will support me on 
Thursday.
    Mr. Raymond. That is a different question.
    Senator Wyden. Sir?
    Mr. Raymond. That is a different question.
    Senator Wyden. I think you have summed it up.
    Just a yes or no answer. Sir?
    Mr. O'Reilly. Senator, it is impossible to----
    Chairman Stevens. The Senator will suspend.
    Our rules provide that the chairman has the duty to 
maintain good order, and any public demonstration of approval 
or disapproval indicated by people in the audience, it is the 
duty of the chair to enforce on his own initiative and without 
any order by any Senator the decorum of this hearing. When the 
chair feels it is necessary to maintain order, he shall have 
the power to clear the room and the committee will continue in 
closed session so long as there is any doubt about the 
continued disruption of the hearing.
    The Senator will proceed.
    Senator Wyden. Sir, right down the row?
    Mr. Pillari. Senator, it is impossible to give a yes or no 
answer, but if you permit me a sentence or two I will answer.
    Senator Wyden. I think what I need to know--you have told 
me the tax breaks are not needed. I want to take them away.
    Mr. O'Reilly. I did not say that.
    Senator Wyden. You said the President was right that we do 
not need tax breaks. The price is over $55 a barrel.
    Mr. O'Reilly. If you forgive me, Senator, I would like to 
answer the question. That is, from our perspective it will have 
a minimal impact on our company, minimal. However, I think my 
understanding of those breaks, because they must affect others, 
is that whatever steps are taken by the Government, they should 
be done on a prospective basis so they do not penalize people 
that have made decisions based on the act that has already been 
adopted.
    Thank you.
    Mr. Mulva. Senator, with respect to oil and gas exploration 
and production we do not need incentives. What we need is 
access so that we can explore. Second, the recent energy----
    Senator Wyden. You will support my effort Thursday to take 
them back?
    Mr. Mulva. The recent energy legislation that was passed, 
while it is a good step, did not do very much with respect to 
supporting and enhancing additional supply, which is what we 
really need, additional supply. And that goes back to access.
    Senator Wyden. The next witness?
    Mr. Pillari. I would agree with what has just been said and 
say it is a minimal impact on us. I would add that included in 
that bill is something about LNG siting, which I believe is 
very important.
    Mr. Hofmeister. The bill for us is not material in any way, 
but I do think we are a large, diverse, and complex industry, 
in which many of the industry players see it differently than 
we do. I would say that there are some areas of the bill, such 
as coal gasification, which offers benefits to States, not only 
to industry.
    Senator Wyden. I just want the public to know you got $2.6 
billion of tax breaks, you have told me they are not needed. I 
hope you will support my effort to take them back and give that 
money to people who are hurting.
    One last question for you, Mr. Raymond, if I might. You 
have been quoted as saying that speculation accounts for about 
$20 of the current per barrel price of oil. Yet you have given 
us now several times multiple discussions about how the markets 
are working. Should we not rein in those speculators who by 
your own admission are accounting for $20 of the current per 
barrel price of oil, in order to make markets work? Will you 
support legislation to rein in those speculators?
    Mr. Raymond. Well, I think the point, Senator, is that that 
is part of the market. That is part of the market system. Now, 
in terms of----
    Senator Wyden. So speculation is good?
    Mr. Raymond. I think you will find that many times 
speculation is a requirement for an orderly market. Now, I am 
not going to be here to defend the speculators on Wall Street. 
That is not my role in life. But I think the point I am trying 
to make to you is that that is an extraordinarily complex 
interaction to try and deal with that. The facts are that in 
the petroleum markets and the scene that has been set for the 
petroleum markets the uncertainty, political, all around the 
world, leads to speculation and that speculation does impact on 
the price of petroleum.
    Beyond that, what you want to try and do with it, that is 
up to you.
    Senator Wyden. My time is up, Mr. Chairman. I am only 
saying that when you yourself say that speculation is such a 
big factor in this clobbering people are taking at the pump, it 
seems to me you owe it to the public to be aggressive in terms 
of trying to root out some of these abuses, and I hope you will 
try to do that when a group of us try to make those changes as 
well.
    Thank you, Mr. Chairman.
    Chairman Stevens. Senator, I look forward to that debate on 
the floor. Since primarily that tax relief was for small 
refineries, we will be happy to have another panel of them come 
and answer your question and tell you why it is necessary.
    The next Senators to question are Senator Smith and Senator 
Cantwell.

              STATEMENT OF HON. GORDON H. SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. Thank you, gentlemen, for being here. 
Obviously this is a most important hearing to the pocketbooks 
of the American people.
    It is my understanding that, while the price of crude has 
gone up about 40 percent this year, the price of gasoline has 
gone up 60 percent. Given that refining costs are essentially 
constant, can you explain to me or, more importantly, to the 
American people this growing disparity between crude oil and 
gasoline prices?
    Mr. Raymond. Was this to me?
    Senator Smith. Any of you.
    Mr. O'Reilly. I will take a turn.
    There really are two markets at work, Senator. First of 
all, the crude oil market has a bearing on all of refined 
products, whether they are gasoline, jet fuel, or diesel, 
because underlying gasoline, jet fuel, and diesel you have 
inherently the raw material cost is crude. That is by far the 
biggest factor in the cost.
    Crude is a global market and it functions, it moves up and 
down. Gasoline is not quite as global in a sense. It has 
regional characteristics that are both geographic and quality 
in nature. Some gasolines are different than others. For 
example, Oregon has a different gasoline than California. So 
you will see differences in gasoline markets that are related 
to supply.
    Senator Smith. Is 20 percent what it takes to account for 
those differences?
    Mr. O'Reilly. Well, clearly if 15 percent of refining 
capacity comes out of the market, as it did during the period 
of the hurricane, you will have dramatic impacts on the product 
markets that are independent of crude, and I think that is what 
you are seeing. There has been more volatility in product 
markets, particularly this year, than in typical years.
    Senator Smith. I suppose I understand those kind of things. 
I have run a commodity business myself. But the concern that I 
have is that, while the Gulf can probably be explained by these 
incredible hurricane and natural events, however, the States 
these three Senators represent were not affected by that. We 
get no crude from the Gulf, yet the prices on the west coast 
spiked as well. I think that increase is really hard for me to 
explain in a town hall in Pendleton, Oregon.
    Mr. O'Reilly. Well, as a west coast-based company I think I 
owe you help with the answer to that question. A lot of people 
do not fully appreciate that the west coast is deficit products 
and we typically bring product to the west coast from the Gulf 
Coast, from Asia, and at times from Europe, because the supply 
lines are so long.
    When the Gulf Coast refineries went down because of the 
hurricanes, there was literally a bidding for the gasoline that 
is coming from these areas, and obviously prices in the Gulf 
Coast were so high that that is where the products moved. Then 
it caused an abnormal supply situation to occur on the west 
coast. It was not as dramatic as what happened in the Gulf or 
as volatile, but nevertheless it did impact the markets in 
California, it impacted the markets in Asia, as well as in 
Europe.
    Senator Smith. Well, look, I want----
    Mr. Mulva. If I could answer one point.
    Senator Smith. Yes, please.
    Mr. Mulva. All these points, the oil market certainly is a 
worldwide market and we have regional situations as a result of 
the hurricane or whatever. But there is something else that as 
an industry, when asked earlier when we started the hearing 
today what could be done, we have so many different fuel 
requirements and specifications from one season to the next 
across the United States that one of the things that we feel 
quite strongly that we need to do and certainly, as I think you 
working here in Congress and in the Senate could help us, is to 
go to more standardized fuels and get away from the boutique 
fuels.
    That can help somewhat with respect to the changes and 
dramatic changes from products from one season to the next and 
within regions of the United States.
    Senator Smith. Let me also say, I do not know petrol, but I 
know the pea business. That was my business. If I owned the 
farm, if I owned the food processing plant, if I owned the 
distributorship and I owned the grocery store, then I am 
totally integrated. If I then posted enormous profits the likes 
of which the petroleum industry has posted, I would get a lot 
of attention.
    My concern is your vertical integration on the west coast. 
When I see profits posted at $9.9 billion, $3.6 billion, after 
you have already accounted, as I understand it, for your 
capital investments, your taxes and more, I am hard-pressed to 
feel good about defending these kinds of increases when all of 
this vertical integration has taken place from the ground to 
the gasoline station.
    This is a public relations problem that you have and it is 
a public policy problem we have. We need your help to solve it.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Smith follows:]

  Prepared Statement of Hon. Gordon H. Smith, U.S. Senator from Oregon

    We are here today to discuss the oil industry, recent profits, and 
the effect of continued high gasoline prices on U.S. consumers. In this 
era when major oil companies control oil production from the ground to 
the gas pump, we need to ensure the American people that their isn't 
profiteering along the way.
    Long after the winds and the water have subsided, Hurricanes 
Katrina and Rita are affecting our entire nation. The loss of life and 
the scope of the destruction in the Gulf region is almost beyond 
comprehension. We must continue to offer federal assistance as 
individuals and communities seek to rebuild.
    The impact of higher gasoline prices on the rest of the nation, 
while less dramatic, is hampering our entire economy. Drivers felt the 
immediate impact on their wallets at the gas pump. Soon these higher 
costs will be reflected in higher prices for all the goods we buy.
    The huge jump in gas prices nationwide in the days immediately 
following Hurricane Katrina spurred allegations of profiteering and 
price gouging. Even in Oregon, which is less reliant on Gulf of Mexico 
production, we had price spikes in the week following Katrina. That is 
why, as Chairman of the Subcommittee on Trade, Tourism and Economic 
Development, I requested early on that the Federal Trade Commission 
launch an investigation into these allegations.
    This disaster also revealed a gap in federal laws pertaining to 
consumer protections and interstate commerce. Even though almost 30 
states have enacted price gouging laws, there is no federal statute to 
protect consumers from price gouging in the wake of a major disaster.
    That is why I introduced legislation aimed at ensuring consumers 
are protected in the future. My bill, S. 1743, the ``Post-Disaster 
Consumer Protection Act of 2005,'' will provide additional authorities 
to the Federal Trade Commission to prevent oil and gas price gouging in 
the immediate aftermath of a declared disaster.
    Under my bill, the President must declare a major disaster under 
the Stafford Act. For 30 days following the disaster declaration, it 
will be unlawful to engage in price gouging of oil or gas products.
    The bill defines price gouging as a gross disparity in the price 
for the product charged after the disaster declaration as compared to 
prices charged by the same supplier during the 30 days immediately 
preceding the disaster. Price gouging will not include price increases 
attributable to increased wholesale or operational costs, international 
market trends, loss of production capability or loss of pipeline 
transmission capability.
    The bill authorizes the Federal Trade Commission to determine what 
represents a gross disparity in pricing. The FTC will to punish 
violations under this act using its existing authorities under the 
Federal Trade Commission Act. Those authorities include seeking civil 
penalties of $11,000 per violation; assessing fines or repayment of 
illegal gains; freezing assets; and seeking preliminary injunctions, 
cease and desist orders or temporary restraining orders.
    I believe my bill provides needed authority to the Federal Trade 
Commission to protect consumers from being victimized in the wake of a 
disaster without hampering the normal functioning of the free market.
    We are heading into the winter heating season, and the high cost of 
energy--particularly for home heating--is only going to put additional 
strains on family budgets. Individuals on fixed incomes, many of whom 
are elderly, are going to be among the hardest hit.
    As Chairman of the Special Committee on Aging, I chaired a hearing 
earlier this year on the impact of high energy prices on seniors. 
Statistics revealed that energy prices were highly burdensome for this 
population. In the Coos-Curry County area of Oregon, 60 percent of 
seniors receiving assistance struggle to pay their utility bills or 
medications. Households in this part of my home state experienced an 
increase in utility bills by as much as 40 percent. Similar increases 
are being felt by retirees on fixed incomes across the state of Oregon 
and throughout the country.
    On average, many low-income elderly citizens pay 10-20 percent of 
their annual income toward energy bills. With the high cost of gasoline 
and home heating expected to reach historic record highs this winter, 
the amount that older Americans on fixed incomes pay for energy can be 
expected to represent an even larger proportion of their income. No one 
should be forced to choose between heating their home and affording 
medicine and putting food on the table, but that is a decision many 
elderly households may be facing this winter.
    I look forward to hearing from the witnesses here today and working 
with the Members of both committees to address these issues in the 
months to come.

    Chairman Stevens. Senator Cantwell.

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Mr. Chairman.
    Gentlemen, this committee was billed as an investigative 
hearing and I think you can imagine as the public looks at what 
some are saying will be $100 billion in profits this year for 
the oil industry, while my constituents are losing their jobs 
or losing their pensions, that Americans want answers. So I am 
going to try in my 5 minutes to ask you some questions, and if 
you could give me yes or no answers that would be helpful.
    First, I would like to know whether your companies in 2005 
exported fuel, gasoline, diesel, outside of U.S. markets prior 
to Katrina? Just a yes or no answer.
    Mr. Raymond. Well, Senator, there are no easy yes or no 
answers in this business.
    Senator Cantwell. Did you export fuel outside of the United 
States prior to Katrina in 2005? It is just a simple question.
    Mr. Raymond. No, it is much more complex than that. 
Historically this country has exported some products. It is 
basically the way that the Caribbean and Central America live. 
So to the extent you say you cannot export to places that have 
been traditional export areas we go to, they will continue. If 
you are asking the question have we had discretionary exports 
that would be not in the historical pattern, for our company 
the answer to that is no.
    Senator Cantwell. I am asking a simple question: Did you 
export any fuel, gas or diesel, out of the United States during 
2005? It is a simple question. Prior to Katrina.
    Mr. O'Reilly, yes or no?
    Mr. O'Reilly. Senator, we import a lot more than we export, 
but we always export because the Caribbean is dependent on our 
refineries in the Gulf Coast.
    Senator Cantwell. Mr. Mulva? Yes or no will do.
    Mr. Mulva. Senator, we as a result of the hurricane, we did 
not export product----
    Senator Cantwell. Prior to Katrina. I am asking prior to 
Katrina.
    Mr. Mulva. We did export product prior to Katrina.
    Senator Cantwell. Thank you.
    Mr. Pillari. I do not have the details, but I would think 
we did, to places like Mexico and Canada and the Caribbean.
    Senator Cantwell. Thank you.
    Mr. Hofmeister. We both import and export.
    Senator Cantwell. Thank you.
    Did any of you sell product outside of the United States in 
this same time period for a smaller profit than you would have 
made if you would have sold the product in the United States?
    Mr. Raymond. I do not know the answer to that question.
    Senator Cantwell. Mr. O'Reilly, do you know?
    Mr. O'Reilly. Impossible to answer without checking.
    Mr. Mulva. I do not know the answer.
    Mr. Pillari. I do not know.
    Mr. Hofmeister. Do not know.
    Senator Cantwell. Thank you.
    Will you gentlemen provide information about how much gas 
and diesel your companies exported in 2005 and whether you sold 
any of that product for a lower profit than you would have made 
in the United States? Will you provide the committee with that 
information?
    Mr. Raymond. Sure.
    Senator Cantwell. Could you answer for the record?
    Mr. O'Reilly. We will get it for you.
    Mr. Mulva. Yes, we will.
    Mr. Pillari. Sure.
    Mr. Hofmeister. Yes.
    Senator Cantwell. Do you know of any instance in which your 
companies might have diverted supply, that is any instance 
where you had a ship heading towards the United States destined 
for the U.S. market with supply and the petroleum products en 
route to the United States were diverted?
    Mr. Raymond. No.
    Mr. O'Reilly. Senator, the other way around. Without 
bringing in products from places like Europe and Asia to the 
west coast, we would----
    Senator Cantwell. I am just asking----
    Mr. O'Reilly. I would just like to clarify. We would have 
been shorter of product on the west coast.
    Mr. Mulva. Senator, no, not that I am aware of.
    Mr. Pillari. No, I do not believe so.
    Mr. Hofmeister. Senator, there were cases where ships were 
on their way to this country but there was no more capacity, no 
room to bring the imports into this country, particularly in 
the New York harbor, where the capacity was simply unable to 
take more imports.
    Senator Cantwell. Would you provide this information to the 
committee as well?
    Mr. Hofmeister. Yes.
    Senator Cantwell. Thank you.
    Now, I only have a few minutes left and I would hope that 
the members before us today would speak to the issue of the 
spot market, because, having dealt with this situation with 
Enron, where all my colleagues here heard that this was about 
the fact that we just did not have enough supply and it was 
environmentalists that were holding things up or it was the 
process, only to find out it was not so much about production 
but about manipulation of supply.
    I want to know whether you gentlemen will help us reform 
the spot market sales and lack of transparency that occurs in 
the off-market exchanges, the fact that we do not know what 
these records and trades were, there is no ability to track 
that. So would you disclose your sales in this off-exchange, in 
the spot markets, for this same time period in 2005?
    Mr. Raymond. I have no problem with that. We are basically 
not in those markets.
    Mr. O'Reilly. With clarification, I would be happy to 
provide that.
    Mr. Mulva. Yes, I think with further clarification we would 
provide it. We are essentially in the physical markets, not 
necessarily the financial markets. So we would share that 
information.
    Mr. Pillari. We would be happy to work with you on what it 
is you are looking for and then provide it.
    Mr. Hofmeister. The same.
    Senator Cantwell. Thank you.
    Thank you, Mr. Chairman. I think this is a very critical, 
important issue, the fact that we have lack of transparency and 
product inventories have changed drastically. This industry has 
moved to just in time inventories and so, instead of having 26 
days of reserves, we now have 5 days of reserves or something 
of that nature. Let us find out.
    But I think that that leads to a manipulation of supply 
that increases price prior to Katrina. The spot market 
fluctuation has to have transparency.
    Thank you, Mr. Chairman.
    Chairman Stevens. We now recognize Senator Martinez and 
Senator Landrieu for 5 minutes each.

                STATEMENT OF HON. MEL MARTINEZ, 
                   U.S. SENATOR FROM FLORIDA

    Senator Martinez. Thank you very much, Mr. Chairman.
    Mr. O'Reilly, the first question is to you. I heard your 
testimony about the area of the Destin Dome, which happens to 
be in my State of Florida, and one of the questions--well, 
frankly, one of the things I hear when I go home is folks not 
only asking what is going on with the prices, but they also do 
say: Thank you for protecting our beaches, thank you for 
protecting Florida.
    So in that vein, in addition to economic considerations, 
environmental considerations, I wonder if you are aware of the 
fact that very close to the Destin Dome is one of the largest 
Air Force bases in the United States, in fact the largest land 
area in the United States, the Eglin Air Force Base, which 
utilizes extensively the Gulf of Mexico for military training 
missions? Are you aware of that presence there?
    Mr. O'Reilly. Yes, I am, Senator.
    Senator Martinez. Would it be also part of the 
consideration of not drilling immediately 25 miles off the 
coast of Florida immediately south of Eglin Air Force Base, the 
fact that military missions and training and testing would be 
impeded if there were platforms in that immediate area just 
south of Eglin Air Force Base?
    Mr. O'Reilly. Senator, I do not--I think it is a policy 
decision that the Government should make. This was done on what 
I would call a bipartisan basis. I am just pointing out it is a 
policy decision. We can either develop the gas or we can leave 
it there. It is a government choice.
    Senator Martinez. But there are policy considerations in 
why we make certain decisions.
    Mr. O'Reilly. That is correct.
    Senator Martinez. Which then have ramifications I do 
understand.
    Mr. O'Reilly. That is correct. That was the point in one of 
my recommendations. Policy alignment is I think a very critical 
issue, and I am just pointing out that it is difficult for us 
to develop resources unless the policies are there to support 
them.
    Senator Martinez. Your example then went on to talk about 
liquefied natural gas from Angola. The fact is that there are 
other means by which gas product can get to Florida, through 
pipelines over land, and those are really the more normal 
routes by which gas comes to Florida, since there are no 
liquefied plants that I am aware of in the State of Florida 
anyway?
    Mr. O'Reilly. No, there are not, that is correct, Senator.
    Senator Martinez. So that is not really how Florida 
receives its gas product, Angola?
    Mr. O'Reilly. It will be, because it will get into the 
pipelines and ultimately arrive in Florida.
    Senator Martinez. Not today.
    Mr. O'Reilly. In a few years, Senator.
    Senator Martinez. This is for all of you now. I recently 
had an opportunity to become aware of some of the things that 
are being done in Brazil and have been done over the years in 
Brazil with the use of ethanol in their mix of fuels. As the 
leading energy companies in our country as it relates to 
gasoline and servicing of our folks that attempt to move about 
in our transportation network with the fuels that we currently 
have, I want to know what each of your companies is doing about 
the future. I want to talk about the thinking that we have as 
to what we will do for tomorrow that will be different than 
what we have been doing in the past.
    In Brazil they are utilizing ethanol extensively as a mix 
into their gasoline. In addition to that, I understand from 
what I was told while there that every single gas station 
outlet in the country has a pump that will pump ethanol. I know 
that the automobile companies there, Ford and GM for two, are 
developing vehicles that will soon be on the market that will 
allow them to run on either ethanol or on more traditional 
gasoline.
    I do believe in the ingenuity of our industry. I do believe 
in the ability of the American know-how to be re-energized and 
for us to become not so wedded to what someone decides on a 
given day in Saudi Arabia that they will sell us crude oil for, 
but that we will be independent of that and that we will be 
independent of irrational and unstable dictators south of the 
border that control a substantial percentage of our fuel.
    What are each of your companies doing for us to develop 
that ingenuity and that know-how into independence of fossil 
fuels as we have known them in the past, utilizing renewables, 
utilizing ethanol and maybe other technologies as well? We will 
begin with you, Mr. Hofmeister. I noticed we have started at 
the other end of the table. I want to give you an equal 
opportunity.
    Mr. Hofmeister. Thank you, Senator. We are heavily involved 
in the ethanol business in Brazil and that is a good business.
    Senator Martinez. Why are we not doing it here?
    Mr. Hofmeister. Well, in fact we are the world's largest 
marketer of ethanol and we are doing it here. We are shipping 
daily tens of thousands of gallons--barrels, I should say--of 
ethanol to different parts of this country. We are also 
investing in cellulose ethanol, which is a more derivative form 
of ethanol. We are both passive investors in companies that are 
doing it and in which we are funding their research, but also 
in our own laboratories.
    We are investing in biofuels, in a wide range of biofuels, 
not just ethanols, to test their viability. And we are working 
closely with the auto manufacturers on their engine designs to 
see to it that the long-lived nature of engines is protected 
with the introduction of these biofuels in such a way that we 
can also handle the climate change issues. What I mean by that 
is the existing climates of North and South and East and West 
of this country.
    We are also--4 miles from here, we are selling hydrogen in 
a retail station and we believe that the hydrogen business, 
working in a partnership with General Motors, is a very good 
future business for us. But it is many years into the future 
before it really does touch many of the consumers in the United 
States.
    Senator Martinez. Gentlemen, I realize my time has expired. 
If anyone can give a similar answer, that's fine. If not, I 
would take it in writing from each of you.
    Mr. Pillari. Senator, I would just add that we are an 
extremely large user of ethanol. We will continue to grow our 
ethanol use. We have hydrogen sites, pilot sites, now in 
Florida, Michigan and California. We are working with auto 
manufacturers on what they are going to do with engines. So it 
is a very similar story.
    Chairman Stevens. The Senator's time has expired. I am 
sorry.
    Senator Landrieu.
    Senator Martinez. Thank you, Mr. Chairman.
    Chairman Domenici. Now Senator Feinstein.
    Chairman Stevens. I had made a mistake.

              STATEMENT OF HON. DIANNE FEINSTEIN, 
                  U.S. SENATOR FROM CALIFORNIA

    Senator Feinstein. Thank you very much, Mr. Chairman.
    Welcome. It is my impression that refineries in the United 
States are virtually at capacity and yet no new refineries are 
planned. I wrote to each CEO earlier asking what you were going 
to do to try to see that prices are lowered or whether you 
would cooperate to see that prices are lower, and I received no 
affirmative answer. I did, however, receive a letter from Mr. 
Bindra, Mr. O'Reilly, of Chevron, which with respect to 
refinery production indicates that Chevron is increasing the 
total California refinery production capacity by roughly 20,000 
barrels per day. That is 800,000 gallons a day. It is a 10 
percent increase as I understand it in production. And that the 
Richmond refinery has already submitted permit applications for 
the city of Richmond and the Bay Area Quality Management 
District, and that modernization is under way at El Segundo. So 
I think that is good news.
    But Deutschebank reported that refining margins on the west 
coast have doubled in 2 years, going from $11.99 in 2003 to 
approximately $24.60 in the third quarter of 2005. So it 
appears that oil companies are holding back adding refining 
capacity because it helps increase margins.
    Now, I know you have spoken about expansion, but I would 
like to know how much of your profit margin is due to refining 
and what justification you have for such huge refining margins?
    Mr. Raymond. Well, Senator, if I may, I recall the letter 
you sent, but I think in our case as I recall it was directed 
primarily toward California. You probably do not recall, no 
need that you would, that at the time that Exxon and Mobil 
merged each one of the companies owned a refinery in 
California. The Federal Trade Commission and the State of 
California made it very clear that we could only own one 
refinery and they were not interested in our making any 
additional investments in any refining in California. So, given 
that that was the circumstance a few years ago and we now only 
own one refinery, we probably are not the right people to talk 
to.
    Senator Feinstein. Mr. O'Reilly?
    Mr. O'Reilly. Senator, with two refineries--and of course 
we are in the process, as you point out, of expanding both; 
they are in the permitting phase. The one at El Segundo is 
under way. The one in Richmond is in the permitting phase and 
we hope to be able to expand there in the coming year if the 
permits are all approved.
    The issue in California is really twofold. It is also an 
issue of the investments that have been required there to meet 
the unique California gasoline and the very strict 
environmental regulations. And I am not squabbling at all about 
the fact that we need strict environmental regulations, but the 
capital that has been invested in California is enormous over 
the last decade to meet those.
    So I think the issue for us is to continue to work on 
expansion and to try to assure that we can meet the market 
needs. Today we bring gasoline into California from places as 
far as Europe to supply the needs because of its unique 
formulation and the fact that the expansion prospects at our 
refineries are difficult to accomplish.
    So I think we are on the right track, but it is a constant 
battle.
    Senator Feinstein. I think perhaps I was a little too 
subtle. What I am trying to get at is it would appear if you 
look at the profit margins that the industry is purposely 
keeping refining capacity low. I tried to say, to recognize 
your expansion at Chevron, but it would appear that overall 
there is a purposeful effort to keep refining capacity tight 
because it increases profit margin. That is what I am trying to 
get at, because the profits have been enormous due to this.
    It seems to me--and I have always been told, we do not have 
refining capacity in California, you cannot add any more 
regardless. Therefore it seems to me that what we need to do is 
increase refining capacity all over this Nation.
    Mr. Mulva?
    Mr. Mulva. Senator, we are one of the largest refiners in 
the United States and we operate in all regions of the United 
States. Several years ago we started embarking on a program to 
expand capacity as well as to modernize our refineries to 
handle the lower quality crude oils that will be made available 
over time that are imported from Canada, from Central America, 
as well as from the Far East and from the Mideast.
    So what that does is not only are we adding capacity--and 
we, our company, announced a $4 billion program over and above 
what we normally do to add capacity and modernize our 
refineries, so we can make more jet fuel, more heating oil, 
more gasoline, more diesel. So we have looked upon-- 
historically this business has not had the returns that we have 
experienced in the last several years. But the utilization of 
capacity, refining capacity, has moved up from less than 80 
percent years ago to essentially full utilization.
    So we are, our company and as you heard from the other 
people on this panel today, we are significantly putting money 
to add capacity and increasing our capability to handle the 
lower quality crude, so we make the transportation fuels and 
the clean fuels that the consumer and the public needs.
    Chairman Stevens. The Senator's time has expired. I am 
sorry.
    Senator Feinstein. Thank you.
    Chairman Stevens. We yield 5 minutes to Senators Hutchison 
and Pryor.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Thank you, Mr. Chairman. Mr. Chairman, I 
was looking up some of the tax breaks that were mentioned 
earlier and trying to determine where those might be applied to 
oil companies. One is allowing natural gas distribution lines 
to be depreciated over 15 years instead of 20 to encourage more 
gas distribution lines. Another is an incentive for deep 
drilling in the Gulf, which we have had for a long period of 
time because of the risk and the cost that is added, and the 
Gulf being one of the few places that we can really drill on 
our shores.
    So my question is this. You say, well, we can do without 
the tax breaks, but when you are making the decisions about 
where you can put your money most productively do 15-year 
depreciation rules instead of 20-year depreciation rules, or 
incentives for something as expensive and risky as deep 
drilling in the Gulf, does it make a difference in where you 
start making allocation decisions as opposed to not needing it?
    Mr. Raymond. Senator, I think the problem you get into here 
is that each company views that somewhat differently. I think 
in our own case when we look at the specific issues you talk 
about the conclusion we came to is that they will not 
significantly alter the programs that we have in any of those 
areas. That does not--but in saying that, that does not mean 
that is the case for every company.
    Senator Hutchison. Let me just ask anyone else, because we 
are trying to do things that will spur building of refineries, 
building of pipelines, and more production in our country, and 
we are trying to determine the best way to do that. So I am 
trying to see if there are certain incentives for doing things 
that you might not do making a business decision in those areas 
that have been put in our tax bills.
    Mr. O'Reilly. Senator, I think that from our perspective 
the more important thing for refining is the permitting side of 
the business. It is one thing to have a 15 or a 20-year 
depreciation schedule, but it is another thing to get it 
started. One of the problems that we face are things like new 
source review, which is in litigation, and the rules around new 
source review.
    If you take it--if you fix the furnace in your home, you 
should not have to go back and re-permit all of the other 
energy-consuming efficiencies in your home. Yet that is what we 
have to do in refineries. So it is a complex issue.
    Frankly, I would much prefer from our company's perspective 
to see streamlined permitting than to see--to me, that is a 
much more important barrier to overcome than tax incentives.
    Mr. Raymond. I would share that view, Senator. I do not 
think, at least in the last 20 years that I can speak for, that 
we have ever come here and asked for a financial incentive to 
do anything. If there are things to be done, it is more in the 
regulatory process and the access issues that are more 
fundamental to our investment outlook in this country.
    Senator Hutchison. Could I just pursue that, because if you 
are saying that the regulatory environment--and I will tell you 
that I have heard this many times from other companies' CEO's, 
not just oil and gas--that the reason refineries or other 
investments in manufacturing are not made in the United States 
but are instead made overseas is because the regulatory 
environment is more stable and more predictable in other 
places--are you saying that that is the issue that we need to 
address more than any other for incentives for building 
refineries?
    Mr. Mulva?
    Mr. Mulva. Senator, I think the prior comments are 
certainly applicable, but what we definitely need is really the 
streamlining of regulations and permits to allow us to expand. 
One of the things we do on refineries is our ability to expand 
capacity generally speaking is about half the cost of building 
a new refinery. So if we can have accelerated permitting and 
whatever to expand, we can bring on capacity far more quickly.
    With respect to the upstream part of the business, 
exploration and production, we really need access. Now, the 
panel that is here today are representing the larger integrated 
companies. But as you know, we have numerous, many, many 
independent producers in the United States who develop a great 
deal of oil and gas. From all of us, integrated companies and 
the independent producers, what we really need is access to 
explore, to drill and add capacity of oil and gas versus 
incentives on the upstream part of the business.
    Senator Hutchison. Thank you, Mr. Chairman.
    Chairman Stevens. You must stop there, Senator.
    Senator Pryor is recognized for 5 minutes.

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman.
    Senator Sununu and I were talking a minute ago about how we 
feel like we are at Thanksgiving dinner and you have put us at 
the children's table. Is there a reason for that?
    Chairman Stevens. I remember a Senator told me once how 
much time you have to log to get from your seat to mine.
    [Laughter.]
    Senator Pryor. Fair enough, fair enough.
    Let me just say that I have a concern and maybe even a 
suspicion, and it is basic Adam Smith economics, and that is in 
a market economy you have supply and demand and that works 
pretty well unless there is market manipulation. I think what 
you are hearing voiced from us and our constituents is that we 
have concerns about market manipulation. I do not have any 
evidence of that. I cannot point out four or five things that I 
am basing that on. But I will tell you right now, that is 
something I am very concerned about and I am looking at.
    Mr. Raymond, if I can start with you. One of the 
disconnects in this price of gasoline issue and the oil 
industry right now, one of the real disconnects in my mind, is 
your profits--and not to single you out, but your profits have 
risen dramatically in what you posted in the third quarter. 
That is obvious to everyone. Many times today the panel has 
talked about the hurricanes and how disruptive the hurricanes 
have been and what the adverse effects of the hurricanes have 
been.
    Are you telling the committee today that had we not had the 
hurricanes that your profits would be even higher?
    Mr. Raymond. That is a hard question to answer. I do not 
believe I would say that that is the case. I think the focus on 
the hurricanes is related to the question about what happened 
to gasoline prices in this country as a result of when 30 
percent of the refining capacity had to go off line because of 
the hurricanes.
    The broader issue of the general level of profitability I 
think is somewhat different. As I commented, 75 percent of our 
profits come from outside of this country. They have nothing to 
do with our U.S. operations. When you then start to focus on 
the U.S. operations, I will be the first to comment to you that 
we are at the high point of a cycle. We go through many cycles. 
I can recall with pain when the crude oil price was $10 a 
barrel. Consumers of course were very happy because gasoline 
was less than a dollar a gallon. We are now on the other end of 
the cycle.
    But in our business we have to manage through the cycles, 
and the question is what is the profitability through the 
cycle, not at any point in time.
    Senator Pryor. You understand the concern I have on that, 
though?
    Mr. Raymond. I understand that, and I think I made that 
comment earlier today. I certainly do understand it. But the 
other side of it is people need to realize we are in a 
commodity business, there are ups and downs in a commodity 
business, and our job is to manage through the ups and downs 
with a view towards the long-term, which is what we try and do.
    Senator Pryor. Mr. Hofmeister, let me ask you, and I hate 
to ask you to keep your answers very brief because we just have 
5 minutes today. In your opening statement you talked about 
crude prices going up, and we all have seen that on the world 
market. What is the connection between the price of crude and 
profits?
    The reason I ask that is it is intuitive to me that when 
your crude price goes up, in other words your feedstock price 
goes up, you are probably--and actually you are, going to have 
to pass that cost on to the consumer and your profits would go 
down. But it appears that we are in a market right now where 
your crude oil prices have been at an all-time high and your 
profits have been at an all-time high. So what is the 
relationship between crude prices and profits?
    Mr. Hofmeister. Well, I think it is largely driven by 
demand. The demand is what is driving up the end price that 
consumers pay. It is also driving up crude. In other words, the 
availability of crude is simply not sufficient at this point in 
time to meet all of the demands put upon that crude and as a 
result the pull on the available crude is keeping crude prices 
high, the demand for products is keeping product prices high. 
That is yielding the profits that we see.
    Senator Pryor. Okay. We know that from the ground up it is 
very expensive to build a new refinery. Is that correct? What 
is the estimated cost on a new refinery?
    Mr. Hofmeister. It really depends on the size of the new 
refinery.
    Senator Pryor. Okay. Well, here is my question for you, 
because I notice that Shell had posted about a $9 billion 
profit in the third quarter. Is it your intention ----
    Chairman Stevens. Senator, this is your last question, 
please.
    Senator Pryor. Yes, sir.
    Is it your intention to take those profits and build a new 
refinery?
    Mr. Hofmeister. Senator, in September we commissioned an 
engineering study to look at alternatives between several 
hundred thousand barrel per day expansions up to a 325,000 
barrel per day expansion in a single site. We will see the 
results of those studies probably in the first quarter and then 
be in a position to make a decision whether to go forward or 
not.
    Chairman Domenici. Back on our side, if I have got it right 
it is Senator Thomas and then Senator Landrieu.

                STATEMENT OF HON. CRAIG THOMAS, 
                   U.S. SENATOR FROM WYOMING

    Senator Thomas. Thank you, Mr. Chairman.
    Thank you, gentlemen, for being here. I have got several 
questions. I will do it quickly and hope you can do it quickly.
    In terms of the industry, it seems like in business usually 
as your volume goes up you make more profits, but the 
percentage of profit on the sales remains about the same. Is 
that true over the last 5 years, 10 years, in the industry? Has 
the profit as a percentage of total sales remained somewhat the 
same or has it increased? Anybody?
    Mr. Raymond. I think the answer to that over the last 10 
years is it has gone up somewhat, because in the early part of 
that period they were extraordinarily low.
    Senator Thomas. Okay. But the profit----
    Mr. Raymond. They have gotten now up to about the average 
of all U.S. business. In the early part of that period they 
were well below that.
    Senator Thomas. So these higher profits are at least a 
fundamental part of having higher sales?
    Mr. Raymond. That is right.
    Senator Thomas. Okay. Coal remains our largest fossil fuel 
resource. Generally, are you guys interested in looking at the 
diesel fuel from a coal kind of alternative? Is that something 
that you look at and are willing to be interested in?
    Mr. Raymond. We have over a long period of time, Senator. 
We have had a number of research projects going back to the 
mid-1960s that looked at converting coal into liquid fuels, and 
continue to be interested.
    Senator Thomas. So you do not see that as a conflict with 
your interest in oil?
    Mr. Raymond. No, no.
    Senator Thomas. Okay, good.
    Mr. Raymond, I guess you specifically. You indicated that 
in 1998 crude oil was $10 a barrel, your company made $15 
billion in capital expenditures. Last year your prices were 
over $40 and you still made $15 a barrel. Do you invest more 
money when you make more profit?
    Mr. Raymond. What we generally try and do, Senator-- the 
numbers were back in 1988 we made $8 billion and we invested 
15; last year we made 24 and we invested 15; this year we are 
going to invest 18 or 19. Our objective over time is to clip 
off the peaks and the valleys and try and have it generally up-
trend with regard to the investments. Year to year you have to 
be careful because there can be big projects in one year versus 
another. So you have to be careful.
    Senator Thomas. So you try to even it out over a period of 
time.
    Mr. Raymond. Yes, that is the intent.
    Senator Thomas. Specifically, I guess in Wyoming, for 
example, one of the alternatives is to have CO2 
secondary recovery, and we are doing quite a bit. Anadarko, for 
example, has a program. You produce a good deal of it at the 
Chute thing.
    Mr. Raymond. Yes, we do.
    Senator Thomas. But you do not put it on the market. Why 
not?
    Mr. Raymond. The CO2?
    Senator Thomas. Yes.
    Mr. Raymond. Well, I think all the studies have indicated, 
given what the location is of the Chute Creek plant versus 
where the location is for the CO2 to be injected 
into the reservoirs, generally up until the prices that have 
gone up in the last year the transportation was uneconomic.
    Senator Thomas. But now that the price--for instance, you 
have a pipeline going up to Salt Creek. That is a long ways.
    Mr. Raymond. But the point is that if people felt that the 
crude price were sustainable even close to the current levels 
then it would likely be that the CO2 would become 
economic.
    Senator Thomas. I got you.
    We talked some earlier or you talked some earlier about, 
importantly I think, educating the public as to what some of 
the issues are in your industry. You have been talking about 
for some time an educational program. Exxon has not joined in 
that. What is your position on that?
    Mr. Raymond. Actually, we have had an educational program 
that the company has funded for 15 or 20 years.
    Senator Thomas. I know, but the industry has talked about 
one.
    Mr. Raymond. Well, that is the API. I hate to just pass it 
off to the API, but Exxon has supported programs like that for 
years.
    Senator Thomas. This is the one that has to do with like 
the livestock deduction for contribution and so on.
    Mr. Raymond. I understand.
    Chairman Domenici. Senator, I hate to interrupt, and do not 
charge this to him, but I just wonder, do you mind when you ask 
the questions if other than Mr. Raymond might answer some of 
them?
    Mr. Raymond. Please.
    Chairman Domenici. Just because he was first does not mean 
he should handle all of them.
    Senator Thomas. Well, a couple of those were specifically 
for Exxon.
    Chairman Domenici. Oh, I am sorry.
    Senator Thomas. I might ask Shell if you are interested in 
shale oil in Wyoming as well as Colorado?
    Mr. Hofmeister. Absolutely, Senator.
    Senator Thomas. I know that.
    No, I understand. I just want to say specifically, to say 
that I know your companies, and Shell specifically to mention, 
and the others have, too, have made considerable contributions 
to environmental kinds of things and are interested in making 
sure that as we move toward access-- and I agree with you 
entirely on access; there is a great deal more access 
available, but we have to do it in a way that is 
environmentally sound, and I think we can do that and I 
appreciate it.
    So I will yield my time.
    Chairman Domenici. Thank you very much, Senator.
    I think on our side Senator Mary Landrieu from Louisiana.

              STATEMENT OF HON. MARY L. LANDRIEU, 
                  U.S. SENATOR FROM LOUISIANA

    Senator Landrieu. Thank you, Mr. Chairman.
    I thank the panel. It has been a long morning and we are 
going to continue on for a while. But first let me begin by 
thanking each of you and the companies for what you did to save 
lives, to save property, to restore the communities along the 
Gulf Coast.
    Sometimes the Members of Congress do not quite understand 
the tremendous investments and number of people that it takes 
to supply gas and oil for this country. But those of us from 
Louisiana and Texas, Mississippi, Alabama, have a little better 
idea. I know the heroic work that all of your companies did to 
save lives, to get people out of the Gulf, out of harm's way. I 
know that your employees, having lost their own homes, and some 
of your suppliers lost their own businesses, stayed up 24/7 so 
that we could keep the lights on in New York and California and 
New Jersey and Florida. So I just want to thank you all for 
what you did.
    No. 2, I understand that there is angst, as it should be, 
by consumers, residential and industrial consumers, because the 
prices are high. When prices are high, our economy is affected 
in negative ways. But I do want to say to the members of this 
committee that look at Louisiana as a producer that we are also 
a great consumer of energy. So the Senators from Louisiana and 
Texas can argue both sides of this argument, and I would say we 
serve as a pretty good bellwether about trying to hit the right 
balance.
    In other words, when prices are high we make a little money 
because we are producers, but because we consume so much energy 
to produce for our industrial base we also feel the burden of 
those high prices. So Louisiana's policies are a good 
bellwether because we are a balance.
    Having said that, let me just go on the record to say the 
tax incentives that, Senator Wyden, you inferred in your 
comments are mostly directed to independent petroleum 
producers. For the record, they produce 85 percent of the wells 
in the United States are run, not by the big oil companies that 
are represented here, but by independent producers.
    Sixty-five percent of the country's natural gas are 
produced by these independent companies, which are smaller, 
many of them located in Louisiana and Texas, but some of course 
in Wyoming and the Midwest. They need these tax incentives 
because they are smaller. They do not have the international 
reach. They are not able to basically hedge against the 
volatility of the price. That is why most of these tax cuts or 
tax credits, tax incentives, are in the record. So I just 
wanted to submit that for the record.
    Let me ask. One of you mentioned that it takes so long to 
put a new refinery in the United States that it really 
diminishes your interest in doing so. Would any one of you want 
to answer for the record how quickly you can build a refinery 
in either Brazil or China compared to the building of a 
refinery in the United States? Just roughly, does it take you 
half the time, a fourth of the time, or about the same time?
    Let us start with----
    Mr. Raymond. Well, Senator, we are in the midst of starting 
to construct a major refinery in China----
    Senator Landrieu. Just quickly, if you can, just generally.
    Mr. Raymond. An integrated chemical plant--it will take 
about 3\1/2\ years.
    Senator Landrieu. What does it take here?
    Mr. Raymond. The comparable time would be 7 or 8.
    Senator Landrieu. What about you, Mr. O'Reilly?
    Mr. O'Reilly. 4 years for the last one we built, which was 
in Thailand.
    Senator Landrieu. How long would it take you here?
    Mr. O'Reilly. Double that.
    Mr. Mulva. Similar experience in terms of time of 
construction, but it takes quite a bit longer on the permitting 
side in the United States compared to other locations.
    Senator Landrieu. So would it be fair to say that for all 
of you it takes about at least twice as long to build a 
refinery here?
    Mr. Mulva. I do not know if it is twice as long, but ----
    Senator Landrieu. 40 percent, 35, 40 percent more?
    Mr. Mulva. It could be. But the other thing that is very 
important is we think we can add an equivalent amount of 
capacity by expanding our current facilities than to build, and 
get the same effect. We get the supply into the marketplace and 
the consumer far more quickly.
    Mr. Pillari. I think an important part in the United States 
is we have multiple layers of government and in some parts of 
the world it does not exist that way. So if we can do parallel 
processing of permitting I think it would be helpful to us.
    Chairman Stevens. Senator, this will be your last question, 
please.
    Senator Landrieu. Okay, thank you, Mr. Chairman.
    Let me ask on the OCS access. Are you aware that only 2.5 
percent of OCS has been explored in the Nation? And are you 
aware that there would be additional supplies of oil and gas 
that could supply and help us with the demand situation? And do 
you support any sort of revenue-sharing, starting with Mr. 
Hofmeister from Shell?
    Mr. Hofmeister. We are fully aware and we look forward to 
the inventory that the energy bill calls for, and we would 
support more revenue-sharing.
    Mr. Pillari. We are interested in what the report will say. 
We want to take a look at each part of it. And while I have not 
personally been involved in revenue-sharing, we would be 
interested in looking at anything.
    Chairman Stevens. Thank you very much.
    Senator Landrieu. Can they just finish, Mr. Chairman?
    Mr. Mulva. We certainly support and are willing to consider 
all alternatives in revenue-sharing.
    Mr. O'Reilly. The same answer.
    Mr. Raymond. The same.
    Senator Landrieu. Thank you very much.
    [The prepared statement of Senator Landrieu follows:]

    Prepared Statement of Hon. Mary L. Landrieu, U.S. Senator From 
                               Louisiana

    The one-two punch of Hurricanes Katrina and Rita has focused this 
country's attention on our energy situation like never before. The 
short term impact to oil and gas production in the Gulf of Mexico is 
unprecedented and the full impacts are likely to be still felt for 
months to come.
    As a result of Hurricanes Katrina and Rita blowing through the Gulf 
Coast last month, almost 45 percent of normal daily oil production in 
the Gulf of Mexico--which represents thirty percent of the nation's oil 
production--and 41 percent of the normal daily gas production in the 
Gulf of Mexico--which represents over 20 percent of the natural gas 
produced domestically--were offline as of yesterday. 11 percent of the 
nation's refining capacity is down or in the process of re-starting--40 
percent of nation's capacity when fully operational. A number of 
natural gas processing plants with an aggregate capacity of just under 
8 billion cubic feet a day were not active as of last week. That 
equates to about 13 percent of our daily consumption of natural gas.
    While prices were up significantly even before these storms hit 
they have been at record levels in their aftermath: oil hovering at or 
above $60 a barrel and natural gas over $14 per thousand cubic feet.
    The past two months have made clear something to the rest of the 
country that those of us who live along and represent the Gulf Coast 
have known for years: as oil and gas production goes in the Gulf of 
Mexico so goes the price and supply of oil and gas for the rest of the 
country.
    Production on the outer continental shelf requires thousands of 
miles of pipelines and onshore refining capacity. Louisiana is the 
heart of this activity, hosting some 80 percent of the production in 
the OCS.
    Just a snapshot would show that 34 percent of the nation's natural 
gas supply and 30 percent of the nation's crude oil supply is produced 
in or offshore Louisiana or flowing through the state. 16 percent of 
the total U.S. refinery capacity, half of the Strategic Petroleum 
Reserve facilities and the nation's only deepwater supertanker port, 
LOOP, as well as several major LNG terminals are located in Louisiana.
    With the companies represented here today experiencing record 
profits and the discussion focused on what can and should be done with 
those profits, I can only hope that some of the discussion will focus 
on re-investing some of these profits back into the areas that have 
served as this industry's platform over the last fifty years.
    Most of the testimony today from these five witnesses touched upon 
the need to develop other areas of the OCS where production is 
currently prohibited. It is estimated that sixty percent of the oil and 
natural gas still to be discovered in U.S. will come from the OCS. 
However, today only 2.5 percent of the 1.76 billion acres that make up 
the OCS are leased. 97 percent of all OCS production is restricted to 
the Central and Western Gulf of Mexico with most of the Pacific Coast 
and the Eastern Gulf of Mexico as well as the entire Atlantic Seaboard 
off limits.
    While I support this effort, I must remind my colleagues and 
witnesses at the table today that the areas where oil and gas presently 
takes place in the Gulf of Mexico are going to continue to supply our 
country with a substantial amount of its oil and gas for the 
foreseeable future. Therefore sharing of the current revenues to 
provide a robust and stable source for coastal impact assistance for 
host states is critical.
    Louisiana and the other Gulf Coast states have experienced the boom 
and bust nature of the oil industry over the years. Now as you 
experience record profits we expect reinvestment in our region.
    Some of the companies represented here today recognized the value 
of my state's coast to its interest well before either Hurricane 
Katrina or Rita made landfall. I hope in the aftermath of these storms 
that role is clear to everyone.
    Prior to Hurricanes Katrina and Rita, Louisiana was losing more 
than 24 square miles of our coastal land each year. Katrina and Rita 
may have accelerated the land loss by several years. The erosion of 
Louisiana's coast is of fundamental interest to all of us because these 
coastal wetlands and barrier islands are the first line of defense for 
protecting the offshore and onshore energy infrastructure in the Gulf 
of Mexico against the combined wind and water forces of a hurricane. In 
fact, a recent report by Louisiana State University found that every 
2.7 miles of healthy marsh can reduce storm surge by as much as a foot. 
As a result of coastal erosion, many pipelines that were once well 
protected are now exposed and subject to open sea conditions.
    Preserving these vital wetlands and the billions in energy 
investments they protect are vital for the continuation and expansion 
of the energy production in the Gulf of Mexico the country so 
desperately relies on every day. Yet, as the barrier islands and 
coastal wetlands of Louisiana continue to wash away, more offshore and 
onshore infrastructure will be damaged by storms less destructive than 
Katrina and Rita. Without energy assets like Port Fourchon, LA-1 and 
the 20,000 miles of pipeline that crisscross our state, it would 
literally be impossible to access the mineral resources of the OCS.
    To maintain and even increase production from off our coasts we 
must reinvest in the infrastructure that makes all of the activity 
possible: port facilities, roads to transport equipment and supplies, 
erosion control or barrier island and wetlands storm protection. The 
high prices and disrupted supply we confront today due to the impact of 
Katrina and Rita have only made the situation more urgent. The 
continued erosion of Louisiana's coastal wetlands presents a clear and 
present danger to our national energy security and makes our trading 
and commercial position in the world economy more vulnerable.
    Thanks to the leadership of the Chairman and Ranking Member of this 
Committee and the good work of the Energy Conferees in the House and 
Senate, Louisiana, as well as other coastal producing states, will 
receive a significant amount of coastal impact assistance through the 
Energy Policy Act of 2005. The wisdom of that policy should be clear to 
everyone. The need to do more apparent.
    I call on the companies represented here today follow Shell Oil 
Company's lead and take a public stand in support of robust revenue 
sharing with coastal producing states and join our efforts to 
accomplish this important goal in the near term.

    Chairman Stevens. We will now call on Senators Sununu and 
Bill Nelson.

               STATEMENT OF HON. JOHN E. SUNUNU, 
                U.S. SENATOR FROM NEW HAMPSHIRE

    Senator Sununu. Thank you, Mr. Chairman.
    I apologize to you, I suppose, in a manner of speaking, in 
that I do not have a list of questions for the panel. I think 
the panel in very reasonable opening statements tried to make a 
few points from their perspective. Their profits are about 8 
percent of revenues. It is a lot of money because they are very 
big companies. 8 percent of revenues for net income is about 
what the national average is at the moment. And obviously, 
being large companies, you have invested a great deal in 
capital expenditure, and I suppose that is fine as far as it 
goes.
    For our part, State and Federal regulators have passed a 
lot of byzantine regulations that result in about 100 different 
formulations of gasoline and other fuels to be sold. We all 
know that no one wants a refinery built in their back yard, and 
I think those are some of the access issues and the regulatory 
issues that we absolutely need to deal with.
    But we all know what is really on the table here or what is 
really being discussed, and that is some kind of discriminatory 
tax program, a windfall profits tax of sort. I do have great 
concerns about that, in that we have a pretty clear picture of 
what that means already, both theoretically and in practice. 
One of the things that were handed out, this is a memo, ``Joint 
Committee Staff.'' I assume this was put together by all the 
staff. There is a summary of a Congressional Research Service 
report, which is a nonpartisan group that supports all of us.
    I want to read from this summary of a 1980 CRS report on 
the windfall profit tax on crude oil, which sounds great when 
you are making a ton of money and we want to show that we are 
trying to do something about gas taxes. But I think it is 
important that we talk about what a windfall tax really is.
    In 1980--this is reading from the summary--``the Federal 
Government enacted a windfall profit tax. The windfall profit 
tax was a tax on oil produced domestically in the United 
States. In economic terms, the windfall profit tax increased 
the marginal cost of domestic oil production.'' I do not know 
if we are really for increasing the domestic cost of oil 
production, but that is what a tax tends to do, is increase the 
cost of things.
    ``It reduced domestic oil production from between 3 and 6 
percent.'' Are we for reducing domestic production? I hope not. 
``And increased oil imports from between 8 and 16 percent.''
    The CRS, Congressional Research Service, went on to say 
that ``The windfall profit tax would reduce domestic oil 
production and increase the level of oil imports,'' which at 
the time was above 50 percent of demand. The profits tax was 
repealed in 1988 because it was an administrative burden on the 
Government and a compliance burden to the oil industry and 
because it made the United States more dependent upon foreign 
oil.
    I will cut the summary of the Research Service report 
there. But I think it is important to understand that, as much 
as we all want to be seen as doing something here in Washington 
about high gas prices or what might be perceived as excess 
profits in the oil industry, we should not undertake 
legislation that has been proven in the past to increase demand 
and increase dependence on foreign imports of oil.
    Taxes that discriminate against specific industries, even 
one that may be as popular as the oil industry at the moment, 
are a bad idea. Tax surcharges on energy and the energy 
industry have been tried and they have failed in practice. That 
does not mean that there are not a whole lot of things that 
should be done better or practices that should be improved in 
your companies or legislation that even might be passed that 
could address concerns we have. But taxes and windfall profit 
tax are not one of them.
    Even more troubling to me is the fact that these are being 
proposed now, on the heels of a huge energy bill that everyone 
on this combined committee voted for except for I think four of 
us. Senator Wyden voted against it, I voted against it, maybe 
two or three other members sitting in the room here today voted 
against this, because we do not need to be subsidizing oil and 
gas production, for all the reasons that were described in a 
very fair and reasonable way.
    I think Senator Wyden is spot on when he talks about the 
need to go back and look at these provisions. There were over 
$12 billion in different kinds of tax subsidies in that energy 
bill, not all of course going to the oil industry. There were 
billions more in spending, programs that subsidize research for 
oil and gas, for coal, for other areas of the energy industry, 
that simply are not needed. And I think it----
    Chairman Stevens. Senator, I am going to have to ask you to 
wind up, if you will.
    Senator Sununu. I absolutely will wind up. I appreciate 
being given the 5 minutes, but my point is one of caution. I 
think we need to be a little bit more circumspect in the kind 
of policy ideas we are proposing. I think we need to go back 
and look at that energy bill, and I think it does not serve 
anyone's interest to just start trying to pass legislation to 
make it look like we are doing something when it is going to 
have counterproductive results.
    Thank you, Mr. Chairman.
    Chairman Stevens. Senator Bill Nelson is recognized for 5 
minutes.

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Thank you, Mr. Chairman.
    To the oil industry's credit, in the immediate aftermath of 
September 11 you froze gas prices. That was a patriotic thing 
to do, so thank you. There was panic. Why did you not freeze 
gas prices in the aftermath of Hurricane Katrina?
    Mr. O'Reilly. Senator, I can tell you that in our company's 
case, looking back on the affected areas in Mississippi, 
Louisiana, and southern Alabama, we did. However, outside of 
that area, to prevent a run on the bank we had to respond to 
the market, although I know from looking back historically our 
prices were conservative.
    Mr. Mulva. Senator, for both hurricanes our companies in 
the three or four-State area, we froze prices for several days, 
but then in all of the markets what we looked at was the spot 
price went up very quickly. We set our prices and lagged the 
run-up in spot prices by 50 percent. We lagged it slowly and 
used moderation. That was our approach because we felt supply 
would respond rather quickly and over time the spot market 
would come down, and so we lagged the market, the spot market, 
in every situation, and now we are back into a more orderly 
situation where you have the spot market at a little bit less 
for gasoline than the physical market.
    Senator Nelson. In the aftermath of September 11, the price 
jumped about 40 cents a gallon and you all stepped in, froze 
the prices, and assured the distribution, and things settled 
down. In the aftermath of Katrina, likewise the price rose 
about 40 cents almost overnight, exactly overnight as a matter 
of fact, in gas stations. So why would there not be the similar 
response?
    Mr. Raymond. It was a different set of circumstances. In 9/
11----
    Senator Nelson. Which is?
    Mr. Raymond. In 9/11 the industry was not concerned about 
whether there was adequate supply. No refinery was affected, no 
shipment anywhere was affected. In Katrina and Rita, we were 
very concerned about the adequacy of supply since we had lost, 
A, a lot of refining capacity and, B, in the early days the 
ability to move the product around. The pipelines were shut 
down. We could not get supplies to service stations.
    So from an industry supply point of view the circumstances 
were quite different. In our own case, in the directly affected 
areas we froze the price. As I commented earlier, outside those 
areas what we tried to do is maintain continuity of supply and 
at the same time avoid a shortage.
    Mr. Hofmeister. Senator, from the point of view of Shell, 
we also froze prices in the area itself for a period of time, 
and then, like any non-economic decision, which it was, it had 
an unintended consequence, which was when the price was lifted 
it moved very, very rapidly, having other consequences for 
local citizens. Nonetheless it was the right thing to do at the 
time.
    I think in addition, the debate that took place within our 
own company with respect to a wider freeze option is that the 
unavailability of supply for quite some time, which we knew 
would be weeks and in some cases turned out to be months, would 
create an artificial demand situation, in which we very 
seriously were concerned about outages in various markets 
around the country. And knowing that price is a rational 
mechanism to keep the balance there, we decided as we did.
    Mr. Pillari. Senator, I would, without repeating everything 
that has already been said, we also did freeze prices for a 
while. But I would not underestimate the importance of the fact 
that even today, unlike 9/11, we still have refineries and we 
still have infrastructure that is not in service. It is a very 
different situation.
    Senator Nelson. Mr. O'Reilly, let me ask you. You have the 
leases that are left on Destin Dome off of northwest Florida. 
What are your plans for those leases?
    Mr. O'Reilly. Senator, we relinquished the leases. I 
believe there are a few of them still in the hands of another 
company not represented here today. But we relinquished them 
after we settled out of court following our attempt to move 
forward with development.
    Senator Nelson. All of yours were bought back, then?
    Mr. O'Reilly. Correct, Senator.
    Senator Nelson. Which company is it that still has the 
leases outstanding?
    Mr. O'Reilly. I believe it is Murphy, but that is something 
that I would have to check.
    Senator Nelson. And that is in an area about 20 miles off 
of Florida?
    Mr. O'Reilly. That is 20 to 25 miles from the Panhandle, 
correct, Senator.
    Chairman Stevens. Senator, your time has expired. Sorry.
    We now have Senators Allen and Burr, Snowe and Craig, and 
those will be the last Senators to question the panel this 
morning. We will not come back to this panel this afternoon. We 
will come back to another panel of attorneys general and the 
FTC.
    Chairman Domenici. On our side, Senator Allen, you are 
next.

                STATEMENT OF HON. GEORGE ALLEN, 
                   U.S. SENATOR FROM VIRGINIA

    Senator Allen. Thank you, Mr. Chairman.
    Thank you, gentlemen, for being here. Let me go real 
quickly through some ideas where we can act presently to 
actually ameliorate and reduce the cost of gasoline, and a big 
picture view from you on how we can become less reliant, less 
dependent on foreign sources of energy.
    Every spring around Memorial Day gas prices go up, 
regardless of hurricanes. It is because of the change in 
formulations. We have a proliferation of boutique, is what they 
are called, fuel specifications. Senator Burr from North 
Carolina and I have teamed up. I am trying to bring some common 
sense and expand refinery capacity, reduce prices at the pump. 
Rather than having 100 different blends or boutique fuels, 
which impact our limited refinery capacity which of course have 
a big impact on the pipelines that have to clean out that other 
blend before they bring in the boutique fuel. What we aim to do 
is get it harmonized and to say the three or four cleanest 
burning fuels to be used in the nonattainment areas, regions 
with poor air quality, and have that as a national standard. 
Let those jurisdictions or regions choose.
    Some of you mentioned this in your remarks, the large 
number of fuel types that limit flexibility and product 
distribution, and particularly end up disrupting supply and 
increasing costs. In the event that this measure passed that 
Senator Burr and I are introducing, right quickly if you could, 
could you estimate for us what impact that would have in 
lowering the price per gallon at the pump for American 
consumers if that were in effect next year? Go through 
sequentially.
    Mr. Raymond. I think, Senator, it is really impossible to 
do that. You would have to look at it area by area. But there 
is no doubt that the system would be much more efficient and 
that would be passed on to consumers.
    Mr. O'Reilly. Senator, I agree with that comment. When the 
EPA waived some of the restrictions temporarily in the 
aftermath of the hurricanes, it enabled a much faster response 
because we were able to move gasoline from, say, Alabama into 
the Atlanta market, which was very deficit and in trouble in 
the aftermath of Katrina. So you could see right away that the 
artificial barriers that exist and how much more efficiently 
the system could function. So I certainly support what you are 
trying to accomplish.
    Senator Allen. Thank you.
    Mr. Mulva. Senator, we support what you are trying to do. 
The initiative going away from boutique fuels to more 
standardization, it would not only be more efficient, but you 
will have fewer outages in a given location by having 
standardization of fuels.
    Senator Allen. Thank you.
    Mr. Pillari. I do not think you can predict what the price 
would be, but what you can predict is that we could move fuels 
around much more efficiently and more flexibly, which means 
supply and demand would move into equilibrium more quickly, 
which would then have an impact on the market price.
    Senator Allen. Lowering it, right?
    Mr. Pillari. It will certainly move into equilibrium.
    Mr. Hofmeister. We believe that energy is a national 
resource rather than a State resource, so we would support 
simplification. Simply, we have a lot of experience in Europe 
with this and I think we could learn some lessons from looking 
across the ocean.
    Senator Allen. Let me ask you all a question looking into 
the future. Obviously we need more production here in the 
United States for American consumers since it has a big impact 
on our economy, on jobs, and this is a national security issue 
as well. Having to worry about getting jerked around by some of 
these people in the Middle East or Venezuela is not the way the 
United States ought to be worrying about its national security.
    There are innovations and some of you have touched on them, 
whether that is solar photovoltaics, obviously we need to have 
more nuclear, and clean coal. But as far as fuels, in the next 
10 years what can our government do to help or stop hindering 
the actual use of, whether it is hydrogen, whether it is fuel 
cells, whether it is clean coal or these renewables, these 
biofuels? What can we do in 10 years to get our automobiles, 
rather than looking at just fossil fuels, looking at these 
renewables and innovative approaches? What can we do in your 
view to actually achieve this greater energy independence?
    I am going to go the other way. Mr. Hofmeister?
    Mr. Hofmeister. I really think this is the challenge for 
industry rather than government.
    Senator Allen. What can we do to help or stop harming?
    Mr. Hofmeister. I think in the area of research grants, in 
the area of enabling experimentation, in the area of enabling 
the auto companies in particular to test a variety of alternate 
ways of doing their business. I think in the case of hydrogen, 
though, we have to be careful. I think we have to take that one 
step at a time. I do not think we want to rush that because for 
the main purpose that this is something that is going to 
simply--we have to learn as we go. This is a whole new 
technology. We do not want to push that too fast.
    Mr. Pillari. I think, as was just said by Mr. Hofmeister, 
this is a role for us. I think a consistent fiscal policy so we 
know how we will be treated for the long term I think would be 
helpful. I think reducing permitting issues----
    Chairman Stevens. I am sorry, Senator; your time has 
expired, and we have two extra Senators, two Senators who have 
come back after I announced there would be no more Senators. So 
we have a real problem here about time.
    Senator Allen. Understood, Mr. Chairman.
    Gentlemen, if you would please provide the answer to that 
question in writing, I would appreciate it.
    Thank you, Mr. Chairman.
    Chairman Stevens. Senator Burr, you are recognized for 5 
minutes, and then we will decide what to do with the other 
Senators.

                STATEMENT OF HON. RICHARD BURR, 
                U.S. SENATOR FROM NORTH CAROLINA

    Senator Burr. I thank the chair. I do not think I will take 
5 minutes and that may help the chair's quandary as it relates 
to speakers. I think every question has been asked.
    Let me thank all of you for your openness and willingness 
to be here. Is there anybody that disagrees that new 
refineries, defined as either expansion of current facilities 
or new facilities, is in fact needed? Anybody that disagrees 
that we need new capacity in refineries?
    [No response.]
    Senator Burr. Let the record show that nobody disagreed 
with that.
    Several of you have mentioned that the new ultra-low sulfur 
diesel regulations that will take effect soon, which set new 
specifications for on-road highway diesel fuels, that would 
allow new heavy-duty trucks to reduce emissions by 90 percent, 
older trucks to run cleaner, and light-duty diesel vehicles 
such as SUVs to get significantly better fuel mileage, and for 
a greater range of diesel retrofit technologies to be used, 
that this is problematic right now from a standpoint of the 
date certain that is set.
    Can I have each one of you comment on whether you can meet 
that date certain? Let us start with Mr. Hofmeister.
    Mr. Hofmeister. Technically, we can. I think our big 
concern is in the distribution of the fuel and the fact that as 
it moves through pipelines it could pick up other sulfur 
molecules.
    Senator Burr. Mr. Pillari?
    Mr. Pillari. That is the real issue for us as well. We can 
make it, but moving it is still problematic.
    Mr. Mulva. Same issue for us.
    Mr. O'Reilly. We can meet it at the refinery.
    Mr. Raymond. Same comment, Senator. We can meet it at the 
refinery. The National Petroleum Council made some comments on 
that in the last year with some suggestions to the EPA as to 
how that would be managed.
    Senator Burr. Well, my hope is, and I would encourage all 
of you, if we can solve the refinery issue, which you have said 
there is not an issue, hopefully collectively we can solve the 
distribution issue, which is moving it through a pipeline. I 
think it is important that we remember that, just like you have 
suppliers, there are manufacturers out there that have 
developed engines that are designed with the intent of running 
on low-sulfur diesel, and anything that does not meet a time 
line that is in sync cheats one side or the other.
    Mr. Chairman, I thank you for your indulgence. I yield back 
the balance.
    Chairman Stevens. Thank you very much.
    Senator Snowe and Senator Craig, you are recognized for 5 
minutes each.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman.
    I want to welcome all of you here today to answer some 
obviously very significant questions, certainly for the State 
that I represent, where 78 percent of Maine people depend upon 
home heating oil for their fuel. And all the more concern, 
given the prospects of winter. We have already experienced a 30 
percent increase this year, which is 20 percent higher than it 
was last year as well. So more than a 50 percent increase and 
we have not yet had the onset of winter.
    Home heating oil, natural gas, these are not your run of 
the mill commodities. These are basic necessities of life, and 
certainly that is true in Maine, as it is elsewhere throughout 
the country. There is a recent survey that indicated one in 
five people over the last few years went a day without some 
basic necessity, whether it is food or prescription drugs or 
forgoing paying their mortgage or rent payments, in order to 
pay for their fuel.
    So it does stretch credibility in many ways, in listening 
to your responses here today, given the fact we are at record-
breaking revenues, record-breaking profits. And that is 
understandable. You are in the profit-making business and you 
should be. But the question is is that in the final analysis in 
making those record-breaking profits, it mirrored a time where 
people experienced historical increases in their fuel prices, 
whether it is home heating oil, natural gas, or gasoline.
    It is really hard to understand, and certainly most 
difficult to explain to my constituents, as to exactly what 
would suggest that that was necessary during that period of 
time. I really would like to have a more direct explanation as 
to what we say to our constituents as to exactly why that would 
happen.
    Can we start with you, Mr. Raymond?
    Mr. Raymond. Well, we can, Senator. I think the point still 
is that we operate in worldwide commodity markets. The prices 
that we charge reflect those markets. I think our primary 
focus, number one on our list is always to make sure that there 
is adequacy of supply. We are not interested in shortages. In 
order to maintain that adequacy of supply, we have to 
participate in those worldwide markets, and that is ultimately 
what gets reflected to the consumer.
    Senator Snowe. Well, could you explain to me why-- my 
office was approached by a captain of a tanker who said that 
there was a tanker that went to Chile a month after the 
hurricanes that was full of gasoline, that left for New Jersey?
    Mr. Raymond. I cannot explain that, but I can assure you it 
was not one of ours, because other than the traditional exports 
that the country has always had to support the Caribbean and 
part of Latin America, we have not participated in exporting 
products from the United States.
    Senator Snowe. Have any of you? Did any of you in recent 
time during the hurricane and the aftermath?
    [No response.]
    Senator Snowe. Is that true of all of you?
    Mr. O'Reilly. Well, I am not sure what the question is, 
Senator. We had a question earlier about imports and exports of 
products and I think I made the point that for every one 
barrel--there are three barrels imported for every barrel 
exported. We are linked to Mexico, we are linked to Canada, and 
we are linked to the Caribbean. All of those markets kind of 
run as one, so there is traffic back and forth.
    Senator Snowe. Well, we get much of our supply from Canada, 
but we saw spikes, as everybody else did in America, for these 
major increases during this time.
    Mr. O'Reilly. I think the hurricane--if I could get past--
the hurricane definitely caused a spike in prices, Senator. But 
I think for heating oil there is a longer term concern, and 
that is that that part of the barrel, the heating oil and 
diesel part of the barrel that we call the distillate part of 
the barrel, is in high demand. Europe is converting its 
automotive fleet systematically from gasoline to diesel, which 
is putting more worldwide pressure on the supply of diesel.
    That is why expanding our refining capacity in this country 
is so important, so that we can make more products such as 
diesel, and hence the comments I made in both my opening 
remarks as well as in my submitted written remarks about what 
government policies need to be in place to assure adequate 
supply to citizens of Maine and other States.
    Senator Snowe. Well, I would hope the industry would 
consider a supplemental fund for low income fuel assistance. I 
think that that certainly would be an appropriate gesture under 
these circumstances, given the profits that you are making, 
given the fact they are recordbreaking, certainly, even in the 
history of corporate America.
    Chairman Stevens. Thank you very much.
    Senator Craig is recognized for 5 minutes.

               STATEMENT OF HON. LARRY E. CRAIG, 
                    U.S. SENATOR FROM IDAHO

    Senator Craig. Mr. Chairmen, thank you both for the 
hearing.
    Gentlemen, I hope you feel your time before this committee 
was productive. I think any objective person listening to the 
dialogue today that has gone on between this joint committee 
and you would come away a much better informed consumer than 
they did prior to listening, and I trust that you believe that 
to be a beneficial experience.
    There is a great deal we know about your industry. There is 
a great deal the average citizen does not know. That gap of 
knowledge will probably never be completed or totally 
understood, as to why you market the way you do, why you price 
the way you do, world markets, fungibility, and all those kinds 
of things that we on these committees look at on a regular 
basis.
    Most of the questions have been asked. One specific to my 
State of Idaho has not been asked. I have an attorney general 
out there now scratching his head as to why Idaho gas prices 
are higher. I always try to go out into Virginia to fuel up 
because they are always 20 cents cheaper than they are here on 
Capitol Hill. But when Capitol Hill is cheaper than Idaho--and 
it is at this moment--I am frustrated.
    Gas in Boise was $2.50 a gallon, $2.56 a gallon this 
weekend. It slipped a few cents in the market. So it is awfully 
difficult regionally in this country to understand why there 
are anomalies of the kind that we have, but we have them. So my 
attorney general is looking at it at this moment and a bit 
frustrated. But so are my consumers.
    Two town meetings this weekend, and I can tell you of the 
300 some total people who attended those town meetings with me 
what the number one question was. It was about you and your 
profitability. I must tell you, it is not terribly fun 
defending you, but I do, and I attempt to explain the markets. 
But I cannot explain this one.
    Can you tell me why Idaho's price is now higher than 
Washington, D.C.'s, by a factor of 15 cents on the gallon? I 
doubt it. Go ahead, Mr. Raymond. You started to reach for the 
button.
    Mr. O'Reilly. I was going to try, but go ahead.
    Mr. Raymond. Well, I am going to let Dave answer, because 
my first comment to you, Senator, is since we hardly market 
anything in Idaho I do not have a dog in that fight.
    Senator Craig. No, I know. I should have called Earl 
Holding down in Salt Lake with Sinclair, but I know what his 
answer is.
    Mr. O'Reilly. We do market in Idaho, Senator, as you know. 
I think your question is a reasonable one and I can certainly 
understand why consumers would be concerned. I just have a 
couple of comments.
    You made the point that, and I think I made it earlier, I 
think you might have heard, that we do have regional markets in 
the gasoline system. You have underlying crude prices that 
drive the general level of price for products, but then the 
regional markets have their own supply and demand 
characteristics. One of the issues in the inter-mountain area 
is that there has been tremendous economic growth and 
population growth in that area, and it is supplied by 
relatively small refineries. You mentioned Holding, for 
example, in Salt Lake. Well, there are other smaller refineries 
in that area that are faced with some very challenging 
investment propositions to meet the new fuel requirements. Some 
of these investments, I think the affordability of these 
investments for the small refiners to continue to supply the 
markets in the inter-mountain region is a big question.
    So I think you are seeing a tightness in the market. I 
would assume that those prices will moderate, as they have been 
in other parts of the country.
    Senator Craig. They are moderating, yes.
    Mr. O'Reilly. And that should help. But it is becoming more 
of a challenge to supply product in the inter-mountain region, 
where in past years it was a relatively easy market to supply.
    Senator Craig. Well, gentlemen, thank you all. One last 
concern. It has been expressed by others here on the panel in 
different ways, and that is the cost, the price of diesel 
today. When you look at rural States like Idaho that are tied 
to markets and economies around the country by truck, 
substantial disadvantages begin to occur. Diesel at the pump, 
certainly not wholesale or even large volume buying, this 
weekend in Idaho was about $3.20 a gallon. For my farmers, who 
are seeing horrendously large input costs today because of what 
is going on in the diesel market along with the natural gas for 
fertilizers, are very, very frustrated at this moment.
    I must tell you that, while the gas prices in Idaho are 
moderating, the diesel prices are just sitting there. To my 
knowledge they have not moved at all in the last month, except 
up. They have leveled off but they have not come down. I do not 
know that you can--you have already talked to the issue. You 
have talked what is going on in Europe. You have talked of 
trying to expand capacity in that area. But great economic 
dislocations are occurring today as a result of that price.
    Thank you all very much.
    Chairman Stevens. Thank you, Senator Craig.
    Senator Talent.

              STATEMENT OF HON. JAMES M. TALENT, 
                   U.S. SENATOR FROM MISSOURI

    Senator Talent. Thank you, Mr. Chairman. I understand you 
are in a hurry. I have two questions----
    Chairman Domenici. Senator, we need to hear from you. You 
were here early and you are entitled to be heard.
    Senator Talent. Thank you, Mr. Chairman. I will try and be 
as brief as I can.
    Mr. O'Reilly, I appreciated one part of your--well, a lot 
of your testimony, but one part of it especially I want to just 
read to you. It is on page 15: ``Historical divisions are 
irrelevant in the energy equation we now face. When a single 
hurricane can knock out nearly 10 percent of our Nation's 
gasoline supplies, it is clear that a new approach to dealing 
with energy issues is needed. This is no time for a divisive 
business as usual energy debate.''
    Then the next page you say: ``We need to shift the 
framework of the national energy dialogue to acknowledge that 
improving America's access to oil and natural gas, investing in 
new energy sources, such as hydrogen, fuel cells, and 
renewables are in fact complementary goals that can help create 
affordable, reliable energy supplies.''
    So investing in renewables is a complementary goal with 
investing in other kinds of energy, that is what I hear you 
saying here?
    Mr. O'Reilly. Yes, Senator. I think the point I was trying 
to make in my testimony is I think we need to approach all 
forms of energy supply and not necessarily one at the expense 
of another, because I truly believe we are going to need it 
all.
    Senator Talent. Well, and I do too. I will say to you, sir, 
it would have been good to have that kind of help a couple of 
months ago when we put the renewable fuel standard on the 
energy bill in this committee, and your industry uniformly 
fought it to prevent us setting a renewable fuel standard that 
would help us encourage the production of ethanol and 
biodiesel. So I do not know whether this is an eleventh hour 
conversion or maybe whether you were a dissenting voice at the 
time. But it would be good if we could work together in the 
future.
    Are you in agreement with that?
    Mr. O'Reilly. Absolutely.
    Senator Talent. Yes, I think so too.
    One other thing I wanted to, area--because you answered the 
question about diesel, which is a question my farmers have got 
as well. Mr. Mulva, this is in your testimony. On page 4 you 
say: ``Until recently, accelerated levels of investment were 
not encouraged because growing global demand could be met 
largely from spare oil production in Russia and in OPEC 
countries, and by taking advantage of spare global refining 
capacity and spare capacity in oil field services and supplies. 
That situation has changed and today the industry can offer the 
prospects of profitable growth as it steps up its investment in 
huge complex energy projects around the world.''
    What you are describing it seems to me is the fact that you 
all view, and I think this is understandable, you view this as 
a global--it is a global market, and investment opportunities 
are global for you. That is a perspective I can understand. 
Now, Senator Allen touched on the point that for us, while we 
understand that the economics of this is global, we have 
particular interests in the United States of America that we 
have to protect as well.
    So in other words, my concern is that if we just let global 
economics dictate investment and the creation of capacity, we 
may be in a situation where in some kind of a perfect world 
where there were no political differences between countries 
everybody would have adequate supply at affordable prices, but 
with that we may be in a situation where we have plenty of 
capacity around the world, but we are cut off from it because 
other governments control it and they do not want us to have 
it. Of course, we have seen that with OPEC and other 
situations.
    Now, what would you suggest from our perspective that we 
can do to make certain that we have adequate capacity here and 
access here? We have talked about renewables, which is one way 
because that is produced here. But do you or any others have 
any suggestions along those lines?
    And that is then all I have, Mr. Chairman.
    Mr. Mulva. Senator, I did not have the opportunity of 
responding to the Senator before, but really----
    Senator Talent. Senator Allen raised the same point, which 
as you have no doubt noticed, the fact that one Senator raises 
a point will not keep other Senators from raising the same 
point. It is almost an encouragement.
    [Laughter.]
    Mr. Mulva. Senator, so I was prepared and I will give you 
the three points that I think that could really help us with 
respect to the upstream part of the business and the downstream 
refining part. We need access, access so we can explore. We 
need streamlined approvals in permitting and regulation. That 
is going to help us upstream and downstream. The third is it 
helps us if we have the flexibility of doing these things--in 
other words, I am saying no mandates as to how this is going to 
be accomplished. That helps us do what we do best, which is 
develop energy and supply for the marketplace.
    Senator Talent. So you are asking to be allowed to explore 
in areas where energy exists in the United States?
    Mr. Mulva. Absolutely, and both upstream and downstream, in 
the refining side and the infrastructure side, the pipeline, we 
need streamlined permitting and regulation, not at the expense 
of the environment in any way, but we just need to get the 
permitting process and regulatory process streamlined.
    When it comes down to renewables and whatever, we are all 
for that, but we do not need mandates as to how to do that.
    [The prepared statement of Senator Talent follows:]

 Prepared Statement of Hon. James M. Talent, U.S. Senator From Missouri

    This past summer we passed the first significant energy legislation 
in 13 years. One of the key features of that legislation was the 
promotion of ethanol as a means of increasing our domestic supply of 
energy by growing it and thereby decreasing our dependence on foreign 
oil. As I recall, the companies you represent vigorously opposed 
ethanol then and continue to discourage its production and distribution 
now.
    However, I believe we agree that sustained high energy prices are 
damaging to our economy and our way of life. It's been well documented 
that high prices for gasoline, diesel, and home heating fuels take 
money out of the pockets of all Americans, resulting in involuntarily 
reductions in discretionary income. This means it costs more to take 
the kids to school and soccer practice, to go to work, or to go 
anywhere for that matter. It also hurts small business as people pay 
more for gasoline have less to spend on other things.
    All of you stated in your testimony that energy prices must come 
down. This can happen by increasing supply, something ethanol can help 
with, or by reducing demand. You've mentioned conservation as one form 
of demand reduction, but I am concerned that the reduced demand we will 
see and have already seen too much of is industries picking up and 
moving overseas, taking millions of good, high paying jobs with them.
    Refining capability was at 97 percent pre-Katrina, according to the 
Energy Information Administration. That seems dangerously close to the 
edge of a supply shortage, one that increased use of ethanol can help 
alleviate. That tight of a margin implies a monopoly power to control 
price through withholding supply. Now I can see that there is 
competition for sales of gasoline to the consumer--gas stations on 
opposite sides of the street from each other post their prices for all 
to see and discount to keep business. There we are only talking about 
five or six cents of the $3.00 or more per gallon of gasoline. The 
larger share of costs by far is in the production and refining sectors. 
Is there competition in the refining business? If there is, I would 
expect that the lowest cost supplier would be expanding to take 
business away from higher cost refiners, who would then become the 
industry's excess capacity.

    Chairman Stevens. Thank you very much.
    The last Senator to be recognized for 5 minutes is Senator 
Lautenberg.

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thank you very much, Mr. Chairman, and 
my apologies for extending this hearing.
    Gentlemen, I respect very much your corporate leadership. I 
come out of the corporate world and the company I started with 
a couple of poor guys from the same neighborhood now has over 
40,000 employees and the longest growth record of any company 
in America at 10 percent each year over the previous year for 
42 years in a row. So I respect your pursuit of profits.
    But I also learned one thing in my corporate world and that 
is that there are obligations that extend beyond simply the 
profits. There are communal obligations, and particularly when 
you are in a business like you are, which is almost a commodity 
business.
    I would like to ask a couple of things that would help me 
understand what has been taking place here. Did your company or 
any representatives in your companies participate in Vice 
President Cheney's energy task force in 2001, the meeting?
    Mr. Raymond. No.
    Senator Lautenberg. Sir?
    Mr. O'Reilly. No.
    Mr. Mulva. We did not, no.
    Mr. Pillari. No. I was not here then.
    Senator Lautenberg. But your company was here.
    Mr. Pillari. Yes.
    Mr. Hofmeister. Not to my knowledge.
    Senator Lautenberg. In order to shake loose the pricing 
mechanism that exists within OPEC--and there is a pricing 
mechanism there and a quota for production; am I correct with 
that, in OPEC?
    Mr. Raymond. There is a quota, but most people do not 
observe it.
    Senator Lautenberg. Most people do not observe it. Well, 
let me ask you this. How would you feel if an opportunity was 
presented in law to say that if they engage in any quota-
setting that they might not be permitted to join another 
international organization, particularly the WTO, which insists 
on free markets if you want to participate in the business 
opportunity as well as membership?
    Now, I have got a suggestion--I have got it in written 
form--that the WTO, Mr. Chairman, exclude any organization--and 
by the way, it is in their charter anyway--and that OPEC be 
included for review as to whether or not their quota-setting 
violates WTO rules. And the fact is that Saudi Arabia would 
like to join and several members of OPEC are currently members 
of the WTO.
    Does that strike any of you as a good idea, a bad idea?
    Mr. O'Reilly. Senator, I will try to comment on this. I 
think the situation in the marketplace today is that all of the 
producers are producing flat-out, and my understanding is that 
Saudi Arabia in particular has indicated that it is adding 
capacity, in the process of adding capacity. They have made 
statements to that effect.
    So what impact--I am not an expert on WTO, but my 
observation is that today every producer seems to be stretched, 
including the members of OPEC.
    Senator Lautenberg. But they may be doing that, as Mr. 
Raymond said earlier, they may have an agreement to that 
effect. But the real outcome is that they could exceed the 
agreement. But there is an agreement--is there any dispute 
about that--as to what their quotas ought to be.
    Mr. Raymond. No. No, I do not think there is, Senator. But 
I guess the point I would make, if you look at it from say the 
global oil markets, is that the whole consuming world is 
dependent on the same pool of resources, and to the extent that 
this country takes action for whatever reason to disrupt that 
pool we end up penalizing ourselves.
    Senator Lautenberg. Well, I do not know that we would 
disrupt the pool. They are still in this business because they 
need and they want the money that comes from their production. 
But they cannot have it both ways. The fact is that I have had 
for some time enormous resentment of the fact that when Saudi 
Arabia dialed 911 in the early 1990s and asked us to come in to 
save the life of their country, and then turned their back on 
us when problems fell the other way. It is an outrage and I do 
not think that we ought to let it go unnoticed.
    Thanks, Mr. Chairman.
    Chairman Stevens. Thank you very much.
    We are going to ask members to submit to their respective 
committees questions to be answered by the witnesses by 
tomorrow at noon.
    Senator Wyden. Mr. Chairman.
    Chairman Stevens. Written questions.
    Senator Wyden. Mr. Chairman.
    Chairman Stevens. Yes?
    Senator Wyden. Just on that point then, I really appreciate 
you and Chairman Domenici indulging me on this. I have been 
trying for many years to get at an anti-competitive set of 
practices involving zone pricing and red-lining----
    Chairman Stevens. Senator, I have got to be back here at 2 
o'clock for another hearing.
    Senator Wyden. Mr. Chairman, I would just like to clarify 
that the response to the questions in this area that we could 
have promptly, say within the next 2 weeks. Would that be 
acceptable to you?
    Chairman Stevens. I think we will ask them to be as prompt 
as possible and 2 weeks if possible.
    Senator Wyden. Thank you, Mr. Chairman.
    Chairman Stevens. It depends on the questions that are 
asked how long it takes to get answers.
    Senator Wyden. Thank you.
    Chairman Stevens. But they will be delivered to the 
respective committees by noon tomorrow and the staff will 
submit them to the witnesses.
    Chairman Domenici. Mr. Chairman.
    Chairman Stevens. Yes?
    Chairman Domenici. Mr. Chairman, I know we want to get out 
of here. I want to do two things. First, I want to thank you 
for joining our committee or letting us join you, and thank the 
witnesses.
    I want to make two quick observations. We did not get to 
ask you what you think about the future supply-demand 
situation. I hope you will do that for us, your own company's 
picture. Secondly, a comment with reference to my question on 
how is crude oil priced. I hope you are expert enough to do a 
better job in writing that out than you were in answering it 
here, to tell us how it is priced, what happens to it.
    Second, could you do the same thing on natural gas, please? 
It comes out of the ground; what happens to it? How does it get 
to $6? How does it get to $12? Who gets the money along the 
way? Can you do that for us?
    Thank you, Mr. Chairman.
    Chairman Stevens. Thank you.
    In my State, diesel is $6 a gallon in rural Alaska today, 
diesel, and regular gasoline is over $5. We have as great an 
interest in this subject as anyone. But I do thank you. I thank 
you for your interest in increasing supply. I think that is the 
answer for America, is to increase the supply and enter into a 
new phase of conservation. We have all supported that.
    We appreciate your appearance here. This committee will 
stand in recess until 2 o'clock for the second panel.

    [Whereupon, at 1:07 p.m., the Committee was recessed, and 
reconvened at 2:01 p.m.]

    Chairman Stevens. Could we ask the witnesses to take your 
places at the table, please.
    This really is a continuation of the hearing we held this 
morning on energy prices. The purpose of this afternoon's 
hearing is to discuss whether States have the tools they need 
to address allegations of price-gouging and whether the 
Congress should require the Federal Trade Commission to 
increase its activities with regard to investigating these 
charges.
    With us today are three State attorneys general. We thank 
you very much for taking the time and responding to our 
request. The New Jersey Attorney General, Peter Harvey; South 
Carolina Attorney General Henry McMaster; and the Arizona 
Attorney General Terry Goddard. We are also going to hear from 
Deborah Platt Majoras, Chairman of the Federal Trade 
Commission.
    Hurricanes Katrina, Rita, and Wilma severely damaged our 
Nation's production and refining capabilities. We heard a lot 
about that this morning. In the immediate aftermath of these 
storms, there was a sharp rise in gasoline prices. Those of us 
elected to public office have a duty to our constituents and 
all Americans and we are concerned about these allegations of 
consumer price-gouging.
    Several members have responded to these allegations by 
introducing price-gouging legislation. Some of those bills 
suggest that the States should be preempted by Federal 
legislation. Under these proposals, the Federal Trade 
Commission would monitor, investigate, and prosecute those 
suspected of price-gouging.
    We are very interested in hearing from the witnesses their 
thoughts on how to determine what really constitutes price-
gouging and whether the State and Federal Government--or the 
Federal Government is best equipped to address these 
activities. I look forward to your statements in this regard.
    Senator Inouye.
    Senator Inouye. Fine.
    Chairman Stevens. Senator Inouye waives.
    Senator Bingaman, do you have a statement?
    Senator Bingaman. Very briefly, Mr. Chairman. I welcome the 
witnesses. My understanding at least of the bill that I co-
signed related to price-gouging is that it would not preempt 
the States. Rather, it would give to the Federal Trade 
Commission authority to prosecute, just as some of the States 
currently have statutes that contemplate prosecutions or 
authorize prosecutions for price-gouging.
    In fact, the idea would be that the Federal Government or 
the State would have the authority to pursue a case of this 
type and it would be up to the officials involved as to which 
chose to move ahead. So I would just make that one 
clarification.
    But I look forward to the testimony and I will have some 
questions after the testimony. Thank you, Mr. Chairman.
    Chairman Stevens. Does any other Senator wish to make an 
opening statement?
    [No response.]
    Chairman Stevens. If not, let us proceed with the witnesses 
that we have before us. I hope you do not mind, ma'am; we would 
like to hear from the attorneys general first to get the 
background here before we get to the FTC issue. So may I call 
on Mr. Harvey, Attorney General Harvey, first. You have to turn 
on your mike.

 STATEMENT OF PETER C. HARVEY, ATTORNEY GENERAL, STATE OF NEW 
                             JERSEY

    Mr. Harvey. That would help. Thank you.
    Chairman Stevens, Co-Chairman Inouye, Chairman Domenici, 
ranking member Bingaman, and members of the two committees: I 
am Peter Harvey, attorney general of the State of New Jersey. 
Thank you for inviting me to testify today about energy pricing 
and profits. As New Jersey's top law enforcement officer, I 
filed lawsuits in September against three oil companies and a 
number of independent gas station operators alleging that they 
violated New Jersey's Motor Fuels Act and Consumer Fraud Act in 
connection with gasoline price increases in the wake of 
Hurricane Katrina.
    New Jersey's citizens, like consumers in other States, were 
stunned by the steep price hikes that followed this tragic 
storm in the Gulf States. Similar to other States, New Jersey 
has a specific price-gouging law that is part of our Consumer 
Fraud Act. It applies, however, only when a state of emergency 
has been declared within our State. Its protections were not 
available to us following Katrina because this disaster 
occurred, as you know, in another region.
    To protect our consumers, who rightly questioned whether 
they were being treated fairly and honestly, we thoroughly 
investigated what was happening at our gas stations in New 
Jersey and took the strongest legal action we could under our 
State laws. I am here to share our experience in New Jersey and 
discuss why I believe we need a Federal price-gouging statute 
that applies nationwide to the sale of essential goods and 
services following a disaster occurring in a particular region 
of the United States.
    In the week after Katrina struck, gas prices in New Jersey 
soared upward to an average of $3.16 by Labor Day. That was a 
dollar higher than the average price just one month earlier. 
Hundreds of concerned citizens telephoned New Jersey Consumer 
Affairs and the State Office of Weights and Measures, both of 
which are within the Attorney General's Office. The Acting 
Governor, Richard Cody, also expressed concern about escalating 
gas prices.
    We responded by closely monitoring gas prices and 
investigating individual complaints regarding gas retailers. To 
be specific, we sent State, county, and municipal weights and 
measures inspectors to visit more than 500 of New Jersey's 3260 
gas stations. The Office of Weights and Measures in the 
Division of Consumer Affairs has responsibility for ensuring 
that all commercial weighing and measuring devices, including 
gas pumps, accurately measure commodities being sold to 
consumers.
    In this case, under our oversight and pursuant to our 
statutory enforcement authority, these State and local 
inspectors conducted broader investigations to ensure that 
gasoline retailers were complying with State laws and treating 
consumers fairly. They monitored price changes and demanded 
access to books and records that retailers are required by law 
to maintain and make available to State inspectors.
    The inspectors identified over 100 violations of New 
Jersey's laws. On September 26, 2005, my office filed suit 
against three oil companies, Hess, Motiva Shell, and Sunoco, as 
well as various independent gas station operators. The suits 
alleged violations at 31 gas stations, 13 owned by the three 
oil companies and 18 independently owned. As I previously 
stated, without a declared state of emergency in New Jersey our 
State's price-gouging statute does not enable us to target gas 
retailers and suppliers who seek to profit unjustly as the 
result of a disaster occurring in another part of the country. 
In our suits we instead alleged specific violations of New 
Jersey's Motor Fuels Act and Consumer Fraud Act. Specifically, 
we alleged that the defendants violated a provision in the 
Motor Fuels Act that prohibits a gas retailer from changing gas 
prices more than once in a 24-hour period. We also alleged that 
price increases that violate the Motor Fuels Act constitute an 
unconscionable commercial practice, in violation of our 
Consumer Fraud Act.
    In other instances, we alleged that defendants posted 
prices on roadside signs that were lower than the actual prices 
charged at the pumps, a violation of the advertising 
regulations under the Consumer Fraud Act that prohibit 
deceptive practices and misrepresentations in the sale of 
merchandise. In addition, we charged defendants with not 
maintaining and providing access to books and records required 
to be kept under the Motor Fuels Act.
    We were able to pursue claims against these retailers who 
failed to obey our laws by their rapid escalation of prices. We 
do believe that part of the volatility in gas prices in New 
Jersey following Katrina was the result of retailers charging 
prices based, not on what they actually paid, but what they 
feared they might eventually pay or, worse yet, on what they 
thought they could get away with, given the market conditions.
    While some busy gas stations do get fuel deliveries more 
than once a day, others were charging increasingly high prices 
for the same gas that they had in the ground when the day or 
week began.
    New Jersey's Motor Fuels Act, enacted in 1938, was indeed 
aimed at reducing volatility in gas pricing. However, this 
trust-busting era legislation was originally intended to 
maintain healthy competition by preventing one gas retailer, 
who was perhaps in a stronger financial position, from 
continuously undercutting a competitor's prices to drive the 
competitor out of business. In other words, it was aimed at 
preventing predatory pricing.
    The Motor Fuels Act still carries the penalty schedule 
originally enacted in 1938, with penalties ranging from $50 to 
$200 and retail license suspension. Unfortunately, these 
penalties are inadequate to punish an oil company, given the 
enormous revenue generated by the sale of gasoline.
    While the Motor Fuels Act applies to the unlawful pricing 
conduct engaged in by certain oil companies in New Jersey, it 
does not get to the heart of the price-gouging issue that we 
experienced in the wake of Katrina. Our Consumer Fraud Act 
casts a wider net and carries penalties of up to $10,000 for a 
first offense and up to $20,000 for subsequent offenses. 
However, this law is also inadequate because it still does not 
get us beyond the gas retailer and onto the conduct of the 
supplier or refinery. Moreover, it does not provide penalties 
that for a big oil company represent more than a marginal cost 
of doing business.
    We are here today because serious questions have been 
raised about why the major oil and gas companies posted record 
profits for the most recent quarter while consumers, who rely 
upon gas every day to get to work and run essential errands, 
were getting squeezed financially with record high prices, 
increased perhaps without any economic justification.
    I believe that our experience with Hurricane Katrina 
clearly points to the need for a Federal price-gouging statute. 
When there is a state of emergency declared in New Jersey, we 
have the ability under the price-gouging provisions of our 
Consumer Fraud Act to take action against merchants operating 
within the State who reap unconscionable profits from essential 
commodities. In the impacted geographical area, we can prevent 
those affected by the disaster from being unfairly exploited by 
profiteers and sharp operators. However, when there is a 
disaster or emergency occurring in one area of the country that 
affects the supply and pricing of an essential nationally 
distributed product, as with Katrina, we cannot do much about 
it.
    Congress should provide a mechanism that reduces the 
volatility of gas prices across State lines. Even if the States 
were to enact new laws to address these situations, a State by 
State approach would prove difficult and inconsistent. A 
nationwide problem demands a nationwide solution, though I 
would recommend one that does not preempt State remedies and 
ideally one that provides an enforcement for State attorneys 
general.
    Let me make one thing clear. I am not talking about 
attacking profits. I am talking about attacking profiteering. 
There is a difference. Consumers should not face artificially 
inflated prices that bear no substantial relationship to the 
supply of goods. Congress has long recognized the need to curb 
profiteering. After the outbreak of the Civil War, Congress 
enacted the Federal False Claims Act to prevent false claims 
and overcharging by those who contracted with the Federal 
Government to provide essential services. Its impact has 
greatly expanded in recent years through private enforcement 
actions authorized under the law.
    A Federal price-gouging statute should take effect, when 
needed, for a limited time span, perhaps for 60 days. The 
purpose of the law should be to allow things to settle, just as 
the New York Stock Exchange can now close the market to prevent 
a crash if there is a large enough fall in stock prices. The 
factors involved in fuel pricing are complex and sustained 
attempts to control fuel prices might prove counterproductive. 
Ultimately, we must have a balance that accommodates business 
as well as the consumer. People must be able to buy essential 
goods such as food, gasoline, home heating oil, and 
electricity.
    I would emphasize that in striking that balance we cannot 
lose sight of just how essential these goods are to Americans. 
For some, the cost of a tank of gas can be the obstacle that 
prevents them from driving to a doctor's appointment or to the 
grocery store for food. We hear stories during winter of 
elderly Americans who freeze to death because they run out of 
fuel oil and in summer of those who die in the heat for lack of 
electricity and air conditioning.
    People should not have to make life or death decisions 
based upon prices that have been put out of their reach by 
profiteering. Many will not have a choice and the result will 
be death. Economics will self-select them to freeze, boil, or 
live in darkness. If Katrina teaches us nothing else, it should 
teach us that our emergency plans must include providing for 
the poor, the immobile, the sick and the elderly, in other 
words those with the least resources to help themselves.
    Thank you for giving me the opportunity to testify here 
today and to make my views known to you, and I will take 
whatever questions you have when you wish to hear from me. 
Thank you.
    [The prepared statement of Mr. Harvey follows:]

 Prepared Statement of Peter C. Harvey, Attorney General, State of New 
                                 Jersey

    Chairman Stevens, Co-Chairman Inouye, Chairman Domenici, Ranking 
Member Bingaman and Members of the two Committees. I am Peter Harvey, 
Attorney General for the State of New Jersey. Thank you for inviting me 
to testify today about energy pricing and profits.
    As New Jersey's top law enforcement officer, I filed lawsuits in 
September against three oil companies and a number of independent gas-
station operators alleging that they violated New Jersey's Motor Fuels 
Act and Consumer Fraud Act in connection with gasoline price increases 
in the wake of Hurricane Katrina. New Jersey citizens, like consumers 
in other states, were stunned by the steep price hikes that followed 
this tragic storm in the Gulf States. Similar to other states, New 
Jersey has a specific price gouging law that is part of our Consumer 
Fraud Act. It applies, however, only when a state of emergency has been 
declared within our state. Its protections were not available to us 
following Katrina because this disaster occurred in another region.
    To protect our consumers, who rightly questioned whether they were 
being treated fairly and honestly, we thoroughly investigated what was 
happening at our gas stations in New Jersey and took the strongest 
legal action we could under our state laws. I'm here to share our 
experience in New Jersey and discuss why I believe that we need a 
federal price gouging statute that applies nationwide to the sale of 
essential goods and services following a disaster occurring in a 
particular region of the United States.

                     A. NEW JERSEY'S INVESTIGATION

    In the week after Katrina struck, gas prices in New Jersey soared 
upward, to an average of $3.16 a gallon by Labor Day. That was a dollar 
higher than the average price just one month earlier. Hundreds of 
concerned citizens telephoned the New Jersey Division of Consumer 
Affairs and the State Office of Weights and Measures, both of which are 
within the Attorney General's Office. The acting Governor, Richard 
Codey, also expressed concern about escalating gas prices. We responded 
by closely monitoring gas prices and investigating individual 
complaints regarding gas retailers.
    To be specific, we sent state, county and municipal weights and 
measures inspectors to visit more than 500 of New Jersey's 3,260 gas 
stations. The Office of Weights and Measures in the Division of 
Consumer Affairs has responsibility for ensuring that all commercial 
weighing and measuring devices, including gas pumps, accurately measure 
commodities being sold to consumers. In this case, under our oversight 
and pursuant to our statutory enforcement authority, these state and 
local inspectors conducted broader investigations to ensure that 
gasoline retailers were complying with state laws and treating 
customers fairly. They monitored price changes and demanded access to 
books and records that retailers are required by law to maintain and 
make available to state inspectors. The inspectors identified over 100 
violations of New Jersey's laws.

         B. OUR LAWSUITS AGAINST OIL COMPANIES AND GAS STATIONS

    On September 26, 2005, my Office filed suit against three oil 
companies, Hess, Motiva Shell and Sunoco, as well as various 
independent gas-station operators. The suits allege violations at 31 
gas stations: 13 owned by the three oil companies, and 18 independently 
owned. As I previously stated, without a declared state of emergency in 
New Jersey, our state's price gouging statute does not enable us to 
target gas retailers and suppliers who seek to profit unjustly as a 
result of a disaster occurring in another part of the country. In our 
suits, we instead allege specific violations of New Jersey's Motor 
Fuels Act and Consumer Fraud Act. Specifically, we allege that the 
defendants violated a provision in the Motor Fuels Act that prohibits a 
gas retailer from changing gas prices more than once in a 24-hour 
period. We also allege that price increases that violate the Motor 
Fuels Act constitute an unconscionable commercial practice in violation 
of our Consumer Fraud Act. In other instances, we allege that 
defendants posted prices on roadside signs that were lower than the 
actual prices charged at the pumps, a violation of the advertising 
regulations under the Consumer Fraud Act that prohibit deceptive 
practices and misrepresentations in the sale of merchandise. In 
addition, we charged defendants with not maintaining and providing 
access to books and records required to be kept under the Motor Fuels 
Act.
    We were able to pursue claims against these retailers who failed to 
obey our laws by their rapid escalation of prices. We do believe that 
part of the volatility in gas prices in New Jersey following Katrina 
was the result of retailers charging prices based not on what they 
actually paid, but on what they feared they might eventually pay or, 
worse yet, on what they thought they could get away with given the 
market conditions. While some busy gas stations do get fuel deliveries 
more than once a day, others were charging increasingly high prices for 
the same gas they had in the ground when the day, or week, began. New 
Jersey's Motor Fuels Act, enacted in 1938, was indeed aimed at reducing 
volatility in gas pricing. However, this trust-busting era legislation 
was originally intended to maintain healthy competition by preventing 
one gas retailer, who is perhaps in a stronger financial position, from 
continuously undercutting a competitor's prices to drive the competitor 
out of business. In other words, it was aimed at preventing predatory 
pricing. The Motor Fuels Act still carries the penalty schedule 
originally enacted in 1938, with penalties ranging from $50 to $200 and 
retail license suspension. Unfortunately, these penalties are 
inadequate to punish an oil company given the enormous revenue 
generated by the sale of gasoline.
    While the Motor Fuels Act applies to the unlawful pricing conduct 
engaged in by certain oil companies in New Jersey, it does not get at 
the heart of the price gouging issue that we experienced in the wake of 
Katrina. Our Consumer Fraud Act casts a wider net and carries penalties 
of up to $10,000 for a first offense and up to $20,000 for subsequent 
offenses. However, this law also is inadequate because it still does 
not get us beyond the gas retailer and onto the conduct of the supplier 
or refinery. Moreover, it does not provide penalties that, for a big 
oil company, represent more than a marginal cost of doing business. We 
are here today because serious questions have been raised about why the 
major oil and gas companies posted record profits for the most recent 
quarter when consumers who rely upon gas every day to get to work and 
run essential errands were getting squeezed financially with record 
high prices, increased, perhaps, without any economic justification. I 
believe that our experience with Hurricane Katrina clearly points to 
the need for a federal price gouging statute.

            C. THE NEED FOR A FEDERAL PRICE GOUGING STATUTE

    When there is a state of emergency declared in New Jersey, we have 
the ability under the price gouging provisions of our Consumer Fraud 
Act to take action against merchants operating within the state who 
reap unconscionable profits from essential commodities. In the impacted 
geographical area, we can prevent those affected by the disaster from 
being unfairly exploited by profiteers and sharp operators. However, 
when there is a disaster or emergency situation in one area of the 
country that affects the supply and pricing of an essential, nationally 
distributed product, as with Katrina, Congress should provide a 
mechanism that reduces the volatility of prices across state lines. 
Even if states were to enact new laws to address these situations, a 
state-by-state approach would prove difficult and inconsistent. A 
nationwide problem demands a nationwide solution, though I would 
recommend one that does not pre-empt state remedies and, ideally, one 
that provides an enforcement role for state attorneys general.
    Let me make one thing clear: I am not talking about attacking 
profits; I am talking about attacking profiteering. There is a 
difference. Consumers should not face artificially inflated prices that 
bear no substantial relationship to the supply of goods. Congress has 
long recognized the need to curb profiteering. After the outbreak of 
the Civil War, it enacted the Federal False Claims Act to prevent false 
claims and overcharging by those who contracted with the Federal 
Government to provide essential services. Its impact has greatly 
expanded in recent years through private enforcement actions authorized 
under the law. A federal price gouging statute should take effect, when 
needed, for a limited time span, perhaps for 60 days. The purpose of 
the law should be to allow things to settle, just as the New York Stock 
Exchange can now close the market to prevent a crash if there is a 
large enough fall in stock prices. The factors involved in fuel pricing 
are complex, and sustained attempts to control fuel prices might prove 
counterproductive.
    Ultimately, we must have a balance that accommodates business as 
well as the consumer. People must to be able to buy essential goods 
such as food, gasoline, home heating oil and electricity. I would 
emphasize that in striking that balance, we cannot lose sight of just 
how essential these goods are to Americans. For some, the cost of a 
tank of gas can be the obstacle that prevents them from driving to a 
doctor's appointment or to the grocery store for food. We hear stories 
during winter of elderly Americans who freeze to death because they run 
out of fuel oil, and, in summer, of those who die in the heat for lack 
of electricity and air conditioning. People should not have to make 
life or death decisions based upon prices that have been put out of 
their reach by profiteering. Many will not have a choice, and the 
result will be death. Economics will self-select them to freeze, boil 
or live in darkness. If Katrina teaches us nothing else, it should 
teach us that our emergency plans must include providing for the poor, 
the immobile, the sick and the elderly--in other words, those with the 
least resources to help themselves.
    Thank you again for the opportunity to testify. This is a critical 
issue, and I am prepared to offer whatever assistance you might request 
in the future as you address it. I look forward to answering any 
questions that you have for me today.

    Chairman Stevens. Thank you very much.
    Next we will hear from the attorney general from South 
Carolina, Henry McMaster.

 STATEMENT OF HENRY McMASTER, ATTORNEY GENERAL, STATE OF SOUTH 
                            CAROLINA

    Mr. McMaster. Thank you, Mr. Chairman, members of the 
committee. I also appreciate the opportunity to discuss this 
with you today, this very important issue.
    We have had some experience with this issue of price-
gouging in South Carolina, which has indicated the need for 
strengthened laws in our State, and we are working on that now. 
We have made a proposal. It has not been introduced. It will 
not be until January.
    Mr. Chairman, to answer your question, which is best 
equipped to deal with price-gouging, the State or the Federal 
Government, it might depend on whom the defendant is. If the 
defendant is a big oil company, then perhaps that should be a 
Federal question. Often a big oil--any big corporation that is 
located outside of the jurisdiction of a State, particularly in 
a lengthy civil action, discovery, with lawyers and all the 
processes involved there with service of process and so forth, 
it may be better to have a Federal response if a response is 
necessary at all.
    But as to the second question, Mr. Chairman, would we favor 
Federal preemption, the answer to that is a solid no, we would 
not. In our State the Federal authorities and the State 
authorities cooperate very closely together and we have no 
difficulty deputizing Federal agencies as State agents, 
deputizing State agents as Federal agents, and participating 
side by side with State and Federal prosecutors in the 
courtroom, whether it be Federal or State, to enforce the 
appropriate law. But we certainly would not want our laws in 
South Carolina that have been written with some specificity and 
utilitarian purpose for us to be preempted by something else.
    We have a fairly good law now. The civil law is very broad, 
the price-gouging. That is the one on unfair trade practices, 
which outlaws as a civil offense anything that is unfair or 
deceptive, very much as the FTC does. It is almost the same 
thing. We have that and that is useful. But we have a price-
gouging law which is a part of that that we need to tune up a 
little bit and I will mention that one specific point in a 
minute.
    But back to the day of the hurricane and thereafter. We got 
550 direct complaints to my office within just a period of a 
couple of weeks and we got about a thousand referrals from the 
Department of Energy. We did the best we could to analyze them 
all. We do not have that many people that we can send out to 
inquire.
    But what we found out was interesting. The pre-Katrina 
prices in South Carolina, depending on where you were in the 
State, were about $2.40 a gallon. A year ago, that is in 
November 2004, they were about $1.88, $1.90, or $1.86. Just 
before, the day before the hurricane, they were $2.40 on the 
average. Shortly after the hurricane on August 29, September 5 
and 6, they had gone up, depending on the part of the State, to 
$3.23, $3.18, $3.13, and people were starting to complain very 
vocally. In fact, people were starting to panic as well because 
of predictions, very dire predictions of the consequences of 
the hurricane. People were hoarding gas. There were people we 
read about and heard about filling up their tanks from their 
boats and both cars, all three cars, all that sort of thing, to 
be sure not to run out, and by the weekend many of the gas 
stations had plenty of gas but did not have any customers 
because everybody had already gassed up.
    Our Governor, Mark Sanford, very wisely decided not to 
declare a state of emergency in South Carolina, which would 
have triggered our price-gouging statute, which has a criminal 
component, thinking--and I agreed with him on that--that to 
make such a declaration would have made matters worse. It would 
have caused people to panic even worse. What they had in 
Louisiana, Alabama, and Mississippi, that was certainly a state 
of emergency and a disaster, but what we had in South Carolina, 
while highly inconvenient and troubling, was nothing like what 
they had there. So he did not declare that and that was a good 
decision.
    But when we got those complaints we then began 
investigating and we ran into the usual problems you run into, 
whether it is in a civil case or a criminal case, and that is 
is the complaint credible. We learned a lot of times that the 
complaints that would come in of high prices simply had no 
basis in fact. Either people were mistaken, they were imagining 
things, or some in fact were just making it up, for reasons 
unknown to us.
    We had a lot of instances where there were legitimate 
reasons. That is, the prices, as we later learned, had gone up, 
but only incrementally, not huge increases one after another, 
but they had gone up incrementally. But when we got the 
information on the prices that the gas stations were being 
charged, we saw that they were typically only 6 or 8 cents, 
maybe a little more, maybe a little less, higher than what they 
were being charged per gallon. I think the average was 
something between 2 and 12 cents per gallon.
    There were other legitimate factors, quirks, odd things 
that happened. For instance, one employee raised the price way 
up to $4.79 and he did so simply because he did not want to run 
out of gas, because if they ran out of gas and had to put up a 
sign then nobody would come into the store to buy all the other 
things they sell and that is where they make most of the money.
    So that is what we ran into in our investigation. We 
gathered a lot of information. I am happy to say we had 
cooperation from everyone we asked. Marathon, Ashland, BP, 
Shell, ConocoPhillips, as well as American Petroleum Institute, 
the South Carolina Petroleum Marketers Association, all came 
and gave us information and maps and taught us about the two 
pipelines, the Colonial and the Plantation Pipeline, that come 
up from Louisiana and come and serve our State, and that is 
where most of our gas comes from. They gave us a lot of 
information.
    What it boils down to is we have ended up with seven 
stations that were charging $4.79 at the height of the prices 
that we are investigating now for purpose of seeing if we 
should bring a civil action against them under the Unfair Trade 
Practices Act, which is very broad. It again is anything that 
is unfair or deceptive. It is based on the FTC definition and 
for a private party it is treble damages and attorney's fees. 
If the Government brings the case it is $5,000 per instance, 
which would be $5,000 per sale. So that is a good law to have.
    But what we need is a criminal law that goes into effect in 
the absence of a declaration of an emergency by the Governor. 
In our State, with our current law, again a part of the Unfair 
Trade Practices Act, says that if the Governor declares a state 
of emergency then the attorney general may bring a criminal 
case against someone who price-gouges in a number of 
commodities, including gas. Price-gouging is defined as an 
unconscionable increase in the price, which is based on a 
mathematical sort of a formula. You take the average price--it 
is all written in the law--for the 30 days prior to the event 
in question, take the average, and if the increase is an 
unconscionable increase over that then they are subject to 
criminal prosecution. It is a misdemeanor, $1,000 or 30 days in 
jail or both. But of course you have your prosecutorial 
discretion that would go in there as well. You do not have to 
prosecute everybody.
    What we are asking for is this. Because our governor wisely 
did not declare a state of emergency, we had no criminal law to 
use as a deterrent. A good specific criminal law that everybody 
can understand is a very good deterrent, we believe, 
particularly something like this that is not done in panic, not 
done as a result of alcohol and drugs and all those kind of 
things, but something that is calculated out to see how much 
profit is going to be made.
    What we have asked for is an amendment to our price-gouging 
law that would allow the attorney general to bring a criminal 
prosecution against someone and have it triggered by our 
governor declaring a state of emergency in our State or the 
President declaring a state of emergency or--and this is the 
new part--a Governor or the President declaring a state of 
emergency in another State and the situation in that State 
having a direct impact on things in our State.
    What that would have done would have been tailor-made for a 
situation as the one we experienced, where you had clearly 
states of emergency in Louisiana, Mississippi and Alabama, 
which because of those pipelines that come right through South 
Carolina and that is where we get the vast majority of our 
gas--Amerada Hess brings some in through the port. But that 
would have been tailor-made for such a prosecution and we think 
with the presence of that law we could have advised people and 
made public service announcements of the presence of that law 
and its ready application to those situations. We think that 
would have helped.
    We still have--back to the seven that we have ended up 
with, we still have not decided what we are going to do with 
them. We do not have the information available. But what it 
boils down to is in South Carolina if our general assembly will 
give the State this criminal authority that I have just 
referred to, we think that we can handle things in our State 
with that. If they do not, we would be delighted to have a 
Federal law that would apply to these things.
    Thank you very much.
    [The prepared statement of Mr. McMaster follows:]

Prepared Statement of Henry McMaster, Attorney General, State of South 
                                Carolina

    Thank you Mr. Chairman and members of the Committees on Commerce, 
Science & Transportation and Energy and Natural Resources for the 
opportunity to testify on the issue of price gouging during periods of 
abnormal market disruptions. My name is Henry McMaster and I am the 
Attorney General for South Carolina.
    South Carolina's most recent experience with allegations of price 
gouging in the sale of a commodity occurred during the time periods 
immediately before and after Hurricanes Katrina and Rita struck the 
Gulf Coast on August 29 and September 24, 2005, respectively. The 
lessons learned in this period with regard to retail gasoline pricing 
are also applicable to possible price gouging for any other commodity 
which may result from abnormal disruptions in the market. For this 
reason, I will review the complexities of the gasoline pricing 
situation and then discuss its applicability to other commodities in 
general.
    Like other states, South Carolina does not produce many of the 
resources necessary to drive its economy. With regard to gasoline, 
South Carolina does not have any native oil production; no refineries 
are located in South Carolina. South Carolina's supply of gasoline, as 
well as other commodities, is dependent on events which occur 
elsewhere.
    My office received more than five hundred and fifty complaints 
directly from consumers and another 1,000 by referrals about alleged 
price gouging by gasoline retailers in South Carolina after Hurricanes 
Katrina and Rita struck the Gulf Coast. Our investigation of these 
complaints opened our eyes to the complexities of investigating 
allegations of price gouging, including (1) the difficulty of 
determining whether complaints are legitimate and credible, (2) the 
complexity of making determinations of whether price increases were 
truly ``gouging'' or were based on legitimate business decisions or 
increases in the costs to the retailer, (3) the importance of having 
the tools necessary to investigate allegations of price gouging 
immediately while the data are fresh, and (4) the interdependence of 
all regions of the country with regard to price and supply allocation 
when a catastrophic event occurs. To conduct our investigation to 
enable us to understand the factors underlying the run-ups in the 
retail, price of gasoline, we met with representatives of the various 
companies involved in the flow of gasoline from its origin as crude oil 
to the pump at retail gasoline stations. Enforcement specialists from 
my office visited approximately one hundred gasoline retailers in 
twenty counties in South Carolina (we have 46). We have also met with 
representatives of Marathon Ashland Petroleum, LLC, BP America, Inc., 
Shell Oil Products US, and ConocoPhillips. Additionally, we had a 
conference call with the chief economist and others of the American 
Petroleum Institute, the trade association for the oil producers. To 
further understand the retail marketing of petroleum products, we met 
with representatives of the South Carolina Petroleum Marketers 
Association. We met with an oil jobber to help us understand the 
problems associated with supplying gasoline to retailers during a 
period when less gasoline is physically available for distribution than 
is needed to continue to supply retailers at the same rate as prior to 
a market disrupting event.
    As demonstrated by our efforts, the investigation of price gouging 
complaints for any commodity will necessarily be a complex 
investigation. As the result of the on-site investigations of various 
retailers, we are doing follow-up investigations of four corporate 
entities that own seven retail outlets. The complexities of the 
production and marketing of any commodity, petroleum in particular, 
makes it difficult to determine whether price increases are the result 
of market forces and the workings of free enterprise or the result of 
short-term profiteering which takes untoward advantage of the market 
disruption. For example, we received a number of complaints about one 
multi-station retailer whose prices for regular gasoline went up to 
$3.519 per gallon on September 29. However, after reviewing his 
records, it was determined that his supply costs had risen 
substantially in line with his retail prices, so that the price 
increases appeared to be the results of increased costs to the retailer 
rather than price gouging. The records of another retailer indicate 
that one of the retailer's employees, without direction from the 
retailer, made an unauthorized price increase out of panic because the 
employee thought the station would run out of gasoline; the employee 
wanted to slow down the sales volume in order to avoid running out of 
supply. As to the retailers under investigation, it is still too early 
to determine whether or not they acted improperly. But we have learned 
how difficult it is to make a determination of the true cause of 
fluctuations in market price.
    Investigative powers which can be implemented immediately are 
necessary to determine whether rapid and large increases in the retail 
prices of any necessary commodity are the result of short-term 
profiteering or fraud instead of the market forces balancing the demand 
for the commodity with the available supply. South Carolina has those 
under the Unfair Trade Practice Act, 35-5-10 et seq.
    The power to file civil actions concerning these changes in prices 
also arise under the Unfair Trade Practice Act. Further, during a 
declared state of emergency (by the Governor of South Carolina or the 
President of the United States), one specific section of the Act also 
makes it a crime (1) to rent or sell or offer to rent or sell a 
commodity (broadly defined, including goods and services) at an 
unconscionable price within the area for which the state of emergency 
is declared during the time period that the state of emergency is 
declared and (2) to impose unconscionable prices for the rental or 
lease of a dwelling unit, including a motel or hotel unit or other 
temporary lodging or self-storage facility. A willful violation 
constitutes a misdemeanor punishable by a fine of not more than one 
thousand dollars or imprisonment for not more than thirty days. An 
``unconscionable price'' is a price which either represents a ``gross 
disparity'' between the price of the covered commodity and the average 
price at which the covered commodity was available during the thirty 
days prior to the declaration of the state of emergency or that 
``grossly exceeds'' the average price that was readily available for 
the covered commodities and services in the trade area thirty days 
prior to the declaration of the state of emergency. A price is not 
considered to be an ``unconscionable price'' if the increase is 
attributable to additional costs incurred or regional, national, or 
international market trends. See South Carolina Statute Sec. 39-5-145, 
a copy of which is attached as Attachment I.*
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    * Attachments I-III have been retained in committee files.
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    As mentioned, even without a declared emergency the Attorney 
General in South Carolina has the power to investigate and punish 
violations under the other sections of the Unfair Trade Practices Act, 
all civil in nature, which declares ``unfair methods of competition and 
unfair or deceptive acts or practices in the conduct of any trade or 
commerce'' unlawful. The Attorney General may recover, on behalf of the 
state, civil penalties not exceeding five thousand dollars per 
violation for willful violations. See South Carolina Statutes Sec. 39-
5-20 and Sec. 39-5-110, copies of which are attached as Attachment II. 
But other than price gouging during a declared state of emergency, 
there are no statutes which specifically address ``price gouging'' in 
South Carolina. This makes it difficult to prove price gouging, as the 
available statutory authority in non-emergency times is only the 
general prohibition against practices that are ``unfair'' or 
``deceptive'', but which lacks a precise definition.
    Under our competitive economic system, high prices or quick run-ups 
in prices are not and should not be illegal absent certain compelling 
circumstances. Taking risks and making a profit--or a loss--is the 
American way. To effectively fight true price gouging, however, we need 
authority to pursue price gougers in South Carolina when we are 
suffering an abnormal disruption of our market as the result of an 
event elsewhere. To this end, we are proposing an addition to South 
Carolina's price gouging statute which would apply to a direct and 
abnormal disruption in the market in South Carolina caused by an event 
happening outside of South Carolina which results in the governor of 
the other state, or the President, declaring a state of emergency or 
disaster. This approach recognizes the regional impacts of events and 
allows prosecutorial authorities to act quickly when unconscionable 
prices are being charged, without the necessity of a locally declared 
state of emergency. I believe such a law would have a salutary 
deterrent effect. See proposed amendment to South Carolina Statute 
Sec. 39-5-145, a copy of which is attached as Attachment III. I see no 
need for additional federal legislation on these points.
    Thank you for the opportunity to testify before this Committee on 
the topic of price gouging. I will be glad to respond to any questions.

    Chairman Stevens. Thank you very much.
    We will now hear from Arizona Attorney General Terry 
Goddard. We appreciate your coming and thank you.

 STATEMENT OF TERRY GODDARD, ATTORNEY GENERAL, STATE OF ARIZONA

    Mr. Goddard. Thank you, Mr. Chairman and members of the 
committees. It is a pleasure to be here to talk about our 
examination in Arizona of the gas market within our State and 
hope that it bears some analogies for your deliberations across 
the country. I will not talk about price-gouging because in 
Arizona we do not have a price-gouging statute. We do not have 
the advantages that have just been described to you. So perhaps 
I am the example of the absence of any kind of consumer 
protections in the area of gouging in prices. I cannot define 
``gouging'' because we do not have a definition in Arizona.
    What we do have to protect consumers are civil antitrust 
provisions and consumer fraud protections, and we have tried to 
use those both to investigate and, if the investigations prove 
fruitful, we will be able to assess penalties to benefit 
consumers. One such investigation has been completed and one is 
now under way.
    These tools, however, in summary are pretty ineffective 
against what we have all been seeing in the gas market. For one 
thing, the antitrust laws depend on an overt conspiracy. They 
depend on meetings and communications, which in the gas market 
are not necessary. Everybody can see what the prices are, 
either in the public data or on the curb, and so that aspect of 
collusion is probably never going to exist in the gas industry.
    Consumer fraud requires deceptive statements and, as I am 
going to show in a moment, usually it is news events that seem 
to trigger the disruptions and the supply interruptions which 
lead to higher prices.
    In Arizona, we have two major examples of supply 
disruptions and price spikes. The first was in 2003 when our 
pipeline from Texas broke. It stopped delivering gas to the 
Phoenix metropolitan area and the consequences were severe for 
our State. And, in 2005 Hurricane Katrina also caused prices to 
spike significantly.
    I cannot underestimate the disruption that these price 
increases of gasoline have caused to our economy. I know that 
has been true across the country. In Arizona we are 
particularly automobile dependent. We have very long distances 
to travel. Commuting by car is the only way to get around. We 
have very little public transportation. So getting to work for 
consumers in Arizona has been a real struggle with the price 
increases.
    My office received hundreds, in fact in 2003 we in a couple 
of days received over a thousand, complaints from consumers who 
saw increases at the pump as price-gouging. So they were pretty 
ready to define it even if our legislature had not.
    Now, we investigated through our civil investigative 
demands in 2003 and found no violation of the antitrust laws. 
But we did learn a great deal about the industry and about how 
gas was delivered to the State of Arizona. Perhaps the most 
surprising finding, given the general disruptive aspect that 
the increased prices had on our economy, was that both times, 
in 2003 and 2005, retailers and wholesalers increased their 
profits by two to three times during the supply disruption. 
During the time when everybody else was tightening their belts, 
profits soared.
    In 2003 on July 30 the Kinder Morgan pipeline from Texas to 
central Arizona ruptured. It was 50 years old and it simply 
gave out. That disruption lasted off and on for about 2 weeks. 
The immediate reaction was panic. People literally pumped the 
stations dry and so the first weekend we had prices soaring to 
40 to 50 cents above the national average, above $2. It may 
seem cheap today, but at that point it was an incredible 
increase. Some stations went up to $5 per gallon. That 2-week 
period was very difficult for our State and the Governor 
struggled to try to find ways to bring in additional supply.
    Perhaps the best lesson that we got out of this whole 
difficulty was that, as a result of the pipeline break, we 
found how fragile our delivery system is. 90 percent of all the 
gas coming into Arizona comes in two pipelines, and when we 
tried to supplement the one that had broken using rail 
transportation or trucks we found it was extremely difficult. 
Rail was virtually impossible as a means to deliver any gas and 
truck capacity was extended elsewhere and the Governor had to 
request, and it was ultimately granted, an extension of 
permitted driver hours of 10 hours more per week in order to 
get trucks diverted to Arizona to help us move gas where the 
pipeline used to be. We applied for an EPA waiver because we 
have certain clean-burning fuel requirements for the center 
part of the State and that was granted very quickly.
    We even tried to use military equipment but we found out 
that commercial nozzles would not service the military tankers. 
Most of our military tankers were in Iraq, but the ones that 
were in Arizona could not be used.
    The other thing that we learned was that the industry's 
``just in time'' delivery system leaves almost no cushion to 
protect consumers. The reserves, such as they were, were gone 
instantly. There are virtually no tank farms in Arizona. We had 
at most 2 or 3 days of reserve in the best of times, usually 
almost none.
    Now, in 2005 the Katrina experience showed some very 
similar aspects. A month before Katrina our prices were right 
at the national average. We did not vary very much from that. 
As soon as the hurricane hit and the crisis was on, everybody's 
prices went up, but ours went up faster and stayed higher 
longer. We paid 15 cents above the national average, which we 
found surprising as almost none of our gas comes from the Gulf 
Coast. Our prices for the first time in my memory went above 
California's. That seems an abomination of nature. For one 
thing, California has 10 cents per gallon higher taxes than we 
do, and we buy most of our supply there. We are subject to the 
same supply process. So how our prices got higher than theirs 
is very hard to understand.
    But the bottom line, when all was said and done, was that 
retailer profits tripled. They went from an average of 10 cents 
a gallon prior to Katrina to above 30 cents a gallon afterward. 
We also found wholesalers----
    Chairman Domenici. May I ask a clarifying question?
    Chairman Stevens. Sure.
    Chairman Domenici. How did you determine that that went up 
that much? You just stated the profits went up how much? How 
was that determined?
    Mr. Goddard. The profits were a comparison between the 
wholesale prices that AAA was able to determine and the prices 
that were charged at the pump, our investigations confirmed 
that, but I am primarily citing the AAA.
    We also found that wholesale profits went up an equivalent 
amount in one case from 9 cents before Katrina to 22 cents per 
gallon afterward.
    Gas sales in Arizona are not, certainly as I understand the 
term, a competitive market. A supply disruption literally turns 
competition on its head. We had examples in our investigation 
of service stations who rushed to raise their prices. If they 
found somebody else down the block had raised a price, they 
would quickly match it. So instead of lowering prices through 
competitive pressure, we found they were going up. That I find 
hard to explain.
    The industry explains it by saying that these stations were 
engaged in replacement cost pricing. In other words, they were 
trying to price their gas based on what the next load would 
cost. Well, at the very best that is a speculative and 
arbitrary exercise. If they err on the high side, obviously 
that results in more profits for them.
    But the thing that we found most dramatic was that 
replacement cost pricing seems to apply when prices are going 
up, but it does not seem to apply when the cost of supply goes 
down. Up like a rocket, down like a feather, has now become a 
truism for how gas prices operate in our State.
    Arizona also has a very fragile, as I have mentioned, and 
non-redundant delivery system--just two pipelines, almost no 
other capacity to get gas into Arizona, which has no local 
refinery, has no local access to crude. That means any supply 
disruption causes a spike in prices. We now know a spike in 
price means increased profits for the oil industry.
    So the bottom line, ``just in time'' supplies eliminate the 
buffers that protect consumers from supply disruptions, make 
consumers in Arizona incredibly vulnerable. Supply disruptions 
immediately led to price hikes and significant increases in 
industry profits.
    I only hope that the huge profits that have been talked 
about in this committee this morning can, in some degree, be 
diverted into diversifying our supply system, making sure that 
States like Arizona--and I think it applies all across the 
country--have some buffers against supply disruption, have some 
way to protect consumers from sudden spikes in prices.
    I also believe, with my colleagues, that we need a Federal 
anti-price-gouging statute, one that does not preempt the 
States, but allows us to use our unique knowledge and 
investigative capacity within our environment, but also that 
speaks to national problems, such as the Katrina situation.
    It is a great pleasure to be here and I would be very happy 
to answer questions.
    [The prepared statement of Mr. Goddard follows:]

Prepared Statement of Terry Goddard, Attorney General, State of Arizona

                              INTRODUCTION

    I respectfully submit this testimony as the Arizona Attorney 
General on behalf of Arizona's consumers and businesses.
    During two recent gasoline market disruptions, one in 2003 and one 
in 2005, our state has suffered from major gasoline price spikes that 
left consumers and business struggling to make ends meet.
    Arizona consumers and businesses have little legal protection 
against arbitrary and excessive price hikes, since our state does not 
have anti-price gouging legislation. My Office has used every 
investigative tool at its disposal under Arizona's civil antitrust and 
consumer fraud statutes, but these tools are less than effective 
against the practices of the oil and gas industry.
    Just as I have strongly supported an anti-price gouging law for 
Arizona, I also support the enactment of a national anti-price gouging 
statute. A federal law, which would allow state Attorneys General to 
take action in their own state courts and compliment any existing state 
anti-price gouging measures, would greatly benefit this Nation's 
consumers.

I. The Arizona Experience
            A. The 2003 Pipeline Rupture: A Lifeline Broken
    On July 30, 2003, the Kinder Morgan gasoline pipeline running from 
Tucson to Phoenix ruptured, cutting off approximately one third of 
Phoenix's fuel supply.\1\ Consumer ``panic buying'' exacerbated supply 
shortages, causing gasoline stations to run out of fuel and fuel prices 
to skyrocket. My Office received and verified consumer complaints that 
some retail stations were charging more than $4 per gallon for 
gasoline. Although the broken pipeline primarily affected the Phoenix 
supply of gas, there were significant, if less drastic, price increases 
in the rest of our State as well (see Attachment A).1a In 
the weeks following the pipeline rupture, my Office received more than 
1,000 complaints of alleged ``price gouging.''
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    \1\ The Phoenix metropolitan area is Arizona's largest population 
center.
    \1a\ Attachments A-C have been retained in committee files.
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    The only tools at my disposal to investigate alleged violations of 
law during pipeline break were Arizona's civil antitrust \2\ and 
consumer protection statutes.\3\ Pursuant to Arizona's antitrust act, 
the Attorney General may investigate alleged anticompetitive behavior 
and file a civil suit if there is evidence of collusion, such as price 
fixing, or exploitation of market power by a firm with a dominant 
market share. Our consumer fraud act prohibits the use of any deception 
or misrepresentation made by a seller or advertiser of merchandise. 
While both statutory schemes are crucial consumer protection tools, 
they have proven ineffective in protecting Arizona consumers against 
sudden, drastic gasoline price increases inflicted during an abnormal 
market disruption.
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    \2\ Arizona Revised Statutes Sec. 44-1401 et seq.
    \3\ Arizona Revised Statutes Sec. 44-1521 et seq.
---------------------------------------------------------------------------
    After the pipeline break, my Office issued civil investigative 
demands to gasoline suppliers under Arizona's antitrust statutes, to 
determine whether any illegal, anticompetitive, or collusive behavior 
contributed to the soaring prices consumers were paying at the pump. 
The investigation revealed no violation of Arizona's antitrust laws but 
did reveal that profit margins during that period were two to three 
times higher than profit margins when there was no supply 
disruption.\4\ However, the increased profits earned by the wholesale 
and retail segments of the industry during and immediately after the 
supply disruption underscored the need for an anti-price gouging law 
that would protect consumers from profiteering during a supply 
emergency.
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    \4\ Many other state and federal antitrust investigations failed to 
establish violations of antitrust law.
---------------------------------------------------------------------------
    Our 2003 antitrust investigation following the pipeline break led 
me to conclude that there is a serious supply problem in Arizona and 
many Western states, especially during a supply disruption or 
emergency. The West's gasoline supply is tighter and thus more 
vulnerable to price spikes and product shortages than other areas of 
the country because we have very few pipelines to transport refined 
product,\5\ rapid population growth in Phoenix, Las Vegas, and Central 
and Southern California, geographic isolation from alternative 
suppliers, and specialized fuel blends, which may deter alternative 
suppliers from refining gasoline for the Western states.\6\
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    \5\ Arizona is almost completely dependent upon two rather small 
Kinder Morgan pipelines to bring fuel into the State. One is from Texas 
and the other is from California (see Attachment B).
    \6\ Peterson D. and Mahnovski, S. 2003. ``New forces at work in 
refining: Industry views of critical business operations trends'', Rand 
Corporation. Retrieved May 17, 2004 from www.rand.orq/publications/MR/
MR1707/.
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    Moreover, the entire oil industry has moved to a ``just-in-time'' 
delivery system, vastly reducing the numbers of refineries nationwide, 
and minimizing inventories at storage sites (``tank farms''). The 
effect is a constant and precarious supply/demand balancing act, which 
is exceedingly beneficial to industry in lowered operating costs, but 
very harmful to consumers as supply vulnerability sets the stage for 
price spikes. The slightest interruption with one of the two pipelines 
or with any of the refineries that produce Arizona's special fuel blend 
causes shortages and price spikes in our gas market. This unstable 
supply situation creates an opportunity for oil companies and gasoline 
retailers to increase prices and profits during any supply disruption, 
and particularly during emergencies.
    Among the surprises coming out of the post 2003 pipeline break 
investigation in Arizona was the discovery that the oil industry has so 
little flexibility. Arizona had almost no ability to obtain petroleum 
products by alternatives to the pipeline. It was not possible to move 
gas by tank car since the railroad yards had few storage tanks or 
facilities to off-load gas. In addition, there was little ability to 
ship large quantities of gas by truck on short notice. Not only were 
most of the tanker trucks already spoken for elsewhere, driver hour 
restrictions prevented overtime to relieve the pressure in Arizona. The 
Governor requested and received an extension of the overtime limits, 
which provided some relief. It was not possible to use the National 
Guard tank trucks since most were on deployment in Iraq and those 
remaining were incompatible with commercial nozzles. In addition, most 
military drivers were not licensed to carry petroleum products on the 
highways.
    Additionally, the specialized fuel blends used in Arizona were hard 
to replace with alternative sources. As a result, the Governor 
requested, and was granted, a waiver by the Environmental Protection 
Agency, which allowed the Phoenix area to use conventional fuel for a 
limited period of time during the disruption. While these measures were 
intended to alleviate the supply shortages, they had minimal immediate 
effect since they took time to implement.
    Although it seems counterintuitive, any calamity that disrupts the 
oil and gasoline market seems to benefit the oil industry. Virtually 
any bad news means higher prices and much higher profits for the 
industry. Since prices tend to come down much more slowly than they go 
up, all segments of the industry reap benefits. Given the financial 
windfalls involved, there is no incentive for industry to improve 
infrastructure or provide supply ``cushions,'' as those measures would 
only stabilize prices and benefit consumers.
    To further complicate matters, the lack of transparency in the oil 
industry, both with respect to upstream pricing and supply, often leads 
to uncertainty and confusion among consumers and government agencies 
alike. When we consider the importance of gasoline to our daily life, 
our economy, and our security, this lack of transparency is alarming. 
Not only do consumer fears of stations running out of gas lead to 
``panic buying,'' but many state and local government officials are 
left guessing about the fuel supply situation when a supply emergency 
occurs.
    Recognizing that persistent supply disruptions were not unique to 
Arizona, I looked for ways to coordinate state and federal dialogue 
regarding gasoline issues. In 2004, I co-chaired the National 
Association of Attorneys General's Gasoline Pricing Task Force with 
then Nevada Attorney General Brian Sandoval. We held face-to-face 
discussions with the United States Department of Energy, the 
Environmental Protection Agency, the White House Office of General 
Counsel, and the Federal Trade Commission about the causes of high 
gasoline prices especially in Arizona and the Western United States. 
Every federal agency we spoke to directed us to a different federal 
agency to discuss our concerns.
    I concluded from this effort that no single federal agency is 
responsible for ensuring a stable, affordable supply of gasoline for 
the nations' consumers and businesses. The alphabet soup of agencies 
involved in oil and gas oversight has the inevitable consequence that 
no agency has responsibility. It is left to the state enforcers, then, 
to investigate and prosecute illegal, exploitative behavior, especially 
during a disaster.
            B. The Ripple Effect: Katrina and the 2005 Experience
    Late this summer, Arizona, like the rest of our Nation, experienced 
significant fuel price spikes attributed to Hurricane Katrina. In the 
month prior to Hurricane Katrina, Arizona's fuel prices were at or 
around the national average prices. Then, although Arizona receives its 
fuel from California and West Texas--not the Gulf Coast areas afflicted 
by the hurricane--Arizona prices spiked to approximately 15 cents above 
the national average in the hurricane's aftermath (see Attachment C).
    Consumer reaction was strong. Since the beginning of August 2005, 
my Office has received hundreds of consumer complaints regarding high 
gasoline prices. An overwhelming number of these complaints reference 
price gouging and point to 30 cent price increases at retail gasoline 
stations that occurred at the time Hurricane Katrina struck the Gulf 
Coast.
    Although, in the past, Arizona's fuel prices sometimes exceeded the 
national average, the price at the pump seldom, if ever, exceeded 
California's prices. There is good reason for this. Approximately two-
thirds of Arizona's gas comes from California, so we are subject to the 
same supply dynamics as California. In addition, California's gasoline 
taxes are approximately 10 cents higher than Arizona's. Yet, for nearly 
two weeks, in early and mid September 2005, Arizona's prices exceeded 
California's prices by about 8 cents per gallon (an 18 cent difference 
when adjusted for the tax difference).
    Concerned about possible market and supply manipulation and alleged 
misrepresentations by the oil industry, I issued antitrust and consumer 
fraud civil investigative demands allowed under Arizona law to Arizona 
fuel wholesalers and retailers. My Office is currently reviewing the 
information provided to determine whether any anticompetitive or 
fraudulent activity occurred during that time period.
            C. The ``Replacement Cost'' Factor
    Gasoline retailers and their trade associations claim that gasoline 
stations must immediately raise their prices in response to a 
threatened supply disruption because they must raise enough money to 
pay for their next shipment of potentially higher priced fuel. They 
call this arbitrary and speculative behavior ``replacement cost'' 
pricing. Whatever the reason, gasoline retailers actually seemed to be 
competing to raise prices during the Katrina episode. I personally 
observed that as soon as one station posted higher prices, others in 
the area quickly matched it. To do otherwise, retailers told my Office, 
would be to risk being overrun by customers and pumped dry.
    Unfortunately for consumers, retailers only adhere to ``replacement 
cost'' pricing when raising prices. They are very slow to lower their 
prices as the supply emergency abates and replacement costs decrease. 
This phenomenon is so widely known that it is commonly referred to as 
``up like a rocket, down like a feather.'' According to AAA Arizona, 
post Katrina and Rita profit margins for retail gasoline stations in 
Arizona swelled to three times higher than normal. ``As wholesale 
prices drop, station owners tend to pass along those savings to 
motorists at a snail's pace.'' Ken Alltucker, State's Gasoline 
Retailers Cash in. Stations Pocketing Year's Biggest Profits, Arizona 
Republic, November 1, 2005.
    Documents provided by some retailers and wholesalers in response to 
my Office's current investigation corroborate AAA's statements about 
higher-than-normal profits. Preliminary information indicates that some 
Arizona retailers, whose average per gallon profit margins prior to 
Hurricane Katrina were 10 cents per gallon, were suddenly making profit 
margins of 30 cents after Hurricane Katrina struck. At least one 
Arizona wholesaler's profit margin was 22 cents per gallon post 
Katrina, when its pre Katrina profit margins were six to nine cents per 
gallon.

II. Legal Remedies: Price Gouging Legislation
            A. What is Price Gouging?
    Of the 28 states, the District of Columbia and two territories with 
protections against price gouging, none has identical legislation. 
Thus, nationally there is no common definition of ``price gouging''. 
However, there are some common elements. Most states require that a 
state of emergency be declared \7\ for the law to go into effect, and 
most cover pricing of essential products and services only.\8\ Some 
states prohibit any price increase during a state of emergency, while 
others allow a 10 or 20 percent increase.\9\ While some states prohibit 
only retailers from increasing their prices and profit margins, others 
have more effective laws that hold the entire production and supply 
chain accountable.
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    \7\ Most legislation requires the President or the Governor to 
declare the emergency, although some states allow counties and mayors 
to make the declarations to activate their laws. E.g. California 
includes the President, Governor, or County or City Executive Officer. 
Cal. Penal Code Sec. 396.
    \8\ These products and services often include food, water, shelter, 
medical supplies, and fuel.
    \9\ Hawaii (H.R.S. 209-9) and Louisiana (LSA-R.S. 29:732, et seq. 
and 14:329.6 et seq.) do not allow any increase; California allows a 10 
percent increase; Alabama (Ala. Code Sec. 8-31-3) allows a 15 percent 
increase; New York (NY Gen Bus 396-R) prohibits an unconscionable or 
excessive increase.
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            B. Price Gouging Laws Work
    Traditional price gouging laws are not in effect during periods of 
``business as usual''. Rather, they only go into effect when the normal 
competitive checks and balances of the free market are disrupted by a 
disaster or other emergency. When a population is trapped and desperate 
for essential supplies, like food, water, shelter and gasoline, victims 
do not have the opportunity to shop around or wait to purchase 
essential products until the prices go down. Demand is steady 
regardless of the price, so unscrupulous businesses can and sometimes 
do take advantage of consumers.
    Antitrust and consumer fraud laws cover some aspects of rogue 
business behavior; however, they are not designed to effectively 
protect consumers from price gouging. Traditional antitrust tools, 
which require an overt conspiracy, are unlikely to succeed in this 
highly concentrated industry where the small numbers of participants 
know exactly what competitors are doing from publicly available data 
and would have no need to meet or communicate directly to coordinate 
price activity. The best and perhaps the only way to effectively 
protect vulnerable consumers in these circumstances is through anti-
price gouging laws.

III. Arizona's Predicament
    After each of the two major gasoline price spikes in 
Arizona, there was an outcry from Arizona consumers, pleading 
for my Office ``to do something,'' to protect them. Most 
consumers simply assumed that charging exorbitant prices for 
essential goods, especially gasoline, during a time of crisis 
would be illegal. They were shocked to find out that in 
Arizona, as in many states, there are no such protections.\10\ 
I listened to countless consumers angered and frustrated with 
the situation.\11\
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    \10\ A poll by the Arizona Republic newspaper in December of 2003 
revealed that 85 percent of Arizonans believe price gouging should be 
illegal.
    \11\ One Arizona consumer wrote:
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          I am sure that you have noticed the continuing rise of gas 
        prices. I understand there is a war going on, and now this 
        hurricane will have some impact, but please take the following 
        to heart. If gas prices don't go down, I may not be able to 
        continue to take my child places, like 4-H meetings, the 
        library, etc. I can't even visit my older child at college, and 
        she is just 2 hours away. We will all have to consider whether 
        or not to continue working, we may not have the means to even 
        get to work. What about all the other bills, if we pay for gas 
        to get to work how will we pay for our utilities and even our 
        house payments. At present my family is spending about $500 a 
        month just in gas. I don't know how much longer we can do this. 
        Do you recommend we all get gas credit cards and max them 
        out??? I don't know if you can do anything to help us out, if 
        so please do something! There just isn't any reasonable answer 
        for this that I can come up with. The American people need 
        help!
    While I shared my fellow consumers' outrage, it was my unfortunate 
duty to inform them that our State had no anti-price gouging law. I 
supported two efforts in the Arizona Legislature to pass anti-price 
gouging legislation. Both times, the bills did not even get a vote in 
committee and never reached the floor of either house.
    I initiated investigations in 2003 and 2005 with the legal tools at 
hand: civil antitrust and consumer fraud law and their attendant 
remedies. Even if the evidence from my current investigation reveals 
what would be ``price gouging'' in any other state, under Arizona law I 
may not have a legal basis for suing the companies involved. Without 
evidence of collusion or deceptive conduct, our current antitrust and 
consumer fraud statutes do not provide consumer relief.
    It is important that states have the ability to tailor their own 
state laws to the needs of their local communities, to cover the 
essential goods and services applicable to them, to address other local 
issues. However, it is also important that all Americans have some 
basic protections against price gouging. For this, a federal law could 
protect all American consumers against price gouging during national or 
regional disasters or abnormal market disruptions. I believe that not 
just gasoline, but all essential commodities and services should be 
covered in both federal and state legislation. Water, essential foods, 
vaccines and other medical supplies, shelter and transportation all 
could be affected during a disaster or abnormal market disruption.
    During a state of emergency, the normal supply and demand of the 
free market may be disrupted. Without legal protections, the suppliers 
of critical commodities can, and many will, charge what the market will 
bear. During a state of emergency, consumers have no market choice 
about where, and at what price, they can purchase essential commodities 
and services.
    It is important to note that the oil industry's price increases 
have had a ripple effect throughout Arizona's economy. For instance, 
Arizona Public Service Company, one of Arizona's largest electric 
companies requested a 20 percent rate increase, citing increased fuel 
prices as a major factor behind its request. Arizona consumers will, in 
all likelihood, continue. to feel the economic pinch of the post 
Katrina gasoline price increases for months to come.
                               conclusion
    The oil industry often tells us that high fuel prices are simply 
the result of supply and demand and that the market is the best arbiter 
of price. The fact is that the inelastic demand for oil and gas and the 
concentration of major industry players makes a mockery of competition. 
The ``just in time'' delivery system and a lack of alternative supplies 
means that any supply disruption, however slight, provides an excuse to 
raise prices. In the Arizona experience, price spikes mean larger 
profits for the industry, whether they are caused by the change in 
seasonal fuel blends, pipeline breaks, or major emergencies like 
Hurricane Katrina. In both major Arizona price spikes investigated by 
my Office, some Arizona gasoline companies enjoyed profit levels two to 
three times above pre-supply disruption profit levels.
    I am here on behalf of Arizona consumers to tell you that market 
forces are not working. The industry's lack of reinvestment in refining 
capacity, product storage, and delivery infrastructure serves only the 
industry's financial interests, while exposing consumers, especially in 
states like Arizona without anti-price gouging laws, to huge price 
spikes when the market experiences a supply disruption. It is up to 
you, our nation's lawmakers, to stop this noncompetitive, exploitative 
and economically disruptive situation. I urge you to adopt an anti-
price gouging law that will allow the Federal Trade Commission to 
protect consumers on a national level and state Attorneys General to 
protect consumers in the state courts.

    Chairman Stevens. Thank you very much.
    I am going to yield to Senator Domenici--well, it had been 
my intention to probably deal with questions. Let me announce 
this. We have been told there are three votes, two votes that 
start at 3:20 and two votes that start at 5:30. So maybe we 
should listen to Ms. Majoras now. Would you please make your 
statement.

      STATEMENT OF HON. DEBORAH PLATT MAJORAS, CHAIRMAN, 
                    FEDERAL TRADE COMMISSION

    Ms. Majoras. Thank you very much, Chairman Stevens, 
Chairman Domenici, members of the committees. I am Deborah 
Majoras, the Chairman of the Federal Trade Commission. I appear 
today to present the Commission's testimony on the 
effectiveness of laws in preventing price gouging. The views 
expressed in the written testimony represent the views of the 
Commission. My oral presentation and responses to questions are 
my own and may, but do not necessarily, represent the views of 
the entire Commission.
    I share the keen interest of both committees on the issue 
of energy prices. Americans depend heavily on automobile 
transportation for their day-to-day survival. The cost of 
transportation is a significant item in their budgets and the 
price of gasoline, prominently displayed on gas station 
placards, is a substantial and visible part of that cost. 
Naturally, sharp increases cause concern for all Americans.
    Over the past 20 years, we have become used to relatively 
low gasoline prices, and our demand rose by 30 percent over 
that period. The United States now must import more than 60 
percent of crude oil from foreign sources, leaving us 
vulnerable to world market supply and pricing decisions. Even 
before Hurricane Katrina, increasing crude oil prices have 
resulted in rising gasoline prices during much of 2005. And now 
we share our rising demand with rising demand in newly 
industrialized nations like China and India.
    Meanwhile, it is not enough to import the crude or pump it 
out of the ground. It then must be refined into gasoline. U.S. 
refiners are operating at high capacity rates, which means that 
virtually any interruption in their operations will have a 
significant impact on supply and thus prices.
    It was in this already tight market that Hurricanes Katrina 
and Rita hit, initially disrupting over 95 percent of crude oil 
production in the Gulf as well as numerous refineries and 
pipelines. With supplies severely interrupted by the 
hurricanes, our consumers watched in horror as prices at 
gasoline stations increased substantially and rapidly, 
sometimes multiple times in a single day.
    Even as we all looked for ways to help our fellow citizens 
ravaged by these hurricanes, we were concerned that some 
appeared to be taking advantage of the victims' plight by 
gouging them with high prices. This has led to the debate over 
whether the tools law enforcers currently have are sufficient 
to deal with sharp price increases in times of crisis.
    Given the importance of the gasoline industry to consumers, 
the FTC scrutinizes this industry for illegal conduct like no 
other. To protect consumers, we carefully review proposed oil 
industry mergers, challenging them at lower levels of 
concentration than in any other industry. We scrutinize price 
movements and business practices and challenge anticompetitive 
conduct. We review the weekly prices of gasoline and diesel 
fuel in 360 retail areas and 20 wholesale regions, an exercise 
we undertake in no other industry. We constantly conduct 
research to learn more about this critical industry and then 
share that knowledge with Americans, producing recently a study 
reviewing industry mergers and a study that explains how 
gasoline is priced. Currently, as mandated by section 1809 of 
the Energy Policy Act, we are investigating the industry for 
price manipulation and any gouging.
    It is understandable that many are calling on the FTC to 
seek out and prosecute those who are perceived to be taking 
advantage of our citizens at a most vulnerable point. But 
neither the antitrust laws nor any other Federal statute makes 
it illegal to charge prices that are considered to be too high, 
as long as companies set those prices independently.
    The omission of a Federal price-gouging law is not, I 
believe, inadvertent, nor does it condone the practice. Rather, 
it reflects a sound policy choice that we should not be quick 
to reverse. Regardless of how repugnant price gouging is, a law 
that prohibits it is a form of price control, which might seem 
attractive and humane in the short run, but is likely to harm 
consumers more in the long run.
    The free movement of prices plays a critical role in 
protecting consumers from even greater hardship. They signal 
the producers to increase or decrease their supply, and in a 
period of shortage, higher prices create incentives for 
suppliers to send more product into the market that needs it 
the most, something we just experienced as substantial imports 
from Europe have helped ease prices even as, as of yesterday, 
almost 50 percent of Gulf Coast crude oil production is still 
shut in.
    Higher prices also signal the consumers to decrease their 
demand. During this recent shortage, we in fact saw signs of 
decreased demand in the United States not witnessed for 20 
years.
    We should not ignore what we know. In the 1970s, price 
controls that were established to deal with the energy crunch 
resulted in massive shortages and endless lines at the pump. 
Higher prices, as tough as they are to swallow--and they are--
help curtail panic buying and topping off practices that cause 
retailers to run out of gasoline. The choice during times of 
emergency--high-priced gasoline or no gasoline at all--is not a 
good one, but unfortunately it is a choice that must be made.
    Another problem with outlawing prices that are considered 
to be excessive is that it is difficult to distinguish fairly 
between a malevolent gouger and an honest retail gas station 
owner who is responding responsibly to tough market conditions. 
Imagine that gas station owner A is a selfish and heartless 
citizen who has decided to use a national emergency as an 
opportunity to raise prices by 30 percent above the pre-
emergency level, but without regard to costs or availability of 
supply. He knows that eventually competition will require him 
to lower the price, but he will make as much as he can during 
this time when our consumers are confused and panicked. Gas 
station owner B, on the other hand, is a good citizen. He has 
no desire to gouge consumers, but not only is the cost of his 
supply increasing, but the supply he has on hand is dwindling 
fast. He observes the lines at his station and sees that 
consumers are coming in consistently to top off the tank 
because they are worried about what the future might hold. At 
this rate of demand, he knows that he will run out of gasoline, 
so he raises the price by 30 percent above the pre-emergency 
rate.
    Now A and B are charging the same price. So how do we 
distinguish between the one who has gouged and the one who 
reacted wisely to tough market forces? Further, regardless of 
motive, both have engaged in pricing behavior that prompts 
consumers to reduce their gasoline consumption, which in turn 
reduces the time of shortage--and this is the important point--
results in all consumers getting needed supply more quickly.
    Beyond the fairness and enforcement issues, a broad Federal 
statute may chill legitimate and helpful price responses that 
look the same as gouging. Retailers may be encouraged simply to 
maintain the current price until they run out of gasoline, and 
there will be no incentive to speed new supply to the markets 
affected by the emergency.
    If Congress disagrees, however, and believes that 
enforcement against price gouging is worth the cost, then it 
should take into account that State officials, given their 
proximity to local retail outlets, can react more expeditiously 
to complaints consumers file about local prices. Most of the 
reports of alleged gouging that the FTC staff have reviewed 
involved individual retailers that raised prices sharply in 
response to dramatic increases in demand or expectations of 
decreased supply right after the hurricanes, but reduced their 
prices just as quickly when no other stations followed suit or 
when their suppliers assured them that their storage tanks 
would soon be refilled. It is more effective and efficient for 
State and local officials knowledgeable about the local 
situation to handle such complaints.
    I remain convinced that strong enforcement of the antitrust 
laws is the best way to protect consumers from market failures, 
and the Commission is committed to strong enforcement. But we 
need to remember that a market failure is not the same as a 
market producing a result that is tough and that we do not 
like. As demonstrated over the past 75 days, if we do not like 
high prices then we can, for example, use less gasoline and 
that will help bring the price back down.
    There are no quick fixes to the gas price situation, and we 
should not tell consumers otherwise. Even if Congress were to 
pass price-gouging legislation, it would not impact the price 
spikes to which we are vulnerable as long as we depend so 
heavily on gasoline and particularly on foreign supplies, do 
not explore alternative sources of energy, do not look 
seriously at our rising demand, and ignore our tight refining 
capacity.
    Tough decisions lie ahead, and Americans need us to address 
these decisions with courage, candor, and resolve. The FTC 
stands ready to work with Congress in any way possible.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Ms. Majoras follows:]

      Prepared Statement of Hon. Deborah Platt Majoras, Chairman, 
                        Federal Trade Commission

                            I. INTRODUCTION

    Chairman Stevens, Chairman Domenici, and members of both 
Committees, I am Deborah Platt Majoras, the Chairman of the Federal 
Trade Commission. I appear before you to present the Commission's 
testimony on the impact of recent supply disruptions on petroleum 
markets; FTC initiatives to protect consumers by safeguarding 
competitive markets in the production, distribution, and sale of 
gasoline; and an important recent Commission study on the factors that 
affect gasoline prices.\1\
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    \1\ This written statement presents the views of the Federal Trade 
Commission. My oral presentation and responses to questions are my own 
and do not necessarily represent the views of the Commission or any 
other Commissioner.
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    Recent events underscore the crucial role played by the energy 
industry in our economy. Not only do changes in energy prices affect 
consumers directly, but the price and availability of energy also 
influence many other economic sectors. No other industry's performance 
is more deeply felt, and no other industry is so carefully scrutinized 
by the FTC.
    Prior to Hurricane Katrina, increasing crude oil paces had resulted 
in rising gasoline prices during much of this year. Despite these 
rising prices, the demand for gasoline during this past summer was 
strong and exceeded summer demand in 2004. Then, in this already tight 
market, Hurricanes Katrina and Rita severely disrupted the important 
Gulf Coast supply of crude oil and gasoline. At one point, over 95 
percent of Gulf Coast crude oil production was inoperable, and numerous 
refineries and pipelines were either damaged or without electricity.\2\ 
In the period immediately following Hurricanes Katrina and Rita, 
gasoline prices rose sharply to $3.00 per gallon or more in many 
markets. Although a good portion of Gulf Coast petroleum infrastructure 
has been put back into production, nearly 68 percent of crude oil 
production remained shut in as of a week ago.\3\
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    \2\ See Minerals Mgmt. Serv., U.S. Dep't of the Interior, Release 
No. 3328, Hurricane Katrina Evacuation and Production Shut-in 
Statistics Report as of Tuesday, August 30, 2005, at http://
www.mms.gov/ooc/press/2005/pressO830.htm.
    \3\ See Minerals Mgmt. Serv., U.S. Dep't of the Interior, Release 
No. 3398, Hurricane Katrina/Hurricane Rita Evacuation and Production 
Shut-in Statistics Report as of Tuesday, November 1, 2005, at http://
www.mms.gov/ooc/press/2005/press1101.htm.
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    Substantially in response to the price effects of this massive and 
continuing supply disruption, demand for gasoline has decreased 
somewhat. This reduced demand, together with the resumption of a 
significant fraction of production in the hurricane-damaged region and 
increased gasoline imports, has brought both wholesale and retail 
gasoline prices back down to or below pre-hurricane levels. It is 
important to remember, however, that Katrina and Rita damaged 
significant parts of the energy infrastructure in the Gulf Coast 
region, including oil and natural gas production and refining and 
processing facilities. Some adverse effect on energy prices may persist 
until the infrastructure recovers fully--a process that could take 
months.
    The Commission is closely scrutinizing prices and examining any 
activity in the gasoline industry that may decrease competition and 
thus harm consumers. The Commission and its staff have developed 
expertise in the industry through years of investigation and research. 
The agency has carefully examined proposed mergers and has blocked or 
required revisions of any that have threatened to harm consumers by 
reducing competition.\4\ Indeed, the Commission has challenged mergers 
in the oil industry at lower levels of consolidation than in any other 
industry. In addition, the Commission has conducted investigations of 
price movements in particular regions of the nation to determine if 
they result in any part from anticompetitive practices, and 
investigated and recently settled a complaint against Unocal for 
monopolization activities that allegedly could have cost consumers 
billions of dollars in higher gasoline prices. In addition to law 
enforcement, the Commission places a premium on careful research and 
industry monitoring to understand current petroleum industry 
developments and to identify accurately obstacles to competition, 
whether arising from private behavior or from public policies. The 
petroleum industry's performance is shaped by the interaction of 
extraordinarily complex, fast-changing commercial arrangements and an 
elaborate set of public regulatory commands. A well-informed 
understanding of these factors is essential if FTC actions are to 
benefit consumers.
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    \4\ Since 1981, the FTC has filed complaints against 19 large 
petroleum mergers. In 13 of these cases, the FTC obtained significant 
divestitures. In one of these, Exxon/Mobil, the Commission required the 
largest divestiture ever, including divestiture of over 2000 retail 
stations and a refinery. Of the six other matters, the parties in four 
cases abandoned the transactions altogether after agency antitrust 
challenges; one case resulted in a remedy requiring the acquiring firm 
to provide the Commission with advance notice of its intent to acquire 
or merge with another entity; and the Commission sought dismissal of 
the sixth complaint (Aloha Petroleum) based on changed circumstances 
that restored allegedly threatened competition.
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    In 2004, the FTC staff published a study reviewing the petroleum 
industry's mergers and structural changes as well as the antitrust 
enforcement actions that the agency has taken in the industry over the 
past 20 years.\5\ Then, in early July of this year, the Commission 
published a study that explains the competitive dynamics of gasoline 
pricing and price changes.\6\ This study is based on years of research 
and experience, as well as information learned at conferences of 
industry, consumer, academic, and government participants held by the 
Commission over the past four years, and explains how gasoline prices 
are set.
---------------------------------------------------------------------------
    \5\ Bureau of Economics, Federal Trade Commission, The Petroleum 
Industry: Mergers, Structural Change, and Antitrust Enforcement (2004) 
[hereinafter Petroleum Merger Report], available at http://www.ftc.gov/
os/2004/08/040813mergersinpetrolberpt.pdf.
    \6\ Federal Trade Commission, Gasoline Price Changes: The Dynamic 
of Supply, Demand, and Competition (2005) [hereinafter Gasoline Price 
Changes], available at http://www.ftc.gov/reports/gasprices05/050705 
gaspricesrpt.pdf.
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    The Commission makes its expertise in this industry available to 
the public in other ways as well. Thousands of consumers have visited 
the Commission's ``Oil and Gas Industry Initiatives'' website,\7\ as 
well as the website recently established by the Commission's Bureau of 
Consumer Protection to provide advice on identity theft and other 
important consumer protection matters in the wake of the hurricanes.\8\ 
As you know, this is the fourth time in recent weeks the Commission has 
shared its expertise on gasoline markets in testimony before 
Congressional committees.\9\
---------------------------------------------------------------------------
    \7\ See http://www.ftc.gov/ftc/oilgas/index.html.
    \8\ See http://www.ftc.gov/bcp/conline/events/katrinalindex.html.
    \9\ Previous prepared statements of the Commission are available at 
http://www.ftc.gov/os/testimony/050907gaspricetest.pdf (before the 
House Committee on Energy and Commerce, Sept. 7, 2005); http://
www.ftc.gov/os/testimony/050921gaspricetest2.pdf (before the Senate 
Committee on Commerce, Science and Transportation, Sept. 21, 2005); 
http://www.ftc.gov/os/testimony/050922katrinatest.pdf (before the House 
Energy and Commerce Subcommittee on Commerce, Trade, and Consumer 
Protection, Sept. 22, 2005).
---------------------------------------------------------------------------
    Congress has also turned to the Commission to investigate whether 
businesses have manipulated markets and prices to the detriment of 
consumers. Section 1809 of the recently enacted Energy Policy Act \10\ 
mandates an FTC investigation ``to determine if the price of gasoline 
is being artificially manipulated by reducing refinery capacity or by 
any other form of market manipulation or price gouging practices.'' In 
response to that legislation and also to the concerns raised by the 
hurricanes, the Commission has launched an investigation to scrutinize 
whether unlawful conduct affecting refinery capacity or other forms of 
illegal behavior have provided a foundation for price manipulation. The 
FTC staff is looking at pricing decisions and other conduct in the wake 
of Katrina to understand what has occurred and identify any illegal 
conduct. The Commission recently issued civil investigative demands to 
a number of companies in this investigation and anticipates reporting 
to Congress on the findings of this investigation next spring. Any 
identification of unlawful conduct will result in aggressive FTC law 
enforcement activity.
---------------------------------------------------------------------------
    \10\ Energy Policy Act of 2005, Pub. L. No. 109-58, Sec. 1809, _ 
Stat. _ (2005).
---------------------------------------------------------------------------
    The Commission's testimony today addresses gasoline pricing issues 
in three parts. It first considers the issue of price gouging. In an 
economy in which producers are generally free to determine their own 
prices and buyers are free to adjust their purchases, it is unusual 
when many parties call for some sort of price caps on gasoline. The 
testimony considers the problems inherent in a price gouging law and 
describes the current Commission investigation of petroleum industry 
conduct in the wake of the hurricanes.
    The testimony next reviews the basic tools that the Commission uses 
to maintain competition in the petroleum industry and thereby ensure 
competitive prices for consumers: challenging potentially 
anticompetitive mergers, prosecuting nonmerger antitrust violations, 
monitoring industry prices and behavior to detect possible 
anticompetitive conduct, and researching petroleum sector developments. 
The nation's economy is based on the premise that competition produces 
the lowest prices and highest quantity and quality of goods and 
services, and the highest rate of innovation, for the betterment of all 
consumers. This review of the Commission's petroleum industry agenda 
highlights the FTC's contributions to promote and maintain competition 
in the industry.
    The final part of this testimony reviews some useful learning the 
Commission has derived from its conferences and research and its review 
of recent gasoline price changes. Among other findings, this discussion 
highlights the paramount role that crude oil prices play in determining 
both the levels and the volatility of gasoline prices in the United 
States. It also discusses how demand has increased substantially over 
the past few years, both in the United States and in the developing 
economies of China and India. When worldwide supply and demand 
conditions resulted in crude oil prices in the range of $70 per barrel 
after Katrina--a level from which we are doubtless all glad to have 
seen the price recede by more than $10 per barrel since the 
hurricanes--it was not surprising to see higher gasoline prices 
nationwide.

                           II. PRICE GOUGING

    The Commission is very conscious of the swift and severe price 
spikes that occurred immediately before and after Katrina and Rita made 
landfall, and of the pain that these price increases have caused 
consumers and small businesses. There have been numerous calls in 
Congress and elsewhere for investigations of ``price gouging,'' 
particularly at the retail gasoline level, and for legislation making 
price gouging (or offenses defined in such alternative terms as 
``unconscionably excessive prices'') a violation of federal law.
    The FTC is keenly aware of the importance to American consumers of 
free and open markets and intends faithfully to fulfill its obligation 
to search for and stop illegal conduct, which undermines the market's 
consumer benefits. We caution, however, that a full understanding of 
pricing practices before and since Katrina may not lead to a conclusion 
that a federal prohibition on ``price gouging'' is appropriate. 
Consumers understandably are upset when they face dramatic price 
increases within very short periods of time, especially during a 
disaster. But price gouging laws that have the effect of controlling 
prices likely will do consumers more harm than good. Experience from 
the 1970s shows that price controls produced longer lines at the pump--
and prolonged the gasoline crisis. While no consumer likes price 
increases, in fact, price increases lower demand and help make the 
shortage shorter-lived than it otherwise would have been.
    Prices play a critical role in our economy: they signal producers 
to increase or decrease supply, and they also signal consumers to 
increase or decrease demand. In a period of shortage--particularly with 
a product, like gasoline, that can be sold in many markets around the 
world--higher prices create incentives for suppliers to send more 
product into the market, while also creating incentives for consumers 
to use less of the product. For instance, sharp increases in the price 
of gasoline can help curtail the panic buying and ``topping off' 
practices that cause retailers to run out of gasoline. In addition, 
higher gasoline prices in the United States have resulted in the 
shipment of substantial additional supplies of European gasoline to the 
United States.\11\ If price gouging laws distort these natural market 
signals, markets may not function well and consumers will be worse off 
Thus, under these circumstances, sound economic principles and 
jurisprudence suggest a seller's independent decision to increase price 
is--and should be--outside the purview of the law.
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    \11\ Total gasoline imports into the United States for September 
and the first three weeks of October were approximately 34 percent 
higher than imports over the same seven-week period in 2004. See U.S. 
Dep't of Energy, Energy Information Admin. (``ETA''), U.S. Weekly 
Gasoline Imports (Oct. 26, 2005), available at http://www.eia.doe.gov/
oil_gas/petroleum/info_glance/gasoline.html.
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    To be sure, there may be situations in which sellers go beyond the 
necessary market-induced price increase. A seller who does not want to 
run out of a supply of gasoline to sell might misjudge the market and 
attempt to charge prices substantially higher than conditions warrant 
or than its competitors are charging. News stories of gasoline 
retailers panicking and setting prices of $6.00 per gallon are evidence 
of such misjudgments after the hurricanes. But the market--not price 
gouging laws--is the best cure for this. Temporary prices that are 
wildly out of line with competitors' prices do not last when consumers 
quickly discover that other stations are charging lower prices. A 
single seller in a competitive market cannot unilaterally raise prices 
for long above the level justified by supply and demand factors. As 
long as they are not sustained by collusive activity, departures from 
competitive prices cannot endure for long in such a market. The few 
retailers who raised prices to the $6.00 level reduced them just as 
quickly when it became apparent that they had misjudged the market.
    Even if Congress outlaws price gouging, the law likely would be 
difficult to enforce fairly. The difficulty for station managers, as 
well as for enforcers, is knowing when the managers have raised prices 
``too much,'' as opposed to responding to reduced supply conditions. It 
can be very difficult to determine the extent to which any more 
moderate price increases are necessary. Examination of the federal 
gasoline price gouging legislation that has been introduced and of 
state price gouging statutes indicates that the offense of ``price 
gouging'' is difficult to define. For example, some bills define 
``gouging'' as consisting of a 10 or 15 percent increase in average 
prices, while most leave the decision to the courts by defining gouging 
in nebulous terms such as ``gross disparity'' or ``unconscionably 
excessive.'' Some, but not all, make allowances for the extra costs 
that maybe involved in providing product in a disaster area. Few, if 
any, of the proposed bills or state laws take account of market 
incentives for sellers to divert supply from their usual customers in 
order to supply the disaster area, or incentives for consumers to 
reduce their purchases as much as possible, minimizing the shortage. 
Ultimately, the inability to agree on when ``price gouging'' should be 
prohibited indicates the risks in developing and enforcing a federal 
statute that would be controversial and could be counterproductive to 
consumers' best interest.
    We note that at least 28 states have statutes that address short-
term price spikes in the aftermath of a disaster, and we understand 
that a number of these states have opened investigations of gasoline 
``price gouging.'' If Congress mandates anti-``gouging'' enforcement in 
spite of the problems discussed above, then state officials--because of 
their proximity to local retail outlets--can react more expeditiously 
at the retail level than a federal agency could to the complaints that 
consumers have filed about local gasoline prices. Most of the reports 
of alleged gasoline price gouging that the FTC staff has seen involved 
individual retailers that raised their prices sharply in reaction to 
dramatic increases in consumer demand or expectations of decreased 
supply right after the hurricanes--and reduced their prices just as 
quickly when no other gas stations followed suit, or when their 
suppliers assured them that their storage tanks would be refilled. It 
would be far more efficient for state and local officials close to 
these incidents (and knowledgeable about the local situation) to handle 
any such complaints.
    For all of these reasons, the Commission remains persuaded that 
federal price gouging legislation would unnecessarily hurt consumers. 
Enforcement of the antitrust laws is the better way to protect 
consumers. The FTC will thoroughly investigate gasoline pricing 
practices and will aggressively respond to any manipulation of gasoline 
prices we are able to uncover that violates federal antitrust law. The 
Commission believes that passage of federal price gouging legislation 
before completion of the Section 1809 investigation is premature at 
best. Commission findings regarding possible market manipulation from 
this study could help inform Congressional committees as they wrestle 
with the difficult issues presented by rapid price increases in periods 
of shortage.

    III. FTC ACTIVITIES TO MAINTAIN AND PROMOTE COMPETITION IN THE 
                           PETROLEUM INDUSTRY

A. The Price Monitoring Project
    Given the importance of the petroleum industry to the U.S. economy, 
and to the pocketbook of most consumers, the Commission decided it 
needed more detailed and more timely knowledge of pricing practices in 
both wholesale and retail markets. Three years ago, the FTC launched a 
program unique to the petroleum industry to actively and continuously 
monitor prices of gasoline and diesel fuel in approximately 360 retail 
areas and 20 wholesale regions.\12\ This initiative to monitor gasoline 
and diesel prices identifies ``unusual'' price movements \13\ and then 
examines whether any such movements might result from anticompetitive 
conduct that violates Section 5 of the FTC Act. FTC economists 
developed a statistical model for identifying such movements.
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    \12\ See FTC, Oil and Gas Industry Initiatives, at http://
www.ftc.gov/ftc/oilgas/index.html.
    \13\ An ``unusual'' price movement in a given area is a price that 
is significantly out of line with the historical relationship between 
the price of gasoline in that area and the gasoline prices prevailing 
in other areas.
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    The staff reviews daily data from the Oil Price Information 
Service, a private data collection agency, and receives information 
weekly from the public gasoline price hotline maintained by the U.S. 
Department of Energy (``DOE''). The staff monitoring team uses an 
econometric model to determine whether current retail and wholesale 
prices are anomalous in comparison to the historical price 
relationships among cities. If the FTC staff detects unusual price 
movements in an area, it researches the possible causes, including, 
where appropriate, through consultation with the state attorneys 
general, state energy agencies, and the ETA.
    In addition to monitoring DOE's gasoline price hotline complaints, 
this project includes scrutiny of gasoline price complaints received by 
the Commission's Consumer Response Center and of similar information 
provided to the FTC by state and local officials. If the staff 
concludes that an unusual price movement likely results from a 
business-related cause (i.e., a cause unrelated to anticompetitive 
conduct), it continues to monitor but--absent indications of 
potentially anticompetitive conduct--it does not investigate 
further.\14\ The Commission's experience from its past investigations 
and from the current monitoring initiative indicates that unusual 
movements in gasoline prices typically have a business-related cause. 
The FTC staff further investigates unusual price movements that do not 
appear to be explained by business-related causes to determine whether 
anticompetitive conduct may underlie the pricing anomaly. Cooperation 
with state law enforcement officials is an important element of such 
investigations.
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    \14\ Business-related causes include movements in crude oil prices, 
supply outages (e.g., from refinery fires or pipeline disruptions), or 
changes in and/or transitions to new fuel requirements imposed by air 
quality standards.
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B. Merger Enforcement in the Petroleum Industry
    The Commission has gained much of its antitrust enforcement 
experience in the petroleum industry by analyzing proposed mergers and 
challenging transactions that likely would reduce competition, thus 
resulting in higher prices.\15\ In 2004, the Commission released data 
on all horizontal merger investigations and enforcement actions from 
1996 to 2003.\16\ These data show that the Commission has brought more 
merger cases at lower levels of concentration in the petroleum industry 
than in other industries. Unlike in other industries, the Commission 
has obtained merger relief in moderately concentrated petroleum 
markets. Moreover, our vigorous merger enforcement has preserved 
competition and thereby kept gas prices at a competitive level.
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    \15\ Section 7 of the Clayton Act prohibits acquisitions that may 
have anticompetitive effects ``in any line of commerce or in any 
activity affecting commerce in any section of the country.'' 15 U.S.C. 
Sec. 18.
    \16\ Federal Trade Commission Horizontal Merger Investigation Data, 
Fiscal Years 1996-2003 (Feb. 2, 2004), Table 3.1, et seq.; FTC 
Horizontal Merger Investigations Post-Merger HHI and Change in HHI for 
Oil Markets, FY 1996 through FY 2003 (May 27, 2004), available at 
http://www.ftc. gov/opa/2004/05/040527petrolactionsHHIdeltachart.pdf.
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    Several recent merger investigations illustrate the FTC's approach 
to merger analysis in the petroleum industry. An important recently 
completed case involved Chevron's acquisition of Unocal. When the 
merger investigation began, the Commission was in the middle of an 
ongoing monopolization case against Unocal that would have been 
affected by the merger. The Commission settled both the merger and the 
monopolization matters with separate consent orders that preserved 
competition in all relevant merger markets and obtained complete relief 
on the monopolization claim.\17\
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    \17\ Chevron Corp., FTC Docket No. C-4144 (July 27, 2005) (consent 
order), at http://www.ftc.gov/os/caselist/0510125/050802do0510125.pdf; 
Union Oil Co. of California, FTC Docket No. 9305 (July 27, 2005) 
(consent order), at http://www.flc.gov/os/adjpro/d9305/050802do.pdf. 
The nonmerger case is discussed infra at 16-17.
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    Another merger case that resulted in a divestiture order resolved a 
complaint concerning the acquisition of Kaneb Services and Kaneb Pipe 
Line Partners, companies that engaged in petroleum transportation and 
terminaling in a number of markets, by Valero L.P., the largest 
petroleum terminal operator and second largest operator of liquid 
petroleum pipelines in the United States. The complaint alleged that 
the acquisition had the potential to increase prices in bulk gasoline 
and diesel markets.\18\ The FTC's divestiture order succeeds in 
maintaining import possibilities for wholesale customers in Northern 
California, Denver, and greater Philadelphia and precludes the merging 
parties from undertaking an anticompetitive price increase.\19\
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    \18\ Valero L.P., FTC Docket No. C-4141 (June 14, 2005) 
(complaint), at http://www.ftc.gov/os/caselist/0510022/
050615com.0510022. pdf.
    \19\ Valero L.P., FTC Docket No. C-4141 (July 22, 2005) (consent 
order), at http://www.ftc.gov/os/caselist/0510022/050726do0510022.pdf.
---------------------------------------------------------------------------
    Most recently, the Commission filed a complaint on July 27, 2005, 
in federal district court in Hawaii, alleging that Aloha Petroleum's 
proposed acquisition of Trustreet Properties' half interest in an 
import-capable terminal and retail gasoline assets on the island of 
Oahu would have reduced the number of gasoline marketers and could have 
led to higher gasoline prices for Hawaii consumers.\20\ To resolve this 
case, the parties executed a 20-year throughput agreement that will 
preserve competition allegedly threatened by the acquisition.\21\
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    \20\ Aloha Petroleum Ltd., FTC File No. 051 0131 (July 27, 2005) 
(complaint), at http://www.ftc.gov/os/caselist/1510131/050728comp 
1510131.pdf .
    \21\ FTC Press Release, FTC Resolves Aloha Petroleum Litigation 
(Sept. 6, 2005), available at http://www.ftc.gov/opa/2005/09/
alohapetrol.htm.
---------------------------------------------------------------------------
    In the past few years, the Commission has brought a number of other 
important merger cases. One of these challenged the merger of Chevron 
and Texaco,\22\ which combined assets located throughout the United 
States. Following an investigation in which 12 states participated, the 
Commission issued a consent order against the merging parties requiring 
numerous divestitures to maintain competition in particular relevant 
markets, primarily in the western and southern United States.\23\
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    \22\ Chevron Corp., FTC Docket No. C-4023 (Jan. 2, 2002) (consent 
order), at http://www.ftc.gov/os/2002/01/chevronorder.pdf.
    \23\ Id.
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    Another petroleum industry transaction that the Commission 
challenged successfully was the $6 billion merger between Valero Energy 
Corp. (``Valero'') and Ultramar Diamond Shamrock Corp. 
(``Ultramar'').\24\ Both Valero and Ultramar were leading refiners and 
marketers of gasoline that met the specifications of the California Air 
Resources Board (``CARB''), and they were the only significant 
suppliers to independent stations in California. The Commission's 
complaint alleged competitive concerns in both the refining and the 
bulk supply of CARE gasoline in two separate geographic markets--
Northern California and the entire state of California--and the 
Commission contended that the merger could raise the cost to California 
consumers by at least $150 million annually for every one-cent-per-
gallon price increase at retail.\25\ To remedy the alleged violations, 
the consent order settling the case required Valero to divest: (a) an 
Ultramar refinery in Avon, California; (b) all bulk gasoline supply 
contracts associated with that refinery; and ) 70 Ultramar retail 
stations in Northern California.\26\
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    \24\ Valero Energy Corp., FTC Docket No. C-4031 (Feb. 19, 2002) 
(consent order), at http://www.ftc.gov/os/2002/02/valerodo.pdf
    \25\ Valero Energy Corp., FTC Docket No. C-4031 (Dec. 18, 2001) 
(complaint), at http://www.ftc.gov/os/2001/12/valerocmp.pdf.
    \26\ Valero Energy Corp., supra note 24.
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    Another example is the Commission's 2002 challenge to the merger of 
Phillips Petroleum Company and Conoco Inc., alleging that the 
transaction would harm competition in the Midwest and Rocky Mountain 
regions of the United States. To resolve that challenge, the Commission 
required the divestiture of: (a) the Phillips refinery in Woods Cross, 
Utah, and all of the Phillips-related marketing assets served by that 
refinery; (b) Conoco's refinery in Commerce City, Colorado (near 
Denver), and all of the Phillips marketing assets in Eastern Colorado; 
and (c) the Phillips light petroleum products terminal in Spokane, 
Washington.\27\ The Commission's order ensured that competition would 
not be lost and that gasoline prices would not increase as a result of 
the merger.
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    \27\ Conoco Inc. and Phillips Petroleum Corp., FTC Docket No. C-
4058 (Aug. 30, 2002) (Analysis of Proposed Consent Order to Aid Public 
Comment), at http://www.ftc.gov/os/2002/08/conocophillipsan.htm. Not 
all oil industry merger activity raises competitive concerns. For 
example, in 2003, the Commission closed its investigation of Sunoco's 
acquisition of the Coastal Eagle Point refinery in the Philadelphia 
area without requiring relief. The Commission noted that the 
acquisition would have no anticompetitive effects and seemed likely to 
yield substantial efficiencies that would benefit consumers. Sunoco 
Inc./Coastal Eagle Point Oil Co., FTC File No. 031 0139 (Dec. 29, 2003) 
(Statement of the Commission), at http://www.ftc.gov/os/caselist/
0310139/031229stmt0310139.pdf. The FTC also considered the likely 
competitive effects of Phillips Petroleum's proposed acquisition of 
Tosco. After careful scrutiny, the Commission declined to challenge the 
acquisition. A statement issued in connection with the closing of the 
investigation set forth the FTC's reasoning in detail. Phillips 
Petroleum Corp., FTC File No. 011 0095 (Sept. 17, 2001) (Statement of 
the Commission), at http://www.ftc.gov/os/2001/09/
phillipstoscostmt.htm.
    Acquisitions of firms operating mainly in oil or natural gas 
exploration and production are unlikely to raise antitrust concerns, 
because that segment of the industry is generally unconcentrated. 
Acquisitions involving firms with de minimis market shares, or with 
production capacity or operations that do not overlap geographically, 
are also unlikely to raise antitrust concerns.
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C. Nonmerger Investigations into Gasoline Pricing
    In addition to scrutinizing mergers, the Commission aggressively 
polices anticompetitive conduct. When it appears that higher prices 
might result from collusive activity or from anticompetitive unilateral 
activity by a firm with market power, the agency investigates to 
determine whether unfair methods of competition have been used. If the 
facts warrant, the Commission challenges the anticompetitive behavior.
    Several petroleum cases of recent years are illustrative. On March 
4, 2003, the Commission issued the administrative complaint against 
Unocal discussed earlier, stating that it had reason to believe that 
Unocal had violated Section 5 of the FTC Act.\28\ The Commission 
alleged that Unocal deceived the California Air Resources Board 
(``CARB'') in connection with regulatory proceedings to develop the 
reformulated gasoline (``RFG'') standards that CARB adopted. Unocal 
allegedly misrepresented that certain technology was non-proprietary 
and in the public domain, while at the same time it pursued patents 
that would enable it to charge substantial royalties if CARB mandated 
the use of Unocal's technology in the refining of CARB-compliant 
summertime RFG. The Commission alleged that, as a result of these 
activities, Unocal illegally acquired monopoly power in the technology 
market for producing the new CARB-compliant summertime RFG, thus 
undermining competition and harming consumers in the downstream product 
market for CARB-compliant summertime RFG in California. The Commission 
estimated that Unocal's enforcement of its patents could potentially 
result in over $500 million of additional consumer costs each year.
---------------------------------------------------------------------------
    \28\ Union Oil Co. of California, FTC Docket No. 9305 (Mar. 4, 
2003) (complaint), at http://www.ftc.gov/os/2003/03/unocalcmp.htm.
---------------------------------------------------------------------------
    The proposed merger between Chevron and Unocal raised additional 
concerns. Although Unocal had no horizontal refining or retailing 
overlaps with Chevron, it had claimed the right to collect patent 
royalties from companies that had refining and retailing assets 
(including Chevron). If Chevron had unconditionally inherited these 
patents by acquisition, it would have been in a position to obtain 
sensitive information and to claim royalties from its own horizontal 
downstream competitors. Chevron, the Commission alleged, could have 
used this information and this power to facilitate coordinated 
interaction and detect any deviations.
    The Commission resolved both the Chevron/Unocal merger 
investigation and the monopolization case against Unocal with consent 
orders. The key element in these orders is Chevron's agreement not to 
enforce the Unocal patents.\29\ The FTC's settlement of these two 
matters is a substantial victory for California consumers. The 
Commission's monopolization case against Unocal was complex and, with 
possible appeals, could have taken years to resolve, with substantial 
royalties to Unocal--and higher consumer prices--in the interim. The 
settlement provides the full relief sought in the monopolization case 
and also resolves the only competitive issue raised by the merger. With 
the settlement, consumers are benefitting immediately from the 
elimination of royalty payments on the Unocal patents, and potential 
merger efficiencies could result in additional savings at the pump.
---------------------------------------------------------------------------
    \29\ Chevron Corp., supra note 17.
---------------------------------------------------------------------------
    The FTC undertook another major nonmerger investigation during 
1998-2001, examining the major oil refiners' marketing and distribution 
practices in Arizona, California, Nevada, Oregon, and Washington (the 
``Western States'' investigation).\30\ The agency initiated the Western 
States investigation out of concern that differences in gasoline prices 
in Los Angeles, San Francisco, and San Diego might be due partly to 
anticompetitive activities. The Commission's staff examined over 300 
boxes of documents, conducted 100 interviews, held over 30 
investigational hearings, and analyzed a substantial amount of pricing 
data. The investigation uncovered no basis to allege an antitrust 
violation. Specifically, the investigation detected no evidence of a 
horizontal agreement on price or output or the adoption of any illegal 
vertical distribution practice at any level of supply. The 
investigation also found no evidence that any refiner had the 
unilateral ability to raise prices profitably in any market or reduce 
output at the wholesale level. Accordingly, the Commission closed the 
investigation in May 2001.
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    \30\ FTC Press Release, FTC Closes Western States Gasoline 
Investigation (May 7, 2001), available at http://www.ftc.gov/opa/2001/
05/westerngas.htm. In part, this investigation focused on ``zone 
pricing'' and ``redlining.'' See Statement of Commissioners Sheila F. 
Anthony, Orson Swindle and Thomas B. Leary, available at http://
www.ftc.gov/os/2001/05/wsgpiswindle.htm, and Statement of Commissioner 
Mozelle W Thompson, available at http://www.ftc.gov/os/2001/05/
wsgpithompson.htm, for a more detailed discussion of these practices 
and the Commission's findings. See also Cary A. Deck & Bart J. Wilson, 
Experimental Gasoline Markets, Federal Trade Commission, Bureau of 
Economics Working Paper (Aug. 2003), available at http://www.ftc.gov/
be/workpapers/wp263.pdf, and David W. Meyer & Jeffrey H. Fischer, The 
Economics of Price Zones and Territorial Restrictions in Gasoline 
Marketing, Federal Trade Commission, Bureau of Economics Working Paper 
(Mar. 2004), available at http://www.ftc.gov/be/workpapers/wp271.pdf.
---------------------------------------------------------------------------
    In addition to the Unocal and Western States pricing 
investigations, the Commission conducted a nine-month investigation 
into the causes of gasoline price spikes in local markets in the 
Midwest in the spring and early summer of 2000.\31\ As explained in a 
2001 report, the Commission found that a variety of factors contributed 
in different degrees to the price spikes, including refinery production 
problems, pipeline disruptions, and low inventories. The industry 
responded quickly to the price spike. Within three or four weeks, an 
increased supply of product had been delivered to the Midwest areas 
suffering from the supply disruption. By mid-July 2000, prices had 
receded to pre-spike or even lower levels.
---------------------------------------------------------------------------
    \31\ Midwest Gasoline Price Investigation, Final Report of the 
Federal Trade Commission (Mar. 29, 2001), available at http://
www.ftc.gov/os/2001/03/mwgasrpt.htm; see also Remarks of Jeremy Bulow, 
Director, Bureau of Economics, Federal Trade Commission, The Midwest 
Gasoline Investigation, available at http://www.ftc.gov/speeches/other/
midwestgas.htm.
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   iv. commission report on factors that affect the price of gasoline
    Identifying the causes of high gasoline prices and gasoline price 
spikes requires a thorough and accurate analysis of the factors--
supply, demand, and competition, as well as federal, state, and local 
regulations--that drive gasoline prices, so that policymakers can 
evaluate and choose strategies likely to succeed in addressing high 
gasoline prices.
    The Commission addressed these issues by conducting extensive 
research concerning gasoline price fluctuations, analyzing specific 
instances of apparent gasoline price anomalies, and holding a series of 
conferences \32\ on the factors that affect gasoline prices. This work 
led to the publication of a report \33\ that draws on what the 
Commission has learned about the factors that can influence gasoline 
prices or cause gasoline price spikes. The report makes numerous 
significant findings, but three basic lessons emerge from this 
collective work.
---------------------------------------------------------------------------
    \32\ FTC Press Release, FTC to Hold Second Public Conference on the 
US. Oil and Gasoline Industry in May 2002 (Dec. 21, 2001), available at 
http://www.flc.gov/opa/2001/12/gasconf.htm.
    \33\ Gasoline Price Changes, supra note 6.
---------------------------------------------------------------------------
    First, in general, the price of gasoline reflects producers' costs 
and consumers' willingness to pay. Gasoline prices rise if it costs 
more to produce and supply gasoline, or if people wish to buy more 
gasoline at the current price--that is, when demand is greater than 
supply. Second, how consumers respond to price changes will affect how 
high prices rise and how low they fall. Limited substitutes for 
gasoline restrict the options available to consumers to respond to 
price increases in the short run. Because gasoline consumers typically 
do not reduce their purchases substantially in response to price 
increases, they are vulnerable to substantial price increases. Third, 
producers' responses to price changes will affect how high prices rise 
and how low they fall. In general, when there is not enough gasoline to 
meet consumers' demands at current prices, higher prices will signal a 
potential profit opportunity and may bring additional supply into the 
market.
    The vast majority of the Commission's investigations and studies 
have revealed market factors as the primary drivers of both price 
increases and price spikes. A complex landscape of market forces 
determines gasoline prices in the United States.

A. Worldwide Supply, Demand, and Competition for Crude Oil Are the Most 
        Important Factors in the National Average Price of Gasoline in 
        the United States
    The world price of crude oil, a commodity that is traded on world 
markets, is the most important factor in the price of gasoline in the 
United States and all other markets. Over the years from 1984 through 
2003, changes in crude oil prices explained approximately 85 percent of 
the changes in the price of gasoline. United States refiners compete 
with refiners all around the world to obtain crude oil. The United 
States now imports more than 60 percent of its crude from foreign 
sources, and these costs are passed on to retailers and then consumers. 
If world crude prices rise, then U.S. refiners must pay higher prices 
for the crude they buy.
    Crude oil prices are not wholly market-determined. Since 1973, 
decisions by OPEC have been a significant factor in the prices that 
refiners pay for crude oil. Over time, OPEC has met with varying 
degrees of success in raising crude oil prices. However, when demand 
surges unexpectedly, as in 2004, OPEC decisions on whether to increase 
supply to meet demand can have a significant impact on world crude oil 
prices.
    Overall, the long-run trend is toward significantly increased 
demand for crude oil. Over the last 20 years, United States consumption 
of all refined petroleum products increased on average by 1.4 percent 
per year, leading to a total increase of nearly 30 percent.\34\
---------------------------------------------------------------------------
    \34\ Id. at 19.
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    Although they have receded from the record levels they reached 
immediately after Hurricanes Katrina and Rita, crude oil prices have 
been increasing rapidly in recent months. Demand has remained high in 
the United States, and large demand increases from rapidly 
industrializing nations, particularly China and India, have made 
supplies much tighter than expected.\35\
---------------------------------------------------------------------------
    \35\ This phenomenon was not limited to crude oil: other 
commodities that form the basis for expanded growth in developing 
economies, such as steel and lumber, also saw unexpectedly rapid growth 
in demand, along with higher prices. Id. at 27.
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B. Gasoline Supply, Demand, and Competition Produced Relatively Low and 
        Stable Prices From 1984 Until 2004, Despite Substantial 
        Increases in United States Gasoline Consumption
    Consumer demand for gasoline in the United States has risen 
substantially, especially since 1990.\36\ Although consumption fell 
sharply from 1978 to 1981, by 1993 consumption rose above 1978 levels, 
and it has continued to increase at a fairly steady rate since then. In 
2004, U.S. gasoline consumption averaged about 9 million barrels per 
day.
---------------------------------------------------------------------------
    \36\ Id. at 48.
---------------------------------------------------------------------------
    Despite high gasoline prices across the nation, demand generally 
has not fallen off in 2005. Although there are reports of some 
diminution in demand in the wake of the hurricanes, it remains to be 
seen whether this is a long-term reduction. Gasoline demand this summer 
driving season was above last year's record driving-season demand and 
well above the average for the previous four years. Higher prices post-
Katrina finally resulted in some falloff in demand. A preliminary 
estimate indicates that gasoline demand for September of 2005 was 
approximately 3.5 percent lower than demand during September 2004.\37\
---------------------------------------------------------------------------
    \37\ EIA, DOE/EIA-0208(2005-34), Weekly Petroleum Status Report, 
Oct. 28, 2005, at 17, tbl.11, at http://www.eia.doe.gov/oil_gas/
petroleum/data_publications/weekly_petroleum status_report/wpsrr.html.
---------------------------------------------------------------------------
    Notwithstanding these substantial demand increases in the pre-
hurricane time periods, increased supply from U.S. refineries and 
imports kept gasoline prices relatively steady until 2004. A comparison 
of ``real'' average annual retail gasoline prices and average annual 
retail gasoline consumption in the United States from 1978 through 2004 
shows that, in general, gasoline prices remained relatively stable 
despite significantly increased demand.\38\ The data show that, from 
1986 through 2003, real national average retail prices for gasoline, 
including taxes, generally were below $2.00 per gallon (in 2004 
dollars). By contrast, between 1919 and 1985, real national average 
retail gasoline prices were above $2.00 per gallon (in 2004 dollars) 
more often than not.\39\
---------------------------------------------------------------------------
    \38\ ``Real'' prices are adjusted for inflation and therefore 
reflect the different values of a dollar at different times; they 
provide more accurate comparisons of prices in different time periods. 
``Nominal'' prices are the literal prices shown at the time of 
purchase.
    \39\ See Gasoline Price Changes, supra note 6, at 43-47.
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    Average U.S. retail prices have been increasing since 2003, 
however, from an average of $1.56 in 2003 to an average of $2.27 in the 
first ten months of 2005.\40\ In the last several months, the prices 
have moved even higher. Setting aside whatever short-term effects may 
be associated with Hurricanes Katrina and Rita, it is difficult to 
predict whether these increases represent the beginning of a longer-
term trend or are merely normal market fluctuations caused by 
unexpectedly strong short-term worldwide demand for crude oil, as well 
as reflecting the effects of instability in such producing areas as the 
Middle East and Venezuela.
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    \40\ The higher prices in 2005 appear to be the result of market 
factors that have uniformly affected the entire country. At least for 
the part of this year that preceded Hurricane Katrina, the FTC's 
Gasoline Price Monitoring Project has detected no evidence of 
significant unusual local or regional gasoline pricing anywhere in the 
United States during this summer driving season. This contrasts with 
the past two summers, during which various regional supply shocks, such 
as the Arizona pipeline shutdown and the Northeast blackouts of August 
2003, and the several unanticipated regional refinery outages and late 
summer hurricanes during the summer of 2004, significantly increased 
prices in some areas above levels that might be expected based on 
historical price patterns.
    Because of the hurricane-induced shocks to supply, historical price 
relationships from one area to another no longer held in many instances 
after Katrina. The pattern of post-Katrina price relationships, 
however, does appear to be generally consistent with the specifics of 
Katrina's and Rita's impact on the supply infrastructure and with the 
degree to which particular regions depend on or compete with supplies 
from the Gulf Coast region. Those few areas in which pricing patterns 
are not consistent are part of our ongoing investigation pursuant to 
Section 1809 of the Energy Policy Act of 2005.
---------------------------------------------------------------------------
    One reason why long-term real prices have been relatively contained 
is that United States refiners have taken advantage of economies of 
scale and adopted more efficient technologies and business strategies. 
Between 1985 and 2005, U.S. refineries increased their total capacity 
to refine crude oil into various refined petroleum products by 8.9 
percent, moving from 15.7 million barrels per day in 1985 to 17.133 
million barrels per day as of August 2005 through the expansion of 
existing refineries and the use of new technologies.\41\ This 
increase--approximately 1.4 million barrels per day--is roughly 
equivalent to adding approximately 10 to 12 average-sized refineries to 
industry supply.
---------------------------------------------------------------------------
    \41\ Petroleum Merger Report, supra note 5, at 196, tbl.7-1; EIA, 
DOE/EIA-0340(04)/l, 1 Petroleum Supply Annual 2004, at 78, tbl.36 
(2005), at http://www.eia.doe.gov/pub/oil_gas/petroleum/
data_publications/petroleum_supply_annual/psa_volume1/current/pdf/
volume1_all.pdf. EIA, DOE/EIA-0208(2005-33), Weekly Petroleum Status 
Report, August 24, 2005, at http://www.eia.doe.gov/pub/oil_gas/
petroleum/data_publications/weekly_ petroleum_status_report/historical/
2005/2005_08_24/pdf/wpsrall.pdf.
---------------------------------------------------------------------------
    Offsetting some of the observed efficiency gains, increased 
environmental requirements since 1992 have likely raised the retail 
price of gasoline by a few cents per gallon in some areas. Because 
gasoline use is a major factor in air pollution in the United States, 
the U.S. Environmental Protection Agency--under the Clean Air Act 
\42\--requires various gasoline blends for particular geographic areas 
that have not met certain air quality standards. Although available 
information shows that the air quality in the United States has 
improved due to the Clean Air Act,\43\ costs come with the benefits (as 
they do with any regulatory program). Estimates of the increased costs 
of environmentally mandated gasoline range from $0.03 to $0.11 per 
gallon.\44\ A recognition that environmental requirements can increase 
gasoline prices came in the post-Katrina period when the EPA 
temporarily suspended certain boutique fuel requirements in order to 
increase the supply of conventional gasoline into affected areas.\45\
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    \42\ Beginning with the Clean Air Act Amendments of 1970 (Pub. L. 
No. 91-604, 84 Stat. 1698) and continuing with further amendments in 
1990 (Pub. L. No. 101-549, 104 Stat. 2468) and the Energy Policy Act of 
1992 (Pub. L. No. 102-486, 106 Stat. 2776), Congress has mandated 
substantial changes in the quality of gasoline, as well as diesel, that 
can be sold in the United States.
    \43\ Robert Larson, Acting Director of the Transportation and 
Regional Programs, Environmental Protection Agency, Remarks at the FTC 
Conference on Factors that Affect Prices of Refined Petroleum Products 
79-80 (May 8, 2002).
    \44\ See EIA, 1995 Reformulated Gasoline Market Affected Refiners 
Differently, in DOE/EIA-0380(1996/01), Petroleum Marketing Monthly 
(1996), and studies cited therein. Environmental mandates are not the 
same in all areas of the country. The EPA requires particular gasoline 
blends for certain geographic areas, but it sometimes allows variations 
on those blends. Differing fuel specifications in different areas can 
limit the ability of gasoline wholesalers to find adequate substitutes 
in the event of a supply shortage. Thus, boutique fuels may exacerbate 
price variability in areas, such as California, that are not 
interconnected with large refining centers in other areas.
    \45\ U.S. Environmental Protection Agency, Fuel Waiver Response to 
Hurricanes 2005, available at http://www.epa.gov/compliance/katrina/
waiver/index.html.
---------------------------------------------------------------------------
    FTC studies indicate that higher retail prices are generally not 
caused by excess oil company profits. Although recent oil company 
profits may be high in absolute terms, industry profits have varied 
widely over time, as well as over industry segments and among firms.
    EIA's Financial Reporting System (``FRS'') tracks the financial 
performance of the 28 major energy producers currently operating in the 
United States. Between 1973 and 2003, the annual average return on 
equity for FRS energy companies was 12.6 percent, while it was 13.1 
percent for the Standard & Poor's Industrials.\46\ The rates of return 
on equity for FRS companies have varied widely over the years, ranging 
from as low as 1.1 percent to as high as 21.1 percent during the period 
from 1974 to 2003.\47\ Returns on equity vary across firms as well.
---------------------------------------------------------------------------
    \46\ See Gasoline Price Changes, supra note 6, at 61.
    \47\ Id.
---------------------------------------------------------------------------
    High absolute profits do not contradict numbers showing that oil 
companies may at times earn less (as a percentage of capital or equity) 
than other industrial firms. This simply reflects the large amount of 
capital necessary to find, refine, and distribute petroleum products.

C. Other Factors, Such as Retail Station Density, New Retail Formats, 
        and State and Local Regulations, Also Can Affect Retail 
        Gasoline Prices
    The interaction of supply and demand and industry efficiency are 
not the only factors that impact retail gasoline prices. State and 
local taxes can be a significant component of the final price of 
gasoline. In 2004, the average state sales tax was $0.225 per gallon, 
with the highest state tax at $0.334 per gallon (New York).\48\ On 
average, about 9 percent of a gallon of gasoline is accounted for by 
state taxes. Some local governments also impose gasoline taxes.\49\
---------------------------------------------------------------------------
    \48\ Id. at 111 (noting that the other four states with the highest 
average taxes on gasoline in 2004 were Wisconsin ($0.33 per gallon), 
Connecticut ($0.325 per gallon), Rhode Island ($0.306 per gallon), and 
California ($0.301 per gallon)).
    \49\ Id. For example, all areas in Florida also have a local tax 
between $0.099 and $0.178 per gallon. Similarly, Honolulu has a local 
tax of $0.165 per gallon.
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    Local regulations may also have an impact on retail gasoline 
prices. For example, bans on self-service sales or below-cost sales 
appear to raise gasoline prices. New Jersey and Oregon ban self-service 
sales, thus requiring consumers to buy gasoline bundled with services 
that increase costs--that is, having staff available to pump the 
gasoline.\50\ Some experts have estimated that self-service bans cost 
consumers between $0.02 and $0.05 per gallon.\51\ In addition, 11 
states have laws banning below-cost sales, so that a gas station is 
required to charge a minimum amount above its wholesale gasoline 
price.\52\ These laws harm consumers by depriving them of the lower 
prices that more efficient (e.g., high-volume) stations can charge.
---------------------------------------------------------------------------
    \50\ See, e.g., Oregon Rev. Stat., ch. 480, Sec. 480.315.
    \51\ See Michael G. Vita, Regulatory Restrictions on Vertical 
Integration and Control: The Competitive Impact of Gasoline Divorcement 
Policies, 18 J. Reg. Econ. 217 (2000); see also Ronald N. Johnson & 
Charles J. Romeo, The Impact of Self-Service Bans in the Retail 
Gasoline Market, 82 Rev. Econ. & Stat. 625 (2000); Donald Vandegrift & 
Joseph A. Bisti, The Economic Effect of New Jersey's Self-Service 
Operations Ban on Retail Gasoline Markets, 24 J. Consumer Pol'y 63 
(2001).
    \52\ See Gasoline Price Changes, supra note 6, at 113.
---------------------------------------------------------------------------
    One of the biggest changes in the retail sale of gasoline in the 
past three decades has been the development of such new formats as 
convenience stores and high-volume operations. These new formats appear 
to lower retail gasoline prices. The number of traditional gasoline-
pump-and-repair-bay outlets has dwindled for a number of years, as 
brand-name gasoline retailers have moved toward a convenience store 
format. Independent gasoline/convenience stores--such as RaceTrac, 
Sheetz, QuikTrip, and Wawa--typically feature large convenience stores 
with multiple fuel islands and multi-product dispensers. They are 
sometimes called ``pumpers'' because of their large-volume fuel sales. 
By 1999, the latest year for which comparable data are available, 
brand-name and independent convenience store and pumper stations 
accounted for almost 67 percent of the volume of U.S. retail gasoline 
sales.\53\
---------------------------------------------------------------------------
    \53\ Petroleum Merger Report, supra note 5, at 246 tbl.9-5.
---------------------------------------------------------------------------
    Another change to the retail gasoline market that appears to have 
helped keep gasoline prices lower is the entry of hypermarkets. 
Hypermarkets are large retailers of general merchandise and grocery 
items, such as Wal-Mart and Safeway, that have begun to sell gasoline. 
Hypermarket sites typically sell even larger volumes of gasoline than 
pumper stations--sometimes four to eight times larger.\54\ 
Hypermarkets' substantial economies of scale generally enable them to 
sell significantly greater volumes of gasoline at lower prices.
---------------------------------------------------------------------------
    \54\ Id. at 239.
---------------------------------------------------------------------------
    This list of factors that have an impact on retail gasoline prices 
is not exhaustive, but it shows that prices are set by a complex array 
of market and regulatory forces working throughout the economy. In the 
long run, these forces have combined to produce relatively stable real 
prices in the face of consistently growing demand. Short-run 
variations, while sometimes painful to consumers, are unavoidable in an 
industry that depends on the demand and supply decisions of literally 
billions of people.

                             V. CONCLUSION

    The Federal Trade Commission has an aggressive program to enforce 
the antitrust laws in the petroleum industry. The Commission has taken 
action whenever a merger or nonmerger conduct has violated the law and 
threatened the welfare of consumers or competition in the industry. The 
Commssion continues to search for appropriate targets of antitrust law 
enforcement, to monitor retail and wholesale gasoline and diesel prices 
closely, and to study this industry in detail.
    Thank you for this opportunity to present the FTC's views on this 
important topic. I would be glad to answer any questions that the 
Committee may have.

    Chairman Domenici. Thank you very much, ma'am.
    We are going to now proceed with questions and we are going 
to do it a little differently. Senator Craig, you are going to 
take my place and go first on our side, followed by Senator 
Bingaman, and then Senator Stevens will take over on his side.
    Senator Craig.
    Senator Craig. Mr. Chairman, thank you very much.
    I guess my question is first to the three attorneys 
general. Under the laws that you have within your States today, 
have you ever found and have been successful in prosecuting 
price-gouging?
    Mr. Harvey. We have not, at least during my tenure we have 
not. Have we ever? I am not sure we can cite any reported cases 
that show that we have. One of the limitations of our price-
gouging statutes in New Jersey is that you must have a declared 
state of emergency in New Jersey.
    Senator Craig. Most States are like that.
    Mr. Harvey. Right. And you must have prices that exceed 
more than 10 percent of the price that was charged prior to the 
emergency. That has not been sufficiently documented in the 
past. So I am not aware of any suits being brought.
    Senator Craig. South Carolina?
    Mr. McMaster. No, Senator, I am not aware of any in South 
Carolina. We have had a few suits----
    Senator Craig. Turn your mike on, would you please.
    Mr. McMaster. I am sorry.
    We have had none in South Carolina that I am aware of under 
the price-gouging statute, which is a part of the Unfair Trade 
Practice Act. But we have had a number of cases under the 
Unfair Trade Practice Act, which is a civil mechanism that 
prohibits unfair and deceptive acts.
    Senator Craig. Successful?
    Mr. McMaster. Yes, sir, they have been successful.
    As I mentioned, there are two sides to it. One is the 
private side, where any individual can bring suit and receive 
treble damages and attorney's fees. In my State most of the 
times when anybody sues in any sort of a business type lawsuit, 
where there is a breach of contract or anything else, the 
Unfair Trade Practice Act is always included in there as one of 
the causes of action.
    But since I have been Attorney General, since January 2003, 
we have had one case of the Unfair Trade Practice Act. That was 
against a power company that had put an assessment, a city 
assessment for using the telephone poles, in the bills to the 
customers and some of the customers did not live in the city. 
So we brought a case against one and the others agreed to--they 
all agreed to pay some damages back to the people. So that law 
has worked well.
    But we have had no prosecutions or civil actions under 
price-gouging in my State.
    Senator Craig. Arizona?
    Mr. Goddard. Senator Craig, we have no price-gouging 
statute, so I cannot say that we have ever had a successful 
prosecution.
    Senator Craig. Do you want one?
    Mr. Goddard. Very definitely, I have been to the 
legislature at virtually every opportunity to urge passage of 
such a bill. Some of our colleagues who are not here, 
specifically Florida, have used their price-gouging statutes 
successfully against gougers when the hurricanes hit them.
    Mr. Harvey. Senator Craig, could I add something?
    Senator Craig. Yes.
    Mr. Harvey. Had there been a declared state of emergency in 
New Jersey, we could have used ours for this Katrina incident. 
Instead, we used the Motor Fuels Act and the Consumer Fraud Act 
provisions. There were suppliers, at least retailers, who had 
increased their prices as many as five times in a single day, 
which violated our Motor Fuels Act. Some of these prices would 
have exceeded the 10 percent statutory threshold. But we simply 
did not have a declared state of emergency in New Jersey.
    Mr. McMaster. Senator, if I could add to that, we made it 
very clear in public service announcements that the Unfair 
Trade Practice Act was available as a remedy and we would bring 
those investigations and suits vigorously. But that does not 
have the teeth and the deterrent effect that a criminal action 
has, and without a declared state of emergency we did not have 
that available.
    Senator Craig. Well, the reason I ask that question, I have 
a survey here that reflects 35 States that have these laws. 
None of them have been successful in finding gouging. A variety 
of things have happened--state of emergency declaration. I 
mean, there are the mechanics within the law that trigger the 
action, there is no question about it.
    I think the ultimate concern I have, or at least as we walk 
through this in trying to understand who is on first here or 
who should not be, is that it is a very complicated process to 
determine what is or is not fair in the market. So is it fair, 
because I watch this going on now, for a single retailer to 
have, let us say, ten locations in a metro market and have four 
different prices at those ten different locations? It is called 
zone pricing. Is that gouging or is that marketing?
    Does anyone wish to respond to that? And I have seen in the 
case of my major metro area in Idaho a difference of nearly 10 
cents in the same retailer, but in a different location where 
there is less competition and more traffic. Is that gouging or 
is that sound pricing?
    Chairman Stevens. That will be your last question, but the 
gentleman should answer.
    Senator Craig. Thank you.
    Mr. McMaster. I would say, depending on how the price is, 
that would probably be zone marketing. If the price is $2.40 
versus $2.50, maybe that is marketing. But if it is $5.20 or as 
opposed to $5.30, that might be gouging.
    Senator Craig. Is that not in the eye of the investigative 
beholder?
    Mr. McMaster. It is, and that is the difficulty with the 
law. In my State we have again a mathematical formula. You take 
the prior 30 days and compare that to what the current incident 
is and if it seems to be unconscionable to the prosecutor and 
in his or her discretion they think it deserves criminal 
prosecution, then you prosecute, assuming a state of emergency.
    Senator Craig. Mr. Harvey.
    Chairman Stevens. Senator, we are just going to have to 
move on.
    Senator Craig. Oh, I will. Thank you, gentlemen, ladies.
    Chairman Stevens. Senator Salazar.

                STATEMENT OF HON. KEN SALAZAR, 
                   U.S. SENATOR FROM COLORADO

    Senator Salazar. Thank you very much, Senator Stevens and 
Chairman Domenici and Senator Inouye, for holding this hearing.
    Thank you for the panelists who are here and my former 
colleagues from the National Associations of Attorneys General. 
The question I have for you is on price-gouging and the 
definition to be adopted. It seems to me that what we have is a 
tremendous amount of noise going on all over the country about 
price-gouging and whether or not it has occurred. Part of the 
problem we have is that we do not have a set definition of what 
price-gouging is.
    I know that our staffs put together a couple of 
alternatives on how you would define price-gouging, and let me 
read you two of them and I would like you to comment on how you 
would define it and whether you think that there is a 
definition that would make sense nationwide for price-gouging. 
One of them basically says retailers charging more than a 
defined percentage above the price charged immediately prior to 
the proclamation of a state emergency. A second alternative is 
retailers charging an unconscionably high price that is not 
attributable to increased wholesale price.
    So as between those two definitions of price-gouging, which 
one do you think would fit the best if in fact the Congress 
were to move forward and pass a national price-gouging statute, 
or do you have some other alternative that would give us a 
definition of what price-gouging is? Whoever wants to respond.
    Mr. Harvey. As between those two, the first would be more 
acceptable to me because it has more definition. I still do not 
think that either is sufficiently specific to give notice and 
protection to consumers as well as businesses. I would suggest 
taking a look at the laws we have in New Jersey. For example, 
we apply a 10 percent rule and we also include increased costs 
that may be attributable to the retailer. It is true that a 
business that faces increased costs, for example if a pipeline 
shuts down in one part of the country and that was the normal 
area of supply and you have to go to another part of the 
country, those costs should be built in, and then there maybe 
should be a 10 percent additional price increase allowed, and 
the window should be----
    Senator Salazar. You would do a numerical calculation, 
right, General Harvey?
    Mr. Harvey. I would.
    Senator Salazar. How about you, Mr. McMaster?
    Mr. McMaster. I like the second definition better. It is 
similar to the one in South Carolina. It uses the words 
``unconscionable.'' It is based on a different formula there. 
But I think that gives your prosecutor, your authorities, more 
flexibility and still gives plenty of notice to those who would 
violate the law.
    Mr. Goddard. Senator Salazar, I proposed a provision that 
really was sort of a blend between the two. We do not use the 
word ``unconscionable'' because it is subjective. I tried to 
use a numerical model--this is a prospective law, not one that 
was passed by a legislature, but I believe it combines the best 
of both of your proposals. It also took into account the 
defense of increased costs and I think that is critical. If a 
retailer has soaring costs to deal with, that is not gouging. 
But if, as we found to be the case in Arizona, they simply 
charged what the market would bear because people were lined up 
at the pumps and they had no choice as to where to go, I 
believe that is something that needs to be penalized.
    And this is not price control. We are only talking about 
emergency situations, where the normal supply and demand has 
broken down and where consumers are truly the victims of 
unconscionable actions.
    Senator Salazar. Chairman Majoras, if in fact it was 
limited to the emergency circumstances that General Goddard was 
just describing, would it still be your position as Chairman of 
the Commission to oppose that kind of a price-gouging 
definition?
    Ms. Majoras. Senator Salazar, I am actually worried that 
during a time of crisis it would make it worse, and here is 
why. Both of these definitions are looking at price only as 
connected to cost. What they are not taking into account is 
that price is also used to regulate supply in the marketplace. 
So if in fact in a place that is experiencing an emergency the 
gas stations that are going to run out of supply cannot raise 
the price, what is going to happen is two things. No. 1, they 
are going to have a shortage and run out of gas; and No. 2, 
supplies from elsewhere around the country where refiners and 
gas stations can get more money because they do not have the 
price cap placed on them are not going to immediately move 
supply into the area of emergency, which I submit is the first 
thing we want to happen when we have an emergency, is to get 
more gasoline into that area. That is what I am worried about.
    Senator Salazar. Thank you.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Salazar follows:

   Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado

    Chairman Stevens, Chairman Domenici, Senator Inouye, Senator 
Bingaman, I want to thank you all very much for holding this very 
important hearing.
    This morning, the Committee on Agriculture is holding a similar 
hearing. The Agriculture Committee is receiving testimony regarding the 
effects of high energy prices on family farms and ranches around the 
country. As I travel around Colorado, the concern expressed to me most 
often relates to increasing fuel prices and how those high prices are 
affecting our farmers, ranchers and rural communities. I expect that is 
true of my distinguished colleagues on these committees as well.
    High fuel prices are hurting Colorado families, farmers and 
ranchers. I know that during harvest time, no one is hurt by high gas 
and diesel prices more than farmers and ranchers.
    This is what I am hearing from my state.

   During harvest, agricultural producers are some of the 
        largest fuel consumers in the U.S. and producers are facing 
        enormous fuel costs. For example, in Grand Junction, Colorado, 
        diesel prices are still over $3.00.
   I have heard from a farmer in Brandon, Colorado who has seen 
        a 238 percent increase in diesel costs and a 71 percent 
        increase in gasoline costs since the summer of 2004. This 
        operation will burn 800 to 1,000 gallons of diesel per day 
        during the heavy farming season, and if fuel prices do not 
        moderate, this farmer will realize a doubling of fuel costs for 
        2006, equating to an additional $65,000 annually in expenses.
   I have also heard from another farmer in northeastern 
        Colorado who, in order to cover the increasing price of fuel, 
        has applied for additional loans only to be turned down because 
        he is already overextended with existing loans.

    These anecdotes are not unique to Colorado. After five years of 
weather-related disasters such as droughts, hurricanes or fires, these 
higher input costs are having a severe impact not only on producer's 
ability to harvest this year, but also in their ability to secure 
financing to operate next year. This is a crisis that is undermining 
the stability of farming operations in Colorado and across the 
country--this is a crisis, an emergency that must be addressed.
    In the long-term, we must address energy conservation, new 
technologies and a balanced development of existing fuel supplies. We 
must continue to expand opportunities in renewable energy. We must do 
right by America by investing in ethanol, biodiesel, wind and biomass. 
Ethanol, for example, is good for our land and water, good for our 
rural communities, and good for consumers. It not only provides a 
value-added product for producers, but also paves the way to energy 
freedom for our country.
    At the moment, most of our biofuels are ethanol, and most of that 
is derived from corn, but we must make these investments and transition 
into a more diverse set of feedstocks that will help our national 
security, our national economy and our producers by allowing our 
farmers from all over the country to grow crops that can be used to 
make transportation fuels. These diverse feedstocks will include 
potatoes, tobacco, sugar, wood waste and more. We must make these 
investments and fully implement and utilize important energy and 
conservation programs in the farm bill and energy bill to do so.
    Such energy efficiency and renewable energy development is 
something that producers across the country agree on. These investments 
will allow them to begin to tackle the alarming increases in energy 
prices and will be a far cheaper form of energy, especially for their 
individual operations.
    At the same time we face this emergency of rising input costs on 
farms, ranches and rural communities across this country, Congress has 
cut $3 billion in agricultural spending. This is $3 billion cut that 
will contribute to the decline of the safety-net for these operations--
we are not doing everything we can on behalf of those farmers, ranches 
and agribusinesses.
    It seems to me that we are failing rural America. It seems to me 
that we must address this emergency from two sides. We must address 
this crisis in the long-term--by developing our renewable technologies, 
fully implementing the recently passed energy bill and working to 
expand the conservation and energy titles in the farm bill. But we also 
are facing a short-term problem. Our producers are seeing increasing 
input costs, which are not covered by production.
    For example, according to statistics from Colorado State University 
(CSU), for a wheat farmer in Colorado it would take a 40 bushel average 
yield per acre and an average price of $4.00 per bushel to cover all 
costs and break even. However, the average yield in 2005, for example, 
was 24 bushels per acre and the average price is projected at $3.34 per 
bushel.
    I hope that the oil company executives who will testify here today 
realize the real world implications of these high prices--American 
farms are in real trouble. I also hope they understand why the 
increases in profits to the tune of billions of dollars that are being 
reporting are perceived by many Americans as a slap in the face to 
those in danger of losing their family farm or ranch.

    Chairman Stevens. Thank you very much.
    I am going to yield my time to Senator Snowe. Senator 
Inouye yields his time to Senator Pryor. Because you waited so 
long last time, we are looking at the last first this time. 
Senator Snowe.
    Senator Snowe. Thank you, Mr. Chairman.
    One of the questions I want to address is how do we 
determine price-gouging.
    Ms. Majoras. Me?
    Senator Snowe. Yes. I would like to ask, because I gather 
you do not think we ought to grant the Federal Trade Commission 
authority to combat price gouging.
    Ms. Majoras. I worry that it would make things worse for 
consumers in the long run. Currently, the Federal Trade 
Commission, which does not have authority to attack price 
gouging, does not therefore have a definition of it. 
Nonetheless, in this debate we have struggled about what would 
define it, and there are some great difficulties in doing that.
    Senator Snowe. This gets back to the original question 
about gas pricing that occurred this fall. The first panel this 
morning, chief executive officers of the major oil companies, 
gave a variety of explanations as to why they were experiencing 
record profits and record revenues, not only record-breaking 
for their industry but record-breaking for corporate America.
    How do we make the distinction between fair and unfair 
profits? We do not have a Federal price gouging law, but are 
there other ways of being able to go after companies who charge 
unjust prices? Because as I said this morning, oil is not a run 
of the mill commodity; it is a basic necessity. People are 
forgoing food, prescription drugs, and making mortgage or rent 
payments, according to many surveys.
    One recent survey, based on a project that was done over 
the last 3 or 4 years, said one in five households went a day 
forgoing necessities in order to pay for fuel prices. This is a 
major issue, as we face the onset of winter. I wonder, how do 
we go about making the distinction as to what is the normal 
price increase and as to what is a situation in which oil 
companies are exploiting vulnerable people, such as the 
emergency situation we were in in the fall?
    Ms. Majoras. Well, Senator Snowe, if there is 
anticompetitive behavior going on between and among these 
gasoline companies, we will find that and we will prosecute. 
Currently, the FTC is undertaking an investigation to see 
whether market manipulation at all is going on in this industry 
and to see whether there has been some form of gouging. It is a 
major investigation. We have sent out dozens of subpoenas in 
the industry and we will expect to report to Congress on it 
next spring. We can give reports along the way.
    But once we conduct that, I hope to have better answers for 
you, Senator Snowe, in terms of on a going-forward basis what 
do we need to do, because, as I said in my opening remarks, we 
are vulnerable to these types of price spikes. As long as we 
accept the tight refining capacity and the dependence that we 
have on foreign oil, we are going to be in for a tough road. So 
we do need to find some solutions.
    Senator Snowe. Even if we did not have a Federal price-
gouging law, would the FTC, in its ongoing investigation and 
study, acknowledge price-gouging if it is found?
    Ms. Majoras. Well, what we are going to try to do--and 
again, it is not defined, so we are working on how we would----
    Senator Snowe. You know the essence of it. I do not think 
it is a secret about how to define price-gouging. Price-gouging 
is defined in State laws in various ways, but pretty much all 
definitions are the same.
    Ms. Majoras. Essentially, yes, although I do not 
necessarily agree with everyone, how they would define it, 
because I think they do not take into account some actually 
very rational price behavior that would be good for consumers. 
But yes, of course, Senator, we are trying to work with what we 
know you want us to do. While that does not mean we would 
prosecute it, when we come back to you and tell you what we 
have found in the study, we will lay it out for you and we will 
say, this is what we have found that these companies and these 
retail stations did when they raised price during this time.
    Senator Snowe. Do you investigate speculation in the 
commodities market at all?
    Ms. Majoras. We do not. That falls within the jurisdiction 
of the CFTC.
    Senator Snowe. Thank you, Mr. Chairman.
    Chairman Stevens. Thank you very much.
    Senator Pryor.
    Senator Pryor. Thank you, Mr. Chairman.
    I want to welcome these three attorneys general here. 
Senator Salazar and Senator Bingaman and I used to serve in 
that office in our home States. We welcome you to the Senate 
today.
    Let me just give you very briefly my philosophy and my 
approach on this. Consumer protection issues generally, I 
think, if the law is structured the right way and the attorney 
general does his job or her job in their home State, can really 
help to clean up the marketplace and really make that State a 
very good place for business to occur. Likewise, with regard to 
antitrust laws--and by the way, Arkansas does have an antitrust 
law. It also has a separate price-gouging statute, which are 
different. I think those type laws, if drafted properly, can be 
very effective in making sure that the marketplace in your 
jurisdiction stays free.
    We want free markets and we want robust competition, but we 
need to make sure that the laws of supply and demand are 
working appropriately. So actually, I think consumer protection 
laws, price-gouging laws, antitrust laws, can all be very good 
for business in this country and in your various States.
    Also, to Senator Craig's question a few moments ago. After 
9/11; when I was the attorney general in my State; we did find 
price-gouging in our State under our price-gouging law. Our law 
is not limited just to gasoline. It also has a number of other 
emergency-type products in there. So again, I think this was 
very good in settling the market down; and the threat, the 
deterrent, that the attorney general can offer again can be 
very good for the State; very good for consumers.
    So let me ask our attorneys general just a few very quick 
questions, especially General Harvey and General McMaster. Have 
you found it difficult in your States to enforce price-gouging 
fairly? Has fairness been an issue in your States?
    Mr. Harvey. It has not been an issue for us in New Jersey. 
We have had very few--we have approached excessive pricing 
through the Consumer Fraud Act, not really through the price-
gouging aspect of the Consumer Fraud Act.
    Senator Pryor. I understand.
    Mr. Harvey. But fairness has not really been an issue.
    Senator Pryor. What about you, General McMaster?
    Mr. McMaster. Fairness on whose part? On the prosecutor's 
part or on the----
    Senator Pryor. I think on the prosecutor, on the State's 
part. Has that been a problem, that the law has not been 
applied fairly?
    Mr. McMaster. No, sir. It has not been applied much. There 
have been a lot, several private actions and a few State 
actions since I have been in office since 2003, but it has not 
been used much by the government.
    Senator Pryor. Do you two think that a price-gouging 
legislation in your States, does your consumers more harm?
    Mr. Harvey. No, I think it does more good than harm, and I 
think if there is a Federal price-gouging statute you may want 
to consider giving concurrent jurisdiction to the States, the 
State attorneys general, to enforce it along with the Federal 
Government.
    Senator Pryor. I agree with that.
    Mr. McMaster?
    Mr. McMaster. I think ours has done much more good than 
harm. I do not know that it has done any harm. Our problem is 
it is not strong enough. We only have the criminal sanctions 
when there has been a declaration of an emergency.
    Senator Pryor. Right, I understand.
    Do you believe that price-gouging statutes are 
counterproductive to the consumer's best interests and they 
actually in effect hurt consumers?
    Mr. Harvey. No.
    Mr. McMaster. Not on the State level. I do not know about 
on the Federal level because I do not know of a proper 
definition that would apply fairly and evenly nationwide.
    Senator Pryor. Have you, either of you, experienced long 
lines at the gas pumps or gas shortages in your States because 
you have price-gouging statutes?
    Mr. Harvey. No, and even when we brought our three lawsuits 
against Sunoco, Amerada Hess, and Motiva Shell and certain 
independent operators, there were no lines. In fact, what we 
saw is prices began to decrease.
    Senator Pryor. Lastly, Chairwoman Majoras, I want to be 
clear on something. The opinions you expressed today, are these 
the unanimous view of the FTC?
    Ms. Majoras. The written remarks most certainly are, and 
certainly parts of my oral I took from the written, so yes.
    Senator Pryor. It is unanimous with the FTC?
    Ms. Majoras. There was one of our Commissioners who was not 
in town and abstained. But the three of us who remained, yes.
    Senator Pryor. Thank you.
    Chairman Stevens. Thank you very much, Senator.
    Now we will turn to the other side here. Senator Bingaman 
and then Senator Wyden, recognized for 5 minutes.
    Senator Bingaman. Thank you very much.
    Ms. Majoras, let me ask about this section 1809 price-
gouging study that was in the energy bill. The way I read that 
legislation, which the President signed in August, it directs 
that the FTC conduct an investigation of price-gouging, and 
report back to Congress within 90 days of enactment. You have 
said that you are planning to report back next spring. How did 
you conclude that we did not mean 90 days when we said 90 days?
    Ms. Majoras. Well, we received a letter from several 
Senators who had put that provision in, telling us that they 
meant we could begin it within 90 days. We have had several 
discussions with members of staff from various members. The 
fact of the matter is we can give you a report within 90 days. 
It will not be worth much, I am afraid, Senator, if you really 
want us to look at whether there has been market manipulation 
and whether there has been price gouging on a widespread scale. 
So we have had several discussions with members about this 
issue.
    Senator Bingaman. Well, just for the record, I was not one 
of them, Mr. Chairman. I felt that we meant 90 days when we 
said 90 days. I think the problem with waiting until next 
spring is that many of these issues may have subsided and gone 
off the national agenda to some extent. So I do not know how 
timely your report will be once we finally see it.
    I am somewhat troubled by the testimony that the Commission 
has provided here. I have always thought the Federal Trade 
Commission's job was to be the advocate for the consumer at the 
Federal level and it seems as though the gist of your testimony 
is that the consumer is better off the higher the price is, 
that somehow or other that inures to the benefit of the 
consumer because it increases supply and it has a variety of 
virtues which, I mean, I guess are arguable.
    It does not strike me that enacting price-gouging 
legislation at the Federal level, if it is properly enforced, 
could harm the consumer. It is not controlling prices. You 
imply that this is a way of controlling prices. Did I 
understand your testimony correctly?
    Ms. Majoras. Well, sure, partly it is a way. It puts a cap 
on prices at a particular time.
    Senator Bingaman. It puts a cap on unconscionable prices, 
but any price that can be justified by virtue of cost or the 
increase in the price of the commodity or the market price, 
that is clearly not covered by price-gouging legislation as I 
understand it.
    Ms. Majoras. Senator, let me first make absolutely clear 
that, yes, without question the FTC is advocating for the 
consumer, and that is why I am sitting here saying something 
that is difficult to say. If on a widespread scale we do not 
allow retailers to price to control for shortages, in other 
words if we only look at their cost, their historic cost, and 
we do not allow them to look at the fact that they are about to 
run out of gasoline, then we will have shortages. We have seen 
it happen in the past. So that is what I am worried about. The 
last thing in the world our consumers need during an emergency 
is to not have access to any gasoline whatsoever.
    The problem, sir, is, that if we could be perfect in our 
enforcement, we could zero in just on the guys who are truly 
unconscionably taking advantage of our citizens. But the 
problem is that every statute you pass and enforce, not just a 
few cases here and there, but seriously enforce, will provide 
incentives. And if I am an honest retailer who really wants to 
do the right thing, I am going to be so afraid to raise my 
price, even when I feel like I need to, to prevent a shortage, 
because, for heaven's sakes, I might have to go to jail for it. 
So that is what I am talking about.
    Senator Bingaman. Well, let me just say, Mr. Chairman, I 
think the argument that we should not have tough anti-gouging 
legislation on the books because it might discourage lawful 
price increases, I just think that is a specious argument. The 
truth is prosecutors, these attorneys general sitting at the 
table with you, every day of the week make decisions as to who 
to prosecute and who not to prosecute based on who they think 
is out to take advantage of the situation, and that can be done 
at the Federal level. It has been done at the Federal level in 
other areas.
    The argument that this is difficult to enforce and there 
are a lot of subjective issues and therefore we do not want to 
put this kind of a statute on the books just strikes me as 
unfounded. So we have a basic disagreement about this issue.
    Thank you, Mr. Chairman.
    Chairman Stevens. Senator Wyden, you are recognized for 5 
minutes.
    Senator Wyden. Mr. Chairman, I think we just have heard 
from Ms. Majoras an astounding theory of consumer protection. 
What you have told us, Ms. Majoras, is essentially there are no 
prices that are ever too high, because somehow if the 
Government does anything ever under any circumstance that is 
going to create the shortage and the like.
    Ms. Majoras. No, that is not what I said, Senator.
    Senator Wyden. Well then, why do you not tell me what you 
think is an appropriate government role here? That is what all 
of us are asking. What we know now is 28 States have laws on 
the books. The gentlemen sitting next to you say that they can 
do it. So for the life of me I cannot figure out why somebody 
who is working constructively cannot work this out in a 
bipartisan way so that we can have a tool that can be truly 
useful in the marketplace.
    You and I have been at this for almost 2 years now and you 
always have an excuse for why the Government should not act. We 
still have not gotten a response to what the Government 
Accountability Office said on mergers.* Of course there are 
reasons why gasoline prices are going up--the demand in China 
and the mischief of OPEC. There are plenty of reasons. But the 
Government Accountability Office said that the FTC is a 
significant factor in why people are getting clobbered on the 
west coast of the United States, and to this day you have not 
responded to it.
---------------------------------------------------------------------------
    * See appendix I for response.
---------------------------------------------------------------------------
    So why do we not just stick to the issue before us today 
and tell me why it is so difficult for the Federal Trade 
Commission to work out an arrangement so that the Federal 
Government can stand up for consumers the way 28 States do, the 
way these attorneys general do? Why can we not figure out a way 
to get that done?
    Ms. Majoras. Well, we can, and I am trying to be 
constructive, Senator. I am sitting here and I am telling you 
what we think and what these fine folks behind me who devote 
their lives to working on these markets think about this issue.
    If we pass price-gouging legislation, sir, that only looks 
at cost as the only element that goes into price during a time 
of shortage and we enforce that on a wide scale, I submit to 
you that we will be back here because we will be experiencing 
shortages that are worse for our consumers. That is what I am 
trying to tell you. The proposals really only take into account 
price.
    Senator Wyden. Are there any significant gaps right now in 
the agency's ability to protect consumers?
    Ms. Majoras. In this industry?
    Senator Wyden. Yes.
    Ms. Majoras. No.
    Senator Wyden. Well, that is contrary to even what FTC 
people have told us. I have sat in hearings where the FTC has 
said that the agency cannot do anything about a company that 
gouges unilaterally. I think that is a significant gap, do you 
not?
    Ms. Majoras. No, I do not think it is a significant gap. I 
do not. As we have said, we have States who can take care of 
this. These are local issues. States are in a much better place 
to respond very quickly to local market conditions. And the 
fact of the matter is what we saw in the alleged gouging 
instances--and we have been watching them and we have been 
looking at them as closely as we can--is that the price came 
down almost as quickly as it went up.
    Senator Wyden. You think when a multinational oil company 
gouges the American consumer and they have stations all over 
that that is not a national--that is not a matter of national 
concern? That is just a local concern?
    Ms. Majoras. First of all, 80 percent of the stations are 
independently owned and operated. So that is what you are 
talking about.
    Senator Wyden. Just respond to my question. We have got 
multinational companies. You have said when they raise prices 
unilaterally that ought to be a local concern. So you do not 
think there is anything the Federal Government ought to do 
about unilateral action by an oil company, no matter how much 
they raise the prices?
    Ms. Majoras. Well, today there is no--today we allow 
companies to raise the price as they see fit and allow 
competition in the marketplace to bring that price back down.
    Senator Wyden. And you have said that that should not 
change. You have said that there are no significant gaps in the 
agency's authority. I think that contradicts what folks from 
the Federal Trade Commission have said.
    Let me just ask one last question. This morning the 
ExxonMobil CEO testified that when the ExxonMobil deal was 
under review the, quote, ``FTC was not interested in ExxonMobil 
expanding its refinery capacity.'' Now, that was the largest 
oil merger in history. Should not the FTC consider the impact 
on refining capacity, including expansion, of an oil mega-
merger?
    Ms. Majoras. No, no, you misinterpreted what he said. We--
--
    Senator Wyden. Those were his exact words, Ms. Majoras.
    Ms. Majoras. Well, he did not like it because we required 
him to do a divestiture. In order to do the ExxonMobil merger, 
we said, you cannot own both of these refineries. We need to 
protect competition for consumers in the refinery market, so 
you have to sell one. And they sold it to Valero. That is what 
happened in that merger, Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Chairman Stevens. Ms. Majoras, two Senators have requested 
that you provide each of the committees the names of the 
Senators who agreed that that report should be delayed. Would 
you do that for us, please?
    Ms. Majoras. Absolutely.
    Chairman Stevens. Senator Cantwell, I am going to yield to 
you and then I will be the closing Senator.
    Senator Cantwell. Thank you, Mr. Chairman.
    Attorney General Goddard, in your testimony you talked 
about the importance of the fact that the entire oil industry 
moved to ``just in time'' delivery system, which vastly, as you 
say in your report, quote, ``vastly reduces the numbers of 
refineries, minimizes inventories and storage tanks.'' Do you 
want to elaborate on that?
    Mr. Goddard. Senator, I would be happy to. What we found in 
our research and in our investigations is that ``just in 
time,'' may reduce industry costs, but makes the consumer 
hypervulnerable to any supply interruption, any time that there 
is maintenance on a refinery, because they run refineries at 96 
percent or higher of capacity. During a pipeline break such as 
we suffered in Arizona, there was no extra tank farm storage 
capacity to pick up the slack in the 2 weeks that the pipeline 
was down. There were no other alternatives out there in the 
market.
    What I think we are looking at is a structural situation in 
the industry, which has been able to cut all the items that 
might provide some redundancy in the market, they have taken 
them away. Gas is the only industry that I know of where bad 
news is good news. When they have a reverse of any kind, prices 
spike. When prices spike, profits in the last two major 
disruptions, triple.
    I would like to respond to something that the chairwoman 
just said, because it is all well and good to respond to 
shortages with increased prices. That is an important factor. 
But we have seen most of the profits on the downhill side when 
supplies are adequate. Prices never come down as fast as they 
go up. In fact, ``up like a rocket, down like a feather,'' is 
the rule.
    Senator Cantwell. But is not the net result of switching 
over to ``just in time'' inventories that we have gone from oil 
companies having something like 26 or 30 days of oil reserves 
to ``just in time'' inventory, only leaving them maybe with a 
couple of days of inventory?
    Mr. Goddard. Senator, that is the situation in Arizona. I 
cannot speak for others, but we have essentially a couple of 
days of inventory, if that.
    Senator Cantwell. So we all know when you only have a 
little bit of supply, of course the price goes up, right?
    Mr. Goddard. As soon as there is any disruption or 
potential disruption in the market, a price spike ensues 
immediately.
    Senator Cantwell. So this morning I asked the oil company 
executives about exports for that very reason and to provide 
this committee with information about whether they had exported 
prior to Katrina supply, whether they had ever diverted, 
purchased and then diverted supply coming to the United States, 
and whether they would supply us with information about the 
paper trading exchange in the off-exchange that they do related 
to the spot market.
    Do you think that information will be helpful in trying to 
pinpoint this particular issue about potential manipulation of 
supply?
    Mr. Goddard. Senator, I certainly do. As a consumer in 
Arizona, if at the time that we were having emergency 
situations some of our suppliers were diverting their supply 
overseas, I would feel doubly betrayed.
    Senator Cantwell. Do you think that you had access to this 
information in your investigations before?
    Mr. Goddard. Senator, we have not had access to any 
information outside of the geographical limits of our State. 
One of the problems we have with petroleum industry numbers is 
the transparency is hazy at best. The reason I was reluctant to 
answer Senator Domenici's question about profits is that under 
our civil investigative demands, we must keep the information 
we get confidential. So it is very difficult to have a clear 
analysis using just the resources that I have in Arizona of the 
industry and its practices. We certainly cannot investigate 
beyond the borders of our State.
    Senator Cantwell. So certainly you would like access to 
that information, even if it was in your own State, correct?
    Mr. Goddard. Absolutely, Senator.
    Senator Cantwell. Well, hopefully we will have the oil 
company executives respond, as they said in the committee 
hearing this morning, and actually provide that information. So 
maybe we can draw the line between what has happened with 
exports and potential of supply.
    I think this is a critical part of why you need Federal 
legislation to make sure that supply is not manipulated and 
that there is transparency in the market. That is exactly what 
we found out with electricity, that we did not have as much 
transparency as we thought we had.
    If I could make a point about one of the Federal bills that 
we are looking at S. 1735, which 25 of my colleagues have 
signed onto, does give the attorneys general additional 
authority in section 5 and it preserves in section 7 their 
existing authorities.
    So I would love to hear further comments at another time on 
that legislation.
    Thank you, Mr. Chairman.
    Chairman Stevens. Thank you very much.
    I am sure you cannot see this from where you are, but this 
is the Energy Information Administration's gasoline pipelines 
of the country. As a westerner, I am interested in the fact 
that Washington State has one; a touch comes up from Utah 
through Idaho and over into Wyoming; California has two, maybe 
three, pipes for gasoline. But the Eastern side of the country 
has enormous capacity for gasoline pipelines. The Western 
United States has very little.
    It does seem to me that the supply concepts of the FTC are 
reasonable concepts to consider, but I also think that the 
attorneys general have had something to say. You have an 
attorneys general association, do you not?
    Mr. Goddard. Yes, sir.
    Chairman Stevens. Have you all discussed this question of 
the adequacy of State laws in price-gouging circumstances at 
that association?
    Mr. Harvey. For about 2 years, Senator, we have been 
looking, in large part raised by Attorney General Charlie Crist 
in Florida and Attorney General Bill Lockyear in California, 
among others, of course Attorney General Goddard as well. We 
have been looking at this issue of price-gouging and gasoline 
pricing for at least 2 years.
    We always seem to face in all of our States price increases 
that attend certain times of the year, that do not seem to have 
any supply or market justification. They just appear and then 
disappear.
    Chairman Stevens. I am an old prosecutor. I do not really 
like the sound of your law, Mr. Attorney General, that says the 
Governor has to trigger it. I believe with what Attorney 
General McMaster said. I believe that a little bit of law 
enforcement and winning one case and advertising it means a lot 
in terms of law enforcement.
    I would like to suggest that perhaps your association could 
get together and give us the portion of a bill we might 
consider. We are going to have to consider these bills some 
time. I do not think we will get them done before this session 
is over, but we are going to consider them. It does seem to me 
that the States ought to take on the role of dealing with local 
concerns and particularly the independent refiners. 80 percent 
of these people are independent gas station owners. These that 
are within one State, the States ought to have a law that takes 
care of them and provides the adequate needs for publicity that 
violators will be prosecuted.
    I disagree with you to a certain extent, Ms. Majoras. I do 
believe that we need a Federal statute that has a criminal 
penalty. We have to look at it in terms of what the standard 
would be for that penalty.
    I do want to ask the attorney generals this. I have said 
this before before this committee. I come from a background of 
having worked in a little gas station back in the 1930s, and 
that is a long time ago. But still, when the price went up the 
person I worked for had to raise the price in order to buy the 
next load of gas. Now, that is the replacement theory that you 
seem to sort of disapprove. Am I wrong, Mr. Harvey?
    Mr. Harvey. No, no, sir, you are not. Senator, what we 
found in New Jersey, and one of the reasons that we brought the 
suits that we brought, is that prices were being charged based 
upon oil, based upon gas that was already in the ground. It had 
been bought 2 days before, 3 days before, 4 days before. There 
was no supply issue. So customers were being charged price 
increases----
    Chairman Stevens. Well, but that is my point. When they 
sell that, how are they going to buy the next gas to replace 
what is in that tank unless they raise the price?
    Mr. Harvey. We would argue that, whatever price-gouging 
statute that is formulated here, that it reach also beyond the 
retailers to the suppliers and the refineries. I do not think 
it should be limited to retailers because I agree with you 
that----
    Chairman Stevens. But these prices went up primarily 
because of overseas pricing.
    Mr. Harvey. Not necessarily. We did not experience that in 
New Jersey. What we saw was not a gasoline shortage. We just 
saw multiple price increases. And we did not see a supply 
shortage.
    Chairman Stevens. Well, we have been reading for months 
about the increasing shortage of crude oil worldwide and that 
it is going to get worse. As a matter of fact, I have seen 
charts that indicate we ought to be expecting increases now 
through the years ahead as China and India and other countries 
start consuming more and more crude oil, unless we find some 
additional supply somewhere.
    Mr. Harvey. I have no doubt about that, but we are talking 
about the narrow period in the days following Hurricane 
Katrina, when there was sufficient supply in New Jersey. There 
were in some instances five price increases in a single day, 
and it went on for multiple days. After we filed suit----
    Chairman Stevens. Were these independent stations?
    Mr. Harvey. Some were. Amerada Hess, however, is a refinery 
and owner that owns many of its own stations.
    Chairman Stevens. It is still pretty much of an independent 
in the world scene.
    Mr. Harvey. That is true. But you did have some company-
owned stores, which is why we sued both the company and as well 
as some independents.
    Chairman Stevens. Well, I am belaboring it and I do think 
we have to get back--this report, when do you think we are 
going to get it from the FTC, Ms. Majoras?
    Ms. Majoras. If we do it right, Senator, we will get it 
done in the spring. As I said, we have sent out dozens of 
subpoenas to lots of different companies so we can try to do 
this overall and get it right.
    We have offered and we are happy to provide any of our 
initial findings along the way. But as you can imagine, a 30-
day study is not worth as much as a 6-month study in terms of 
our work. So that is the situation we are facing.
    Senator Wyden. Mr. Chairman.
    Chairman Stevens. Yes. I am trying to listen to three 
people at one time. Yes, sir, Senator.
    Senator Wyden. I would like to be able to submit some 
questions for Ms. Majoras in writing. I think she distorted 
what Mr. Raymond said and what I asked about. He was talking 
about the refinery they kept, and I would like to submit some 
questions to her in writing.
    Chairman Stevens. That is fine as long as we are still 
going to abide by the same concept as this morning. Questions 
must be submitted by tomorrow noon.
    Senator Wyden. Absolutely.
    Chairman Stevens. And we will submit them through the two 
committees.
    Ms. Majoras. If I may, Mr. Chairman, because I have just 
been accused of distortion. I will obviously respond to it, and 
if I misunderstood Senator Wyden's question then I will answer 
it. But I was responding to what I thought he said this 
morning, and I do not appreciate accusations of distortion.
    Thank you, Mr. Chairman.
    Chairman Stevens. We do thank you all. I want to come down 
and thank you personally for coming. But I think we will just 
sort of stand at ease for a minute. Senator Domenici said he 
wished to come back after the vote. As a matter of fact, we are 
in the middle of four votes that run through. For all intents 
and purposes, unless you want to wait for 2 hours, this hearing 
is over. Thank you.
    [Whereupon, at 3:31 p.m., the hearing was adjourned.]

                            A P P E N D I X

  Prepared Statement of Hon. Daniel K. Akaka, U.S. Senator From Hawaii

    Chairman Domenici and Chairman Stevens, thank you for holding this 
timely hearing on energy prices and profits. There is nothing closer to 
the hearts of Americans than gasoline prices, and consumers in Hawaii 
know a lot about high gasoline prices. Our state has had the highest 
average gasoline prices in the nation for over 20 years. Today the 
national average is $2.36 per gallon for regular; and in Hawaii it is 
$2.82. For premium, the national average is $2.60 per gallon; and in 
Hawaii, it is $3.04. To make matters worse, on the islands other than 
Oahu, the price is even higher.
    Hawaii's energy situation is unique for several reasons, not the 
least of which is the state's almost complete dependence on petroleum 
for its transportation energy sector but also for its electricity 
sector. Hawaii depends on imports to meet almost all its energy needs. 
This dependency, combined with other factors--such as the costs of 
transporting refined products interisland, high real estate prices and 
a number of regulations specific to Hawaii--means that gasoline prices 
in the state are the most expensive in the nation. Although accusations 
of collusion and market control have remained unproven in the courts, 
many in the state remain suspicious that the market is ``broken,'' that 
there is collusion, and that the high profits of oil companies today 
are unfair and prove that something is ``wrong.''
    Hawaii's energy markets are an integrated system. Policies that 
affect gasoline also affect other products as well, such as syngas or 
propane, and the refineries that process crude oil into jet fuel, and 
other residual energy sources. It is for this reason that the policies 
surrounding oil markets--and gasoline prices in particular--are so 
important.
    I know that many on this panel have questions about the large 
profits that are being reported and about possible legislation. I look 
forward to the testimony of the distinguished witnesses today and I 
have questions that I would like to ask the witnesses at the 
appropriate time.
                                 ______
                                 
 Prepared Statement of Hon. John D. Rockefeller IV, U.S. Senator From 
                             West Virginia

    I want to thank both Chairman Stevens and Chairman Domenici for 
arranging this hearing. West Virginians have been asking when Congress 
was going to do something about the high costs they've been paying at 
the pump, the devastating cost of natural gas for our manufacturing 
sector, and the likelihood that a cold winter will mean our seniors and 
others on fixed incomes will have to choose between food, medicine, and 
heating their homes.
    We know that there are no simple answers. I supported the Energy 
bill the President signed into law earlier this year, and I have 
recently joined the Ranking Member of the Energy Committee in asking 
Interior Secretary Norton to open some portions of the Gulf of Mexico 
that are closed to drilling. We know that this country has insufficient 
refining capacity, and that we tend to drive too much and in vehicles 
that are not as fuel efficient as they could be.
    West Virginians understand that the demand for both petroleum 
products and natural gas is high here, and exploding in Asia. What they 
may not understand--and what I surely do not understand--is how 
American oil companies can plead so many problems in carrying out their 
business and then turn around and make so much money in a few months 
that even some of my most distinguished, pro-business colleagues are 
calling on them to contribute to LIHEAP and to otherwise answer for 
their profits.
    My colleagues know, and undoubtedly our audience knows, that my 
name is Rockefeller, and they know who my great-grandfather was. If you 
think that makes me side with the oil companies, you haven't followed 
my career very closely. I am prepared, with no hesitation, to call the 
profits--profits that these companies are making off the backs of West 
Virginians--what they are, obscene. I'm not anti-capitalism, but I will 
always be anti-gouging.
    I look forward to hearing from our witnesses how what they're doing 
to my constituents isn't gouging, and I again want to thank the two 
chairmen for providing the nation with this opportunity to probe these 
companies' actions.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                       Hon. Deborah Platt Majoras

    Question 1. Thank you for your testimony and your work on the 
gasoline market analysis mandated by Section 1809 of the Energy Policy 
Act of 2005 (P.L. 109-58). With respect to the latter, and any 
additional investigations required by Congress (such as the Pryor/
Miladski amendment to H.R. 2862), I would appreciate any specific 
attention you can give to the State of Hawaii and its unique situation 
with a small market and small number of gasoline providers.
    In your 2003 testimony before the Hawaii State Legislature, 
testifying on the effects of the wholesale gasoline price cap, you 
suggested that the more consumer friendly way to reduce gasoline prices 
in Hawaii would be through policies that reduce costs and/or promote 
competition.
    For example, you suggested that you would expect the cost of 
imported gasoline to influence the price that marketers pay for 
gasoline in Hawaii. In other words, if we had more importers of refined 
product, it could help bring down the price of gasoline in Hawaii. So 
far; we have only one gasoline importer. Are there federal policies or 
actions that the FTC can identify that could help increase the number 
of gasoline importers and thus bring down the price of gasoline (both 
with and without the price cap law)?
    Answer. Imports of gasoline into Hawaii--or, more precisely, 
credible threats to import gasoline--play an important role in limiting 
the bulk supply price that the two Hawaii refiners (Chevron and Tesoro) 
can charge. This is so even though those two refineries (situated on 
Oahu) can produce enough gasoline to supply the entire state--and can 
do so more cheaply than an importer. (Indeed, there have been few 
recent gasoline imports into the state.) Nevertheless, a firm that can 
import a full cargo of gasoline can use that ability to negotiate a 
bulk supply contract with Chevron or Tesoro at a price no higher than 
``import parity,'' i.e., the cost of importing the cargo. Each firm 
capable of importing gasoline can achieve an import parity price 
(although that price may vary from firm to firm depending on each one's 
cost to import). As a general matter, competition at the wholesale and 
retail levels in Hawaii benefits from the presence of more bulk 
suppliers that can credibly threaten to import.
    In its recent law enforcement action against Aloha Petroleum's then 
proposed acquisition of Trustreet's petroleum interests in Hawaii, the 
FTC took steps to maintain competition at the bulk supply level by 
ensuring that at least two firms would remain capable of importing 
gasoline into Hawaii. Although Aloha has been the only regular importer 
of gasoline into the state in recent years, Trustreet also was able to 
import by virtue of its 50 percent interest in the Barber's Point 
terminal, which it shared with Aloha.\1\ The Commission's action was 
resolved when Aloha agreed to lease half the capacity of the Barber's 
Point terminal for 20 years to Mid Pac, a firm that markets gasoline in 
Hawaii under the ``Union 76'' brand name. With this 20-year throughput 
agreement, Mid Pac replaced the acquired Trustreet as a firm that can 
credibly threaten to import gasoline into Hawaii and thereby preserved 
competition allegedly threatened by the acquisition,
---------------------------------------------------------------------------
    \1\ Trustreet and Aloha jointly imported a cargo of gasoline in 
2002.
---------------------------------------------------------------------------
    To the extent that federal policies help reduce the cost of 
imports, they could improve the ability of firms to bargain with the 
Oahu refiners and thus could have some impact on bulk supply prices.\2\ 
One such policy initiative would be to relax the restrictions imposed 
by the Jones Act, which increases the costs of shipments to and from 
United States ports by requiring that they be made on U.S.-built, -
owned, and -flagged vessels. In addition, to the extent that federal or 
state laws or regulations increase the cost of owning and operating a 
marine storage terminal in Hawaii, relaxing those requirements could 
have some effect on bulk supply prices. It is important to recognize 
that any benefits that such statutory or regulatory requirements may 
provide come at a cost to an efficient gasoline market.

    \2\ The 2003 testimony before the Hawaii State Legislature to which 
the question refers was that of Jerry Ellig, then-Deputy Director of 
the FTC's Office of Policy Planning, entitled ``Competition and the 
Effects of Price Controls in Hawaii's Gasoline Market'' (Jan. 28, 
2003), available at http://www.ftc.gov/be/v030005.htm.
---------------------------------------------------------------------------
    Question 2. Some analysts have concluded that Hawaii's gasoline 
market is competitive, with certain inefficiencies; and that the 
inefficiencies (high costs and less than vigorous competition), occur 
between the wholesale and retail level. Can you please expand on how 
these inefficiencies (between the wholesale and retail level) occur and 
how they contribute to high gasoline prices in Hawaii? In addition, 
what recommendations would the FTC have with respect to solving the 
inefficiencies to create a more competitive market with respect to that 
sector?
    Answer. As a report prepared by Stillwater Associates noted, 
certain structural characteristics make Hawaii's wholesale gasoline 
market less efficient than its mainland counterparts.\3\ These 
characteristics--such as a limited number of bulk suppliers--are the 
result of Hawaii's position as a relatively small market that is 
distant from mainland gasoline markets. The state's size in terms of 
gasoline demand and its geographic position relative to other gasoline-
producing areas lead to certain diseconomies of scale in gasoline 
production and marine supply that cannot be changed.
---------------------------------------------------------------------------
    \3\ Stillwater Associates LLC, Study of Fuel Prices and Legislative 
Initiatives for the State of Hawaii (Aug. 5, 2003) (``Stillwater 
Report''), available at http://www.stillwaterassociates.com/
Presentations/Study of Fuel Prices for the State of Hawaii.pdf.
---------------------------------------------------------------------------
    Land in Hawaii is more expensive--and land ownership arrangements 
in the state are more complex--than in most areas of the United States, 
and this contributes to higher retail costs. Other inefficiencies are 
the result of laws and regulations that increase costs and distort 
investment decisions in Hawaii. These include ``anti-encroachment'' 
legislation that limits oil companies and jobbers from opening stations 
near dealer-operated stations; rent caps for lessee-dealer stations; 
and the state's wholesale price cap.\4\ The removal or reduction of 
these regulatory impediments to entry or expansion likely would make 
the wholesale and retail gasoline sectors in Hawaii more competitive. 
Nonetheless, they would not eliminate the underlying problem associated 
with a small, isolated market.\5\ In addition, taxes on retail gasoline 
sales in Hawaii are above the average figure for the United States as a 
whole.

    \4\ Federal Trade Commission, Gasoline Price Changes: The Dynamic 
of Supply, Demand, and Competition 110 (2005), available at http://
www.ftc.gov/reports/gasprices05/050705 gaspricesrpt.pdf
    \5\ The discussion in the text concerning regulatory impediments 
presents my views and should not be viewed as an official 
recommendation of the Commission.
---------------------------------------------------------------------------
    Question 3. In addition some islands, particularly Maui and West 
Hawaii, are affected by logistical bottlenecks that further impair 
competition and cost effectiveness. What are the anti-competitive 
forces with respect to market entry on those islands, and how could it 
be solved?
    Answer. The Neighbor Islands have a number of disadvantages 
relative to Oahu. First, those islands incur added transportation costs 
because they must obtain gasoline supplies from the refiners or marine 
terminal owners on Oahu. Second, there are fewer terminal owners on the 
Neighbor Islands than on Oahu, and it is uncertain whether these 
smaller markets will accommodate entry by additional terminals. Third, 
the small size of the market on the smaller Neighbor Islands cannot 
support the number of jobbers and retailers that exist on Oahu or the 
Big Island. In this vein, the Stillwater Report noted that Aloha does 
not do business on Maui, while both Aloha and Tesoro are absent from 
Kauai.\6\ Moreover, according to that report, prices are higher on Maui 
than on Kauai because Maui lacks unbranded gas stations.\7\ Fourth, the 
smaller size of the market on these islands also likely results in 
lower throughput per station, which would raise average costs and 
therefore increase prices.
---------------------------------------------------------------------------
    \6\ Stillwater Report, supra note 3, at 61.
    \7\ Id. Aloha supplies gasoline to Costco elsewhere in the state 
but does not own a terminal on Maui, and thus Costco does not sell 
gasoline on Maui. Extant terminal owners on Maui may be disinclined to 
make space available to Aloha so as to prevent low-priced competition 
from Costco. (It is almost never a violation of the antitrust laws for 
one firm to refuse to deal with another. So long as a firm makes the 
decision unilaterally, in its own business interests, it is not 
obligated to share its facilities with a potential competitor.)
---------------------------------------------------------------------------
    There is probably little that can be done to eliminate the costs 
associated with being situated on small Neighbor Islands distant from 
the refining center on Oahu, including entry impediments inherent in 
small markets where scale economies may be important. In addition, 
there are no indications of restrictions on terminal access that could 
be challenged under the antitrust laws.

    Question 4. Earlier this year I asked the FTC to investigate a 
price spike in diesel fuel in Oregon. At that time, it was attributed 
largely to a pipeline outage. However, diesel prices remain higher than 
gasoline prices in my state. I am asking you to initiate a new 
investigation as to why diesel prices remain so high in Oregon, and to 
report your findings to me by December.
    Answer. In response to requests from Senators Smith and Wyden and 
Representative Hooley, as well as in response to consumer complaints 
collected as part of the Commission's Gasoline and Diesel Price 
Monitoring project, the FTC staff examined diesel pricing in the 
Pacific Northwest during February and March 2005. As the question 
notes, a pipeline outage contributed to unusual diesel price increases 
in the region at that time. The following discussion provides more 
details regarding the higher-than-predicted diesel prices in the 
Pacific Northwest during the winter and spring of 2005. As I will 
subsequently explain, however, current prices for diesel fuel in 
Oregon--unlike the prices experienced in the Pacific Northwest last 
winter and spring--are not out of line with diesel pricing throughout 
the United States and the rest of the world.
    The pricing models that the FTC's economists use showed that retail 
diesel prices in Idaho, Montana, Oregon, Utah, and Washington rose 
above their predicted ranges in mid-February of 2005. Thus, beyond the 
increase in diesel prices that has occurred this year across the 
nation--much of which has stemmed from increases in the worldwide price 
of crude oil--additional factors affected diesel prices in these 
western states.
    In particular, several disruptions to supply in the Pacific 
Northwest appear to have exacerbated local prices there. Multiple 
refineries in Washington--a major source of supply to Oregon--
experienced planned and unplanned unit outages during the period, 
including facilities operated by Shell, Tesoro, and ConocoPhillips. For 
example, Tesoro reportedly idled most of its Anacortes, Washington, 
refinery for maintenance and repair purposes for 30 days, during which 
it discontinued production of diesel fuel. Several of the refinery 
maintenance operations in the Pacific Northwest were major turnarounds 
involving hydrotreater upgrades necessary to produce the ultra-low-
sulfur diesel mandated for 2006. In addition, because refineries in 
Montana and Utah ship diesel and other light petroleum products to the 
Pacific Northwest, diesel pricing in the Pacific Northwest felt the 
effects of additional supply shortfalls in certain Rocky Mountain 
states caused by refinery turnarounds and by problems with the 
acquisition of synthetic crude oil after a January 2005 fire at 
Suncor's Alberta oil sands facility. Moreover, the Olympic Pipeline, 
which transports fuel from refineries in Washington to Oregon, was shut 
down for several days for planned maintenance at the end of February. 
The rapid rise in Oregon diesel prices was consistent with these supply 
disruptions.
    By contrast, current diesel prices in Oregon--unlike prices last 
winter and spring--are not high relative to the rest of the country. As 
the enclosed Figure 1 * shows, prices in Portland have been at or below 
their predicted ranges since the area recovered from the diesel price 
spike that it experienced earlier this year. Figure 2--which shows 
statewide average diesel prices for Oregon and Washington relative to 
the United States average--also demonstrates that diesel prices in 
Oregon are not abnormally high relative to the rest of the nation.\8\
---------------------------------------------------------------------------
    * Figures 1-4 have been retained in committee files.
    \8\ With the exception of a short period between Hurricanes Katrina 
and Rita, diesel prices rose steadily across the United States until 
mid-October.
---------------------------------------------------------------------------
    Nationally, diesel prices have consistently exceeded gasoline 
prices for most of the past 16 months. Our research has shown that this 
shift in the relative prices of diesel and gasoline is attributable 
primarily to worldwide supply and demand factors--particularly the 
increased dependence of European countries on diesel--and this trend 
was exacerbated by the timing and magnitude of the Gulf Coast refinery 
disruptions in the wake of the hurricanes.
    No. 2 diesel fuel is used as a transportation fuel in trucks and 
automobiles. Because New York is a major market for trading in No. 2 
diesel, and because the New York spot price is thus a widely recognized 
benchmark for trading in this product, we enclose a graph that compares 
New York Harbor spot prices for diesel and gasoline. Figure 3 plots the 
difference between the New York No. 2 diesel spot price and the New 
York conventional gasoline spot price since 1997. As that figure shows, 
until the second half of 2004, diesel prices typically exceeded 
gasoline prices only for short periods--typically during winter months, 
when demand for heating oil (another petroleum distillate similar to 
diesel) was in greatest demand. Since July 2004, however, the New York 
diesel spot price has exceeded the conventional gasoline spot price in 
each month except August and September 2005. According to the Energy 
Information Administration (``EIA''), this diesel-to-gasoline price gap 
stems largely from a strong shift away from gasoline toward diesel that 
has posed challenges to global diesel supply and has affected U.S. 
distillate markets.\9\ Middle distillates' share of total gasoline and 
distillate consumption in Europe has increased from approximately 60 
percent to around 65 percent since 1999, and European daily consumption 
of diesel fuel is roughly 500,000 barrels per day higher than it was 
five years ago.\10\ All of this may portend a long-term trend toward 
observed diesel prices that generally exceed gasoline prices.\11\
---------------------------------------------------------------------------
    \9\ J. Hackworth & J. Shore, U.S. Dep't of Energy, EIA, 
``Distillate in Depth--The Supply, Demand, and Price Picture'' (Winter 
Fuels Conference, Oct. 12, 2005), available at http://www.eia.doe.gov/
pub/oil--gas/petroleum/presentations / 2005 / distillate2005 / 
distillate2005-- files/frame.html.
    \10\ According to the EIA, despite European refinery investments in 
hydrotreater and hydrocracker upgrades to facilitate increased diesel 
production, Europe's refineries have been unable to keep pace with 
increased diesel demand in the region, and reliance on diesel imports 
(particularly in the former Soviet Union) has increased.
    \11\ The increased demand for diesel in Europe has left some 
European refineries with excess capacity to produce gasoline, which is 
why those refineries were able quickly to produce and ship more 
gasoline to the United States after the hurricanes. These additional 
imports helped limit the effect of the hurricanes on gasoline prices.
---------------------------------------------------------------------------
    In addition to this possible long-term trend, recent events have 
played a major role. The price gap between diesel and gasoline has 
widened substantially since late September, and the national average 
retail price of diesel has exceeded the average retail price of 
gasoline by over 50 cents per gallon since mid-October.\12\ This sudden 
and dramatic increase in diesel prices relative to gasoline prices is 
attributable to the supply disruptions associated with Hurricanes 
Katrina and Rita.
---------------------------------------------------------------------------
    \12\ See Figures 3 and 4.
---------------------------------------------------------------------------
    According to the EIA, Rita affected distillate stocks more than 
gasoline stocks. Distillate stocks fell by 5.6 million barrels for the 
week that ended September 30 (the week following Rita), while gasoline 
stocks fell by 4.4 million barrels. Rita had much less impact on 
gasoline inventories than on distillate inventories because increased 
imports after the hurricane bolstered gasoline supplies far more than 
distillate supplies and because refineries shifted some production from 
distillates to gasoline. A large gap between diesel and gasoline prices 
likely will persist until distillate inventories recover for the winter 
heating season. Although the Commission's monitoring program and other 
detection efforts have not unearthed evidence of anticompetitive 
conduct in the diesel fuel industry in Oregon or elsewhere in the 
nation, we will remain vigilant in our search for any such evidence.

    Question 5. ExxonMobil's CEO Lee Raymond testified at this hearing 
that when the Exxon-Mobil merger was under review, the ``FTC wasn't 
interested in ExxonMobil expanding its refinery capacity.'' I 
understood Mr. Raymond's comments to refer to expanding capacity at the 
California refinery that ExxonMobil retained following the merger, 
rather than the refinery that the company divested as a condition of 
the merger. I would not think that Mr. Raymond would have any concern 
about the expansion of a refinery that was no longer owned by his 
company. My question to you at the hearing was: Shouldn't the FTC 
consider the impact on refining capacity, including expansion, of the 
refineries involved in an oil mega-merger like the Exxon-Mobil merger? 
You answered that the FTC required divestiture of a different refinery 
than the one I understood Mr. Raymond to be referring to. To be clear, 
I am asking whether in reviewing oil mergers, the FTC should consider 
the impact on refining capacity including whether refineries retained 
following the merger can expand or should be encouraged to expand 
capacity to increase supply and provide lower prices for consumers?
    Answer. In reviewing mergers in the petroleum industry or any other 
industry, the Commission considers it crucial to evaluate whether the 
merger is likely to lead to increased productive capacity and a 
consequent increase in supply, with lower prices for consumers. In this 
regard, our analysis of a proposed merger looks very carefully at 
whether the transaction is likely to produce substantial efficiencies 
that will outweigh probable anticompetitive effects and that could not 
be achieved absent the transaction. For example, if a merger between 
two refineries would allow more efficient utilization of intermediate 
products across refineries that would in turn increase the total 
production of gasoline at the two refineries, and if this optimization 
would be unlikely without the merger, then the FTC would recognize this 
expected output increase as a procompetitive benefit of the 
acquisition. Our analysis also counts as a procompetitive benefit of a 
merger any planned or expected increase in capacity at the refineries 
retained by the merged firm following the acquisition.
    In his November 9 testimony, I understand that Mr. Raymond was 
discussing the FTC challenge to Exxon's plan to merge with Mobil--and 
thereby to take over Mobil's refinery in Torrance, California, which 
competed with Exxon's Benicia refinery in the production of CARB 
gasoline. With respect to this aspect of the Exxon/Mobil merger, the 
Commission determined after a very searching analysis that the 
transaction would reduce consumer welfare for Californians unless the 
merged firm divested either the Benicia or the Torrance refinery (and 
related marketing assets). In order to remedy the anticompetitive 
effects of this aspect of the merger, the Commission ordered ExxonMobil 
to divest the Benicia refinery to an FTC-approved third party. The 
Benicia refinery was in fact divested to Valero Energy Corp.--at that 
time a new entrant in California--and that refinery remains fully 
operational today. The FTC did not want Exxon to add to its position in 
the CARB refining market through an anticompetitive acquisition of a 
competing refinery.\13\ At no time has the Commission or its staff told 
Mr. Raymond or any other oil industry executive that the FTC would 
oppose ExxonMobil's expansion of capacity at the Torrance refinery or 
the construction of a new refinery in California. It is in the 
interests of all consumers for ExxonMobil and other refiners to compete 
vigorously to take additional market share. We would expect such 
competition to include refinery construction and expansion where 
warranted.
---------------------------------------------------------------------------
    \13\ The Commission alleged that the Exxon/Mobil merger would 
increase the Herfindahl-Hirschman Index in a market defined by the 
capacity to refine and market CARB gasoline by 171, to a post-merger 
level of 1,699. See, e.g., Federal Trade Commission, Bureau of 
Economics, The Petroleum Industry: Mergers, Structural Change, and 
Antitrust Enforcement 196 (2004), available at http://www.ftc.gov/os/
2004/08/040813mergersinpetrolberpt.pdf.
---------------------------------------------------------------------------
    Your question also raises a broader issue that pertains to all 
industries. The FTC has no authority to prohibit any firm in any 
industry from increasing productive capacity through internal 
expansion. The only legal basis on which a federal antitrust agency can 
limit corporate expansion is to challenge mergers and acquisitions that 
are unlawful because they have the potential to create or enhance 
market power without yielding countervailing benefits such as the 
creation of new productive capacity. Internal corporate growth through 
capacity expansion would not raise this concern, and the statutes that 
we enforce do not give us authority to prohibit internal expansion. 
Moreover, it would be contrary to the interests of consumers to limit 
such expansion--even expansion by a firm with a large market share. For 
consumers to receive the best goods and services at the lowest prices, 
our economy depends on the efforts of all firms to compete vigorously 
to grow their market share. Indeed, one of the key factors that the 
Commission considers in analyzing a proposed merger is the parties' 
plans to achieve merger-related efficiencies, including expansions of 
capacity. It would be bad economics and bad policy for an antitrust 
agency to tell any company that it may not expand capacity.
          * * * * * * *
    Finally, in response to your oral request at the hearing, I would 
like to elaborate on my testimony regarding the timing of the agency's 
issuance of a report under Section 1809 of the Energy Policy Act of 
2005. As I noted at the hearing, the Commission already has begun an 
investigation under Section 1809 to determine whether the price of 
gasoline is being artificially manipulated. Our investigation will be 
thorough. Indeed, the Commission has already issued extensive civil 
investigative demands to a number of companies in this investigation.
    It is essential that our staff be afforded adequate time to collect 
and analyze the information necessary for this investigation. As the 
sponsors of Section 1809 themselves recognized, a credible 
investigation of these issues will take more than 90 days. On September 
19, Senators Stabenow, Dorgan, and Boxer, along with six other 
Senators, clarified in a letter (enclosed) to me that ``[t]he Stabenow-
Dorgan-Boxer provision, included in the Energy Policy Act of 2005 
(Public Law 109-58) [i.e., Section 1809], allows the Commission 90 days 
to begin its investigation'' and urged the Commission to submit its 
report to Congress ``as soon as possible'' (emphasis added). Similarly, 
an August 18 press release (enclosed) from Sen. Dorgan stated that 
section 1809 requires the FTC to ``launch'' an investigation within the 
first 90 days. In light of these statements and the needs of the 
investigation, I anticipate reporting to Congress on the findings of 
this investigation in spring 2006.
    We have informed Members of Congress of the anticipated release 
date in staff briefings in September 2005, and in a number of letters 
responding to congressional inquiries about gasoline prices this fall. 
In the meantime, I anticipate that our staff will be able to brief the 
appropriate congressional committees on the status of the investigation 
periodically.
    I appreciate you concern about energy pricing and profits, Mr. 
Chairman, and I thank you for this opportunity to respond to the 
Committees' questions.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                       Hon. Deborah Platt Majoras

    Question 1. FTC investigations have found that companies withheld 
supplies from the market in order to keep prices high. For example, the 
FTC stated in a March 2001 report concluding its Midwest Gasoline Price 
Investigation:

          ``An executive of this company [the company was not 
        disclosed] made clear that he would rather sell less gasoline 
        and earn a higher margin on each gallon sold than sell more 
        gasoline and earn a lower margin. Another employee of this firm 
        raised concerns about oversupplying the market and thereby 
        reducing the high market prices. A decision to limit supply 
        does not violate the antitrust laws absent some agreement among 
        firms. Firms that withheld or delayed shipping additional 
        supply in the face of a price spike did not violate the 
        antitrust laws. In each instance, the firms chose strategies 
        they thought would maximize their profits.''

    Does the FTC stand by its 2001 finding that oil companies have 
withheld oil products from the market in order to prevent prices from 
falling?
    Answer. The Commission did not find in its Midwest Gasoline Price 
Investigation that firms withheld oil products from the market in order 
to keep prices high. Rather, the Commission determined that some firms 
increased their Gulf Coast production of gasoline for shipment into the 
Midwest only after it was clear that higher prices in the Midwest would 
make such shipments profitable. The Commission also found that one firm 
had a higher-than-expected inventory for a short period, accurately 
anticipated a tight market, and sold this inventory at a rate that 
maximized its profits at prevailing prices. In the context of localized 
product shortages caused by refinery production problems and pipeline 
disruptions, the Commission found no conduct--either collusive or on 
the part of any individual firm--that violated the antitrust laws. The 
salient fact found by the investigation was the Commission's conclusion 
that ``[t]he gasoline price spike in the Midwest was short-lived. Soon 
after prices spiked, additional gasoline was produced and imported to 
the region, and prices dropped as quickly and dramatically as they had 
risen.'' \1\ Rather than withhold gasoline, most firms moved extra 
product into the region in order to take advantage of higher prices, 
and consumers benefitted accordingly.
---------------------------------------------------------------------------
    \1\ Final Report of the Federal Trade Commission, Midwest Gasoline 
Price Investigation (Mar. 29, 2001), available at http://www.ftc.gov/
os/2001/03/mwgasrpt.htm.
---------------------------------------------------------------------------
    Several factors that contributed to the price spike in the Midwest 
in the summer of 2000 were largely beyond the immediate control of the 
industry participants. These included production problems at 
refineries,\2\ two important pipeline disruptions,\3\ and low 
inventories.\4\
---------------------------------------------------------------------------
    \2\ Production problems during this period stemmed from several 
sources. First, there were problems with meeting the new fuel 
specification requirements for reformulated gasoline, known as ``RFG 
II.'' In particular, Midwest refiners' use of ethanol as an oxygenate 
in RFG II made it more costly and difficult to achieve the required low 
vapor pressure for summertime gasolines. Second, some Midwest 
refineries were shut down longer than expected for maintenance, 
replacement, or modification of processing units. Third, several 
refinery disruptions arose unexpectedly from damage to refining 
equipment caused by fires or thunderstorms.
    \3\ The Explorer Pipeline, which transports gasoline from 
refineries on the Gulf of Mexico to Chicago, was closed for five days 
in March 2000 because of a rupture, and its capacity was thereafter 
reduced to 90 percent until December 2000. In addition, the Wolverine 
Pipeline, which carries one-third of Michigan's gasoline supply, was 
shut down for nine days in June, and subsequently operated at only 80 
percent of capacity for a month, causing shortages in Detroit and 
northern Ohio.
    \4\ Gasoline inventories were low in the Midwest in the spring and 
summer of 2000 because of the high price of crude oil and the 
expectation (reflected in futures prices) that crude oil prices would 
fall. Oil companies hoped to rebuild inventories with lower-priced 
crude oil in the future. In addition, many industries, including the 
petroleum industry, have moved to just-in-time distribution techniques 
in recent years in order to reduce ongoing inventory costs. Finally, 
the Explorer Pipeline break and refinery production problems made it 
difficult to rebuild inventories in advance of the summer driving 
season. Further compounding the problem was the need to drain storage 
tanks of the winter-grade formulation before switching to the summer-
grade formulation. As a result of these factors, low inventory levels 
made it more difficult to respond to unexpected supply problems.
---------------------------------------------------------------------------
    On the other hand, the industry as a whole made errors in supply 
forecasts and underestimated the potential for supply shortages in the 
Midwest in the spring and early summer of 2000. For instance, in 
determining how they would comply with the stricter EPA regulations for 
summer-grade RFG that took effect that spring, three Midwestern 
refiners each independently concluded that it would be more profitable 
to expend capital on refinery upgrades only to the extent necessary to 
supply their branded gas stations and fulfill their contractual 
obligations. As a result of these decisions, these three firms did not 
have summer-grade RFG available to sell on the spot market, as they had 
in prior years. When prices unexpectedly rose, these firms realized the 
significance of the RFG shortfall in the Midwest. Each quickly 
concluded that it made economic sense to ship extra product into the 
area, and they juggled their output mixes at Gulf Coast refineries and 
produced and shipped more RFG by barge into the Midwest. The 
Commission's investigation did not unearth evidence of an agreement 
among these firms.
    Not every firm made the same misestimation regarding supply 
shortages, however. One firm made a different decision in 1999 and 
expended the capital necessary to increase its summer-grade RFG 
production substantially. This firm, which had more abundant supplies 
of RFG and had capacity available to produce even more RFG at the time 
of the price spike, therefore faced very strong demand for its product. 
Not surprisingly, this company decided to charge what the market would 
bear and to release its inventory over time consistent with profit-
maximization. It was able to sell at higher prices while its 
competitors scrambled to get more product into the market, and it 
enjoyed higher profits for a limited period.
    I reiterate that the Commission found no evidence that firms in the 
industry agreed to limit supply into the Midwest in order to take 
advantage of higher prices. Rather, once the extent of the supply 
disruption became apparent, the firms moved more product from the Gulf 
Coast into the Midwest, and prices dropped sharply.

    Question 2. If oil companies have enough market power that they can 
keep the price of oil high by withholding supplies from the market, 
isn't that by definition an anti-competitive practice?
    Answer. This question raises issues with implications beyond the 
petroleum industry. An answer to this question requires consideration 
of the reasons why certain business practices are deemed 
anticompetitive. Congress decreed long ago that the nation's economy 
would be largely free from government regulation and that the national 
common market would be governed by the principles of competition. 
Competitive market forces would best guarantee for consumers the 
benefits of efficiency and innovation in the production and 
distribution of goods and services. Nevertheless, because these 
benefits will not be available if competitive markets are compromised 
by restrictive business practices, certain practices are deemed 
anticompetitive if they restrict output or raise prices.
    The three primary areas of concern covered by the antitrust laws 
are anticompetitive mergers, collusion among competitors, and 
exclusionary or predatory practices by a firm with market power. 
Mergers may be anticompetitive if they increase the merged firm's 
potential to wield market power or increase the likelihood of 
coordinated behavior among the firms remaining in the market. 
Agreements among competitors to engage in conduct that leads to output 
restrictions and increased prices also are anticompetitive and, indeed, 
certain horizontal conduct, including naked price fixing, is considered 
so pernicious that the law condemns it summarily.
    Conduct by a single firm is anticompetitive only if the firm has 
sufficient market share that its unilateral reduction in output would 
be a substantial portion of the total market, and only if its decision 
to restrict output cannot be counteracted relatively quickly by its 
competitors or by new entrants. The Commission's long history of 
investigating and studying the petroleum industry has shown that such 
unilateral power is rare in petroleum markets. It should be noted that 
anticompetitive unilateral conduct often closely resembles fair but 
aggressive business behavior, and enforcement policy must distinguish 
very carefully between them to avoid stifling commercial practices that 
actually benefit consumers. If law enforcement policy were costless and 
frictionless and enforcers were omniscient--which they are not--it 
might be possible to differentiate every instance of anticompetitive 
conduct from the type of aggressively procompetitive conduct that the 
law encourages. In recognition of the imperfections in the law 
enforcement system, antitrust enforcers are at great pains to avoid 
taking enforcement actions that chill competitive unilateral conduct--
in other words, not to reduce incentives for firms, even firms with 
large market shares, to compete vigorously in their markets.
    According to the report on the FTC's Midwest Gasoline Price 
Investigation, the firm that correctly anticipated the shortages of 
summertime RFG ``found itself with considerable market power in the 
short term.'' The firm exercised that power by refusing to release its 
inventory all at once, which would have reduced the market price. 
Instead, it chose to release inventory at a rate consistent with a 
higher and more profitable price that it could temporarily obtain. This 
higher price, however, could not be sustained for long, as buyers 
turned to the firm's competitors that were rushing additional product 
into the Midwest from the Gulf Coast. The antitrust laws do not condemn 
this conduct as anticompetitive.
    First, as I have noted, this temporary market situation stemmed 
largely from unanticipated factors and was alleviated in only a few 
weeks. Temporary market power occurs frequently because of supply 
problems arising from (among other sources) natural disasters or 
government-imposed environmental policies, because of sudden increases 
in demand caused by changes in consumer taste, or because some firms 
simply respond more quickly than their rivals to opportunities to enter 
new or emerging markets.
    Second, and more important, such an exercise of short-term market 
power typically benefits rather than harms consumers overall. It is the 
prospect of profits that provides the incentive for supply, capital, 
and entrepreneurs to be attracted to markets in the first place. It is 
unlikely that additional supplies from the Gulf Coast would have been 
forthcoming so quickly absent the profit opportunity signaled by the 
high prices in the Midwest. These short-term profit opportunities can 
also have long-term consequences. The expansion of pipeline capacity to 
bring refined product from the Gulf Coast into the Midwest was 
doubtless driven by the potential profit opportunities to supply the 
Midwest.\5\
---------------------------------------------------------------------------
    \5\ See Bureau of Economics, Federal Trade Commission, The 
Petroleum Industry: Mergers, Structural Change, and Antitrust 
Enforcement 209 (discussing the Centennial Pipeline's entry into the 
Midwest and the expansion of the Explorer Pipeline in that region), 
available at http://www.ftc.gov/os/2004/08/
040813mergersinpetrolberpt.pdf.
---------------------------------------------------------------------------
    As for the firm with the abundant inventory, to have a policy that 
penalizes firms--particularly firms that ordinarily enjoy modest market 
shares--if they exercise temporary market power would put at risk the 
very forces that drive the competitive economy. If the antitrust laws 
were to condemn the conduct at issue in the Midwest Gasoline situation, 
it would perversely penalize the firm that more accurately anticipated 
market conditions by refining more gasoline and building inventory 
ahead of the market. Restraining firms' ability to reap the rewards of 
better decision-making may leave even less supply of gasoline products 
for consumers during future market dislocations. The opportunity to 
profit by correctly anticipating market shifts--which may also involve 
the possession of temporary market power--is part of the incentive that 
drives supply into all markets, to the benefit of all consumers. Even 
if this temporary market power is the result of unforeseen 
circumstances, penalizing it may dull future incentives to enter the 
market and may drive fungible capital into other markets, to the 
detriment of gasoline consumers.
    The Commission deeply appreciates the concern that you and your 
colleagues have expressed about consumers in petroleum markets, and the 
agency will steadfastly maintain its extensive efforts to promote 
competition and protect consumers in those markets. If you or your 
staff have any questions or comments, please feel free to call me or 
have your staff call Anna Davis, the Director of our Office of 
Congressional Relations, at (202) 326-2195.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                       Hon. Deborah Platt Majoras

    Question 1. Please respond to the conclusions reached by the 
Government Accountability Office (GAO) in its May 2004 report on Energy 
Markets: Effects of Mergers and Market Concentration in the U.S. 
Petroleum Industry (``GAO Report'') regarding the effects of certain 
petroleum industry mergers on wholesale gasoline prices.
    Answer. First, the GAO's econometric models do not properly control 
for the numerous factors that cause gasoline prices to increase or 
decrease. These omissions undermine the GAO Report's estimates of the 
effects of concentration and mergers on wholesale gasoline prices.
    Second, the GAO Report does not measure concentration in any 
properly defined geographic market. If a merger impacts competition, it 
does so in the particular geographic region in which the merging firms 
compete. The GAO Report measures concentration for refinery capacity at 
the PADD \1\ level when analyzing wholesale rack prices in the 
corresponding PADD. The FTC staff's experience from decades of 
assessing the competitive effects of mergers in the petroleum industry 
is that PADDs generally do not correspond to properly defined 
geographic markets for wholesale gasoline. GAO's failure to delineate a 
properly defined geographic market calls into question the validity of 
its conclusions about the effect of concentration and mergers on 
wholesale gasoline prices.
---------------------------------------------------------------------------
    \1\ ``PADD'' stands for ``Petroleum Administration for Defense 
District.'' PADD I consists of the East Coast. PADD II consists of the 
Midwest. PADD III includes the Gulf Coast. PADD IV consists of the 
Rocky Mountain region. PADD V is made up of the West Coast plus Alaska 
and Hawaii.
---------------------------------------------------------------------------
    Third, by focusing exclusively on wholesale prices, the GAO Report 
fails to address the effects of concentration and mergers on retail 
gasoline prices. FTC staff's research indicates that wholesale price 
effects are not necessarily indicative of retail price effects. Indeed, 
rack wholesale gasoline prices and retail prices do not always move 
together, in part because rack prices do not necessarily measure actual 
wholesale transaction prices, which are also affected by discounts, and 
in part because significant quantities of gasoline reach the pump 
without going through wholesalers. The GAO's failure to assess the 
effects of concentration and mergers on retail gasoline prices--that 
is, the prices that ordinary consumers pay at the pump--further 
undermines the credibility and importance of its findings.
    The Commission, however, has never refused to acknowledge studies 
that reach conclusions different from those drawn in our staff's own 
analytical work. Instead, we analyze those studies and attempt to 
discern the reasons for the differing conclusions. We adopt new 
approaches and refine our work when we find new methodologies that 
appear superior. Accordingly, we have spent additional significant 
resources analyzing the GAO Report, in an effort to determine whether, 
despite the already-identified significant deficiencies, it presents 
any useful methodological advances in the analysis of petroleum mergers 
and joint ventures.
    In both our merger analyses and our evaluation of the GAO Report, 
we look for the best way to use real-world data to gauge whether 
gasoline prices rose after petroleum industry mergers--including after 
FTC-required divestitures--from the levels that would have prevailed in 
the absence of the mergers. It might appear easy to determine the 
reasons for a gasoline price increase, but it is not. It is a very 
difficult task, in large part because gasoline prices change 
continually for numerous reasons. For example, during periods of 
increased merger activity in the petroleum industry, gasoline prices 
also were significantly affected by other important changes in gasoline 
supply and demand conditions unrelated to mergers, such as fluctuations 
in crude oil prices, variations among regions in access to refineries 
and to petroleum product pipelines, the proliferation of ``boutique 
fuel'' requirements in various states and localities, and differences 
in state and local gasoline taxes.\2\ In light of the multiple causes 
of gasoline price changes, economists use a variety of statistical 
methods to try to isolate the price effects of mergers from the price 
effects of contemporaneous changes in other factors that affect supply 
and demand. It is necessary to conduct a considerable amount of 
testing--typically involving alternative assumptions and statistical 
methods--before we can have confidence in any particular estimate of a 
merger's effect on gasoline prices.
---------------------------------------------------------------------------
    \2\ See Federal Trade Commission, Gasoline Price Changes: The 
Dynamic of Supply, Demand, and Competition (2005), available at http://
www.ftc.gov/reports/gasprices05/050705gaspricesrpt.pdf.
---------------------------------------------------------------------------
    In recognition of these complexities, FTC staff has devoted a 
substantial amount of time to comparing different approaches to 
estimating the price effects of petroleum mergers, including those used 
in the GAO Report and in their own studies. On January 14, 2005, the 
FTC's Bureau of Economics sponsored a public conference featuring five 
prominent economists who presented their views on the GAO Report and on 
an FTC staff report about the Marathon-Ashland (``MAP'') joint 
venture.\3\ The MAP Study and the GAO Report differed in their 
econometric methodologies and in their conclusions regarding the price 
effects of the MAP joint venture.\4\
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    \3\ Christopher T. Taylor and Daniel S. Hosken, Bureau of 
Economics, Federal Trade Commission, The Economic Effects of the 
Marathon-Ashland Joint Venture: The Importance of Industry Supply 
Shocks and Vertical Market Structure (last revised May 7, 2004), 
available at http://www.ftc.gov/be/workpapers/wp270.pdf (``MAP 
Study'').
    \4\ The MAP Study concluded that wholesale prices for conventional 
gasoline did not increase after formation of the joint venture. 
Wholesale prices for reformulated gasoline (``RFG'') did increase 
approximately 18 months after the transaction, but the MAP Study 
concluded that this increase was more likely attributable to changes in 
required fuel specifications in the St. Louis, Missouri, area. The MAP 
Study found no increases in retail prices attributable to the joint 
venture.
    The GAO Report, on the other hand, concluded that the MAP joint 
venture led to wholesale price increases for both RFG and conventional 
gasoline. The GAO Report did not analyze the effects of mergers or 
joint ventures on retail prices.
---------------------------------------------------------------------------
    The five experts invited to serve as panelists at this public 
conference--all prominent in the fields of industrial organization or 
applied econometrics--were Professor Jerry Hausman of the Massachusetts 
Institute of Technology, Professor Dennis Carlton of the University of 
Chicago, Professor Halbert White of the University of California at San 
Diego, Professor Kenneth Hendricks of the University of Texas at 
Austin, and Dr. Scott Thompson of the Antitrust Division of the U.S. 
Department of Justice.\5\
---------------------------------------------------------------------------
    \5\ Although GAO declined our invitation to participate formally in 
the conference, GAO's then-chief economist was in the audience.
---------------------------------------------------------------------------
    To assist these expert panelists, the FTC's Bureau of Economics 
furnished them in advance with copies of the GAO Report, the FTC 
staff's MAP Study, and a Technical Report prepared by FTC economists 
that assessed the methodology and findings of the GAO Report.\6\ The 
Technical Report began with the construction of a ``baseline model'' 
that represented FTC staff's effort to understand the assumptions, 
methods, and analysis used in the GAO Report. A baseline model enables 
a researcher systematically to vary initial assumptions and technical 
procedures employed in a study in order to gauge the effect of such 
variations on the study's results and conclusions. To construct the 
baseline model for the Technical Report, the FTC staff needed to 
understand the underlying assumptions of the GAO Report. To that end, 
during the latter part of 2004, our economists had a series of helpful 
exchanges with GAO economists to clarify technical issues that were not 
transparent in the GAO Report. GAO economists answered our staffs 
questions about their data and methodological decisions and provided us 
with written documentation on certain issues, such as the identity of 
wholesale terminals that they assumed were either affected or 
unaffected by particular mergers.
---------------------------------------------------------------------------
    \6\ FTC Staff Technical Report, Robustness of the Results in GAO's 
2004 Report Concerning Price Effects of Mergers and Concentration 
Changes in the Petroleum Industry (Dec. 21, 2004), available at http://
www.ftc.gov/ftc/workshops/oilmergers/ftcstafftechnicalreport122104.pdf.
---------------------------------------------------------------------------
    Citing confidentiality restrictions and agency protocols, however, 
GAO staff stated that they could not provide FTC staff with certain of 
their data inputs and their statistical programming codes. In light of 
GAO's inability to share with FTC staff the proprietary price data that 
GAO used, our staff purchased the same data, with respect to RFG and 
CARE gasoline, from the Oil Price Information Service.
    FTC staffs Technical Report focused on GAO's analysis of the 
effects of mergers on prices for RFG and for gasoline that meets the 
criteria prescribed by the California Air Resources Board (``GARB 
gasoline'')--two types of gasoline that GAO concluded were affected by 
seven of the eight mergers that GAO analyzed. The Technical Report 
sought to mimic the GAO's econometric analyses and to assess whether 
the use of alternative methodologies, modified statistical techniques, 
or additional real-world data would produce changes in the study's 
findings and conclusions.
    The introductory portion of the January 14, 2005, conference 
outlined the major results of the GAO Report and the FTC staff's MAP 
Study. A number of in-depth panel sessions followed, addressing topics 
such as general econometric issues encountered in estimating the price 
effects of petroleum industry mergers; technical issues encountered in 
estimating the effects of market concentration on prices; issues 
involved in the measurement of economic variables; the sensitivity of 
econometric estimates to changes in underlying assumptions; and the 
implications for merger policy of current learning regarding 
consummated petroleum mergers.
    The panelists generally agreed on a number of important points.\7\ 
First, they agreed that the need to control for the many nonmerger 
developments that affect gasoline prices makes it difficult to estimate 
reliably the price effects of petroleum mergers. Second, the panelists 
agreed that there are many conceptual and statistical problems with 
estimates of the effect of concentration on prices such as those 
contained in the GAO Report, including the assumptions about relevant 
markets that underlie GAO's concentration measurements.
---------------------------------------------------------------------------
    \7\ There were also areas of disagreement among the panelists. For 
example, they debated the relative advantages and disadvantages of an 
econometric methodology--the ``treatments approach''--that differs 
significantly from the approaches used by GAO and FTC researchers. In 
addition, there were differing opinions as to the suitability of market 
concentration measures in assessing the likely competitive effects of 
proposed mergers.
---------------------------------------------------------------------------
    Third, and significantly, the panelists agreed that the GAO Report 
and the MAP Study, by themselves, did not provide a basis to modify 
merger enforcement policy. The panelists cautioned against drawing 
strong conclusions from these studies, in part because the studies came 
to widely different conclusions about the price effects of particular 
mergers. Not only did the GAO and FTC studies come to different 
conclusions about the MAP joint venture, but the GAO Report's results 
themselves were mixed. The GAO Report provided 28 statistical estimates 
of the effects of eight mergers on wholesale prices of branded or 
unbranded gasoline across three gasoline types or specifications: 
conventional gasoline, RFG, and CARB gasoline. The GAO Report 
associated a statistically significant price increase with a merger in 
16 cases. In seven cases, however, the report found statistically 
significant price decreases associated with mergers. No statistically 
significant merger price effect was found in the five other cases.
    Finally, the panelists agreed that further exploration of technical 
issues raised by both the GAO Report and the MAP Study would be 
beneficial. To this end, they urged consideration of new, alternative 
methodologies and called for additional studies of consummated 
mergers.\8\
---------------------------------------------------------------------------
    \8\ In the panelists' view, there is likely to be more benefit to 
public policy development in studying the effects of specific mergers 
than in conducting more general studies of the relationship between 
concentration and prices.
---------------------------------------------------------------------------
    In the months following the January 14, 2005, conference, FTC staff 
followed up on the panelists' recommendations and conducted further 
analysis of the statistical and methodological approaches employed in 
the GAO Report. Using the baseline model developed in their Technical 
Report, FTC economists found additional indications that GAO 
researchers' methodological approach and assumptions did not yield 
reliable estimates of merger effects. In particular, the FTC staff 
tested whether the use of varying assumptions caused the overall 
results to change. Indeed, our staff found that when they allowed the 
effects of variables used by GAO (such as capacity utilization and 
inventory-to-demand ratios) to assume different values in the pre- and 
post-merger periods, the estimates of the effects of some mergers 
analyzed by GAO changed significantly. Another very serious deficiency 
in GAO's methodology was identified when FTC staff applied the baseline 
model--i.e., the model that represents GAO's own methodology--and found 
significant merger-associated price increases at terminal rack 
locations where (according to GAO's own researchers) only one or 
neither of the merging parties supplied gasoline before the merger. 
Clearly, any price increases at such locations in fact stemmed from 
causes other than the merger, because the merging parties never 
competed head-to-head there. Yet, GAO's flawed methodology found a 
merger impact where there could not have been such an impact.
    Our staff also has been working with Professor Halbert White (one 
of the expert panelists at the January 14, 2005, conference) to develop 
an alternative econometric methodology--the ``treatments approach'' 
referred to above--to assess the competitive effects of consummated 
petroleum mergers. This methodology may provide more accurate estimates 
of merger effects than the alternatives when data are imperfect and 
when there are difficulties in specifying all variables that 
significantly affect gasoline prices. We are continuing to study this 
issue and to refine our approach, with the goal of making our merger 
policies even more effective.
    The FTC staff has taken a number of additional steps to follow up 
on the January 14, 2005, conference's findings and recommendations. 
First, the staff expanded its examination of the MAP joint venture to 
cover all cities in which both Marathon and Ashland sold RFG prior to 
the joint venture. The staff also increased the number of control 
cities (i. e., comparison cities not affected by the formation of the 
joint venture) to increase confidence in the model's conclusions. These 
revisions, however, did not change the key finding of the original MAP 
Study that no price increase was attributable to the formation of the 
joint venture.
    Second, the January 14, 2005, conference served as a springboard 
for an FTC staff retrospective concerning MAP's 1999 acquisition of the 
Michigan marketing assets of Ultramar Diamond Shamrock. In July 2005, 
the FTC released the Bureau of Economics' study of this transaction, 
finding no evidence that the transaction was associated with an 
increase in retail gasoline prices.\9\
---------------------------------------------------------------------------
    \9\ John Simpson and Christopher T. Taylor, Bureau of Economics, 
Federal Trade Commission, Michigan Gasoline Pricing and the Marathon 
Ashland and Ultramar Diamond Shamrock Transaction (last revised July 
27, 2005), available at http://www.ftc.gov/be/workpapers/wp278.pdf. The 
GAO Report had concluded that the MAP/UDS merger led to higher 
wholesale prices for gasoline.
---------------------------------------------------------------------------
    As I explained in my November 8 letter, the Commission is 
conducting an investigation to determine whether the price of gasoline 
is being manipulated, as directed by Section 1809 of the Energy Policy 
Act of 2005.\10\ As part of this investigation, the agency is seeking 
information from the petroleum industry concerning the possible effects 
that industry mergers and joint ventures since 1997 may have had on 
light petroleum product prices. As we examine past mergers and joint 
ventures as part of our Section 1809 investigation, we will continue to 
draw upon the learning stemming from last January's conference.
---------------------------------------------------------------------------
    \10\ The Commission also is conducting an investigation pursuant to 
Section 632 of the Science, State, Justice, Commerce, and Related 
Agencies Appropriations Act, 2006, Pub. L. No. 109-108, 119 Stat. 2290 
(Nov. 22, 2005), that is focused on gasoline prices in the wake of 
Hurricane Katrina.
---------------------------------------------------------------------------
    The FTC will steadfastly continue its extensive efforts to maintain 
competition and protect consumers in petroleum markets.

    Question 2. Please explain how ``the mergers the agency has 
allowed'' have not harmed consumers and competition.
    Answer. We are not aware of any conclusive evidence that recent oil 
industry mergers have weakened competition or led to higher gasoline 
prices. As discussed in detail in the enclosed August 2004 FTC staff 
report entitled The Petroleum Industry: Mergers, Structural Change, and 
Antitrust Enforcement, most sectors of the petroleum industry at the 
national, regional, and state levels remain unconcentrated or 
moderately concentrated, even though the industry has undergone 
substantial restructuring and consolidation over the past 20 years.\1\ 
Throughout this petroleum industry consolidation, the Commission has 
remained vigilant to protect against mergers and acquisitions that may 
harm consumers and competition. In particular, since 1981, the FTC has 
filed complaints against 19 large petroleum mergers. In 13 of these 
cases, the FTC obtained significant divestitures in specific markets to 
protect competition that otherwise may have been diminished by the 
merger. Of the six other matters, the parties in four cases abandoned 
the transactions altogether after the FTC's respective antitrust 
challenges; one case resulted in a remedy requiring the acquiring firm 
to provide the Commission with advance notice of its intent to acquire 
or merge with another entity; and the sixth case was resolved with the 
execution by the parties of a 20-year throughput agreement that will 
preserve competition allegedly threatened by the acquisition.
---------------------------------------------------------------------------
    \1\ Recent industry consolidation and restructuring have been 
accompanied by efficiency-enhancing trends toward greater economies of 
scale at many levels in the petroleum industry. For example, average 
refinery size has increased, refineries on average have become more 
productive per unit of crude oil input, and many very small (and less 
efficient) refineries have closed. Although the number of refineries 
has fallen since the late 1990s, total industry capacity to produce 
refined petroleum products has increased. Moreover, changes such as 
improvements in supply management technologies have reduced the demand 
for product terminal space, and have encouraged joint use of 
underutilized facilities through product exchanges and joint ventures. 
Brand-name companies and independent wholesalers alike have combined 
operations to take advantage of scale economies in gasoline marketing. 
In many cases, mergers and acquisitions (and the exit of some firms) 
have facilitated the achievement of these greater economies of scale. 
Other notable changes reflected in the recent restructuring of the 
industry include increased gasoline sales through non-traditional 
retail outlets, such as grocery stores and hypermarkets, and the rise 
to national prominence of a number of substantial independent refiners. 
All of these trends--from increased refinery efficiency to the 
proliferation of new gasoline retailing formats--promise benefits to 
consumers.
---------------------------------------------------------------------------
    Notably, under the especially strict approach that it has taken in 
reviewing oil mergers, the Commission has obtained relief in markets at 
lower concentration levels than in other industries. Data released last 
year on all of the FTC's horizontal merger investigations and 
enforcement actions from 1996 to 2003 show that the Commission has 
brought more merger cases at lower levels of concentration in the 
petroleum industry than in any other industry throughout the economy. 
Mergers in moderately concentrated markets (with more competitors with 
lower market shares) have generally led to fewer antitrust challenges 
than mergers in highly concentrated markets (with fewer competitors and 
higher market shares).\2\ The Commission has taken a more aggressive 
enforcement stance in the petroleum industry, however, and has secured 
relief in a number of oil merger matters involving markets that were 
only moderately concentrated.\3\
---------------------------------------------------------------------------
    \2\ The Commission and the Department of Justice measure market 
concentration by means of the Herfindahl-Hirschman Index (``HHI''), 
which is calculated by summing the squares of the market shares of all 
firms in the market. FTC and Department of Justice Horizontal Merger 
Guidelines (``Merger Guidelines'') Sec. 1.5. Under the Merger 
Guidelines, markets with HHIs between 1000 and 1800 are deemed 
``moderately concentrated,'' while markets with HHIs exceeding 1800 are 
deemed ``highly concentrated.'' Merger Guidelines Sec. 1.51.
    \3\ FTC Horizontal Merger Investigation Data, Fiscal Years 1996-
2003 (Feb--2, 2004), Table 3.1 et seq., available at http://
www.ftc.gov/opa/2004/02/horizmerger.htm; FTC Horizontal Merger 
Investigations Post Merger HHI and Change in HHI for Oil Markets, 
Fiscal Years 1996-2003 (May 27, 2004), available at http://www.ftc.gov/
op a/2004/05/040527petrolactionsHHIdeltachart.pdf.
---------------------------------------------------------------------------
    As an example, in its review of the Exxon/Mobil merger--which was 
coordinated with the European Commission, 13 states, and the District 
of Columbia--the Commission identified potential competitive problems 
in both moderately concentrated markets (gasoline refining and gasoline 
marketing and retailing) and highly concentrated markets (e.g., jet 
turbine oil).\4\ The consent order that the FTC issued in settlement of 
this very intensive investigation required the respondents to sell or 
assign more than 2,400 Exxon and Mobil gas stations, as well as an 
Exxon refinery in California, terminals, a pipeline, and other assets. 
The most significant portions of the consent order resolved problems in 
moderately concentrated or highly concentrated markets involving 
gasoline refining and marketing in California, and involving gasoline 
marketing and retailing in many regions of the Northeast and Mid-
Atlantic and in parts of California and Texas. Based on potential 
increases in concentration and other relevant market factors such as 
entry conditions, the Commission required sweeping divestitures in all 
of the many moderately concentrated markets involved, as well as in the 
highly concentrated markets. Specifically, the Commission required the 
respondents to divest company-owned retail outlets and to reassign 
franchise and supply contracts, and gave acquirers the right to use the 
Exxon or Mobil brand name for a limited period of time at the divested 
retail outlets they acquired.
---------------------------------------------------------------------------
    \4\ In the Matter of Exxon Corp., FTC Docket No. C-3907 (consent 
order issued Jan. 26, 2001), available at http://www.ftc.gov/os/2001/
01/exxondo.pdf.
---------------------------------------------------------------------------
    Similarly, as a consequence of its investigation of the Chevron/
Texaco merger, the Commission issued a consent order in early 2002 that 
went beyond providing relief in highly concentrated markets by 
requiring divestitures in moderately concentrated gasoline markets.\5\ 
The complaint that accompanied the FTC's order alleged that competition 
likely would be harmed in a number of relevant markets, including (1) 
gasoline marketing in numerous metropolitan areas in the western and 
southern United States; (2) the refining, bulk supply, and marketing of 
California Air Resources Board gasoline in California; (3) the refining 
and bulk supply of gasoline and jet fuel in the Pacific Northwest; and 
(4) the pipeline transportation of crude oil and natural gas in various 
geographic markets. To maintain competition, the Commission required 
comprehensive divestitures and other relief. Twelve states assisted the 
Commission in conducting the Chevron/Texaco investigation and 
fashioning the consent order.
---------------------------------------------------------------------------
    \5\ In the Matter of Chevron Corp., FTC Docket No. C-4023 (consent 
order issued Jan. 2, 2002), available at http://www.ftc.gov/os/2002/01/
chevronorder.pdf.
---------------------------------------------------------------------------
    As you noted, the GAO issued a report last year on its study of 
eight petroleum industry mergers, including that agency's finding that 
six of those transactions led to increased wholesale gasoline prices, 
averaging about one to two cents per gallon.\6\ There are serious 
questions, however, about GAO's methodology and the robustness of its 
conclusions. Although I do not believe that the GAO report represents 
conclusive evidence that oil mergers have led to higher prices--or, by 
implication,,that the FTC has not done enough to protect the public 
against anticompetitive oil mergers--we have taken the GAO report's 
findings very seriously. In January 2005, our Bureau of Economics 
sponsored a conference featuring five prominent expert economists, who 
presented their views on the GAO report and on an FTC study of the 
Marathon-Ashland joint venture, which used a methodology that differed 
from GAO's and reached different conclusions from those of the GAO 
report.\7\ As input into the conference, the Bureau of Economics also 
prepared a technical report that pointedly questioned the GAO's 
methodology and findings.\8\ The experts at the conference agreed on 
the difficulties involved in properly identifying the price effects of 
mergers in an econometric study. They also agreed that it would be 
.premature to change merger enforcement policy based only on these two 
studies. They recommended that additional merger studies be undertaken 
and that various technical, statistical issues be explored further.
---------------------------------------------------------------------------
    \6\ GAO, Energy Markets: Effects of Mergers and Market 
Concentration in the U.S. Petroleum Industry (GAO-04-96), available at 
http://www.gao.gov/new.itemsld0496.pdf.
    \7\ Christopher T. Taylor and Daniel S. Hosken, Bureau of 
Economics, Federal Trade Commission, The Economic Effects of the 
Marathon Ashland Joint Venture: The Importance of Industry Supply 
Shocks and Vertical Market Structure (last revised May 7, 2004), 
available at http://www.ftc.gov/be/workpapers/wp270.pdf.
    \8\ FTC Staff Technical Report (Dec. 21, 2004), available at http:/
/www.ftc.gov/ftc/workshops/oilmergers/
ftcstafftechnicalreport122104.pdf.
---------------------------------------------------------------------------
    Since the conference, FTC economists have continued to follow up on 
the recommendations of the expert panel. They have produced an 
additional merger retrospective, which found no evidence of a merger-
related price increase in the Marathon-Ashland/Ultramar Diamond 
Shamrock transaction.\9\ In considering the expert panel's technical 
comments, FTC economists have also found new indications that GAO's 
econometric methodology may not have properly identified merger 
effects. Moreover, FTC economists have been working with one of the 
expert panelists in developing an alternative--and potentially 
superior--econometric methodology to assess the possible effects of 
consummated mergers. I would also add that the Commission's ongoing 
price manipulation investigation under Section 1809 of the Energy 
Policy Act will include a fresh inquiry into whether past oil mergers 
have had anticompetitive effects.
---------------------------------------------------------------------------
    \9\ John Simpson and Christopher T. Taylor, Bureau of Economics, 
Federal Trade Commission, Michigan Gasoline Pricing and the Marathon 
Ashland and Ultramar Diamond Shamrock Transaction (last revised July 
27, 2005), available at http://www.ftc.gov/be/workpapers/wp278.pdf.
---------------------------------------------------------------------------
    As the Commission confirmed most recently in its September 21 
testimony before the Senate Committee on Commerce, Science, and 
Transportation and its September 22 testimony before the House Energy 
and Commerce Subcommittee on Commerce, Trade, and Consumer Protection, 
we continue to use all of our available tools to promote competition 
and protect consumers in the petroleum industry, including careful 
scrutiny of industry behavior to detect anticompetitive conduct, 
effective challenges to mergers and practices that violate any laws 
that the Commission enforces, and comprehensive research to understand 
petroleum sector developments.\10\ Thus, for example, in June of this 
year, the Commission announced settlements of three important petroleum 
industry cases: its challenge to Chevron Corporation's proposed 
acquisition of Unocal Corporation; its administrative litigation to 
address allegations that a Unocal subsidiary violated the antitrust 
laws by defrauding the California Air Resources Board in connection 
with reformulated gasoline regulatory proceedings; and its challenge to 
Valero's proposed acquisition of Kaneb Services LLC and Kaneb Pipe Line 
Partners. In addition, the FTC filed a federal court complaint in July 
2005 challenging a petroleum merger in Hawaii that allegedly would have 
reduced the number of gasoline marketers and bulk suppliers in the 
state and would have led to higher gasoline prices for Hawaii 
consumers.\11\ I have enclosed copies of the Commission news releases 
describing these cases for your review.
---------------------------------------------------------------------------
    \10\ I have enclosed copies of those Commission testimonies for 
your review.
    \11\ The Hawaii lawsuit was resolved with the execution of the 20-
year throughput agreement described on page 2 of this letter.
---------------------------------------------------------------------------
    Pursuant to the Commission's gasoline and diesel price monitoring 
project, we continuously monitor price movements in 20 wholesale 
regions and approximately 360 retail areas across the nation to 
identify corporate conduct in petroleum markets that may violate the 
antitrust laws. Our economists and attorneys scrutinize every unusual 
price movement to ascertain whether it arises from conduct in violation 
of the antitrust laws or instead stems from another cause, such as 
pipeline disruptions, refinery production problems, low inventories, 
transitions to new fuel requirements imposed by government air quality 
standards, or some other supply-related problem. Although these 
examinations by our staff to date have revealed market-related causes 
for the unusual price movements detected before Hurricane Katrina, the 
Commission will take swift and decisive action if our scrutiny of price 
movements in the aftermath of Katrina or Rita--or at any other time--
reveals the use of illegal anticompetitive practices. Of course, a 
possible link between any identified unlawful activity and recent 
changes in market structure or any other structural factor would 
receive close attention.
    In addition, in response to Section 1809 of the Energy Policy Act 
of 2005, the Commission has begun an investigation to determine whether 
the price of gasoline is being artificially manipulated. This 
investigation of course will include a review of possibly 
anticompetitive behavior in the wake of Hurricanes Katrina and Rita. 
The Commission's Bureau of Competition is conducting the investigation 
in close consultation and cooperation with the Bureau of Economics, and 
they will pursue the investigation, and the Commission will report to 
Congress, as expeditiously as possible. As the FTC staff moves forward 
with this investigation, it will be able to brief the appropriate 
committees periodically about its progress. I expect the Commission's 
report pursuant to Section 1809 to be completed in the spring of 2006.
    The Commission investigation also will be informed by our extensive 
previous investigations and research in the petroleum industry. In 
particular, the Commission issued a report in early July--Gasoline 
Price Changes: The Dynamic of Supply, Demand, and Competition--that 
examines in detail numerous factors that produce fluctuations in 
gasoline prices, including the cost of crude oil, increasing domestic 
and international demand, and federal, state, and local regulations. 
The report is based on research and on the expertise that the FTC has 
acquired in investigating oil-related antitrust matters, holding public 
hearings, undertaking empirical economic studies, and preparing 
extensive reports on oil-related issues over the past 30 Years.\12\
---------------------------------------------------------------------------
    \12\ I have enclosed a copy of that report for your information. It 
is also available at http://www.ftc.gov/opa/2005/07/gaspricefactor.htm.
---------------------------------------------------------------------------
    The Commission deeply appreciates your concern about consumers in 
petroleum markets, and the agency will steadfastly maintain its 
extensive efforts to promote competition and protect consumers in those 
markets.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                           David J. O'Reilly

    Question 1. Do you think given budget deficits and record profits 
for oil companies that it is appropriate to divert tax benefits (from 
LIFO accounting method) for large integrated oil companies such as 
yours to pay for such a measure?
    Answer. No. LIFO has been a generally accepted accounting method 
for tax purposes since 1938 and all taxpayers with inventory have the 
ability to use LIFO. Changing the rules for one industry on a one-time 
basis is very poor tax policy. It has never been shown that the use of 
LIFO generates an improper accounting of costs and income for the oil 
and gas industry, and changing the rules would be contrary to the 
requirement that taxpayers utilize consistent accounting methods to 
account for income and expenses from year-to-year. Imposing such a 
large economic penalty, which would particularly impact the refining 
and marketing sector, would be counterproductive to fulfilling the 
national energy policy objectives of increasing investments in 
additional domestic production and refining capacity.

    Question 1a. Does this seem like an equitable approach given that 
the high cost of oil enable you to not only bank large profits, but 
also to use accounting methods to substantially reduce taxes? Is it 
fair to report less taxes when you're profiting the most?
    Answer. It is very poor public policy to deny the oil and gas 
industry the ability to continue to use an accounting method which is 
available to other industries. LIFO is a well-established accounting 
practice that is applied for all taxpayers with inventories. Over the 
long-term, LIFO does not overstate or understate taxes. Over the past 7 
decades, the LIFO method of accounting has been demonstrated to show an 
appropriate matching of revenues and expenses. It is inconsistent with 
sound tax policy and accounting practice to change the use of these 
well-established principles at a particular moment for a select 
industry to secure additional revenues. Further, as this accounting 
change would impact principally the integrated refining and marketing 
segment of the industry and is discriminatory, it further distorts the 
competitive playing field even within the energy industry. It is 
counterproductive to impose a higher tax burden on an industry, and an 
industry segment, where shortages are occurring when additional 
investments by that very industry and industry segment are needed to 
alleviate the shortages. Using the tax law to impose such a penalty 
would act as a large economic disincentive for investment to integrated 
refiners and marketers in an environment when the national policy and 
focus has been on trying to increase domestic refining capacity and 
refined product supplies.

    Question 2. I realize that you reinvest some of these profits in 
exploration for more product. In each quarter, have you reinvested the 
same percentage of the profits to reinvestment? What have your 
reinvestment percentages been to your total profits? Do they vary from 
quarter to quarter or year to year?
    Answer. Chevron is investing aggressively in energy development 
including oil and gas exploration, production, transportation, 
refining, marketing, and development of alternatives. Since 2002 and 
through the first 9 months of 2005, Chevron has invested more than we 
earned--$32 billion in capital expenditures worldwide compared with 
$31.6 billion in earnings. During this period, on average, roughly 75 
percent of our annual capital program has been invested in the upstream 
sector (oil and gas production) and roughly 17 percent in the 
downstream (refining and marketing). The remainder goes to chemicals, 
technology, power and other.
    We do not believe quarter by quarter comparisons, or even single 
year by single year comparisons, of capital spending versus earnings is 
particularly meaningful information. But, multi-year data is 
meaningful, as provided above. Our capital expenditures are planned 
often years in advance and are based on investment opportunities 
available. Our major capital projects require sustained spending 
commitments over multiple years for the new energy capacity to be 
installed. Thus, we maintain high levels of spending even during 
periods of depressed earnings.

    Question 3. To what non-profit organizations and academic research 
that address global climate change does your company donate financial 
support to and how much do you donate each year?
    Answer. Chevron contributes to the funding of academic research 
programs on climate science, engineering, and economics policy research 
at the Massachusetts Institute of Technology (MIT) Joint Program on the 
Science and Policy of Global Change, MIT Carbon Sequestration 
Initiative, and the International Energy Agency's Greenhouse Gas R&D 
Programme for a total of approximately $165,000 annually. In addition, 
Chevron also provides approximately $25,000 annually to the non-profit 
organization Resources for the Future which conducts independent 
research on environmental and energy issues. Climate change is 
addressed as part of their research portfolio

    Question 4. Your industry has taken the position in its SEC filings 
and at yesterday's hearing that the escalation of its fuel prices is 
the result of increases in crude oil process. However, if your retail 
gas prices were raised simply to cover your increased costs in 
purchasing crude oil, your net profits would remain the same. Everyone 
knows this is not happening. Can you identify for this committee the 
reason that the rise in gasoline prices is far out-pacing the rise in 
crude oil prices?
    Answer. Crude oil and gasoline markets are different markets. While 
increases in gasoline prices have generally followed increases in crude 
oil prices over time, the hurricanes impacted the markets differently. 
Crude prices are driven by overall product demand, the available crude 
supplies, and the available refining capacity to convert the crude to 
products. Crude supplies were impacted by the hurricane, but the 
release from the SPR helped alleviate this constraint.
    Gasoline prices are determined by supply, demand, and other 
competitive factors in the marketplace for products. Following the 
hurricanes, demand for refined products remained relatively unchanged, 
but because roughly one fourth of U.S. refining capacity was shut down, 
there was less available supply of products until those refineries 
could restart. This temporarily reduced demand for crude oil and 
lessened price pressures for that commodity. The U.S. gasoline market, 
however, remained short relative to demand, resulting in temporarily 
higher prices. Higher prices attracted product imports from around the 
world. Gasoline prices have now fallen to pre-hurricane levels, as 
refinery production is being restored and as additional product was 
imported into the United States.
    A significant majority of Chevron's profits come from the 
exploration and production of crude oil throughout the world. Chevron's 
profits from its U.S. refining and marketing operations are actually 
below those for 2004 for the first nine months of the year--partially 
due the effects of the hurricanes.

    Question 4a. Even though crude oil prices have risen this year, 
your companies aren't actually incurring those costs, are they? Isn't 
the gasoline and heating oil that your firms are currently selling on 
the market actually being produced from inventories that your companies 
purchased when the price of crude oil was much lower?
    Answer. Yes, we are incurring these costs. Crude oil and petroleum 
product inventories turn over very quickly, since refineries typically 
have only a few weeks of inventory of crude supplies. More 
significantly, prices for crude oil and refined products are set by the 
marketplace responding to supply and demand. While increases in 
gasoline prices have generally followed increases in crude oil prices 
over time, the hurricanes impacted the markets differently as indicated 
in the response to the previous question.

    Question 4b. If you're producing oil from crude that you bought at 
$40 per barrel, but selling it at a price that is purportedly based 
upon a $70 per barrel cost to you, wouldn't that account for the 90% 
increase in profits we've seen?
    Answer. Chevron's worldwide profits for the first nine months of 
2005 were up about 12% over those for 2004. The vast majority of those 
profits were from Chevron's worldwide crude oil exploration and 
production operations. Chevron's profits from its U.S. refining and 
marketing operations for the first nine months of 2005 were lower than 
for last year--largely due to the effects of the hurricanes.

    Question 5. I have alluded to the vital role petroleum plays in our 
economy and society, from the price of bread to the price of a plane 
ticket to the price of heating one's home. While you're obviously in 
the business for profit, there are other sectors of the economy where 
we put a limit on selling commodities at unconscionable prices. How 
much more of a toll do these fuel prices have to take on our society 
before Congress steps in and places similarly appropriate regulations 
on your industry?
    Answer. The oil and gas industry in the United States is very 
competitive, and on a comparable basis, oil and company profits, 
including Chevron's, as a percentage of sales revenue are in line or 
less than many other industry and business sectors. Further, U.S. 
retail gasoline and diesel prices are extremely competitive compared to 
most other developed countries, or when compared to historical U.S. 
energy prices adjusted for inflation. Additional detailed comparative 
information can be supplied either by the American Petroleum Institute 
or the U.S. Department of Energy on these factors.
    Price controls or other actions to regulate energy prices would be 
very poor public policy, and as we have seen from history, are likely 
exacerbate the current supply and price situation. Chevron is investing 
aggressively to increase reliable supplies of energy, including 
investments in oil and gas exploration, production, transportation, 
refining, marketing, and development of alternatives. Please refer to 
Chevron's written testimony about what Chevron is doing to help meet 
America's energy needs. Chevron makes a number of policy 
recommendations for the Role of the U.S. Government, and in Attachment 
C: Global Energy Equation and U.S. Energy Policy: A Declaration of 
Interdependence, to promote investment that would help ensure more 
reliable and affordable supplies of energy.

    Question 5a. Many consumers would say that raising the price of gas 
by $2 per gallon over the past 2 years,\1\ while reaping over $25 
billion in profits is price gouging. Many lawmakers would agree. What 
do you say to them?
---------------------------------------------------------------------------
    \1\ Dec. 2003 price per gallon on East Coast was $1.30; in August 
2005 it was $3.25
---------------------------------------------------------------------------
    Answer. The oil and gas industry in the United States is very 
competitive, and on a comparable basis, oil and company profits, 
including Chevron's, as a percentage of sales revenue are in line or 
less than many other industry and business sectors. Gasoline prices are 
determined by supply and demand, and in times such as those that 
followed the recent hurricanes, supply is disrupted and that puts 
upward pressure on prices. Prices have now fallen as refineries damaged 
in the hurricanes have come back on line and there is more supply in 
the market. Further, demand has tapered off somewhat, and that puts 
downward pressure on gasoline prices. Attached below from Chevron's 
written testimony (Attachment B) \2\ are regular gasoline prices by 
region, both prior to, and after the hurricanes occurred.
---------------------------------------------------------------------------
    \2\ Retained in Committee files.
---------------------------------------------------------------------------
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Pete V. Domenici to 
                           David J. O'Reilly

    Question 1. What are you doing to bring oil prices down?
    Answer. Crude oil is priced in a global market that has been 
impacted by a combination of rising oil demand and tightening supply. 
Increases in the price of oil largely can be attributed to a surge in 
global demand, particularly in China, developing Asia and the United 
States, and resulting in less spare production capacity among other 
factors. The hurricanes in the U.S. Gulf Coast further magnified the 
tightness in oil markets by shutting in nearly one quarter of domestic 
refining capacity and roughly one third of domestic oil production.
    Price volatility is oftentimes a result of rapid changes in supply, 
demand, and other competitive and geopolitical factors in the 
marketplace. Nonetheless; Chevron is investing aggressively to increase 
reliable supplies of energy, including investments in oil and gas 
exploration, production, transportation, refining, marketing, and 
development of alternatives. Since 2002, Chevron has invested $32 
billion in capital expenditures worldwide--more than it earned over 
this same period. This year alone, Chevron's 2005 capital investment 
program for the nine month period ending September 30, 2005 totaled 
$7.1 billion--a 26 percent increase over spending for the same period 
last year.
    In our written testimony, Chevron makes a number of policy 
recommendations for the Role of the U.S. Government, and in Attachment 
C: Global Energy Equation, and U.S. Energy Policy: A Declaration of 
Interdependence, to promote investment that would help ensure more 
reliable and affordable supplies of energy.

    Question 2. What is the relationship between the price of oil that 
Americans are paying and the profits you are making?
    Answer. Oil is a globally traded commodity and its pricing is a 
reflection of the interplay between supply and demand, as well as other 
competitive and geopolitical forces. Current high crude oil prices 
reflect a changing of the balance between world supply and rising 
demand, and when that demand/supply relationship is disrupted by events 
such as a hurricane, which causes lost production, then prices can 
increase until additional supplies can be brought back in line to meet 
demand.
    The oil and gas industry is one of the world's largest, so its 
revenues are large. But so are its costs, both for finding and 
producing crude oil and gas from all over the globe, and refining crude 
oil into gasoline and other refined products. As the demand for crude 
oil increases, it is becoming harder and more costly to replace the 
depleting resource base. The industry is continuing to explore for and 
produce from more challenging--and more costly--locations in order to 
satisfy this growing demand. These new potential sources of energy 
supplies (such as in the deepwater, Arctic or tapping into 
unconventional resource bases) are more expensive to bring to market. 
They require higher investments, and the higher revenues the industry 
is now seeing will enable the investments needed to bring these new 
energy supplies to market.
    That said, the oil and gas industry in the United States is also 
very competitive. On a comparable basis, oil and gas company profits as 
a percentage of sales are in line with or less than many other industry 
and business sectors. Further, U.S. retail gasoline and diesel prices 
are extremely competitive compared to most other developed countries, 
or when compared to historical U.S. energy prices adjusted for 
inflation. Additional detailed comparative information can be supplied 
either by the American Petroleum Institute or the U.S. Department of 
Energy on these factors.

    Question 3. The question I hear most from people is how is the 
price of oil is set? Many Americans think oil companies are rigging 
prices to reap big profits. How would you respond to that?
    Answer. Oil is a globally traded commodity and its pricing is a 
reflection of the interplay between supply and demand, as well as other 
competitive and geopolitical forces. As noted above, the oil and gas 
industry in the United States is very competitive, and on a comparable 
basis, oil and gas company profits as a percentage of sales are in line 
with or less than many other industry and business sectors. There are 
many thousands of participants in the oil markets as buyers and 
sellers, and therefore the notion that any company could actually 
``rig'' crude prices in an industry this competitive is not plausible. 
Chevron's percentage of global oil and gas production is approximately 
2%.

    Question 4. Americans are being burdened with high oil, natural 
gas, and gasoline prices while you all are raking in record profits. 
What do you say to those people that blame you for this and say that it 
is unfair?
    Answer. Chevron understands its important role in providing energy 
to American consumers. The price of oil is a globally traded commodity 
and its pricing is a reflection of the interplay between supply and 
demand, as well as other competitive and geopolitical forces. Current 
high prices reflect a changing of the balance between world supply and 
rising demand, and when that demand/supply relationship is disrupted by 
events such as a hurricane, which causes lost production, then prices 
can rise until additional supplies can be brought back in line to meet 
demand.
    The oil and gas industry is one of the world's largest, so its 
revenues are large. But so are its costs, both for finding and 
producing crude oil and gas from all over the globe and refining crude 
oil into gasoline and other refined products. As noted above, higher 
revenues being generated today in the energy industry will enable the 
investments needed over coming years to bring new--and more costly--
energy supplies to market.
    The United States has historically enjoyed some of the lowest 
energy costs of most developed nations. However domestic supplies have 
declined, while demand both in the United States and elsewhere around 
the world continues to increase. In addition, U.S. policy choices have 
hindered development of additional supplies. In our written testimony, 
Chevron makes a number of policy recommendations for the Role of the 
U.S. Government, and in Attachment C: Global Energy Equation, and U.S. 
Energy Policy: A Declaration of Interdependence, to promote investment 
that would help ensure more reliable and affordable supplies of energy.

    Question 5. Americans want to know if it is not costing so much 
more to produce a barrel of oil, why are prices rising so high?
    Answer. Crude oil is priced in a global market that has been 
impacted by the combination of rising oil demand and tight supply. As 
in any other industry or market (real estate, clothing food, 
electronics, etc.), prices are set by supply, demand and other 
competitive and geopolitical factors in the marketplace. While the cost 
of producing oil has increased over the past few years, the rise in oil 
price has been driven more by a surge in the rate of oil demand growth, 
particularly in China and developing Asia, and the United States and 
resulting in less spare production capacity across the oil supply chain 
and the global refining system. Adding new increments of production 
capacity is increasingly complex and expensive, and often takes 
multiple years to achieve. The hurricanes in the U.S. Gulf Coast 
further magnified the tightness in oil markets by shutting in nearly 
one quarter of domestic refining capacity and roughly one third of 
domestic oil production.

    Question 6. What is your company's response to proposals for 
enactment of a Windfall Profits Tax?
    Answer. Chevron opposes a windfall profits tax. Oil and gas 
industry profits are not excessive compared to other industries. 
Imposing such a punitive tax would discourage long-term investment in 
the very sector where tightness of supply currently exists and thereby 
exacerbate the conditions presently contributing to higher prices. The 
oil and gas industry operates in a highly cyclical and capital 
intensive, high risk business, where large investments are needed for 
continued exploration and production. A windfall profits tax would 
create a disincentive at the very time America needs more investment in 
energy production and refining capacity. Moreover, as previously 
reported by the Congressional Research Service, the 1980 windfall 
profits tax reduced domestic oil production and increased reliance on 
annual oil imports, thereby adversely affecting America's energy 
security. Such a significant change in U.S. tax law would also send the 
signal for other governments to change tax regimes in their own 
countries. This would discourage energy investment globally, and would 
not lead to additional energy supplies.

    Question 7. Do you believe that Americans are dangerously dependent 
on oil and its refined products?
    Answer. Globally, energy markets for oil, natural gas, and refined 
products are becoming more interdependent, which has ramifications for 
America's energy policy. Please refer to Chevron's written testimony 
about what Chevron is doing to help meet America's energy needs, for 
the Role of the U.S. Government, and Attachment C: Global Energy 
Equation, and U.S. Energy Policy: A Declaration of Interdependence.

    Question 8. The International Energy Agency's recent Global Outlook 
report expresses concern about world energy supplies and reliance on 
the Middle East for oil. Do you think the IEA's anxiety is justified?
    Answer. The Middle East will continue to be important from an 
energy perspective, since roughly two thirds of the global oil and gas 
reserves are located there. As noted in Chevron's written testimony, 
over the last several years, there has been a significant shift in the 
relationship between oil and gas supply and demand globally, and 
markets are becoming more interdependent, which has ramifications for 
America's energy policy. Per the answer above, please refer to specific 
sections of Chevron's written testimony.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Lisa Murkowski to 
                           David J. O'Reilly

    Question. First, thank you for being willing in your written 
testimony to support oil exploration and development in the Arctic 
coastal plain. If the coastal plain, including the Native-owned lands 
are opened by Congress this year, how quickly do you believe industry 
will attempt to explore in the area and what is your view as to how 
long it might take for the area to produce oil? Does your company have 
any interest in actually engaging in exploration or oil production 
operations in Alaska given current events?
    Answer. If the ANWR coastal plain is opened by Congress this year, 
a date would presumably be set for a lease sale which would give 
industry time to collect seismic data and evaluate the value of 
acreage. It is likely that seismic data acquisition could begin within 
12-18 months; exploration drilling could commence 12-24 months after 
the first lease sale; and production could begin as early as five years 
after exploration drilling starts, depending on permits for pipelines. 
Chevron continues to strongly support opening the ANWR coastal plain 
for environmentally responsible oil and gas exploration and 
development, and our long-term interest in ANWR is demonstrated by the 
maintenance of our 92,000 acre lease position on the coastal plain.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. James M. Talent to 
                           David J. O'Reilly

    Question 1. The recent hurricanes have highlighted the need for 
increasing refinery capacity, which was already operating at a tight 
margin of 97 percent. While that is laudable for efficiency purposes, 
it allows no room for error in case of sudden outages or demand 
increases. What is the optimal amount of spare refining capacity to 
ensure a reliable supply of finished petroleum products at stable 
prices?
    Answer. The refined product markets are large, global and flexible, 
with product imports being an economic component of meeting total U.S. 
product demand. In fact, the United States has routinely imported 
petroleum products since the end of World War II. While the recent high 
crude utilization rates may seem to leave no room for sudden outages, 
our refineries have been able to meet customer demands by maintaining 
the appropriate inventories and acquiring product from our system or 
from other suppliers. As noted in our testimony, Chevron is investing 
to increase refining capacity in the United States through our existing 
refining network. Further, Chevron recommended a number of policy 
changes that the U.S. government can implement to create a better 
climate for refinery investment, which are highlighted in our written 
testimony.

    Question 2. How has industry consolidation impacted the amount of 
spare production and refining capacity?
    Answer. Domestic refining capacity has continued to grow over time, 
even as the number of operating refineries has declined. EIA data show 
that since 1950, while the number of refineries has decreased from over 
300 to about 150 today, the U.S. refining capacity has more than 
doubled, from roughly 7 million barrels per day to almost 17 million 
barrels per day. We do not believe that industry consolidation has 
impacted refining capacity. There are other reasons why some refineries 
have closed, such as the economics related size and efficiency, and 
investments needed for environmental and other compliance requirements 
and fuel reformulations.
    With respect to oil and gas production, Chevron does not know how 
industry consolidation has impacted production capacity, if it has at 
all. In many cases, consolidation has led to property sales to 
independent E&P companies, who continue to operate those fields. For 
Chevron, consolidation has focused on improving efficiencies and 
reducing operating expenses. These efficiency gains have provided 
sufficient incentive to move ahead with production enhancement projects 
which were previously marginal.

    Question 3. Describe the degree of competition between refineries 
for crude oil supplies and sales to retailers. What percentage of crude 
oil processed in the U.S. is processed by integrated companies (i.e., 
those produce and refine) versus refined by independent refining 
companies?
    Answer. Chevron faces significant competition from U.S. refining 
and marketing companies for crude oil supply and sales to retailers. 
The Federal Trade Commission (FTC) concluded in its 2004 report The 
Petroleum Industry: Mergers, Structural Change and Enforcement that 
despite substantial industry restructuring and consolidation, ``most 
sectors of the petroleum industry at the national, regional, or state 
level generally remain unconcentrated or moderately concentrated.''
    Total U.S. refining capacity is approximately 16.8 million barrels 
per day. Overall, integrated oil companies provide just over half of 
the capacity with independent refining companies making up the balance. 
By comparison, Chevron's share of U.S. refining capacity today is 
approximately 5.5%, while the largest U.S. refiner is an independent 
refiner with approximately 13.5% of U.S. refining capacity (Valero).

    Question 4. How has the amount of refining capacity tracked changes 
in demand for gasoline and diesel over the last 30 years?
    Answer. Product demand in the United States has grown at a pace of 
1-2% per year over this period. As noted in Chevron's written testimony 
(see Attachment D), * U.S. refining capacity has grown at nearly the 
same rate through modification and expansion of existing refineries. As 
noted on that chart, the percentage of refining capacity being operated 
has generally been increasing over the last two decades. There have 
been no new refineries constructed in the United States during that 
time.

    * The information referred to has been retained in Committee files.
---------------------------------------------------------------------------
    Question 5. Explain to me your company's plan to increase refining 
capacity in the U.S. to meet the need for new refinery capability.
    Answer. We are always evaluating opportunities to expand our 
capacity where demand warrants and it is economic to do so. As noted in 
Chevron's written testimony, Chevron is making investments to improve 
reliability and increase production capacity at our refineries in 
Richmond and El Segundo, CA, and Pascagoula, MS. Chevron has expanded 
capacity over the past ten years and has plans to continue to do so in 
the future.

    Question 6. EPAct 2005 removed the requirement to include 
oxygenates from gasoline, largely because of concerns over the use of 
MTBE. What is the impact on the price of removing oxygenates from 
gasoline?
    Answer. There is no way to predict the impact of MTBE reduction on 
the market as other factors of supply and demand come into play. 
Unfortunately, the 2005 Energy Bill actually did little to directly 
address MTBE use. Prior Congressional action effectively required the 
use of MTBE, yet Congress has not passed new legislation protecting the 
industry from defective product claims advanced by the plaintiffs' 
trial bar. Oxygenates are useful in meeting the specifications for 
reformulated gasoline and for extending volume. When oxygenates are 
removed from gasoline, other hydrocarbon components can be used to make 
up part or all of the lost volumes. Nor is there reason to believe that 
all oxygenates will be dropped from gasoline because of the EPAct 2005 
changes; ethanol use is likely to rise. And, finally, many other market 
conditions enter into the supply/demand equation which ultimately 
determines price. Chevron has already eliminated MTBE use in many 
places where Chevron refines and markets gasoline.

    Question 7. Are there other oxygenates that can be used in place of 
MTBE, such as using ethanol to make ETBE, and how does the cost of such 
alternative additives compare to the cost of gasoline?
    Answer. Ethanol can be used to replace MTBE to some degree and 
under some circumstances. However, it should not be viewed as a direct 
gallon-for-gallon replacement since its physical characteristics differ 
from those of MTBE in several important respects. Averaged over the 
long run, ethanol and MTBE have both been more expensive than wholesale 
gasoline. Ethanol has remained competitive with MTBE only because its 
cost is subsidized by the Federal Government. Chevron has no plans to 
make ETBE, which has many of the same physical characteristics as MTBE.

    Question 8. Have you studied the use of ETBE, the cost of 
converting MTBE plants and how long it would take to do so, and whether 
ETBE avoids the leakage/water contamination problems that were caused 
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE 
and use it to increase the volume of gasoline produced by a barrel of 
oil compare to the cost of expanding existing or adding new refinery 
capability?
    Answer. Chevron has studied the use of ETBE, including the cost of 
converting MTBE plants, but has decided against using it in Chevron 
gasolines. ETBE has many of the same physical characteristics as MTBE.

    Question 9. What, if anything, is preventing your company from 
using ETBE in place of MTBE?
    Answer. As noted above, Chevron has decided against using ETBE in 
the gasolines it manufactures.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Gordon H. Smith to 
                           David J. O'Reilly

    Question 1. I have a bill, S. 1743, to give the Federal Trade 
Commission, additional authority to prevent and punish price gouging in 
the aftermath of a major disaster. My bill provides effective authority 
to the Federal Trade Commission to protect consumers from being 
victimized in the wake of a disaster without hampering the normal 
functioning of the free market. It even recognizes that there are 
legitimate reasons why prices may increase. Do you think that this 
consumer protection authority should be available to the FTC?
    Answer. Chevron has indicated its support for the Barton bill which 
contains price gouging provisions among other important energy policy 
provisions including fuel waivers during emergencies, boutique fuels, 
and permit streamlining, among other issues. However, Chevron agrees 
with the FTC that ``price gouging'' legislation is likely to do 
consumers more harm than good. As noted in the prepared statement 
presented by FTC Chairman Deborah Platt Majoras on November 9, 2005 to 
the Senate Committees on Energy and Natural Resources and Commerce, 
Science, and Transportation.

          ``Experience from the 1970's shows that price controls 
        produced longer lines at the pump--and prolonged the gasoline 
        crisis. While no consumer likes price increases, in fact, price 
        increases lower demand and help make the shortage shorter-lived 
        than it otherwise would have been.
          ``Prices play a critical role in our economy: they signal 
        producers to increase or decrease supply, and they also signal 
        consumers to increase or decrease demand. In a period of 
        shortage--particularly with a product like gasoline, that can 
        be sold in many markets around the world--higher prices create 
        incentives for suppliers to send more product into the market, 
        while also creating incentives for consumers to use less of the 
        product. For instance, sharp increases in the price of gasoline 
        can help curtail the panic buying and `topping off' practices 
        that cause retailers to run out of gasoline. In addition, 
        higher gasoline prices in the United States have resulted in 
        the shipment of substantial additional supplies of European 
        gasoline to the United States. If price gouging laws distort 
        these natural market signals, markets may not function well and 
        consumers will be worse off. Thus, under these circumstances, 
        sound economic principles and jurisprudence suggest a seller's 
        independent decision to increase price is--and should be--
        outside the purview of the law.''

    Question 1a. Would this serve as a deterrent to price gouging by 
individual retailers?
    Answer. Any beneficial deterrent effect of price gouging 
legislation would be more than offset by the detrimental effects 
discussed above.

    Question 2. Can you tell me why diesel prices continue to remain 
significantly higher than gasoline prices in Oregon?
    Answer. Transportation fuel prices are determined by supply, demand 
and other competitive factors in the marketplace. Demand for diesel 
products has been increasing in both the U.S. and Europe, and is 
expected to continue increasing as we enter the winter season. The 
recent impact of hurricanes significantly affected both U.S. gasoline 
and diesel supplies because of refinery outages. The market works in a 
way that supplies move to the highest demand. Because of higher demand 
for diesel than gasoline, notably in the European Union, the United 
States ended up attracting less diesel imports which have led to 
continuing higher prices for diesel in Oregon and the rest of the 
country.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Jim Bunning to 
                           David J. O'Reilly

    Question 1. Some analysts believe that OPEC is approaching its 
current oil production capacity. Given this, are oil companies looking 
at alternative sources of energy, such as liquid fuels made from coal, 
in order to expand their business and maintain energy supplies for the 
United States? Please include a review of the level of investment your 
company is making this year and the projected investment over the next 
three years in coal to liquid fuels initiatives.
    Answer. Chevron is established as one of the world's premier 
producers and refiners of heavy hydrocarbons. Fundamental to our 
success is a complete suite of advanced research, engineering, and 
operational capabilities to produce clean transportation fuels and 
products from the increasing supply of challenged resources such as 
extra-heavy oil, bitumen, tar, coal, and shale oils. Components of our 
heavy oil processing technology have been made available to other 
refiners in the U.S. and around the world through technology licensing 
agreements.
    For several decades, Chevron has sustained investments in the full 
technology pipeline from basic R&D in catalytic chemistry through the 
deployment of world-scale processing facilities. For the past few 
years, we have been significantly expanding our core R&D programs in 
heavy hydrocarbon conversion technology to meet the challenge of 
producing advanced fuels from these very large, but technically and 
economically difficult resource bases. Our R&D expenditures in heavy 
hydrocarbon conversion technology for 2005 will be an estimated $50 
million. We will continue to invest in R&D expenditures in subsequent 
years.

    Question 2. I have been concerned with the lag time between the 
wholesale cost of a barrel of oil and the retail price of a gallon of 
gasoline. As we saw following the hurricane, in an ascending market 
where wholesale oil prices increase, there is a lag period of a few 
days before retail gas prices reflect this change. Similarly one would 
expect a lag in a descending market. My concern is that retail prices 
are not dropping as quickly as they rose, relative to the change in oil 
prices. Could you explain why price movements vary during a complete 
market cycle and whether you believe any part of the energy industry is 
unfairly profiting from this price lag?
    Answer. Crude oil and gasoline markets are different markets. While 
increases in gasoline prices have generally followed increases in crude 
oil prices over time, the hurricanes impacted the markets differently. 
Crude prices are primarily driven by overall product demand, the 
available crude supplies, and the available refining capacity to 
convert the crude to products. Crude supplies were impacted by the 
hurricane, but the release from the Strategic Petroleum Reserve helped 
alleviate this constraint.
    Gasoline prices are determined by supply, demand, and other 
competitive factors in the marketplace for products. Following the 
hurricanes, demand for refined products remained relatively unchanged, 
but because roughly one-fourth of U.S. refining capacity was shut down, 
there was less available supply of products until those refineries 
could restart. This temporarily reduced demand for crude oil and 
lessened price pressures for that commodity. The U.S. gasoline market, 
however, remained short relative to demand, resulting in temporarily 
higher prices. Higher prices attracted product imports from around the 
world. Gasoline prices have now fallen to pre-hurricane levels, as 
refinery production is being restored and as additional product was 
imported into the United States.

    Question 3. Boosting our domestic energy production is vitally 
important not only to our economy but also to our national security. 
Many of the countries we import oil from today are unstable, 
jeopardizing the reliability of sustained production. Please provide a 
chart for each of the last five years reflecting the percentage of your 
exploration and production budget that invested in the United States 
versus that invested overseas. Please also provide a chart reflecting 
your current projections of the percentage of your exploration and 
production budgets that will be allocated to projects in the United 
States versus overseas for the next five years.
    Answer. Since 2002, Chevron has invested $32 billion in total 
capital expenditures worldwide. This year alone, Chevron's 2005 capital 
investment program for the nine month period ending September 30, 2005 
totaled $7.1 billion--a 26 percent increase over spending for the same 
period last year. Chevron does not disclose capital programs beyond the 
current year.

    Question 4. The disruption caused by the recent hurricanes 
displayed the United States' vulnerability when it comes to domestic 
energy supply and production. What suggestions do you have to 
strengthen our energy supply and production capability?
    Answer. Chevron encourages the opening of federal and state lands 
and waters that are currently off limits to oil and gas exploration and 
production. These include the eastern Gulf of Mexico, the Atlantic and 
Pacific coasts, ANWR, and onshore locations across the United States. 
These areas can be developed with minimal environmental impacts, and 
the government has significant environmental safeguards currently in 
place. In addition, streamlined permitting of liquefied natural gas 
terminals in the U.S. will speed increases in the diversity of the U.S. 
energy supply.

    Question 5. It has been suggested that the United States consider 
developing a strategic gasoline and natural gas reserve, similar to 
Strategic Petroleum Reserve we currently have. Some analysts suggest 
that such reserves may minimize price spikes in these commodities 
during periods of market supply disruptions. What are your views on 
whether a strategic natural gas or gasoline reserve would be feasible 
and whether they might help minimize price increases during periods of 
market uncertainty?
    Answer. Chevron does not believe that establishing gasoline or 
other refined product reserves would ensure stability of price and 
supply. There would be costs and logistical challenges for establishing 
and maintaining such reserves and could result in unintended 
consequences, such as raising the cost of gasoline or jet fuel. These 
challenges include determining when and where to store products, 
dealing with a number of fuel specifications, and the need to rotate 
storage of products to prevent them becoming stale, among other issues. 
Chevron believes a comprehensive national energy policy that addresses 
both supply and demand would have a more significant impact on market 
stability.
    Chevron believes that additional natural gas storage is being 
developed today and that market forces are the most efficient means for 
adding new storage. However, Chevron could support studying the 
establishment of a U.S. natural gas reserve. Such a review would need 
to assess fundamental technology and market differences, and other 
issues, associated with natural gas storage as compared to crude oil 
storage.

    Question 6. China is becoming a bigger world oil player. This not 
only has tightened the world oil market but also has produced national 
security concerns for us. What concerns or problems do you see have 
arisen since China became a bigger world energy player?
    Answer. China's increased demand for energy has raised important 
questions for the United States about how to more effectively work with 
China both to ensure increased energy supplies to meet growing global 
demand as well as ensure focus on energy efficiency and conservation 
measures. Such a dialogue between the two largest energy importers in 
the world is extremely important.
    Chinese energy demand, having grown rapidly, has outstripped its 
domestic sources of energy supply. It is now looking abroad for 
resources, as are many other counties, including the United States. 
Globally, demand is increasing, spare production capacity is 
increasingly constrained, and energy markets have become more 
interdependent. As noted in Chevron's written testimony, the United 
States needs to work more actively with other countries to gain access 
to additional sources of energy and to ensure a level investment 
playing field across national boundaries.

    Question 7. While there have been expansions and efficiency gains 
at existing refineries, no refinery has been built in the United States 
in 30 years. Since the oil companies are now making record earnings, 
are there plans to build new refineries in the United States?
    Answer. Chevron currently has no plans to build new refineries in 
the United States. Instead, we are focusing our efforts on adding 
capacity at existing refineries because it is typically more cost-
effective, and fewer permitting barriers exist. We are always 
evaluating opportunities to expand our capacity where demand warrants 
and it is economic to do so. As noted in Chevron's written testimony, 
Chevron is making investments to improve reliability and increase 
production capacity at our refineries in Richmond and El Segundo, CA, 
and Pascagoula, MS. Chevron has expanded capacity over past ten years.

    Question 8. The 2005 Energy Bill implemented a controlled phase-out 
of MTBE. Many companies, however, are planning on completely halting 
its use. How will a sudden halt of the use of MTBE affect the gasoline 
market and refineries?
    Answer. There is no way to predict the impact of MTBE reduction on 
the market as other factors of supply and demand come into play. 
Unfortunately, the 2005 Energy Bill actually did little to directly 
address MTBE, although there is clearly a disincentive to continued use 
of MTBE. Prior Congressional action effectively required the use of 
MTBE, yet Congress has not passed new legislation protecting the 
industry from defective product claims advanced by the plaintiff trial 
bar. Chevron has had a long-standing goal of eliminating MTBE from our 
gasolines and we continue to work aggressively to fulfill that goal. 
Years ago we stopped manufacturing MTBE in our own refineries but have 
not been able to obtain sufficient supply of non-MTBE gasoline from 
other sources to completely eliminate it from the gasolines we sell. As 
other companies increase the availability of non-MTBE gasoline to us, 
we will make greater progress toward meeting our goal. Of note, there 
was little market/price reaction to the MTBE phase-outs in California, 
New York and Connecticut which have already occurred.

    Question 9. I have noticed very large differences between the price 
of gasoline in different areas of the country. For example, I recently 
saw gasoline in northern Virginia that was much more expensive than 
gasoline in northern Kentucky. Please explain why there can be such a 
significant difference in gasoline prices in different areas of the 
country.
    Answer. Gasoline prices vary across geographic areas because of 
differences in supply, demand and competitive forces from region to 
region. In addition, regional differences in factors such as taxes, 
supply proximity and disruptions, and special formulated gasoline 
requirements can affect price levels in different states and regions.
Below are Several Questions on Oil and the Commodities Futures Market
    Question 10. When was oil first traded on the world-wide 
commodities futures market?
    Answer. NYMEX launched crude oil futures trading in 1983.

    Question 10a. Would the price of oil be affected if oil was taken 
off the commodities futures market and no longer traded?
    Answer. It is our belief that the futures market adds transparency 
and liquidity, thereby providing a better reflection of the oil's 
``true'' value over time. It has been suggested that futures market 
speculation distorts the price of oil. However, speculation occurs in 
physical markets as well (e.g. buying for storage). Ultimately, and 
over the long term, it is the relative state of the physical supply/
demand balance that determines price levels.

    Question 10b. Would oil then be bought and sold as a true supply 
and demand product?
    Answer. The answer to this question is covered in the prior answer 
above.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Jeff Bingaman to 
                           David J. O'Reilly

    Question 1. Section 392 of the Energy Bill, which was negotiated 
with the involvement of the Chairman and Ranking Member of the Energy 
and EPW Committees, contains permitting streamlining language. The 
Energy Policy Act of 2005 permits the EPA Administrator to enter into a 
refinery permitting cooperative agreement with a state. Under such an 
agreement, each party identifies steps, including decision timelines, 
it will take to streamline the consideration of federal and state 
environmental permits for a new refinery. I want to ask you several 
questions about that provision, since you have supported streamlining:
    A. Have you requested that EPA issue any regulations or take any 
action to implement these new provisions?
    Answer. Section 392 of the Energy Bill requires the Governor to 
request a permitting cooperative agreement for siting and construction 
of new refineries. Chevron has not pursued this provision since we have 
not planned a new refinery since this bill was enacted.

   If yes, when?
   If no, when do you anticipate you will do so?

    Answer. Chevron currently has no plans to build new refineries in 
the United States. Instead, we are focusing our efforts on adding 
capacity at existing refineries because it is typically more cost-
effective, and fewer permitting barriers exist. We are always 
evaluating opportunities to expand our capacity where demand warrants 
and it is economic to do so. As noted in Chevron's written testimony 
(page 9), Chevron is making investments to improve reliability and 
increase production capacity at our refineries in Richmond and El 
Segundo, CA, and Pascagoula, MS. Chevron has expanded capacity over 
past ten years.

    Question 1a. Have you worked with any state to encourage them to 
enter into an agreement with EPA under Section 392 of EPAct?
    Answer. We have not worked with states since we have no current 
plans to build a new refinery, as noted above.

    Question 1b. Do you support the EPAct streamlining provisions?
    Answer. We support provisions to streamline federal, state and 
local requirements. EPAct is a good first step, but it does not address 
the most troublesome permitting challenges a facility must overcome in 
order to gain approvals from multiple levels of government. The 
permitting process could be significantly improved without compromising 
environmental protection by eliminating duplicate requirements, 
creating single approval authority, providing regulatory certainty and 
limiting third party ability to protract the project approval process 
indefinitely.

    Question 1c. Do you have any examples of where a state came to EPA 
and said we want to work closely with you on permitting a new refinery 
or refinery expansion and EPA refused to provide technical assistance 
and even financial resources under existing law to that state?
    Answer. No. A state would not usually advocate approval of a new 
refinery or refinery expansion project to EPA. States and local 
authorities are bound, as is the EPA, by a statutory and regulatory 
framework for processing permits. It is this cumulative compilation of 
federal, state and local requirements as well as review and approval 
timelines that creates investment uncertainty and barriers to capacity 
expansion projects.
    A better example of the state/federal difficulty is the requirement 
for EPA oversight and/or approval of federally required permits and 
State Implementation Plans. These federal approvals must be sought even 
in those situations where the state is granted federal authority to 
administer the environmental program. When EPA withholds these 
approvals or disputes the states' implementation interpretations, it 
creates substantial delays in granting individual permits and amplifies 
regulatory uncertainty.

    Question 2. In answer to several of the questions at today's 
hearing (Nov. 9) the witnesses have noted that the market for petroleum 
and petroleum products is a global one and should be viewed in that 
context. Please list all planned refinery construction that your 
company plans to undertake globally. Please list them by country and 
include the projected size of the facility, including the projected 
capacity for all units and their potential product yields in addition 
to the project's total investment cost.
    Answer. In addition to refining projects in the United States, 
Chevron currently has clean fuels projects underway at its refineries 
in Singapore and South Africa. Chevron is evaluating additional 
refinery investments in a number of locations globally. For competitive 
reasons, we do not share specific information on projects until they 
have been publicly announced.

    Question 3. The International Energy Agency (IEA) has just released 
its World Energy Outlook 2005. It contains a piece on the global 
refining picture. The study notes a lack of investment in upstream and 
downstream capacity has contributed to the extreme tightness in global 
oil markets. What are your thoughts in response to this? What is your 
company doing in response (actions)? What is your company doing 
(investments/analysis) in the ``MENA'' regions? Do you agree with the 
IEA's projections?
    Answer. Chevron believes The IEA's assessment of tightness in the 
global refining picture is a reasonably accurate for near-term 
conditions. Globally, refinery utilization has increased to the point 
where complex upgrading capacity to produce more light products 
(gasoline and diesel fuel, as opposed to fuel oil and other heavy 
products) is nearly full. However, as the IEA points out, there are 
complications and risks associated with additional investment in new 
refineries, including:

          1. environmental restrictions and local resistance hamper 
        additional refinery investments
          2. increasing light product demand and shrinking fuel oil 
        markets require expensive upgrading units to produce lighter 
        refined products,
          3. tightening fuel specifications and trend towards heavier 
        crude oils also require refiners to make refinery investments, 
        and
          4. uncertainty in investment economics due to the length of 
        time to build new refining capacity.

    Nevertheless, many analysts expect refining capacity to grow by 
over 1 million barrels per day each year before 2010 as refiners 
respond to the current tightness. However, we do not necessarily agree 
with the IEA's demand growth projections and, consequently, their 
estimated need for refining capacity. Even so, demand growth appears 
sufficiently strong near-term to encourage more refining investments 
globally. Chevron is evaluating additional refinery investments in a 
number of locations globally. For competitive reasons, we do not share 
specific information on projects until they have been publicly 
announced.

    Question 4. Voluntary standards--Post hurricanes, what is the 
industry doing to come up with voluntary standards/best practices for 
back-up power supply to critical energy infrastructure (refineries, 
pipelines, etc.) and natural disaster recovery? Will the API undertake 
such an effort? If not, what is your company doing?
    Answer. Chevron has taken several steps to reduce impacts from the 
hurricanes, including building a dike around our Pascagoula refinery 
following Hurricane Georges in 1998 to reduce the risk of flooding 
damage, and more recently placing of generators at marketing terminals 
and various service station locations to provide emergency power. 
Chevron is evaluating several projects that would minimize the impact 
of future hurricanes. These projects could help minimize the wind 
damage, reduce impact from flooding as well as allow a more rapid 
startup of the refinery after such an event.

    Question 5. A number of witnesses testified that failure of the 
electricity system resulting from hurricanes Rita and Katrina 
contributed in great part to the inability to get refineries restarted, 
or to get natural gas pipelines restarted. What are the arrangements 
for backup power in case of such emergencies at your critical 
facilities?
    Answer. We can only speak to Chevron's experience. Lack of 
electrical power to our facility was not the limiting factor in 
restarting the Pascagoula refinery after Hurricane Katrina. Although we 
secured temporary electrical generators to restart our fuel terminal, 
there were many steps and procedures that needed to be executed before 
the refinery could be safely restarted. Electrical power supply did not 
limit the full refinery restart. Electrical generators were used at 
many marketing terminals and service stations to provide emergency 
power, until normal power service was restored.

    Question 6. How many of your plants have on site cogeneration 
facilities? Which plants have these facilities?
    Answer. Four of Chevron's U.S. refineries have cogeneration 
facilities located on site: they are our facilities at Pascagoula, MS; 
El Segundo, CA; Richmond, CA; and Kapolei, HI.

    Question 7. Are there regulatory barriers at the either the state 
or federal level that prevent the installation of cogeneration plants 
at your facilities that do not have them?
    Answer. Construction of cogeneration facilities has associated 
regulatory barriers including permitting difficulties, as well as 
difficulties/uncertainties whether one can sell excess power to the 
electrical grid system. Our decisions to install cogeneration 
facilities are based on the economics of fuel and electricity costs, 
reliability of the electrical delivery system as well as existing 
refinery infrastructure and utility balances.

    Question 8. Would the presence of cogeneration facilities at your 
refineries reduce the recovery time during such emergencies?
    Answer. Chevron has cogeneration facilities at its Pascagoula 
refinery, which was impacted by the hurricanes. Although cogen 
facilities are an alternative source of electrical power, they need a 
fuel source and utility water to operate. Restoring the natural gas 
supply and water supply were critical to reestablishing electrical 
power to the facility.

    Question 9. Witnesses at earlier hearings testified that there are 
a number of modern natural gas generation facilities in the Louisiana/
Texas area that are not used to their full capacity. Are there natural 
gas generation facilities in close proximity to your refinery 
facilities that could be used for backup generation at the refineries?
    Answer. By modern natural gas generation facilities, Chevron is 
assuming this question is asking whether cogeneration facilities were 
available to help provide back-up power generation at refineries. As 
noted in our response to question #6 above, Chevron's Pascagoula 
refinery, which was our only refinery impacted by the hurricanes, has 
its own cogeneration capacity.

    Question 10. Would use of generators that are in close proximity to 
refineries to provide backup power during such emergencies mean that 
recovery times might be shortened, since the restoration time for a 
nearby facility might be less than the restoration time for the 
transmission facilities for traditional utilities?
    Answer. Chevron used portable generators at its Pascagoula refinery 
to provide power to its fuel truck loading rack. This loading rack was 
used to supply motor gasoline and diesel fuel to emergency services in 
the initial days following the hurricane. Chevron used the generator to 
provide electricity until sufficient power was restored by the local 
utility. Additionally, Chevron used generators at many marketing 
terminals and service stations, until power was restored.
Environment
    Question 11. Please specify exactly which, if any, Federal or State 
environmental regulations have prevented your company from expanding 
refinery capacity or siting a new refinery, and documentation on the 
exact details of the project prevented.
    Answer. Several regulations impose economic burdens to existing 
operations and new projects. However, New Source Review (NSR) presents 
one of the most significant disincentives to new investment. NSR not 
only presents a cumbersome, uncertain permitting process, but more 
importantly, can trigger additional requirements including installing 
costly emission controls, acquiring emission offset credits from other 
sources and in some cases initiating re-permitting of entire existing 
co-located process units. Projects under consideration to increase 
production capacity must factor all these burdens into the economic 
justification for investment. In some cases, refinery capacity 
expansion projects have been constrained or deferred to avoid this 
uncertain and time consuming process.

    Question 11a. How much have so-called ``boutique fuel'' 
requirements added to the average retail price, where applicable, and 
the average wholesale price per gallon of the gasoline sold by your 
company?
    Answer. Because it is impossible to separate out all the factors 
that affect supply and demand, Chevron cannot isolate the single impact 
boutique fuels have on the price of gasoline. However, there is no 
question that the proliferation of boutique fuels has added to the 
complexity associated with the regional supply and distribution of 
fuels. Further, boutique fuels can result in market instability in 
local markets for short periods of time when supplies of a designated 
fuel are interrupted and substitutes, while physically available, are 
not allowed for use.

    Question 11b. If the EPA or the Congress were to act to minimize 
the number of ``boutique fuel'' formulations required by the states to 
protect air quality, how many should there be and what should the 
specifications of each be in order to maintain air quality and improve 
fungibility?
    Answer. Minimizing the number of ``boutique fuels'' would be 
helpful. It is equally important to align them with the regional supply 
and distribution system. Many proposals to reduce the number still 
leave open the possibility that several could be required in one 
region. In addition, several proposals still allow state and local 
jurisdictions to create their own boutiques. Should these shortcomings 
be rectified, Chevron believes an acceptable list could be forged from 
S. 1859 (BURR/ALLEN) and H.R. 3893 (BARTON) which generally limit the 
number of boutique gasolines to five and diesel fuels to two.

    Question 12. Streamlining New Source Review (NSR) permitting 
constraints was mentioned as an incentive that would encourage refiners 
to supply more product to the U.S. market. How many air quality permit 
applications for refinery expansions has your company submitted for NSR 
over the last ten years? How long did it take the EPA, or the 
applicable State, to approve or deny each permit application, after 
receipt of a complete permit application? What was the expected 
percentage increase in product output of the expansion?
    Answer. We have submitted approximately 200 permits (from our 5 
refineries) that are subject to NSR (federal and local) review for our 
refineries in the last 10 years. However, this number is not in itself 
meaningful since some districts require individual permits for sources 
and others allow multiple sources within a project to be included in a 
single permit. In general, a major refinery in a non-attainment area 
will have to seek approximately 2 to 4 major NSR permits a year. These 
permits are necessary for preventative maintenance projects such as 
replacing a tank or a pump, and may take 3 to 9 months to obtain. More 
significant projects such as process debottlenecking and major unit 
upgrades can take 2 years or longer.
    Typical refinery projects subject to NSR permitting include new 
fuel projects, and other refinery modifications. Due to new 
technologies and improved efficiency, the new or upgraded equipment 
will usually have much lower emissions than the previous equipment, but 
still be subject to NSR even when actual emissions do not increase.

    Question 12a. How would you propose to streamline NSR and still 
maintain local air quality and prevent any increase in total annual 
emissions from such expansions?
    Answer. Codifying many of the reforms in EPA's 2002/2003 NSR reform 
package would offer significant relief without increasing actual 
emissions. In particular:

   Plant-wide applicable limits--Allow facilities to make 
        process changes, throughput increases and debottlenecking 
        improvements in any way necessary to accommodate business needs 
        and new technology as long as their total overall plant 
        emissions stay the same.
   Clarify that routine repair and maintenance projects are not 
        defined as new or modified sources. This would encourage 
        facilities to increase reliability and energy efficiency.
   Eliminate unnecessary re-permitting of entire units co-
        located with a modification when emissions from the existing 
        equipment would stay within permitted limits.
   In addition, we support provisions in the House passed Bill 
        (H.R. 3893) that would streamline permitting process for 
        projects that increase facility efficiency and reliability.

    Question 13. How much did the fuel specification waivers that have 
been granted by EPA to date, due to the supply disruptions caused by 
the hurricanes, reduce the average retail price of the gasoline or 
other refined products made by your company?
    Answer. It is impossible to determine the how fuel specification 
waivers granted by EPA to date impacted the retail price of gasoline or 
other refined products since those are determined by available supply, 
demand and other competitive factors in the marketplace. However, the 
EPA waivers were very effective in making both gasoline and diesel 
supplies more widely available to the public (see copy of Chevron 
letter previously sent by Mr. Michael Wirth, President of Chevron 
Global Supply & Trading, to EPA Administrator Johnson, with copies to 
Chairman Domenici and Senator Bingaman, which provides examples of 
where Chevron was able to provide additional supplies because of the 
waivers, dated October 10, 2005). Directionally, the waivers lessened 
the extent both in terms of volume and time to which certain markets 
were experiencing very tight supplies.

    Question 14. One witness indicated that ``getting two 100-year 
hurricanes in four weeks'' caused a great deal of chaos and disruption 
in the gasoline supply chain. The National Oceanic and Atmospheric 
Administration has projected that the country and the Gulf of Mexico 
have entered a cyclical period of 20-30 years during which the Gulf and 
coastal areas are likely to experience a greater frequency of 
hurricanes and higher odds of those hurricanes making landfall in the 
U.S. What preparations has your company made to deal with a greater 
hurricane frequency to decrease repetition of the supply disruption 
that occurred this year?
    Answer. Following hurricanes and other natural disasters, Chevron 
evaluates how our onshore and offshore oil and gas production 
facilities and processes performed. Chevron also participates in 
similar ongoing industry evaluations. We use the evaluations to guide 
improvements to our assets and processes, and to help guide design 
specifications for new facilities which are being constructed. Our 
primary focus is protecting our employees and contractors, followed 
closely by protecting the environment. Even in the face of these 
significant storms, our facilities did very well--we had no injuries to 
our personnel and we had only minor environmental impact, in spite of 
significant facility damage.
    The installation of a 22-foot dike wall after 1998 Hurricane 
Georges reduced the risk of damage at our Pascagoula Refinery. 
Hurricane Katrina-related storm surge damage to the Pascagoula area 
outside the refinery was far greater than was experienced during 
Hurricane Georges. Yet in contrast, the flooding inside the refinery 
was reduced such that we were able to return the refinery to normal 
operation in 6 weeks after Katrina as opposed to 4 months after 
Hurricane Georges.
    We are evaluating several projects that will minimize the risk of 
damage from future hurricanes such as Katrina. These projects include 
efforts to minimize the wind damage, further reduce impact from 
flooding as well as allow a more rapid startup of the refinery after 
the event.

    Question 15. Over the last 50 years, average annual sea surface 
temperatures have increased in the Gulf of Mexico and, according to the 
National Academy of Sciences and other similar scientific expert 
bodies, are expected to continue increasing as the oceans continue 
warming due to accelerating global climate change. The Administration's 
Climate Action Report (2002) stated ``model simulations indicate that, 
in a warmer climate, hurricanes that do develop are likely to have 
higher wind speeds and produce more rainfall.'' What preparations has 
your company made to deal with a greater likelihood of greater 
hurricane intensity so as to decrease repetition of the disruption that 
occurred this year?
    Answer. See the answer to question above.

    Question 16. How has your company disclosed to shareholders and 
investors the risks associated with the potential impacts on your 
company's assets in the Gulf of Mexico or indirect impacts on its 
assets elsewhere, of either the expected greater frequency of 
hurricanes making landfall in the U.S. or the probable greater 
intensity of hurricanes in the region?
    Answer. Chevron includes many forward-looking statements in its 
filings with the Securities and Exchange Commission to assist the 
investor in making his or her investment decision. The company also 
makes disclosure of factors of risk and other matters that could 
materially affect financial results in the future.
    Among these various disclosures are the following that were 
included in the company's 2004 Form 10-K relating to weather conditions 
and their possible impact on the company's operations and financial 
results:

        Page 2:
                  ``CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING 
                INFORMATION FOR THE PURPOSE OF `SAFE-HARBOR' PROVISIONS 
                OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 
                . . .''
                  ``This Annual Report on Form 10-K . . . contains 
                forward-looking statements . . . These statements are 
                not guarantees of future performance and are subject to 
                certain risks, uncertainties and other factors, some of 
                which are beyond our control and are difficult to 
                predict. Therefore, actual outcomes and results may 
                differ materially from what is expressed or forecasted 
                in such forward-looking statements . . .''
                  ``Among the factors that could cause actual results 
                to differ materially are . . . potential disruption or 
                interruption of the company's production or 
                manufacturing facilities due to . . . severe weather . 
                . . Unpredictable or unknown factors not discussed 
                herein also could have material adverse effects on 
                forward-looking statements.''
        Page 4:
                  ``Risk Factors . . .''
                  ``. . . some inherent risks could materially impact 
                the company's financial results of operations or 
                financial condition . . .''
                  ``The company's operations could be disrupted by 
                natural or human factors.''
                  ``. . . The company's operations and facilities are 
                therefore subject to disruption from either natural or 
                human causes, including hurricanes . . . which could 
                result in suspension of operations, or harm to people 
                or the natural environment.''
        Page FS-3:
                  ``Upstream Year-to-year changes in exploration and 
                production earnings align most closely with industry 
                price levels for crude oil and natural gas. Crude oil 
                and natural gas prices are subject to external factors 
                over which the company has no control, including . . . 
                weather-related damages and disruptions . . . Moreover, 
                any of these factors could also inhibit the company's 
                production capacity in an affected region.''

    Similar disclosures are included in the company's SEC Form 10-Q 
reports. In the third quarter 2005 SEC Form 10-Q, the following was 
included in the ``Cautionary Statements'' on page 2:

          ``Among the important factors that could cause actual results 
        to differ materially from those in the forward-looking 
        statements are unknown or unexpected problems in the resumption 
        of operations affected by Hurricanes Katrina and Rita and other 
        severe weather in the Gulf of Mexico . . .''

    The company makes no reference in its SEC filings to long-range 
weather forecasts in the company's many areas of operation.
                  finances, production, imports, etc.
    Question 17. Please provide for each of last ten years your 
company's--

   Gross revenue of U.S. operations

    Answer. Chevron's United States sales and operating revenues for 
1998 through 2004 are summarized below. The data exclude amounts 
associated with internal transfers between Chevron segments, which are 
eliminated for preparation of the company's consolidated income 
statement. As a result of the Chevron merger with Texaco in 2001, an 
SEC Form 8-K was filed and included combined Chevron and Texaco 
comparative data for U.S. operations beginning only in 1998. No other 
pre-merger combined data prior to 1998 for U.S. operations were 
required under the rules of accounting and SEC disclosure.

----------------------------------------------------------------------------------------------------------------
                       $ billions                          2004    2003    2002    2001    2000    1999    1998
----------------------------------------------------------------------------------------------------------------
U.S. sales and other operating revenues.................   $71.0   $55.9   $43.5   $46.7   $52.1   $35.2   $30.2
----------------------------------------------------------------------------------------------------------------
Source: Chevron Form 10-K (2004 and 2001)--``Operating segments and geographic data'' footnote to the
  consolidated financial statements. Chevron Form 8-K (2001).

   Total capital expenditures in the U.S.

    Answer. Chevron's total capital and exploratory expenditures (C&E) 
in the United States from 1998 through 2004 are summarized below. The 
first SEC Form 10-K following the Chevron-Texaco merger included 
combined Chevron and Texaco comparative data for U.S. capital and 
exploratory expenditures beginning only in 1999. No other pre-merger 
combined data prior to 1999 for U.S. capital and exploratory 
expenditures were required under the rules of accounting and SEC 
disclosure.

----------------------------------------------------------------------------------------------------------------
                       $ billions                          2004    2003    2002    2001    2000    1999    1998
----------------------------------------------------------------------------------------------------------------
U.S. C&E expenditures...................................    $3.0    $2.6    $3.8    $6.0    $4.3    $3.4    $4.1
----------------------------------------------------------------------------------------------------------------
Source: Chevron and Texaco Form 10-Ks; includes Chevron's and Texaco's share of affiliate expenditures.

   Net profit of U.S. operations

    Answer. Net income from Chevron's operations in the United States 
for 2001 through 2004 is summarized below. Data prior to 2001 are not 
readily available because the split between U.S. and international 
income for years prior to the Chevron-Texaco merger was not presented 
for all activities in the pre-merger financial statements because such 
a disclosure was not required. The information below was obtained from 
the Chevron SEC Form 10-Ks.

------------------------------------------------------------------------
               $ billions                 2004    2003     2002    2001
------------------------------------------------------------------------
U.S. net income (loss).................    $5.4    $3.9   $(1.8)    $0.4
------------------------------------------------------------------------
Source: Chevron Form 10-Ks.

   Total taxes paid to the Federal government

    Answer. See answer/chart directly below.

   Total taxes paid to State governments

    Answer. As was reported in the annual reports that Chevron filed 
with the Securities and Exchange Commission, Chevron accrued the 
following current Federal and State tax amounts for 1998-2004 (see 
attached table below). As a result of the Chevron merger with Texaco in 
2001, an SEC Form 8-K was filed and included combined Chevron and 
Texaco comparative data for U.S. operations beginning only in 1998. No 
other pre-merger combined data prior to 1998 for U.S. operations were 
required under the rules of accounting and SEC disclosure.

                          CHEVRON CORPORATION--SUMMARY OF U.S. TAXES ACCRUED 1998-2004
                                                  [$ Millions]
----------------------------------------------------------------------------------------------------------------
                                                           1998    1999    2000    2001    2002    2003    2004
----------------------------------------------------------------------------------------------------------------
Income taxes
  Federal...............................................   (215)     307   1,238     946    (72)   1,147   2,266
  State and local.......................................      32    (50)     185     276      21     133     368
                                                         -------------------------------------------------------
Total...................................................   (183)     257   1,423   1,222    (51)   1,280   2,634
 
Federal and State non income taxes
  Excise taxes on products and merchandise..............   3,568   3,767   3,909   3,954   3,990   3,744   4,147
  Import duties and other levies, and property and other     397     399     370     418     360     320     364
   miscellaneous........................................
  Payroll taxes.........................................     196     165     139     148     141     138     137
  Taxes on production...................................     160     158     238     225     179     244     257
                                                         -------------------------------------------------------
Total...................................................   4,321   4,489   4,656   4,745   4,670   4,446   4,905
                                                         =======================================================
Total income and non income.............................   4,138   4,746   6,079   5,967   4,619   5,726   7,539
----------------------------------------------------------------------------------------------------------------
The earliest year of combined financial statement results for Chevron and Texaco in an SEC filing is 1998. All
  years exclude data for Unocal Corporation, which Chevron acquired in 2005.

   Total donated to charity

    Answer. Chevron's charitable contributions over the three year 
period ended December 31, 2004 were:

        Year                                                ($ Millions)
2002.............................................................. $62.8
2003.............................................................. $60.8
2004.............................................................. $63.8

Source of Contributions Data: 2002-2004--Chevron Charitable 
Contributions yearly data files.

    Question 18. How much additional petroleum refining capacity do you 
expect your company to install in the United States over the next 10 
years?
    Answer. Chevron always evaluates opportunities to expand our 
capacity where demand exists and it is economic to do so. As noted in 
Chevron's written testimony, Chevron is making investments to improve 
reliability and increase production capacity at our refineries in 
Richmond and El Segundo, CA, and Pascagoula, MS. Many analysts expect 
world-wide demand for petroleum products to increase by approximately 
10 million barrels per day over the next 10 years. Chevron intends to 
be a global supplier of energy and will want to continue to invest to 
meet the needs of our customers.

    Question 19. What percentage of profits over the last 10 years has 
your company re-invested in capital, exploration, drilling, and 
production in the United States? Please provide an annual total for 
those U.S. expenditures and a clear breakdown.
    Answer. The table below shows Chevron's U.S. expenditures related 
to capital, exploration and production for the periods 1999 through 
2004. Drilling expenditures are included in each of the categories. The 
first SEC Form 10-K following the Chevron-Texaco merger included 
combined Chevron and Texaco comparative data for U.S. capital and 
exploratory expenditures beginning only in 1999. No other pre-merger 
combined data prior to 1999 for U.S. capital and exploratory 
expenditures were required under the rules of accounting and SEC 
disclosure.

----------------------------------------------------------------------------------------------------------------
                         $ Billions                           2004   2003   2002    2001    2000   1999    1998
----------------------------------------------------------------------------------------------------------------
U.S. upstream (exploration and production) capital and        $1.8   $1.6    $1.9    $2.4   $2.4    $1.8    $2.7
 exploratory expenditures..................................
U.S. production expense....................................    2.0    2.0     2.0     2.1    2.1     2.0     2.2
Total U.S. upstream capital and exploratory expenditures       3.8    3.6     3.9     4.5    4.5     3.8     4.9
 and production expense....................................
Net income worldwide.......................................   13.3    7.2     1.1     3.3    7.7     3.2     1.9
Percentage of total net income reinvested in U.S. upstream     28%    50%    342%    136%    59%    116%    255%
 capital, exploration, drilling and production.............
----------------------------------------------------------------------------------------------------------------
Source: Chevron SEC Form 10-Ks.

    Please note the percentage relationships in the table above are not 
correlated with any percentage-expenditure targets set by the company. 
That is, capital and exploratory expenditure spending is aimed at 
economic projects in the United States and outside the United States 
that are available investment opportunities, without regard for their 
geographic location. The production expense shown for the United States 
represents the level of spending necessary to optimize the production 
from U.S. producing properties. Currently the greatest number of 
investment opportunities lies in areas outside the United States. The 
company possibly would have had higher capital and exploratory spending 
in the United States during these years if additional economic 
investment opportunities had been available. However, certain areas in 
the United States have been placed off-limits for the exploration and 
production of oil and gas.

    Question 20. What percentage of profits over the last 10 years has 
your company re-invested in non-petroleum energy supply and production 
in the United States? Please provide a total and the results of such 
investment.
    Answer. Chevron has interpreted the question of ``non-petroleum'' 
energy investments in to include all non-crude oil (i.e., non-liquid 
hydrocarbons) energy investments, including investments in natural gas, 
coal, power, geothermal, pipelines, and shipping, as well as 
alternative energy and advanced energy technologies, such as gas-to-
liquids, renewables, hydrogen, fuel cells and batteries. Detailed 
information of the total annual investment in these types of activities 
in the United States is not readily available in the company's 
accounting records, however, globally these expenditures over the last 
10 years are in the billions of dollars.
    Globally, Chevron is making significant investments from the 
wellhead to the end consumer to bring new natural gas supplies to 
markets, including the United States. Chevron has major natural gas 
development projects underway in Australia, Nigeria, and Angola where 
natural gas will be liquefied for shipment on LNG tankers to markets in 
the United States and around the world. Chevron has recently contracted 
for two state-of-the-art LNG tankers to add to its shipping fleet.
    Chevron is also partnering with Sasol in a joint venture--Sasol 
Chevron--aimed at converting natural gas to high quality diesel fuel 
utilizing its gas-to-liquids (GTL) technology. Sasol-Chevron has 
announced a memorandum of understanding with Qatar Petroleum for a $6 
billion GTL initiative.
    Chevron is investing in major pipeline systems to provide export 
capability of both liquids and natural gas to world markets. Chevron is 
a partner in the Caspian Pipeline Consortium (CPC) to bring oil 
supplies from Kazakstan to ports on the Black Sea, and with the 
acquisition this year of Unocal, Chevron is also a partner in the Baku-
Tbilisi-Ceyhan pipeline (BTC) which will bring oil from the Caspian Sea 
region to the Mediterranean port at Ceyhan.
    In the United States, Pittsburg and Midway Coal Company is a wholly 
owned Chevron subsidiary, which provides coal to utilities from mines 
operating in Wyoming, New Mexico, and Alabama.
    Chevron Energy Solutions (CES) develops, engineers and constructs 
holistic energy efficiency, conservation and power system projects for 
institutions and businesses. CES has developed energy efficiency and 
renewable projects for large-scale facilities operated by the U.S. 
Postal Service, the Department of Defense, hospitals and public 
schools.
    Chevron is the world's largest producer of geothermal energy, 
having developed more than 1000 MW of capacity. In 2004 Chevron 
announced a $128 million plan to expand our Daajat geothermal power 
plant in Garut, West Java, Indonesia.
    Chevron invested in a 22.5 MW wind farm at the Nerefco refinery in 
the Netherlands, the first large-scale wind project on a brownfield 
refinery. Chevron has one of the largest solar photovoltaic 
installations in the U.S., a 5090 kw solar array at our Bakersfield, 
California production location.
    Chevron is a joint venture participant with COBASYS, working to 
commercialize nickel-metal hydride batteries for such applications as 
hybrid electric vehicles and stationary power supply devices.
    Chevron is also leading a consortium in a five-year demonstration 
of hydrogen infrastructure and fuel-cell vehicles by building six 
hydrogen energy service stations with fueling facilities for small 
fleets of fuel-cell vehicles and capacity to generate high-quality 
electrical power from stationary fuel cells.

    Question 21. On average for the last ten years, please compare your 
company's overall capital expenditures in the United States to its 
expenditures elsewhere.
    Answer. The table below shows Chevron's capital and exploratory 
expenditures for the periods 1999 through 2004 and the percentage 
applicable to U.S. expenditures. Some of the exploratory expenditures 
are capitalized. Other amounts may be expensed under the applicable 
accounting rules if a project is not successful or if the project does 
not move into the development phase within a certain time period.

------------------------------------------------------------------------
          $ Billions             2004   2003   2002   2001   2000   1999
------------------------------------------------------------------------
Capital and exploratory
 expenditures:
  Total United States.........   $3.0   $2.6   $3.8   $6.0   $4.3   $3.4
  Total Worldwide.............    8.3    7.4    9.3   12.0    9.5   10.1
Percentage United States......    36%    35%    41%    50%    45%    33%
------------------------------------------------------------------------
Source: Chevron SEC Form 10-Ks; includes share of affiliate
  expenditures.

    As stated in the response to question 8, the percentage 
relationships in the table above are not correlated with any 
percentage-expenditure targets set by the company. That is, capital and 
exploratory expenditure spending is aimed at economic projects in the 
United States and outside the United States that are available 
investment opportunities, without regard for their geographic location. 
Currently the greatest number of investment opportunities lies in areas 
outside the United States. The company possibly would have had higher 
capital and exploratory spending in the United States during these 
years if additional economic investment opportunities had been 
available. However, certain areas in the United States have been made 
off-limits for the exploration and production of oil and gas.
    The first SEC Form 10-K following the Chevron-Texaco merger 
included combined Chevron and Texaco comparative data for U.S. capital 
and exploratory expenditures beginning only in 1999. No other pre-
merger combined data prior to 1999 for U.S. capital and exploratory 
expenditures were required under the rules of accounting and SEC 
disclosure.

    Question 22. What percentage of your company's gross revenue was 
collected in the United States in each of the last 10 years?
    Answer. Chevron's U.S. sales and operating revenue for 1998 through 
2004 are summarized below. The data exclude amounts associated with 
internal transfers between Chevron segments, which are eliminated for 
preparation of the company's consolidated income statement. As a result 
of the Chevron merger with Texaco in 2001, an SEC Form 8-K was filed 
and included combined Chevron and Texaco comparative data for U.S. 
operations beginning only in 1998. No other pre-merger combined data 
prior to 1998 for U.S. operations were required under the rules of 
accounting and SEC disclosure. The company does not believe the 
percentage relationships for the 3 years 1995-1997 would differ 
significantly from the fairly stable relationships shown below for the 
7 years 1998-2004.

----------------------------------------------------------------------------------------------------------------
                                                                  2004   2002   2002   2001   2000   1999   1998
----------------------------------------------------------------------------------------------------------------
U.S. sales and operating revenues as a % of total..............    47%    47%    44%    45%    44%    42%    42%
----------------------------------------------------------------------------------------------------------------
Source: Chevron SEC Form 10-Ks and 8-K.


    Question 23. How much of your company's revenue collected in the 
United States was used to pay for purchasing crude oil from OPEC 
countries?
    Answer. Detailed information regarding revenue collected in the 
United States used to purchase crude oil from OPEC countries is not 
readily available in the company's accounting records. Revenues in any 
geographic area are not specifically earmarked for purchasing crude oil 
from OPEC countries or for any other purpose. The use of cash to fund 
company operations is independently determined from the source of such 
cash.

    Question 24. Do you support S. 1794 or something like it create 
gasoline and jet fuel reserves to ensure stability of price and supply? 
Should it be extended to diesel and other fuels like natural gas?
    Answer. Chevron does not believe that establishing gasoline or 
other refined product reserves would ensure stability of price and 
supply. There would be costs and logistical challenges for establishing 
and maintaining such reserves and could result in unintended 
consequences, such as raising the cost of gasoline or jet fuel. These 
challenges include determining when and where to store products, 
dealing with a number of fuel specifications, and the need to rotate 
storage of products to prevent them becoming stale, among other issues. 
Chevron believes a comprehensive national energy policy that addresses 
both supply and demand would have a more significant impact on market 
stability.
    Chevron believes that additional natural gas storage is being 
developed today and that market forces are the most efficient means for 
adding new storage. However, Chevron could support studying the 
establishment of a U.S. natural gas reserve. Such a review would need 
to assess fundamental technology and market differences, and other 
issues associated with natural gas storage as compared to crude oil 
storage.

    Question 25. On average for the last ten years, how much of what is 
refined by your company in the U.S. stays in the U.S.?
    Answer. Through the first 3 quarters of 2005 the percentage of 
gasoline (including blendstocks), jet and diesel refined at our U.S.-
based refineries that was sold in the United States was 98.6%. A small 
percentage of products sold to other parties at a refinery dock may 
have been resold outside the United States, but we cannot confirm final 
sales destinations for such sales. Due to the tight timeframe for 
developing a response, we were unable to provide an exact percentage 
for the prior nine years; however, we do not believe there would have 
been a material difference in this percentage.

    Question 25a. What amount of refined product did your company 
import in 2004 and in 2005?
    Answer. Today, Chevron imports more refined products into the 
United States each year than it exports. We imported a total of 9.8 
million barrels of gasoline (including gasoline blendstocks), jet and 
diesel fuels through the first three quarters of 2005 and 13.1 million 
barrels in 2004.

    Question 25b. What are your assumptions about demand growth in 
India in China?
    Answer. The EIA forecasts that China's oil demand will grow between 
3.9% and 5.1% and India's will grow between 3.0% and 4.0% annually 
between 2002 and 2025. Chevron believes these forecasts are within 
likely ranges.

    Question 25c. How have your investments in the United States 
increased the energy security of the country?
    Answer. Energy markets are increasingly interdependent from a 
global perspective. Oil is a globally-traded commodity; any investments 
anywhere in the world that adds supplies benefits all consumers, 
including those in the United States. And, while natural gas is not yet 
a globally-traded commodity, natural gas markets are also moving in 
that direction. Likewise, any investments in global refinery capacity 
that are generating additional supplies of petroleum products benefit 
U.S. markets.

    Question 26. What market signals will occur in advance of peaking 
world oil production and what is the appropriate policy or set of 
policies for the U.S. government to adopt when such signals occur?
    Answer. In advance of peaking conventional world oil production, we 
would expect to see expensive, long-lead projects that generate non-
conventional oil from bitumen and shale, as well as diesel and other 
products from gas, coal and biomass become economic enough for large 
scale production to proceed. Access to all of these resources, both 
here and abroad, will be key to an orderly transition from conventional 
oil. Chevron in its written testimony provides a series of policy 
recommendations that the U.S. government should consider related to 
enhancing U.S. Energy Policy.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Akaka to 
                           David J. O'Reilly

    Question 1. I have some questions about the Chevron refinery in 
Hawaii. As you know, Chevron is one of two refineries that we have in 
Hawaii, and it is very important to us. It is well-known that no new 
refineries have been built since 1976. It is also well-known that 
Hawaii has the highest gasoline prices nationwide over the last twenty 
years, so I am naturally interested in anything that will help dampen 
gasoline prices for my constituents.
    Do you expect to expand refinery capacity in Honolulu? Right now, 
Chevron is considered a ``small'' refinery in terms of its output (less 
than 75,000 barrels per day throughput). Do you have any plans to 
expand the capacity of the refinery on Oahu?
    Answer. Because of factors including the current investment climate 
in Hawaii, additional regulatory requirements (wholesale price cap, 
state ethanol mandate, rent caps, etc), and the sizeable investment 
that would be needed to increase refining capacity, we have no plans to 
increase capacity at this time. We are always evaluating opportunities 
to expand our capacity where demand warrants and it is economic to do 
so.

    Question 2. What factors would make it possible to expand refinery 
capacity, assuming that Hawaii did not have the wholesale gas price cap 
law? Would expanding capacity help bring down the price of gasoline?
    Answer. Chevron believes that Hawaii currently has sufficient 
refinery capacity relative to the size of its market. Because it is not 
supported by local demand, we believe the sizeable investment required 
to increase refinery capacity would not be likely to result in a return 
which would justify the investment.
    Hawaii's relatively high gasoline prices are not caused by a 
shortage of refinery capacity. Factors that make gasoline more 
expensive in Hawaii than other locations include: (1) higher taxes, (2) 
more market regulation, and (3) higher costs of doing business. In 
addition, the wholesale price cap that went into effect in Hawaii 
effective September 1, 2005 interferes with the normal operation of the 
marketplace. It is the best interests of consumers if prices are set by 
supply, demand and competitive forces in the marketplace.

    Question 3. I understand from the Stillwater and Associates 2003 
report on Act 77 (the Hawaii gas cap law) that refineries in Hawaii 
have low margins on jet fuel and residual fuel oil for power 
generation, and that Hawaii refiners compensated with higher gasoline 
prices. What would be the effect of changing such margins on those 
fuels on the pump price of gasoline?
    Answer. There would probably be little or no effect. The Stillwater 
and Associates Report in 2003 indicates that margins for each of these 
products are set by supply and demand for those products in the 
marketplace. It also points out that the two Hawaii refineries (unlike 
many more complex refineries on the Mainland) have little ability to 
vary the slate of products which they produce from a barrel of crude 
oil.

    Question 4. Realistically, what policies at the federal level could 
help bring gasoline prices down for Hawaii in the short term? What 
about in the long term?
    Answer. As noted in Chevron's written testimony, U.S. policy 
actions that create more regulatory certainty and create a better 
investment climate including elimination of boutique fuels, permit 
streamlining, and access to potentially resource-rich areas will 
provide more reliable and affordable supplies of energy for the United 
States. The United States needs more investments in energy supplies, 
energy infrastructure, and enabling energy imports. Government actions 
to promote those investments would help secure reliable supplies of 
energy for American consumers.

    Question 5. Would a windfall profits tax affect your profitability 
in Hawaii, or would it have no effect at all on refineries in general?
    Answer. Chevron opposes a windfall profits tax. Oil and gas 
industry profits are not excessive compared to other industries, and 
such a tax would reduce available capital and would discourage long-
term investment strategies by the oil and gas industry, including 
potentially Hawaii. Moreover, as previously reported by the 
Congressional Research Service, the 1980 windfall profits tax reduced 
domestic oil production and increased reliance on annual oil imports 
which adversely affected America's energy security. Such a significant 
change in U.S. tax law would also send the signal for other governments 
to change tax regimes in their own countries. This would discourage 
energy investment globally, and would not lead to additional energy 
supplies.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                           David J. O'Reilly

    Question. All over America, the oil industry drives up the price at 
our gas pumps by redlining and zone pricing. ``Redlining'' is when your 
companies draw a phony line around a community to lock out competition 
and raise prices for the consumers. ``Zone pricing'' is plain old 
discrimination and it takes place when one oil company supplies gas to 
several gas stations located near each other and one station is charged 
much more than the others for the same type of gas. This drives 
stations out of business, reducing choice and raising prices for 
consumers. To help hurting consumers at our gas pumps, will you company 
commit to stop redlining and zone pricing? Yes or no?
    Answer. ``Red-lining'' is a phrase that historically has been used 
in the insurance industry, not the oil industry. If you mean 
distinguishing between direct-served and jobber-served areas, Chevron 
generally does not allow jobbers to serve stations in areas that are 
directly served by Chevron. Generally jobbers are set up to serve areas 
where Chevron has decided it will not make direct deliveries. The 
Federal Trade Commission has recognized that territorial restrictions 
may allow a branded refiner to implement a more efficient distribution 
system. Chevron believes that its approach on this subject is both 
rational and promotes competition.
    A ``price zone'' is simply another term for a local marketplace. 
Chevron sets it retailer prices by zones, or local markets, because the 
competitive environment differs from local market to local market. Each 
price zone contains stations that Chevron believes are generally 
subject to the same competitive pressures. The Federal Trade Commission 
has noted that zone pricing may provide branded refiners the 
flexibility to meet localized competition resulting in lower prices 
than might otherwise occur. Chevron believes that it would be 
counterproductive and anticompetitive to ignore local market forces in 
making pricing decisions.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                           David J. O'Reilly

    Question 1. I'm aware that the cost of crude oil is driven by the 
world market and that its cost is currently significantly above 
historic averages. But I'm not aware of any substantive increases in 
the cost of producing crude oil, the cost of refining it into various 
petroleum products such as gasoline and diesel, and the cost of 
transportation of refined products to markets. Through the end of 
September 2005, the price of crude had increased 40 percent in 2005 
while gasoline prices increased almost 80 percent. If the percent 
difference in the prices isn't pure profit, please explain to me how 
you account for the difference in the substantially lower increase in 
crude oil when compared to gasoline.
    Answer. Crude oil and gasoline markets are different markets. While 
increases in gasoline prices have generally followed increases in crude 
oil prices over time, the hurricanes impacted the markets differently. 
Crude prices are primarily driven by overall product demand, the 
available crude supplies, and the available refining capacity to 
convert the crude to products. Adding new increments of crude oil 
production capacity is increasingly complex and expensive, and often 
takes multiple years to achieve. Crude supplies were impacted by the 
hurricane, but the release from the Strategic Petroleum Reserve helped 
alleviate this constraint.
    Gasoline prices are determined by supply, demand, and other 
competitive factors in the marketplace for products. Following the 
hurricanes, demand for refined products remained relatively unchanged, 
but because roughly one-fourth of U.S. refining capacity was shut down, 
there was less available supply of products until those refineries 
could restart. This temporarily reduced demand for crude oil and 
lessened price pressures for that commodity. The U.S. gasoline market, 
however, remained short relative to demand, resulting in temporarily 
higher prices. Higher prices attracted product imports from around the 
world. Gasoline prices have now fallen to pre-hurricane levels, as 
refinery production is being restored and as additional product was 
imported into the United States.

    Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to 
149. Further, no new refineries have been built in the U.S. since 1976. 
In 1981, the 321 refineries had a capacity of 18.6 million barrels a 
day. Today, the remaining 149 refineries produce 16.8 million barrels a 
day. I recognize the difficult financial, environmental, and legal 
considerations associated with the location and construction of new 
refineries. But I fail to understand the closure of existing refineries 
even if they required investment to enhance their efficiency and 
production capability unless, of course, this mechanism is being used 
to increase the price of gasoline and other refined products. Please 
help me understand why you would shut down refineries in the face of 
the supply and demand situation. What conditions would have to exist 
for you to invest in new refining capacity? I have heard the industry 
claim that up to $48 billion has been used on capital expenditures for 
existing refineries. If those investments were not used for capacity 
increases, what were they used for?
    Answer. Even though the total number of existing refineries in the 
U.S. has decreased over the past 20 years, total refinery capacity has 
increased because the average size, sophistication, and capacity of 
existing refineries have increased (see Chevron's written testimony, 
included as Attachment D). The rationalization of refining capacity has 
occurred in part because smaller refineries lacked the financial 
resources to complete facility upgrades needed to comply with 
environmental and fuel reformulation requirements. They also lacked the 
scale needed to economically justify the capital investment necessary 
and compete efficiently. The Federal Trade Commission noted in a 2004 
report on petroleum industry mergers that refinery closures ``have 
overwhelmingly involved small, relatively unsophisticated facilities. 
Of the 57 refineries closed since 1990, 23 had distillation capacities 
of 10 MBD or less, only seven had capacities greater than 50 MBD, and 
only two had capacities greater than 100 MBD.'' The Petroleum Industry: 
Mergers, Structural Change and Enforcement, p. 185.
    Nonetheless, Chevron always evaluates opportunities to expand our 
capacity where demand warrants and it is economic to do so. As noted in 
Chevron's written testimony, Chevron is making investments to improve 
reliability and increase production at our refineries in Richmond and 
El Segundo, CA, and Pascagoula, MS. Chevron has expanded capacity over 
the past ten years and has plans to continue to do so in the future.

    Question 3. The recent hurricanes resulted in the need to import 
substantial refined products such as gasoline, diesel fuel and aviation 
fuel to meet U.S. demand. The question has been raised as to whether 
the country should develop a strategic reserve of finished petroleum 
products. What would be your reaction if the Federal government either 
directly or by way of contract with the private sector sought to create 
a strategic reserve of finished petroleum products? Since these 
products have a limited shelf-life, one proposal is to obtain and 
operate a number of refineries and have the products be used by the 
Federal government. Appreciate your comments on this proposal.
    Answer. Chevron does not believe that establishing gasoline or 
other refined product reserves would ensure stability of price and 
supply. There would be costs and logistical challenges for establishing 
and maintaining such reserves and could result in unintended 
consequences, such as raising the cost of gasoline or jet fuel. These 
challenges include determining when and where to store products, 
dealing with a number of fuel specifications, and the need to rotate 
storage of products to prevent them becoming stale, among other issues. 
Chevron believes a comprehensive national energy policy that addresses 
both supply and demand would have a more significant impact on market 
stability. Further Chevron believes private enterprise is best suited, 
rather than the government, to own and operate refineries.

    Question 4. Given the recent profitability of the oil industry, I 
am interested to learn more on the disposition of these profits, 
particularly to enhance both production and refining capacity. Are any 
of these profits being used to enhance production and refining capacity 
for the benefit of other countries? What fraction of your profits is 
being invested for production and for refining? What percentage of 
profits have been used for stock buybacks and mergers and acquisitions?
    Answer. Re: Profits being used to enhance production and refining 
capacity for the benefit of other countries--Crude oil is a globally-
traded commodity. Investments anywhere in the world that add to the 
supply of crude oil benefit all consumers, including those in the 
United States. While natural gas is not yet a globally-traded 
commodity, industry investments are rapidly moving markets in that 
direction. Likewise, investments in global refinery capacity that 
generate additional supplies of petroleum products benefit U.S. 
markets.
    Re: Fraction of profits being reinvested for production and 
refining--Chevron is investing all across the value chain. Since 2002, 
Chevron has invested $32 billion in capital expenditures worldwide--
more than it earned over this same period.
    For the nine-month period ended September 30, 2005, Chevron's 
capital and exploratory expenditures totaled $7.1 billion, a 26 percent 
increase over spending for the same period last year. Approximately 
three-fourths of total capital spending for the nine-month period ended 
September 30, 2005, or $5.5 billion, was invested in upstream 
(exploration and production) activities. About $1.3 billion, or 18 
percent of total spending, was for global downstream (refining, 
marketing and transportation).
    Our capital expenditures are planned often years in advance and are 
based on investment opportunities available. Our major capital projects 
require sustained spending commitments over multiple years for the new 
energy production capacity to be installed. Thus, we maintain high 
levels of spending even during periods of depressed earnings.
    Re: Percentage of profits used for stock buy-backs and mergers and 
acquisitions--In 2004, Chevron announced a $5 billion common stock 
repurchase program. Purchases under this program totaled $4.3 billion 
through September 2005.
    In August 2005, Chevron acquired 100 percent of the outstanding 
common shares of Unocal Corporation. The aggregate purchase price 
included approximately $7.5 billion cash as partial consideration of 
the total purchase price. This was the largest of the company's recent 
merger and acquisition activity involving cash. From time to time, the 
company also makes relatively minor property acquisitions in the normal 
course of business.

    Question 5. You've all said profits are cyclical, and that your 
companies have also suffered from the volatility of the oil markets. 
Would your stockholders be better served if domestically produced oil 
was sold at a fixed rate that included a generous profit margin above 
the production, refining, and distribution costs?
    Answer. No, our stockholders are best served when market forces are 
allowed to act unfettered and when the U.S. government consistently 
advances a comprehensive energy policy that promotes a stable and 
encouraging investment climate for the responsible development of 
energy supplies. This question raises the prospect of establishing 
comprehensive price controls. History shows price controls and other 
interference with normal market mechanisms do not accomplish the 
intended effect. Gasoline price controls in effect in the 1970s and 
early 1980s were poor public policy. Prices shot up to their maximum 
allowed levels, the industry's quality of service dropped, and 
consumers were forced to wait for hours in long lines to purchase gas 
during that period. These consequences are not in the best interest of 
our shareholders or consumers.

    Question 6. Do you believe that global warming is occurring? Do you 
believe that man-made activities have a role in this phenomenon? How 
will global warming impact your companies in term of added costs for 
oil and gas development, or allow access to new areas for oil and gas 
development?
    Answer. Chevron recognizes and shares the concerns that governments 
and the public have about climate change. Although Chevron does not 
have specific expertise in climate science, Chevron has been 
implementing a business-driven, four-fold action plan dedicated to 
reducing our greenhouse gas (GHG) emissions. The action plan is focused 
on improving energy efficiency, investing in research, pursuing 
opportunities in innovative energy technologies, and supporting 
economically sound policies that protect the environment.
    We have developed a comprehensive program to manage GHG emissions 
that is being integrated into our business decisions. We include GHG 
emissions analysis in the planning of all major capital projects, 
acquisitions and divestitures.
    We also support and assess the work of reputable scientific 
institutions such as the Massachusetts Institute of Technology (MIT) 
Joint Program on the Science and Policy of Global Climate Change, MIT 
Carbon Sequestration Initiative. We also monitor the activities of the 
Intergovernmental Panel on Climate Change, and the U.S. National 
Academy of Sciences on all aspects of the climate change issue.
    One of the most critical environmental challenges facing the world 
today is finding ways to provide and use reliable, affordable energy 
while reducing long-term growth in GHG emissions. Technology offers a 
variety of potential solutions, including efficiency improvements; 
CO2 capture and geologic storage; the use of trees, plants 
and soils to store carbon; and the development of commercially viable 
non-fossil-fuel energy systems. Regarding costs and access for oil and 
gas development, at this time the impact is unclear.
    For more information, regarding Chevron climate change activities, 
our website can be visited at http://www.chevron.com/social--
responsibility/environment/global--climate.asp

    Question 7. Is it accurate that United States LNG terminals in 
Massachusetts and Maryland are only operating at half capacity? Do you 
believe if these plants were operated at a higher capacity it would 
have changes the market dynamics that determine the current price?
    Answer. Chevron does not own or operate the referenced LNG 
terminals in Massachusetts and Maryland and cannot comment on whether 
they are operating at their rated capacity. We would recommend the 
Committee get information directly from the terminal owners on this 
question.

    Question 8. Please state for the record your company position on 
fuel economy standards. Are there other incentives that you support 
that you feel are better for consumers than the Corporate Average Fuel 
Economy paradigm?
    Answer. Chevron has not taken a position on Corporate Average Fuel 
Economy standards at this time. Chevron will defer to Congress and 
other policymakers whether to address changes in fuel economy 
standards. Chevron has clearly supported efforts to conserve energy, 
and recognizes that conservation is one of the cheapest forms of 
``new'' energy that we have. Many automakers (including Ford, Toyota, 
and Honda) are making more fuel-efficient vehicles, which consumers are 
increasingly purchasing, indicating that market forces are working to 
help encourage introduction of these new vehicles.

    Question 9. I understand that over the past 5 years companies in 
your industry have downsized significantly. Now there is a shortage in 
workers and equipment to increase drilling. Please explain that 
dynamic.
    Answer. By its very nature, the economics of oil and gas production 
runs in long-term cycles. High market prices of oil and gas attract 
investment, spur drilling and associated industry activity, and 
increase the demand for workers and equipment. When market prices fall, 
investment goes elsewhere, workers move to other jobs, and equipment 
sits idle. We are now in the part of the cycle where prices are high, 
resulting in demand for workers and equipment. These cycles peak and 
trough over multi-year periods, which is how long it takes for new 
investment to bring oil or gas to the market place.

    Question 10. As you probably know, Congress is likely to open up 
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas 
exploration. Do you have plan to bid for leases in this area? What does 
the price of oil have to be to make ANWR exploration and extraction be 
economically viable?
    Answer. Chevron continues to strongly support opening the ANWR 
coastal plain for environmentally responsible oil and gas exploration 
and development, and our long-term interest in ANWR is demonstrated by 
the maintenance of our 92,000 acre lease position on the coastal plain. 
As a matter of long standing policy, Chevron does not comment on future 
leasing plans. We will evaluate any future bidding opportunities as 
they arise.

    Question 11. I understand that many of your resources and equipment 
are working flat out to rebuild infrastructure in the Gulf of Mexico. 
If there is no capacity to expand oil and gas exploration, what good is 
opening up sensitive environmental areas to increased drilling going to 
do for the consumer in the short run?
    Answer. Repairing the platforms and pipelines in the Gulf of Mexico 
is a short-term anomaly to our normal activity, and we expect most 
repairs to be completed in the near future. Oil and gas exploration and 
production are longer term activities that include gathering seismic 
data, exploratory drilling and production of new resources found that 
collectively take years to complete. If areas were opened today, the 
capacity for exploration and production would be available when needed.

    Question 12. Given the growing demand for oil in Asia, do you 
believe that oil derived from the Arctic National Wildlife Refuge could 
be diverted to supply Asian markets? If drilling in the Arctic National 
Wildlife Refuge is authorized this year, when will it begin to have an 
impact on gasoline prices? What do you believe that effect will be?
    Answer. We believe that most oil produced from ANWR will be 
directed to lower 48 markets. Gasoline prices are driven by supply, 
demand, and other market conditions. An ANWR opening could have an 
immediate impact on market perceptions of long-term supply/demand 
dynamics, but at this time it is impossible to quantify its impact.

    Question 13. Do you support more transparency in the oil and 
natural gas markets, as would be provided in my bill S. 1735?
    Answer. We believe the existing mechanisms and services provide 
sufficient information on market prices. We also believe the 
transparency provisions of S. 1735, which require additional data 
collection and dissemination by the FTC, are not needed and will not 
measurably improve the quality of price information available to the 
public, government and market participants.

    Question 14. How has the last 3 years of escalating gasoline prices 
affected demand by American drivers? Have we seen a correlation between 
a certain level of price increase and less demand by American drivers? 
What is the actual level of reduced demand today compared to 3 years 
ago (please respond in the context of a doubling of retail gasoline 
prices)?
    Answer. The extent to which changes in price for gasoline over the 
past three years affected the demand for gasoline is unclear. Based on 
EIA data, consumption of gasoline has increased from an average of 
8.880 million barrels per day in 2003, to 9.140 million barrels per day 
in 2005, an increase of almost 3% over the period. Gasoline consumption 
in 2005 has increased by about 0.8% over 2004.

    Question 15. What is the crude oil extraction costs for major oil 
producing countries, including our own? How does that compare with oil 
derived from shale or coal?
    Answer. Chevron does not have data on crude oil extraction costs 
for other oil producing countries, as production in many countries is 
run by national oil companies and this information is not made public. 
In the United States, operating costs have been rising since the mid-
1990s, and have jumped significantly since 2002 due to high demand on 
purchased goods and services.
    Some methods for producing oil from shale indicate that production 
may be profitable at current crude prices of about $60 per barrel. 
Chevron has submitted an application to the U.S. government to build 
and operate an experimental shale oil pilot facility. If successful, in 
several years we should have much more information on the costs and 
technical issues of producing oil from the country's extensive oil 
shale resource.

    Question 16. Regarding foreign exporting, inventory maintenance, 
and other practices of your company, please provide a response to each 
of the following questions and information requests:
    a. For each and every export shipment to a foreign country of 
gasoline, distillate fuel oil, propane, or liquefied natural gas 
occurring from January 1, 2005 to present, please provide the date, 
product type, volume, domestic port of exit, foreign destination, 
transportation costs, and the sale price or transfer value upon arrival 
at the foreign destination.
    Answer. Today, Chevron imports more refined products into the 
United States each year than it exports. The attached table (Attachment 
1)* includes the requested data for gasoline and distillate fuel oil 
exports. There was no export activity involving propane or LNG.
---------------------------------------------------------------------------
    * Attachments 1-3 have been retained in committee files.

    Question 16a. Since January 1, 2001 to present, please identify the 
number of shipments wherein your company exported gasoline, distillate 
fuel oil or jet fuel and the sales price or transfer value received at 
the destination was less than the amount that would have been received 
had the product been marketed by your firm in the United States.
    Answer. Due to contractual commitments, differences in foreign and 
U.S. fuel specifications, the long lead time between the point of 
committing to an export and when the actual delivery occurs, constantly 
changing conditions in foreign and U.S. markets and many other factors, 
it would be extremely difficult if not impossible to reconstruct the 
details behind each export that would be necessary in order to answer 
this question.

    Question 16b. Since January 1, 2001 to present, please identify the 
date, product, volume(s), foreign port of origin, expected U.S. port of 
entry, and eventual port of final destination in each instance wherein 
your company basically ``turned a ship away'' (whether proprietary 
product or acquired from a third party) by changing the shipments 
expected arrival in a U.S. port to a foreign port.
    Answer. If the premise of the question is that Chevron would direct 
a cargo destined for a U.S. port to another location in order to reduce 
supply into the US, Chevron disagrees with that premise. However, 
Chevron does not maintain a database that would facilitate answering a 
question about cargoes originally destined to the United States which 
ended up being shipped to a non-U.S. location. In the normal course of 
business, changing refinery operations, market conditions or other 
business reasons can result in cargoes originally destined for one 
location to be redirected to another location or destination. For 
example, following hurricanes Katrina and Rita, in response to the 
temporary shortages of refined product, Chevron contracted for 
shipments of fuel to supply customers in the United States. Some of 
those cargoes were originally destined to other markets, including 
other U.S. ports. As another example, following Hurricane Katrina, 
cargoes of crude oil which were destined for our Pascagoula refinery 
had to be redirected because our wharf and terminal were damaged by the 
storm and could not accept them.

    Question 16c. From 1995 until present, please identify by month the 
inventory levels maintained by your company for gasoline and distillate 
fuel oil in both barrels and converted to ``days of cover'' or ``days 
of supply'' for your firm's distribution and sales volumes within each 
of the Petroleum Allocation Defense Districts (PADDS) in the United 
States.
    Answer. For purposes of this question, Chevron defined the ``days 
of supply'' as inventory divided by average daily sales. The attached 
table (Attachment 2) presents data for the period 1/1/2003 to present. 
Prior period data is not readily available.

    Question 16d. From January 1, 2005 to present, provide the details 
of each ``spot market'' (as commonly referred to in the industry for 
bulk sales, in volumes exceeding 5,000 barrels per transaction) 
including the date, identity of both the seller and purchaser, location 
of the product being sold, and the selling price.
    Answer. The attached table (Attachment 3) provides the requested 
transaction details other than purchaser and seller identities. We 
generally consider purchaser and seller identities to be business 
confidential. If Committee members have questions about particular 
Chevron spot transactions, we would be happy to discuss such questions 
with the staff further.

    Question 16e. Describe your company's use of ``in-house trading 
platforms,'' and identify all individuals in your company by name, 
address, email, and phone number that were authorized during 2005 to 
either exchange, trade, sell or purchase gasoline or distillate fuel 
oil on either the ``spot market'', NYMEX futures market, or via 
``forward paper'' purchase rights.
    Answer. Chevron uses two internal software systems to track trades. 
One system is used primarily to track non-U.S. waterborne movements of 
products and the second to track movements of product within the U.S. 
For privacy reasons, we are not providing the identifying information 
requested concerning employees. We have numerous employees who are 
authorized to conduct such activity. If Committee members have 
questions about Chevron trading activities or the activities of 
individual Chevron traders, we would be happy to discuss such questions 
with the staff further.

    Question 16f. Please identify all third party reporting services, 
including but not limited to Oil Price Information Service (OPIS), 
Lundberg Surveys, Platts, and Oil Intelligence that your company 
regularly supplies transaction data or marketing information and all 
individuals of the company by name, address, email, and phone number 
that were authorized during 2005 to provide the information or data to 
such third parties.
    Answer. For privacy reasons, we are not providing the identifying 
information requested concerning employees. Chevron has a select number 
of people within the company who are authorized to conduct such 
activity. Chevron provides information on crude oil transactions to the 
following third party reporting services--Platt's, Bloomberg, Dow Jones 
(Telerate), Reuters, Argus, RIM (in Asia only) and APPI (Far East 
only). Chevron provides information on products transactions to 
Platt's, Argus or OPIS. Chevron reports natural gas transactions which 
meet the reporting requirements of the Federal Energy Regulatory 
Commission's (FERC) Policy Statement on Natural Gas and Electric Price 
Indices (Docket No. PL03-3) and participates in both Bidweek and Daily 
Price Reporting to the following index publications: Platt's, 
Bloomberg, Natural Gas Intelligence (NGI), Natural Gas Weekly (NGW), 
Ioenergy and Argus Media. An independent group within Chevron also 
communicates with these third party reporting services to obtain 
feedback on the reporting described in this paragraph, to offer 
improvements to the transparency of the data used in index development 
and to discuss any issues with the information supplied by Chevron.
    If Committee members have additional questions about Chevron price 
reporting activities, we would be happy to discuss such questions with 
the staff further.

    Question 16g. Please identify the branded and unbranded ``rack 
prices'' that were reported by your company to third party reporting 
services such as OPIS and the branded and unbranded ``rack prices'' 
that were actually charged distributors or jobbers by your company each 
day, from January 1, 2005 to present, at the truck loading terminal(s) 
that typically supply gasoline stations in Houston, TX, Atlanta, GA, 
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR, and Seattle, 
WA.
    Answer. Chevron does not report its terminal rack prices to price 
reporting services such as OPIS. Nor during 2005 has Chevron sold 
unbranded gasoline at the rack to distributors or jobbers at any of the 
locations identified, or branded gasoline at terminals that supply 
gasoline stations in New York or Chicago.
    Chevron's branded rack prices for the other terminal locations from 
January 1, 2005--November 1, 2005 are set forth in the attached table 
(Attachment 4). * As noted earlier in Chevron's written testimony (see 
Attachment B), the hurricanes impacted markets throughout the United 
States and elsewhere around the world.

    * The information referred to has been retained in Committee files.
---------------------------------------------------------------------------
    Question 16h. Will your company commit that it will take no efforts 
to retaliate against any firm or individual that is a potential witness 
before this Committee or cooperates with any investigation into the oil 
industry by Congress or another governmental authority?
    Answer. Chevron does not and will not engage in the type of conduct 
suggested by the question.

    Question 16i. From January 1, 2005 to present, for each instance 
known to your company wherein a third party (not your company) exported 
gasoline, distillate fuel oil, propane, or liquefied natural to a 
foreign country, please provide any of the details known to your 
company including the identity of the exporter, date, product type, 
volume, domestic port of exit, foreign destination, transportation 
costs, and the sale price or transfer value upon arrival at the foreign 
destination.
    Answer. Chevron has only limited anecdotal information regarding 
third party shipping activity and Chevron does not attempt to validate 
such information.

    Question 16j. Since January 1, 2001 to present please identify the 
identity, date, product, volume(s), foreign port of origin, expected 
U.S. port of entry, and eventual port of final destination in each 
instance wherein your company is aware a third party (not your company) 
basically ``turned a ship away'' (whether proprietary product or 
acquired from a third party) by changing the shipments expected arrival 
in a U.S. port to a foreign port.
    Answer. Chevron does not possess this information. Chevron has 
anecdotal information about third party shipping activity, but it is 
not validated and Chevron does not know a third party's instruction to 
its vessels.

    Question 16k. Please provide an itemized list of tax deductions and 
credits taken under the U.S. tax code for 2004, by your parent company 
and subsidiaries.
    Answer. For 2004, Chevron claimed tax deductions for salaries, 
wages, compensation, rents, interest, bad debts, taxes and licenses, 
charitable contributions, depreciation, depletion, advertising, 
employee benefits and other miscellaneous business expenses. Chevron 
also claimed foreign tax credits, general business tax credits and non-
conventional fuel credits.

    Response to Written Questions Submitted by Hon. Ken Salazar to 
                           David J. O'Reilly

    Question 1. The Agriculture Committee is looking at the impacts 
these high energy prices are having on agricultural producers around 
the country. To sum it up: they are hurting. It seems to me that there 
is tremendous potential for our country to grow fuels such as ethanol 
and bio-diesel. This approach offers many benefits to rural America as 
well as to the country as a whole. What type of investments is your 
company making (and planning to make) in these types of renewable fuels 
in the United States?
    Answer. Chevron has spent more than $1 billion since 2000 on the 
next generation of energy by focusing on the pragmatic development of 
renewables and alternative energy sources, and the creation of more 
efficient ways of using the energy.
    Chevron Energy Solutions (CES) develops, engineers and constructs 
holistic energy efficiency, conservation and power system projects for 
institutions and businesses. CES has developed energy efficiency and 
renewable projects for large-scale facilities operated by the U.S. 
Postal Service, the Department of Defense, hospitals and public 
schools.
    Chevron is the world's largest producer of geothermal energy having 
developed more than 1000 MW of capacity. In 2004 Chevron announced a 
$128 million plan to expand our Daajat geothermal power plant in Garut, 
West Java, Indonesia.
    Chevron invested in a 22.5 MW wind farm at the Nerefco refinery in 
the Netherlands, the first large-scale wind project on a brownfield 
refinery. Chevron has one of the largest solar photovoltaic 
installations in the U.S., a 5090 kw solar array, at our Bakersfield, 
California production location.
    Chevron is a joint venture participant with COBASYS, working to 
commercialize nickel-metal hydride batteries for such applications as 
hybrid electric vehicles and stationary power supply devices.
    Chevron is also leading a consortium in a five-year demonstration 
of hydrogen infrastructure and fuel-cell vehicles by building six 
hydrogen energy service stations with fueling facilities for small 
fleets of fuel-cell vehicles and capacity to generate high-quality 
electrical power from stationary fuel cells.

    Question 1a. Rural America is crying out for investment in 
renewable fuels, and I encourage your companies to look at the 
potential of renewable fuels. In terms of a percentage of your capital 
expenditures, how much money did your company spend this year to 
develop renewable fuel sources in the United States? What will that 
percentage be going forward?
    Answer. Detailed information is not readily available. See answer 
to question above regarding Chevron investments in renewables, 
alternative energy sources, and the creation of more efficient ways of 
using energy.

    Question 1b. Will you also provide this committee with some 
examples of renewable fuel projects that your company is pursuing 
outside the United States?
    Answer. See answer above.

    Question 2. As a few of you note in your testimony, diesel prices 
have remained high while unleaded gasoline prices have come down. It 
seems as if we are getting lower priced unleaded gas at the expense of 
diesel. Since diesel is the fuel of choice in agriculture, it is a sort 
of a double whammy on our producers. What is being done, or what can be 
done, to get diesel prices back in line with the price of gasoline?
    Answer. Transportation fuel prices are determined by supply, demand 
and other competitive factors in the marketplace. Demand for diesel 
products has been increasing in both the U.S. and Europe, and is 
expected to continue increasing as we enter the winter season. The 
recent impact of hurricanes significantly affected both U.S. gasoline 
and diesel supplies because of refinery outages. The market works in a 
way that supplies move to the highest demand. Because of higher demand 
for diesel than gasoline, notably in the European Union, the United 
States ended up attracting less diesel imports which have led to 
continuing higher prices for diesel.

    Question 2a. If demand for diesel is so high in Europe and high 
prices don't attract the supplies necessary to lower prices, isn't that 
a good indicator that we should work to produce more diesel in the 
United States and look to biodiesel as an option?
    Answer. As noted in our testimony, Chevron is investing to increase 
refining capacity in the United States through our existing refining 
network. Further, there are policy recommendations that the U.S. 
government can implement to create a better investment climate for 
refinery investment, which are highlighted in our written testimony. 
Lastly, biodiesel and diesel made from natural gas (Gas-to-Liquids 
technology) may create additional and alternative supplies of diesel 
fuel.

    Question 3. For the record, will you tell me what your company has 
spent on capital expenditures in cash, not including write offs such as 
amortization or depreciation. Will you also provide the figures spent 
on cash dividends and stock buyback for the same time period?
    Capital expenditures: The table below shows Chevron's capital and 
exploratory expenditures for the periods 2000 through September 30, 
2005. Some of the exploratory expenditures are capitalized. Other 
amounts may be expensed under the applicable accounting rules if a 
project is not successful or if the project does not move into the 
development phase within a certain time period.

----------------------------------------------------------------------------------------------------------------
                                                     Total for
                                                     the period  Nine months
                    $ Billions                        1/1/2000   ended  9/30/  2004   2003   2002   2001    2000
                                                    through  9/      2005
                                                      30/2005
----------------------------------------------------------------------------------------------------------------
Capital an exploratory expenditures...............      $53.6         $7.1     $8.3    7.4   $9.3   $12.0   $9.5
----------------------------------------------------------------------------------------------------------------
Source: Chevron Form 10-Ks.

    Cash dividends and stock buy-back: Dividends and share repurchases 
under repurchase programs for the periods 2000 through September 30, 
2005 totaled $17.4 billion and $5.9 billion, respectively.

    Question 4. On November 1st, Senator Grassley asked your companies 
to contribute 10% of your record profits to supplement LIHEAP funding 
for the less fortunate. Will your companies support Senator Grassley's 
proposal?
    Answer. Chevron supports full funding of the LIHEAP program but 
does not believe funding should be done by the energy industry. 
Chevron's role is to invest to provide new energy supplies, examples of 
which are highlighted in our written testimony. Since 2002, Chevron has 
re-invested the equivalent of our profits to help produce more energy. 
The government's role is to best determine the priority and the funding 
of programs such as LIHEAP. Congress's prioritization and funding of 
LIHEAP should be completely independent of oil industry earnings.

    Question 5. I'd like to encourage you to actively work with the 
Department of Energy and any other relevant federal agency on 
initiating a public/private education campaign focused on energy 
education and conservation. In the meantime, will you tell me what your 
company has done on its own initiative?
    Answer. As noted at the hearing, Chevron would be receptive to 
working with DOE and other on a public/private campaign on energy 
education and conservation. As a company, Chevron has launched a new 
thought/advertising campaign called ``Will You Join Us'' http://
www.willyoujoinus.com/ that highlights energy issues, helps put energy 
issues into context (particularly around near term, real energy 
solutions and alternatives) and helps educate the public about steps 
they can take to conserve energy.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Mel Martinez to 
                           David J. O'Reilly

    Question. What are each of your companies doing for us to develop 
that ingenuity and that know-how into independence of fossil fuels as 
we've known them in the past, utilizing renewables, utilizing ethanol 
and maybe other technologies as well?
    Answer. As noted in Chevron's written testimony to the Committee, 
in the short term, globally energy markets are becoming more 
interdependent rather than independent (see written testimony 
Attachment C: Global Energy Equation, and U.S. Energy Policy: A 
Declaration of Interdependence). Please refer to Chevron's written 
testimony about what Chevron is doing to help meet America's energy 
needs, including research and development expenditures and investments 
in energy efficiency, and alternatives such hydrogen infrastructure and 
fuel cell vehicles, advanced batteries, and renewables such as solar 
photovoltaic installations. Chevron suggests policy recommendations for 
the U.S. government to consider.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. George Allen to 
                           David J. O'Reilly

    Question. But insofar as fuels, in the next 10 years what can our 
government do to help or stop hindering the actual use of--whether it's 
hydrogen, whether it's fuel cells, whether it's clean coal or these 
renewables, these biofuels, what can we do in 10 years to get our 
automobiles--rather than looking at just fossil fuels, looking at these 
renewables and innovative approaches--what can we do, in your view, to 
actually achieve this greater energy independence?
    Answer. As noted above, and in Chevron's written testimony to the 
Committee, in the short term, globally energy markets are becoming more 
interdependent rather than independent (see written testimony 
Attachment C: Global Energy Equation, and U.S. Energy Policy: A 
Declaration of Interdependence). Please refer to Chevron's written 
testimony about what Chevron is doing to help meet America's energy 
needs, including research and development expenditures and investments 
in energy efficiency, and alternatives such hydrogen infrastructure and 
fuel cell vehicles, advanced batteries, and renewables such as solar 
photovoltaic installations. On page 13, Chevron suggests policy 
recommendations for the U.S. government to consider.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                           David J. O'Reilly

    Question 1. Did the existence of price gouging statutes in 
Louisiana, Mississippi and Alabama play any role in your decision to 
freeze prices after Hurricane Katrina?
    Answer. No.

    Question 2. In the last decade, has your company ever withheld 
supply of crude oil or refined product from the market in order to 
prevent prices from falling?
    Answer. No.

    Question 3. Please describe any business relationship or 
transaction your company or any of its subsidiaries, wherever located 
and wherever incorporated, whether wholly owned or not, have had with 
Iranian nationals (except employment of Iranian expatriates), the 
Iranian government, individuals or corporations located or incorporated 
in Iran, or any representative of these people or companies.
    Answer. Based upon due inquiry, except for the employment of or 
possible transactions with Iranian expatriates outside Iran and the 
other incidental matters mentioned below, we are not aware of any 
instance in which Chevron Corporation or any of its owned, controlled 
or operated subsidiaries has, since the combination of Chevron and 
Texaco occurred in late 2001, entered into any business relationship or 
performed any transaction with any instrumentality of the Iranian 
government, with any Iranian national or with any individual or 
corporation that is located or incorporated in Iran, or with any 
representative of such persons.
    Chevron and its subsidiaries have taken only those actions that the 
U.S. sanctions permit U.S. companies to take, namely (i) to acquire and 
analyze preexisting geological and geophysical data and information 
about Iranian oil and gas fields, (ii) to participate in public 
conferences concerning Iranian oil and gas properties, and (iii) to 
meet and become acquainted with the personnel of the Iranian government 
who manage Iran's oil and gas assets. Chevron has not, of course, 
entered into any agreements or negotiations for agreements with Iran or 
made any business proposals to Iran. Neither has Chevron provided any 
information to Iran concerning our analysis of the geological and 
geophysical information that we have acquired.
    The foregoing actions have involved incidental transactions that 
are related to attendance at public conferences, to the acquisition of 
preexisting data and to travel to Iran, all of which are transactions 
that the U.S. sanctions permit U.S. companies to conduct. Our 
subsidiaries have also maintained and renewed preexisting trademark 
registrations in Iran, to protect our valuable trademarks and trade 
names from being misappropriated by others. Finally, Chevron has made 
humanitarian donations to U.S. nonprofit relief organizations for their 
use in connection with natural disasters which have occurred in Iran.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                            Peter C. Harvey

    Question 1. State of Emergency as Trigger for Price Gouging--Most 
state price gouging laws are applicable only in situations arising from 
a declared emergency. My home State of Maine is different in that the 
law applies in any instance where there is evidence of ``unjust and 
unreasonable profits in the sale, exchange or handling of 
necessities.'' Why did your state legislature choose to limit its law's 
impact to declared states of emergency?
    Answer. The purpose of New Jersey's law is to ensure that merchants 
do not worsen the harm or loss suffered by people who are facing an 
emergency, or attempting to mitigate the harm or loss incurred as a 
result of the emergency, by artificially inflating the prices they are 
charged for essential goods or services. It should be noted that New 
Jersey's law applies only when a state of emergency has been declared 
in New Jersey by the Governor and only in the geographical area of the 
State where the emergency is declared. It prohibits excessive price 
increases in the sale of any merchandise ``consumed or used as a direct 
result of an emergency or which is consumed or used to preserve, 
protect, or sustain the life, health, safety or comfort of persons or 
their property.'' The statute is not a price control provision. Its 
language makes that clear. Rather, it is a provision aimed at 
protecting people who are recovering from a disaster or an emergency.
    The law seeks to strike a balance between respecting market 
conditions and protecting consumers. The ``Legislative findings'' 
section of the law states, ``While the pricing of merchandise is 
generally best left to the marketplace under ordinary conditions, when 
a declared state of emergency results in abnormal disruptions of the 
market, the public interest requires that excessive and unjustified 
price increases in the sale of certain merchandise be prohibited.''

    Question 1a. How frequently do states declare a state of emergency?
    Answer. During the past five years, New Jersey has declared 
weather-related states of emergency 16 times, or roughly 3 times per 
year.

    Question 1b. Has there ever been a situation where there is 
evidence of an unconscionable increase in price outside of a declared 
emergency?
    Answer. Yes. Generally we allow sellers to charge what the market 
will bear and rely on competition to keep prices in check. However, 
there certainly are instances of situational pricing which a reasonable 
person would consider to be unconscionable, where sellers exploit the 
immediate needs of consumers and the lack of alternative, less costly 
sources for essential goods or services. A good example is the tow 
truck driver who doubles or triples the standard fee ordinarily charged 
for a tow or repair service for a stranded motorist at 3 a.m. when no 
other tow truck is available. To determine whether ``unconscionable'' 
pricing occurred after Katrina would require a complex analysis of 
supply and market conditions nationwide after the hurricane.
    Question 2. The Department of Energy established a 1-800 phone 
number as well as Web form for consumers to report possible instances 
of price gouging. According to the DOE, the information they receive is 
forwarded to the Department of Justice, the Federal Trade Commission, 
and the affected State's Attorney General. Have you been receiving this 
information?
    Answer. Yes.

    Question 2a. Is it helpful?
    Answer. Yes.

    Question 2b. What do your offices do with this information once it 
is received?
    Answer. Follow up, investigate and, where appropriate, take action.

    Question 3. As a former Attorney General, I recognize the enormity 
of the job that you perform with limited resources. In September, I 
wrote to Attorney General Gonzales and asked the Department of Justice 
to provide technical and financial support to state attorneys general 
to investigate price gouging. What, if any, assistance have you 
received from the DOJ?
    Answer. None to date.

    Question 3a. What, if any, additional assistance could the Federal 
Government provide to your offices?
    Answer. State attorneys general would welcome federal financial 
assistance to support investigations and enforcement targeting price 
gouging and other consumer issues affecting essential commodities such 
as gasoline, home heating oil, food and non-alcoholic beverages. State 
attorneys general also have a need for economic and technical expertise 
from the Federal Government, as well as relevant data, which would be 
helpful to prove price gouging in many cases. Proving gas price gouging 
after Katrina would have demanded analysis of highly technical issues 
of supply and pricing in the energy industry.

    Question 4. Are you aware of price gouging for fuel--or other 
commodities--in your state following Hurricane Katrina? Are there 
investigations underway? Do you have adequate state authority?
    Answer. As I testified before the Committees on November 9, 2005, I 
filed four lawsuits on September 26, 2005 on behalf of New Jersey 
against three oil companies, Hess, Motiva Shell and Sunoco, and a 
number of independent gas station operators in connection with gas 
price increases after Hurricane Katrina. In the week after Katrina 
struck, gas prices in New Jersey soared to an average of $3.16 a gallon 
by Labor Day, a dollar higher than the average just one month earlier. 
We sent inspectors to more than 500 gas stations in response to 
consumer complaints. Although New Jersey's price gouging law applies 
only when a state of emergency has been declared in the state, we were 
able to pursue claims alleging the defendants violated New Jersey's 
Motor Fuels Act and Consumer Fraud Act, including a provision in the 
Motor Fuels Act prohibiting a gas retailer from changing gas prices 
more than once in a 24-hour period.
    Since the November 9 hearing, New Jersey has reached a cooperative 
settlement with Amerada Hess in which the company agreed to pay 
$372,391, a portion of which will be used to fund consumer protection 
initiatives by our Division of Consumer Affairs, including efforts to 
address the home heating needs of seniors and low-income families in 
New Jersey. I have attached our press release regarding the settlement 
to supplement my answer to this question.
    We do believe that some retailers engaged in what could be 
appropriately called price gouging after Katrina by artificially 
inflating their gas prices based not on what they actually paid, but on 
what they believed could be charged given the fears raised about 
gasoline supply. Given the limitations of our price gouging law, our 
legal efforts were grounded on the Motor Fuels Act, an antiquated 
statute enacted in 1938 to prevent predatory pricing. The original 
intent of the Act was to prevent one gas retailer from repeatedly 
undercutting a competitor's prices to drive the competitor out of 
business. It provided a tool for us to address the volatility in gas 
prices in New Jersey following Katrina, but not an ideal tool.
    While the New Jersey Legislature could expand the state price 
gouging statute beyond in-state emergencies, I believe our experience 
with Katrina points to the need for a federal price gouging statute. A 
federal price gouging statute should take effect for a limited time 
span, perhaps for 60 days, in order to help stabilize pricing when a 
disaster or emergency in one geographic area of the country affects the 
supply and pricing of an essential, nationally distributed product. As 
I stated previously, proving gas price gouging after Katrina would have 
demanded analysis of highly technical issues of supply and pricing in 
the energy industry. It was a problem that apparently went beyond 
retailers to the major oil and gas companies, which posted record 
profits at the same time that consumers were paying record prices. It 
went beyond state lines. We need a solution that brings federal 
expertise and resources to bear on the problem and that provides for 
consistent enforcement nationwide. The enforcement statute should 
address not only retailers, but also wholesalers, suppliers and 
manufacturers. A federal price gouging statute should not preempt 
additional state remedies and, ideally, should provide an enforcement 
role for State attorneys general.

                           [NEWS ATTACHMENT]
                     Office of the Attorney General
     attorney general harvey announces settlement with amerada hess

    NEWARK--Amerada Hess Corporation today voluntarily settled a 
lawsuit filed in September by the Attorney General's Office, with a 
portion of the settlement proceeds funding an energy and motoring 
assistance program for low-income residents, Attorney General Peter C. 
Harvey and Consumer Affairs Director Kimberly Ricketts announced.
    Amerada Hess is the only one of the three oil companies named in 
the State's lawsuits to reach voluntary settlement of the matter to 
date.
    ``This settlement, first and foremost, is about protecting the 
rights of our consumers,'' said Acting Governor Richard J. Codey. ``It 
represents a cooperative understanding between the State of New Jersey 
and Amerada Hess that protects the interests of all of our residents, 
and also benefits those most in need--low-income families and 
individuals on fixed incomes who have been hit hard by rising energy 
prices.''
    ``Our goal is always to make sure that New Jersey consumers get 
what they pay for,'' said Attorney General Harvey. ``Gasoline is 
essential to our lives and it must be priced consistent with the law. 
Amerada Hess showed good corporate citizenship by reaching this 
settlement with our Office. We expect other oil companies to follow 
Hess's lead.''
    The Attorney General filed suit in September against Amerada Hess, 
Motiva Shell, Sunoco and various independent gas station operators for 
alleged violations of the State Motor Fuels Act and Consumer Fraud Act.
    In settling the lawsuit, Amerada Hess agreed to adhere to state law 
regarding the pricing of gasoline. Both sides agreed to settle the 
matter without an admission of any violation having occurred.
    Amerada Hess has agreed to pay $372,391 in settlement. These funds 
will be used to reimburse state and county investigative and legal 
costs.
    A portion of the funds will also be used to fund future consumer 
protection initiatives at the Division of Consumer Affairs, including 
efforts to address the home heating needs of seniors and low-income 
families in New Jersey.
    ``At its very core, the mission of the Division of Consumer Affairs 
is the protection of New Jersey's consumers and, with this settlement, 
we have done just that,'' said Kimberly Ricketts, Consumer Affairs 
Director. ``This is a good example of how government and private 
industry can work together in a productive and beneficial manner.''
    Deputy Attorney General Brian Brennan represented the State in the 
settlement with Amerada Hess.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Pete V. Domenici to 
                            Ross J. Pillari

    Question 1. What are you doing to bring oil prices down?
    Answer. BP is continuing to invest for sustainable production 
growth. Over the past 5 years, BP has invested $45 bn in the 
exploration and production segment. BP's oil and gas production has 
grown more than twice as fast as the world's total production from 
2000-2004 (5.4% for BP against 2% for the world.) Due to the 
investments over the past five years and our plans for the future, this 
strong contribution to supply is set to continue. BP is directly 
involved in oil fields which are expected to contribute almost half of 
non-OPEC production growth over the medium term.
    Over the next five years, our plans show the start up of some 35 
major projects. This is in addition to the eight projects which have 
already come on stream in 2004 and 2005 and which are ramping up 
production. Combined, these projects are expected to develop around 5.5 
billion barrels oil equivalent of BP net reserve and underpin our 
estimates that we will continue to grow production through the end of 
this decade at a cumulative average growth rate of around 5% p.a. In 
the longer run, we expect the growth rate to lie in the range of 2% to 
5% p.a.

    Question 2. What is the relationship between the price of oil that 
Americans are paying and the profits you are making?
    Answer. We don't report profits on a geographic or segment basis as 
we do not have an effective means to allocate taxes and interest at 
these detailed levels. For the first nine months of 2005, BP's U.S. 
operating profit (before interest and taxes) was $8.2 Billion. This 
represents 35% of BP's global operating profit for 2005.

    Question 3. The question I hear most from people is how is the 
price of oil set? Many Americans think oil companies are rigging prices 
to reap big profits. How would you respond to that?
    Answer. Oil companies do not set the price of crude. Crude oil is 
bought and sold on the international marketplace and the price paid 
reflects the market conditions of the day. Like any commodity market, 
there is a balance between the world's supply and demand for crude oil. 
When there is a disruption in supply, whether perceived or real, prices 
will normally increase, unless there is a corresponding reduction in 
demand. Similarly, when there is a surge in demand, as has been 
happening recently, prices will increase unless there is a 
corresponding supply response.
    The unusually strong global consumption growth of last year, led by 
China, has had the effect of bringing almost all of the world's 
available oil capacity into production. There has always been enough 
oil in aggregate to meet world demand, but most estimates now place 
spare production capacity at only around 1-1.5 million b/d, compared to 
an historic average of around 3 million b/d. This provides little 
flexibility in the system for supply disruption or strong demand, and 
markets naturally drive prices up in such a situation. There is general 
agreement that build up of significant additional excess capacity will 
take time, even though there is no shortage of potentially producible 
oil resources and there have been no reported cases of refineries 
cutting runs due to a lack of crude supply.
    To date, the rise in oil price has had minimal impact on either 
demand or supply. This is not surprising because in the short run, 
demand is relatively inelastic. Consumer behaviors take time to change. 
Lead times to develop additional supplies are long, so despite record 
levels of industry investment, the production impact is not yet 
detectable.

    Question 4. Americans are being burdened with high oil, natural 
gas, and gasoline prices while you all are raking in record profits. 
What do you say to those people that blame you for this and say that it 
is unfair?
    Answer. The high prices experienced by American consumers are a 
result of natural market forces. Demand is squeezing available supply 
driving prices up. It is a normal characteristic of free markets that 
producers receive higher profits when their products are in more 
demand. Oil companies invest billions of dollars in high-risk, long-
term investments for exploration, development and technology. In most 
years, oil companies do not receive a very large return on those 
investments. On average, the returns realized by oil companies are 
significantly below those of biotechs, financial firms and computing 
industries in particular and all industry in general, despite the level 
of risk undertaken.

    Question 5. Americans want to know if it is not costing so much 
more to produce a barrel of oil, why are prices rising so high?
    Answer. Prices are set by the market not by relative production 
costs. So the high demand for crude is what is driving the price, not 
its lifting cost. However, the cost of production is rising. BP has 
experienced oilfield cost increases of between 10-12% in 2005. 
Additionally, increased demand brings more expensive hydrocarbons into 
the market such as heavy oil, tar sands and deepwater fields)

    Question 6. What is your company's response to proposals for 
enactment of a Windfall Profits Tax?
    Answer. A windfall profits tax would discourage energy investment 
in the U.S. and decrease domestic energy security and employment. For 
example, the Congressional Research Services (CSR) found that when the 
windfall profit tax was imposed during 1980-1988 domestic oil 
production dropped as much as 6% and oil imports grew as much as 16%. 
BP has had a consistent investment strategy over the last ten years in 
the U.S. of about $6 billion/year independent of oil price and company 
profits.

    Question 7. Do you believe that Americans are dangerously dependent 
on oil and its refined products?
    Answer. American dependence on oil and refined products has both 
costs and benefits. The amount of oil consumed to produce a dollar of 
GDP continues to decline, and the amount spent on oil, although it has 
increased in recent years, remains below previous peaks.
    Relying on imported oil & refined products enables the U.S. to tap 
in to lower-cost supplies. And, given that both crude oil and refined 
product markets are global, the U.S. would be vulnerable to disruptions 
(in the production of crude oil or refined products) even if it were 
self-sufficient. On the other hand, U.S. dependence on foreign 
production is in itself a function of U.S. oil consumption. Given the 
current distribution of oil reserves, the larger U.S. consumption, the 
larger its dependence on foreign oil supplies.

    Question 8. The International Energy Agency's recent Global Outlook 
report expresses concern about world energy supplies and reliance on 
the Middle East for oil. Do you think the LEA's anxiety is justified?
    Answer. The IEA's role is to provide information (on behalf of its 
consuming-country members) on energy market risks today and in the 
future. As such, it is appropriate for the IEA to analyze and publicize 
risks to global energy supplies, including dependence on Middle East 
oil. The Middle Eastern share of world oil exports has not increased 
substantially over the last 20 years. It is nonetheless important to 
keep those risks in perspective by also assessing the benefits accruing 
to the U.S. and world economies by consuming fossil fuels (including 
Middle East oil).
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Lisa Murkowski to 
                            Ross J. Pillari

    Question 1. In your agreement on an Alaska natural gas pipeline 
that you are negotiating with the State of Alaska under the state's 
Stranded Gas Act, do you anticipate making a firm commitment to develop 
the Alaska gas pipeline project or do you anticipate accepting an 
agreement that will only involve a series of spending and work 
commitments? If the latter is the case, how long will it be before a 
binding construction commitment deadline is reached?
    Answer. Negotiations with the State of Alaska are ongoing and we 
continue to make progress. A fiscal contract agreement with the State 
of Alaska that is approved by the Legislature will enable the Alaska 
Gas Pipeline project to move forward to the next phase of permitting 
and engineering. We will quickly begin this work after gaining 
Legislative approval for the fiscal contract in Alaska. This 
engineering work leading to an Open Season as stipulated in the Federal 
Legislation will result in the filing of permit applications with the 
Federal Energy Regulatory Commission, which is responsible for the 
issuance of a Certificate of Public Convenience and Necessity following 
application review. Estimated spend by project sponsors prior to final 
FERC approval is approximately $1 billion.
    A project construction sanction decision would occur following 
issuance of FERC approvals.
    To summarize, once the fiscal contract is approved by the 
legislature and signed into law, the producers would begin advancing 
the project. Initial estimates of the project work plan include:

   3 years project planning, permitting, engineering, for 
        regulatory applications
   2 years regulatory review; final permits.
   1 to 2 years preconstruction activity--ROW preparation, 
        ordering steel, compressors, etc.
   3 years construction
   First gas flow to North American consumers

    Question 2. If there is a concern about tying up your investment 
capital in a single project, if a pipeline company presented you with a 
proposal to take all of the risk of construction of the Alaska pipeline 
project and to ship your gas at a reasonable tariff, would you commit 
the gas you control to that pipeline within a reasonable time period? 
If not, why?
    Answer. BP has built several basin opening pipelines around the 
world where the risk profile was such that it required direct BP 
involvement. We have the capital, the financial capability and the 
organizational capability needed to undertake an Alaska Gas project 
provided the potential risks and rewards are balanced.
    The resource owners, including the State of Alaska, shoulder the 
risk in the case of an Alaska Gas pipeline, because it is their firm 
commitment to use and pay for the pipeline that enables the project to 
be financed.
    No other entity is as motivated to develop a highly efficient, low 
cost pipeline than the resource owners (producers and state). That is 
because low costs translate into lower tolls. Lower tolls mean higher 
netbacks and more revenues. That is good for Alaska, the producers and 
consumers.
    BP has consistently indicated a willingness to work with any party 
than can reduce risk and add value to a project. If a pipeline company 
could actually guarantee a cost of service matched to our projected 
production needs that is more competitive than what we believe we can 
do ourselves, we would obviously be interested. This has been, and 
always will be, the case. It's good business. It is the way industry 
operates.
    Indeed, we hope and expect the pipeline industry will develop 
competitive proposals to move gas out of Alberta to U.S. markets. This 
would be a much larger challenge for the pipeline industry than for the 
Alaska to Alberta segment given the costs and risks involved. However, 
nothing in the agreement we are negotiating with the State of Alaska 
would preclude this from happening. In fact, an agreement between the 
producers and the State would be a necessary prerequisite for this to 
happen.

    Question 3. In your companies' view, is it less risky to invest 
billions of dollars in new LNG facilities to import natural gas from 
foreign sources, than to invest in the Alaska gas line project? If not, 
why are you investing in LNG projects before making a firm commitment 
to the Alaska project?
    Answer. We are attempting to do both as soon as possible because 
the nation needs both sources of natural gas. The fact that we invested 
in LNG facilities to bring gas to the U.S. before investing in the 
Alaska gas line project does not indicate a preference for LNG over the 
Alaska gas line--it merely says that, for a variety of reasons, we were 
able to bring on LNG investments earlier than the Alaska gas line. The 
fact that we did so has been to the benefit of the gas consumers of the 
U.S.

    Question 4. All of your companies are global in scope. This nation 
is concerned about its reliance on foreign sources of crude oil. Does 
it make sense for the United States to increase its reliance on foreign 
LNG while allowing Alaska's natural gas reserves to continue to remain 
in the ground?
    Answer. As mentioned above, the nation needs both sources of 
natural gas--it is not in an ``either/or'' situation. So the fact LNG 
trade into the U.S. increases does not mean that the Alaska gas line is 
any less likely to proceed. As well as LNG and the Alaska gas line, the 
nation also needs to increase its conservation of all types of energy 
so that reliance on all types of energy production is mitigated.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. James M. Talent to 
                            Ross J. Pillari

    Question 1. The recent hurricanes have highlighted the need for 
increasing refinery capacity, which was already operating at a tight 
margin of 97 percent. While that is laudable for efficiency purposes, 
it allows no room for error in case of sudden outages or demand 
increases. What is the optimal amount of spare refining capacity to 
ensure a reliable supply of finished petroleum products at stable 
prices?
    Answer. There are a number of factors that impact supply, including 
global refining capacity. Despite the major supply disruption to the 
U.S. markets post-Katrina and Rita, the global refining capacity was 
available to minimize longer market impacts. Historically, a global 
refining operating utilization of 90% has allowed for enough spare 
capacity to reduce market impacts to supply disruptions.

    Question 2. How has industry consolidation impacted the amount of 
spare production and refining capacity?
    Answer. It has had no impact that we have observed. BP sold 4 
refineries in the U.S. during the most recent consolidation activity 
and each of those refineries continues to operate today under its new 
owners.

    Question 3. Describe the degree of competition between refineries 
for crude oil supplies and sales to retailers. What percentage of crude 
oil processed in the U.S. is processed by integrated companies (i.e., 
those produce and refine) versus refined by independent refining 
companies?
    Answer. Both the market for crude oil and the market for the sale 
of refined products are extremely competitive. BP, one of the largest 
crude oil producers in the U.S. has only about 8.7% of U.S. refinery 
capacity. Per API, the integrated oil companies process approximately 
53% of the Refining capacity while the Independents process the 
remainder.

    Question 4. How has the amount of refining capacity tracked changes 
in demand for gasoline and diesel over the last 30 years?
    Answer.
   As shown in the attached API charts,* the gap between U.S. 
        refining capacity and gasoline/diesel demand has decreased over 
        the past 30 years.
---------------------------------------------------------------------------
    * The charts has been retained in committee files.
---------------------------------------------------------------------------
   U.S. refining capacity has been steadily increasing over the 
        past 10 years, driven mainly by `capacity creep'.
   Refining capacity alone doesn't give a complete picture. It 
        may not capture other feedstocks (NGL's, condensates, etc). It 
        also does not reflect changes in the upgrading capability of 
        refineries, i.e. at constant capacity a refinery may have 
        increase gasoline and diesel yields while reducing fuel oil.
   In the case of gasoline, growing U.S. demand has been 
        complementary to an increasing supply surplus from Europe 
        (caused by lower economic growth and the trend towards diesel).

    Question 5. Explain to me your company's plan to increase refining 
capacity in the U.S. to meet the need for new refinery capability.
    Answer. Refinery margins are very volatile and margins over the 
last 10-15 years have not been high enough on average to justify 
building a new refinery. BP is planning a $2 billion project focused on 
bringing Canadian crude to our existing Northern tier refineries 
(Whiting, IN; Toledo, OH, Cherry Point, WA). This investment will 
improve the security of crude supply and give better assurance of 
keeping refinery runs at maximum. Modest increases in gasoline 
production are anticipated.
    Outside the Canadian crude project, BP is spending approximately 
$700 million per year to insure that our U.S. refineries operate 
safely, in an environmentally appropriate way and achieve a high degree 
of availability to the American public.

    Question 6. EPAct 2005 removed the requirement to include 
oxygenates from gasoline, largely because of concerns over the use of 
MTBE. What is the impact on the price of removing oxygenates from 
gasoline?
    Answer. Assuming that with the elimination of the oxygen 
requirement for Federal Reformulated Gasoline less MTBE will be blended 
into refinery gasoline stocks, total domestic gasoline production could 
decline somewhat. Impact on price is unknown since blending ethanol, 
imports and other strategies will undoubtedly take up the shortfall.

    Question 7. Are there other oxygenates that can be used in place of 
MTBE, such as using ethanol to make ETBE, and how does the cost of such 
alternative additives compare to the cost of gasoline?
    Answer. The oxygen requirement of RFG has predominantly been met 
with either MTBE or ethanol. With the elimination of the oxygen 
requirement, if an oxygenate is to be used it will likely be ethanol. 
In future years, advances in biofuels production technology may lead to 
the economic production of other oxygenates and/or blending components. 
The cost of such alternatives is unknown.

    Question 8. Have you studied the use of ETBE, the cost of 
converting MTBE plants and how long it would take to do so, and whether 
ETBE avoids the leakage/water contamination problems that were caused 
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE 
and use it to increase the volume of gasoline produced by a barrel of 
oil compare to the cost of expanding existing or adding new refinery 
capability?
    Answer. Yes, we have studied. ETBE is an ether with properties 
similar to MTBE and it can impart an odor/taste to water, if not 
properly contained. BP has no current plans to use ETBE as a gasoline 
component.

    Question 9. What, if anything, is preventing your company from 
using ETBE in place of MTBE?
    Answer. ETBE is an ether with properties similar to MTBE and it can 
impart an odor/taste to water, if not properly contained.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Gordon H. Smith to 
                            Ross J. Pillari

    I have a bill, S. 1743, to give the Federal Trade Commission, 
additional authority to prevent and punish price gouging in the 
aftermath of a major disaster. My bill provides effective authority to 
the Federal Trade Commission to protect consumers from being victimized 
in the wake of a disaster without hampering the normal functioning of 
the free market. It even recognizes that there are legitimate reasons 
why prices may increase.
    Question 1. Do you think that this consumer protection authority 
should be available to the FTC?
    Answer. We have not reviewed your bill. BP supports market-based 
pricing that insures an adequate supply from local and global markets 
at all times. During times of emergency, it is important that supply 
can be moved to the areas that need it. This should not be inhibited. 
We also believe that the FTC currently has consumer protection 
authority sufficient to address improper conduct during emergencies.

    Question 2. Would this serve as a deterrent to price gouging by 
individual retailers?
    Answer. We can't predict how individual retailers would respond to 
increased activity by the FTC.

    Question 3. Can you tell me why diesel prices continue to remain 
significantly higher than gasoline prices in Oregon?
    Answer. The primary driver of why diesel fuel prices are higher 
than gasoline is that available inventory for diesel fuel is much lower 
than that for gasoline relative to historical levels. Diesel fuel 
stocks are at the lowest level that they have been since sometime in 
2000 on the west coast while Gasoline stocks are the at the highest 
level they have been since 1995 (See attached charts--based on DOE 
information).*
---------------------------------------------------------------------------
    * The charts have been retained in committee files.
---------------------------------------------------------------------------
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Jim Bunning to 
                            Ross J. Pillari

    Question 1. Some analysts believe that OPEC is approaching its 
current oil production capacity. Given this, are oil companies looking 
at alternative sources of energy, such as liquid fuels made from coal, 
in order to expand their business and maintain energy supplies for the 
United States? Please include a review of the level of investment your 
company is making this year and the projected investment over the next 
three years in coal to liquid fuels initiatives.
    Answer. We do not believe that the world is reaching peak oil 
production yet. There are still enormous quantities of conventional oil 
worldwide, close to 1.2 trillion barrels proven as well as additional 
unproven and yet to find barrels.
    However we understand the need to maintain a healthy diversity in 
the supply of energy and see a number of emerging opportunities to 
convert a variety of unconventional hydrocarbons including: heavy oils, 
coal, stranded gas, and biomass, into liquids--in many ways these 
unconventional liquids represent the next frontier for the oil 
industry.
    Today less than 2.5Mboe/d is produced from unconventional 
resources. We see three principle challenges to further development of 
unconventional liquids moving forward: firstly reduction in production 
costs driven by scale and technology advances (currently unconventional 
technologies range in costs from $25-80/bbl); secondly, and equally 
important, will be securing the right policy frameworks to enable 
development of these higher cost resources in competitive markets and 
where oil prices can still be influenced by OPEC; lastly, converting 
most of these unconventional resources, especially coal, is 
significantly more carbon intensive than conventional oil, and so we 
will need to find ways of reducing carbon emissions.
    BP currently invests in the region of $35MM per year in conversion 
technologies (not including heavy oil) and are projecting an increase 
in spend to over $55MM by 2010. In addition we invest approximately 
$10MM today in technologies to reduce the carbon impact of conversion 
processes; this will rise to over $20MM by 2010. We believe this is 
sufficient to ensure we have a number of technologies ready to 
commercialize low carbon conversion technologies, including coal to 
liquids, post 2010 depending on the price and policy environment of 
particular markets.

    Question 2. I have been concerned with the lag time between the 
wholesale cost of a barrel of oil and the retail price of a gallon of 
gasoline. As we saw following the hurricane, in an ascending market 
where wholesale oil prices increase, there is a lag period of a few 
days before retail gas prices reflect this change. Similarly one would 
expect a lag in a descending market. My concern is that retail prices 
are not dropping as quickly as they rose, relative to the change in oil 
prices. Could you explain why price movements vary during a complete 
market cycle and whether you believe any part of the energy industry is 
unfairly profiting from this price lag?
    Answer. We believe the profits earned by the industry reflect a 
fair return on investment over the long term. Describing the pricing 
environment in our business as having a ``complete market cycle,'' is 
not entirely accurate. There is no beginning or end in the market 
place, but rather periods of rising or falling prices and various 
levels of volatility. Retail prices do tend to lag wholesale movements 
up and down over time, however retail prices do not move as a result of 
wholesale price changes alone. The wholesale price is only one of many 
factors that are considered when setting prices. Other factors that are 
considered when setting retail prices include competitor price, year-
to-date volume and margin performance, supply, etc.

    Question 3. Boosting our domestic energy production is vitally 
important not only to our economy but also to our national security. 
Many of the countries we import oil from today are unstable, 
jeopardizing the reliability of sustained production. Please provide a 
chart for each of the last five years reflecting the percentage of your 
exploration and production budget that invested in the United States 
versus that invested overseas. Please also provide a chart reflecting 
your current projections of the percentage of your exploration and 
production budgets that will be allocated to projects in the United 
States versus overseas for the next five years.
    Answer. The table below indicate the absolute spend in the U.S. 
over the past 5 years for investment in exploration and production. 
This indicates the amount spent in the U.S. expressed as a percentage 
of the total exploration and production investment for the year. As you 
can see, for BP the spend in the U.S. for E&P has remained constant at 
around $4 bn since the integration of Arco into the portfolio and the 
percentage spend has averaged around 45%. This investment is greater 
than the average percentage profits generated by the U.S. over the 
period of around 37%. The significant percentage drop in 2003 
investment is attributable to the significant investment we made in the 
Russian TNK-BP joint venture that year.
    BP would expect future investment levels in exploration and 
production to remain at about two-thirds of BP's total global 
investment. BP would expect the total investment to be around $15 bn 
going forward (plus or minus largely dependent on inflationary and 
foreign exchange effects). As to which geographies will be allocated 
funding, that would depend on the relative economic regime, including 
accessibility to resources, fiscal and political stability, and market 
growth.

                         EXPLORATION & PRODUCTION CAPITAL EXPENDITURES AND ACQUISITIONS
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                2000      2001      2002       2003       2004
----------------------------------------------------------------------------------------------------------------
USA.........................................................   3,140     4,047     4,116      3,906      3,913
Global......................................................   6,344     8,753     9,483     15,192     11,088
USA %.......................................................     49%       46%       43%        26%        35%
----------------------------------------------------------------------------------------------------------------
Figures from BP's F&OI 2000-2004


    Question 4. The disruption caused by the recent hurricanes 
displayed the United States' vulnerability when it comes to domestic 
energy supply and production. What suggestions do you have to 
strengthen our energy supply and production capability?
    Answer. Our recommendation is to simplify the current boutique fuel 
situation across the U.S. This would increase the industry's ability to 
provide product to the American public by simplifying delivery 
logistics across the U.S. Another recommendation is to consolidate and 
facilitate the permitting process for new projects. Because the scale 
of oil and gas projects is so large, regulatory certainty is needed 
before investments can be made and the many avenues available to delay 
or challenge permits substantially increases the lead time to get new 
projects on stream. Continuing to promote energy conservation is 
another important government initiative.

    Question 5. It has been suggested that the United States consider 
developing a strategic gasoline and natural gas reserve, similar to 
Strategic Petroleum Reserve we currently have. Some analysts suggest 
that such reserves may minimize price spikes in these commodities 
during periods of market supply disruptions. What are your views on 
whether a strategic natural gas or gasoline reserve would be feasible 
and whether they might help minimize price increases during periods of 
market uncertainty?
    Answer. BP does not support the creation of a product reserve 
because we believe it would be ineffective. Unlike crude, the storage 
of product requires regular rotation of stock which is a complex and 
costly logistical issue. With the multitude of product types across the 
U.S., it is reasonably likely that the right product would not be 
available in the right place when needed. It is also likely, especially 
in events of natural disaster that the infrastructure (people, roads, 
pipelines, trucks etc.) would not be available to access the reserve. 
Lastly, when use of the product reserve would be required, it would be 
sold in to the market at spot prices which would be reflective of the 
emergency conditions. Thus unless there was a really large reserve, it 
wouldn't have the desired effect of avoiding price spikes. All these 
factors indicate that a product reserve would bring costs to consumers 
without necessarily giving them improved access to product in an 
emergency situation.

    Question 6. China is becoming a bigger world oil player. This not 
only has tightened the world oil market but also has produced national 
security concerns for us. What concerns or problems do you see have 
arisen since China became a bigger world energy player?
    Answer. Just as energy demand increases accompanied economic growth 
in the United States, China's rapidly developing economy now also 
requires more energy inputs. This is a natural development. As other 
countries grow, we can expect similar increases in needs for energy. 
Regular functioning of the international market system plays a large 
role in ensuring that the world copes with these new demands. Alternate 
and renewable fuels should be considered where appropriate. Meanwhile 
major consuming countries should continue seeking ways to improve 
energy efficiency.
    China's share in World oil consumption was 8.2% in 2004. It is 
likely to rise if high economic growth is maintained, but we do think 
global oil markets can and will adapt to this, if market forces are 
allowed to work.

    Question 7. While there have been expansions and efficiency gains 
at existing refineries, no refinery has been built in the United States 
in 30 years. Since the oil companies are now making record earnings, 
are there plans to build new refineries in the United States?
    Answer. Refinery margins are very volatile and margins over the 
last 10-15 years have not been high enough on average to justify 
building a new refinery. BP is planning a $2 billion project focused on 
bringing Canadian crude to our existing Northern tier refineries 
(Whiting, IN; Toledo, OH, Cherry Point, WA). This investment will 
improve the security of crude supply and give better assurance of 
keeping refinery runs at maximum. Modest increases in gasoline 
production are anticipated.
    Outside the Canadian crude project, BP is spending approximately 
$700 million per year to insure that our U.S. refineries operate 
safely, in an environmentally appropriate way and achieve a high degree 
of availability to the American public.

    Question 8. The 2005 Energy Bill implemented a controlled phase-out 
of MTBE. Many companies, however, are planning on completely halting 
its use. How will a sudden halt of the use of MTBE affect the gasoline 
market and refineries?
    Answer. A sudden halt in the use of MTBE could result in a 
reduction in the volume of domestic gasoline production, resulting in 
an increase in imports.

    Question 9. I have noticed very large differences in the price of 
gasoline in different areas of the country. For example, I recently saw 
gasoline in northern Virginia that was much more expensive than 
gasoline in northern Kentucky. Please explain why there can be such a 
significant difference in gasoline prices in different areas of the 
country.
    Answer. There are a number of factors that can influence price 
differences between geographies. A major factor is competition between 
individual retail outlets. Pricing may also be impacted by tax 
differentials between Virginia and Kentucky. There can also be a 
significant market differential based on the availability of supply and 
overall markets in each area.

    Question 10. Below are several questions on oil and the commodities 
futures market:

   When was oil first traded on the world-wide commodities 
        futures market?
   Would the price of oil be affected if oil was taken off the 
        commodities futures market and no longer traded?
   Would oil then be bought and sold as a true supply and 
        demand product?

    Answer. The International Petroleum Exchange (IPE) was founded in 
1980 and the first contract, for Gas Oil futures, was launched the 
following year. The IPE Brent Crude futures contract was launched in 
June 1988. The WTI crude futures contract first traded in March 1983 on 
the NYMEX. Any statement about the impacts of eliminating commodity 
trading of crude oil would be pure speculation.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Jeff Bingaman to 
                            Ross J. Pillari

    Section 392 of the Energy Bill, which was negotiated with the 
involvement of the Chairman and Ranking Member of the Energy and EPW 
Committees, contains permitting streamlining language. The Energy 
Policy Act of 2005 permits the EPA Administrator to enter into a 
refinery permitting cooperative agreement with a state. Under such an 
agreement, each party identifies steps, including decision timelines, 
it will take to streamline the consideration of federal and state 
environmental permits for a new refinery. I want to ask you several 
questions about that provision, since you have supported streamlining:
    Question 1. Have you requested that EPA issue any regulations or 
take any action to implement these new provisions? If yes, when? If no, 
when do you anticipate you will do so?
    Answer. BP has not requested EPA to take steps to implement these 
provisions and has no current plans to do so in the future.

    Question 1a. Have you worked with any state to encourage them to 
enter into an agreement with EPA under Section 392 of EPAct?
    Response: No.

    Question 1b. Do you support the EPAct streamlining provisions?
    Answer. Yes. We believe the additional authorities assigned to the 
EPA Administrator may prove to be useful and valuable.

    Question 1c. Do you have any examples of where a state came to EPA 
and said we want to work closely with you on permitting a new refinery 
or refinery expansion and EPA refused to provide technical assistance 
and even financial resources under existing law to that state?
    Response: No.

    Question 2. In answer to several of the questions at today's 
hearing (Nov 9) the witnesses (you) have noted that the market for 
petroleum and petroleum products is a global one and should be viewed 
in that context. Please list all planned refinery construction that 
your company plans to undertake globally. Please list them by country 
and include the projected size of the facility, including the projected 
capacity for all units and their potential product yields in addition 
to the project's total investment cost.
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 3. The International Energy Agency (IEA) has just released 
its World Energy Outlook 2005. It contains a piece on the global 
refining picture. (Please see the summary below.) The study notes a 
lack of investment in upstream and downstream capacity has contributed 
to the extreme tightness in global oil markets. What are your thoughts 
in response to this? What is your company doing in response (actions)? 
What is your company doing (investments/analysis) in the ``MENA'' 
regions? Do you agree with the IEA's projections?
    World Energy Outlook 2005: IEA Projects Growth in Middle East and 
North Africa Oil and Natural Gas Sectors through 2030 but a Lack of 
Investment would Push up Prices and Depress GDP Growth
    11/7/2005 London--``The importance of the Middle East and North 
Africa (MENA) to global oil and gas markets cannot be underestimated. 
These countries have vast resources, but these resources must be 
further developed. Investment should not be delayed,'' said Mr. William 
C. Ramsay, Deputy Executive Director of the Paris-based International 
Energy Agency, as he presented findings from the World Energy Outlook 
2005: Middle East and North Africa Insights (WEO-2005) today in London. 
Noting that a lack of investment in upstream and downstream capacity 
has contributed to the extreme tightness in the global oil market in 
recent months, Mr. Ramsay highlighted the critical role that this 
region will play in meeting growth in global energy demand.
    The WEO-2005 expects global energy markets to remain robust through 
2030. If policies remain unchanged, world energy demand is projected to 
increase by over 50% between now and 2030. World energy resources are 
adequate to meet this demand, but investment of $17 trillion will be 
needed to bring these resources to consumers. Oil and gas imports from 
the Middle East and North Africa will rise, creating greater dependence 
for IEA countries and large importers like China and India. Energy-
related CO2 emissions also climb--by 2030, they will be 52% 
higher than today. ``These projected trends have important implications 
and lead to a future that is not sustainable--from an energy-security 
or environmental perspective. We must change these outcomes and get the 
planet onto a sustainable energy path,'' added Mr. Ramsay.
    WEO 2005 focuses on the energy prospects in the Middle East and 
North Africa to 2030, covering in detail developments in Algeria, 
Egypt, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United 
Arab Emirates. Internal demand, resources, policies, investment, 
production, exports, even energy use for water desalination, all are 
examined. ``To our knowledge, this is the first time that any 
publication with a focus on the Middle East and North Africa has 
undertaken such an extensive, country-by-country review of the energy 
sector of the region. At a time when experts debate whether the world 
will run out of energy, these results are particularly relevant,'' Mr. 
Ramsay said.
    In the MENA region, domestic energy demand is driven by surging 
populations, economic growth and heavy energy subsidies. Primary energy 
demand more than doubles by 2030. At the same time, MENA oil production 
will increase by 75% by 2030 and natural gas production will treble, 
allowing more gas exports. The region's share in global oil production 
will increase from 35% today to 44% in 2030. However, this means the 
countries of the Middle East and North Africa would need to invest, on 
average, $56 billion per year in energy infrastructure. The level of 
upstream oil investment required will be more than twice that of the 
last decade.
    But what if adequate investment is not made or consuming countries' 
policies change? To assess these risks, WEO 2005 develops two other 
scenarios, each of them far from unlikely: a Deferred Investment 
Scenario, in which investment in the producing countries is delayed, 
whether deliberately or inadvertently; and a World Alternative Policy 
Scenario, in which energy-importing countries take determined action to 
cut demand and change the pattern of fuel use, driven by high prices, 
environmental or security goals, or all three.
    The two scenarios have significant implications for MENA countries. 
In the Deferred Investment Scenario, energy prices rise sharply. Global 
energy-demand growth falls, cutting the region's oil and gas export 
revenues by more than $1 trillion from 2004-2030. World GDP growth 
slows down. Deferred investment could be the result of many factors, 
but whatever the cause, the results are higher prices, greater 
uncertainty and market inefficiencies.
    The WEO World Alternative Policy Scenario examines the consequences 
of new policies under consideration in consuming countries. ``The G8 
Plan of Action, agreed at the Gleneagles Summit in July 2005, launched 
detailed initiatives to promote cleaner energy and combat the impact of 
climate change. The IEA was asked to play an important role. This 
strong global commitment indicates that governments are already 
adopting alternative policies--such as those in the World Alternative 
Policy Scenario--to achieve the G8 goals,'' explained Mr. Ramsay. Under 
this Scenario, global oil and gas demand growth is lower, but the world 
continues to rely heavily on MENA oil and gas. CO2 emissions 
fall 16% below the level of the Reference Scenario--but still increase 
around 30% by 2030.
    Assumptions about international energy prices have been revised 
significantly upwards in WEO-2005, as a result of changed market 
expectations after years of underinvestment in oil production and the 
refinery sector. The average IEA crude oil import price, a proxy for 
international prices, averaged $36.33 per barrel in 2004 and peaked at 
around $65 (in year-2004 dollars) in September 2005. In the Reference 
Scenario, the price is assumed to ease to around $35 in 2010 (in year-
2004 dollars) as new crude oil production and refining capacity comes 
on stream. It is then assumed to rise slowly, to near $39 in 2030. In 
the Deferred Investment Scenario the oil price reaches $52 in 2030.
    The World Energy Outlook 2005 contains over 600 pages of detailed 
statistics and in-depth analysis. The study was produced by the IEA 
with input from many international experts from producing countries, 
industry and organizations including OPEC. The IEA's prestigious annual 
WEO series has long been recognized as the authoritative source for 
global long-term energy market analysis and has received honors for 
analytical excellence including awards from the Russian Academy of 
Sciences, the U.S. Department of Energy and numerous public and private 
organizations.
    Answer. We do not believe that refining constraints contribute 
directly to the absolute level of oil price. Oil prices are high 
because of limited spare capacity and perceptions of increased geo-
political risks. Supply interruptions from the recent hurricanes in the 
Gulf of Mexico have also tightened crude oil availability. The global 
refining system still has spare distillation capacity that can be used 
when needed. This has been demonstrated in the wake of hurricanes 
Katrina and Rita when at one point about 5 mmb/d of U.S. Gulf Coast 
capacity was shutdown. However, the rapid increase in oil demand growth 
since 2003 and the need for Saudi Arabia to produce increased marginal 
volumes of Arab Heavy has considerably tightened refinery upgrading 
capacity. This has resulted in relative over-supply of fuel oil 
compared to light and middle distillates. As a result the prices of 
heavy crudes that contain high fuel yields have deteriorated relative 
to lighter grades. It is this widening of the so-called ``light-heavy'' 
spread that reflects the constraints in the global refining system 
rather than the absolute oil price.
    Industry investment must be based on long-term price expectations 
(guided by history) due to the long lead-times needed to bring new 
projects onstream and the long economic lives of those projects. But 
the industry clearly does respond to changes in prices (and especially 
to changes in future expectations): A June 2005 survey by Lehman 
Brothers shows that over 300 leading upstream companies planned to 
increase Exploration & Development spending in 2005.
    The IEA forecast is a `business as usual' scenario that is 
consistent with the IEA's role of informing (on behalf of its 
consuming-country members) of energy market risks today and in the 
future.
    As context, BP has no refining assets in the Middle East or North 
African region.

    Question 4. Voluntary standards--Post hurricanes, what is the 
industry doing to come up with voluntary standards/best practices for 
back-up power supply to critical energy infrastructure (refineries, 
pipelines, etc.) and natural disaster recovery? Will the API undertake 
such an effort? If not, what is your company doing?
    Answer. The loss of the power grid was a major cause of delays in 
restarting refineries, pipelines, and gas processing plants after 
Hurricanes Katrina and Rita. Even if one component of the fuel supply 
system has back-up electricity capability, it is of little use when 
other components are without power. Electricity is critical to the 
whole supply chain. Oil production can't be restored unless there is 
electricity for pipelines to move the oil. For natural gas to flow, the 
natural gas processing plants must have electric power. Moreover, 
product pipelines must have power to move product.
    The priority restoration of power to the major pipelines was a 
critical action that prevented potential shortages and panic at a 
critical time with a holiday increase in demand. Policymakers should 
consider establishing emergency powers authorities for priority power 
restoration for all components of the oil and natural gas 
infrastructure to be used in emergency situations.
    The government should do whatever it can to make the electric grid 
more robust and reliant. Improvements to the reliability of electric 
power will significantly enhance the availability of petroleum products 
during periods of temporary emergency, such as that which occurred in 
the Gulf Coast region post-hurricane.
    BP is reviewing its own requirements to evaluate whether additional 
stand-by power capability is necessary to operate critical 
infrastructure.

    Question 5. A number of witnesses testified that failure of the 
electricity system resulting from hurricanes Rita and Katrina 
contributed in great part to the inability to get refineries restarted, 
or to get natural gas pipelines restarted. What are the arrangements 
for backup power in case of such emergencies at your critical 
facilities?
    Answer. The following examples identify backup power that was 
arranged in anticipation of Hurricane Rita:

   A small, back-up generator that could operate independently 
        of the power grid was installed at the Texas City refinery to 
        provide on-site power for safety, security and instrument 
        control panels.
   Diesel generators were leased and installed to provide power 
        to major oil pipelines, such as Capline in which BP has an 
        ownership interest.
   BP procured 2 portable generators to supply our product 
        terminals.

    BP generally relies upon backup power from the grid or the local 
utility for operations at its Texas City refinery and works with the 
local utility or grid operator to enable power restoration at critical 
energy infrastructure facilities.
    BP has on-site cogeneration facilities at its Texas City refinery. 
These cogeneration facilities are designed to support steady-state 
industrial operations, not to provide power restoration following a 
hurricane or similar event. However, BP and Cinergy, its partner in the 
cogeneration facility, are investigating installation of a backup 
generator at the Texas City refinery that could startup independently 
from the grid (black-start capability) and provide power for startup of 
the cogeneration facilities and power to the refinery. Even though this 
may be technically possible, on-site management will need to address 
operational issues.
    In light of other emergency situations, such as a cascading effect 
(or outage) experienced on the power grid that was not in the immediate 
proximity of the BP facility, these on-site cogeneration facilities 
would enable the BP facility to isolate itself from the power grid and 
continue limited operations.
    While some of BP's other facilities have on-site generation or 
cogeneration, BP generally relies upon power via contract from the grid 
or the local utility for most of its facilities including: processing 
facilities and pipeline pumping or compressor stations.

    Question 6. How many of your plants have on site cogeneration 
facilities? Which plants have these facilities?
    Answer. For BP's largest refineries in the USA:

   There are cogeneration facilities located on-site at the BP 
        refineries in Texas City, Texas and Carson, California.
   There is a cogeneration facility in Whiting, Indiana which 
        provides steam to the BP refinery.
   BP does not currently have an on-site cogeneration facility 
        at its Cherry Point, Washington refinery. However, BP has been 
        actively pursuing a project to add a 500 MW facility at this 
        site.

    Additionally, BP has cogeneration facilities at its Green Lake and 
Chocolate Bayou Chemical Plants in Texas, the Wilmington Coke Calciner 
in California, at a production facility in Wattenburg, Colorado, and at 
the Naperville Research Center in Illinois. BP obtains steam from an 
on-site cogeneration facility at a chemical plant in Decatur, Alabama.

    Question 7. Are there regulatory barriers at the either the state 
or federal level that prevent the installation of cogeneration plants 
at your facilities that do not have them?
    Answer. While state or federal rules may not prevent or prohibit 
the installation of cogeneration plants at our facilities, there are 
key aspects that may significantly inhibit the economic viability of 
this type of investment in the future. BP has worked to overcome these 
obstacles to arrange for on-site cogeneration at most refineries.
    Key aspects that must be addressed when considering installation of 
on-site cogeneration facilities include:

   Transmission Access including: 1) interconnection studies, 
        wherein the host utility performs a study to determine whether 
        transmission upgrades are necessary prior to interconnecting 
        with a new power plant; and 2) the scope, priority, timing and 
        cost of required transmission upgrades.
   Permitting Issues including: 1) the time period for permits 
        and siting approval which is typically one to three years; and 
        2) purchase or acquisition of offsets for emissions prior to 
        permitting.
   Negotiating a Utility Interconnection Agreement specifying 
        the terms of interconnection.
   Availability and cost of contracting with the local utility 
        for Backup, Standby and Maintenance power.
   The ability to sell excess power to a local utility under 
        PURPA.

    Question 8. Would the presence of cogeneration facilities at your 
refineries reduce the recovery time during such emergencies?
    Answer. Cogeneration facilities coupled with back-up generation 
that could operate independently of the power grid (black-start 
capability) may reduce the recovery time in bringing an industrial 
facility (refinery) back on line.
    BP and Cinergy, its partner in the Texas City cogeneration 
facilities, are investigating installation of a small backup generator 
that could startup independently of the grid (black-start capability) 
at the Texas City site which would provide auxiliary power to the 
cogeneration facilities. Auxiliary power would enable start-up of the 
cogeneration units and provide power to the refinery for partial 
operation in the event of a power outage. Depending upon the nature of 
the power outage on the grid (i.e. damage to transmission lines), on-
site cogeneration facilities coupled with backup generation with black-
start capability may reduce the recovery time to bring the refinery 
back on line
    There are certain emergencies and outages where on-site 
cogeneration facilities are beneficial. One example involves a 
cascading outage on the utility system or power grid that is not in the 
immediate proximity of the BP facility. In this case, BP can isolate 
certain operations from the utility power grid, or, in some instances, 
may help stabilize the grid while enabling the refinery to continue 
producing transportation fuels.

    Question 9. Witnesses at earlier hearings testified that there are 
a number of modern natural generation facilities in the Louisiana/Texas 
area that are not used to their full capacity. Are there natural gas 
generation facilities in close proximity to your refinery facilities 
that could be used for backup generation at the refineries?
    Answer. BP is not aware of any under-utilized power generation 
facilities near our refinery in Texas.

    Question 10. Would use of generators that are in close proximity to 
refineries to provide backup power during such emergencies mean that 
recovery times might be shortened, since the restoration time for a 
nearby facility might be less than the restoration time for the 
transmission facilities for traditional utilities?
    Answer. A coordinated program with local utilities and/or the grid 
operator is necessary to energize the grid in a safe and effective 
manner while providing early power restoration to critical energy 
infrastructure.
    Recent examples of this type of prioritization and communication 
that enabled early power restoration to critical facilities are:

   Prior to landfall of Hurricane Wilma, BP requested and 
        received priority designation for the Port Everglades Terminal 
        in Hollywood, Florida resulting in power restoration within two 
        to three days to the terminal.
   After Hurricane Wilma made landfall, a utility asked BP to 
        identify critical portions of its retail gasoline network for 
        power restoration so that the public could obtain gasoline and 
        diesel fuel.

    Establishing a priority for power restoration to critical energy 
infrastructure (to the extent practical along with high-priority human 
needs) would be beneficial.
    If there were near-by generators that could startup independently 
from the grid (with black-start capability) that could follow load and 
re-synchronize with the grid when the grid was operational, this could 
be beneficial to provide for limited operations and duration if both 
the generator and the refinery were disconnected from the grid 
(isolated).
Environment
    Question 11. Please specify exactly which, if any, Federal or State 
environmental regulations have prevented your company from expanding 
refinery capacity or siting a new refinery, and documentation on the 
exact details of the project prevented.
    Answer. BP does not believe that any Federal or State environmental 
regulations have literally ``prevented'' us from expanding refinery 
capacity or siting a new refinery. Rather, the complex and overlapping 
environmental regulations have had the effect of discouraging efforts 
to expand refining capacity. In particular, New Source Review (NSR) 
regulations have created a disincentive to expanding refining capacity.
    In general, new refinery construction has been largely uneconomic 
for most of the past 20 years due to the low level of profitability in 
the industry. And, although profitability has improved over the past 
few years, what capital is available for refining has gone mainly for 
construction of pollution control equipment required by Federal and 
State regulations, and to construction of processing capability 
necessary to furnish fuels required by Federal fuels regulations.

    Question 11a. How much have so-called ``boutique fuel'' 
requirements added to the average retail price, where applicable, and 
the average wholesale price per gallon of the gasoline sold by your 
company?
    Answer. Typically, the more stringent the standards are for a 
``boutique fuel'', the greater the cost to produce such a fuel. The 
production cost of a ``boutique fuel'' will likely vary from refinery 
to refinery. Retail and wholesale prices are a function of supply and 
demand and it is impossible to quantify the impact that cost has on 
short term prices.

    Question 11b. If the EPA or the Congress were to act to minimize 
the number of ``boutique fuel'' formulations required by the states to 
protect air quality, how many should there be and what should the 
specifications of each be in order to maintain air quality and improve 
fungibility?
    Answer. Reducing the number of ``boutique fuel'' formulations to 
five would help to maintain air quality and reduce logistical 
constraints. The five-fuel slate for the summer season would consist of 
9.0, 7.8 and 7.0 psi RVP conventional gasoline, RFG and GARB gasoline 
with GARB gasoline limited to California and its natural distribution 
system.

    Question 12. Streamlining New Source Review (NSR) permitting 
constraints was mentioned as an incentive that would encourage refiners 
to supply more product to the U.S. market. How many air quality permit 
applications for refinery expansions has your company submitted for NSR 
over the last ten years? How long did it take the EPA, or the 
applicable State, to approve or deny each permit application, after 
receipt of a complete permit application? What was the expected 
percentage increase in product output of the expansion?
    Answer. BP and its predecessor companies submitted two major NSR/
PSD permit applications over the last 10 years. Information is not 
readily available concerning the length of time required for permit 
processing. Neither of the permitted projects resulted in a net 
increase of product output from the refinery.
    It should be noted that while there were only two projects 
submitted for formal Federal NSR/PSD permitting, there were other 
projects for which considerable effort was expended to design the 
project to ``net out'' from the NSR/PSD thresholds and thus avoid the 
formal process. Also, there were many other projects which were 
inherently below the Federal NSR/PSD thresholds and thus were subject 
to state-only (or ``minor'') NSR permitting.

    Question 12b. How would you propose to streamline NSR and still 
maintain local air quality and prevent any increase in total annual 
emissions from such expansions?
    Answer. BP supports full implementation of the NSR/PSD regulatory 
reforms which EPA developed over the past 15 years. The three rules 
were written by EPA after a fully collaborative stakeholder process; we 
believe they offer the best chance of clarifying and streamlining the 
NSR process while protecting air quality.

    Question 13. How much did the fuel specification waivers that have 
been granted by EPA to date, due to the supply disruptions caused by 
the hurricanes, reduce the average retail price of the gasoline or 
other refined products made by your company?
    Answer. The RVP waiver allowed BP to produce additional gasoline at 
its refineries by blending additional butane into the gasoline pool and 
significantly increase supply to the affected areas. We cannot say 
what, if any impact this has had on retail gasoline prices as the 
retail price is determined by a number of factors.
    Additionally, with respect to the distillate market, the sulfur 
waivers on diesel fuel did not directly increase BP refinery production 
of diesel fuel, but did allow customers to substitute high sulfur 
diesel at the terminal which likely reduced the overall level of diesel 
outages in many locations. Again, cannot determine the impact on retail 
prices as the retail price is determined by a number of factors.

    Question 14. One witness indicated that ``getting two 100-year 
hurricanes in four weeks'' caused a great deal of chaos and disruption 
in the gasoline supply chain. The National Oceanic and Atmospheric 
Administration has projected that the country and the Gulf of Mexico 
have entered a cyclical period of 20-30 years during which the Gulf and 
coastal areas are likely to experience a greater frequency of 
hurricanes and higher odds of those hurricanes making landfall in the 
U.S. What preparations has your company made to deal with a greater 
hurricane frequency to decrease repetition of the supply disruption 
that occurred this year?

    Question 15. Over the last 50 years, average annual sea surface 
temperatures have increased in the Gulf of Mexico and, according to the 
National Academy of Sciences and other similar scientific expert 
bodies, are expected to continue increasing as the oceans continue 
warming due to accelerating global climate change. The Administration's 
Climate Action Report (2002) stated ``model simulations indicate that, 
in a warmer climate, hurricanes that do develop are likely to have 
higher wind speeds and produce more rainfall.'' What preparations has 
your company made to deal with a greater likelihood of greater 
hurricane intensity so as to decrease repetition of the disruption that 
occurred this year?
    Answer. BP experienced direct impacts to facilities and production 
in the Gulf of Mexico (GoM) during the 2005 hurricane season. As a 
result, we have taken a comprehensive approach to mitigate impacts, 
going forward. For BP, the following are key areas of focus: Deepwater 
Facility Design & Operating Systems; Shelf Production Facilities; 
Export Systems & Flow Assurance Program; and Mobile Drilling Unit 
(MODU) rigs.
Deepwater Facility Design and Operating Systems
    Improved communication links with offshore facilities--Each 
facility now has an independent satellite phone system as back-ups to 
existing micro-wave and satellite systems. We are moving forward with 
installation of a subsea fiber optic network project that will improve 
communication and monitoring of offshore facilities. We are also 
establishing more reliable metocean monitoring systems to allow remote 
monitoring of facility movements in storm conditions so we can improve 
future designs.
    Personnel transportation--BP has charted a fleet of the most modern 
and capable helicopters that have long-range and wide weather 
operations windows. These aircraft will enable BP to reduce evacuation 
and response times, improve safety and enhance our ability to conduct 
better post-storm assessments.
    Future Deepwater Facility Design Criteria--BP has begun evaluating 
future facilities' design criteria and plans exist to review metocean 
conditions from the recent past (wind, waves, currents, hurricanes, 
other storms) to determine what has been the real impact of severe 
conditions and how BP can and should respond.
Outer Continental Shelf (Shelf) Production Facilities
    BP has initiated work on three severely damaged platforms and three 
damaged caissons to remediate or decommission them prior to the 2006 
hurricane season. Evacuation procedures have been strengthened to 
ensure that lift boats are moved to shore during low sea states before 
the storm. This will reduce risk of damage to production facilities 
from these vessels moving around in storms. Our aim is to decrease the 
impact of future hurricanes by focusing on strengthening the basic 
structures of our platforms and increasing investment in preventative 
maintenance.
Export Systems and Flow Assurance Program
    BP is working with industry to provide multiple, economically 
viable, access points to BP's production facilities. Having redundant 
crude oil and natural gas transportation options will help minimize 
supply disruptions and expedite the return of any lost production to 
the market place.
Mobile Drilling Unit Rigs
    Industry, MMS and the Coast Guard are working collaboratively to 
identify short and long term actions which can be taken to make MODU's 
more robust in times of increased hurricane activity. From this 
collaboration, interim guidelines will be developed for the 2006 
hurricane season. There is concern about moored rigs and their station 
keeping capability during hurricanes. Key areas of focus include: 
reducing the probability of station keeping failure, reducing 
consequences in the event of station keeping failure, and achieving 
objectives with minimal impacts to exploration and development 
activity.

    Question 16. How has your company disclosed to shareholders and 
investors the risks associated with the potential impacts on your 
company's assets in the Gulf of Mexico or indirect impacts on its 
assets elsewhere, of either the expected greater frequency of 
hurricanes making landfall in the U.S. or the probable greater 
intensity of hurricanes in the region?
    Answer. In part I, Item 3 of our annual 20-F document, BP discloses 
external, reputational and operational risks associated with our 
business. The risk of adverse weather conditions is noted within the 
Operational Risks section.
                  finances, production, imports, etc.
    Please provide for each of last ten years your company's:

   Gross revenue of U.S. operations
   Total capital expenditures in the U.S.
   Net profit of U.S. operations
   Total taxes paid to the Federal government
   Total taxes paid to State governments
   Total donated to charity

    Answer. Note: Data is provided since 2000 because that is the year 
when BP completed the major consolidation of the Arco and Burmah 
Castro) acquisitions. Using financial and operational data prior to 
2000 would not be comparable as BP was a much smaller company than it 
is today.

                                        GROSS REVENUE OF U.S. OPERATIONS
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                      Sales to third parties                         2000     2001     2002     2003      2004
----------------------------------------------------------------------------------------------------------------
USA..............................................................   71,084   84,696   80,381   108,910   130,652
----------------------------------------------------------------------------------------------------------------
Figures from BP's Annual Report & Accounts.


          TOTAL CAPITAL EXPENDITURES, ACQUISITIONS IN THE U.S.
                              [$ millions]
------------------------------------------------------------------------
                                                           IFRS    IFRS
                                   2000    2001    2002    2003    2004
------------------------------------------------------------------------
USA............................   34,037   6,160   6,095   5,967   6,005
------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial
  Reporting Standards (IFRS). Prior year data is presented in accordance
  with UK GAAP, unless otherwise noted. Figures from BP's F&OI 2000-
  2004.

                  OPERATING PROFIT OF U.S. OPERATIONS

    BP does not report net profit by geography due to the difficulties 
in allocating tax and interest at a segment and geographic level. As an 
indicator, however, we provide the following chart, which is the 
operating profit (pre-tax and pre-interest) by geography. The USA 
percentage of the total has averaged around 37% over this period.

------------------------------------------------------------------------
                                                           IFRS    IFRS
                                   2000    2001    2002    2003    2004
------------------------------------------------------------------------
USA.............................   7,627   7,183   2,764   5,935   8,720
------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial
  Reporting Standards (IFRS). Prior year data is presented in accordance
  with UK GAAP, unless otherwise noted. Figures from BP's F&OI 2000-
  2004.


                                          TOTAL TAXES PAID IN THE U.S.
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                     2000     2001     2002     2003      2004
----------------------------------------------------------------------------------------------------------------
Federal income...................................................    2,206    2,039    (240)     1,089     2,072
State Income.....................................................      353      153      157       392       351
Excise **........................................................    6,865    8,501    8,841     9,389    10,121
Production & severance **........................................      793      658      533       770       894
Real estate personal property....................................      544      430      421       248       277
----------------------------------------------------------------------------------------------------------------
** Primarily U.S., however, includes expense related to foreign jurisdictions unable to separate in time
  allotted.


                                              BP SOCIAL INVESTMENT
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                         Global investment                             2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
UK.................................................................    15.4     14.9     13.9     12.7     11.7
Rest of Europe.....................................................     5.3      8        6.2      8.2      6.5
U.S................................................................    46       52.9     46.3     31.5     25.7
Rest of World......................................................    14.9     18.9     18.8     22       43.8
                                                                    --------------------------------------------
  Global total.....................................................    81.6     94.7     85.2     74.4     87.7
----------------------------------------------------------------------------------------------------------------
* Per BP Sustainability Report.


    Question 17. How much additional petroleum refining capacity do you 
expect your company to install in the United States over the next 10 
years?
    Answer. Refinery margins are very volatile and margins over the 
last 10-15 years have not been high enough on average to justify 
building a new refinery. BP is planning a $2 billion project focused on 
bringing Canadian crude to our existing Northern tier refineries 
(Whiting, IN; Toledo, OH, Cherry Point, WA). This investment will 
improve the security of crude supply and give better assurance of 
keeping refinery runs at maximum. Modest increases in gasoline 
production are anticipated.
    Outside the Canadian crude project, BP is spending approximately 
$700 million per year to insure that our U.S. refineries operate 
safely, in an environmentally appropriate way and achieve a high degree 
of availability to the American public.

    Question 18. What percentage of profits over the last 10 years has 
your company re-invested in capital, exploration, drilling, and 
production in the United States? Please provide an annual total for 
those U.S. expenditures and a clear breakdown.
    Answer. Note: Data is provided since 2000 because that is the year 
when BP completed the major consolidation of the Arco and Burmah 
Castrol acquisitions. Using financial and operational data prior to 
2000 would not be comparable as BP was a much smaller company than it 
is today.

                                             REINVESTMENT OF PROFITS
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                              Total BP                                 2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
Replacement cost profit for the period.............................    9,392    8,456    5,691   12,432   15,432
Capital expenditures and acquisitions..............................   47,549   14,091   19,093   20,012   17,249
Ratio..............................................................     506%     167%     335%     161%     112%
----------------------------------------------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial Reporting Standards (IFRS). Prior year data
  is presented in accordance with UK GAAP. Figures are shown in brackets because they are outflows. Figures from
  BP's F&OI 2000-2004.


    Question 19. What percentage of profits over the last 10 years has 
your company re-invested in non-petroleum energy supply and production 
in the United States? Please provide a total and the results of such 
investment.
    Answer. BP has invested approximately $600 million in our 
alternative energy business over the past five years. BP Solar is in 
the process of more than doubling its annual global manufacturing 
capacity from 90MW to 200MW to be complete by the end of 2006. The 
first part of that expansion is seen in a $25 million investment at our 
Frederick, Maryland plant--that part of the expansion project is now 
complete and the company is focusing on finalizing the rest of the 
expansion plan at facilities in Madrid, Bangalore, and Sydney.

    Question 20. On average for the last ten years, please compare your 
company's overall capital expenditures in the United States to its 
expenditures elsewhere.
    Answer. Note: Data is provided since 2000 because that is the year 
when BP completed the major consolidation of the Arco and Burmah 
Castrol acquisitions. Using financial and operational data prior to 
2000 would not be comparable as BP was a much smaller company than it 
is today

               CAPITAL EXPENDITURE INCLUDING ACQUISITIONS
                              [$ millions]
------------------------------------------------------------------------
                                                           IFRS    IFRS
                                   2000    2001    2002    2003    2004
------------------------------------------------------------------------
USA............................   34,037   6,160   6,095   5,967   6,005
% of total.....................      72%     44%     32%     30%     36%
------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial
  Reporting Standards (IFRS). Prior year data is presented in accordance
  with UK GAAP, unless otherwise noted. Figures from BP's F&OI 2000-
  2004.


    Question 21. What percentage of your company's gross revenue was 
collected in the United States in each of the last 10 years?
    Answer. Note: Data is provided since 2000 because that is the year 
when BP completed the major consolidation of the Arco and Burmah 
Castro) acquisitions. Using financial and operational data prior to 
2000 would not be comparable as BP was a much smaller company than it 
is today.

----------------------------------------------------------------------------------------------------------------
                         Gross revenue                            2001      2002      2003      2004      2005
----------------------------------------------------------------------------------------------------------------
USA...........................................................    71,084    84,696    80,381   108,910   130,652
Global........................................................   148,062   174,218   178,721   232,571   285,059
Ratio.........................................................       48%       49%       45%       47%       46%
----------------------------------------------------------------------------------------------------------------
Figures from BP's Annual Report & Accounts.


    Question 22. How much of your company's revenue collected in the 
United States was used to pay for purchasing crude oil from OPEC 
countries?
    Answer. There is no reasonable way to determine what amount of U.S. 
generated revenue was used to purchase OPEC originated crude over the 
last 10 years.

    Question 23. Do you support S. 1794 or something like it create 
gasoline and jet fuel reserves to ensure stability of price and supply? 
Should it be extended to diesel and other fuels like natural gas?
    Answer. BP does not support the creation of a product reserve 
because we believe it would be ineffective. Unlike crude, the storage 
of product requires regular rotation of stock which is a complex and 
costly logistical issue. With the multitude of product types across the 
U.S., it is reasonably likely that the right product would not be 
available in the right place when needed. It is also likely, especially 
in events of natural disaster that the infrastructure (people, roads, 
pipelines, trucks etc.) would not be available to access the reserve. 
Lastly, when use of the product reserve would be required, it would be 
sold in to the market at spot prices which would be reflective of the 
emergency conditions. Thus unless there was a really large reserve, it 
wouldn't have the desired effect of avoiding price spikes. All these 
factors indicate that a product reserve would bring costs to consumers 
without necessarily giving them improved access to product in an 
emergency situation.

    Question 24. On average for the last ten years, how much of what is 
refined by your company in the U.S. stays in the U.S.?
    Answer. Initial review shows that more than 90% of finished product 
(gasoline and distillate) produced by our refineries stays in the U.S. 
Remaining product is largely sold to customers in Canada, Mexico and 
the Caribbean.

    Question 24a. What amount of refined product did your company 
import in 2004 and in 2005?
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 24b. What are your assumptions about demand growth in 
India; in China?
    Answer. We believe that oil demand in China and India will continue 
to grow with economic activity. In looking at demand we use consensus 
estimates from a variety of external forecasters including FACTS and 
Parpinelli-Technon.

    Question 24c. How have your investments in the United States 
increased the energy security of the country?
    Answer. Over the last 5 years BP has invested over $31 billion in 
the United States to serve our customers and help meet the nation's 
need for energy.
    Our U.S. investments have included continued expenditures in mature 
operations such as $700 million per year in Alaskan North Slope fields, 
a 30% increase in lower-48 natural gas fields over the last two years 
to $1.5 billion this year, and over $650 million per year in refinery 
investments. Additional investments have also been made to maintain 
terminal and pipeline capability and to meet new regulations affecting 
distribution and marketing.
    For the future we see continued opportunities to invest in the 
United States. Projects currently announced include:

   $2 billion for new development and infill drilling in the 
        Wamsutter natural gas field in Wyoming. This investment is 
        expected to double BP's net production to 250 million standard 
        cubic feet by the end of the decade.
   Two proposed LNG projects, one on the East Coast and one on 
        the Gulf Coast at a cost of $1.2 billion. These projects will 
        allow us to access our natural gas 32 of 61 position in 
        Trinidad and elsewhere in the world; and if approved, 
        potentially add 2.4 billion cubic feet send out capacity of LNG 
        to supply markets in the USA.
   $300 million to increase the use of Canadian heavy oil at 
        BP's Midwest refineries in order to secure a North American 
        source of crude oil supply.
   $2 billion per year sanctioned investment through the rest 
        of the decade as a part of our continuing program to invest 
        over $15 billion in exploration and production in the Gulf of 
        Mexico.
   BP has publicly announced its intention to participate in 
        the nearly $20 billion Alaskan Natural Gas Pipeline to bring 
        Alaskan gas to the lower 48. We, together with other interested 
        parties, are nearing completion of a commercial agreement with 
        the State of Alaska.
   Building on the success of BP Solar--which expects to hit 
        revenues of $1 billion in 2008--BP Alternative Energy will 
        manage an investment program in solar, wind, hydrogen and 
        combined-cycle-gas-turbine (CCGT) power generation, which could 
        amount to $8 billion over the next ten years.

    Question 25. What market signals will occur in advance of peaking 
world oil production and what is the appropriate policy or set of 
policies for the U.S. government to adopt when such signals occur?
    Answer. Global oil reserves are sufficient to permit oil production 
to continue rising for many years. In fact, global proved reserves have 
been rising, not falling over time (which is true even if only looking 
at non-OPEC countries). Global natural gas and coal reserves are even 
more abundant.

   While non-OPEC conventional crude oil output may eventually 
        plateau, total non-OPEC supply--including natural gas liquids, 
        heavy oil, gas-to-liquids, coal-to-liquids, and biofuels--could 
        continue rising, especially if prices remain above historical 
        averages.
   The appropriate role for government policy is to ensure 
        access to known resources at a competitive investment regime. 
        Government should ensure that any externalities--environmental, 
        etc.--are reflected in the price of competing energy sources. 
        And policy should seek to encourage outcomes rather than 
        dictate specific paths or options.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                            Ross J. Pillari

    Question. All over America, the oil industry drives up the price at 
our gas pumps by redlining and zone pricing. ``Redlining'' is when your 
companies draw a phony line around a community to lock out competition 
and raise prices for the consumers. ``Zone pricing'' is plain old 
discrimination and it takes place when one oil company supplies gas to 
several gas stations located near each other and one station is charged 
much more than the others for the same type of gas. This drives 
stations out of business, reducing choice and raising prices for 
consumers. To help hurting consumers at our gas pumps, will you company 
commit to stop redlining and zone pricing? Yes or no?
    Answer. Zone pricing is a practice we use to recognize different 
competitive conditions that exist in different geographic areas. 
Various studies conducted by independent agencies and task forces have 
consistently found that zone pricing results in reduced consumer prices 
because it allows for greater competition. See, Md. Task Force on Zone 
Pricing (2001); and similar reports in Ohio, Penn and Minn. The FTC 
issued a report in 2001 discussing zone pricing exists, but concluding 
there was no evidence of collusion among refiners (see press release 
below). BP will continue to zone price as we believe this is fair to 
our dealers and ultimately our customers in the form of competitive 
prices.

For Release: May 7, 2001
            FTC Closes Western States Gasoline Investigation
        Investigation Finds No Illegal Activity By Oil Refiners
    The Federal Trade Commission today announced the completion of its 
investigation of various marketing and distribution practices employed 
by the major oil refiners in Arizona, California, Nevada, Oregon, and 
Washington (``Western States''). After an almost three-year 
investigation, the Commission found no evidence of conduct by the 
refiners that violated federal antitrust laws.
    According to Commissioners Sheila F. Anthony, Orson Swindle and 
Thomas B. Leary, the FTC initiated the investigation to explain the 
differences in the price of gasoline between Los Angeles, San Francisco 
and San Diego. Regarding the particular question that was 
investigated--whether there was a violation of antitrust laws--the 
investigation produced no evidence of illegal conduct by the refiners.
    The Commissioners write that ``[t]he investigation produced no 
evidence of horizontal agreement on price or output at any level of 
supply.'' While zone pricing--the practice whereby refiners ``set 
uniform wholesale prices and supply branded gasoline directly to their 
company-operated and leased stations and to some independent open 
dealer stations within a small but distinct geographic area called a 
`price zone.' ''--exists in the Western States, the investigation found 
no evidence of collusion between oil companies in furtherance of this 
practice.
    In addition, the Commissioners state that ``the investigation 
revealed no evidence of conspiracy or coordination'' in marketing 
practices known as ``redlining''--the refiners' practice of preventing 
independent gasoline distributors--``jobbers''--``from competing with 
them to supply branded gasoline to independent dealers in metropolitan 
areas.''
    In the absence of such a conspiracy, redlining ``likely would be 
evaluated under the rule of reason,'' which ``would require the 
Commission to show actual or prospective consumer harm. `` However, the 
investigation ``uncovered no evidence that any refiner had the ability 
profitably to raise price market-wide or reduce output at the wholesale 
level, nor did it find a situation in which a refiner adopted redlining 
in a metropolitan area and increased market-wide prices.'' As a result 
of these findings, the Commission voted to close the investigation.
    Commissioner Mozelle W. Thompson stated in a concurring statement 
that despite voting with the majority, he remains ``somewhat troubled 
by the practice of site-specific redlining that some West Coast 
refiners utilize as part of their distribution strategies.'' Thompson 
adds that ``[s]uch vertical restraints could be unlawful in those 
circumstances where--whether in the Western States or other gasoline 
markets--the practice leads to higher-than-otherwise wholesale 
prices.'' He concludes by saying he believes that, ``should the 
Commission find evidence in any future investigation that site-specific 
redlining results in anticompetitive effects without generating 
countervailing consumer benefits, it would challenge the practice.''
    The Commission vote to close the investigation was 4-0, with 
Chairman Robert Pitofsky recused from participating.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                            Ross J. Pillari

    Question 1. I'm aware that the cost of crude oil is driven by the 
world market and that its cost is currently significantly above 
historic averages. But I'm not aware of any substantive increases in 
the cost of producing crude oil, the cost of refining it into various 
petroleum products such as gasoline and diesel, and the cost of 
transportation of refined products to markets. Through the end of 
September 2005, the price of crude had increased 40 percent in 2005 
while gasoline prices increased almost 80 percent. If the percent 
difference in the prices isn't pure profit, please explain to me how 
you account for the difference in the substantially lower increase in 
crude oil when compared to gasoline.
    Answer. In the long-run prices reflect the marginal cost of 
production. However, in the short-term, prices can move from marginal 
cost due to disruptions to supply. The scale of the price response to 
supply disruption is affected in part by the availability of spare 
productive capacity and inventory levels. Price spikes by definition 
are short-lived as they sow the seeds of their own destruction by 
providing a signal to market participants to increase supply from other 
sources and to limit demand. During the U.S. hurricane season, the 
price of gasoline increased relatively more than crude as the loss of 
gasoline supply exceeded that of crude. Moreover, inventories of 
gasoline were and continue to be at lower levels relative to history 
than those of crude, increasing the price sensitivity of gasoline to 
supply disruption relative to that of crude.
    In the long-run, refined product supply is tied to the marginal 
cost of production, with sustained prices above this level encouraging 
new supplies which in turn brings prices back to this marginal cost. 
For crude oil, cartel behaviour by OPEC does impact crude price but it 
should be noted that non-OPEC supply does respond to market principles. 
Notwithstanding this, the price of both crude oil and refined product 
is not always tied to the cost of production due to short-term events, 
as experienced this year.
    In the short-run, prices will move above marginal cost on occasions 
when supply is constrained and/or demand exceeds expectations. In 
addition, prices are affected by the level of spare productive capacity 
and inventories.
    Additional information is available in the paper below prepared by 
the American Petroleum Institute.

November 22, 2005
                Market Determination of Petroleum Prices
    Crude oil and refined petroleum product prices are determined by 
the forces of supply and demand in the world market. For both crude and 
products, the growth in spot markets and futures trading has increased 
substantially the transparency of the price-setting process. American 
refiners pay the world price for crude oil and distributors pay the 
world price for imported petroleum products. U.S. oil companies do not 
set these prices. The world market does. Whether a barrel of crude oil 
is produced in Texas or Saudi Arabia, it is sold in the highly 
competitive world marketplace, which is comprised of hundreds of 
thousands of buyers and sellers of crude oil from around the world.

                            CRUDE OIL MARKET

    In the crude oil market, several ``marker crudes'' are widely 
traded in both spot and futures markets.\1\ Changes in the prices of 
these marker crudes are quickly translated into prices for other 
crudes, with minor differences reflecting quality and transportation 
differentials. The best known of these markets are the New York 
Mercantile Exchange (where contracts for future delivery of West Texas 
Intermediate oil are traded) and the International Petroleum Exchange 
(where contracts for Brent crude are traded).
---------------------------------------------------------------------------
    \1\ The term ``futures markets'' refers to those organized 
exchanges where standardized contracts for the delivery of crude and 
petroleum products at various future dates are bought and sold.
---------------------------------------------------------------------------
    These markets have expanded substantially in the last 20 years and 
have also contributed to a significant increase in the trading of crude 
oil on so-called ``spot markets,'' which are markets in which crude oil 
is bought and sold without long-term contracts. Trading of crudes on 
the spot market has increased significantly over the past two decades 
and has greatly facilitated refiners' ability to obtain adequate crude 
supplies. Moreover, as refiners compete for available crude supplies, 
the price on any given day reflects the independent judgments of the 
thousands of oil companies, petroleum consumers, investment banks and 
speculators regarding both the current supply and demand balance and 
the outlook for how this may change in future months.
    Because of the fungibility of the crude oil market, changes in the 
price for crudes traded on the futures markets are quickly translated 
into changes in prices for crudes on spot markets, causing world oil 
prices to move together, as seen on the graph on page 2.* While crude 
oil prices fluctuate on a minute-by-minute basis, a change in market 
conditions (for example, concerns about a political disturbance in a 
producing country) could cause prices to increase for crude that would 
be delivered months in the future. These higher future prices will, in 
turn, cause market participants to alter their perceptions of the 
current balance of supply and demand, possibly building inventories in 
anticipation of future market tightness, thereby taking crude off the 
current market and causing current prices to potentially rise.
---------------------------------------------------------------------------
    * The graph has been retained in committee files.
---------------------------------------------------------------------------
    The price changes for these marker crude oils can, in turn, lead to 
equivalent changes (with adjustments for quality and transportation 
differentials) in the prices for all other crudes. In this manner, 
expected changes in the future supply or demand for crude oil can very 
quickly be translated into changes in the prices paid for crude being 
bought and sold today.

                    REFINED PETROLEUM PRODUCT MARKET

    Conceptually, the market for refined petroleum products is very 
similar to the crude oil market, with widespread trading of products on 
both the spot and futures markets.
    Because it is the major component of petroleum product costs, 
changes in crude oil prices have a significant effect on petroleum 
product prices. In fact, the Federal Trade Commission has concluded: 
``Over the last 20 years, changes in crude oil prices have explained 
85% of the changes in the price of gasoline in the U.S.'' Thus, changes 
in the future price of crude oil can lead to similar changes in the 
price of gasoline and other petroleum products. However, changes in the 
supply or demand of petroleum products arising from factors unrelated 
to the crude market (such as an expected hurricane that would interfere 
with refinery operations or colder than normal weather in the Northern 
Hemisphere) can also cause the price paid for product to be delivered 
today or months from now to rise or fall independent of crude oil price 
changes.
    Similar to the crude oil market, a change in the price of gasoline 
or heating oil to be delivered some months in the future can lead to 
similar changes in the price paid for product to be delivered next 
month, which, in turn, will affect the prices being paid today on the 
spot market. These changes will also provide market participants with 
signals about whether they should be building up or drawing down 
inventories, thereby either adding to or subtracting from the supply of 
product currently on the market. A change in this spot price could, in 
turn, lead to a similar change in the wholesale, or ``rack,'' price 
paid for unbranded gasoline by retailers and, in turn, in the prices 
paid by motorists at the pump.
    In the wholesale gasoline market, there are generally several 
different prices quoted, depending on the relationship between the 
supplier and retailer and on the terms, if any, of their contractual 
relationship. Thus, the wholesale price paid by different retailers 
will likely differ slightly depending on such factors as whether there 
is a long-term supply agreement or whether the retailer has the right 
to use the supplier's brand. However, through the mechanism described 
above, a change in the market forces affecting the future supply or 
demand of petroleum product is quickly translated into a change in the 
prices being paid for gasoline at the pump today.

    Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to 
149. Further, no new refineries have been built in the U.S. since 1976. 
In 1981, the 321 refineries had a capacity of 18.6 million barrels a 
day. Today, the remaining 149 refineries produce 16.8 million barrels a 
day. I recognize the difficult financial, environmental, and legal 
considerations associated with the location and construction of new 
refineries. But I fail to understand the closure of existing refineries 
even if they required investment to enhance their efficiency and 
production capability unless, of course, this mechanism is being used 
to increase the price of gasoline and other refined products. Please 
help me understand why you would shut down refineries in the face of 
the supply and demand situation. What conditions would have to exist 
for you to invest in new refining capacity? I have heard the industry 
claim that up to $48 billion has been used on capital expenditures for 
existing refineries. If those investments were not used for capacity 
increases, what were they used for?
    Answer.

   Refining is a highly volatile business. Investment decisions 
        are based on long-term trends.
   There are numerous risk factors affecting the profitability 
        of new refining capacity: demand growth, changes in crude 
        quality & availability, refining technology, vehicle 
        technology, regulations, competitor actions, etc.
   In the recent past, investment has been focused on clean 
        fuels, regulatory requirements and extensive expenditures to 
        maintain existing facilities.
   Refinery investment is often directed toward environmental 
        compliance and safety and maintenance issues
   BP evaluates new investment options globally and has 
        invested in existing refineries to maintain supply in global 
        markets. With numerous factors impacting gasoline and diesel 
        markets, the best and most efficient investments in the U.S. 
        continue to be increasing capacity on existing refineries.

    Question 3. The recent hurricanes resulted in the need to import 
substantial refined products such as gasoline, diesel fuel and aviation 
fuel to meet U.S. demand. The question has been raised as to whether 
the country should develop a strategic reserve of finished petroleum 
products. What would be your reaction if the Federal government either 
directly or by way of contract with the private sector sought to create 
a strategic reserve of finished petroleum products? Since these 
products have a limited shelf-life, one proposal is to obtain and 
operate a number of refineries and have the products be used by the 
Federal government. Appreciate your comments on this proposal.
    Answer. BP does not support the creation of a product reserve 
because we believe it would be ineffective. Unlike crude, the storage 
of product requires regular rotation of stock which is a complex and 
costly logistical issue. With the multitude of product types across the 
U.S., it is reasonably likely that the right product would not be 
available in the right place when needed. It is also likely, especially 
in events of natural disaster that the infrastructure (people, roads, 
pipelines, trucks etc.) would not be available to access the reserve. 
Lastly, when use of the product reserve would be required, it would be 
sold in to the market at spot prices which would be reflective of the 
emergency conditions. Thus unless there was a really large reserve, it 
wouldn't have the desired effect of avoiding price spikes. All these 
factors indicate that a product reserve would bring costs to consumers 
without necessarily giving them improved access to product in an 
emergency situation.

    Question 4. Given the recent profitability of the oil industry, I 
am interested to learn more on the disposition of these profits, 
particularly to enhance both production and refining capacity. Are any 
of these profits being used to enhance production and refining capacity 
for the benefit of other countries? What fraction of your profits is 
being invested for production and for refining? What percentage of 
profits have been used for stock buybacks and mergers and acquisitions?
    Answer. Note: Data is provided since 2000 because that is the year 
when BP completed the major consolidation of the Arco and Burmah Castro 
acquisitions. Using financial and operational data prior to 2000 would 
not be comparable as BP was a much smaller company than it is today.

                                              DISPOSITION OF FUNDS
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                              Total BP                                 2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
Replacement cost profit............................................    9,392    8,456    5,691   12,432   15,432
Share buybacks.....................................................    2,000    1,300      700    2,000    7,524
Capital expenditures...............................................   11,107   13,167   13,303   13,986   14,408
Acquisitions.......................................................   36,442      924    5,790    6,026    2,841
----------------------------------------------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial Reporting Standards (IFRS). Prior year data
  is presented in accordance with UK GAAP. Figures are shown in brackets because they are outflows. Figures from
  BP's F&OI 2000-2004.


    Question 5. You've all said profits are cyclical, and that your 
companies have also suffered from the volatility of the oil markets. 
Would your stockholders be better served if domestically produced oil 
was sold at a fixed rate that included a generous profit margin above 
the production, refining, and distribution costs?
    Answer. What is being suggested here is creation of a public 
utility model rather than a free market. We do not agree that 
shareholders are better served in a price regulated market.

    Question 6. Do you believe that global warming is occurring? Do you 
believe that man-made activities have a role in this phenomenon? How 
will global warming impact your companies in term of added costs for 
oil and gas development, or allow access to new areas for oil and gas 
development?
    Answer. While the science of climate change is unproven in absolute 
terms, BP believes there is sufficient evidence to suggest that human 
activity could affect the earth's climate in a serious way and that 
precautionary action should be taken.
    BP was one of the first companies to commit to reducing 
CO emissions from its operations, establishing a goal in 
1997 to reduce emissions by 10% from 1990 levels. BP achieved this 
objective several years early in 2001 and has established new goals to 
maintain these levels going forward.
    On November 29, 2005, BP announced plans to create a new business 
unit called BP Alternative Energy. This business will be dedicated to 
developing alternative energy sources (solar, wind, hydrogen, combined-
cycle-gas-turbine) for power generation. Investment in this new segment 
could amount to $8 billion over the next 10 years.
    BP's press release announcing the new business may be found at: 
http://www.bp.com/
genericarticle.do?categoryld=2012968&contentld=7012352
    Additionally, Lord John Browne's remarks regarding this new 
business may be found at: http://www.bp.com/
genericarticle.do?categoryld=98&contentld=7012385
    You may find additional detail regarding BP's position on Climate 
Change on our website: http://www.bp.com/
subsection.do?categoryld=4451&contentld=3072030

    Question 7. Is it accurate that United States LNG terminals in 
Massachusetts and Maryland are only operating at half capacity? Do you 
believe if these plants were operated at a higher capacity it would 
have changes the market dynamics that determine the current price?
    Answer. For 2005, including forecasts for December, BP intends to 
utilize about 90% of its allocated theoretical capacity at Cove Point. 
BP does not own capacity at the Massachusetts terminal.

    Question 8. I understand that Shell and BP have entered into the 
market and are now operating in the black. If that is accurate, what 
barriers are you experiencing in expanding this promising market? What 
federal incentives can Congress provide to help promote the solar 
energy market? How about advancing the shift to a hydrogen fueled 
economy?
    Answer. BP has been a leader in the solar business for 
approximately 30 years and the solar business achieved profitability 
for the first time in 2004.
    Enacting simple and uniform net metering and electricity grid 
interconnection standards and effective electricity time-of-use 
policies would help level the regulatory playing field currently 
disadvantaging distributed energy sources such as solar.
    Extension of the current tax credits for residential and commercial 
solar customers for at least five years and incentives for 
technologies, like solar, that promote grid reliability and help reduce 
grid congestion could help promote solar market growth.
    As to hydrogen, BP has been investing in hydrogen demonstration 
programs for the last five years. We are a major partner in the world's 
two largest--Europe's hydrogen bus demonstration project, known as 
Clean Urban Transport for Europe (CUTE) and the U.S. Department of 
Energy's fuel cell vehicle and infrastructure validation program. In 
total we are involved in more than 10 refueling stations around the 
world, testing a different technology, storage or delivery pathway at 
each one. These practical demonstrations help companies such as BP 
learn about what is required to help deliver the hydrogen economy.
    In addition to the demonstration programs we are involved in we 
also participate in a number of committees involved in developing codes 
and standards for hydrogen transport (for example the DOE tech teams). 
BP is also an active member of the California Fuel Cell Partnership, 
the world's premier hydrogen transport organization, bringing together 
a unique combination of auto manufacturers, energy companies, 
technology suppliers and legislators. BP supports a variety of work in 
academia in the area of hydrogen for transport and maintains links with 
institutions such as the University of Delaware and UC Davis.
    Since hydrogen can be made, transported and stored in a variety of 
ways it is very versatile as a fuel source, but that also creates 
challenges. As a result commercial availability of hydrogen and fuel 
cell cars is still several years away since it is not clear which 
pathways will be most economic. Fuel cell technology also needs to come 
down dramatically in cost and improve in driving range in order for 
customers to buy fuel cell vehicles.

    Question 9. Please state for the record your company position on 
fuel economy standards. Are there other incentives that you support 
that you feel are better for consumers then the Corporate Average Fuel 
Economy paradigm?
    Answer. BP fully supports conservation including increased vehicle 
efficiency standards. As to specific programs and tools, BP believes it 
is the role of government to select them and determine their funding.

    Question 10. I understand that over the past 5 years companies in 
your industry have downsized significantly. Now there is a shortage in 
workers and equipment to increase drilling. Please explain that 
dynamic.
    Answer. Over the past five years this industry has seen relatively 
low oil prices and industry consolidation. Now it is experiencing high 
oil prices. This dynamic is not uncommon for cyclical industries.
    During the low price environment, the industry saw a curtailment of 
investment in drilling activity. This forced those who were employed in 
the drilling sector to find employment elsewhere, thus reducing the 
size of the workforce.
    Now, the industry is in a period of high oil prices and demand for 
workers skilled in drilling are highly desired because of the surge in 
spending on drilling activity, new finds and other activities.
    Meantime, U.S. universities and colleges are producing fewer 
graduates with degrees in math, science and engineering. Therefore, 
there is a smaller pool of potential employees from which to choose. 
Combine this with the fact that the average age in the oil and gas 
industry is approximately 50 and you see the real challenge the 
industry is facing.
    In an effort to plan for the future and meet some immediate needs, 
BP is working with local, state and federal officials and educators to 
try to build the right educational and training programs to meet the 
needs of the industry, going forward.

    Question 11. As you probably know, Congress is likely to open up 
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas 
exploration. Do you have plan to bid for leases in this area? What does 
the price of oil have to be to make ANWR exploration and extraction be 
economically viable?
    Answer. BP does not comment publicly on its intentions regarding 
competitive exploration lease sales. Should the Congress and the 
President agree that energy development in ANWR is in the best interest 
of the United States, we will evaluate the opportunity, assess it 
against the other exploration opportunities in our global portfolio, 
and then decide, on the basis of many factors including compatibility 
with a clean environment and healthy wildlife populations--whether the 
coastal plain is a place BP should explore.

    Question 12. I understand that many of your resources and equipment 
are working flat out to rebuild infrastructure in the Gulf of Mexico. 
If there is no capacity to expand oil and gas exploration, what good is 
opening up sensitive environmental areas to increased drilling going to 
do for the consumer in the short run?
    Answer. It is true that the industry is working hard to rebuild 
infrastructure in the Gulf of Mexico. We are also focused on 
maintaining and enhancing production in the area. While the industry is 
presently facing challenges in labor and equipment markets; just as in 
other sectors, if new opportunities are made available the industry 
will size itself accordingly. Industry has proven repeatedly that it 
can meet challenges, if given opportunities.

    Question 13. Given the growing demand for oil in Asia, do you 
believe that oil derived from the Arctic National Wildlife Refuge could 
be diverted to supply Asian markets? If drilling in the Arctic National 
Wildlife Refuge is authorized this year, when will it begin to have an 
impact on gasoline prices? What do you believe that effect will be?
    Answer. Crude oil is a global commodity and where it ends up is a 
function of market conditions at the time it is produced. Historically, 
the natural market for Alaskan crude is the West Coast of the United 
States.

    Question 14. Do you support more transparency in the oil and 
natural gas markets, as would be provided in my bill S. 1735?
    Answer. BP supports more transparency in the oil and natural gas 
markets and supports the view taken by the Acting Chairman of the 
Commodity Futures Trading Commission who stated:
    ``To deal with the price reporting problems, there have been those 
who have called for an invasive government presence in the price 
reporting business. Some have called for the creation of a centralized 
data hub to which all natural gas, and possibly electricity prices 
would be reported. Under some proposals this would be a government-
sanctioned entity with the power to force companies to report prices. 
In other scenarios, advocated by some in Congress, the hub would be a 
government regulator. As one can imagine, such an endeavor would be a 
huge undertaking as the regulator/data hub sought to ensure the 
integrity of prices in a widely diverse market. As an alternative I 
supported, and still do support, an industry initiative such as that 
proposed by the Committee of Chief Risk Officers, that establishes 
guidelines for reporting prices. I believe that such industry 
initiatives can be very effective in stemming the price reporting 
problems in a less costly fashion than by interposing a regulator into 
a job that the market can perform itself.'' \2\
---------------------------------------------------------------------------
    \2\ Overview of the North American Energy, Commodities and 
Developing Products Markets Sharon Brown-Hruska, Acting Chairman U.S. 
Commodity Futures Trading Commission International Swaps and 
Derivatives Association (ISDA) New York, November 17, 2004.

    Question 15. How has the last 3 years of escalating gasoline prices 
affected demand by American drivers? Have we seen a correlation between 
a certain level of price increase and less demand by American drivers? 
What is the actual level of reduced demand today compared to 3 years 
ago (please respond in the context of a doubling of retail gasoline 
prices)?
    Answer. Information on gasoline demand in the DOE web site lags by 
a little over 2 months so we are just getting insights into demand post 
the Katrina environment. However, over the past 3 years gasoline demand 
as increased by 3% annually in an environment that also experienced 
increasing gasoline prices. While demand growth appears to have slowed 
in September following Katrina, it is unclear how this may impact full 
year 2005 growth rates.

    Question 16. What is the crude oil extraction cost for major oil 
producing countries, including our own? How does that compare with oil 
derived from shale or coal?
    Answer. BP does not have independent data on cost of oil extraction 
for different countries and production costs vary significantly with a 
given country for different projects. In general, finding and 
development costs industry-wide have been rising in recent years.
    BP does not have investments in oil extraction from shale or coal.

    Question 17. Regarding foreign exporting, inventory maintenance, 
and other practices of your company, please provide a response to each 
of the following questions and information requests: For each and every 
export shipment to a foreign country of gasoline, distillate fuel oil, 
propane, or liquefied natural gas occurring from January 1, 2005 to 
present, please provide the date, product type, volume, domestic port 
of exit, foreign destination, transportation costs, and the sale price 
or transfer value upon arrival at the foreign destination.
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 17a. Since January 1, 2001 to present, please identify the 
number of shipments wherein your company exported gasoline, distillate 
fuel oil or jet fuel and the sales price or transfer value received at 
the destination was less than the amount that would have been received 
had the product been marketed by your firm in the United States.
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 17b. Since January 1, 2001 to present, please identify the 
date, product, volume(s), foreign port of origin, expected U.S. port of 
entry, and eventual port of final destination in each instance wherein 
your company basically ``turned a ship away'' (whether proprietary 
product or acquired from a third party) by changing the shipments 
expected arrival in a U.S. port to a foreign port.
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 17c. From 1995 until present, please identify by month the 
inventory levels maintained by your company for gasoline and distillate 
fuel oil in both barrels and converted to ``days of cover'' or ``days 
of supply'' for your firm's distribution and sales volumes within each 
of the Petroleum Allocation Defense Districts (PADDS) in the United 
States.
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 17d. From January 1, 2005 to present, provide the details 
of each ``spot market'' (as commonly referred to in the industry for 
bulk sales, in volumes exceeding 5,000 barrels per transaction) 
including the date, identity of both the seller and purchaser, location 
of the product being sold, and the selling price.
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 17e. Describe your company's use of ``in-house trading 
platforms,'' and identify all individuals in your company by name, 
address, email, and phone number that were authorized during 2005 to 
either exchange, trade, sell or purchase gasoline or distillate fuel 
oil on either the ``spot market'', NYMEX futures market, or via 
``forward paper'' purchase rights.
    Answer. BP does not publicly disclose personal information about 
its individual employees.

    Question 17f. Please identify all third party reporting services, 
including but not limited to Oil Price Information Service (OPIS), 
Lundberg Surveys, Platts, and Oil Intelligence that your company 
regularly supplies transaction data or marketing information and all 
individuals of the company by name, address, email, and phone number 
that were authorized during 2005 to provide the information or data to 
such third parties.
    Answer. The third parties that we presently report to are the 
following: PLATTS, OPIS, CMAI, JJ&A, ICIS and Dewitt's (to the last 
four entities, we report chemicals (aromatics) only). BP does not 
publicly disclose personal information about its individual employees.

    Question 17g. Please identify the branded and unbranded ``rack 
prices'' that were reported by your company to third party reporting 
services such as OPIS and the branded and unbranded ``rack prices'' 
that were actually charged distributors or jobbers by your company each 
day, from January 1, 2005 to present, at the truck loading terminal(s) 
that typically supply gasoline stations in Houston, TX, Atlanta, GA, 
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR, and Seattle, 
WA.
    Answer. East of Rockies, BP generally does not provide any rack 
prices to OPIS. BP sends a price notification of our branded and 
unbranded rack prices directly to our customers each day. OPIS then 
surveys a panel of customers to collect this information for its daily 
reporting. If there are any discrepancies between what we send to our 
customers and what OPIS publishes it is related to what the customer 
provided to OPIS as a part of its daily survey. On the West Coast, BP 
does report to OPIS for most finished products.
    Regarding information on actual prices charged to distributors and 
jobbers, this information is commercially sensitive and proprietary. We 
are willing to meet with you privately to discuss these matters under 
proper protections of confidentiality.

    Question 17h. Will your company commit that it will take no efforts 
to retaliate against any firm or individual that is a potential witness 
before this Committee or cooperates with any investigation into the oil 
industry by Congress or another governmental authority?
    Response: Yes.

    Question 17i. From January 1, 2005 to present, for each instance 
known to your company wherein a third party (not your company) exported 
gasoline, distillate fuel oil, propane, or liquefied natural to a 
foreign country, please provide any of the details known to your 
company including the identity of the exporter, date, product type, 
volume, domestic port of exit, foreign destination, transportation 
costs, and the sale price or transfer value upon arrival at the foreign 
destination.
    Answer. We do not have information available pertaining to third 
parties.

    Question 17j. Since January 1, 2001 to present please identify the 
identity, date, product, volume(s), foreign port of origin, expected 
U.S. port of entry, and eventual port of final destination in each 
instance wherein your company is aware a third party (not your company) 
basically ``turned a ship away'' (whether proprietary product or 
acquired from a third party) by changing the shipments expected arrival 
in a U.S. port to a foreign port.
    Answer. We do not have information available pertaining to third 
parties.

    Question 17k. Please provide an itemized list of tax deductions and 
credits taken under the U.S. tax code for 2004, by your parent company 
and subsidiaries.
    Answer. This information is proprietary and confidential under laws 
and regulations pertaining to tax returns. BP complies fully with the 
tax filing requirements for companies operating in the United States. 
If there are particular tax issues you wish to discuss, BP is willing 
to meet with you to discuss them.

    Question 17l. For each and every export shipment to a foreign 
country of gasoline, distillate fuel oil, or propane from BP's Cherry 
Point refinery in Washington state occurring from January 1, 2001 to 
the present, please provide the date, product type, volume, domestic 
port of exit, foreign destination, transportation costs, and the sale 
price or transfer value upon arrival at the foreign destination.
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 17m. For each and every export shipment to a foreign 
country of gasoline, distillate fuel oil, or propane from BP's Cherry 
Point refinery in Washington state occurring from January 1, 2001 to 
the present, please provide the date, product type, volume, domestic 
port of exit, foreign destination, transportation costs, and the sale 
price or transfer value upon arrival at the foreign destination.
    Answer. This information is commercially sensitive and proprietary. 
We are willing to meet with you privately to discuss these matters 
under proper protections of confidentiality.

    Question 17n. Since January 1, 2001 to present, please identify the 
number of shipments from BP's Cherry Port refinery wherein your company 
exported to a foreign destination gasoline, distillate fuel oil or jet 
fuel and the sales price or transfer value received at the destination 
was less than the amount that would have been received had the product 
been marketed by your firm in the United States.
    Answer. Taking into account the entire slate of products produced 
by the Cherry Point refinery, no exports to a foreign destination 
yielded a lower overall refinery realization or value than if that 
product had been marketed in the United States.

    Question 17o. Isn't it true that the refining capacity at BP's 
Cherry Point refinery has over time grown from 96,000 barrels per day 
to 225,000 barrels per day?
    Answer. Yes, since the refinery went into operation in 1971, BP has 
increased its capacity from about 100,000 barrels per day to today's 
225,000 barrels per day. However, current operations and future growth 
opportunities are being challenged by interpretations of the Magnuson 
Amendment. The Magnuson Amendment was enacted in 1977 to thwart plans 
for a crude oil pipeline project from Cherry Point to the upper 
Midwest. The legislation was not intended to restrict the ability of 
the Washington refineries to meet the regional demand for petroleum 
products. However, as a result of a recent federal court decision, BP 
faces a litigation risk that Cherry Point will not be able to obtain 
the crude oil needed to meet growing demand for gasoline and other 
products. Furthermore, lack of access to additional crude supplies acts 
as a deterrent to possible expansion of the refinery. The West Coast 
refineries together do not produce enough petroleum products to meet 
the regional demand. BP supports clarifying legislation to ensure that 
the Magnuson Amendment does not exacerbate the imbalance between supply 
and demand in the West Coast states.

    Question 17p. Isn't it true that BP has previously stated that the 
Cherry Point refinery can take crude from the TransMountain Pipeline? 
Isn't it true that BP has also previously stated that the Cherry Point 
refinery can transport refined product by rail and via the Olympic 
pipeline?
    Answer. BP gets 100% of its crude supply via water borne shipments. 
The refinery runs a combination of Alaska and foreign crudes based on 
availability. There is a pipeline that supplies crude oil from Canada 
to some of the other Washington based refineries. This pipeline is 
currently at capacity.
    BP ships finished product by truck, vessel and the Olympic 
pipeline. Rail shipments are only available for butane and propane. The 
Olympic Pipeline is also operating at capacity and is currently unable 
to ship additional product from Cherry Point.

    Question 17q. Isn't it true that the BP refinery is in a Foreign 
Trade Zone enabling you to export oil products overseas without 
tariffs? Since 2001, how much money has BP saved as a result of this 
tax benefit?
    Answer. The BP Cherry Point Refinery is an active Foreign Trade 
Zone and has operated under zone status since October 2002. While there 
are benefits from being in a Foreign Trade Zone, they are not derived 
from the export of oil products.

    Question 18. We request that you provide an explanation why your 
industry trade association would put out information about Senator 
Feinstein's amendment stating that major oil companies need to expense 
these exploration costs when each of you as the Chief Executive 
Officers of the API member companies affected by the Feinstein 
amendment told two Senate Committees that your companies didn't need 
these incentives.
    Answer. Senator Wyden's question at the Senate hearing specifically 
referred to his proposed amendment to repeal the tax incentives that 
were enacted earlier in 2005 in the energy bill. Mr. Pillari's response 
to this specific question which Senator Wyden asked was ``I would agree 
with what has just been said and say it's a minimal impact on us.'' 
With this answer, he agreed with the other witnesses who said that the 
new incentives in the bill would have a minimal impact on our company.
    Senator Feinstein's amendment dealt with the expensing of 
intangible drilling costs (IDC), which have been the law in the tax 
code for decades. Expensing of IDC has been allowed on an optional 
basis from the early days of income taxation. Early deductibility under 
the regulations was not mandated by the statute but was a recognition 
by the tax administrator of the nature of these costs and an 
appreciation of the risk and ``intangible'' character of these costs.
    When, in 1945, a court found the regulations for current 
deductibility invalid because of the lack of express statutory 
authority, Congress expressly confirmed the deductibility of IDC, 
initially in a House Concurrent Resolution and finally in what is now 
IRC sec. 263(c).
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ken Salazar to 
                            Ross J. Pillari

    Question 1. The Agriculture Committee is looking at the impacts 
these high energy prices are having on agricultural producers around 
the country. To sum it up: they are hurting. It seems to me that there 
is tremendous potential for our country to grow fuels such as ethanol 
and bio-diesel. This approach offers many benefits to rural America as 
well as to the country as a whole. What type of investments is your 
company making (and planning to make) in these types of renewable fuels 
in the United States?
    Answer. BP is one of the largest blenders of ethanol in the U.S. In 
2005 alone, BP will introduce gasoline-ethanol blends to more than 
twenty new markets in the U.S. This has been achieved through a mix of 
investment in blending capability at a number of proprietary 
distribution terminals and contracting for blending services at a 
number of third party terminals. This has all been done on the basis of 
economics that were supportive of this investment and product offering.

    Question 1a. Rural America is crying out for investment in 
renewable fuels, and I encourage your companies to look at the 
potential of renewable fuels. In terms of a percentage of your capital 
expenditures, how much money did your company spend this year to 
develop renewable fuel sources in the United States?
    Answer. In 2005, BP is investing approximately $7 million for 
blending of renewable fuels at proprietary terminals.

    Question 1b. What will that percentage be going forward?
    Answer. BP is currently conducting research in next generation bio-
fuels and evaluating options for expansion of conventional bio-fuels in 
our operations.

    Question 1c. Will you also provide this committee with some 
examples of renewable fuel projects that your company is pursuing 
outside the United States?
    Answer. Outside of the U.S., BP's marketing activities are focused 
in Europe and Australia/New Zealand.

   BP is one of the largest blenders of biodiesel in Europe 
        with most of its efforts focused on Germany.
   The blending of ethanol into gasoline is not common practice 
        in Europe due to a differing distribution infrastructure and 
        the absence of vapor pressure relief for gasoline-ethanol 
        blends.

    Question 2. As a few of you note in your testimony, diesel prices 
have remained high while unleaded gasoline prices have come down. It 
seems as if we are getting lower priced unleaded gas at the expense of 
diesel. Since diesel is the fuel of choice in agriculture, it is a sort 
of a double whammy on our producers. What is being done, or what can be 
done, to get diesel prices back in line with the price of gasoline?
    Answer. As is the case with gasoline, market prices for diesel are 
set by supply and demand.

   Demand patterns for gasoline and diesel in the U.S. are 
        significantly different. Demand for gasoline is largely driven 
        by individual consumers who appear to have significantly 
        reduced discretionary driving in response to high prices. 
        Diesel demand in the U.S. is largely driven by commercial and 
        agricultural uses with considerably less discretionary demand. 
        This was particularly the case for agricultural demand with 
        supply disruptions coming during harvest season.
   Supply of both fuels was severely impacted by the loss of 
        domestic refinery production caused by Hurricanes Katrina and 
        Rita. In the case of gasoline, high domestic prices attracted 
        gasoline imports from refineries in Europe and the rest of the 
        world to help cover the shortfall while the U.S. refineries 
        ramped back up. Imports were not so readily available for 
        diesel because global refining capacity for diesel is much more 
        tightly balanced. Refineries have limited capability to shift 
        production between gasoline and diesel. Supply conditions for 
        diesel are likely to improve as domestic refining production 
        recovers.

    Question 2a. If demand for diesel is so high in Europe and high 
prices don't attract the supplies necessary to lower prices, isn't that 
a good indicator that we should work to produce more diesel in the 
United States and look to biodiesel as an option?
    Answer. Refining investments have long economic lifetimes (15+ 
years) so investment decisions, whether for diesel or other products, 
need to consider the expected refining business environment over a 
similar time frame. BP bases its investment decisions on many factors 
including a forward view of supply and demand and tests those decisions 
against a range of possible scenarios.
    Biodiesel has grown considerably in 2005 with the initiation of the 
$1.00/gal federal tax credit, current diesel prices and initiation of 
the MN biodiesel mandate. However, it still remains well below 1% of 
the U.S. diesel supply. Significant new biodiesel production capacity 
has been announced. If current conditions persist, market forces may be 
expected to attract the output from these new plants into the diesel 
supply.

    Question 3. For the record, will you tell me what your company has 
spent on capital expenditures in cash, not including write offs such as 
amortization or depreciation. Will you also provide the figures spent 
on cash dividends and stock buyback for the same time period?
    Answer.

                                                   CASH BASIS
----------------------------------------------------------------------------------------------------------------
                                                              2000       2001       2002       2003       2004
----------------------------------------------------------------------------------------------------------------
Capital expenditures.....................................   (10,037)   (12,181)   (12,098)   (11,885)   (12,286)
Acquisitions, net of cash acquired.......................    (6,265)    (1,210)    (4,324)      (211)    (1,503)
Buybacks.................................................    (2,103)    (1,133)      (573)    (1,889)    (7,208)
Dividends paid...........................................    (4,439)    (4,881)    (5,304)    (5,674)    (6,074)
----------------------------------------------------------------------------------------------------------------
2003-4 data is presented in accordance with International Financial Reporting Standards (IFRS). Prior year data
  is presented in accordance with UK GAAP. Figures are shown in brackets because they are outflows. Figures from
  BP's F&OI 2000-2004.


    Question 4. On November 1st, Senator Grassley asked your companies 
to contribute 10% of your record profits to supplement LIHEAP funding 
for the less fortunate. Will your companies support Senator Grassley's 
proposal?
    Answer. LIHEAP (Low Income Home Energy Assistance Program) is a 
government program that provides financial assistance to families who 
are unable to afford their utility bills. BP agrees with the intent of 
the program. However, BP believes that it is the role of government to 
determine the funding levels for specific programs through allocation 
of its general revenues. BP does not make direct contributions to 
government programs but pays substantial amounts in federal and state 
income taxes which are the primary source of government funds.

    Question 5. I'd like to encourage you to actively work with the 
Department of Energy and any other relevant federal agency on 
initiating a public/private education campaign focused on energy 
education and conservation. In the meantime, will you tell me what your 
company has done on its own initiative?
    Answer. BP is highly supportive of industry efforts geared to 
energy efficiency and public education focusing on energy education, 
efficiency and conservation.
    BP has been engaged in a partnership with the National Renewable 
Energy Lab that has produced a traveling energy education vehicle and 
interactive program for teachers and students.
    BP has created a partnership with the Enterprise Foundation where 
we donate solar systems to needy families in inner-city Los Angeles.
    BP has a long-standing relationship with the National Energy 
Education Development project that promotes the improvement of energy 
education capabilities of educators across the country. BP's A+ for 
Energy program in California (delivered by NEED) provides grants and 
scholarships to teachers for the delivery of energy and conservation 
education. The program is being expanded to Texas. NEED also helps 
deliver the Solar Connection program in Chicago, which offers selected 
schools solar systems and companion curriculum.
    BP has built hydrogen fueling station pilot projects at Los Angeles 
International Airport, in Florida and Southeast Michigan and will build 
more in 2006. A number of educational visits have occurred as part of 
the demonstrations of the technology overall hydrogen fueling 
initiatives. In addition, BP is in partnership with Ford and Daimler 
Chrysler to bring fuel technology to the U.S.
    BP continues to expand its solar partnerships with companies like 
Whole Foods and Home Depot where installations of solar systems are 
actively promoted to the public.
    As a member of the American Petroleum Institute (API), BP is 
supporting an extensive effort led by API to encourage consumers to 
save energy. This campaign includes television, radio and newspaper 
ads.
    As a member of the Center for LNG, BP has supported educational 
aspects regarding the need for diversified fuel supply and issues 
related to LNG.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                            Ross J. Pillari

    I have introduced legislation that will offer an up to $500 tax 
credit to working low and middle income individuals for the cost of 
home heating expenses. According to the National Energy Assistance 
Directors Association, heating costs for the average family using 
heating oil are projected to hit $1,666 for the upcoming winter. This 
represents an increase of $403 over last winter's prices and $714 over 
the winter heating season of 2003-2004. Meanwhile, profits of oil and 
gas rose 62 percent in the third quarter for companies in the Standard 
& Poor 500 Index. I am proposing to offset the $500 tax credit for home 
heating expenses by curtailing the benefit large oil companies receive 
by using the LIFO accounting method.
    Question 1. Do you think given budget deficits and record profits 
for oil companies that it is appropriate to divert tax benefits for 
large integrated oil companies such as yours to pay for such a measure?
    Answer. BP pays U.S. federal income tax at a 35% rate as well as a 
number of other taxes including excise, property, royalties and 
severance taxes. It is important to note that with the increased 
profits that BP has seen this year, we have paid a commensurate 
increase in taxes to the U.S. government. On a group basis, 2005 income 
taxes are expected to increase by 60% over 2004 payments and increases 
in the U.S. are of a similar magnitude.
    It is appropriate for the Federal Government including the Congress 
to make decisions about how to use the revenues received from taxpayers 
from payment of federal income taxes. It is not appropriate for a 
taxpayer such as BP to determine the proper use of federal tax 
payments. With respect to use of the LIFO accounting method, the 
current LIFO accounting rules apply to all industries, and it is 
inappropriate to change the rules for the oil industry only. In 
addition, this change would result in a significant financial impact to 
the refinery side of the business at a time when Congress has expressed 
an intention to increase refinery capacity.

    Question 1a. Does this seem like an equitable approach given that 
the high cost of oil enables you to not only bank large profits, but 
also to use accounting methods to substantially reduce taxes? Is it 
fair to report less taxes when you're profiting the most?
    Answer. LIFO (last-in/first-out) is an accounting methodology that 
tracks and values a taxpayer's inventory for purposes of determining 
the cost of goods sold, which is deducted by the business from its 
gross income, and for determining the value of its inventory at year 
end. This inventory accounting method is based upon the assumption that 
the last goods brought into inventory are the first goods sold. The use 
of LIFO inventory accounting is not new and has been an accepted method 
under the tax code to determine a taxpayer's income since the 1930s. 
Like taxpayers in other industries, many oil and gas companies properly 
elected to use LIFO for their downstream inventory. At a time when the 
industry anticipated continued rising costs, LIFO was acknowledged to 
be the best method for tracking the true cost of inventory products. 
Denying access to standard accounting methods to a single industry is 
unfair.
    The revenue raising measure that you are proposing is neither 
equitable nor is it sound tax policy. Energy prices are only one of a 
multitude of elements affecting the income tax that BP pays. For every 
other corporation that is subject to income tax the mix will be 
different. The common denominator for all of these taxpayers is taxable 
income to which a rate of 35% is applied. To the extent that BP's 
taxable income has increased because of energy prices 35% of that 
income will be paid to the Federal Government. From a policy 
perspective, a multiplicity of statutory tax rates would undermine the 
general neutrality of the income tax system in this country. It would 
also attract capital to industries that are adequately capitalized (and 
thus selling products at the lowest prices) and be a disincentive to 
investment in those that need it most.

    Question 2. Your third quarter profits have certainly been a 
lightning rod that has riled consumers as they continue to pay 30 
percent more in Maine for their home heating oil for the winter.
    I realize that you reinvest some of these profits in exploration 
for more product. In each quarter, have you reinvested the same 
percentage of the profits to reinvestment? What have your reinvestment 
percentages been to your total profits? Do they vary from quarter to 
quarter or year to year?
    Answer. Note: Data is provided since 2000 because that is the year 
when BP completed the major consolidation of the Arco and Burmah 
Castro) acquisitions. Using financial and operational data prior to 
2000 would not be comparable as BP was a much smaller company than it 
is today.

                                   GLOBAL CAPITAL EXPENDITURES & ACQUISITIONS
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                              Total BP                                 2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
Replacement cost profit............................................    9,392    8,456    5,691   12,432   15,432
Capital expenditures...............................................   11,107   13,167   13,303   13,986   14,408
Acquisitions.......................................................   36,442      924    5,790    6,026    2,841
Ratio..............................................................     506%     166%     335%     161%     112%
----------------------------------------------------------------------------------------------------------------
Figures from BP's F&OI 2000-2004.


    Question 3. To what non-profit organizations and academic research 
that address global climate change does your company donate financial 
support to and how much to you donate each year?
    Answer. BP supports a wide range of innovative research through 
partnerships with many diverse organizations. This research seeks 
largely to address the challenge of developing secure, reliable and 
affordable supplies of energy while at the same time reducing the 
impact of energy production and use on our natural environment. In 2003 
our expenditures on all research totaled $349 million while in 2004 
those expenditures increased to $439 million. Following are several 
specific examples of climate-related expenditures to non-profit 
organizations and/or academic research.

   Princeton University, U.S.--With Ford Motor Company, BP 
        sponsors the Carbon Mitigation Initiative, a 10 year, $20 
        million project that aims to find safe, effective and 
        affordable strategies to reduce CO2 emissions and 
        solve the problem of climate change.
   The Carbon Capture Project (CCP)--BP is leading a public-
        private collaboration made up of industry, governments, NGOs 
        and other stakeholders, funding commercial and academic 
        research into carbon capture and storage. BP funding of this 
        initiative has been approximately $12 million to date with an 
        expectation to spend several million more over coming years.
   Stanford University, U.S.--BP supports a three-year, $2 
        million research program on public aspects of modern energy 
        markets and climate change.
   The Chinese Academy of Sciences and Tsinghua University--BP 
        supports ``Clean Energy Facing the Future''--a 10-year, $10 
        million program to develop and deploy new clean energy 
        technologies for China and the rest of the world.
   The Tsinghua BP Clean Energy Research and Education Centre--
        an energy and environmental studies center established through 
        a grant from BP.
   World Resources Institute--a project with leading 
        environmental NGO to study the public policy aspects of a 
        framework to enable a wider scale deployment of carbon capture 
        and storage as a means to address greenhouse gas emissions.
   BP Solar Neighbors--a community program whereby celebrities 
        help bring attention to the benefits of solar power, and help 
        low-income families use solar power to reduce their energy 
        bills. Every time an invited celebrity purchases a BP solar 
        system for their home, BP donates a similar system to be 
        installed on a low-income family's home in South Central Los 
        Angeles. These families also become clean electricity users and 
        learn about energy efficiency and solar energy so they can 
        become environmental role models in their communities.
   A Plus for Education--A BP program that awards $2 million in 
        annual grants and scholarships to California K-12 teachers to 
        implement creative and innovative educational programs to teach 
        students about energy and energy conservation. The program will 
        also be rolled out in Texas in 2006.

    There has been much discussion about the skyrocketing costs of 
gasoline, heating oil, and other petroleum products over the past year, 
magnified by the three hurricanes which have hit the Gulf Coast region 
this year. In response to these inquiries into the rising prices and 
your soaring profits, you have asserted that these increases are tied 
to market forces, particularly rising prices of crude oil.
    I've reviewed your financial filings from the Securities and 
Exchange Commission, and they paint a very stark picture when compared 
to the financial misery being experienced by millions of Americans. 
ExxonMobil, for example, has realized a net income of $25.42 billion in 
the first nine months of 2005, an increase of $8.5 billion over the 
first nine months of 2004. Exxon's third quarter net income this year 
was $9.92 billion, up a full 90%.
    Similarly, ConocoPhillips' net income for the third quarter of 2005 
was $3.8 billion, compared with $2.006 billion during the same time 
period in 2004. Conoco's filing attributes this jump in profit to 
``higher crude oil, natural gas and natural liquid gas prices,'' 
``improved refining margins,'' and ``equity earnings from our 
investment in LUKOIL.''
    In my State of Maine, the median state income is $17,044 per year. 
A full 78 percent of Mainers use heating oil to warm their houses in 
wintertime, and this, combined with gasoline prices of anywhere from 
$2.50 to $3.00 per gallon paints a harsh picture for Maine and New 
England this winter. Petroleum is not any run-of-the-mill commodity. It 
is the lifeblood of commerce in this country, with fuel costs being 
built into the price of every other good bought and sold on the market. 
And in places like New England where petroleum heats most homes, it's 
literally a life-and-death commodity.

    Question 4. Your industry has taken the position in its SEC filings 
and at yesterday's hearing that the escalation of its fuel prices is 
the result of increases in crude oil prices. However, if your retail 
gas prices were raised simply to cover your increased costs in 
purchasing crude oil, your net profits would remain the same. Everyone 
knows this is not happening. Can you identify for this committee the 
reason that the rise in gasoline prices is far out-pacing the rise in 
crude oil prices?
    Answer. In the long run retail product prices must be sufficient to 
recover costs of raw materials, manufacture and transportation. In the 
short run, however, product prices are not cost-driven. The significant 
increase in crude oil prices over the last two years has caused 
refiners to look to recovering their increased costs. Refiners are only 
able to recover these cost increases, however, to the extent that 
demand is sufficient to absorb product at the increased price. If 
demand exceeds supply at a given price, the price will increase to the 
point that supply equals demand. This is the equilibrium price for a 
free market commodity.
    Severe interruptions in the supply chain, such as that caused by 
the recent hurricanes, drive prices up because overall demand is 
bidding for scarce supplies. The severe peaking in the wake of the 
hurricanes was driven primarily by refinery and other supply chain 
interruptions rather than underlying crude oil prices.

    Question 4a. Even though crude oil prices have risen this year, 
your companies aren't actually incurring those costs, are they? Isn't 
the gasoline and heating oil that your firms are currently selling on 
the market actually being produced from inventories that your companies 
purchased when the price of crude oil was much lower?
    Answer. This question relates to LIFO inventory accounting 
procedures which are standard in many industries. LIFO accounting 
recognizes that a barrel of crude oil consumed today has to be replaced 
in inventory by a barrel purchased at today's price, therefore having 
an economic cost equal to the current crude oil price. In a rising raw 
material market, the theoretical input costs may appear to be lower 
than spot market prices for the input materials. In a falling market, 
the inverse is true, and costs can appear to exceed realizations for 
the finished goods. Over time, LIFO accounting, which is a generally 
accepted accounting procedure, fairly portrays manufacturing profit 
margins.

    Question 4b. If you're producing oil from crude that you bought at 
$40 per barrel, but selling it at a price that is purportedly based 
upon a $70 per barrel cost to you, wouldn't that account for the 90% 
increase in profits we've seen?
    Answer. Product prices are set by the supply/demand balance in the 
market, not by the price of raw material inputs, although if product 
prices are not sufficient over the long term to cover input and other 
costs, the enterprise will fail. BP's profits in 2005 are attributable 
largely to the production and sale of crude oil, not to the sale of 
refined products.

    Question 5. I've alluded to the vital role petroleum plays in our 
economy and society, from the price of bread to the price of a plane 
ticket to the price of heating one's home. While you're obviously in 
the business for profit, there are other sectors of the economy where 
we put a limit on selling commodities at unconscionable prices. One 
example is usury law, where lenders are prohibited from charging 
unconscionable rates for borrowing money--because we recognize that 
access to cash is critical to enterprise. How much more of a toll do 
these fuel prices have to take on our society before Congress steps in 
and places similarly appropriate regulations on your industry? Many 
consumers would say that raising the price of gas by $2 per gallon over 
the past 2 years, while reaping over $25 billion in profits is price 
gouging. Many lawmakers would agree. What do you say to them?
    Answer. Prices for crude oil and refined products represent market 
driven commodity prices established by supply and demand. Neither the 
comparison of current prices to historical prices nor the profitability 
of market participants is sufficient to establish ``price gouging.'' If 
demand outpaces supply, prices will increase. Historically cheap 
commodities may, in this way, become expensive over time. High prices 
and strong profitability attract entry in the free market model, and 
entry and competition drive prices down if sufficient supplies are 
available to meet demand. If sufficient supplies are not available, 
high prices encourage shifting to substitutes for the product in short 
supply. This leads to innovation and expansion of the economy overall. 
Free markets have served the United States well. BP believes that 
regulatory regimes that interfere with natural market forces do not 
work well and should not be considered in response to if the short run-
up in consumer prices attributable largely to the hurricanes.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                            Ross J. Pillari

    Question 1. In the last decade, has your company ever withheld 
supply of crude oil or refined product from the market in order to 
prevent prices from falling?
    Answer. No.

    Question 2. Please describe any business relationship or 
transaction your company or any of its subsidiaries, wherever located 
and wherever incorporated, whether wholly owned or not, have had with 
Iranian nationals (except employment of Iranian expatriates), the 
Iranian government, individuals or corporations located or incorporated 
in Iran, or any representative of these people or companies.
    Answer. The Iran-Libya Act of 1996 (ILSA), renewed in 2001, 
mandates that the President impose sanctions on persons or entitles 
which make new investments over $20 million for the development of 
petroleum resources in Iran. Moreover, the Executive Orders of 1995 and 
ILSA restrict American company trade and investment with Iran without 
specific OFAC waiver authority.
    Since the enactment of these laws and regulations, BP America, Inc 
and its subsidiaries have fully complied with all laws and regulations 
governing American company activity with Iran.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Pete V. Domenici to 
                            John Hofmeister

    Question 1. What are you doing to bring oil prices down?
    Answer. Shell does not control the price of oil. Oil is a 
commodity, and prices are set by the marketplace. Crude oil and natural 
gas prices fluctuate substantially and unpredictably. The industry must 
manage its business in the face of these severe price fluctuations. The 
business requires massive investment over long periods of time--even 
when prices are relatively low--to ensure that there will be energy 
supplies in the future. The energy consumed today is made possible by 
investments made years or even decades ago.
    Oil and gas industry earnings per dollar of sales are in line with 
all U.S. industry during the second quarter of 2005. The energy 
industry overall earned 7.6 cents for every dollar of sales, compared 
to an average of 7.9 cents for all U.S. industry. The total dollar 
numbers may be large, but so are the billions of dollars that petroleum 
companies have invested to supply energy to U.S. consumers--and will 
need to re-invest--to meet future demand in a safe and environmentally 
sustainable way.
    Shell has a history of making significant investments in the U.S. 
and is dedicated to growing the North American energy supply. Shell is 
an industry leader in the Deepwater Gulf of Mexico, beginning with the 
development of our Auger field over a decade ago. Over the past five 
years, Shell gross production in the Gulf of Mexico has been nearly one 
billion barrels of oil equivalent, and over the same period Shell has 
reinvested almost $7 billion in new offshore supply capacity.
    Shell is aggressively pursuing natural gas prospects in onshore 
North American basins. We are building new supply positions by 
developing both conventional and unconventional gas resources. Shell is 
investing in oil shale in Colorado, where we are testing a process to 
unlock very large oil shale resources by conversion in the ground--
using electric heaters to gradually heat the rock formation to release 
light oil and gas. This technology has the potential to recover over 10 
times as much as traditional retort technologies, in a more 
environmentally sensitive way.

    Question 2. What is the relationship between the price of oil that 
Americans are paying and the profits you are making?
    Answer. See Answer to Question 1, above.

    Question 3. The question I hear most from people is how is the 
price of oil set? Many Americans think oil companies are rigging prices 
to keep big profits. How would you respond to that?
    Answer. See Answer to Question 1, above.

    Question 4. Americans are being burdened with high oil, natural gas 
and gasoline prices while you all are raking in record profits. What do 
you say to those people that blame you for this and say that it is 
unfair?
    Answer. See Answer to Question 1, above.

    Question 5. Americans want to know if it is not costing so much 
more to produce a barrel of oil, why are prices rising so high?
    Answer. See Answer to Question 1, above.

    Question 6. What is your company's response to proposals for 
enactment of a Windfall Profits Tax?
    Answer. History has demonstrated that a windfall profit tax does 
not work. In the 1980s, the windfall profit tax (WPT) drained $79 
billion in industry revenues that could have been invested into the 
U.S. economy to fund new production and infrastructure. A WPT 
discourages investment in domestic production and increases U.S. 
dependence on imported oil. The Congressional Research Service 
concluded that between 1980 and 1986 the WPT reduced domestic oil 
production by as much as 1.6 billion barrels.

    Question 7. Do you believe that Americans are dangerously dependent 
on oil and its refined products?
    Answer. Most American consumers and the U.S. economy currently 
depend on fossil fuels to heat and cool their homes, power their cars 
and run their businesses. Regardless of the answer to this question, 
Shell's goal is to invest both in new supplies of oil and gas, as well 
as in alternative energies and energy technologies of the future, all 
in an effort to meet U.S. energy needs today and tomorrow.

    Question 8. The International Energy Agency's recent Global Outlook 
report expresses concern about world energy supplies and reliance on 
the Middle East for oil. Do you think the IEA's anxiety is justified?
    Answer. IEA is in the best position to comment on its analysis.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Jim Bunning to 
                            John Hofmeister

    Question 1. Some analysts believe that OPEC is approaching its 
current oil production capacity. Given this, are oil companies looking 
at alternative sources of energy, such as liquid fuels made from coal, 
in order to expand their business and maintain energy supplies for the 
United States? Please include a review of the level of investment your 
company is making this year and the projected investment over the next 
three years in coal to liquid fuels initiatives.
    Answer. Shell believes that coal-to-liquids (CTL) could play a role 
in addressing the USA's energy needs, particularly given the scale of 
U.S. coal resources and the strength of its established coal industry. 
Although CTL technology has been proven, the commercialization of the 
process remains challenged by high relative capital intensity, which 
argues for CTL projects of large scale coupled with a high confidence 
of sustained energy prices sufficient to stimulate private sector 
investment. Shell's clean coal business unit in the U.S. is focusing on 
delivering in North America the coal gasification process to a number 
of projects some of which include processes to convert natural gas to 
liquids.

    Question 2. I have been concerned with the lag time between the 
wholesale cost of a barrel of oil and the retail price of a gallon of 
gasoline. As we saw following the hurricanes, in an ascending market 
where wholesale oil prices increase, there is a lag period of a few 
days before retail gas prices reflect this change. Similarly one would 
expect a lag in a descending market. My concern is that retail prices 
are not dropping as quickly as they rose, relative to the change in oil 
prices. Could you explain why price movements vary during a complete 
market cycle and whether you believe any part of the energy industry is 
unfairly profiting from this price lag?
    Answer. Retail gasoline prices tend to move more slowly than the 
underlying cost of product. This ``lag'' effect is evident during 
periods when prices are rising as well as those times when prices are 
falling. The best way to measure profitability is over a longer period 
of time, after the market has experienced several rising and falling 
cycles. This type of longer-term measurement provides a more realistic 
representation of profitability.

    Question 3. Boosting our domestic energy production is vitally 
important not only to our economy but also to our national security. 
Many of the countries we import oil from today are unstable, 
jeopardizing the reliability of sustained production. Please provide a 
chart for each of the last five years reflecting the percentage of your 
exploration and production budget that invested in the Untied States 
versus that invested overseas. Please also provide a chart reflecting 
your current projection of the percentage of your exploration and 
production budgets that will be allocated to projects in the United 
States versus overseas for the next five years.

           CAPITAL EXPENDITURES FOR EXPLORATION AND PRODUCTION
------------------------------------------------------------------------
                                                          % invested in
                         Year                                 U.S.
------------------------------------------------------------------------
2000..................................................         27
2001..................................................         26
2002..................................................         14
2003..................................................         18
2004..................................................         13
------------------------------------------------------------------------

    Our capital expenditure budgets are approved on an annual basis 
during the month of December, and therefore we cannot provide the data 
for the next five years.

    Question 4. The disruption caused by the recent hurricanes 
displayed the United States' vulnerability when it comes to domestic 
energy supply and production. What suggestions do you have to 
strengthen our energy supply and production capability?
    Answer. To secure energy supply in the United States, industry must 
re-invest profits to meet both short and long-term needs. Congress 
should ``do no harm'' by distorting markets or seeking punitive taxes 
on an industry working hard to meet the energy demands. Other policy 
initiatives might include:
    Access to Resources. Gaining access to diverse energy resources is 
a key to securing--energy supply to meet future needs. U.S. oil and gas 
production must be broadened to other parts of the country in order to 
ensure reliable and adequate energy supplies. Our current dependence on 
Gulf production was highlighted when Hurricane Katrina shut in 92 
percent of the Gulf's oil output and 83 percent of its natural gas 
production. Shell is actively exploring for oil and gas in all the 
areas in North America that are currently available, but most of the 
Outer Continental Shelf (OCS) is not available. Yet, there are about 
300 trillion cubic feet of natural gas and more than 50 billion barrels 
of oil yet to be discovered on the OCS surrounding the Lower 48. Alaska 
OCS has an estimated 122 trillion cubic feet of natural gas and 25 
billion barrels of oil. Access to oil and gas resources off our 
coastlines would be an important step, particularly in light of the 
fact that the hurricanes highlighted the U.S. dependence on the Gulf 
Coast for domestic oil and gas supply.
    OCS Revenue Sharing. For years, the Gulf of Mexico has shouldered 
the burden of the U.S. offshore energy production. OCS revenues should 
be shared with states and communities that have production off their 
coasts, in order to mitigate the impacts of offshore development.
    Conservation. Conservation is important in ensuring future energy 
supply. Energy efficiency and conservation affect demand and that, in 
turn, affects the market. Shell has found significant cost savings in 
our own facilities from energy conservation.
    Workforce. Today, nearly 50 percent of all oil and gas industry 
workers are over the age of 50. The available skilled workforce is 
aging, and interest in energy-related educational opportunities is 
shrinking. We need engineers, scientists, inventors, drillers, 
geologists and skilled trades people to meet our energy needs. Shell 
has funded a number of workforce initiatives and encourages governments 
to consider the same.

    Question 5. It has been suggested that the United States consider 
developing a strategic gasoline and natural gas reserve, similar to the 
Strategic Petroleum Reserve we currently have. Some analysts suggest 
that such reserves may minimize price spikes in these commodities 
during periods of market supply disruptions. What are your views on 
whether a strategic natural gas or gasoline reserve would be feasible 
and whether they might help minimize price increases during periods of 
market uncertainty?
    Answer. The creation of strategic reserves for natural gas, 
gasoline or other products must be carefully considered. The creation 
of such reserves would involve tremendous costs, logistical challenges 
and operational complexities. Comprehensive studies should be done to 
determine whether such reserves are feasible, cost-effective or 
helpful.
    Note, for example, that proposals to create gasoline product 
reserves have been considered and rejected several times by the 
California Energy Commission, which found that ``a strategic fuel 
reserve could have several unintended consequences, which could limit 
its effectiveness as a tool to moderate gasoline price spikes and could 
reduce the total supply of gasoline to the state.'' The National 
Petroleum Council also concluded that strategic product reserves are 
not appropriate for the U.S.

    Question 6. China is becoming a bigger world oil player. This not 
only has tightened the world oil market but also has produced national 
security concerns for us. What concerns or problems do you see have 
arisen since China became a bigger world energy player?
    Answer. China's rapid economic growth has resulted in a 
corresponding growth in energy demand. Because energy markets are 
global, it is impossible to isolate a single nation or region in 
evaluating energy supply/demand forecasts. Keeping pace with worldwide 
growth in energy demand will be a challenge. It will require very large 
investments in complex, costly and technologically demanding projects.

    Question 7. While there have been expansions and efficiency gains 
at existing refineries, no refinery has been built in the United States 
in 30 years. Since the oil companies are now making record earnings, 
are there plans to build new refineries in the United States?
    Answer. Neither Shell nor Motiva (a U.S. joint venture between 
Shell and Saudi Refining, Inc) currently have plans to build a new 
refinery in the United States. However, from 1994 to 2004 Shell and 
Motiva refineries in the U.S. increased overall capacity by about 30 
percent and invested significant capital expenditures to do so. Shell 
will continue to consider optimizing its refining assets in all markets 
to take advantage of existing site infrastructure for expansion and 
debottlenecking. Motiva recently announced that several options are 
being considered to increase production of gasoline, diesel and 
aviation fuels at its Gulf Coast refining network. Capacity expansion 
projects being considered range from 100,000 barrels per day to 325,000 
barrels per day.

    Question 8. The 2005 Energy Bill implemented a controlled phase-out 
of MTBE. Many companies, however, are planning on completely halting 
its use. How will a sudden halt of the use of MTBE affect the gasoline 
market and refineries?
    Answer. It is unclear if there will be a sudden halt in the use of 
MTBE. However, a sudden halt could reduce the total gasoline pool 
depending on what refiners choose to do to replace the lost volume.

    Question 9. I have noticed very large differences between the 
prices of gasoline in different areas of the country. For example, I 
recently saw gasoline in northern Virginia that was much more expensive 
than gasoline in northern Kentucky. Please explain why there can be 
such a significant difference in gasoline prices in different areas of 
the country.
    Answer. Prices in markets will vary as every market is subject to 
unique conditions. Fuel prices are affected by a number of factors 
including the cost of crude, formulation requirements, state taxes, 
supply and distribution logistics, local market conditions, 
environmental regulations and operating costs. These factors vary in 
each market.
    Question 10. When was oil first traded on the worldwide commodities 
futures market?
    Answer. To the best of our knowledge, the first contract on a 
regulated futures exchange was in 1978, when a Heating Oil contract was 
introduced on the New York Mercantile Exchange.

    Question 10a. Would the price of oil be affected if oil was taken 
off the commodities futures market and no longer traded?
    Answer. There is no reason to believe prices would be higher or 
lower on average. Prices would continue to reflect supply/demand 
fundamentals, as they do now. However, prices might become less 
reflective of true market conditions at any given moment.

    Question 10b. Would oil then be bought and sold as a true supply 
and demand product?
    Answer. Oil currently is priced by supply and demand.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. James M. Talent to 
                            John Hofmeister

    Question 1. The recent hurricanes have highlighted the need for 
increasing refinery capacity, which was already operating at a tight 
margin of 97 percent. While that is laudable for efficiency purposes, 
it allows no room for error in case of sudden outages or demand 
increases. What is the optimal amount of spare refining capacity to 
ensure a reliable supply of finished petroleum products at stable 
prices?
    Answer. Shell is not aware of an industry specific optimal amount 
of spare refining capacity. Competitive forces within a free market 
system are the best way to determine capacity, supply and prices. A 
free and competitive market ultimately serves the best interest of the 
consumer.

    Question 2. How has industry consolidation impacted the amount of 
spare production and refining capacity?
    Answer. Shell is not aware of industry consolidation directly 
impacting spare production and refinery capacity. Since 1990, according 
to API, refinery capacity has grown from 15.5 to 17 million barrels per 
day.

    Question 3. Describe the degree of competition between refineries 
for crude oil supplies and sales to retailers. What percentage of crude 
oil processed in the U.S. is processed by integrated companies (i.e., 
those produce and refiner) versus refined by independent refining 
companies?
    Answer. There is a tremendous amount of competition between U.S. 
refineries for crude oil supplies. Several factors come into play when 
buying crude oil--the quality, sulfur, gravity, country of origin/
location, method of shipping, as well as the location of the refinery 
and financial factors, including term contracts and market conditions. 
Availability of crude barrels is a significant factor. Weather and 
unplanned outages of refineries/production facilities affect the global 
market.
    Percentages of crude oil produced by integrated companies versus 
independent refining companies can be found on the DOE website. The 
information includes all refiners. www.eia.doe.gov

    Question 4. How has the amount of refining capacity tracked changes 
in demand for gasoline and diesel over the last 30 years?
    Answer. According to DOE data acquired by API, the amount of 
refined product supplied to the U.S. market over the last 30 years has 
exceeded U.S. refining capacity, except for a period from 1980 to 1984. 
Demand has been met by a combination of both domestic refined product 
and the importation of refined products from overseas. Since 1985, 
there has been stronger growth in demand compared to refining capacity; 
however, refining capacity has continued to increase since 1994.

    Question 5. Explain to me your company's plan to increase refining 
capacity in the U.S. to meet the need for new refinery capability.
    Answer. Shell will continue to consider optimizing its refining 
assets in all markets to take advantage of existing site infrastructure 
for expansion and debottlenecking. Motiva recently announced that 
several options are being considered to increase production of 
gasoline, diesel and aviation fuels at its Gulf Coast refining network. 
Capacity expansion projects being considered range from 100,000 barrels 
per day to 325,000 barrels per day. Note, too, that we have increased 
capacity as demand has grown. From 1994 to 2004 Shell and Motiva 
refineries in the U.S. increased overall capacity by about 30 percent 
while investing significant capital expenditures to do so.

    Question 6. EPAct 2005 removed the requirement to include 
oxygenates from gasoline, largely because of concerns over the use of 
MTBE. What is the impact on the price of removing oxygenates from 
gasoline?
    Answer. The price impact will vary depending on market conditions.

    Question 7. Are there other oxygenates that can be used in place of 
MTBE, such as using ethanol to make ETBE, and how does the cost of such 
alternative additives compare to the cost of gasoline?
    Answer. As of May 2006, it will no longer be necessary under 
federal law to use oxygenates in gasoline. Refiners may choose to use 
an oxygenate, such as ethanol, and will likely make such choices based 
on a variety of factors. The relative costs of alternative additives 
vary depending on market conditions and may be more or less than the 
cost of other gasoline components.

    Question 8. Have you studied the use of ETBE, the cost of 
converting MTBE plants and how long it would take to do so, and whether 
ETBE avoids the leakage/water contamination problems that were caused 
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE 
and use it to increase the volume of gasoline produced by a barrel of 
oil compare to the cost of expanding existing or adding new refinery 
capability?
    Answer. Yes, Shell has studied the cost of converting MTBE plants. 
At this time, however, Shell has no plans to use ETBE as a gasoline 
additive in the U.S.

    Question 9. What, if anything, is preventing your company from 
using ETBE in place of MTBE?
    Answer. While Shell is not prevented from using ETBE in place of 
MTBE, Shell has no plans at this time to use ETBE as a gasoline 
additive in the U.S. ETBE has chemical properties similar to MTBE. 
Therefore, use of ETBE as a replacement for MTBE may not be 
significantly different from a groundwater perspective.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Gordon H. Smith to 
                            John Hofmeister

    Question 1. I have a bill, S. 1743, to give the Federal Trade 
Commission, additional authority to prevent and punish price gouging in 
the aftermath of a major disaster. My bill provides effective authority 
to the Federal Trade commission to protect consumers from being 
victimized in the wake of a disaster without hampering the normal 
functioning of the free market. It even recognizes that there are 
legitimate reasons why prices may increase. Do you think that this 
consumer protection authority should be available to the FTC?
    Answer. The FTC already has effective authority to protect 
consumers from unlawful pricing practices.

    Question 2. Would this serve as a deterrent to price gouging by 
individual retailers?
    Answer. Shell has a strong history of competitive pricing and does 
not condone price gouging in any form. It is unknown what effect S. 
1743 might have on independent retailers

    Question 3. Can you tell me why diesel prices continue to remain 
significantly higher than gasoline prices in Oregon?
    Answer. Nationally, diesel prices have been higher than gasoline 
for an extended period of time. Diesel and gasoline prices are impacted 
by similar market fundamentals, but they can and do operate 
independently if the underlying supply and demand is impacted for one 
product more than the other. In the case of diesel, growing economies 
tend to expand demand as industry uses fuel to power factories, 
utilities use diesel fuels to generate electricity, and transportation 
demand increases as goods are moved from one part of the country to the 
other. At the same time, diesel supply is impacted as refineries 
experience planned or unplanned maintenance and begin the necessary 
modifications to reduce the amount of sulfur contained in diesel fuels. 
All of these elements impact the ultimate price a consumer pays for 
diesel fuel.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Jeff Bingaman to 
                            John Hofmeister

    Question 1. Section 392 of the Energy Bill, which was negotiated 
with the involvement of the Chairman and Ranking member of the Energy 
and EPW Committees, contains permitting streamlining language. The 
Energy Policy Act of 2005 permits the EPA Administrator to enter into a 
refinery permitting cooperative agreement with a state. Under such an 
agreement, each party identifies steps, including decisions timelines, 
it will take to streamline the consideration of federal and state 
environmental permits for a new refinery. I want to ask you several 
questions about that provision, since you have supported streamlining: 
Have you requested that EPA issue any regulations or take any action to 
implement these new provisions? If yes, when? If no, when do you 
anticipate that you will do so?
    Answer. Neither Shell nor Motiva has formally requested this step. 
However, on the refinery expansion project that Motiva is considering 
along the Gulf Coast, if Motiva submits a permit application to either 
Texas or Louisiana the company would meet with EPA Region 6 officials 
as well as EPA HQ to brief them on the project and to set out the 
desired timeline for permitting.

    Question 1a. Have you worked with any state to encourage them to 
enter into an agreement with EPA under Section 392 of EPAct?
    Answer. Neither Shell nor Motiva has formally used this process.

    Question 1b. Do you support EPAct streamlining provisions?
    Answer. Yes, we do support the streamlining provisions.

    Question 1c. Do you have any examples of where a state came to EPA 
and said we want to work closely with you on permitting a new refinery 
or refinery expansion and EPA refused to provide technical assistance 
and even financial resources under existing law to that state?
    Answer. Shell is not in a position to know about interactions 
between individual states and the EPA.

    Question 2. In answer to several of the questions at today's 
hearing (Nov. 9) the witnesses (you) have noted that the market for 
petroleum and petroleum products is a global one and should be viewed 
in that context. Please list all planned refinery construction that 
your company plans to undertake globally. Please list them by country 
and include the projected size of the facility, including the projected 
capacity for all units and their potential product yields in addition 
to the project's total investment cost.
    Answer. Shell Oil Company is the domestic operating company of 
Royal Dutch Shell and as such SOC has no investments planned outside of 
the U.S. Previously in this questionnaire, we mentioned Motiva 
expansion plans are being considered in the U.S. In Singapore, 
affiliates of Royal Dutch Shell recently announced the awarding of 
contracts for basic design and engineering for a potential world-scale 
ethylene cracker facility at the Pulau Bukom manufacturing complex. 
Potential product yields and investment costs have not been disclosed.

    Question 3. The International Energy Agency (IEA) has just released 
its World Energy Outlook 2005. It contains a piece on the global 
refining picture. The study notes a lack of investment in upstream and 
downstream capacity has contributed to the extreme tightness in global 
oil markets. What are your thoughts in response to this? What is your 
company doing in response (actions)? What is your company doing 
(investments/analysis) in the ``MENA'' regions? Do you agree with IEA's 
projections?
    Answer. The IEA report summary provides a plausible explanation for 
tight global oil markets. Actions taken by Shell include the following:
    Globally, this year Royal Dutch Shell plc has expended a total of 
$15 billion in capital investments: $10 billion in exploration and 
production, $2 billion in gas and power and $3 billion in downstream. 
In the U.S., Shell Oil Company has invested over the last five years 
virtually 100 percent of U.S. after-tax earnings in U.S. projects to 
meet future energy needs.
    Returning production and refining capacities to pre-hurricane 
levels is a priority. The U.S. Congressional Budget Office estimates 
the energy sector sustained capital losses from hurricanes Katrina and 
Rita between $18 billion to $31 billion.
    Shell has major upstream investments in the Gulf of Mexico, where 
we have reinvested almost $7 billion in the last five years. We are 
pursuing natural gas in the Gulf as well as onshore. We have a major 
oil shale investment in Colorado, testing a process to unlock very 
large oil shale resources.
    Motiva Enterprises LLC, a joint venture between Shell Oil Company 
and Saudi Refining Inc, announced in September that it is studying 
options for major capacity expansion at its refineries in the U.S. Gulf 
Coast--a project that, once decided, will take years to complete.
    Shell is investing in LNG and hydrogen as well as renewable energy 
sources such as solar and wind. Although renewable energy technologies 
are a small part of the total global energy mix, their annual growth 
rate outperforms traditional fuels. Shell has major developing new 
technologies such as coal gasification, oil shale, gas-to-liquids and 
biofuels we will be able to put more supply into the marketplace.

    Question 4. Voluntary standards--Post hurricanes, what is the 
industry doing to come up with voluntary standards/best practices for 
back-up power supply to critical energy infrastructure (refineries, 
pipelines, etc.) and natural disaster recovery? Will the API undertake 
such an effort? If not, what is your company doing?
    Answer. It our understanding that API is evaluating this important 
issue. Shell continuously strengthens its preparation and response 
activities, and to ensure that consumers have an adequate supply of 
fuel at all times--especially during emergencies. For example, shortly 
after Hurricane Katrina, the Shell Pipeline Company procured thirteen 
1-megawatt generators. These units are capable of powering even our 
largest electric pump drivers and were later needed to make critical 
movements from our Port Arthur Products Station in the absence of 
commercial power. We are reviewing needs at other critical facilities 
and intend to make similar back-up power procurements where 
practicable.

    Question 5. A number of witnesses testified that failure of the 
electricity system resulting from hurricanes Rita and Katrina 
contributed in great part to the inability to get refineries restarted, 
or to get natural gas pipelines restarted. What are the arrangements 
for backup power in case of such emergencies at your critical 
facilities?
    Answer. See Answer to Question 4, above.

    Question 6. How many of your plants have on site cogeneration 
facilities? Which plants have these facilities?
    Answer. Five of our plants in the U.S. have on-site cogeneration: 
Shell Deer Park Refinery and Chemical (Texas); Motiva Port Arthur 
Refinery (Texas); Shell Geismar Chemical (Louisiana); Shell Los Angeles 
Refinery (California); Shell Martinez Refinery (California).
    In addition to the above facilities, Shell is a minority owner of 
the March Point Cogeneration Company, a cogeneration facility located 
on the Puget Sound Refinery property.

    Question 7. Are there regulatory barriers at either the state or 
federal level that prevent the installation of cogeneration plants at 
your facilities that do not have them?
    Answer. Four of our plants do not have cogeneration facilities: 
Motiva Convent Refinery (Louisiana); Motiva Norco Refinery and Shell 
Norco Chemical; (Louisiana); Mobile (Alabama); Puget Sound (Washington) 
(reference March point Cogeneration note above).
    Decisions to build cogeneration facilities are based on 
environmental regulations, local electricity costs, plant requirements 
and internal economics. Cogeneration projects have been considered at 
the above plants and did not meet internal economics or could not 
compete with local utility electricity costs.

    Question 8. Would the presence of cogeneration facilities at your 
refineries reduce the recovery time during such emergencies?
    Answer. Recovery time for our plants is dependent upon many factors 
including parts of facility impacted by severe weather, natural gas 
supplies (that may feed a cogeneration facility), electricity and 
availability of feedstocks. Recovery time could be reduced if 
cogeneration facilities were on site and functional when traditional 
utility facilities are out.

    Question 9. Witnesses at earlier hearings testified that there are 
a number of modern natural generation facilities in Louisiana/Texas 
area that are not used to their full capacity. Are there natural gas 
generation facilities in close proximity to your refinery facilities 
that could be used for backup generation at the refineries?
    Answer. There are no generation facilities in close proximity that 
could be used for back-up generation.

    Question 10. Would the use of generators that are in close 
proximity to refineries to provide backup power during such emergencies 
mean that recovery times might be shortened, since the restoration time 
for a nearby facility might be less than the restoration time for the 
transmission facilities for traditional utilities?
    Answer. Generally, yes, when electricity is a critical path item.
                              environment
    Question 11. Please specify exactly which, if any, Federal or State 
environmental regulations have prevented your company from expanding 
refinery capacity or siting a new refinery, and documentation on the 
exact details of the project prevented.
    Answer. We are not aware of any environmental regulations that have 
prevented us from expanding refinery capacity or siting a new refinery.

    Question 11a. How much have so-called ``boutique fuel'' 
requirements added to the average retail price, where applicable, and 
the average wholesale price per gallon of the gasoline sold by your 
company?
    Answer. Boutique fuels generally cost more to produce because they 
require special production and handling, which can cause inefficiencies 
in the distribution system. In the event that supply or transportation 
is disrupted, boutique fuels create the potential for significant price 
volatility because supplies cannot be readily shifted between areas.

    Question 11b. If the EPA or the Congress were to act to minimize 
the number of ``boutique fuel'' formulations required by the states to 
protect air quality, how many should there be and what should the 
specifications of each be in order to maintain air quality and improve 
fungibility?
    Answer. Refiners now produce numerous, different fuels to satisfy 
state and federal requirements. There are several factors to consider 
when evaluating whether or not to reduce the number of boutique fuels 
such as ensuring air quality needs, the impact on supply, cost issues 
and distribution compatibility. After weighing those factors, we 
recommend reducing the number of gasoline formulations to approximately 
5 in order to streamline and simplify this complex system. There is a 
proposal by API to consolidate fuel requirements to five standardized 
fuels, which Shell supports. The proposal would provide states with 
fuel options that ensure continued progress toward attaining air 
quality standards. The fuel options available to states would depend on 
air quality need, cost-effectiveness, the availability of other, more 
cost-effective emissions controls, and compatibility with the nation's 
gasoline manufacturing and distribution system.

    Question 12. Streamlining New Source Review (NSR) permitting 
constraints was mentioned as an incentive that would encourage refiners 
to supply more products to the U.S. market. How many air quality permit 
applications for refinery expansions has your company submitted for NSR 
over the last ten years? How long did it take the EPA, or the 
applicable State, to approve or deny each permit application, after 
receipt of a complete permit application? What was the expected 
percentage increase in product output of the expansion?
    Answer. In the last ten years, neither Shell nor Motiva has 
submitted applications for air quality permits for significant refinery 
expansions under NSR.

    Question 12b. How would you propose to streamline NSR and still 
maintain local air quality and prevent any increase in total annual 
emissions from such expansions?
    Answer. Shell supports the streamlining of the NSR process. In 
addition, we strive to minimize emissions in the planning and design of 
manufacturing facilities. We expect careful government review of these 
plans, and work closely with all permitting agencies to achieve the 
best result both in terms of the environment and the supply of energy 
to consumers.

    Question 13. How much did the fuel specification waivers that have 
been granted by EPA to date, due to the supply disruptions caused by 
the hurricanes, reduce the average retail price of the gasoline or 
other refined products made by your company?
    Answer. Typically, fuel prices increase when interruptions to the 
supply or transportation systems occur. The speed and willingness of 
the EPA to grant fuel waivers was incredibly helpful in quickly and 
efficiently improving the fuel supply in areas directly or indirectly 
impacted by hurricanes.

    Question 14. One witness indicated that ``getting two 100-year 
hurricanes in four weeks'' caused a great deal of chaos and disruption 
in the gasoline supply chain. The National Oceanic and Atmospheric 
Administration has projected that the country and the Gulf of Mexico 
have entered a cyclical period of 20-30 years during which the Gulf and 
coastal areas are likely to experience a greater frequency of 
hurricanes and higher odds of those hurricanes making landfall in the 
U.S. What preparations has your company made to deal with a great 
hurricane frequency to decrease repetition of the supply disruption 
that occurred this year?
    Answer. See Answer to Question 15, below.

    Question 15. Over the last 50 years, average annual sea surface 
temperatures have increased in the Gulf of Mexico and, according to the 
National Academy of Sciences and other similar scientific expert 
bodies, are expected to continue increasing as the oceans continue 
warming due to accelerating global climate change. The Administration's 
Climate Action Report (2002) states ``model simulations indicated that, 
in a warmer climate, hurricanes that do develop are likely to have 
higher wind speeds and produce more rainfall.'' What preparations has 
your company made to deal with a greater likelihood of greater 
hurricanes intensity so as to decrease repetition of the disruption 
that occurred this year?
    Answer. We prepare for and monitor tropical storm developments 
every year and incorporate learning's from previous years. We have 
safely evacuated and redeployed people over the last two seasons, just 
as we have done for decades. We are currently undertaking an assessment 
of our offshore operations to determine what future actions and 
modifications may be required to prevent future disruptions. Shell 
supports the expansion of oil and gas production to new areas both 
onshore and offshore, subject to appropriate environmental and land use 
regulations.

    Question 16. How has your company disclosed to shareholders and 
investors the risks associated with the potential impacts on your 
company's assets in the Gulf of Mexico or indirect impacts on its 
assets elsewhere, of either the expected greater frequency of 
hurricanes making landfall in the U.S. or the probably greater 
intensity of hurricanes in the regions?
                  finances, production, imports, etc.
    Please provide for each of the last ten years your company's--
          Gross revenue of U.S. operations
          Total capital expenditures in the U.S.
          Net profit of U.S. operations
          Total taxes paid to the Federal government
          Total taxes paid to State governments
          Total donated to charity.

------------------------------------------------------------------------
                                     Gross        Capital        U.S.
               Year                 revenue    expenditures    earnings
------------------------------------------------------------------------
1995.............................     24.3          2.9            1.4
1996.............................     28.8          3.2            1.7
1997.............................     28.5          3.5            1.7
1998.............................     16.6          4.0           -2.4
1999.............................     17.3          1.5            1.7
2000.............................     26.1          1.5            3.1
2001.............................     21.1          2.3            1.9
2002.............................     54.7          6.6            2.0
2003.............................     75.1          2.5            2.7
2004.............................    102.9          1.6            4.7
------------------------------------------------------------------------
All amounts are in billion dollars.

          Total taxes paid to the Federal government
          Total taxes paid to State governments

           SHELL OIL COMPANY AND ITS CONSOLIDATED SUBSIDIARIES
------------------------------------------------------------------------
                         Year                           Federal   State
------------------------------------------------------------------------
1995.................................................     667       35
1996.................................................     295       51
1997.................................................     648       40
1998.................................................     192       39
1999.................................................     811       39
2000.................................................   1,343       51
2001.................................................     908       75
2002.................................................     229       27
2003.................................................   1,330       45
2004.................................................   2,115      133
                                                      ------------------
    Total............................................   8,538     535
------------------------------------------------------------------------
All tax amounts in millions of dollars.

          Total donated to charity.

------------------------------------------------------------------------
                                                             Donations
                          Year                             (Millions $)
------------------------------------------------------------------------
1995....................................................        16.2
1996....................................................        19.2
1997....................................................        23.2
1998....................................................        26.3
1999....................................................        26.2
2000....................................................        32.1
2001....................................................        36.7
2002....................................................        35.8
2003....................................................        36.3
2004....................................................        32.4
------------------------------------------------------------------------

    YTD 2005 (through Third Quarter) $24.8 million. The above amounts 
reflect U.S. donations only.

    Question 17. How much additional petroleum refining capacity do you 
expect your company to install in the United States over the next 10 
years?
    Answer. Shell will continue to consider optimizing its refining 
assets in all markets to take advantage of existing site infrastructure 
for expansion and debottlenecking. Motiva recently announced that 
several options are being considered to increase production of 
gasoline, diesel and aviation fuels at its Gulf Coast refining network. 
Capacity expansion projects being considered range from 100,000 barrels 
per day to 325,000 barrels per day. Note, too, that we have increased 
capacity as demand has grown. From 1994 to 2004 Shell and Motiva 
refineries in the U.S. increased overall capacity by about 30 percent 
while investing significant capital expenditures to do so.

    Question 18. What percentage of profits over the last 10 years has 
your company re-invested in capital, exploration, drilling and 
production in the United States? Please provide an annual total for 
those U.S. expenditures and a clear breakdown.

----------------------------------------------------------------------------------------------------------------
                                                                    Capital    Exploration
                        Year                             U.S.     exploration    expense     CapEx +   % of U.S.
                                                       earnings     (CapEx)     (Expl Exp)   Expl Exp   earnings
----------------------------------------------------------------------------------------------------------------
1995................................................       1.4         2.9          0.2         3.1       221%
1996................................................       1.7         3.2          0.3         3.5       206%
1997................................................       1.7         3.5          0.3         3.8       224%
1998................................................      -2.4         4.0          0.4         4.4        N/A
1999................................................       1.7         1.5          0.2         1.7       100%
2000................................................       3.1         1.5          0.2         1.7        55%
2001................................................       1.9         2.3          0.3         2.6       137%
2002................................................       2.0         6.6          0.2         6.8       340%
2003................................................       2.7         2.5          0.3         2.8       104%
2004................................................       4.7         1.6          0.4         2.0        43%
----------------------------------------------------------------------------------------------------------------
All amounts are in billions of dollars.


    Question 19. What percentage of profits over the last 10 years has 
your company re-invested in non-petroleum energy supply and production 
in the United States? Please provide a total and the results of such 
investment.
    Answer. Shell has invested in hydrogen, solar and wind energy in 
the U.S. over the last 10 years. The capital and earnings from these 
businesses are in addition to the amounts reported in the response to 
question 18. We do not typically report U.S. numbers for these 
businesses.

    Question 20. On average for the last ten years, please compare your 
company's overall capital expenditures in the United States to its 
expenditures elsewhere.

------------------------------------------------------------------------
                                                  Total
                                U.S. capital    worldwide      % U.S.
             Year               expenditures     capital       capital
                                              expenditures  expenditures
------------------------------------------------------------------------
1995..........................       2.9           11.0         26%
1996..........................       3.2           11.0         29%
1997..........................       3.5           12.3         28%
1998..........................       4.0           12.9         31%
1999..........................       1.5            7.4         20%
2000..........................       1.5            6.1         25%
2001..........................       2.3            9.6         24%
2002..........................       6.6           22.4         29%
2003..........................       2.5           12.3         20%
2004..........................       1.6           12.7         13%
                               -----------------------------------------
    Average:..................       3.0           11.8         25%
------------------------------------------------------------------------


    Question 21. What percentage of your company's gross revenue was 
collected in the United States in each of the last 10 years?

------------------------------------------------------------------------
                                                          % net proceeds
                          Year                             collected in
                                                               U.S.
------------------------------------------------------------------------
1995...................................................        22%
1996...................................................        22%
1997...................................................        22%
1998...................................................        18%
1999...................................................        16%
2000...................................................        19%
2001...................................................        17%
2002...................................................        33%
2003...................................................        38%
2004...................................................        39%
------------------------------------------------------------------------

    Shell only reports net proceeds by region, not gross revenue. 
Difference between the two is mainly taxes collected by Shell on behalf 
of various taxing authorities.

    Question 22. How much of your company's revenue collected in the 
United States was used to pay for purchasing crude oil from OPEC 
countries?
    Answer. Shell does not keep records in this format.

    Question 23. Do you support S. 1794 or something like it to create 
gasoline and jet fuel reserves to ensure stability of price and supply? 
Should it be extended to diesel and other fuels like natural gas?
    Answer. See answer to Question 5. from Senator Bunning's questions.

    Question 24. On average for the last ten years, how much of what is 
refined by your company in the U.S. stays in the U.S.?
    Answer. Shell's U.S. retail supply requirements generally exceed 
Shell's U.S. gasoline refining capacity.

    Question 24a. What amount of refined product did your company 
import in 2004 and 2005?
    Answer. Much of the data that is requested by this Question is the 
subject of a supplemental subpoena issued by the Federal Trade 
Commission on November 23, 2005 with a return date of January 4, 2006. 
This response requires the compilation of a large amount of export and 
import data over a five-year period of time, and historical tax 
expenditure data. Shell is willing, upon request, to provide non-
proprietary information to the Committee as soon as the response to the 
FTC subpoena is completed.

    Question 24b. What are your assumptions about demand growth in 
India in [sic] China?
    Answer. In its World Energy Outlook 2004, the International Energy 
Agency states that global primary energy demand is set to rise by 59% 
from now until 2030. Two-thirds of the new demand will come from the 
developing world, especially China and India.

    Question 24c. How have your investments in the United States 
increased the energy security of the country?
    Answer. Shell has invested virtually 100% of its U.S. profits in 
the U.S. over the last five years to meet the energy needs of the U.S.

    Question 25. What market signals will occur in advance of peaking 
world oil production and what is the appropriate policy or set of 
policies for the U.S. government to adopt when such signals occur?
    Answer. History has shown that estimates of recoverable resources 
have continuously increased over time, despite the effects of 
cumulative production, as we better understand the nature of the fields 
we drill and as we discover new fields. Predictions of peaking oil 
production typically focus on conventional crude oil produced from 
reservoirs in much the same way as the industry has operated in the 
past. New technology is enabling more development of conventional 
resources, and development in deep and ultra-deep water that were 
previously deemed inaccessible.
    Technology will also add significant new ``unconventional'' 
resources to the hydrocarbon supply mix in the form of extra-heavy oil, 
tar sands, gas-to-liquids, coal-to liquids and biofuels.
    The growth of oil production could be constrained for other 
reasons, such as onerous policies related to access, licensing and 
leasing, and fiscal terms and conditions. Such onerous factors could 
give the appearance of peaking oil production. Government policies that 
create a favorable investment climate, put oil production back on a 
growth path. Specifically, policymakers in the U.S. should consider:

   Lifting the current drilling/leasing moratoria in certain 
        areas on the Outer Continental Shelf (OCS), in a manner that 
        ensures industry's impact is minimized, and environmental 
        resources are protected;
   Developing an equitable and fair system to share OCS 
        revenues with coastal states and nearby communities and to 
        share federal onshore oil and gas revenues with local 
        communities.
   Developing policies that foster development of 
        unconventional domestic resources, such as oil shale and tar 
        sands, and innovative technologies, such as coal gasification 
        processes.
   Providing extended and/or flexible lease terms for 
        production in frontier areas in the offshore and offering an 
        opportunity for development of consortia to test new technology 
        in clearly defined, high-risk areas; and
   Providing additional funds, including direct funding from 
        federal oil and gas royalties, bonus bids and rental fees, to 
        BLM and MMS and state wildlife management agencies to perform 
        their environmental and regulatory responsibilities in a timely 
        fashion.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                            John Hofmeister

    Question. All over America, the oil industry drives up the price at 
our gas pumps by redlining and zone pricing. ``Redlining'' is when your 
companies draw a phone line around a community to lock out competition 
and raise prices for the consumers. ``Zone pricing'' is plain oil 
discrimination and it takes place when one oil company supplies gas to 
several gas stations located near each other and one station is charged 
much more than the others for the same type of gas. This drives 
stations out of business, reducing choice and raising prices for 
consumers. To help hurting consumers at our gas pumps, will your 
company commit to stop redlining and zone pricing? Yes or no?
    Answer. We will continue to utilize appropriate and legal measures 
to address competitive factors in the marketplace, and will need 
sufficient flexibility to deal with the circumstances affecting each of 
the classes of trade in their respective market areas. We disagree that 
zone pricing is illegally discriminatory. We take care to operate 
within federal and state pricing regulations. Legally implemented, zone 
pricing has been an effective method of addressing the impact of 
extremely competitive conditions within a local market area. Responding 
to such competition is beneficial to both the impacted retailers and to 
consumers.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                            John Hofmeister

    Question 1. I'm aware that the cost of crude oil is driven by the 
world market and that its cost is currently significantly above 
historic averages. But I'm not aware of any substantive increases in 
the cost of producing crude oil, the cost of refining it into various 
petroleum products such as gasoline and diesel, and the cost of 
transportation of refined products to markets. Through the end of 
September 2005, the price of crude had increased 40 percent in 2005 
while gasoline prices increased almost 80 percent. If the percent 
difference in the prices isn't pure profit, please explain to me how 
you account for the difference in the substantially lower increase in 
crude oil when compared to gasoline.
    Answer. Retail gasoline prices tend to move more slowly than the 
underlying cost of product. This ``lag'' effect is evident during 
periods when prices are rising as well as those times when prices are 
falling. The best way to measure profitability is over a longer period 
of time, after the market has experienced several rising and falling 
cycles. This type of longer-term measurement provides a more realistic 
representation of profitability.

    Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to 
149. Further, no new refineries have been built in the U.S. since 1976. 
In 1981, the 321 refineries had a capacity of 18.6 million barrels a 
day. Today, the remaining 149 refineries produce 16.8 million barrels 
per day. I recognize the difficult financial, environmental, and legal 
considerations associated with the location and construction of new 
refineries. But I fail to understand the closure of existing refineries 
event if they required investment to enhance their efficiency and 
production capability unless, of course, this mechanism is being used 
to increase the price of gasoline and other refined products. Please 
help me understand why you would shut down refineries in the face of 
the supply and demand situation. What conditions would have to exist 
for you to invest in new refining capacity? I have heard the industry 
claim that up to $48 million has been used on capital expenditures for 
existing refineries. If those investments were not used for capacity 
increases, what were they used for?
    Answer. According to information compiled by API, the number of 
U.S. refineries peaked in 1981, when there were 315 operating 
refineries. We believe that some owed their existence largely to 
government subsidies to small refiners that ended in 1981 and that many 
closed because they were small and inefficient. As the industry faced 
increasing requirements for cleaner fuels and improved environmental 
performance, the number of refineries continued to shrink-from 194 in 
1990 to 144 at the end of 2004. However, growth in capacity at existing 
refineries has largely offset the effect of refinery closures-
particularly in the later part of the last decade, with the result that 
total refinery capacity in the U.S. has grown from 15.5 to 17 million 
barrels per day since 1990.
    Shell has invested in new refining capacity in order to help 
satisfy demand. From 1994 to 2004 Shell refineries in the U.S. 
increased overall capacity by about 30 percent and invested significant 
capital expenditures to do so. Shell will continue to consider 
optimizing its refining assets in all markets to take advantage of 
existing site infrastructure for expansion and debottlenecking. Motiva 
recently announced that several options are being considered to 
increase production of gasoline, diesel and aviation fuels at its Gulf 
Coast refining network. Capacity expansion projects being considered 
range from 100,000 barrels per day to 325,000 barrels per day.
    Capital expenditures not used for adding capacity include costs of 
modifications to comply with clean air and boutique fuel requirements, 
as well as maintenance and improvements to sustain and improve asset 
integrity. In addition to product demand, key factors for any proposed 
refinery expansion would include the overall cost to design, engineer, 
build and operate new processing units; favorable indicators of future 
crude supply and related costs; and expected return on investment.

    Question 3. The recent hurricanes resulted in the need to import 
substantial refined products such as gasoline, diesel fuel and aviation 
fuels to meet U.S. demand. The question has been raised as to whether 
the country should development a strategic reserve for finished 
petroleum products. What would be your reaction if the Federal 
government either directly or by way of contract with the private 
sector sought to create a strategic reserve of finished petroleum 
products? Since these products have a limited shelf-life, one proposal 
is to obtain and operate a number of refineries and has the products be 
used by the Federal government. Appreciate your comments on this 
proposal.
    Answer. See the Answer to Question #5 from Senator Bunning's 
questions.

    Question 4. Given the recent profitability of the oil industry, I 
am interested to learn more on the disposition of these profits, 
particularly to enhance both production and refining capacity. Are any 
of these profits being used to enhance production and refining capacity 
for the benefit of other countries? What fraction of your profits is 
being invested for production and for refining? What percentage of 
profits have [sic] been used for stock buybacks and mergers and 
acquisitions?"
    Answer. From 2000 through 2004, Shell bought back approximately 
$7.0 billion in its own stock on a global basis. During that same time 
period, Shell spent nearly $14.0 billion in U.S. capital expenditures, 
which represents 134% of U.S. Business Segment Earnings for that 
period.

    Question 5. You've all said profits are cyclical, and that your 
companies have also suffered from the volatility of the oil markets. 
Would your stockholders be better served if domestically produced oil 
was sold at a fixed rate that included a generous profit margin above 
the production, refining and distribution costs?
    Answer. Competitive and open markets are the most effective way of 
operating commodity businesses.

    Question 6. Do you believe that global warming is occurring? Do you 
believe that man-made activities have a role in this phenomenon? How 
will global warming impact your companies in terms of added costs for 
oil and gas development, or allow access to new areas for oil and gas 
development?
    Answer. We share the concern that the emission of greenhouse gases 
(GHG) from human activities could lead to changes in the global climate 
and might impact development and access. We are engaged with the World 
Business Council for Sustainable Development, which advocates change in 
infrastructure and lifestyle over the coming decades to address the 
issue of climate change. No single solution or single industry can 
deliver this change.

    Question 7. Is it accurate that United States LNG terminals in 
Massachusetts and Maryland are only operating at half capacity? Do you 
believe if these plants were operated at a higher capacity it would 
have changed the market dynamics that determine the current price?
    Answer. The Maryland facility (Dominion Cove Point LNG regas) 
operated at approximately 80-90 percent for Shell's capacity in 2005. 
Shell holds one-third of the capacity at this terminal. We do not 
utilize the Massachusetts terminal. Market dynamics for LNG are at the 
global level and occasional spot cargos would not likely have an 
impact.

    Question 8. I understand that Shell and BP have entered into the 
market and are now operating in the black. If that is accurate, what 
barriers are you experiencing in expanding this promising market? What 
federal incentives can Congress provide to help promote the solar 
energy market? How about advancing the shift to a hydrogen-fueled 
economy?
    Answer. The renewables and hydrogen industries are still in the 
investment stage. Shell has invested nearly $1 billion in new energies 
between 2002-2005, with over $300 million invested in the U.S. alone 
over the last five years. Shell Wind is the No. 2 wind company in the 
U.S. and the vast majority of its 740MW Wind portfolio operates in the 
USA where we have seven large wind farm projects. Shell Solar is the 
No. 2 solar company in the U.S.
    Policymakers should be aware that these emerging industries require 
a stable and predictable investment climate if they are to grow. In 
addition, we support extending the 30 percent federal solar tax credit 
for ten years; lifting the $2000 credit cap on residential systems; and 
a stable and consistent production tax credit for wind energy projects.
    Shell Hydrogen has hydrogen projects in the United States, Iceland, 
The Netherlands, Japan and Luxembourg. In the U.S., Shell is pleased to 
be working with federal and state policymakers on a number of important 
efforts. The goal of introducing hydrogen as a fuel on a significant 
scale requires an unprecedented joint undertaking by government, the 
automotive industry, and energy companies. Strong government support 
and structures are required to shape a coordinated and geographically 
concentrated introduction of vehicles and deployment of fueling 
infrastructure.

    Question 9. Please state for the record your company position on 
fuel economy standards. Are there other incentives that you support 
that you feel are better for consumers than the Corporate Average Fuel 
Economy paradigm?
    Answer. Shell does not have a position on the U.S. CAFE policy 
debate. However, Shell does support conservation measures and 
recognizes that energy efficiency improvements -- whether in vehicles, 
in residences, or in businesses--can make a difference in energy 
demand.

    Question 10. I understand that over the past 5 years companies in 
your industry have downsized significantly. How there is a shortage in 
workers and equipment to increase drilling. Please explain that 
dynamic.
    Answer. Workers in the industry who are in highest demand in the 
current market are those with the specialized technical education, 
training, and experience required to find and produce oil and gas, 
typically individuals with university degrees in specific engineering 
and science disciplines. This pool of talent has been shrinking over 
the past 15-20 years due to two important factors. First, technology 
continues to advance making many processes and activities less labor 
intensive. Second, and most significantly, U.S. domestic oil industry 
growth has been constrained by both legislation and low price/low 
return on investment environment. This lack of stability has had its 
impact. Portrayed and viewed as a sunset, 'old energy' for the past 15-
20 years, the oil business has failed to attract in sufficient numbers 
those with the aptitude to learn the specialized technical skills 
needed to be successful in our industry who have opted for industries 
they viewed as offering greater long-term opportunity. It is too soon 
to know if this trend can be reversed but if the industry is to be 
successful in attracting new talent, it will take a number of years of 
what would be considered higher than normal growth opportunities in the 
U.S. Growth is needed to change the dynamic for the industry to be 
considered sustainable enough for students on college campuses today to 
begin specializing for jobs in our industry in greater numbers. 
Throughout this timeframe, despite these challenges we have remained 
active on university campuses to encourage continued interest in our 
industry and continue to do so.
    With respect to the availability of drilling rigs and other 
equipment required to find and produce oil, this too has been driven by 
supply and demand. As noted, the overall trend in the U.S. is one of a 
shrinking oil industry, over a period of nearly 20 years. During the 
last 20 years, oil prices have fallen to $10 twice (1986 and 1998) and 
lingered at the $20 level most of the time. Owners of needed rigs and 
equipment require significant levels of investment and lead time, and 
many companies who provided such equipment and related oil field 
services in the past have gone out of business. Remaining companies who 
survived over the past 15-20 years are understandably cautious that the 
current price environment will not be sustained, exposing them to great 
risk in any investment they make. In addition, both rig companies and 
service companies face the same challenges as majors and independents 
in attracting people and retaining them.

    Question 11. As you probably know, Congress is likely to open up 
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas 
exploration. Do you have plans to bid for leases in this area? What 
does the price of oil have to be to make ANWR exploration and 
extraction be economically viable?
    Answer. Although Shell has no current exploration and production 
plans for the Arctic National Wildlife Refuge (ANWR), Shell supports 
exploration and development on public lands, including lands such as 
ANWR, subject to appropriate environmental and land use regulations to 
ensure that industry's footprint is minimized and that biological 
resources and the environment are protected. Any future Shell decision 
with regard to ANWR will be guided by our evaluation of any acreage 
that may eventually be made available for lease and a positive 
assessment at that time that leasing and development activity can be 
done without significant adverse impact on the environment.
    We look forward to continuing our policy of engaging with 
stakeholders as Shell considers business opportunities in Alaska and on 
other public lands made available for leasing, where Shell can best use 
our technological expertise to responsibly develop vital oil and 
natural gas resources.
    For competitive reasons, Shell cannot reveal our economic criteria 
or any internal economic assessment of areas that could potentially be 
offered for leasing in the future. From a geographical perspective, 
ANWR is no more remote than the National Petroleum Reserve--Alaska 
(NPRA). Recent lease sales in NPRA have attracted aggressive bids from 
many companies. These bids were made in 2004, prior to the increases in 
oil and gas commodity prices seen in 2005.

    Question 12. I understand that many of your resources and equipment 
are working flat out to rebuild infrastructure in the Gulf of Mexico. 
If there is no capacity to expand oil and gas exploration, what good is 
opening up sensitive environmental areas to increased drilling going to 
do for the consumer in the short run?
    Answer. Oil and gas production is an investment cycle business 
where 5 to 10 years is necessary to develop new production. Actions 
taken in the short run to improve the industry's ability to drill in 
any prospective new areas will benefit consumers over the long run.

    Question 13. Given the growing demand for oil in Asia, do you 
believe that oil derived from the Arctic National Wildlife Refuge could 
be diverted to supply Asian markets? If drilling in the Arctic National 
Wildlife Refuge is authorized this year, when will it begin to have an 
impact on gasoline prices? What do you believe that effect will be?
    Answer. Any material new oil that is brought onto the market should 
have a downward effect on oil prices. The actual impact on global 
prices cannot be known without knowing the global supply and demand 
balance at the time that that production occurs. The world oil market 
is a fungible market in which crude oil and products move to markets 
where they obtain the highest value and/or incur the lowest cost of 
transportation. All else being equal, oil from ANWR and other material 
new oil should be good for U.S. consumers, regardless of where actual 
crude volumes are ultimately delivered.

    Question 14. Do you support more transparency in the oil and 
natural gas markets, as would be provided in my bill S. 1735?
    Answer. Current laws and regulations provide transparency and we 
are not aware that they need to be modified. Concerns about or 
proposals to improve current laws and regulations should be fully 
understood and carefully studied to ensure no unintended consequences.

    Question 15. How has the last 3 years of escalating gasoline prices 
affected demand by American drivers? Have we seen a correlation between 
a certain level of price increase and less demand by American drivers? 
What is the actual level of reduced demand today compared to 3 years 
ago (please respond in the context of a doubling or retail gasoline 
prices)?
    Answer. Gasoline demand has increased over the last three years 
despite considerable volatility in prices. The Energy Information 
Administration (EIA) collects, reports and analyzes data regarding 
supply and demand within the energy sector and might be better situated 
to provide the analysis requested.

    Question 16. What is the crude oil extraction costs for major oil 
producing countries, including our own? How does that compare with oil 
derived from shale or coal?
    Answer. The costs of exploration, development and production of 
crude oil can vary significantly between countries and between types of 
resources, even within the same country. On the technical side, costs 
vary with reservoir depth, reservoir size, the characteristics of the 
oil in the reservoir, the needs for supporting infrastructure and 
whether the oil is in an onshore or offshore location. In the latter 
case, water depth is also an important variable. On the institutional 
side costs are heavily influenced by the fiscal regime, local content 
requirements, local partnership requirements and access to material 
opportunities.
    A recent report from the International Energy Agency (IEA) 
``Resources to Reserves: Oil & Gas Technologies for the Energy Markets 
of the Future'' (September 2005) included an estimate of the 
distribution of costs for different resource types and different 
resource regions. The report can be accessed through the IEA website at 
http://www.iea.org/
    IEA's report sites a varying ranges of costs for crude extraction 
from between $5-$15 for Middle East OPEC suppliers at the low end, up 
to a wide range of $25 to $70 for some oil shale developments at the 
high end. Shell does not necessarily endorse this range as an accurate 
assessment for the potential cost of oil shale production. Because 
there has never been commercial oil shale development in the United 
States, neither Shell nor the oil industry has any history of actual 
unit production costs. However, assuming that Shell's research 
continues to advance, we hope to make a commercial decision by the end 
of this decade that could lead to first generation commercial 
production in the next decade.

    Question 17. Regarding foreign exporting, inventory maintenance, 
and other practices of your company, please provide a response to each 
of the following questions and information requests: For each and every 
export shipment to a foreign country of gasoline, distillate fuel oil, 
propane, or liquefied natural gas occurring from January 1, 2005 to 
present, please provide the date, product type, volume, domestic port 
of exit, foreign destination, transportation costs, and the sale price 
or transfer value upon arrival at the foreign destination.
    Answer. Much of the data that is requested by this question is the 
subject of a supplemental subpoena issued by the Federal Trade 
Commission on November 23, 2005 with a return date of January 4, 2006. 
This response requires the compilation of a large amount of export and 
import data over a five-year period of time, and historical tax 
expenditure data. Shell is willing to provide, upon request, non-
proprietary information to the Committee to this question as soon as 
the response to the FTC subpoena is completed

    Question 17a. Since January 1, 2001 to present, please identify the 
number of shipments wherein your company exported gasoline, distillate 
fuel oil, or jet fuel and the sales price or transfer value received at 
the destination was less than the amount that would have been received 
had the product been marketed by your firm in the United States.
    Answer. See Response to Question 17, above.

    Question 17b. Since January 1, 2001 to present, please identify the 
date, product, volume(s), foreign port of origin, expected U.S. port of 
entry, and eventual port of final destination in each instance wherein 
your company basically ``turned a ship away'' (whether proprietary 
product or acquired from a third party) by changing the shipments 
expected arrival in a U.S. port to a foreign port.
    Answer. See Response to Question 17, above.

    Question 17c. From 1995 until present, please identify by month the 
inventory levels maintained by your company for gasoline and distillate 
fuel oil in both barrels and converted to ``cays of cover'' of ``day of 
supply'' for your firm's distribution and sales volumes within each of 
the Petroleum Allocation Defense Districts (PADDS) in the United 
States.
    Answer. See Response to Question 17, above.

    Question 17d. From January 1, 2005 to present, provide the details 
of each ``spot market'' (as commonly referred to in the industry for 
bulk sales, in volumes exceeding 5,000 barrels per transaction) 
including the date, identify of both the seller and purchasers, 
location of the product being sold, and the selling price.
    Answer. See Response to Question 17, above.

    Question 17e. Describe your company's use of ``in-house trading 
platforms'' and identify all individuals in your company by name, 
address, email, and phone number that were authorized during 2005 to 
either exchange, trade, sell or purchase gasoline or distillate fuel 
oil on either the ``spot market'', NYMEX futures market, or via 
``forward paper'' purchase rights.
    Answer. See Response to Question 17, above.

    Question 17f. Please identify all third party reporting services, 
including but not limited to Oil Price Information Service (OPIS), 
Lundberg surveys, Platts, and Oil Intelligence that your company 
regularly supplies transaction data or marketing information.
    Answer. See Response to Question 17a, above.

    Question 17g. Please identify the branded and unbranded ``rack 
prices'' that were reported by your company to third party reporting 
services such as OPIS and the branded and unbranded ``rack prices'' 
that were actually charged distributors or jobbers by your company each 
day, from January 1, 2005 to present, at the truck loading terminal(s) 
that typically supply gasoline stations in Houston, TX, Atlanta, GA, 
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR and Seattle, 
WA.
    Answer. See Response to Question 17, above.

    Question 17h. Will your company commit that it will take no efforts 
to retaliate against any firm or individual that is a potential witness 
before this Committee or cooperates with any investigation into the oil 
industry by Congress or another governmental authority?
    Answer. The question appears to ask whether Shell will comply with 
existing provisions of the civil and criminal laws concerning 
interference with witnesses. Shell has complied, and will continue to 
comply, with all such laws.

    Question 17i. From January 1, 2005 to present, for each instance 
known to your company wherein a third party (not your company) exported 
gasoline, distillate fuel oil, propane, or liquefied natural to a 
foreign country, please provide any of the details known to your 
company including the identify of the exporter, date, product type, 
volume, domestic port of exit, foreign destination, transportation 
costs, and the sale price or transfer value upon arrival at the foreign 
destination.
    Answer. See Response to Question 17, above.

    Question 17j. Since January 2, 2001 to present please identify the 
identity, date, product, volume(s), foreign port of origin, expected 
U.S. port of entry, and eventual port of final destination in each 
instance wherein your company is aware a third party (not your company) 
basically ``turned a ship away'' (whether proprietary product or 
acquired from a third party) by changing the shipments expected arrival 
in a U.S. port to a foreign port.
    Answer. See Response to Question 17, above.

    Question 17k. Please provide an itemized list of tax deductions and 
credits taken under the U.S. tax code for 2004, by your parent company 
and subsidiaries.
    Answer. See Response to Question 17, above.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ken Salazar to 
                            John Hofmeister

    Question 1. The Agriculture Committee is looking at the impacts 
these high-energy prices are having on agricultural producers around 
the country. To sum it up: they are hurting. It seems to me that there 
is tremendous potential for our country to grow fuels such as ethanol 
and bio-diesel. This approach offers many benefits to rural American as 
well as to the country as a whole. What type of investments is your 
company making (and planning to make) in these types of renewable fuels 
in the United States?
    Rural American is crying out for investment in renewable fuels, and 
I encourage your companies to look at the potential of renewable fuels. 
In terms of a percentage of your capital expenditures, how much money 
did your company spend this year to develop renewable fuel sources in 
the Untied States? What will that percentage be going forward?
    Answer. Shell currently blends ethanol into gasoline in many 
states. Investments include investments in terminal ethanol blending 
equipment. With the enactment of the Renewable Fuels Standard in the 
recently passed energy bill, which requires the use of 4.0 billion 
gallons of renewable fuel in 2006 up to 7.5 billion gallons of 
renewable fuels in 2012, use of ethanol and other renewable fuels will 
increase.
    Shell purchased an equity stake in Iogen Energy Corporation, a 
world-leading bioethanol technology company, in May 2002. The U.S. $29 
million investment will enable the Canadian based company to develop 
more rapidly the world's first commercial-scale biomass to ethanol 
plant. Traditionally manufactured ethanol costs significantly more than 
gasoline. The type of feedstock used accounts for well over half of the 
final ethanol cost. By developing the commercial scale ability to 
produce ethanol from biomass, Shell and Iogen hope to reduce the cost 
of producing ethanol thus making it more competitive. However, the 
specification of the gasoline into which ethanol (produced via whatever 
process) is blended has to be changed in order to meet the final fuel 
specifications. This together with the changes required in the 
logistical infrastructure in order to make the blended product 
available at service stations makes it unlikely that traditionally 
manufactured ethanol will ever be able to compete directly with mo-gas 
on a cost basis.
    Question 1a. Will you also provide this committee with some 
examples of renewable fuel projects that your company is pursuing 
outside the United States?
    Answer. Shell is, we believe, the largest marketer of biofuels by 
volume in the world, selling 2.4 billion litres of biofuel in 2004, 
mostly in the USA and Brazil where government policies favor ethanol. 
Shell markets bio-esters in Europe, and has technology development 
programs in advanced biofuels such as cellulose ethanol (Iogen, 
discussed above) and biomass-to-liquids (Choren investment).
    Use of biofuels as a vehicle fuel might be favored for purposes of 
(1) reducing carbon-dioxide emissions, (2) increasing domestic energy 
security and/or and (3) supporting agricultural production. Biofuels do 
cost more to produce than conventional fuels, and this cost must be 
covered. To create consumer demand for biofuels the cost must be 
reduced, and the performance of the fuel must assured. Further, biofuel 
technologies are relatively inefficient, typically delivering only 20-
30% more energy than is consumed in their production. Advanced 
processes are being developed and need to be refined.
    For information on Shell Wind, Solar and Hydrogen, please see 
response to Senator Cantwell Question 8, above.

    Question 2. As a few of you note in your testimony, diesel prices 
have remained high while unleaded gasoline prices have come down. It 
seems as if we are getting lower priced unleaded gas at the expense of 
diesel. Since diesel is the fuel of choice in agriculture, it is a sort 
of a double whammy on our producers. What is being done, or what can be 
done, to get diesel prices back in line with the price of gasoline?
    If demand for diesel is so high in Europe and high prices don't 
attract the supplies necessary to lower prices, isn't that a good 
indicator that we should work to produce more diesel in the United 
States and look to biodiesel as an option?
    Answer. Nationally, diesel prices have been higher than gasoline 
for an extended period of time. Diesel and gasoline prices are impacted 
by similar market fundamentals, but they can and do operate 
independently if the underlying supply and demand is impacted for one 
product more than the other. In the case of diesel, growing economies 
tend to expand demand as industry uses fuel to power factories, 
utilities use diesel fuels to generate electricity, and transportation 
demand increases as goods are moved from one part of the country to the 
other. At the same time, diesel supply is impacted as refineries 
experience planned or unplanned maintenance and begin the necessary 
modifications to reduce the amount of sulfur contained in diesel fuels. 
All of these elements impact the ultimate price a consumer pays for 
diesel fuel.

    Question 3. For the record, will you tell me what your company has 
spent on capital expenditures in case, not including write offs such as 
amortization or depreciation. Will you also provide the figures spent 
on cash dividends and stock buyback for the same time period?

------------------------------------------------------------------------
                                                 Stock        Capital
              Year                 Dividends    buyback    expenditures
------------------------------------------------------------------------
2000............................      5.4         0.0            6.1
2001............................      5.2         4.0            9.6
2002............................      5.5         1.3           22.4
2003............................      6.5         0.0           12.3
2004............................      7.6         1.7           12.7
------------------------------------------------------------------------
All amounts are for Shell worldwide and are in billions of dollars.


    Question 4. On November 1, Senator Grassley asked your companies to 
contribute 10% of your record profits to supplement LIHEAP funding for 
the less fortunate. Will your companies support Senator Grassley's 
proposal?
    Answer. Shell believes such public service funding decisions are 
more properly suited for the role of government than for private 
industry. Shell will direct its efforts to finding more energy so that 
Americans can not only heat and cool their homes, but also fuel their 
vehicles and power their businesses.

    Question 5. I'd like to encourage you to actively work with the 
Department of Energy and any other relevant federal agency on 
initiating a public/private education campaign focused on energy 
education and conservation. In the meantime, will you tell me what your 
company has done on its own initiative?
    Answer. Shell has a long-term commitment to educating consumers 
about vehicle maintenance and driving safety, starting with the Shell 
Answer Man campaign, which provided useful information to consumers for 
approximately 40 years. While the Answer Man campaign was ended in the 
1990's, we continue to educate reporters and consumers about issues 
relevant to today's drivers, including fuel technology, alternative 
fuels and fuel economy. Over the last few years we have conducted one-
on-one meetings with reporters to discuss conventional fuels, emerging 
fuels and future fuels, and have issued press releases and tips books 
designed to educate consumers on better caring for their vehicles and 
driving for improved fuel economy.

    Question 6. In your testimony you mention workforce-training 
efforts Shell has in Louisiana and Wyoming. Will you provide my office 
with more information about these programs? Colorado's returning 
veterans will be excited to learn about these opportunities.
    Answer. Shell is involved in numerous workforce-training efforts in 
Louisiana, Wyoming and other parts of the U.S. Workforce training is a 
priority issue for the future viability of oil and gas development in 
the U.S.
    In Louisiana, we are in the process of creating the Center for 
Petroleum Workforce Development in conjunction with LSU, the State of 
Louisiana and the City of New Orleans to offer an education and 
training curriculum tailored to maintain a top level producing 
operations, drilling and support workforce to meet the growing needs of 
the oil and gas industry in the Gulf of Mexico, onshore United States 
and globally. Shell is also leading the effort to form the first PTEC 
(Process Technology) Advisory Council for the Greater New Orleans area, 
and we are in the process of identifying the Technical/Community 
Colleges where we would implement this curriculum. We expect to resume 
our efforts to make this opportunity available to inner city youth in 
2006.
    Workforce efforts are also underway in Wyoming and the Rockies in 
general. Shell is actively involved with Rock Springs (Wyoming) 
Community College and has worked along with the school and others in 
our industry to implement a PTEC program there. Through an industry 
group called Center for the Advancement of Process Technology, Shell 
sponsors scholarship opportunities for students entering or currently 
enrolled in Process Technology programs at over 40 technical/community 
colleges located in Alabama, Alaska, California, Canada, Colorado, 
Delaware, Illinois, Indiana, Louisiana, Mississippi, Montana, New 
Jersey, New Mexico, North Dakota, Oklahoma, Texas, Virgin Islands, 
Washington, and Wyoming.
    Shell also sponsors a technical scholarship to support students 
pursuing four-year engineering and geosciences degrees at accredited 
universities. Scholarships are renewable and students have an 
opportunity to participate in internships at a Shell facilities. Shell 
offers student internship job opportunities in offshore Gulf of Mexico, 
at a Louisiana chemical plant, in the Rockies and Alaska.
    Shell is also partnering with the President's National Hire 
Veterans Committee to explore how Shell can proactively tap exiting 
military personnel for operator and craft jobs across Shell locations, 
including Louisiana and the Rocky Mountain Region.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                            John Hofmeister

    Question 1. I have introduced legislation that will offer an up to 
$500 tax credit to working low and middle income individuals for the 
cost of home heating expenses. According to the National Energy 
Assistance Directors Association, heating costs for the average family 
using heating oil are projected to hit $1,666 for the upcoming winter. 
This represents an increase of $403 over last winter's prices and $714 
over the winter heating season of 2003-2004. Meanwhile, profits of oil 
and gas rose 62 percent in the third quarter for companies in the 
Standard & Poor 500 index. I am proposing to offset the $500 tax credit 
for home heating expenses by curtailing the benefit large oil companies 
receive by using the LIFO accounting method. Do you think given budget 
deficits and record profits for oil companies that it is appropriate to 
divert tax benefits for large integrated oil companies such as yours to 
pay for such a measure?
    Answer. We do not believe that it is appropriate to tax selected 
oil companies under the LIFO proposal for a number of reasons.
    Oil is a commodity, and prices are set by the marketplace. Crude 
oil and natural gas prices fluctuate substantially and unpredictably. 
The industry must manage its business in the face of these severe price 
fluctuations. The business requires massive investment over long 
periods of time--even when prices are relatively low--to ensure that 
there will be energy supplies in the future. Oil and gas industry 
earnings per dollar of sales are in line with all U.S. industry during 
the second quarter of 2005. The energy industry overall earned 7.6 
cents for every dollar of sales, compared to an average of 7.9 cents 
for all U.S. industry. The total dollar numbers may be large, but so 
are the billions of dollars that petroleum companies have invested to 
supply energy to U.S. consumers--and will need to reinvest--to meet 
future demand. Developing these energy resources will require a 
tremendous capital investment by our company, year in and year out, in 
periods of high and low prices.
    In addition, the LIFO methodology is a long-standing and well-
accepted methodology that is available to taxpayers. This methodology 
is based upon the assumption that the last goods brought into inventory 
are the first goods sold. In a time of rising prices, LIFO is 
acknowledged to be the best method for tracking the true cost of 
products in inventory and cost of goods sold. This one-time accounting 
method change has been universally opposed as inappropriate tax and 
accounting policy. In our view, the proposal is inequitable and 
punitive, as it arbitrarily subjects a select group of oil companies to 
taxation without policy justification. Furthermore, the proposal would 
result in disincentives to the domestic oil and gas industry at a time 
when the country needs more domestic oil and gas. Shell supports and 
relies upon stable regulatory and fiscal policies that enable companies 
to develop energy projects and secure energy supplies. We respectfully 
request that Congress ``do no harm'' by distorting markets or seeking 
punitive taxes on an industry working hard to respond to high prices 
and supply shortfalls.

    Question 1a. Does this seem like an equitable approach given that 
the high cost of oil enables you to not only bank large profits, but 
also to use accounting methods to substantially reduce taxes? Is it 
fair to report less taxes when you're profiting the most?
    Answer. See Response to Question 1, above.

    Question 2. Your third quarter profits have certainly been a 
lightning rod that has riled consumers as they continue to pay 30 
percent more in Maine for their home heating oil for the winter.
    I realize that you reinvest some of these profits in exploration 
for more product. In each quarter, have you reinvested the same 
percentage of the profits to reinvestment? What have your reinvestment 
percentages been to your total profits? Do they vary from quarter to 
quarter or year to year?
    Answer. Shell has reinvested roughly 100% of its U.S. earnings back 
into U.S. businesses over the last 5 years. The percentage invested 
varies from year to year and from quarter to quarter.

    Question 3. To what non-profit organizations and academic research 
that address global climate change does your company donate financial 
support to and how much do you donate each year?
    Answer. The majority of Shell's research and development investment 
on future energy technologies is focused in house through Shell 
Renewables and Shell Global Solutions. In addition we are partners in a 
number of industry consortia, which are engaged in the development of 
technologies such as hydrogen fuel cells and carbon sequestration. 
Shell makes an annual donation of $100,000 to the MIT Joint Program on 
the Science and Policy of Global Change. We are closely involved with a 
number of non-profit organizations that address climate change (e.g. 
Pew Center).
    The Shell Group established The Shell Foundation, a UK registered 
charitable organization with a goal to promote sustainable development, 
which includes projects related to energy and climate change. In 
December 2000 Shell announced an endowment to the Shell Foundation of 
$250 million.
    Shell has other climate change related investment programs 
throughout the world. For example, in the UK we recently launched Shell 
Springboard--a program to encourage small businesses with big ideas on 
climate change. Springboard offers a financial boost of up to 
40,000 for a small number of UK businesses who submit the 
most compelling plans for a product or service, which helps combat 
climate change.

    Question 4. There has been much discussion about the skyrocketing 
costs of gasoline, heating oil, and other petroleum products over the 
past year magnified by the three hurricanes, which have hit the Gulf 
Coast region this year. In response to these inquiries into the rising 
prices and your soaring profits, you have asserted that these increases 
are tied to market forces, particularly the rising prices of crude oil.
    I've reviewed your financial filings from the Securities and 
Exchange Commission and they paint a very stark picture when compared 
to the financial misery being experienced by millions of Americans. 
ExxonMobil, for example, has realized a net income of $25.42 billion in 
the first nine months of 2005, an increase of $8.5 billion over the 
first nine months of 2004. Exxon's third quarter net income this year 
was $9.92 billion, up a full 90%.
    Similarly, ConocoPhillips' net income for the third quarter of 2005 
was $3.8 billion, compared with $2.006 billion during the same time 
period in 2004. Conoco's filing attributes this jump in profit to 
``higher crude oil, natural gas and natural liquid gas prices,'' 
``improved refining margins,'' and ``equity earnings from our 
investment in LUKOIL.''
    In my State of Maine, the median state income is $17,044 per year. 
A full 78 percent of Mainers use heating oil to warm their houses in 
wintertime, and this, combined with gasoline prices of anywhere from 
$2.50 to $3.00 per gallon paints a harsh picture for Maine and New 
England this winter. Petroleum is not any run-of-the-mill commodity. It 
is the lifeblood of commerce in this country, with fuel costs being 
built into the price of every other good bought and sold on the market. 
And in places like New England where petroleum heats most homes, it's 
literally a life-and-death commodity.
    Your industry has taken the position in its SEC filings and at 
yesterday's hearing that the escalation of its fuel prices is the 
result of increases in crude oil prices. However, if your retail gas 
prices were raised simply to cover your increased costs in purchasing 
crude oil, your net profits would remain the same. Everyone knows this 
is not happening. Can you identify for this committee the reason that 
the rise in gasoline prices is far out-pacing the rise in crude oil 
prices?
    Answer. Fuel prices are affected by a number of factors including 
the cost of crude, formulation requirements, state taxes, supply and 
distribution logistics, local market conditions, environmental 
regulations and operating costs.

    Question 4a. Even though crude oil prices have risen this year, 
your companies aren't actually incurring those costs, are they? Isn't 
the gasoline and heating oil that your firms are currently selling on 
the market actually being produced from inventories that your companies 
purchased when the price of crude oil was much lower?
    Answer. Our refineries typically only hold enough crude to make 
sure they don't slow down due to supply disruptions. There is generally 
only a 10 to 20 day supply of crude oil feedstock at the refinery or in 
the process of being delivered. Crude oil used at Shell refineries is 
bought from a variety of sources both domestically and internationally. 
The price paid is set by the marketplace on the day it is purchased. 
Occasionally, crude oil feedstock is purchased from distant suppliers, 
such as those in the Far East. In such cases, the price is set by the 
marketplace at the time of purchase, which might be six to eight weeks 
before it is processed by the refinery.

    Question 4b. If you're producing oil from crude that you bought at 
$40 per barrel, but selling it at a price that is purportedly based 
upon a $70 per barrel cost to you, wouldn't that account for the 90% 
increase in profits we've seen?

    Answer. See Response to Question 4a, above.

    Question 5. I've alluded to the vital role petroleum plays in our 
economy and society, from the price of bread to the price of a plane 
ticket to the price of heating one's home. While you're obviously in 
the business for profit there are other sectors of the economy where we 
put a limit on selling commodities at unconscionable prices. One 
example is usury law, where lenders are prohibited from charging 
unconscionable rates for borrowing money-because we recognize that 
access to cash is critical to enterprise. How much more of a toll do 
these fuel prices have to take on our society before Congress steps in 
and places similarly appropriate regulations on your industry?
    Answer. It remains to be seen what steps Congress will take to 
address the nation's energy policy issues. A number of policy proposals 
that Congress might want to consider are identified in my written and 
oral testimony.

    Question 5a. Many consumers would say that raising the price of gas 
by $2 per gallon over the past 2 years, while reaping over $25 billion 
in profits is price gouging. Many lawmakers would agree. What do you 
say to them?
    Answer. The attention focused on the oil industry during periods of 
higher profits vastly outweighs the focus when profits are down due to 
the same cyclical factors that have moved markets for years, and have 
caused this industry to be a ``feast or famine'' business. We kept 
exploring, producing, refining, transporting and satisfying consumer 
demand for products when oil prices dropped below $10 per barrel. We 
must take the long-term view of the business, and hope that our ability 
to recover costs and make a profit returns when the pricing environment 
changes.
    Now we are in one of those periods where the pricing environment 
has been more favorable to the oil industry, and we are generating the 
cash needed to keep investing in the future of energy and to pay much 
more in taxes as well. No one knows how long this period will last, and 
conditions will inevitably change. Recently, gasoline prices have 
declined by nearly $1 per gallon as conditions have returned to a more 
typical environment. Neither the rise in price nor the fall back down 
should influence energy policy or company strategies in a significant 
way.
    Consumers should consider that they pay much more per gallon for 
many other types of consumer products that don't require the same 
degree of sophisticated business activity to place in commerce--foods, 
cleaning supplies and other household products, for example. The oil 
industry is among the most efficient in the world in delivering highly 
refined products to consumers, and must comply with an impressive array 
or environmental laws and regulations in the process, as well as other 
forms of business regulation, many of which vary considerably across 
state lines. We must make a wide variety of different fuels to satisfy 
local regulatory specifications, adding more cost to the process.
    In conclusion, we disagree that the volatility in pricing, and the 
varying impact of such volatility on profits, means that the industry 
has engaged in price gouging.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                            John Hofmeister

    Question 1. In the last decade, has your company ever withheld 
supply of crude oil or refined product from the market in order to 
prevent prices from falling?
    Answer. Shell has not withheld crude oil or refined product from 
the market in order to prevent prices from falling.

    Question 2. Please describe any business relationship or 
transaction your company or any of its subsidiaries, wherever located 
and wherever incorporated, whether wholly owned or not, have had with 
Iranian nationals (except employment of Iranian expatriates), the 
Iranian government, individuals or corporations located or incorporated 
in Iran, or any representative of these people or companies.
    Answer. I am president of Shell Oil Company, which is a wholly 
owned subsidiary of Royal Dutch Shell plc (RDS). Shell Oil Company is 
not involved in activities in Iran. It is well-known, however, that 
certain RDS subsidiaries have a history in Iran that spans nearly 50 
years.
    For the record, I am a U.S. citizen. Therefore, consistent with 
U.S. law and with our corporate policy, I do not advise or otherwise 
participate in any RDS activities relating to potential or actual 
transactions in or for Iran.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                             James J. Mulva

    Question 1. I have introduced legislation that will offer an up to 
$500 tax credit to working low and middle income individuals for the 
cost of home heating expenses. According to the National Energy 
Assistance Directors Association, heating costs for the average family 
using heating oil are projected to hit $1,666 for the upcoming winter. 
This represents an increase of $403 over last winter's prices and $714 
over the winter heating season of 2003-2004. Meanwhile, profits of oil 
and gas rose 62 percent in the third quarter for companies in the 
Standard & Poor's 500 index. I am proposing to offset the $500 tax 
credit for home heating expenses by curtailing the benefit large oil 
companies receive by using the LIFO accounting method.
    A) Do you think given budget deficits and record profits for oil 
companies that it is appropriate to divert tax benefits for large 
integrated oil companies such as yours to pay for such a measure?
    B) Does this seem like an equitable approach given that the high 
cost of oil enables you to not only bank large profits, but also to use 
accounting methods to substantially reduce taxes? Is it fair to report 
less taxes when you're profiting the most?
    Answer. LIFO has been a generally accepted accounting method under 
the Internal Revenue Code since 1938 and therefore is considered to 
generate a clear reflection of a taxpayer's income. All taxpayers with 
inventory have the ability to elect to use LIFO. It is not a loophole 
established for the petroleum industry.
    Revaluing LIFO inventories for select oil and gas companies is bad 
tax policy because it would be contrary to the requirement that 
taxpayers utilize consistent accounting methods to account for income 
and expenses from year to year, and it would create a bad precedent 
that could be used to penalize other industries as a means of raising 
revenues.
    A one-time increase in the LIFO inventory valuation would generate 
a substantial negative tax impact in the year of the change, as many 
oil and gas companies have inventories reflecting years of historical 
costs. Such a penalty is equivalent to a windfall profits tax and would 
provide a huge economic disincentive to invest in new oil and gas 
supplies and refining capacity. It would also hurt U.S. companies' 
ability to compete with foreign companies for oil and natural gas 
resources around the world.
    We also don't see a windfall. Even with the highest price 
environment our industry has seen in 22 years, adjusted for inflation, 
our profit margin of 7.7 cents per dollar of sales is near or below the 
average of all industries.

    Question 2. Your third quarter profits have certainly been a 
lightning rod that has riled consumers as they continue to pay 30 
percent more in Maine for their home heating oil for the winter. I 
realize that you reinvest some of these profits in exploration for more 
product. In each quarter, have you reinvested the same percentage of 
the profits to reinvestment? What have your reinvestment percentages 
been to your total profits? Do they vary from quarter to quarter or 
year to year?
    Answer. Our reinvestment percentages are reflected in the table 
below. Since 1995, we have invested, on average, the equivalent of 189% 
of our earnings into our business. Annual reinvestment percentages have 
ranged from 87% to 865%.
    There is no distinct relationship between quarterly profitability 
and the amount we invest in expanding our business in a given quarter, 
therefore quarterly reinvestment percentages can vary significantly. 
Because of the magnitude and complexity of the projects that we 
undertake and the long-term commitment they represent, investment plans 
are contemplated well in advance of actual expenditures, based on a set 
of long-term economic assumptions e.g. estimated commodity prices, 
estimated costs, estimated tax expenses etc. As long as there is no 
major shift in those long-term assumptions, investment activity 
continues despite the fact that investment may exceed earnings in a 
given quarter or a given year. Given the long term investment horizon 
associated with our asset base, a temporary increase or decrease in 
earnings will not normally immediately result in a significantly higher 
or lower investment in a given quarter or year.

                                      CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER 2002)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Capital      Reinvestment                U.S. capital   Reinvestment
                               $MM                                 Net  income   expenditures &   as % of net   U.S. net    expenditures &   as % of net
                                                                       \1\      investments \2\     income     income \3\  investments \4\     income
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995............................................................       469          (1,456)         310%           335           (923)           276%
1996............................................................     1,303          (1,544)         118%         1,130           (841)            74%
1997............................................................       959          (2,043)         213%           710         (1,059)           149%
1998............................................................       237          (2,052)         865%           263           (936)           357%
1999............................................................       609          (1,690)         278%           376           (919)           244%
2000 *..........................................................     1,862          (8,460)         454%         1,250         (7,707)           617%
2001 *..........................................................     1,661         (10,054)         605%         1,305         (8,887)           681%
2002 **.........................................................     (295)          (4,388)      ............    (910)         (2,043)      ............
2003............................................................     4,735          (6,169)         130%         2,513         (2,493)            99%
2004............................................................     8,129          (9,496)         117%         4,659         (2,520)            54%
2005............................................................     9,850          (8,573)          87%         5,626         (3,140)            56%
                                                                 ---------------------------------------------------------------------------------------
  10 Year Avg...................................................     2,683          (5,084)         189%         1,569         (2,861)           182%
--------------------------------------------------------------------------------------------------------------------------------------------------------
* 2000 Includes Alaska acquisition--($6,443MM), 2001 Includes Tosco Acquisition--($7,038MM).
** The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this table. Sources:
\1\ Net Income. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2000 (ConocoPhillips 2004 Annual Report, page 108); 1999-1995 (Phillips 2001
  Annual Report, page 95).
\2\ Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2000 (ConocoPhillips 2004 Annual Report, page 108);
  1999-1995 (Phillips 2001 Annual Report, page 95).
\3\ U.S. Net Income. A domestic and international breakdown is provided externally for the major company segments (I.e. E&P and R&M). Midstream and
  Emerging businesses are internally reported as domestic and international and this breakdown is included in the above total. The Chemical and
  Corporate Segments have been included in the U.S. total.
\4\ U.S. Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2002 (ConocoPhillips 2004 Annual Report, page
  45); 2001 (ConocoPhillips 2003 Annual Report, page 49); 2000 (ConocoPhillips 2002 Annual Report, page 49); 1999 (Phillips 2001 Annual Report, page 47
  adj. to exclude discontinued ops.); 1998 (Phillips 2000 Annual Report, page 47 adj. to exclude discontinued ops.); 1997 (Phillips 1999 Annual Report,
  page 44); 1996 (Phillips 1998 Annual Report, page 42); 1995 (Phillips 1997 Annual Report, page 40).


    Question 3. To what non-profit organizations and academic research 
that address global climate change does your company donate financial 
support to and how much do you donate each year?
    Answer. ConocoPhillips has numerous projects focused on or related 
to global climate change. Some are part of an overall corporate 
initiative while other projects are being researched and implemented 
locally with lessons learned and best practices to be shared across the 
company.
    As stated in our 2003 Climate Change Position Statement, 
ConocoPhillips recognizes that human activity, including the burning of 
fossil fuels, is contributing to increased concentrations of greenhouse 
gases (GHG) in the atmosphere, which can lead to adverse changes in 
global climate. While the debate continues over the extent of human 
contributions and the timing and magnitude of future impacts, the 
company is committed to taking action now to begin addressing the 
issue.
    In 2004, ConocoPhillips took several actions toward implementing 
our climate change position. The company's E&P and R&M business 
segments began assessing data to develop objectives to reduce GHG 
emissions. Guidance for integrating climate change considerations into 
ConocoPhillips' project planning and approval processes is being 
developed in conjunction with efforts to integrate sustainable 
development. The company actively engages in discussions on climate 
change and supports third-party studies and research through 
memberships in the American Petroleum Institute (API) and the 
International Petroleum Industry Environmental Conservation 
Association, the World Business Council for Sustainable Development, 
and the International Emissions Trading Association among others.
    In 2004, ConocoPhillips created a Global Gas unit within its E&P 
business to focus the company's efforts in the development and 
management of lower-carbon natural gas. The company is performing 
internal research and participating in a number of joint industry 
projects that are focused on increasing its understanding of carbon 
dioxide (CO2) sequestration, and reducing capture and 
storage costs through development and application of new technology. 
These projects include WESTCARB (the U.S. Department of Energy's West 
Coast Regional Sequestration Partnership), the SINTEF Group study of 
CO2 for enhanced oil recovery and disposition in aquifers in 
Norway, and the Alberta Research Council's Enhanced Coalbed Methane 
Consortium. ConocoPhillips also is a member of CO2Net, the 
European network of CO2 researchers, developers and users of 
CO2 mitigation technology. In addition, ConocoPhillips has 
joined the CO2 Capture Project.
    We participate in a number of joint industry/government initiatives 
that address the capture and sequestration of Carbon Dioxide. These 
organizations are non-profit and most of them also involve the academic 
community. This includes almost one million dollars annually to support 
two research efforts on CO2 capture and long term geological 
storage as a viable green house gas mitigation technique. Additionally, 
ConocoPhillips sponsors a $700,000 per year research effort at the 
University of Bergen in Norway to evaluate the sequestration of 
CO2 and production of methane from methane hydrates.
    ConocoPhillips sponsors numerous academic fellowships on many 
different subjects related to the oil and gas industry. Though not 
climate change specific, some are associated with climate change such 
as a $70,000 fellowship at the University of Oklahoma to improve the 
efficiency of diesel fuel which will consequently reduce carbon dioxide 
and other emissions.
    Our individual operations research and implement many local efforts 
that are climate change-related. Our operations in Norway are spending 
more than three million dollars on climate change initiatives including 
studies of climate for the arctic environment, using waste 
CO2 in reservoir management and wind-powered generation for 
offshore platforms. Our extensive refinery efficiency improvement 
effort makes us a lower cost refiner and reduces greenhouse gas 
emissions. Likewise, our efforts to reduce gas flaring in production 
directly relates to climate change because flaring produces greenhouse 
gases. Finally, our clean fuels program will help all consumers reduce 
their individual greenhouse gas emissions from driving.

    Question 4. There has been much discussion about the skyrocketing 
costs of gasoline, heating oil, and other petroleum products over the 
past year, magnified by the three hurricanes which have hit the Gulf 
Coast region this year. In response to these inquiries into the rising 
prices and your soaring profits, you have asserted that these increases 
are tied to market forces, particularly the rising prices of crude oil.
    I've reviewed your financial filings from the Securities and 
Exchange Commission, and they paint a very stark picture when compared 
to the financial misery being experienced by millions of Americans. 
ExxonMobil, for example, has realized a net income of $25.42 billion in 
the first nine months of 2005, an increase of $8.5 billion over the 
first nine months of 2004. Exxon's third quarter net income this year 
was $9.92 billion, up a full 90%.
    Similarly, ConocoPhillips' net income for the third quarter of 2005 
was $3.8 billion, compared with $2.006 billion during the same time 
period in 2004. Conoco's filing attributes this jump in profit to 
``higher crude oil, natural gas and natural liquid gas prices,'' 
``improved refining margins,'' and ``equity earnings from our 
investment in LUKOIL.''
    In my State of Maine, the median state income is $17,044 per year. 
A full 78 percent of Mainers use heating oil to warm their houses in 
wintertime, and this, combined with gasoline prices of anywhere from 
$2.50 to $3.00 per gallon paints a harsh picture for Maine and New 
England this winter. Petroleum is not any run-of-the-mill commodity. It 
is the lifeblood of commerce in this country, with fuel costs being 
built into the price of every other good bought and sold on the market. 
And in places like New England where petroleum heats most homes, it's 
literally a life-and-death commodity.

    Question 4a. Your industry has taken the position in its SEC 
filings and at yesterday's hearing that the escalation of its fuel 
prices is the result of increases in crude oil prices. However, if your 
retail gas prices were raised simply to cover your increased costs in 
purchasing crude oil, your net profits would remain the same. Everyone 
knows this is not happening. Can you identify for this committee the 
reason that the rise in gasoline prices is far out-pacing the rise in 
crude oil prices?
    Answer. During the recent hurricanes in the third quarter, refined 
product supply was impacted more than crude supply. The United States 
lost five million barrels per day or nearly 30% of its total refining 
capacity at the peak, and this substantially reduced the industry's 
ability to supply the market with gasoline and diesel fuel. The market 
price of gasoline increased rapidly due to the real and very 
significant shortage of supply caused by Gulf Coast refining and 
distribution shutdowns.
    The hurricanes shut down 1.5 million barrels per day of Gulf of 
Mexico crude production at the peak. This event normally would create a 
significant shortage of U.S. crude oil supply and a large, rapid 
associate increase in crude oil price. However, with about two million 
barrels per day of U.S. refining capacity down for an extended period 
and a release of crude from the U.S. Strategic Petroleum Reserve, a 
severe crude shortage did not develop and the crude price increase was 
tempered.
    According to DOE data, in the third quarter of 2005 versus the 
third quarter of 2004, the WTI crude price rose by 44%. During that 
same period, a simplified Gulf Coast refinery margin called a light oil 
price spread (two-thirds regular gasoline plus one-third heating oil 
minus WTI crude) more than doubled due to the hurricanes. The retail 
gasoline price reflects both the crude price increase as well as the 
increase in refining margins resulting from the hurricane-induced 
shutdown of U.S. refining capacity.
    Product prices increased as a result of the imbalance, which 
moderated demand and attracted new supplies from overseas, which to a 
large degree restored the supply/demand balance. Gasoline prices have 
now fallen to below pre-hurricane levels.
    The U.S. Federal Trade Commission's assessment that 85% of the 
changes in retail gasoline prices are caused by crude price changes has 
historically been true. However, there were unique circumstances in the 
third quarter caused by the hurricanes and their impact on such a large 
portion of the nation's refining capacity.
    It is also important to note that the marketplace sets prices in 
accordance with the laws of supply & demand. These prices do not 
necessarily reflect production costs at any given moment. Sometimes 
supply/demand conditions set prices above and sometimes below costs and 
an acceptable return. Historically, over the last 20 years, both crude 
prices and refining margins have been set at levels that gave the 
petroleum industry sub-par returns when compared with other industries. 
Between 1990 and 2002, the average return on equity for the petroleum 
industry was 11.3%, lower on average than the 12.6% return for the S&P 
industrials. The refining & marketing sector has an even lower 
historical return on capital than the total petroleum sector. Between 
1990 and 2002, the refining and marketing sector had a return on 
capital employed of 5.0% versus 7.1% for the total petroleum industry.
    While the petroleum industry has been criticized for having a large 
concentration of energy infrastructure in the Gulf Coast, we are there 
because of the energy resources and because that is where we have been 
able to get energy infrastructure sited. Much of New England, including 
Maine, suffers from a lack of energy infrastructure due to community 
opposition to expansions. For example, ConocoPhillips made an attempt 
to provide Maine consumers with competitive options to home heating oil 
by bringing LNG into the state. We worked closely with the citizens and 
city council of Harpswell, Maine where we hoped to site an LNG 
regasification facility. There was support of the State, Labor, some of 
the commercial fishermen and most of the citizens who grew up in the 
area, but the project failed on a close vote. That project could have 
been a real energy supply success story for Maine.

    Question 4b. Even though crude oil prices have risen this year, 
your companies aren't actually incurring those costs, are they? Isn't 
the gasoline and heating oil that your firms are currently selling on 
the market actually being produced from inventories that your companies 
purchased when the price of crude oil was much lower?
    Answer. First it is important to note that the marketplace sets 
prices in accordance with the laws of supply and demand. These prices 
do not necessarily reflect production costs at any given moment. 
Sometimes supply/demand conditions set prices above and sometimes below 
costs and an acceptable level of return. Over the long-run, prices on 
average equate to cost and an acceptable level of return or there will 
be too much or too little supply, which will push prices back towards a 
cost-based equilibrium level. In the short-term, there can be a series 
of imbalances that lead to prices being above and below a long-term 
cost-based equilibrium.
    During a supply disruption, like we saw after the hurricanes, 
prices rise for all available supplies, including those in storage. 
There is about a three-week time lag between when crude is purchased 
and put in storage and when refined products are produced. Since the 
market was in a period of rising prices after the hurricanes, by the 
time the crude was turned into products, it was worth more. During 
periods of price decline, crude would be worth less by the time it was 
refined into products.

    Question 4c. If you're producing oil from crude that you bought at 
$40 per barrel, but selling it at a price that is purportedly based 
upon a $70 per barrel cost to you, wouldn't that account for the 90% 
increase in profits we've seen?
    Answer. ConocoPhillips reported third-quarter 2005 net income of 
$3.8 billion, up 89% from this quarter last year. Of this increase, 48% 
came from our worldwide oil and gas exploration and production 
operations, 38% of this increase came from our worldwide refining and 
marketing operations and 15% came from our strategic alliance with 
LUKOIL, which we entered into during the fourth quarter of 2004.
    According to U.S. Department of Energy data on spot prices for West 
Texas Intermediate crude, the increase in the third quarter of 2005 
over the third quarter of 2004 was 44%. Our exploration and production 
earnings were up by closer to 60% during this period because they were 
also helped by higher natural gas prices and higher crude oil sales.
    Earnings from our U.S. refining and marketing operations were about 
$1.1 billion in the third quarter of 2005, compared with $505 million a 
year ago. U.S. Department of Energy data for a simplified refining 
margin in the Gulf Coast, called a crack spread (2/3 regular gasoline, 
1/3 heating oil minus WTI) more than doubled in the third quarter of 
2005, versus the third quarter of 2004 as a result of the hurricanes 
and shutting in of nearly 30% of the nation's refinery capacity at the 
peak. The doubling of our U.S. refining & marketing earnings was 
consistent with the doubling of the Gulf Coast light oil spread or 
simplified refining margin. Thus, our earnings are reflective of the 
change in commodity prices.
    It is important to remember that crude and gasoline prices are set 
in the marketplace by a large number of buyers, sellers, traders and 
financial players based on global and regional supply and demand 
conditions and may be higher or lower than costs and a profit on any 
given day, depending upon market conditions. In the third quarter of 
2002, for example, this simplified refinery margin (Gulf Coast crack 
spread) was 60% below where this spread was in the third quarter of 
2004. 2002 was a particularly weak year for refining margins due to 
weak demand resulting from September 11, 2001 and the economic slowdown 
in the United States. Over the long run average, refinery margins 
equate to costs plus a modest return but at any given moment, margins 
will vary based on market conditions. The U.S. refining business has 
historically had sub-par returns, given the large capital investments 
required to stay in business, and the large investments required to 
reduce emissions and make clean fuels. While the environmental 
investments are very important, they usually do not provide a return. 
Between 1990 and 2002, the average return on equity for the petroleum 
industry was 11.3%, lower on average than the 12.6% return for the S&P 
industrials. The refining & marketing sector had an even lower 
historical return on capital than the total petroleum sector. Between 
1990 and 2002, the refining and marketing sector had a return on 
capital employed of 5.0% versus 7.1% for the total petroleum industry.

    Question 5. I've alluded to the vital role petroleum plays in our 
economy and society, from the price of bread to the price of a plane 
ticket to the price of heating one's home. While you're obviously in 
the business for profit, there are other sectors of the economy where 
we put a limit on selling commodities at unconscionable prices. One 
example is usury law, where lenders are prohibited from charging 
unconscionable rates for borrowing money--because we recognize that 
access to cash is critical to enterprise.
    How much more of a toll do these fuel prices have to take on our 
society before Congress steps in and places similarly appropriate 
regulations on your industry?
    Answer. Imposing a regulatory scheme on the petroleum industry as a 
result of price increases that arose from world-wide events and weather 
related incidents is bad economic policy and could discourage capital 
investments aimed at increasing refining capacity. This would result in 
less supply being available in the marketplace and will do nothing to 
ensure lower prices for consumers.

    Question 5a. Many consumers would say that raising the price of gas 
by $2 per gallon over the past 2 years (Dec. 2003 price per gallon on 
East Coast was $1.30; in August 2005 it was $3.25) while reaping over 
$25 billion in profits is price gouging. Many lawmakers would agree. 
What do you say to them?
    Answer. Calling the increase in gasoline prices between the two 
times cited in the question ``price gouging'' disregards the fact that: 
(a) during the same time frames world wide crude oil prices more than 
doubled (b) the costs of refining and marketing gasoline increased, and 
(c) the August 2005 gasoline price was driven by the devastation 
wreaked on oil producing platforms in the Gulf of Mexico, shut ins of 
the refining complex in the Gulf Coast region (which produces 44% of 
America's gasoline), and the shutdown of the Colonial Pipeline which 
delivers most of the gasoline to the East Coast of the United States 
from the Gulf Coast region, all of which were occasioned by Hurricane 
Katrina. The East Coast gasoline price has now dropped to $2.21 per 
gallon (November 21, 2005--DOE) as refinery production has been 
restored and gasoline imports have been brought in from Europe to 
replace lost domestic supplies.
    We are also in a commodity business and our prices and profits 
swing up and down with prices set in global and regional highly 
transparent markets. On average, the petroleum business has had sub-par 
returns historically. ConocoPhillips' third-quarter revenues of about 
$50 billion generated about $3.8 billion of income. This represents a 
profit margin of 7.7 cents per dollar of sales, near or below the 
average of all industries. With this level of profit in the highest 
price environment our industry has experienced in 22 years, adjusted 
for inflation, we don't see how our profits can be construed as 
gouging.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Jeff Bingaman to 
                             James J. Mulva

    Question 1. Section 392 of the Energy Bill, which was negotiated 
with the involvement of the Chairman and Ranking Member of the Energy 
and EPW Committees, contains permitting streamlining language. The 
Energy Policy Act of 2005 permits the EPA Administrator to enter into a 
refinery permitting cooperative agreement with a state. Under such an 
agreement, each party identifies steps, including decision timelines, 
it will take to streamline the consideration of federal and state 
environmental permits for a new refinery. I want to ask you several 
questions about that provision, since you have supported streamlining: 
Have you requested that EPA issue any regulations or take any action to 
implement these new provisions? If no, when do you anticipate you will 
do so?
    Answer. No, we have not as they relate only to new refineries.
    The Section as written is specific only for the construction of a 
new refinery. We have no current plans to build a new refinery in the 
United States. ConocoPhillips plans to invest $4-5 billion, on top of 
our other refinery investments of $1-2 billion per year. This multi-
year investment program is aimed at growing our U.S. refining capacity 
by about 11 percent and improving our capability of handling lower 
quality oils in order to make 15 percent more clean fuels such as 
gasoline, diesel and heating oil by the year 2011. These expansions 
will add enough clean fuels product to be the equivalent of adding one 
world-scale refinery to our domestic refining system.

    Question 1a. Have you worked with any state to encourage them to 
enter into an agreement with EPA under Section 392 of EPAct?
    Answer. No, we have not.

    Question 1b. Do you support the EPAct streamlining provisions?
    Answer. The provision, if utilized as intended by all parties, may 
be helpful in the project timeline of a new refinery in the United 
States. However, the provision as we interpret it is applicable solely 
to the construction of a new refinery. As such, the provision has 
little if any value to ConocoPhillips. ConocoPhillips currently owns 
and operates twelve refineries in the United States. We have an 
aggressive growth plan for these refineries that not only adds domestic 
capacity to the United States but will increase the facilities' 
robustness in their flexibility to handle more difficult-to-refine 
crudes including heavy oils and will expand our conversion capabilities 
to clean fuels.
    This investment program is a large downstream expansion but is 
dependent upon the securing of permits to proceed. We are disappointed 
that the provisions in EPAct 2005 addressed only new refineries and 
provided limited or no additional permit streamlining for other 
capacity and/or crude and product flexibility projects.

    Question 1c. Do you have any examples of where a state came to EPA 
and said we want to work closely with you on permitting a new refinery 
or refinery expansion and EPA refused to provide technical assistance 
and even financial resources under existing law to that state?
    Answer. No. However, this does not mean that the permitting 
processes in existence today are efficient or certain in their timing 
and application. A federal facilitator coordinating the permitting 
process for qualifying projects could provide all parties with improved 
understanding and commitments to time and content of applications and 
eliminate the overlap between federal agencies and/or federal and state 
agency efforts.

    Question 2. In answer to several of the questions at today's 
hearing (Nov. 9) the witnesses have noted that the market for petroleum 
and petroleum products is a global one and should be viewed in that 
context. Please list all planned refinery construction that your 
company plans to undertake globally. Please list them by country and 
include the projected size of the facility, including the projected 
capacity for all units and their potential product yields in addition 
to the project's total investment cost.
    Answer. ConocoPhillips plans to invest $4-5 billion, on top of our 
other refinery investments of $1-2 billion per year. This multi-year 
investment program is aimed at growing our U.S. refining capacity by 
about 11 percent and improving our capability of handling lower quality 
oils in order to make 15 percent more clean fuels such as gasoline, 
diesel and heating oil by the year 2011. These expansions will add 
enough clean fuels product to be the equivalent of adding one world-
scale refinery to our domestic refining system.
    The following table provides some of our preliminary estimates for 
these U.S. refinery projects. Note that most of these projects are in 
the early design phase. As such, individual unit capacities and 
specific product yields are not yet defined. We have provided a rough 
estimate of our intended crude capacity increases, clean product 
volumes (a total of gasoline, jet fuel and diesel) expected, the types 
of units that will be added or modified, and an early estimate of the 
capital investment costs. Note that we have not done final engineering 
or applied for the permits, which could change our plans. Thus, these 
are very rough estimates and are subject to change.
    ConocoPhillips is also considering opportunities to build grass 
roots refining capacity, and acquire existing refining capacity. On 
November 25, we announced that we would acquire Louis Dreyfus' 275MBPD 
refinery near Wilhelmshaven, Germany, subject to regulatory approvals. 
Should we be successful in acquiring the Wilhelmshaven refinery, we 
will consider upgrading investments to increase diesel and gasoline 
output.

                                        PROPOSED MAJOR CONOCOPHILLIPS U.S. REFINERY CAPACITY RELATED CONSTRUCTION
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Current                Estimated
                                                                                facility    Projected     clean       Total
               Refinery                          Country            Ownership     crude       crude      product   investment   Major units being added
                                                                    interest    capacity    capacity    increase   cost ($MM)         or modified
                                                                                (MBPD)\1\   (MBPD)\2\   (MBPD)\3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Los Angeles...........................  USA......................     100%         139         179          34         495     Crude Unit
                                                                                                                               Hydrocracker
                                                                                                                               Coker
                                                                                                                               FCC
San Francisco.........................  USA......................     100%         115         122           6         235     Hydrocracker
Ferndale..............................  USA......................     100%          93         105          10         455     Crude Unit
                                                                                                                               Coker
                                                                                                                               FCC
Wood River............................  USA......................     100%         306         331          21        1230     Crude Unit
                                                                                                                               Hydrocracker
                                                                                                                               Coker
                                                                                                                               FCC
Borger................................  USA......................     100%         146         146       \4\ 0         230     Coker
                                                                                                                               FCC
Billings..............................  USA......................     100%          58          83          21         395     Crude Unit
                                                                                                                               FCC
Alliance..............................  USA......................     100%         247         287          34         270     Crude Unit
                                                                                                                               Coker
                                                                                                                               FCC
Sweeny................................  USA......................     100%         229         259          26         705     Crude Unit
                                                                                                                               Coker
                                                                                                                               FCC
Bayway................................  USA......................     100%         238         238       \4\ 0         300     Crude Unit
                                                                                                                               FCC
                                                                              --------------------------------------------------------------------------
  U.S. total..........................    .......................                 1571        1750         152        4315
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Utilizes corporate stated crude capacities. Sweeny and San Francisco capacities were updated as of 2005, respectively.
\2\ Calculated growth added to stated corporate capacity.
\3\ Clean product increase estimated as crude increase multiplied by average system clean product yield of .85.
\4\ Major emphasis of project is to process heavier, higher sulfur crudes.


    Question 3. The International Energy Agency (IEA) has just released 
its World Energy Outlook 2005. It contains a piece on the global 
refining picture. (Please see the summary below.) The study notes a 
lack of investment in upstream and downstream capacity has contributed 
to the extreme tightness in global oil markets. What are your thoughts 
in response to this? What is your company doing in response (actions)? 
What is your company doing (investments/analysis) in the ``MENA'' 
regions? Do you agree with the IEA's projections?

          World Energy Outlook 2005: IEA Projects Growth in Middle East 
        and North Africa Oil and Natural Gas Sectors through 2030 but a 
        Lack of Investment would Push up Prices and Depress GDP Growth
          11/7/2005 London--``The importance of the Middle East and 
        North Africa (MENA) to global oil and gas markets cannot be 
        underestimated. These countries have vast resources, but these 
        resources must be further developed. Investment should not be 
        delayed,'' said Mr. William C. Ramsay, Deputy Executive 
        Director of the Paris-based International Energy Agency, as he 
        presented findings from the World Energy Outlook 2005: Middle 
        East and North Africa Insights (WEO-2005) today in London. 
        Noting that a lack of investment in upstream and downstream 
        capacity has contributed to the extreme tightness in the global 
        oil market in recent months, Mr. Ramsay highlighted the 
        critical role that this region will play in meeting growth in 
        global energy demand.
          The WEO-2005 expects global energy markets to remain robust 
        through 2030. If policies remain unchanged, world energy demand 
        is projected to increase by over 50% between now and 2030. 
        World energy resources are adequate to meet this demand, but 
        investment of $17 trillion will be needed to bring these 
        resources to consumers. Oil and gas imports from the Middle 
        East and North Africa will rise, creating greater dependence 
        for IEA countries and large importers like China and India. 
        Energy-related CO2 emissions also climb--by 2030, 
        they will be 52% higher than today. ``These projected trends 
        have important implications and lead to a future that is not 
        sustainable--from an energy-security or environmental 
        perspective. We must change these outcomes and get the planet 
        onto a sustainable energy path,'' added Mr. Ramsay.
          WEO 2005 focuses on the energy prospects in the Middle East 
        and North Africa to 2030, covering in detail developments in 
        Algeria, Egypt, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia 
        and the United Arab Emirates. Internal demand, resources, 
        policies, investment, production, exports, even energy use for 
        water desalination, all are examined. ``To our knowledge, this 
        is the first time that any publication with a focus on the 
        Middle East and North Africa has undertaken such an extensive, 
        country-by-country review of the energy sector of the region. 
        At a time when experts debate whether the world will run out of 
        energy, these results are particularly relevant,'' Mr. Ramsay 
        said.
          In the MENA region, domestic energy demand is driven by 
        surging populations, economic growth and heavy energy 
        subsidies. Primary energy demand more than doubles by 2030. At 
        the same time, MENA oil production will increase by 75% by 2030 
        and natural gas production will treble, allowing more gas 
        exports. The region's share in global oil production will 
        increase from 35% today to 44% in 2030. However, this means the 
        countries of the Middle East and North Africa would need to 
        invest, on average, $56 billion per year in energy 
        infrastructure. The level of upstream oil investment required 
        will be more than twice that of the last decade.
          But what if adequate investment is not made or consuming 
        countries' policies change? To assess these risks, WEO 2005 
        develops two other scenarios, each of them far from unlikely: a 
        Deferred Investment Scenario, in which investment in the 
        producing countries is delayed, whether deliberately or 
        inadvertently; and a World Alternative Policy Scenario, in 
        which energy-importing countries take determined action to cut 
        demand and change the pattern of fuel use, driven by high 
        prices, environmental or security goals, or all three.
          The two scenarios have significant implications for MENA 
        countries. In the Deferred Investment Scenario, energy prices 
        rise sharply. Global energy-demand growth falls, cutting the 
        region's oil and gas export revenues by more than $1 trillion 
        from 2004-2030. World GDP growth slows down. Deferred 
        investment could be the result of many factors, but whatever 
        the cause, the results are higher prices, greater uncertainty 
        and market inefficiencies.
          The WEO World Alternative Policy Scenario examines the 
        consequences of new policies under consideration in consuming 
        countries. ``The G8 Plan of Action, agreed at the Gleneagles 
        Summit in July 2005, launched detailed initiatives to promote 
        cleaner energy and combat the impact of climate change. The IEA 
        was asked to play an important role. This strong global 
        commitment indicates that governments are already adopting 
        alternative policies--such as those in the World Alternative 
        Policy Scenario--to achieve the G8 goals,'' explained Mr. 
        Ramsay. Under this Scenario, global oil and gas demand growth 
        is lower, but the world continues to rely heavily on MENA oil 
        and gas. CO2 emissions fall 16% below the level of 
        the Reference Scenario--but still increase around 30% by 2030.
          Assumptions about international energy prices have been 
        revised significantly upwards in WEO-2005, as a result of 
        changed market expectations after years of underinvestment in 
        oil production and the refinery sector. The average IEA crude 
        oil import price, a proxy for international prices, averaged 
        $36.33 per barrel in 2004 and peaked at around $65 (in year-
        2004 dollars) in September 2005. In the Reference Scenario, the 
        price is assumed to ease to around $35 in 2010 (in year-2004 
        dollars) as new crude oil production and refining capacity 
        comes on stream. It is then assumed to rise slowly, to near $39 
        in 2030. In the Deferred Investment Scenario the oil price 
        reaches $52 in 2030.
          The World Energy Outlook 2005 contains over 600 pages of 
        detailed statistics and in-depth analysis. The study was 
        produced by the IEA with input from many international experts 
        from producing countries, industry and organizations including 
        OPEC. The IEA's prestigious annual WEO series has long been 
        recognized as the authoritative source for global long-term 
        energy market analysis and has received honors for analytical 
        excellence including awards from the Russian Academy of 
        Sciences, the U.S. Department of Energy and numerous public and 
        private organizations.

    Answer.
Comments on Investment
    The main drivers for present elevated prices are the exceptionally 
strong global economic recovery and resulting demand growth and supply 
disruptions, including the recent hurricanes in the Gulf of Mexico. 
While sustained strong prices help encourage investment, for many years 
the industry has recorded poor historical returns, which have limited 
capital available for investment. Between 1990 and 2002, the average 
return on equity for the petroleum industry was 11.3 percent, lower on 
average than the 12.6 percent average return for the S&P industrials. 
The refining & marketing sector has an even lower historical return on 
capital than the total petroleum sector. Between 1990 and 2002, the 
refining and marketing sector had an average return on capital employed 
of 5.0 percent versus an average of 7.1 percent for the total petroleum 
industry. Given the degree of price, technical, capital and political 
risk in our projects, the price levels and returns in the 1980s and 
1990s did not allow the industry to attract sufficient capital. The IEA 
report acknowledged that average financial returns over the past three 
decades have usually been very low and that uncertainty about future 
investment returns discourages investment.\1\
---------------------------------------------------------------------------
    \1\ International Energy Agency, World Energy Outlook 2005, 
November 2005, page 98.
---------------------------------------------------------------------------
    Until recently, accelerated levels of investment were not 
encouraged because growing global demand could be met largely from 
spare oil production capacity in Russia and in OPEC countries, and by 
taking advantage of spare global refining capacity and spare capacity 
in oilfield services and supplies. As a result, the market did not 
provide the economic incentives for new grassroots investment. Within 
the past two years, the free market metrics have encouraged the 
industry to recalibrate the investment dial to higher, more aggressive 
levels of spending.
    In the exploration, development and production business, investment 
by private oil companies has also been constrained by a lack of access 
to low-cost reserves, including in the United States. The opportunities 
available tend to be more remote, complex, or involve lower quality 
crude oil that requires higher prices to be economically produced.
    Expansion in the refining business has also been constrained by the 
need to dedicate investments to a ``stay in business'' program for 
emissions reductions and clean fuels projects. These projects, while 
useful for ensuring a cleaner environment, do not expand and sometimes 
reduce supplies. Difficulties in permitting have also constrained 
refinery investment in the United States.
    Now that the market is identifying that new supplies are needed and 
peak clean fuel investments are nearing completion, the private sector 
will likely make these investments without need of any new government 
incentives. However, the industry does need governments at all levels 
to be thorough--but at the same time--to streamline permitting and 
environmental review processes so we can make these investments and add 
energy supplies.
    ConocoPhillips has been aggressively investing in refining, and in 
developing new natural gas supplies for the United States. The projects 
described below are all very large and will require significant capital 
expenditures in the future.
    Over the past five years, ConocoPhillips has spent $4.0 billion 
worldwide, of which $3.2 billion was spent domestically, to expand and 
modernize our refineries and upgrade marketing operations.
    Going forward, we are planning an expanded incremental investment 
program, whereby we expect to invest $4-5 billion, on top of our 
ongoing refinery investments of $1-2 billion per year. This investment 
program is aimed at growing our U.S. refining capacity by about 11 
percent and improving our capability of handling lower quality oils in 
order to make 15 percent more clean fuels such as gasoline, diesel and 
heating oil by the year 2011. These expansions will add enough clean 
fuels product to be the equivalent of adding one world scale refinery 
to our domestic refining system.
    ConocoPhillips is making major investments in North American Arctic 
natural gas through the Mackenzie Delta and Alaskan North Slope 
pipelines. Initial development of Mackenzie Delta will access about 6 
trillion cubic feet of gas, which is expected to come on stream in the 
year 2011 at approximately 1 billion cubic feet per day. As other 
fields are added, the pipeline will have the capacity to be expanded to 
1.8 billion cubic feet per day. The total cost of this pipeline is 
estimated to be at least $6 billion.
    The Alaskan North Slope presently has an estimated 35 trillion 
cubic feet of natural gas, which would increase total U.S. gas reserves 
by approximately 20 percent. When the pipeline connecting this gas with 
the lower 48 market is completed, about 4.0-4.5 billion cubic feet per 
day will be added to natural gas supplies. This equates to about 8 
percent of present U.S. natural gas production. This project 
exemplifies what we have been saying about capital-intensive projects 
that require many years before we see a return on the investment. The 
Alaska pipeline alone is expected to cost about $20 billion and take 
ten years before the first cubic foot of gas is sold on the market. In 
October 2005, ConocoPhillips joined Governor Murkowski of Alaska in 
announcing that we have reached an agreement in principle on terms and 
conditions that would move the Alaskan natural gas pipeline closer to 
reality. Once the agreement is completed by all gas owners, the Alaska 
legislature will, hopefully, act on that agreement, passing it quickly. 
While it is not a short-term solution, gas from Alaska will eventually 
make a sizable contribution in addressing the market problems we are 
anticipating for natural gas.
    ConocoPhillips is also investing aggressively in bringing liquefied 
natural gas (LNG) to the U.S. market. We are progressing LNG projects 
in Qatar and Nigeria and aggressively pursuing projects in Russia, 
Venezuela and Australia. These are all multi-billion dollar projects. 
We expect to bring our first cargo of Qatari gas to the United States 
in 2009. We are also developing an LNG supertanker to bring gas to the 
United States. We are participating in the construction of an LNG 
regasification facility at Freeport, Texas. We are pursuing a second 
LNG regasification terminal in Compass Port, offshore Alabama, although 
it is currently bogged down in the permitting process. We are committed 
to making the investments in these two facilities, which total over 
$1.5 billion. We are also pursuing permitting of regasification 
facilities on the East and West Coasts, as well as an additional Gulf 
Coast terminal.
    To bolster U.S. and global oil supplies, ConocoPhillips is 
expanding conventional crude production in Venezuela, Russia and the 
Far East. There is likely to be a bridge of unconventional heavy-oil 
and natural gas before the world transitions to alternative fuels in a 
major way. ConocoPhillips has invested and continues to invest heavily 
in unconventional heavy oil production in Venezuela and Canada. Our 
company recently announced that we will be partnering with a Canadian 
company to develop the $2.1 billion Keystone pipeline to bring over 400 
thousand barrels per day of much-needed Canadian heavy oil production 
to our U.S. mid-continent refineries.
    There is an estimated 7 trillion barrels of unconventional oil in 
place globally versus conventional estimates of 3 trillion barrels. 
Technology improvement will be important in raising the present low 
recovery rates of unconventional oil. We are building additional 
upgrading capacity in our refineries to process unconventional heavy 
crude, while exploring opportunities to apply our proprietary 
technology for turning natural gas into a slate of clean refined oil 
products, which will enhance clean diesel supplies.
ConocoPhillips' Investments in MENA Region
    ConocoPhillips' Middle East and North Africa regional office is in 
Doha, Qatar. Regional activities comprise pursuit of new business 
opportunities throughout the region in addition to a number of existing 
and emerging businesses.
    Through its subsidiary, Dubai Petroleum Company, ConocoPhillips 
produced first oil in 1969 and continues to operate four offshore oil 
fields.
    In Syria, we have a service contract with the Syrian Petroleum 
Company that expires on December 31, 2005. Our current plan is to honor 
that contract to its termination date. We expect our presence in Syria 
to end in 2006, once the formalities of closing out the service 
contract are accomplished. We have no plans to seek additional business 
in Syria.
    In 2003, ConocoPhillips and Qatar Petroleum signed a heads of 
agreement for the development of Qatar Gas 3 a large scale (7.8 MMTPA) 
LNG project located in Qatar with the U.S. Gulf Coast targeted as the 
primary gas sales market. Development activities continue with a final 
investment decision expected soon. If the project is approved, first 
gas is expected in late 2009. Also in 2003, ConocoPhillips signed a 
Statement of Intent with Qatar Petroleum for the development of a large 
scale gas to liquids (GTL) plant located in Qatar. Currently this 
project is on hold by Qatar Petroleum, owing to the unprecedented level 
of industrial development activities in Qatar.
    In 2004, ConocoPhillips and LUKOIL announced their intent to seek 
the right to develop the West Qurna field in Iraq. Subject to 
confirmation of LUKOIL rights under its PSA (production sharing 
agreement) related to the field, as well as governmental authorities 
and parties to the contract, ConocoPhillips expects to enter into 
further agreements regarding the assignment of a 17.5 percent interest 
in the PSA by LUKOIL.
    Since spring 2004, following U.S. government approval, 
ConocoPhillips together with partners Amerada Hess and Marathon have 
been negotiating with the Libyan Government and the Libyan National Oil 
Company to re-enter the Oasis concession (Waha Oil Company) the 
companies departed in 1986. These negotiations are continuing.
Views on IEA's Projections
    We generally agree with the IEA's reference case and its view of 
how challenging it will be to get $17 trillion (2004 dollars) of 
investment between 2004 and 2030. We believe that governments around 
the world can help by maintaining an attractive investment climate and 
removing barriers to investment, such as allowing greater resource 
access, streamlined--but thorough--permitting processes and stable 
fiscal terms. We would like to put in perspective one comment made in 
the report that the level of annual Upstream investment in MENA 
countries will have to double to meet the IEA's production forecast. 
The level of investment in MENA countries over the last 15 years was 
constrained by the enormous amount of excess capacity these countries 
held in the mid-1980s as they continued to lose market share to non-
OPEC production and an extended period of relatively weak prices and 
returns on investment. The market is now providing the price incentive 
for investment. Earlier this year, Saudi Arabia announced an investment 
program to expand their oil production capacity by 1.5 million barrels 
per day (from 11-12.5 million barrels per day) or by 14 percent by 
early 2009.

    Question 4. Voluntary standards--Post hurricanes, what is the 
industry doing to come up with voluntary standards/best practices for 
back-up power supply to critical energy infrastructure (refineries, 
pipelines, etc.) and natural disaster recovery? Will the API undertake 
such an effort? If not, what is your company doing?
    Answer. First, it is worth noting that our industry has established 
voluntary pre-hurricane shutdown procedures to protect people, the 
environment and equipment. Shutting down the complex refinery processes 
that may be in the path of hurricanes is a proactive step to reduce the 
chances for more extensive damage. The severity of the recent 
hurricanes and local infrastructure devastation has been unprecedented. 
Our company has faced different challenges from hurricanes Katrina and 
Rita, and there is no single common solution or best practice for post-
hurricane disaster recovery. We have extensive existing best practices 
to repair and restart our refineries. The first step of any recovery 
effort is a critical assessment of the condition of all equipment and 
infrastructure. We will continue to work hard to develop future best 
practices to minimize downtime at our refineries and other critical 
infrastructure facilities.
    Our industry has shown great resilience in working within the 
storm-devastated areas to set priorities for both the good of the 
community and the energy industry. The API should be consulted directly 
for positions on potential standards of disaster recovery. We are 
active members of the API and will participate in any activities 
undertaken.

    Question 5. A number of witnesses testified that failure of the 
electricity system resulting from hurricanes Rita and Katrina 
contributed in great part to the inability to get refineries restarted, 
or to get natural gas pipelines restarted. What are the arrangements 
for backup power in case of such emergencies at your critical 
facilities?
    Answer. One-half of our U.S. refineries have owned cogeneration 
plants or local area third-party cogeneration plants with contracts to 
supply electricity to the refineries. Each major storm event we 
witnessed this year brought with it widespread devastation. An on-site 
or local area cogeneration plant is much like a refinery in terms of 
storm exposure to wind and flood damage.
    Storm damage to on-site cogeneration plants can occur to the same 
degree as the damage to the refinery. Additionally, cogeneration plants 
normally require connectivity to a regional electrical grid system in 
order to start up. Thus, damage to adjacent regional power distribution 
grids will have a significant impact on the ability to restart either 
the cogeneration plant or the refinery.
    As an example, following Hurricane Rita, both our Lake Charles 
refinery and the local area third-party NISCO cogeneration plant, of 
which we own 36 percent, experienced hurricane damage. The same 
hurricane also produced widespread devastation in the region. The 
startup timing of both plants was dependent on the completion of 
repairs to the portions of the damaged regional power distribution 
system.
    In cases where storm devastation is this widespread, there are 
often many additional concerns for refinery restarts such as 
availability of refinery workers and contractors who have been 
displaced, critical local services like police and firefighting, fresh 
water supplies, etc. In cases of such severe devastation, the civil/
community needs may be given first priority for manpower or critical 
backup equipment such as portable generators, etc.

    Question 6. How many of your plants have on site cogeneration 
facilities? Which plants have these facilities?
    Answer. Roughly one half of our U.S. refineries have owned 
cogeneration plants or local area third party cogeneration plants with 
contracts to supply electricity to the refineries.
          Los Angeles, CA--Owned cogeneration that provides a portion 
        of the total electricity requirement for the plant.
          San Francisco, CA--Owned cogeneration that provides a portion 
        of the total electricity requirement for the plant.
          Lake Charles, LA--We own 36 percent of a local area 
        cogeneration plant, this percentage ownership supplies a 
        majority of the electricity needs for our plant.
          Bayway, NJ--Third-Party local area Cogeneration supplies 
        power to our plant on contract.
          Sweeny, TX--Third-Party local area Cogeneration supplies 
        power to our plant on contract.
          Borger, TX--Third-Party local area Cogeneration supplies 
        power to our plant on contract.
          Ponca, OK--Third-Party local area Cogeneration that supplies 
        power to our plant on contract--note, this cogeneration will 
        shut down in 2006.

    Question 7. Are there regulatory barriers at either the state or 
federal level that prevent the installation of cogeneration plants at 
your facilities that do not have them?
    Answer. No.

    Question 8. Would the presence of cogeneration facilities at your 
refineries reduce the recovery time during such emergencies?
    One-half of our U.S. refineries have owned cogeneration plants or 
local area third-party cogeneration plants with contracts to supply 
electricity to the refineries. Each major storm event we witnessed this 
year brought with it widespread devastation. An on-site or local area 
cogeneration plant is much like a refinery in terms of storm exposure 
to wind and flood damage.
    Storm damage to on-site cogeneration plants can occur to the same 
degree as the damage to the refinery. Additionally, cogeneration plants 
normally require connectivity to a regional electrical grid system in 
order to start up. Thus, damage to adjacent regional power distribution 
grids will have a significant impact on the ability to restart either 
the cogeneration plant or the refinery.
    As an example, following hurricane Rita, both our Lake Charles 
refinery and the local area third-party NISCO cogeneration plant, of 
which we own 36 percent, experienced hurricane damage. The same 
hurricane also produced widespread devastation in the region. The 
startup timing of both plants was dependent on the completion of 
repairs to the portions of the damaged regional power distribution 
system.
    In cases where storm devastation is this widespread, there are 
often many additional concerns for refinery restarts such as 
availability of refinery workers and contractors who have been 
displaced, critical local services like police and firefighting, fresh 
water supplies, etc. In cases of such severe devastation, the civil/
community needs may be given first priority for manpower or critical 
backup equipment such as portable generators, etc.

    Question 9. Witnesses at earlier hearings testified that there are 
a number of modern natural gas generation facilities in the Louisiana/
Texas area that are not used to their full capacity. Are there natural 
gas generation facilities in close proximity to your refinery 
facilities that could be used for backup generation at the refineries?
    Answer. Natural gas production and distribution was disrupted 
during the hurricanes so natural gas-fired power generation plants 
would not have helped. Unless the facilities are immediately adjacent, 
power lines would connect them to the refinery, and power lines were 
severely impacted during the hurricanes.

    Question 10. Would use of generators that are in close proximity to 
refineries to provide backup power during such emergencies mean that 
recovery times might be shortened, since the restoration time for a 
nearby facility might be less than the restoration time for the 
transmission facilities for traditional utilities?
    Answer. One-half of our U.S. refineries have owned cogeneration 
plants or local area third-party cogeneration plants with contracts to 
supply electricity to the refineries. Each major storm event we 
witnessed this year brought with it widespread devastation. An on-site 
or local area cogeneration plant is much like a refinery in terms of 
storm exposure to wind and flood damage. Storm damage to on-site 
cogeneration plants can occur to the same degree as the damage to the 
refinery. Additionally, cogeneration plants normally require 
connectivity to a regional electrical grid system in order to start up. 
Thus, damage to adjacent regional power distribution grids will have a 
significant impact on the ability to restart either the cogeneration 
plant or the refinery.
    As an example, following hurricane Rita, both our Lake Charles 
refinery and the local area third-party NISCO cogeneration plant, of 
which we own 36 percent, experienced hurricane damage. The same 
hurricane also produced widespread devastation in the region. The 
startup timing of both plants was dependent on the completion of 
repairs to the portions of the damaged regional power distribution 
system.
    In cases where storm devastation is this widespread, there are 
often many additional concerns for refinery restarts such as 
availability of refinery workers and contractors who have been 
displaced, critical local services like police and firefighting, fresh 
water supplies, etc. In cases of such severe devastation, the civil/
community needs may be given first priority for manpower or critical 
backup equipment such as portable generators, etc.
                        environmental questions
    Question 11. Please specify exactly which, if any, Federal or State 
environmental regulations have prevented your company from expanding 
refinery capacity or siting a new refinery, and documentation on the 
exact details of the project prevented.
    Answer. At this time we are not aware of any projects that have 
been directly prevented as a result of any specific Federal or State 
regulation. However, the Clean Air Act, Resource Conservation and 
Recovery Act, Clean Water Act, Toxic Substance Control Act, 
Comprehensive Environmental Response Compensation and Liability Act, 
Oil Pollution Act, Solid Waste Disposal Act, Hazardous and Solid Waste 
Amendments, etc. give rise to many regulatory programs. Each of the 
resulting regulatory programs gives rise to numerous design, operation, 
maintenance, monitoring and reporting obligations for refineries. 
Specifically, these obligations arise from (but are not limited to) New 
Source Review and Prevention of Significant Deterioration, Refinery 
Maximum Achievable Control Technology (MACT) I, Refinery MACT II, 
Heater and Boiler MACT, New Source Performance Standards (NSPS) Subpart 
J, NSPS Subpart K, NSPS Subpart GGG, NSPS Subpart VVV, NSPS Subpart 
QQQ, National Emissions Standards for Hazardous Air Pollutants (NESHAP) 
for Benzene Waste Operations, National Pollution Discharge Elimination 
System, Spill Prevention Control and Countermeasures, Stormwater 
Pollution Prevention, Hazardous Waste Regulations, etc. In addition, 
many of the environmental programs have extensive permitting processes 
which can require years of negotiation. Cumulatively, the programs add 
significant cost and time to refinery construction or expansion. 
Ultimately, the cost and time of the environmental requirements must be 
included in a refinery construction or expansion project, increasing 
costs and reducing the return on investment. All of these factors must 
be considered as part of the investment decision during the project 
planning process and make refinery construction and expansion efforts 
less attractive in the absence of significant improvement of the long-
term refining margin outlook.

    Question 11a. How much have so-called ``boutique fuel'' 
requirements added to the average retail price, where applicable, and 
the average wholesale price per gallon of the gasoline sold by your 
company?
    Answer. Boutique fuels generally represent barriers to market entry 
for refiners who do not have the flexibility to make these more 
difficult-to-produce specialty fuels. Additionally, not all 
transportation systems can accommodate the addition of a specialty 
grade without giving up some shipping flexibility. Boutique fuels also 
limit the amount of storage that can be held for any given fuel since 
these fuels must be held in separate tanks. These factors make meeting 
boutique fuels demand more difficult, particularly when operating 
problems occur and when these fuels are first introduced. In general, 
these factors increase the price to produce these specialty fuels but 
the magnitude depends on market conditions.
    In addition, the transition periods when products with new 
specifications are introduced tend to have greater price volatility 
since the supply system needs to go through an adjustment period to 
accommodate the new product. Similarly, when there are different 
seasonal specifications (e.g., summer and winter gasoline), inventories 
must be drawn down at the end of one season to enable switching to a 
different seasonal specification. The switching points will have low 
inventories and leave the market more vulnerable to supply disruption.

    Question 11b. If the EPA or the Congress were to act to minimize 
the number of ``boutique fuel'' formulations required by the states to 
protect air quality, how many should there be and what should the 
specifications of each be in order to maintain air quality and improve 
fungibility?
    Answer. EPAct 2005 has initiated the process of reducing the 
proliferation of boutique fuels. In addition, Congress directed the 
U.S. EPA to merge southern and northern grades of RFG, beginning the 
process of reducing the number of ``boutiques''. Congress also directed 
the Agency, in concert with the Department of Energy, to study the 
boutique fuels in this country to identify.and make recommendations to 
Congress for a more efficient federal fuel system.
    In reviewing the various boutique gasolines in this country, five 
(5) primary summer gasoline types evolve as reasonable candidates for a 
future slate. These are California gasoline, Conventional Gasoline at 
9.0 psi Reid Vapor Pressure (RVP), Conventional Gasoline at 7.8 psi 
RVP, Conventional Gasoline at 7.0 psi RVP, and RFG. However, states 
have adopted various versions of these fuels (sulfur controls, ethanol 
mandates, additives and other unique specifications or controls) that 
have complicated the delivery infrastructure and their 
interchangeability should shortages occur in one area when supplies are 
ample in another. This has become even more apparent with the impact of 
the hurricanes that severely tested the supply and distribution for 
motor fuels in this country.
    We support Congress in its efforts to look for means of 
rationalizing the number of boutique fuels. We believe this effort must 
include a review of the air quality benefits, fungibility, costs and 
supply impact to assure unintended consequences of taking action does 
not occur. Any such reduction of fuels on a federal basis must preempt 
state and local controls in order to assure no overlapping controls 
exist that defeat the intended purpose of the rationalization.
    The U.S. EPA has taken action to bring diesel fuels used on the 
highway and in non-road application to a common specification. However, 
we have recently begun to experience the bifurcation of the diesel 
markets by independent state action to adopt unique ``boutique'' diesel 
fuels beyond the federally directed specifications. Most recently the 
state of Texas has adopted a unique diesel fuel that is manufactured 
solely for the eastern half of Texas. Likewise, Minnesota this year has 
imposed a formulation mandate for diesel fuel sold in the state. 
California has had its unique diesel fuel for several years. These 
actions do not bode well for the future of a single nationwide diesel 
fuel with federally imposed ultra-low sulfur content to enable the next 
generation of low emission vehicles. We encourage Congress to include 
diesel fuel harmonization as further actions are considered relative to 
the proliferation of ``boutique'' fuels.

    Question 12. Streamlining New Source Review (NSR) permitting 
constraints was mentioned as an incentive that would encourage refiners 
to supply more product to the U.S. market. How many air quality permit 
applications for refinery expansions has your company submitted for NSR 
over the last ten years? How long did it take the EPA, or the 
applicable State, to approve or deny each permit application, after 
receipt of a complete permit application? What was the expected 
percentage increase in product output of the expansion?
    Answer. At least 20 major PSD (prevention of significant 
deterioration) permits have been applied for in the last 10 years. 
Permit approvals range from 9 to 24 months, with typical permit 
approval occurring in the 12- to 15-month window. In addition to major 
PSD permitting, numerous (well over 100) minor permitting activities 
have occurred at the same time. Permit approvals for minor permits 
range from 3 to 12 months with approvals generally occurring in about 6 
to 9 months. In addition to the permit approval process, some 
consideration should be given to the time required to prepare permit 
applications, which can take as much as 6 to 12 months (for bigger 
projects) before a permit is ready for submission to the agency.
    The permitting experiences relied on for the previous examples have 
resulted in relatively modest increases of either crude capacity or 
product conversion. Many past permits have resulted in no capacity 
increase but have focused on improved product quality, increased 
reliability, increased refinery efficiency, or have been required for 
regulatory compliance (e.g. to meet clean fuels requirements).
    Due to the evolution of implementation, the various permitting 
programs (federal, state and local) have had the effect of becoming a 
disincentive to some small, cost-effective projects which in the past 
were an important way a refinery met growing demand in a traditionally 
low margin environment. With larger projects having much longer 
implementation cycles (e.g. multiple years), overall flexibility to 
meet market fluctuations has diminished.

    Question 12a. How would you propose to streamline NSR and still 
maintain local air quality and prevent any increase in total annual 
emissions from such expansions?
    Answer. The following is a list of some specific potential options 
to consider for improving the permitting process:

   To mandate the use of the NSR Reform rules (not all states 
        have implemented to date)
   Codify that NSR programs cannot be altered by states
   Codify a 10-year refinery PAL (plantwide applicability 
        limit) which is applicable in all states, incorporate (and 
        reduce emissions) as new federal regulations are implemented, 
        but wait for the 10-year term of the PAL to end before applying 
        any State Implementation Plan-required emissions reductions due 
        to NAAQS (National Ambient Air Quality Standard) attainment
   For post-Katrina reconstruction, allow for expedited 
        permitting provided that objective is to rebuild
   Reasonable permit review--a deadline-based approach designed 
        to coordinate and eliminate overlap among numerous permitting 
        processes
   Energy projects get priority review due to national security 
        significance
   Time limits on government reviews (90 days)
   Grant DOE authority as facilitator, if requested, for 
        ensuring timely review of all permits to build new refineries 
        or add new capacity
   Initiate federal, state, and local review process 
        simultaneously
   Public participation addressed via 45-day comment period
   To allow project construction to begin concurrent with a 
        complete permit application to the state, rather than final 
        permit approval (e.g. expand allowable work to include actual 
        construction such as making tie-ins, building supports and 
        foundations, perhaps even building and setting new equipment 
        such as furnaces, vessels, exchangers, pumps, etc.)
   Encourage more flexible permit terms and conditions. For 
        example, allow physical changes and modifications to refineries 
        to be permitted ``prospectively'' (e.g. if a project is 
        anticipated to increase production, set allowable increases in 
        the permit for the anticipated pollutant increases even though 
        specific project information is unknown, thus allowing for 
        future modifications so long as the capped emission limits for 
        pollutants are not exceeded)
   Extend to refineries the recently proposed rule for electric 
        generating units which clarifies that Federal NSRIPSD 
        permitting is triggered only if there is an increase in the 
        maximum hourly emissions rate of a source which then yields a 
        significant increase in the annual mass emissions of the 
        pollutant in question. This proposal, dated Oct. 20, 2005 at FR 
        61081-61103 utilizes the New Source Performance Standard (NSPS) 
        as the initial emissions test for determining emissions 
        increase
   Calculate emission increases using past-actual to future-
        actual analysis instead of past actual to future potential

    Question 13. How much did the fuel specification waivers that have 
been granted by EPA to date, due to the supply disruptions caused by 
the hurricanes, reduce the average retail price of the gasoline or 
other refined products made by your company?
    Answer. ConocoPhillips' U.S. refining system was able to supply 
approximately 340 thousand barrels of extra gasoline due to the RVP 
waivers. This helped increase the supply of gasoline which would likely 
directionally reduce the price of gasoline. However, it is difficult to 
isolate the price impact since there are many other suppliers and 
operating factors that impact the overall supply and demand balance and 
marketplace. The diesel waivers proved to be burdensome and difficult 
to implement, resulting in minimal ConocoPhillips supply increases.

    Question 14. One witness indicated that ``getting two 100-year 
hurricanes in four weeks'' caused a great deal of chaos and disruption 
in the gasoline supply chain. The National Oceanic and Atmospheric 
Administration has projected that the country and the Gulf of Mexico 
have entered a cyclical period of 20-30 years during which the Gulf and 
coastal areas are likely to experience a greater frequency of 
hurricanes and higher odds of those hurricanes making landfall in the 
U.S. What preparations has your company made to deal with a greater 
hurricane frequency to decrease repetition of the supply disruption 
that occurred this year?
    Answer. First, it is worth noting that our industry has established 
voluntary pre-hurricane shutdown procedures to protect people, the 
environment and equipment. Shutting down the complex refinery processes 
that may be in the path of hurricanes is a proactive step to reduce the 
chances for more extensive damage. The severity of the recent 
hurricanes and local infrastructure devastation has been unprecedented. 
Our company has faced different challenges from hurricanes Katrina and 
Rita, and there is no single common solution or best practice for post-
hurricane disaster recovery. We have extensive existing best practices 
to repair and restart our refineries. The first step of any recovery 
effort is a critical assessment of the condition of all equipment and 
infrastructure. We will continue to work hard to develop future best 
practices to minimize downtime at our refineries and other critical 
infrastructure facilities.
    Our industry has shown great resilience in working within the 
storm-devastated areas to set priorities for both the good of the 
community and the energy industry. The API should be consulted directly 
for positions on potential standards or disaster recovery. We are 
active members of the API and will participate in any activities 
undertaken.

    Question 15. Over the last 50 years, average annual sea surface 
temperatures have increased in the Gulf of Mexico and, according to the 
National Academy of Sciences and other similar scientific expert 
bodies, are expected to continue increasing as the oceans continue 
warming due to accelerating global climate change. The Administration's 
Climate Action Report (2002) stated ``model simulations indicate that, 
in a warmer climate, hurricanes that do develop are likely to have 
higher wind speeds and produce more rainfall.'' What preparations has 
your company made to deal with a greater likelihood of greater 
hurricane intensity so as to decrease repetition of the disruption that 
occurred this year?
    First, it is worth noting that our industry has established 
voluntary pre-hurricane shutdown procedures to protect people, the 
environment and equipment. Shutting down the complex refinery processes 
that may be in the path of hurricanes is a proactive step to reduce the 
chances for more extensive damage. The severity of the recent 
hurricanes and local infrastructure devastation has been unprecedented. 
Our company has faced different challenges from hurricanes Katrina and 
Rita, and there is no single common solution or best practice for post-
hurricane disaster recovery. We have extensive existing best practices 
to repair and restart our refineries. The first step of any recovery 
effort is a critical assessment of the condition of all equipment and 
infrastructure. We will continue to work hard to develop future best 
practices to minimize downtime at our refineries and other critical 
infrastructure facilities.
    Our industry has shown great resilience in working within the 
storm-devastated areas to set priorities for both the good of the 
community and the energy industry. The API should be consulted directly 
for positions on potential standards or disaster recovery. We are 
active members of the API and will participate in any activities 
undertaken.

    Question 16. How has your company disclosed to shareholders and 
investors the risks associated with the potential impacts on your 
company's assets in the Gulf of Mexico or indirect impacts on its 
assets elsewhere, of either the expected greater frequency of 
hurricanes making landfall in the U.S. or the probable greater 
intensity of hurricanes in the region?
    Answer. All of ConocoPhillips worldwide operations, like all 
activities conducted by industry, governments, non-government 
organizations and private individuals, have a degree of external risk 
involved. This external risk might be as a result of acts of God such 
as extreme weather or earthquakes or man-made actions such as political 
change, terrorism or war. ConocoPhillips assesses and takes steps to 
manage these risks when warranted. ConocoPhillips seeks to be 
transparent about the location of all our operations through our Annual 
Report to Stockholders, Fact Book, our Forms 10-K and 10-Q and many 
other documents, allowing shareholders and investors to make their own 
evaluations of the degree of risk involved. We do include a safe harbor 
statement in our various documents describing the risks involved in any 
forward-looking statement. The Forms 10-K, 10-Q and Annual Report to 
Stockholders specifically state (among many other possible factors) 
that differences from forward-looking statements could result from 
potential disruption or interruption of our operations due to 
accidents, extraordinary weather events, civil unrest, political events 
or terrorism.
               financial, production and import questions
    Question 17. Please provide for each of last ten years your 
company's: Gross revenue of U.S. operations; Total capital expenditures 
in the U.S.; Net profit of U.S. operations.
    Answer. Please see chart below.

                                      CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER 2002)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Capital      Reinvestment                U.S. capital   Reinvestment
                                $MM                                 Net income   expenditures &   as % of net   U.S. net    expenditures &  as % of U.S.
                                                                        \1\     investments \2\     income     income \3\  investments \4\   net income
--------------------------------------------------------------------------------------------------------------------------------------------------------
1995..............................................................      469          (1,456)          310%         335           (923)           276%
1996..............................................................    1,303          (1,544)          118%       1,130           (841)            74%
1997..............................................................      959          (2,043)          213%         710         (1,059)           149%
1998..............................................................      237          (2,052)          865%         263           (936)           357%
1999..............................................................      609          (1,690)          278%         376           (919)           244%
2000 *............................................................    1,862          (8,460)          454%       1,250         (7,707)           617%
2001 *............................................................    1,661         (10,054)          605%       1,305         (8,887)           681%
2002 **...........................................................    (295)          (4,388)     ............    (910)         (2,043)      ............
2003..............................................................    4,735          (6,169)          130%       2,513         (2,493)            99%
2004..............................................................    8,129          (9,496)          117%       4,659         (2,520)            54%
2005..............................................................    9,850          (8,573)           87%.      5,626         (3,140)            56%
                                                                   -------------------------------------------------------------------------------------
  Average.........................................................    2,683          (5,084)          189%       1,569         (2,861)          182%
--------------------------------------------------------------------------------------------------------------------------------------------------------
* 2000 Includes Alaska acquisition--($6,443MM), 2001 Includes Tosco Acquisition--($7,038MM).
** The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this table. Sources:
\1\ Net Income. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2000 (ConocoPhillips 2004 Annual Report, page 108); 1999-1995 (Phillips 2001
  Annual Report, page 95).
\2\ Capital Expenditures & Investments. 2005 YID through September (ConocoPhillips 3Q, 10Q); 2004-2000 (ConocoPhillips 2004 Annual Report, page 108);
  1999-1995 (Phillips 2001 Annual Report, page 95).
\3\ U.S. Net Income. A domestic and international breakdown is provided externally for the major company segments (I.e. E&P and R&M). Midstream and
  Emerging businesses are internally reported as domestic and international and this breakdown is included in the above total. The Chemical and
  Corporate Segments have been included in the U.S. total.
\4\ U.S. Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2002 (ConocoPhillips 2004 Annual Report, page
  45); 2001 (ConocoPhillips 2003 Annual Report, page 49); 2000 (ConocoPhillips 2002 Annual Report, page 49); 1999 (Phillips 2001 Annual Report, page 47
  adj. to exclude discontinued ops.); 1998 (Phillips 2000 Annual Report, page 47 adj. to exclude discontinued ops.); 1997 (Phillips 1999 Annual Report,
  page 44); 1996 (Phillips 1998 Annual Report, page 42); 1995 (Phillips 1997 Annual Report, page 40).


 CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER
                                  2002)
------------------------------------------------------------------------
                                                                U.S. %
                                      Sales &     U.S. sales    sales &
                $MM                  operating   & operating   operating
                                    revenue \1\  revenue \1\    revenue
------------------------------------------------------------------------
1995..............................     13,368       11,310        85%
1996..............................     15,731       13,211        84%
1997..............................     15,210       12,633        83%
1998..............................     11,545        9,535        83%
1999..............................     15,396       13,019        85%
2000..............................     22,155       18,700        84%
2001..............................     24,892       22,466        90%
2002..............................     56,748       46,674        82%
2003..............................    104,246       74,768        72%
2004..............................    135,076       96,449        71%
2005..............................    128,184       95,461        74%
                                   -------------------------------------
  Average.........................     49,323       37,657        76%
------------------------------------------------------------------------
\1\ Sales & Operating Revenue, U.S. Sales & Operating Revenue. 2005 YTD
  through September (ConocoPhillips 3Q, 10Q); 2004-2002 (ConocoPhillips
  2004 Annual Report, page 97); 2001 (ConocoPhillips 2003 Annual Report,
  page 97); 2000 (ConocoPhillips 2002 Annual Report, page 92); 1999
  (Phillips 2001 Annual Report, page 83); 1998-1996 (Phillips 1998
  Annual Report, page 67); 1995 (Phillips 1997 Annual Report, page 63).

    Question 17a. Total taxes paid to the Federal Government
    Answer. Total U.S. and International tax provisions for the years 
2003, 2004 and 2005 (YTD September) were $3,744 million, $6,262 million 
and $7,068 million, as reflected in our financial statements. Of these 
amounts, federal and state tax provisions were $1,346 million, $2,604 
million and $3,159 million for the same time periods.

                                     CONOCOPHILLIPS REPORTED--TAX PROVISION
----------------------------------------------------------------------------------------------------------------
                                                     Federal
                       $MM                             tax      State tax  Total U.S.  International     Total
                                                    provision   provision                               company
----------------------------------------------------------------------------------------------------------------
2003.............................................    1,173         173       1,346         2,398        3,744
2004.............................................    2,335         269       2,604         3,658        6,262
2005 \1\.........................................    2,715         444       3,159         3,909        7,068
----------------------------------------------------------------------------------------------------------------
\1\ Total Company tax provision. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2003 (ConocoPhillips
  2004 Annual Report).


    Question 17b. Total taxes paid to State governments
    Answer. State tax provisions for the years 2003, 2004, and year-to-
date 2005 were $173 million, $269 million and $444 million 
respectively.

    Question 17c. Total donated to charity
    Answer. Over the past three years, ConocoPhillips' charitable 
donations were $36 million in 2003, $39 million in 2004 including $2 
million pledged for tsunami victims, and $44 million to date in 2005 
including $7 million pledged for Gulf Coast disaster relief.

    Question 18. How much additional petroleum refining capacity do you 
expect your company to install in the United States over the next 10 
years?
    Answer. Our current, formal forward planning for expanding our 
refining business generally goes out six years. ConocoPhillips plans to 
invest $4-5 billion, on top of our other refinery investments of $1-2 
billion per year. This multi-year investment program is aimed at 
growing our U.S. refining capacity by about 11 percent and improving 
our capability of handling lower quality oils in order to make 15 
percent more clean fuels such as gasoline, diesel and heating oil by 
the year 2011. These expansions will add enough clean fuels product to 
be the equivalent of adding one world-scale refinery to our domestic 
refining system.

    Question 19. What percentage of profits over the last 10 years has 
your company re-invested in capital, exploration, drilling, and 
production in the United States? Please provide an annual total for 
those U.S. expenditures and a clear breakdown.
    Answer. We have invested a total of $34.4 billion in capital 
expenditures and investments in the Exploration and Production (E&P) 
part of our business since 1995. This represents the equivalent of 147 
percent of our earnings for this period. For the same time frame, U.S. 
E&P capital expenditures and investments totaled $15.5 billion, or 116 
percent of U.S. E&P net income of $13.4 billion.

             EXPLORATION AND PRODUCTION CAPITAL EXPENDITURES AND INVESTMENTS RELATIVE TO NET INCOME
                                              [Millions of dollars]
                              [Phillips Petroleum Company Prior to September 2002]
----------------------------------------------------------------------------------------------------------------
                                                              U.S. E&P
                                                               capital                                 Capital
                                    U.S. E&P                expenditures    Total E&P               expenditures
                                     capital     U.S. E&P        and         capital     Total E&P       and
              Year                expenditures  net income   investments  expenditures  net income   investments
                                       and                    as a % of        and                    as a % of
                                   investments              U.S. E&P net   investments              U.S. E&P net
                                                               income                                  income
----------------------------------------------------------------------------------------------------------------
1995............................      (329)          239         138%         (856)          373         229%
1996............................      (294)          320          92%         (981)          493         199%
1997............................      (381)          360         106%       (1,346)          609         221%
1998............................      (311)         (32)          n/a       (1,406)         (67)
1999............................      (320)          379          84%       (1,079)          570         189%
2000 \1\........................    (7,394)        1,388         533%       (8,120)        1,945         417%
2001............................    (1,354)        1,342         101%       (2,516)        1,699         148%
2002 \2\........................    (1,205)        1,156         104%       (3,276)        1,749         187%
2003............................    (1,418)        2,374          60%       (4,508)        4,302         105%
2004............................    (1,314)        2,942          45%       (5,249)        5,702          92%
2005 \3\........................    (1,221)        2,965          41%       (5,018)        6,004          84%
                                 -------------------------------------------------------------------------------
  Total.........................   (15,541)       13,433         116%      (34,355)       23,379         147%
----------------------------------------------------------------------------------------------------------------
\1\ 2000 Includes Alaska acquisition--($6,443MM).
\2\ The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this table.
\3\ Through September 30, 2005.


    Question 20. What percentage of profits over the last 10 years has 
your company reinvested in non-petroleum energy supply and production 
in the United States? Please provide a total and the results of such 
investment.
    Answer. Over the last 10 years, including both Conoco and Phillips 
activities prior to the merger, we have invested about $435 million in 
alternative energy supply technologies. Chief among these is our 
investment in gas-to-liquids technologies, which target the ability to 
economically develop and produce stranded natural gas reserves. 
Stranded natural gas reserves are those located in areas which cannot 
currently be economically transported to market. In addition, we have 
invested in coal-to-liquids technologies, and are stepping-up our 
investment in coal/petroleum coke gasification technologies.

    Question 21. On average for the last ten years, please compare your 
company's overall capital expenditures in the United States to its 
expenditures elsewhere.
    Answer. Increased spending outside the U.S. is occurring because 
North America only has about 12 percent of the world's undiscovered oil 
and gas reserves (IEA estimate), and because of limited resource access 
to the most highly prospective areas in the United States. In addition, 
some of our spending outside the U.S. (e.g., Qatar LNG, Venezuela, 
Canada) will be to increase energy supplies to the U.S. in the form of 
LNG or unconventional heavy oil.

     CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER 2002)--CAPITAL EXPENDITURES AND
                                                   INVESTMENTS
----------------------------------------------------------------------------------------------------------------
                                                                    Capital        U.S. capital   U.S. % capital
                              $MM                                expenditures &   expenditures &  expenditures &
                                                                investments \1\  investments \2\    investments
----------------------------------------------------------------------------------------------------------------
1995..........................................................       (1,456)            (923)           63%
1996..........................................................       (1,544)            (841)           54%
1997..........................................................       (2,043)          (1,059)           52%
1998..........................................................       (2,052)            (936)           46%
1999..........................................................       (1,690)            (919)           54%
2000 *........................................................       (8,460)          (7,707)           91%
2001 *........................................................      (10,054)          (8,887)           88%
2002 **.......................................................       (4,388)          (2,043)           47%
2003..........................................................       (6,169)          (2,493)           40%
2004..........................................................       (9,496)          (2,520)           27%
2005..........................................................       (8,573)          (3,140)           37%
                                                               -------------------------------------------------
  Average.....................................................       (5,084)          (2,861)           56%
----------------------------------------------------------------------------------------------------------------
* 2000 Includes Alaska acquisition--($6,443MM), 2001 Includes Tosco Acquisition--($7,038MM).
** The merger of Conoco and Phillips in August, 2002 is not considered an acquisition in this table.
Sources:
\1\ Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2000
  (ConocoPhillips 2004 Annual Report, page 108); 1999-1995 (Phillips 2001 Annual Report, page 95).
\2\ U.S. Capital Expenditures & Investments. 2005 YTD through September (ConocoPhillips 3Q, 10Q); 2004-2002
  (ConocoPhillips 2004 Annual Report, page 45); 2001 (ConocoPhillips 2003 Annual Report, page 49); 2000
  (ConocoPhillips 2002 Annual Report, page 49); 1999 (Phillips 2001 Annual Report, page 47 adj. to exclude
  discontinued ops.); 1998 (Phillips 2000 Annual Report, page 47 adj. to exclude discontinued ops.); 1997
  (Phillips 1999 Annual Report, page 44); 1996 (Phillips 1998 Annual Report, page 42); 1995 (Phillips 1997
  Annual Report, page 40).


    Question 22. What percentage of your company's gross revenue was 
collected in the United States in each of the last 10 years?
    Answer.

 CONOCOPHILLIPS REPORTED (PHILLIPS PETROLEUM COMPANY PRIOR TO SEPTEMBER
                    2002)--SALES & OPERATING REVENUE
------------------------------------------------------------------------
                                                                U.S. %
                                      Sales &     U.S. sales    sales &
                $MM                  operating   & operating   operating
                                    revenue \1\  revenue \1\    revenue
------------------------------------------------------------------------
1995..............................     13,368       11,310        85%
1996..............................     15,731       13,211        84%
1997..............................     15,210       12,633        83%
1998..............................     11,545        9,535        83%
1999..............................     15,396       13,019        85%
2000..............................     22,155       18,700        84%
2001..............................     24,892       22,466        90%
2002..............................     56,748       46,674        82%
2003..............................    104,246       74,768        72%
2004..............................    135,076       96,449        71%
2005..............................    128,184       95,461        74%
                                   -------------------------------------
  Average.........................     49,323       37,657        76%
------------------------------------------------------------------------
Sources:
\1\ Sales & Operating Revenue, U.S. Sales & Operating Revenue. 2005 YTD
  through September (ConocoPhillips 3Q, 10Q); 2004-2002 (ConocoPhillips
  2004 Annual Report, page 97); 2001 (ConocoPhillips 2003 Annual Report,
  page 97); 2000 (ConocoPhillips 2002 Annual Report, page 92); 1999
  (Phillips 2001 Annual Report, page 83); 1998-1996 (Phillips 1998
  Annual Report, page 67); 1995 (Phillips 1997 Annual Report, page 63).


    Question 23. How much of your company's revenue collected in the 
United States was used to pay for purchasing crude oil from OPEC 
countries?
    Answer.

                      CONOCOPHILLIPS U.S.--ANNUAL CRUDE OIL PURCHASES FROM  OPEC COUNTRIES
                                                  [$ millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                          OPEC
                                                                                                       purhcases
                                                                   Purchases     Total     U.S. sales     as a
                                                        Direct     from OPEC   crude oil      and       percent
                        Year                           purchases   countries   purchases   operating    of U.S.
                                                       from OPEC   via third   from OPEC    revenue    sales and
                                                                    parties    countries               operating
                                                                                                        revenues
----------------------------------------------------------------------------------------------------------------
2003................................................    $2,099      $2,723      $4,822      $74,768        6.4%
2004................................................    $2,558      $4,790      $7,348      $96,449        7.6%
2005................................................    $3,626      $5,666      $9,292      $95,461        9.7%
----------------------------------------------------------------------------------------------------------------


    Question 24. Do you support S. 1794 or something like it to create 
gasoline and jet fuel reserves to ensure stability of price and supply? 
Should it be extended to diesel and other fuels like natural gas?
    Answer. The holding and management of a strategic gasoline reserve 
is complex and challenging, but deserves further study. Unlike the SPR 
crude oil reserve that only needs to get crude to 140 refineries, half 
of whose capacity are in three states, a strategic gasoline reserve or 
reserves will have to supply more than 1,500 terminals across all 
states. Also, unlike crude oil, it is difficult to store gasoline for 
long periods of time as the inventory must by turned over seasonally to 
match required products specifications and to avoid product (aging) 
degradation. Location is very important, as it must be away from areas 
that are likely to experience frequent supply logistics disruptions 
such as power outages and hurricanes to avoid the potential loss of 
power and disruptions to the distribution systems. The reserve must be 
distributed across the country since it is impossible to predict when 
and where there will be outages. Additionally, the numerous regional 
and local fuels specification requirements severely complicate design 
of strategic reserves due to the very large number of different grades 
required in different locations around the United States. In addition, 
the cost of storage is high so it is important to do a cost-benefit 
analysis to determine whether the costs of holding this inventory are 
worth the benefits of avoided disruption costs.
    It is also important that this reserve not be used for price 
management purposes but rather be saved for use when there is a 
physical disruption to supplies. It would not ultimately be beneficial 
to consumers to have the government remove the price signals when there 
is a supply disruption. Price rises during a disruption play an 
important role in the marketplace to moderate demand to avoid physical 
shortages and attract additional supplies from around the world.

    Question 25. On average for the last ten years, how much of what is 
refined by your company in the U.S. stays in the U.S.?
    Answer. In August, 2002, ConocoPhillips was formed from the merger 
of Conoco, Inc. and Phillips Petroleum Company. This merger and 
acquisition resulted in multiple accounting and computer systems, 
making it impossible to provide 10 years worth of data in the short 
time period provided. However, we were able to gather data from January 
2004. Using data from January 2004, over 98 percent of the clean 
products produced by our refineries stayed in the United States. Those 
products are finished gasoline, gasoline blending components, diesel, 
heating oil, kerosene and jet fuel.

    Question 25a. What amount of refined product did your company 
import in 2004 and in 2005?

------------------------------------------------------------------------
                 Imports in Bbls                      2004       2005
------------------------------------------------------------------------
Alkylate.........................................    306,313     411,110
Butane...........................................          0     236,357
Reformate........................................    339,545     405,341
Naphtha..........................................  2,696,303   3,405,293
Isomerate........................................     93,146           0
  Gasoline blendstocks...........................  3,435,307   4,458,101
Diesel...........................................    264,622     419,751
Light cycle oil..................................          0     126,369
  Diesel.........................................    264,622     546,120
RBOB.............................................  1,831,202   2,523,945
Conv gasoline....................................  2,182,254   3,578,795
  Finished gasoline..............................  4,013,456   6,102,740
                                                  ----------------------
Total............................................  7,713,385  11,106,961
------------------------------------------------------------------------


    Question 25b. What are your assumptions about demand growth in 
India in China?
    Answer. As China and India continue to grow and modernize their 
economies they will have relatively rapid energy demand growth. China 
and India today consume approximately 9 million barrels per day, or 
about 11 percent of world oil demand. We would agree with the U.S. 
Department of Energy's forecast that between 2002 and 2015 oil demand 
in these 2 countries will more than double. In 2015, China's share of 
world demand will be about 14 percent. However, we have already seen a 
substantial amount of this growth in the last two years, and the growth 
rate is expected to moderate. A significant amount of demand growth in 
the last year was due to the use of off-grid diesel generators 
resulting from power shortages. As China adds more coal-fired and other 
electric generation capacity, diesel demand use for purposes of power 
generation will likely be reduced.
    Natural gas presents a similar picture as oil for China and India 
but demand is less advanced than oil use due to the lack of 
infrastructure for distributing gas. According to the U.S. Department 
of Energy, these two countries consumed a little over 2 trillion cubic 
feet of natural gas in 2002, or 2.3 percent of worldwide demand of 92 
trillion cubic feet. DOE projects that by 2015, these two countries 
will be consuming over 5 trillion cubic feet, and by 2025, they will be 
consuming over 9 trillion cubic feet or about 6 percent of the world's 
natural gas consumption.
    DOE projects natural gas to overtake coal as the second largest 
source of energy by 2025. Growth in coal demand will be concentrated 
primarily in China and India, both of which possess sizable coal 
reserves. China and India today account for over 40 percent of global 
coal demand, and this will grow to about 48 percent of total world coal 
demand by 2025.

    Question 25c. How have your investments in the United States 
increased the energy security of the country?
    Answer. ConocoPhillips has been aggressively investing in refining 
and in developing new natural gas and crude supplies for the United 
States. By increasing supplies, these projects are increasing energy 
security in the United States.
    The projects described below are all very large and will require 
significant capital expenditures in the future.

   Over the past five years, ConocoPhillips has spent $4.0 
        billion worldwide, of which $3.2 billion was spent 
        domestically, to expand and modernize our refineries and 
        upgrade marketing operations.
   Going forward, we are planning an expanded incremental 
        investment program, whereby we expect to invest $4-5 billion, 
        on top of our other refinery investments of $1-2 billion per 
        year. This investment program is aimed at growing our U.S. 
        refining capacity by about 11 percent and improving our 
        capability of handling lower quality oils in order to make 15 
        percent more clean fuels such as gasoline, diesel and heating 
        oil by the year 2011. These expansions will add enough clean 
        fuels product to be the equivalent of adding one world-scale 
        refinery to our domestic refining system.
   ConocoPhillips is making major investments in North American 
        Arctic natural gas through the Mackenzie Delta and Alaskan 
        North Slope pipelines. The initial development of Mackenzie 
        Delta will access about 6 trillion cubic feet of gas, which is 
        expected to come on stream in the year 2011 at approximately 1 
        billion cubic feet per day. As other fields are added, the 
        pipeline will have the capacity to be expanded to 1.8 billion 
        cubic feet per day. The total cost of this pipeline is 
        estimated to be at least $6 billion.
   The Alaskan North Slope presently has an estimated 35 
        trillion cubic feet of natural gas, which would increase total 
        U.S. gas reserves by approximately 20 percent. When the 
        pipeline connecting this gas with the lower 48 market is 
        completed, about 4.0-4.5 billion cubic feet per day will be 
        added to natural gas supplies. This equates to about 8 percent 
        of present U.S. natural gas production. This project 
        exemplifies what we have been saying about capital-intensive 
        projects that require many years before we see a return on the 
        investment. The Alaska pipeline alone is expected to cost about 
        $20 billion and take ten years before the first cubic foot of 
        gas is sold on the market. In October 2005, ConocoPhillips 
        joined Governor Murkowski of Alaska in announcing that we have 
        reached an agreement in principle on terms and conditions that 
        would move the Alaskan natural gas pipeline closer to reality. 
        Once the agreement is completed by all gas owners, the Alaska 
        legislature will hopefully act on that agreement, passing it 
        quickly. While it is not a short-term solution, gas from Alaska 
        will, eventually, make a sizable contribution in addressing the 
        market problems we are anticipating for natural gas.
   ConocoPhillips is also investing aggressively in bringing 
        liquefied natural gas (LNG) to the U.S. market. We are 
        progressing LNG projects in Qatar and Nigeria and aggressively 
        pursuing projects in Russia, Venezuela and Australia. These are 
        all multi-billion dollar projects. We expect to bring our first 
        cargo of Qatari gas to the United States in 2009. We are also 
        developing an LNG supertanker to bring gas to the United 
        States. We are participating in the construction of an LNG 
        regasification facility at Freeport, Texas. We are pursuing a 
        second LNG regasification terminal in Compass Port, offshore 
        Alabama, although it is currently bogged down in the permitting 
        process. Investments in these two facilities are expected to 
        total over $1.5 billion. We are also pursuing permitting of 
        regasification facilities on the East and West Coasts as well 
        as an additional Gulf Coast terminal.
   To bolster U.S. crude supplies and improve energy security 
        through diversification of supply sources, ConocoPhillips is 
        expanding conventional crude production in Venezuela, and 
        continues to invest heavily in unconventional heavy oil 
        production in Venezuela and Canada. This crude supply will 
        likely come to the United States. Our company recently 
        announced that we will be partnering with a Canadian company to 
        develop the $2.1 billion Keystone pipeline, which will bring 
        over 400 thousand barrels per day of much needed Canadian heavy 
        oil production to our U.S. mid-continent refineries. We are 
        also building additional upgrading capacity in our refineries 
        to process unconventional heavy crude.
   While we are aggressively investing in the United States, we 
        could do much more if not deterred by U.S. policies. Increased 
        resource access and permit streamlining changes could open new 
        opportunities for furthering our nation's energy security.

    Question 26. What market signals will occur in advance of peaking 
world oil production and what is the appropriate policy or set of 
policies for the U.S. government to adopt when such signals occur?
    Answer. Many of the ``signals'' commonly quoted as signs of 
production peaking have alternative explanations and thus may be false 
signals. For example, the reduction in reserve-to-production ratios can 
be a sign of efficiency improvement, and doesn't necessarily mean that 
production is peaking. Similarly, lower reserve additions after the 
1980s reflect the fact that privatizations around the world opened up 
known reserves for development so that the industry could bring 
reserves to market without exploring as much with the associated risk. 
Returns and investment in this industry are highly cyclical so it is 
easy to mistake the downside of the investment cycle for a peak.
    In addition, peak forecasts often assume static technology and 
ignore the important role of technology in expanding the resource base 
that can be economically produced. Peak predictions also often ignore 
the role of unconventional oil and natural gas. For example, there are 
estimated to be 7 trillion barrels of unconventional oil in place 
(versus 3 trillion barrels of conventional) and two-thirds of that is 
in North America. Recovery rates are relatively low today but 
technological improvement will change that over time. Finally, peak 
forecasts often fail to take into account that host government tax 
rates may be reduced over time to offset rising costs in mature areas. 
This will extend the economic life of fields.
    To believe that the peak of global oil production was approaching, 
we would want to see an acceleration of decline rates in existing 
production and multiple years of high investment and drilling activity 
without much of an increase in overall production. Trends in lower 48 
natural gas production illustrate what happens when production 
approaches peak. In the early 2000s, there was a 50 percent increase in 
drilling rates and little appreciable production increase. Recovery 
rates per well are dropping steeply and existing production is 
declining at a rate of 30 percent per year, up from a rate of 15 
percent per year in the early 1990s. This trend will continue if new 
areas remain off limits for development.
    It would be prudent to prepare for the day global production peaks 
long before the signals occur. Governments around the world should be 
supportive of the development of alternative energy sources and fuel 
efficiency improvement today. When the signals do occur, we should see 
sustained higher oil prices, which will help commercialize the new 
technologies that have been developed.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. James M. Talent to 
                             James J. Mulva

    Question 1. The recent hurricanes have highlighted the need for 
increasing refinery capacity, which was already operating at a tight 
margin of 97 percent. While that is laudable for efficiency purposes, 
it allows no room for error in case of sudden outages or demand 
increases. What is the optimal amount of spare refining capacity to 
ensure a reliable supply of finished petroleum products at stable 
prices?
    Answer. The U.S. refining industry operates at a very high level of 
utilization and efficiency. In order to provide refined products at the 
most economic prices to the consumer, the markets take advantage of 
excess capacity outside of the U.S., allowing for relatively low-priced 
product imports. (The U.S. has imported petroleum products routinely 
for decades to meet consumer demand. In 2004, net gasoline imports were 
about 800 thousand barrels per day (mbd) or 9 percent of market needs.)
    Recently the U.S. experienced severe supply disruptions following 
Hurricanes Rita and Katrina. These interruptions, while severe, were 
also short-term in nature as demonstrated by gasoline markets self-
correcting to below pre-hurricane levels within a little over one 
month. During the recent hurricane impact periods, U.S. gasoline 
imports increased substantially, which helped restore the supply and 
demand balance.
    Furthermore, pricing impacts and inventory draws reflected these 
same short-term supply disruptions, with impacts mitigated by the 
proactive steps taken by the major oil companies to constrain wholesale 
prices and dramatically increase supplies.
    While the ``optimum'' will vary by location and how easy it is to 
obtain alternative supplies, we believe, and prices reflect, that 
global refining capacity has become too tight so we have plans in place 
to add refining capacity. Going forward, we are planning an expanded 
incremental investment program, whereby we expect to invest $4-5 
billion, on top of our other refinery investments of $1-2 billion per 
year. This investment program is aimed at growing our U.S. refining 
capacity by about 11 percent and improving our capability of handling 
lower quality oils in order to make 15 percent more clean fuels such as 
gasoline, diesel and heating oil by the year 2011. These expansions 
will add enough clean fuels product to be the equivalent of adding one 
world-scale refinery to our domestic refining system.
    We do not need any new government incentives to make these 
investments. However, we do need thorough--but expedited--permitting 
and regulatory environmental reviews so we can quickly make the 
investments, thereby adding capacity and refined product supply.

    Question 2. How has industry consolidation impacted the amount of 
spare production and refining capacity?
    The U.S. Federal Trade Commission in a study published in 2004 
stated that ``mergers of private oil companies have not significantly 
affected worldwide concentration in crude oil. This fact is important 
because crude oil prices are the chief determinant of gasoline 
prices.'' \2\ In the same report, the FTC concluded that despite some 
increases over time, concentration for most levels of the petroleum 
industry has remained low to moderate. This report also observed that 
industry developments have lessened the incentive to be vertically 
integrated throughout all or most levels of production, distribution 
and marketing. Several significant refiners have no crude oil 
production, and integrated petroleum companies today tend to depend 
less on their own crude oil production. Thus, there has been a trend of 
majors selling capacity to independent refiners. The FTC report 
concluded that mergers have contributed to the restructuring of the 
petroleum industry in the last two decades but have had only a limited 
impact on industry concentration.\3\
---------------------------------------------------------------------------
    \2\ U.S. Federal Trade Commission, Bureau of Economics, ``The 
Petroleum Industry: Mergers, Structural Change, and Antitrust 
Enforcement'', August 2004, page 12.
    \3\ U.S. Federal Trade Commission, Bureau of Economics, ``The 
Petroleum Industry: Mergers, Structural Change, and Antitrust 
Enforcement'', August 2004, page 16.
---------------------------------------------------------------------------
    There has been a reduction in the number of refineries being 
operated but it is not related to mergers. Between 1973 and 1981, 
government control on the pricing and allocation of crude oil favored 
small refineries and provided incentives for companies to own and 
operate small, inefficient refineries. The elimination of these 
government controls in 1981 spurred the eventual exit of many 
inefficient refineries. The number of domestic operable refineries 
declined from 319 in 1980 to 149 in 2004. According to the FTC, 
refinery closures overwhelmingly have involved small, relatively 
unsophisticated facilities.\4\ The oil industry has done a commendable 
job of expanding and increasing the utilization of existing refineries. 
Despite the fact that the closure of inefficient refineries reduced the 
total number of refineries by more than half since 1980, U.S. refining 
capacity fell by only 6 percent, and this impact was more than offset 
by efficiency improvements that allowed the industry to increase 
refinery runs by 14 percent. Additionally, there has been substantial 
excess capacity outside of the United States until recently, allowing 
for relatively low-priced product imports.
---------------------------------------------------------------------------
    \4\ U.S. Federal Trade Commission, Bureau of Economics, ``The 
Petroleum Industry: Mergers, Structural Change, and Antitrust 
Enforcement'', August 2004, page 7.
---------------------------------------------------------------------------
    Other issues constraining capacity that don't relate to 
consolidation are the historical weak returns in the refining industry 
and the need to invest a great deal of capital for reducing refinery 
emissions and making clean fuels. As a result of the strong economic 
recovery in 2004 and spending focused on clean fuels rather than 
expansion, demand growth during the recent economic recovery has 
outpaced supply growth.
    The two hurricanes exacerbated this tightness by disabling 5 
million barrels per day (mmbd) or nearly 30 percent of the nation's 
refining capacity at the peak (September 25, 2005, 4 mmbd shutdown for 
Rita, 879 mbd shutdown from Katrina).

    Question 3. Describe the degree of competition between refineries 
for crude oil supplies and sales to retailers. What percentage of crude 
oil processed in the U.S. is processed by integrated companies (i.e., 
those produce and refine) versus refined by independent refining 
companies?
    Integrated companies make up roughly 55 percent of total U.S. 
refining capacity.\5\ The balance of U.S. refining is made up of very 
large (e.g., Valero, the largest U.S. refiner) to much smaller 
independent companies. ConocoPhillips utilizes only 10 percent of its 
equity production in U.S. refineries. Like all other integrated 
companies, ConocoPhillips must compete for the balance of crude 
supplies from the same domestic and import markets as the independent 
refining companies.
---------------------------------------------------------------------------
    \5\ U.S. Department of Energy, EIA Website eia.doe.gov, Report of 
Capacity of Operable Petroleum Refineries by State as of 1/1/05.
---------------------------------------------------------------------------
    Integrated company `brands' make up roughly 60 percent \6\ of the 
total U.S. retail gasoline markets. Much of this market share is made 
up of branded jobbers (i.e., independent businesses that establish 
their own pump prices). The balance of the U.S. retail market is made 
up of independent and unbranded companies.
---------------------------------------------------------------------------
    \6\ Lundberg Survey Incorporated, Share of Market Data, June 2004 
(subscriber confidential).

    Question 4. How has the amount of refining capacity tracked changes 
in demand for gasoline and diesel over the last 30 years?
    Note: A graph accompanying this question has been retained in 
committee files.
    Answer. The refining industry has historically not attracted 
sufficient investment because of unattractive returns. Between 1990 and 
2002, it had a ROCE of 5.2 percent versus 7.1 percent for the total 
petroleum industry. Refining is highly capital intensive and the 
industry spends a great deal on mandated emissions reduction and clean 
fuels production, which generally do not have a return on investment. 
Additionally, there has been substantial excess capacity outside the 
U.S. until recently, allowing for relatively low-priced product 
imports.
    As a result of this low return, coupled with difficulties in 
permitting, no grassroots refineries have been built in the U.S. since 
the mid-1970s. For many of the same reasons, inefficient refineries 
that were not economic in a free market (built during small refinery 
entitlement program) were closed. However, the oil industry has worked 
diligently to expand and increase the utilization of existing 
refineries. Despite the fact that the closure of inefficient refineries 
reduced the total number of refineries by more than half since 1980, 
U.S. refining capacity fell by only 6 percent, and this impact was more 
than offset by efficiency improvements that allowed us to increase 
refinery runs by 14 percent.
    While the U.S. refining industry has the potential for making 
substantial amount of investment going forward in response to recent 
increases in refining margins and provisions of the National Energy 
Policy Act, substantial barriers remain for building grassroots 
refineries. The biggest barrier is that future refinery margins are not 
expected to be high enough to justify the high cost of grassroots 
building. The cost of expanding existing capacity is about half that of 
adding grassroots capacity so it is a more viable option. Additionally, 
there is still a strong need to streamline the permitting process and 
to provide more certainty to the future regulatory environment.

    Question 5. Explain to me your company's plan to increase refining 
capacity in the U.S. to meet the need for new refinery capability.
    Answer. We have announced a multi-year capital investment plan to 
increase capacity and improve utilization at nine of our twelve U.S. 
refineries. Going forward, we are planning an expanded incremental 
investment program, whereby we expect to invest $4-5 billion, on top of 
our other refinery investments of $1-2 billion per year. Measured in 
terms of improved output, the investments in the aggregate are 
anticipated to yield the equivalent of adding a world-scale refinery to 
the company's U.S. refining system.

    Question 6. EPAct 2005 removed the requirement to include 
oxygenates from gasoline, largely because of concerns over the use of 
MTBE. What is the impact on the price of removing oxygenates from 
gasoline?
    Answer. While EPAct 2005 removed the statutory requirement for 
oxygen in the federal formula for Reformulated Gasoline (RFG), 
immediately in California and after 270 days for the balance of the 
country upon enactment by the President of the United States, EPAct 
2005 did not affect the U.S. Environmental Protection Agency's 
regulatory requirement for oxygen in RFG. We understand from public 
statements by the EPA that the requirement continues to exist unless 
and until the Agency acts to remove it through regulatory process.
    In any case, we have not attempted nor do we believe it possible to 
estimate the impact, if any, on the price of removing oxygenates from 
gasoline. This is dependent in a major way upon the availability of 
other components, demand, imports, and other environmental constraints 
imposed on non-oxygenated gasoline. We note that the EPA's Tier 2 
gasoline sulfur standards are stepping down from a 300 parts per 
million cap limit to an 80 parts per million cap limit beginning 
January 1, 2006 and that the federally imposed renewable fuel standard 
also becomes mandatory beginning in the same time frame. The regulatory 
provisions defining the renewable program remain to be proposed. These 
two additional constraints may very well overwhelm any impact of 
removing the oxygen mandate from RFG when ultimately allowed by the 
EPA.

    Question 7. Are there other oxygenates that can be used in place of 
MTBE, such as using ethanol to make ETBE, and how does the cost of such 
alternative additives compare to the cost of gasoline?
    Answer. There may be other suitable oxygenates that can be used in 
gasoline in the United States. However, state government limitations, 
e.g. California and New York, suggests that ETBE and other ethers or 
heavy alcohols may not be considered acceptable substitutes in the 
United States. The only oxygenate of sizable market availability that 
we are aware of is ethanol. The cost of ethanol varies substantially 
but has historically been above the cost of that to produce and supply 
non-ethanol containing gasoline. Delivered cost of ethanol is dependent 
in a major way upon availability, subsidies, demand, imports, raw 
material costs and other features known best by the ethanol producers.

    Question 8. Have you studied the use of ETBE, the cost of 
converting MTBE plants and how long it would take to do so, and whether 
ETBE avoids the leakage/water contamination problems that were caused 
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE 
and use it to increase the volume of gasoline produced by a barrel of 
oil compare to the cost of expanding existing or adding new refinery 
capability?
    Answer. In the past, we have considered the blending characteristic 
of ETBE in gasoline and its impact on octane and other specification 
values for gasoline. However, we have not recently considered the cost 
of converting any MTBE plant to ETBE production because state 
government limitations, e.g. California and New York, suggest that ETBE 
and other ethers or heavy alcohols may not be considered acceptable 
substitutes in the United States. Additionally, we are not aware of any 
current ETBE blending in gasoline in the United States.

    Question 9. What, if anything, is preventing your company from 
using ETBE in place of MTBE?
    Answer. State government limitations, e.g. California and New York, 
suggest that ETBE and other ethers or heavy alcohols may not be 
considered acceptable substitutes in the United States.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Gordon H. Smith to 
                             James J. Mulva

    Question 1. I have a bill, S. 1743, to give the Federal Trade 
Commission, additional authority to prevent and punish price gouging in 
the aftermath of a major disaster. My bill provides effective authority 
to the Federal Trade Commission to protect consumers from being 
victimized in the wake of a disaster without hampering the normal 
functioning of the free market. It even recognizes that there are 
legitimate reasons why prices may increase. Do you think that this 
consumer protection authority should be available to the FTC?
    Answer. We concur with the statements of FTC Chairman Majoras, who 
testified before these Committees on November 8, 2005. Chairman Majoras 
noted that the large price-spikes reported in a few instances after the 
hurricanes quickly corrected themselves through normal market 
operations and that price-gouging legislation can actually harm 
consumers if it dampens natural market prices, which serve as an 
important market signal. Chairman Majoras concluded that federal price-
gouging legislation ``would unnecessarily hurt consumers'' and that 
``[e]nforcement of the antitrust laws is the better way to protect 
consumers.''

    Question 1a. Would this serve as a deterrent to price gouging by 
individual retailers?
    Answer. We believe the FTC Act already empowers the FTC to prohibit 
unfair trade practices that are detrimental to consumers.

    Question 2. Can you tell me why diesel prices continue to remain 
significantly higher than gasoline prices in Oregon?
    Answer. U.S. diesel prices are higher than gasoline prices due to a 
tighter global diesel supply-demand balance, which stems from the 
strong trend in Europe toward dieseling the passenger car fleet and 
robust diesel demand in Asia. Global and U.S. diesel demand have been 
and will likely continue to grow at a faster rate than gasoline demand. 
Thus, the trend of global diesel prices moving above gasoline prices is 
not likely to be reversed even when immediate supply losses from the 
hurricanes are restored.
    The long-term strengthening diesel prices was exacerbated by the 
hurricanes, which temporarily shut down nearly 30 percent of U.S. 
refining capacity at the peak. While the U.S. made up lost gasoline 
supplies through imports and specification waivers, diesel fuel did not 
have the same options. Diesel demand and price strength in Europe made 
it difficult for the U.S. to attract as much diesel as gasoline 
supplies. European refineries have excess gasoline production capacity 
due to dieselization so they were able to provide additional gasoline 
supplies. In addition, diesel prices gain strength in the winter as 
diesel is blended and/or re-graded into the heating oil market.
    Oregon must compete in the global and regional markets for diesel 
supplies and it often doesn't have as attractive logistics for 
obtaining products as other regional ports. Since Oregon does not have 
refineries, the state must import all of its fuels from states such as 
Washington, California or from foreign countries. Most fuel supplies 
are imported from Washington via pipeline (up to its maximum capacity) 
and marine shipments from California or foreign locations into 
Portland. While Oregon has logistical disadvantages that raise its 
supply cost, Oregon is mostly experiencing the same supply and demand 
and pricing trends that are being experienced by U.S. and global 
markets.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Jim Bunning to 
                             James J. Mulva

    Question 1. Some analysts believe that OPEC is approaching its 
current oil production capacity. Given this, are oil companies looking 
at alternative sources of energy, such as liquid fuels made from coal, 
in order to expand their business and maintain energy supplies for the 
United States? Please include a review of the level of investment your 
company is making this year and the projected investment over the next 
three years in coal to liquid fuels initiatives.
    Answer. We have not seen evidence that OPEC is approaching its peak 
capacity. Nevertheless, we believe it is important to develop new 
technologies to supplement existing supplies and ease the transition 
once peak oil production is reached. The points below highlight some of 
our activities in this area. The information reflects activities of 
both Conoco and Phillips prior to our merger in 2002 and the merged 
company since then. We have omitted forward-looking spending because it 
is confidential, competitively sensitive, and could mislead 
shareholders because there are a number of factors and approvals that 
need to occur before this spending can occur.
Coal-to-Liquids Activity (CTL)
    Includes:

   Specific Coal-to-products activities
   E-Gas gasification technology activities
   Related Gas-to-Liquids (GTL) activities
            CTL and Related Technology Development
   Offered support to University of Kentucky/Purdue/Southern 
        Illinois University to utilize Wabash River gasification 
        facility for the FT Development Center activities outlined in 
        the Energy Policy Act of 2005
   Various proprietary analysis and lab work
            Project Support
    Examples included below. This excludes proprietary studies and 
those that we are contractually committed to not disclose.

   Completed feasibility study for gasification project in 
        Illinois to refuel ammonia plant and provide syngas to coal-to-
        liquids demonstration plant (Rentech Development project with 
        Royster-Clark in East Dubuque, 5,000 barrels per day Fischer-
        Tropsch liquids)
   Considering proposals for feasibility studies to 6 
        prospective coal-to-liquids facilities.
   Presented at Gasification Technologies Conference that 
        ConocoPhillips was developing an E-Gas CTL template and 
        reference plant.
E-Gas Technoloqy Development Proqram Expenditures
   Spent $16 MM from 2003-2005.
Potential E-Gas/CTL Projects
_______________________________________________________________________

                          Program Description

          1. Technology Development--Coal to Gasoline
          2. Technology Development--Coal to Clean Diesel
          3. Technology Development--CTL Joint effort with DOE
                  a) Support initial studies with universities
                  b) Demonstration unit at Wabash (50% cost share)
          4. Project Development efforts--CTL Td Party licensing
                  a) Development of E-Gas coal-to-liquids template
                  b) Proposal preparation for commercial CTL requests
          5. Potential Project Development

_______________________________________________________________________
ConocoPhillips Fischer-Tropsch (F-T) Technology Development Program--
        Related to GTL Program
    Highlights:

   Developed proprietary reactor system for conversion of 
        synthesis gas to diesel via Fisher-Tropsch technology
   Developed proprietary upgrading scheme to maximize 
        production of distillates from F-T derived materials
   Participated in DOE program to better understand and improve 
        performance of F-T derived fuels
   Developed significant intellectual property portfolio for F-
        T technology
   Operated 400 barrel per day demonstration plant in Ponca 
        City, Oklahoma for more than one year
   Continuing technology development and optimization at lab 
        and pilot plant scale, including catalyst development
Actual Proqram Expenditures since Program Inception
   Note that spending for programs in individual years is 
        confidential, proprietary information that cannot be disclosed 
        for competitive reasons or due to confidentiality agreements

------------------------------------------------------------------------
 
------------------------------------------------------------------------
1997...............................  ...........  Catalyst screening and
                                                   laboratory set-up
1998...............................  ...........  Catalyst development
                                                   at laboratory scale;
                                                  Preliminary flowsheet
                                                   development
1999...............................  ...........  Continued lab scale
                                                   development and
                                                   initial pilot plant
                                                   work
2000...............................  ...........  Technology development
                                                   at lab and pilot
                                                   plant scale
2001...............................  ...........  Continued technology
                                                   development at lab
                                                   and pilot plant
                                                   scale;
                                                  Ultraclean fuels
                                                   program work with DOE
                                                   using FT diesel
2002...............................  ...........  Continued technology
                                                   development at lab
                                                   and pilot plant
                                                   scale;
                                                  Continuation of DOE
                                                   fuels program;
                                                  Construction of
                                                   Demonstration Plant
                                                   for scale-up of
                                                   technology
2003...............................  ...........  Continued technology
                                                   development at lab
                                                   and pilot plant
                                                   scale;
                                                  Continuation of DOE
                                                   fuels program
                                                  Complete Demo Plant
                                                   construction and
                                                   begin operations of
                                                   it
2004...............................  ...........  Continued technology
                                                   development at lab
                                                   and pilot plant
                                                   scale;
                                                  Full operations of
                                                   Demonstration Plant
2005...............................  ...........  Continued technology
                                                   development at lab
                                                   and pilot plant
                                                   scale;
                                                  Operated Demonstration
                                                   Plant
                                                  Optimization of
                                                   technology
  Total............................     $184 MM   Total portion of
                                                   actual GTL
                                                   expenditures that
                                                   apply to CTL
------------------------------------------------------------------------


    Question 2. I have been concerned with the lag time between the 
wholesale cost of a barrel of oil and the retail price of a gallon of 
gasoline. As we saw following the hurricane, in an ascending market 
where wholesale oil prices increase, there is a lag period of a few 
days before retail gas prices reflect this change. Similarly one would 
expect a lag in a descending market. My concern is that retail prices 
are not dropping as quickly as they rose, relative to the change in oil 
prices. Could you explain why price movements vary during a complete 
market cycle and whether you believe any part of the energy industry is 
unfairly profiting from this price lag?
    Answer. The price of crude oil impacts the price of gasoline. 
However, additional factors such as regional spot markets affect retail 
street prices as well. Crude oil is sold on the world market. It is 
priced based on its own buyers and sellers. Directionally, retail pump 
prices are impacted by crude oil prices; however the impact may be 
delayed because of regional gasoline spot markets or may be 
overshadowed by regional spot market events. Crude oil represents 
roughly 50 percent of the cost per gallon of gasoline, so ultimately an 
effect is seen albeit, delayed.
    During the recent hurricanes, refined product supply was impacted 
more than crude supply. The United States lost nearly 30 percent of its 
total refining capacity at the peak and this substantially reduced the 
industry's ability to supply the market with gasoline and diesel. 
Refined product prices rose as a result of this imbalance to moderate 
demand, attract new supplies from overseas and restore the supply/
demand balance. The hurricanes also shut down one million barrels per 
day of Gulf of Mexico crude production. This event normally would 
create a significant shortage of U.S. crude oil supply and a large, 
rapid associated increase in crude oil price. However, with about two 
millions barrels per day of U.S. refining down for much of the same 
period and a release of crude from the U.S. Strategic Petroleum 
Reserve, a severe crude shortage did not develop and the crude price 
increase was tempered.
    The branded pump price changes lag spot product price changes. This 
minimizes dramatic upward changes in cost for independent marketers and 
consumers. The result is that during a rising market, branded customers 
are insulated from steeply rising costs. Except for 356 retail 
locations (including fee-operated stores), ConocoPhillips does not sell 
at the retail level. This accounts for approximately 4.3 percent of 
total gallons sold through our U.S. marketing operations. Pump prices 
are set in the marketplace with independent marketers posting prices 
based on their business economics and supply and demand fundamentals. 
In a rising market, pump prices, set by independent marketers, lag spot 
product prices. This ultimately lessens the impact on the driving 
public. The result for suppliers during a rising market is negatively 
impacted marketing margins.
    The appearance of retail prices rising more than they later fall 
(price asymmetry) can be misleading. Because of time lags in the 
gasoline distribution system, retail prices may continue to rise even 
after wholesale prices have begun falling, giving the appearance of 
pattern price asymmetry. However, when allowance is made for the lagged 
adjustment times, the perceived pattern asymmetry may disappear. The 
GAO studied gasoline price asymmetry and concluded that during a market 
price shock, retail gas prices would rise and fall in price 
symmetrically, with over half the price adjustment occurring in the 
first month, but with complete price adjustment to shocks taking as 
long as 17 weeks.\7\
---------------------------------------------------------------------------
    \7\ U.S. General Accounting Office, Energy Security and Policy: 
Analysis of the Pricing of Crude Oil and Petroleum Products, Report 
GAO/RCED-93-17, U.S. Government Printing Office (Washington, DC, March 
1993).

    Question 3. Boosting our domestic energy production is vitally 
important not only to our economy but also to our national security. 
Many of the countries we import oil from today are unstable, 
jeopardizing the reliability of sustained production. Please provide a 
chart for each of the last five years reflecting the percentage of your 
exploration and production budget that is invested in the United States 
versus that invested overseas. Please also provide a chart reflecting 
your current projections of the percentage of your exploration and 
production budgets that will be allocated to projects in the United 
States versus overseas for the next five years.
    Answer. The chart below provides historical information for U.S. 
and international exploration and production capital expenditures. 
While not yet approved, it is anticipated that the company's Board of 
Directors will approve various capital expenditures during the next 
five years with the result that between 18-27 percent of new capital 
expenditures will be located in the United States.
    While expenditures tend to shift with opportunities outside the 
United States, note that a significant portion of the capital 
expenditures outside of the United States will be directed towards 
increasing supplies that will go to the United States (e.g., LNG 
projects, Canadian oil sands).

                                            E&P CAPITAL EXPENDITURES
                                                   [$Millions]
----------------------------------------------------------------------------------------------------------------
                                                              U.S. E&P    International    Total E&P    U.S. E&P
                                                               capital     E&P capital      capital     capital
                           Year                             expenditures   expenditures  expenditures   as % of
                                                                 and           and            and      total E&P
                                                             investments   investments    investments   capital
----------------------------------------------------------------------------------------------------------------
2000 \1\..................................................     (7,394)         (726)        (8,120)       91%
2001 \1\..................................................     (1,354)       (1,162)        (2,516)       54%
2002 \2\..................................................     (1,205)       (2,071)        (3,276)       37%
2003......................................................     (1,418)       (3,090)        (4,508)       31%
2004......................................................     (1,314)       (3,935)        (5,249)       25%
2005 \3\..................................................     (1,221)       (3,797)        (5,018)       24%
----------------------------------------------------------------------------------------------------------------
\1\ Phillips heritage only prior to merger as reported.
\2\ COP after August 30, 2002. Phillips prior to that.
\3\ Through September 30, 2005.
Note: Year 2000 includes Alaska acquisition. The merger of Conoco and Phillips in August 2002 is not considered
  an acquisition in this table.


    Question 4. The disruption caused by the recent hurricanes 
displayed the United States' vulnerability when it comes to domestic 
energy supply and production. What suggestions do you have to 
strengthen our energy supply and production capability?
    Answer. This country needs additional refining capacity, pipelines, 
and other critical energy infrastructure to be added in the United 
States or in markets that can serve the United States. The private 
sector will likely make these investments without need of any new 
government incentives now that the market is providing signals that 
this capacity is needed. However, the industry does need governments at 
all levels to be thorough--but at the same time--to streamline 
permitting and environmental review processes so we can make these 
investments and add energy supplies.
    We think serious consideration should be given to the issue of 
access to resources. ConocoPhillips is not pursuing the opening of 
national parks, the Everglades and other such sensitive areas to energy 
development. But with the entire East and West Coasts, the Eastern Gulf 
of Mexico and key areas in Alaska all closed to entry, it is 
understandable why supply/demand is tight. The industry's only access 
to new offshore development remains the Central and Western Gulf of 
Mexico.
    The Eastern Gulf of Mexico probably has more natural gas potential 
for consumers than about any place in the lower 48 states. When outer 
continental shelf lease sale 181 was withdrawn from development, 
another key prospect for finding badly needed natural gas reserves was 
removed from consideration. We would encourage the Senate to consider 
reinstating that sale and revisiting access in other areas. Our 
industry has the technological know-how and the track record necessary 
to protect Florida's treasures and, at the same time, explore and 
produce in the Eastern Gulf in a safe and environmentally responsible 
manner.
    The Rocky Mountain region of the country is another area where new 
natural gas production can make a difference. But the leasing and 
permitting process has hampered development in areas such as the San 
Juan basin of New Mexico and the Powder River basin to the north. 
Funding and staffing appear to be improving but continue to be key 
challenges in these areas. Local BLM personnel are doing a commendable 
job with the resources they have but more funding for permitting and 
related staffing must be directed to those areas.
    Our company is particularly concerned about permitting and siting 
issues associated with building new LNG receiving terminals. LNG offers 
one of the most promising options for meeting the growing natural gas 
needs of American consumers in the near term. The permitting and 
approval of new regasification terminals are occurring significantly 
slower than we expected, and many terminals are being delayed or may be 
cancelled altogether due to local opposition. We are concerned that all 
of the new terminals will be sited in the U.S. Gulf Coast because of 
difficulties in permitting terminals closer to other consuming regions. 
Recent hurricanes demonstrated the need to diversify the location of 
key energy infrastructure.
    The siting of LNG terminals was addressed in earlier energy policy 
legislation. However, the Federal Government, the states and the 
individual localities where these facilities are planned need to have 
continued dialogue and cooperation on siting issues. There also needs 
to be better cooperation among the various federal agencies charged 
with evaluating and permitting these facilities.
    Our energy supply and production capability can only be 
strengthened by the development of all energy sources--coal, including 
coal gasification, nuclear, alternative energy with appropriate 
environmental safeguards--as well as conservation and efficiency 
standards. We will need to include all of these to diversify supply 
sources and put some needed slack back in our system.

    Question 5. It has been suggested that the United States consider 
developing a strategic gasoline and natural gas reserve, similar to 
Strategic Petroleum Reserve we currently have. Some analysts suggest 
that such reserves may minimize price spikes in these commodities 
during periods of market supply disruptions. What are your views on 
whether a strategic natural gas or gasoline reserve would be feasible 
and whether they might help minimize price increases during periods of 
market uncertainty?
    Answer. The holding and management of a strategic gasoline reserve 
is complex and challenging, but deserves further study. Unlike the SPR 
crude oil reserve that only needs to get crude to 140 refineries, half 
of whose capacity is in three states, a strategic gasoline reserve or 
reserves will have to supply more than 1,500 terminals across all U.S. 
states. Also, unlike crude oil, it is difficult to store gasoline for 
long periods of time as the inventory must by turned over seasonally to 
match required products specifications and to avoid product (aging) 
degradation. Location is very important as it must be away from areas 
that are likely to experience frequent supply logistics disruptions 
such as power outages and hurricanes to avoid the potential loss of 
power and disruptions to the distribution systems. The reserve must be 
distributed across the country since it is impossible to predict when 
and where there will be outages. Additionally, the numerous regional 
and local fuels specification requirements severely complicate design 
of strategic reserves due to the very large number of different grades 
required in different locations around the United States. In addition, 
the cost of storage is high so it is important to do a cost-benefit 
analysis to determine whether the costs of holding this inventory are 
worth the benefits of avoided disruption costs.
    It is also important that this reserve not be used for price 
management purposes but rather be saved for use when there is a 
physical disruption to supplies. It would not ultimately be beneficial 
to consumers to have the government remove the price signals when there 
is a supply disruption. Price rises during a disruption play an 
important role in the market place to moderate demand to avoid physical 
shortages and attract additional supplies from around the world.
    A strategic natural gas reserve is feasible, although a 
sophisticated analysis would be advisable to determine the potential 
effectiveness. Working gas storage capacity in the United States 
exceeds 3.3 trillion cubic feet. Storage capacity could be expanded to 
facilitate a strategic reserve. Cost for such an expansion would be 
influenced by various factors including the type of storage facilities 
required, injection/withdrawal capacities, pipeline interconnections 
and the cost to acquire the gas to be placed in storage. Gas storage 
facilities include depleted reservoirs, aquifers, salt caverns and LNG 
storage tanks. Each type of facility has different technical and 
economic characteristics. Key factors that would determine if strategic 
gas reserves could influence price volatility in the manner desired 
include: (1) location of stored gas relative to load centers, (2) the 
rate at which stored gas could be delivered to the pipeline system, and 
(3) the ability of the downstream pipeline infrastructure to move gas 
to market without constraint.

    Question 6. China is becoming a bigger world oil player. This not 
only has tightened the world oil market but also has produced national 
security concerns for us. What concerns or problems do you see have 
arisen since China became a bigger world energy player?
    Answer. China is reaching a phase of its economic development that 
is commodity-intensive, and per-capita income in some regions has 
reached a level that allows Chinese consumers to purchase cars and 
appliances, resulting in sharply rising energy consumption. But there 
are still many consumers in China who do not have access to adequate 
energy resources. For example, according to the International Energy 
Agency, there are over 700 million people in China who rely on 
traditional biomass for cooking and heating today. The World Health 
Organization estimates that, each year, 1.6 million women and children 
in developing countries are killed by the fumes from indoor biomass 
stoves. Over half are in China and India. As incomes rise in developing 
countries, households typically switch to modern energy services for 
cooking, heating, lighting and electrical appliances and transport 
fuels for personal mobility. An important means to reducing global 
poverty is to increase developing country access to energy. However, 
rapid growth in demand in China and other developing countries is 
tightening the global energy supply/demand balance. The United States 
can do its part in allowing affordable energy to citizens of the U.S. 
and the world by promoting conservation and the more efficient use of 
energy. The United States can also play a role in transferring more 
efficient energy technologies to China and other developing countries.

    Question 7. While there have been expansions and efficiency gains 
at existing refineries, no refinery has been built in the United States 
in 30 years. Since the oil companies are now making record earnings, 
are there plans to build new refineries in the United States?
    Answer. We don't have knowledge of other companies' expansion plans 
but ConocoPhillips is planning an expanded incremental investment 
program, whereby we expect to invest $4-5 billion, on top of our other 
refinery investments of $1-2 billion per year. This investment program 
is aimed at growing our U.S. refining capacity by about 11 percent and 
improving our capability of handling lower quality crude oils in order 
to make 15 percent more clean fuels such as gasoline, diesel and 
heating oil by the year 2011. These expansions will add enough clean 
fuels capacity to be the equivalent of adding one world-scale refinery 
to our domestic refining system.
    While the U.S. refining industry has the potential for making a 
substantial amount of investment going forward in response to recent 
increases in refining margins, substantial barriers remain for building 
grassroots refineries. The biggest barrier is uncertainty about future 
investment returns. Financial returns over the past three decades have 
usually been very low. While returns in the last two years have greatly 
improved, it takes about five years to build a refinery, increasing the 
risk that future margins many not cover investment costs. The cost of 
expanding existing capacity is a more viable option because expansions 
cost about half that of adding grassroots capacity and they can be done 
much more quickly.\8\ Additionally, there is still a strong need to 
streamline the permitting process and to provide more certainty in the 
future regulatory environment. The International Energy Agency 
concluded in its latest World Energy Outlook that in OECD North America 
it is ``virtually impossible to build a grassroots refinery,'' citing 
``environmental restrictions and local resistance.'' \9\
---------------------------------------------------------------------------
    \8\ Bear Steams, Not in My Backyard Report--The Prospects and 
Pitfalls of a Grassroots Refinery, October 4, 2005.
    \9\ International Energy Agency, World Energy Outlook 2005, 
November 2005, page 97.

    Question 8. The 2005 Energy Bill implemented a controlled phase-out 
of MTBE. Many companies, however, are planning on completely halting 
its use. How will a sudden halt of the use of MTBE affect the gasoline 
market and refineries?
    Answer. A refinery using MTBE today to produce RFG and 
discontinuing its use will be impacted by the reduction of a high 
octane/low RVP blendstock used for gasoline production. Should the U.S. 
EPA remove the oxygen mandate in RFG, a refinery would have various 
options in addressing this loss of blendstock, including the blending 
of other hydrocarbon products and/or possibly the addition of ethanol, 
reducing delivered pool octane by shifting product slates and/or 
grades. How the market reacts to these changes remains indeterminate 
and highly dependent upon other regulatory and/or market constraints on 
the system as well as demand for the product types.

    Question 9. I have noticed very large differences between the price 
of gasoline in different areas of the country. For example, I recently 
saw gasoline in northern Virginia that was much more expensive than 
gasoline in northern Kentucky. Please explain why there can be such a 
significant difference in gasoline prices in different areas of the 
country.
    Answer. Although price levels vary over time, U.S. Department of 
Energy EIA data indicate that average retail gasoline prices tend to 
typically be higher in certain states or regions than in others. DOE 
attributes these differences to the following factors:
    Proximity of supply--Areas farthest from the Gulf Coast (the source 
of nearly half of the gasoline produced in the U.S. and, thus, a major 
supplier to the rest of the country), tend to have higher prices. The 
proximity of refineries to crude oil supplies can even be a factor, as 
well as shipping costs (pipeline or waterborne) from refinery to 
market.
    Supply disruptions--Any event which slows or stops production of 
gasoline for a short time, such as planned or unplanned refinery 
maintenance can prompt bidding for available supplies. If the 
transportation system cannot support the flow of surplus supplies from 
one region to another, prices will remain comparatively high.
    Competition in the local market--Competitive differences can be 
substantial between a locality with only one or a few gasoline 
suppliers versus one with a large number of competitors in close 
proximity. Consumers in remote locations may face a trade-off between 
higher local prices and the inconvenience of driving some distance to a 
lower-priced alternative.
    Environmental programs--Some areas of the country are required to 
use special gasolines. Environmental programs, aimed at reducing carbon 
monoxide, smog, and air toxics, include the federal and/or state-
required oxygenated, reformulated, and low-volatility (evaporates more 
slowly) gasolines. Other environmental programs put restrictions on 
transportation and storage. The reformulated gasolines required in some 
urban areas and in California cost more to produce than conventional 
gasoline served elsewhere, increasing the price paid at the pump.
    State and local taxes--There are also substantial differences in 
tax rates between states. For example, Rhode Island has a gasoline tax 
of 30 cents per gallon, while the state of Georgia has a gasoline tax 
of 7.5 cents per gallon.
    The price differences between markets are normally a result of 
differences in the balance of supply-demand and the cost of supply. An 
area with restricted supply or higher cost supply will generally have 
higher prices than an area with balanced supply-demand and/or lower 
cost of supply.
    The comparison between prices in northern Virginia and northern 
Kentucky can be explained by the first two factors--proximity of supply 
and supply disruptions. After the recent hurricanes, U.S. Gulf of 
Mexico refining was significantly impacted and a very large percentage 
of area refining capacity (close to 30 percent of U.S. capacity at 
peak) shut down. In addition, major distribution and pipeline systems, 
like the Colonial product pipeline, were also shut down as a result of 
flooding and loss of power from the hurricanes. This situation 
restricted gasoline production and supply from the Gulf Coast refining 
center to the East Coast and parts of the Mid-continent. In the example 
referenced of northern Virginia and northern Kentucky, the impact of 
Gulf Coast refining and Colonial pipeline shutdowns created a 
significant shift or difference of supply-demand balances between these 
two areas. Northern Virginia, which derives its supply from the 
Colonial pipeline, is at the end of the pipeline. Thus, this area lost 
a significant volume of gasoline supplies due to the refinery and 
pipeline outages caused by the hurricanes. This loss of supply, and the 
fact the demand was not impacted by the hurricanes, created a shortage 
of supply for the area, resulting in higher gasoline prices. In 
contrast, northern Kentucky is supplied by local/regional refineries 
and pipelines not directly impacted by the hurricanes. Thus, this area 
did not experience the same degree of supply disruption. The net result 
was greater spot and pump price increases in Virginia, due to more 
direct impacts from the hurricanes and loss of normal supply.

    Question 10. Below are several questions on oil and the commodities 
futures market: When was oil first traded on the world-wide commodities 
futures market?
    Answer. The two major world-wide futures markets for trading crude 
oil are the New York Mercantile Exchange (U.S.) and the 
InterContinental Exchange (ICE--formerly known as the International 
Petroleum Exchange in London). The International Petroleum Exchange was 
founded in 1980 and the first futures contract on gas oil (heating oil) 
was introduced the following year. The International Petroleum Exchange 
launched Brent futures in June 1988.
    The New York Mercantile Exchange (NYMEX) pioneered the development 
of energy futures and options contracts. The heating oil contract 
started trading in 1978, light sweet crude oil in 1983 and unleaded 
gasoline in 1984.

    Question 10a. Would the price of oil be affected if oil was taken 
off the commodities futures market and no longer traded?
    Answer. The futures market is helpful in having an efficient, low-
cost market. First, the futures market provides market liquidity and 
price (discovery) transparency. Second, the futures market provides a 
means to `hedge' physical market risk. And third, the futures market 
provides a valuable means to manage `credit' risk. If the futures 
market did not exist, all three of these benefits would be lost and the 
price of oil could increase. Without the ability to hedge, the risk of 
future physical price increases must be built into the current (prompt) 
prices as insurance against these potential price increases. Without 
the ability to manage counterparty (contract performance) `credit 
risk,' the cost of this risk will likely be built into the current 
physical prices as insurance against non-performance (bad debt). And 
further, the lack of price discovery would make the market 
inefficient--as it was in the past. The only available prices prior to 
the futures market were company/producer postings. These postings were 
set by a very few entities (i.e. lacked liquidity and price discovery) 
and actual sales/purchases physical prices were commonly discounts or 
premiums to published postings. (These transactions were often company 
confidential and not transparent to the general market). This made it 
extremely difficult for buyers and sells to know what `fair market 
value' was at any point in time or at different locations. Also, this 
gave considerable leverage (market knowledge) to a relatively few 
companies who executed a sufficient number of transactions to 
understand the market.

    Question 10b. Would oil then be bought and sold as a true supply 
and demand product?
    Answer. The oil market today is highly liquid and efficient, with 
prices normally set by supply and demand conditions, including seasonal 
specification changes. The price is also impacted by factors that can 
affect future supply and demand and cost (e.g., transportation, 
storage, risk, etc.) Eliminating the connection to the futures market 
will make the current markets less efficient and directionally increase 
prices from today. First, the futures market provides market liquidity 
and price (discovery) transparency.
    Second, the futures market provides a means to `hedge' physical 
market risk. And, third the futures market provides a valuable means to 
manage `credit' risk. If the futures market did not exist, all three of 
these benefits would be lost and the price of oil could increase. 
Without the ability to hedge, the risk of future physical price 
increases must be built into the current (prompt) prices as insurance 
against these potential price increases. Without the ability to manage 
counter party (contract performance) `credit risk', the cost of this 
risk will likely be built into the current physical prices as insurance 
against non-performance (bad debt).
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Pete V. Domenici to 
                             James J. Mulva

    Question 1. What are you doing to bring oil prices down?
    Answer. Oil prices have already been reduced significantly since 
Hurricanes Katrina and Rita made landfall as the temporary period of 
higher prices attracted new supplies and brought the market back in 
balance. According to U.S. Department of Energy data, the spot price of 
WTI crude peaked at nearly $70 per barrel on August 30, 2005, after 
Hurricane Katrina, but has since fallen below levels immediately 
preceding the hurricane to $58 per barrel on November 22. Similarly, 
U.S. average gasoline prices reached their peak at over $3.00 per 
gallon during the week of September 5 following Hurricane Katrina. 
Subsequently, the average gasoline price fell to $2.15 per gallon 
during the week of November 28. This price was last observed in June 
2005, well before the hurricanes.
    The following are actions ConocoPhillips has or is taking to bring 
additional supplies to the market, which should contribute to the 
reduction of prices:

   Increased West Coast, Gulf Coast and Mid-continent gasoline 
        and distillate (jet & diesel) products supplies by deferring 
        refinery turnarounds and re-directing supplies to impacted 
        areas
   Increased gasoline and distillate imports where feasible to 
        re-supply short markets from what is normally brought in during 
        the September time period
   Worked with the Federal Government on temporary waivers of 
        required product specifications to increase available supplies.
   Diligently worked to quickly restore all ConocoPhillips shut 
        in natural gas and crude oil Gulf of Mexico production and 
        refining capacity immediately after the hurricanes
   Affected ConocoPhillips plants worked diligently to restore 
        temporary power and operations that allowed rapid blending and 
        shipping of all available products stranded in storage just 
        prior to the hurricanes.
   Held gasoline rack prices constant for a few days 
        immediately after the hurricanes and then lagged spot prices by 
        50 percent in the state of emergency areas.
   Although constrained by anti-trust laws from giving them 
        specific direction on re-sale pricing, we encouraged customers 
        (independent marketers, dealers and resellers) to exhibit 
        restraint following the hurricanes.

    Longer term we are:

   Pursuing a very aggressive capital program to expand 
        domestic refining capacity and increase U.S. gasoline and 
        distillate domestic supply. This investment program is aimed at 
        growing our U.S. refining capacity by about 11 percent and 
        improving our capability of handling lower quality oils in 
        order to make 15 percent more clean fuels such as gasoline, 
        diesel and heating oil by the year 2011. Planned expansion is 
        the equivalent of adding the capacity of one world-class 
        refinery to the U.S.
   Bolstering U.S. and global oil supplies by expanding 
        conventional crude production in Venezuela, Russia and the Far 
        East.
   Producing unconventional heavy oil in Venezuela and Canada 
        and continuing to invest in unconventional heavy-oil production 
        in Canada. This crude is intended to come to our refineries in 
        the United States. Our company recently announced that we will 
        be partnering with a Canadian company to develop the $2.1 
        billion Keystone pipeline to bring over 400 thousand barrels 
        per day of much-needed Canadian heavy oil production to our 
        U.S. mid-continent refineries. We are also building additional 
        upgrading capacity in our refineries to process unconventional 
        heavy crude.
   Developing technology for turning natural gas into a slate 
        of clean refined oil products, which will enhance clean diesel 
        supplies.
   Conducting research and development on alternative energy 
        sources. We recently had a successful experiment with renewable 
        diesel, and we are conducting other tests to evaluate 
        technologies to produce gasoline and other liquid fuels from 
        non-petroleum feedstock.
   Expanding the business of gasoline and blending stock 
        imports to the United States, which will increase gasoline 
        supplies, particularly in the Northeast region of the United 
        States.

    Question 2. What is the relationship between the price of oil that 
Americans are paying and the profits you are making?
    Answer. As discussed in our testimony, there is a strong 
relationship between the price of crude oil and gasoline prices. Our 
industry is a commodity industry with associated high price volatility 
driven by supply and demand. That also means that our earnings are 
highly volatile. However, it is important to note that even though the 
third quarter of 2005 was the highest price environment our industry 
has experienced in 22 years, adjusted for inflation, our profit margin 
of 7.7 cents per dollar of sales was near or below the average of all 
industries. The petroleum industry for the last 20 years has had 
returns on equity on average below the S&P industrials.

    Question 3. The question I hear most from people is how is the 
price of oil set? Many Americans think oil companies are rigging prices 
to reap big profits. How would you respond to that?
    Answer. Crude oil prices are set in the global market place where 
thousands of buyers, sellers, traders and financial players come 
together in both physical (spot) and futures markets to buy and sell 
crude oil. Several crude oils with large traded volumes have become the 
established regional markers for pricing all other crude. The major 
marker crude oil in the United States is West Texas Intermediate (WTI) 
in Cushing, Oklahoma, sold on a spot basis and on the New York 
Mercantile Exchange. In Europe, the major marker crude oil is North Sea 
Brent crude, which is sold in Sullom Voe, Scotland on a physical and 
forward basis and on the Intercontinental Exchange (ICE) in London. In 
the Middle East and Asia, the major marker crude oils are Dubai and 
Oman. All other crude oils are priced in relation to these markers, 
adjusting for quality and location differentials. Quality differentials 
are determined by the refining value of that crude (e.g., priced below 
WTI if it has higher sulfur content or if it produces less high value 
clean products and more low-value heavy products). Location 
differentials are determined by the shipping costs of the specific 
crude to the major market for that crude oil.
    Because of these highly transparent marker prices, it is highly 
unlikely that crude oil will be traded at prices that vary 
significantly from these markers, adjusting for quality and location 
differences, because either the buyer or seller would not be willing to 
pay or receive something above or below the ``marker'' price. If the 
seller asks for too high a price, the buyer will purchase the crude 
elsewhere. If the buyer offers too low a price, the seller will sell 
elsewhere.
    Collectively the international oil majors \10\ have only a 14.5 
percent market share of global oil production. In addition, trade of 
marker crude oils is many times greater than the physical volume 
produced. For example, the 2005 year-to-date paper trade for WTI has 
averaged 241 million barrels per day, which is substantially higher 
than the approximately 450 thousand barrels per day of physical WTI 
production. This large volume of trade provides a highly liquid and 
very competitive market. Given this liquidity and transparency, oil 
companies cannot exert significant influence on the price of crude oil.
---------------------------------------------------------------------------
    \10\ Total crude and NLG production, including syncrude, in 2004 
for ConocoPhillips, Royal Dutch Shell, British Petroleum, ExxonMobil, 
Chevron and Total.
---------------------------------------------------------------------------
    Spot \11\ prices for crude oil are determined by current short-term 
and anticipated supply/demand conditions. In the last few years, prices 
rose as a result of the global economic recovery and exceptionally 
strong oil demand growth. This strong demand growth occurred at a time 
when OPEC had little spare oil production capacity. The tight supply/
demand balance has been exacerbated by market concerns about increased 
geopolitical risk in a number of oil-producing countries and hurricanes 
shutting in U.S. crude production.
---------------------------------------------------------------------------
    \11\ Spot prices are wholesale prices for physical delivery of the 
crude or product set at a number of industry transfer points, such as a 
location on a pipeline or at a harbor.
---------------------------------------------------------------------------
    Spot product (e.g., gasoline and diesel) prices tend to follow 
crude oil prices since the cost of crude oil is a large part of the 
cost of these products, and both crude oil and products prices are 
driven by the same global market fundamentals. A recent report by the 
U.S. Federal Trade Commission \12\ indicated that changes in crude oil 
prices have accounted for approximately 85 percent of the increases and 
decreases in motor gasoline prices over the last 20 years. Product 
markets are becoming increasingly global because of increased trade to 
rectify product supply/demand imbalances that may occur in any region. 
As a result, supply and demand in one region can have an impact on 
prices in another region. For example, as a result of the hurricanes in 
the United States, gasoline prices went up in Europe and Singapore.
---------------------------------------------------------------------------
    \12\ Gasoline Price Changes: The Dynamic of Supply, Demand, and 
Competition: A Federal Trade Commission Report (2005).
---------------------------------------------------------------------------
    There are a number of factors that may result in periodic 
dislocations between crude oil and product prices, such as seasonal 
demand, a tight product supply/demand balance, and product 
specification changes. The recent hurricanes strengthened product 
prices relative to crude because it was easier to replace lost crude 
oil than refined products. This was particularly true for diesel fuel 
due to strong European demand limiting their ability to export 
additional diesel to the United States. The United States was able to 
get substantial additional gasoline imports from Europe, and that is 
why gasoline prices dropped swiftly to pre-hurricane levels.
    Retail product prices lag spot prices in part because some product 
goes through a succession of resales by any combination of traders, 
jobbers, lessee dealers, or independent marketers. A U.S. Department of 
Energy study \13\ on gasoline price pass-through from the spot to 
retail level last year determined that significant changes in spot 
prices appear to show up in retail prices with some time delay, and 
somewhat dampened.

    \13\ U.S. Department of Energy, Energy Information Administration, 
Michael Burdette and John Zyren, ``Gasoline Price Pass-through,'' 
January 2003.
---------------------------------------------------------------------------
    Question 4. Americans are being burdened with high oil, natural 
gas, and gasoline prices while you all are raking in record profits. 
What do you say to those people that blame you for this and say that it 
is unfair?
    Answer. Our profits did increase as a result of higher energy 
prices, but energy products are commodities with prices set in 
international and regional markets by thousands of players based on 
supply/demand conditions. Prices rose in response to the reduction in 
supplies resulting from the hurricanes but these price increases 
attracted gasoline supplies from all over the world, which swiftly 
moved gasoline prices below pre-hurricane levels. The increase in 
earnings has also led to increased investment in new supplies, which 
should ultimately lower prices for the long-term.
    ConocoPhillips has been reinvesting our earnings in developing new 
supplies. We have had earnings of about $10 billion through the first 
nine months of 2005--about $1 billion a month, but our capital 
investments were also close to $1 billion a month. In fact, over a 
three-year timeframe, using 2003-2004 reported results and 2005 
annualized year-to-date third-quarter actual results, ConocoPhillips' 
earnings are about $26 billion but investments are just over $26 
billion. Mistaking the size of our earnings for a windfall fails to 
realize the enormous levels of investment and risk required to achieve 
those earnings and bring new energy supplies to the market.
    Most people don't realize how volatile profits and returns are in 
this industry due to significant swings in crude prices. A recent study 
by PIRINC \14\ showed that returns on investment in domestic oil and 
gas production averaged just under 8 percent between 1985 and 2003, 
with individual years ranging from lows of near zero in 1986 and 1998 
to 18 percent in 2000 due to energy price swings.
---------------------------------------------------------------------------
    \14\ Petroleum Industry Research Foundation, ``Lessons From the 
Hurricanes'', November 2005, page 7.
---------------------------------------------------------------------------
    Today we have the highest price environment our industry has 
experienced in 22 years, adjusted for inflation. Yet despite being at 
what some consider as the top of the cycle, ConocoPhillips' profit 
margin of 7.7 cents per dollar of sales in the third quarter of 2005 is 
near or below the average of all industries. On average, over the 
course of the investment cycle, the petroleum industry has had sub-par 
returns. Between 1990 and 2002, the average return on equity for the 
petroleum industry was 11.3 percent, lower on average than the 12.6 
percent return for the S&P industrial companies.\15\

    \15\ U.S. Department of Energy, Energy Information Administration, 
Financial Reporting System.
---------------------------------------------------------------------------
    Question 5. Americans want to know if it is not costing so much 
more to produce a barrel of oil, why are prices rising so high?
    Answer. Increases in the cost of finding, developing and producing 
a barrel of oil are a large factor in the price increases we have seen 
in recent years. Steel prices doubled between the end of 2002 and end 
of 2004, and they are a large cost component for our industry. In the 
last three years, onshore drilling costs in the U.S. rose 52 percent 
and the cost of tubular goods rose by 125 percent. These components 
represent about half the cost of onshore wells. Costs have been rising 
in part because the oil services industry has not been able to keep 
pace with the spending increases by the petroleum industry. However, 
there is also a longer term trend of costs increasing because our 
industry doesn't have access to the lowest cost reserves, including 
reserves in the United States. Thus, our industry is going after more 
remote, deeper water, more complex and lower quality reserves that 
inherently cost more than what we were developing a decade ago. Both 
Goldman Sachs and Sanford Bernstein recently estimated that oil 
replacement costs are presently around $50 per barrel, when they were 
closer to $20 per barrel in the 1990s.\16\ We believe that some of this 
replacement cost is related to the high market price environment and 
will come down as prices come down.
---------------------------------------------------------------------------
    \16\ Bernstein Research Call, November 4, 2005, page 2; Goldman 
Sachs, Jeff Currie, ``The sustainability of higher energy prices, April 
2005, page 21.

    Question 6. What is your company's response to proposals for 
enactment of a Windfall Profits Tax?
    Answer. ConocoPhillips does not see a windfall. Our earnings, as 
well as earnings from the rest of the petroleum industry, even in the 
3rd quarter of 2005, were in line with other industries. In cents per 
dollar of sales, ConocoPhillips made 7.7 cents similar to Caterpillar 
(7.4 cents) and IBM (7.0 cents), and well below GE (11.2 cents), 
McDonalds (13.8 cents), American Express (17.0 cents) Coca-Cola (21.2 
cents), Eli Lilly (22.1 cents), Google (24.2 cents), Merck (26.2 cents) 
and Citigroup (33.2 cents) in the third quarter of 2005.
    In the case of ConocoPhillips, we have been reinvesting an amount 
equal to all of our earnings, and any additional tax, would reduce our 
ability to invest. Reducing industry investment would sow the seeds for 
the next supply crunch. This tax would also reduce the competitiveness 
of the U.S. oil and gas industry vis-a-vis foreign competitors.
    Commodity prices are highly volatile, and the petroleum industry 
won't be able to attract capital if governments shave off the top but 
don't help on the bottom. As an example of this volatility, just seven 
years ago, the price of WTI was $11/bbl.
    Rather than impose a punitive tax that would discourage domestic 
production, it makes more sense to encourage domestic investment by 
opening up highly prospective areas for exploration and development, 
such as the Eastern Gulf of Mexico, for natural gas drilling.

    Question 7. Do you believe that Americans are dangerously dependent 
on oil and its refined products?
    Answer. The United States consumes 25 percent of the world's oil, 
almost equal to consumption in all of Europe and Eurasia combined. In 
the developing countries of the world, oil consumption is rising as 
their per capita income rises and they can afford a better lifestyle. 
The large demand in the United States, combined with rapid growth in 
some developing countries, is tightening the supply/demand balance and 
putting upwards pressure on prices. It is important that the United 
States conserve oil and use it more efficiently to relieve some of the 
supply/demand pressure.
    The United States is part of a global energy market and should 
continue to foster improving the development and transparency of energy 
markets.

    Question 8. The International Energy Agency's recent Global Outlook 
report expresses concern about world energy supplies and reliance on 
the Middle East for oil. Do you think the IEA's anxiety is justified?
    Answer. This recently published study by the International Energy 
Agency concluded that, ``the world's energy resources are adequate to 
meet the projected growth in energy demand in the Reference Scenario.'' 
The study goes on to say that cumulative energy-sector investment needs 
are estimated at about $17 trillion (2004 dollars) over 2004-2030, 
about half in developing countries. The IEA stated that financing the 
required investments in non-OECD countries is one of the biggest 
challenges posed. Our perspective is that these investments can be 
made, if 1) private industry is allowed access to resources and 2) 
governments who own these resources and set the rules by which 
infrastructure can be developed, maintain an attractive investment 
climate (e.g., stability of fiscal regimes and terms, rules of law, 
streamlined regulatory processes).
    While it is not IEA's base or reference case, the agency's study 
has a deferred investment scenario for Middle East and North African 
producing nations, which results in lower supplies and higher prices. 
However, IEA's analysis also indicates that these producing countries 
would lose out financially were investment to be deferred because the 
price increase would fail to compensate for lower export volumes 
resulting from reduced demand.
    In our view, the major reason that production capacity hasn't been 
expanding faster in these countries is because the production wasn't 
needed up until very recently. Few countries can afford to develop 
capacity and have it sit idle. Looking forward, we are concerned that 
there is a potential for misunderstanding between producing and 
consuming nations. Producing countries become very concerned when they 
hear consuming nations talk about drastically reducing the demand for 
their product, and they will then likely hesitate to expand supplies 
rapidly. They want to know that the demand will be there before they 
make multi-billion dollar investments. Thus, we would underline the 
importance of the IEA's recommendation to deepen the consumer-producer 
dialogue to ``reconcile their interests and achieve mutually beneficial 
outcomes.'' \17\
---------------------------------------------------------------------------
    \17\ International Energy Agency, World Energy Outlook 2005, 
November 2005, page 51.
---------------------------------------------------------------------------
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Lisa Murkowski to 
                             James J. Mulva

    Question 1. In your agreement on an Alaska natural gas pipeline 
that you are negotiating with the State of Alaska under the state's 
Stranded Gas Act, do you anticipate making a firm commitment to develop 
the Alaska gas pipeline project or do you anticipate accepting an 
agreement that will only involve a series of spending and work 
commitments? If the latter is the case, how long will it be before a 
binding construction commitment deadline is reached?
    Answer. ConocoPhillips has been diligently pursuing the Alaska Gas 
Pipeline Project for a number of years and is committed to continuing 
this effort. We have reached an agreement in principle with the State 
of Alaska on the base fiscal terms for the project, and this agreement 
includes significant spending and work commitments. After the fiscal 
contract is complete, we will initiate steps to secure the state and 
federal permits necessary to begin construction. The actual date a 
commitment to construct is made depends in large measure upon the date 
these permits are issued, and whether there are any legal challenges to 
these permits.

    Question 2. If there is a concern about tying up your investment 
capital in a single project, if a pipeline company presented you with a 
proposal to take all of the risk of construction of the Alaska pipeline 
project and to ship your gas at a reasonable tariff, would you commit 
the gas you control to that pipeline within a reasonable time period? 
If not, why?
    Answer. ConocoPhillips is investing in many projects to bring 
additional supplies of natural gas, LNG and refined products to United 
States consumers. We are prepared to invest in the Alaska Natural Gas 
Pipeline project. We are not limiting investment capital to any single 
project.

    Question 3. In your companies' view, is it less risky to invest 
billions of dollars in new LNG facilities to import natural gas from 
foreign sources, than to invest in the Alaska gas line project. If not, 
why are you investing in LNG projects before making a firm commitment 
to the Alaska project?
    Answer. ConocoPhillips believes that many new sources of natural 
gas will be necessary to meet future natural gas demand in the United 
States. Consequently, in addition to the Alaska Natural Gas Pipeline 
project, we are investing in the MacKenzie Delta gas pipeline and other 
gas exploration and development projects in the United States and 
Canada, as well as LNG opportunities around the world. None of these 
investments are being made at the expense of the Alaska project.

    Question 4. While all of your companies are global in scope, this 
nation is concerned about its reliance on foreign sources of crude oil. 
Does it make sense for the United States to increase its reliance on 
foreign LNG while allowing Alaska's natural gas reserves to continue to 
remain in the ground?
    Answer. The United States needs to develop both a significant 
number of LNG import projects and Alaskan natural gas reserves if U.S. 
natural gas energy needs are to be met. Even successful development of 
Alaskan natural gas will in no way eliminate the need for a significant 
increase in LNG imports.
    The United States currently consumes around 22 trillion cubic feet 
(Tcf) of natural gas annually. The National Petroleum Council estimates 
that, by 2025, U.S. natural gas consumption will have risen to about 28 
Tcf. The U.S. Department of Energy's corresponding prediction is that 
U.S. natural gas consumption will exceed 30 Tcf by 2025.
    Where will the gas supply necessary to meet this demand come from? 
Based on assumptions of sustained high natural gas prices, which would 
continue to stimulate U.S. domestic drilling activity, the NPC and DOE 
both estimate that, by 2025, U.S. domestic natural gas production will 
still be maintained at around today's level of 19 Tcf. However, many 
independent consultants estimate that domestic production is likely to 
be considerably lower than this figure, especially if natural gas 
prices fall and domestic drilling becomes less economic. Some industry 
analysts believe that U.S. production may well fall below 16 Tcf by 
2025.
    Whichever predictions turn out to be correct, current forecasts 
indicate that required imports (the gap between U.S. demand and U.S. 
domestic production) are likely to be at least 9 Tcf annually by 2025.
    If Alaska North Slope (ANS) gas reserves are developed, the massive 
ANS pipeline will provide around 1.8 Tcf of additional gas annually. It 
is hoped that the MacKenzie Delta pipeline proposed from northern 
Canada will provide a further 0.6 Tcf annually. However, even if these 
reserves are developed and current Canadian imports of around 3 Tcf are 
maintained, the United States will still be facing an import deficit of 
about 3.6 Tcf annually. Thus, even if all available sources of pipeline 
gas are developed, including Alaskan reserves, a significant volume of 
LNG imports will be required to ensure that U.S. consumer demand is 
met.
    In summary, it is not a question of `choosing' either Alaskan gas 
or LNG. Both are required if U.S. consumer demand is to be met.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                             James J. Mulva
    Question. All over America, the oil industry drives up the price at 
our gas pumps by redlining and zone pricing. ``Redlining'' is when your 
companies draw a phony line around a community to lock out competition 
and raise prices for the consumers. ``Zone pricing'' is plain old 
discrimination and it takes place when one oil company supplies gas to 
several gas stations located near each other and one station is charged 
much more than the others for the same type of gas. This drives 
stations out of business, reducing choice and raising prices for 
consumers. To help hurting consumers at our gas pumps, will your 
company commit to stop redlining and zone pricing? Yes or no?
    Answer.
    Redlining--ConocoPhillips has not and does not engage in any 
practice whereby its marketers are precluded from branding or reselling 
ConocoPhillips motor fuels to retail outlets in any discreet geographic 
area or region of the country. ConocoPhillips' marketers have non-
exclusive territories and can compete for the resale of motor fuels to 
branded retail outlets anywhere marketers believe in their own business 
judgment they can economically resell motor fuels.
    Zone Pricing--Zone pricing is a methodology whereby competitive 
discounts and allowances are given to individual service station 
dealers in response to lower retail prices of competitors with whom the 
service station dealer competes. This practice has repeatedly been 
found to be consistent with relevant laws governing marketplace 
competition. State and Federal Court opinions, and studies of zone 
pricing practices by the Federal Trade Commission, have concluded that 
appropriate use of zone pricing is pro-competitive, and that such 
practices comport with the principles of the Robinson-Patman Act which 
permits pricing differences that reflect a good faith effort to meet 
competition. ConocoPhillips' use of zone pricing has comported, and 
will comport, with applicable law.

   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                             James J. Mulva

    Question 1. I'm aware that the cost of crude oil is driven by the 
world market and that its cost is currently significantly above 
historic averages. But I'm not aware of any substantive increases in 
the cost of producing crude oil, the cost of refining it into various 
petroleum products such as gasoline and diesel, and the cost of 
transportation of refined products to markets. Through the end of 
September 2005, the price of crude had increased 40 percent in 2005 
while gasoline prices increased almost 80 percent. If the percent 
difference in the prices isn't pure profit, please explain to me how 
you account for the difference in the substantially lower increase in 
crude oil when compared to gasoline.
    Answer. Increases in the cost of finding, developing and producing 
a barrel of oil are a large factor in the price increases we have seen 
in recent years. Steel prices doubled between the end of 2002 and end 
of 2004, and they are a large cost component for our industry. In the 
last three years, onshore drilling costs in the U.S. rose 52 percent 
and the cost of tubular goods rose by 125 percent. These components 
represent about half the cost of onshore wells. Costs have been rising 
in part because the oil services industry has not been able to keep 
pace with the rapid spending increases by our industry. Shipping rates 
for large crude carriers (VLCCs) also tripled between 2002 and 2004, 
raising the cost of imported crude. However, there is also a longer 
term trend of costs increasing because our industry doesn't have access 
to the lowest cost reserves, including in the United States. Thus, our 
industry is going after more remote, deeper water, more complex and 
lower quality reserves that inherently cost more than what we were 
developing a decade ago. Both Goldman Sachs and Sanford Bernstein 
recently estimated that oil replacement costs are presently around $50 
per barrel, when they were closer to $35 per barrel in the early 2000s 
and $20 per barrel in the 1990s.\18\ We believe that some of this 
replacement cost is related to the high market price environment and 
will come down as market prices come down. Costs have also been rising 
for refining. According to the Nelson-Farrar Composite Refinery 
Operating Index and Construction Cost Index, between 2001 and 2004, 
operating costs have increased 14 percent and construction costs 
increased 16 percent.
---------------------------------------------------------------------------
    \18\ Bernstein Research Call, November 4, 2005, page 2; Goldman 
Sachs, Jeff Currie, ``The sustainability of higher energy prices, April 
2005, page 21.
---------------------------------------------------------------------------
    Using data published by the U.S. Department of Energy, the spot 
price of WTI crude rose by 41 percent from January-September 2004 to 
January-September 2005 (from $39.25 to $55.52/barrel). During this same 
time period, the U.S. Gulf Coast spot price for regular gasoline went 
up by 38 percent (from $1.16 to $1.59 per gallon). The retail gasoline 
price increase in the Gulf Coast went up by only 24 percent during the 
same time period ($1.72 to $2.13 per gallon). It is also important to 
remember that the hurricanes shut in nearly 30 percent of total U.S. 
refining capacity at the peak, and that 10 percent of Gulf refining 
capacity is still shut in (as of November 28). Despite this reduced 
supply capability in the Gulf Coast, retail gasoline prices in the Gulf 
fell by 18 percent since the end of September and are presently 
significantly below pre-hurricane levels.

    Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to 
149. Further, no new refineries have been built in the U.S. since 1976. 
In 1981, the 321 refineries had a capacity of 18.6 million barrels a 
day. Today, the remaining 149 refineries produce 16.8 million barrels a 
day. I recognize the difficult financial, environmental, and legal 
considerations associated with the location and construction of new 
refineries. But I fail to understand the closure of existing refineries 
even if they required investment to enhance their efficiency and 
production capability unless, of course, this mechanism is being used 
to increase the price of gasoline and other refined products. Please 
help me understand why you would shut down refineries in the face of 
the supply and demand situation. What conditions would have to exist 
for you to invest in new refining capacity? I have heard the industry 
claim that up to $48 billion has been used on capital expenditures for 
existing refineries. If those investments were not used for capacity 
increases, what were they used for?
    Answer. According to the Federal Trade Commission, between 1973 and 
1981, government controls on the pricing and allocation of crude oil 
favored small refineries and provided incentives to companies to own 
and operate small, inefficient refineries. The elimination of these 
government controls in 1981 spurred the eventual exit of many 
inefficient refineries, which also faced high investment needs in order 
to meet increasingly stringent emission and clean fuel requirements. 
According to the FTC, refinery closures overwhelmingly have involved 
small, relatively unsophisticated facilities.\19\ These refineries 
probably could not compete in U.S. and global products market under 
free market conditions.
---------------------------------------------------------------------------
    \19\ U.S. Federal Trade Commission, Bureau of Economics, ``The 
Petroleum Industry: Mergers, Structural Change, and Antitrust 
Enforcement'', August 2004, page 7.
---------------------------------------------------------------------------
    To consider investing in a grassroots refinery in the United 
States, there would have to be substantial improvements in the 
permitting process and we would have to be convinced that refinery 
margins and returns would be significantly higher than they were 
historically on a sustained basis.
    Our company today is one of the largest refining companies in the 
United States. Over the last ten years, we have made significant 
investment in our refineries. Our capital programs have focused on the 
business objectives stated below:

   Improve mechanical integrity and utilization
   Meet environmental and fuels standards while maintaining 
        capacity
   Infrastructure improvements to ensure the long-term 
        viability of our assets
   Modernization programs for instrumentation and controls
   Updating technology of individual processes
   Adding conversion capacity for lower quality crude 
        processing
   Adding incremental throughput capacity.

    The average annual capital spend for our U.S. refining system has 
increased by roughly 50 percent when comparing the period of 1997-2001 
versus 2002 through projected 2006.

                        1997-2001 (1) = $640MM/Year
                        2002-2006 Projected (2) = $965 MM/Year

          Notes: (1) Approximate Capital Spend for Conoco, Phillips and 
        Tosco refineries. (2) ConocoPhillips Capital Spend excluding 
        the planned Strategic Investment Program to invest $4-5 billion 
        from 2006-2011 on top of other refinery investments of $1-2 
        billion per year.
    In the period of 2002-projected 2006, the capital spend includes an 
average of roughly $400 MM/Year for the $2 Billion Clean Fuels program. 
This program builds extensive facilities to meet the EPA regulatory 
requirements for Low Sulfur Gasoline (LSG) and On-Road Ultra Low Sulfur 
Diesel (ULSD). Our program for Clean Fuels has focused on meeting the 
new fuel regulatory requirements while maintaining our capacity of 
clean product production.
    Going forward, our company has announced a multi-billion dollar 
program to be implemented over the next five years. While this 
Strategic Investment Program is underway, our ongoing capital spending 
will continue for infrastructure improvements, environmental and fuels 
compliance, and modernization of our plants.

    Question 3. The recent hurricanes resulted in the need to import 
substantial refined products such as gasoline, diesel fuel and aviation 
fuel to meet U.S. demand. The question has been raised as to whether 
the country should develop a strategic reserve of finished petroleum 
products. What would be your reaction if the Federal government either 
directly or by way of contract with the private sector sought to create 
a strategic reserve of finished petroleum products? Since these 
products have a limited shelf-life, one proposal is to obtain and 
operate a number of refineries and have the products be used by the 
Federal government. Appreciate your comments on this proposal.
    Answer. The holding and management of a strategic gasoline reserve 
is complex and challenging, but deserves further study. Unlike the SPR 
crude oil reserve that only needs to get crude to 140 refineries, half 
of whose capacity are in three states, a strategic gasoline reserve or 
reserves will have to supply more than 1,500 terminals across all 
states. Also, unlike crude oil, it is difficult to store gasoline for 
long periods of time as the inventory must by turned over seasonally to 
match required products specifications and to avoid product (aging) 
degradation. Location is very important as it must be away from areas 
that are likely to experience frequent supply logistics disruptions 
such as power outages and hurricanes to avoid the potential loss of 
power and disruptions to the distribution systems. The reserve must be 
distributed across the country since it is impossible to predict when 
and where there will be outages. Additionally, the numerous regional 
and local fuels specification requirements severely complicate design 
of strategic reserves due to the very large number of different grades 
required in different locations around the United States. In addition, 
the cost of storage is high so it is important to do a cost-benefit 
analysis to determine whether the costs of holding this inventory are 
worth the benefits of avoided disruption costs.
    It is also important that this reserve not be used for price 
management purposes but rather be saved for use when there is a 
physical disruption to supplies. It would not ultimately be beneficial 
to consumers to have the government remove the price signals when there 
is a supply disruption.
    While the concept of adding refinery capacity to improve the U.S. 
balance of domestic supply relative to total demand appears to be sound 
public policy, getting the Federal government into the refining 
business may not be the most efficient (cost effective) alternative. 
Federal government products demand is fairly evenly distributed across 
the U.S. To supply Federal government demand will require solving the 
logistics and distribution issues inherent in this proposal. The U.S. 
industry accomplishes this by `exchanging' products between refinery 
supply locations and pipeline/terminal demand locations across the 
country. Similar arrangements are possible between Federal government 
and private enterprises. However, the most efficient (lower cost) 
option remains the removing of current barriers to expansion 
(permitting) and encouraging the continued growth of the existing 
private U.S. refining industry.
    The private sector expanded refining capacity modestly in recent 
years because it wasn't needed given surplus global capacity and the 
ready availability of low-cost product imports. With two years of 
strong demand growth, particularly in Asia, the global refining balance 
is now tight and new capacity is needed. The market is now providing 
the appropriate signals for private investment to build more capacity. 
As a consequence, there is no need for the government to own capacity.

    Question 4. Given the recent profitability of the oil industry, I 
am interested to learn more on the disposition of these profits, 
particularly to enhance both production and refining capacity. Are any 
of these profits being used to enhance production and refining capacity 
for the benefit of other countries? What fraction of your profits is 
being invested for production and for refining? What percentage of 
profits has been used for stock buybacks and mergers and acquisitions?
    Although ConocoPhillips' absolute dollar earnings for the first 
nine months of 2005 appear large because of the size and scope of the 
company's operations, the company's net income as a percentage of total 
revenues earned was only 7.5 percent. (Over the last three years, the 
company's net income as a percentage of total revenues averaged only 
4.2 percent.)
    With respect to how the company has reinvested its earnings, the 
table below shows that we reinvested at a rate of 120 percent of 
earnings in 2003, into our Exploration and Production (E&P) and 
Refining and Marketing (R&M) segments. In 2004, we began investing in 
LUKOIL, an international integrated oil and gas company headquartered 
in Russia. Combining that investment with the investments in our R&M 
and E&P segments, our reinvestment percentage was 114 percent of 
earnings in 2004 and 77 percent of earnings through September 30, 2005.
    We started a modest share repurchase program in early 2005 that has 
resulted in stock repurchases of $1,165 million, equivalent to about 12 
percent of earnings, through September 30, 2005.

  CAPITAL EXPENDITURES AND INVESTMENTS IN E&P AND R&M AND LUKOIL STOCK PURCHASES AS A PERCENTAGE OF NET INCOME
                                              2003 THROUGH YTD 2005
                                              [Millions of Dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                      % of net
                                                                   Capital                           income used
                                                     Capital    expenditures             Purchases   for E&P/R&M
                                                  expenditures  & investment  Purchases  of LUKOIL     capital
                  Year                     Net    & investment   in E&P and   of shares  shares as  expenditures
                                          income   in E&P and     R&M as a    in LUKOIL    a % of   & investment
                                                       R&M       percent of                 net      and LUKOIL
                                                                 net income                income       share
                                                                                                      purchases
----------------------------------------------------------------------------------------------------------------
2003...................................   $4,735     $(5,687)       120%      .........  .........       120%
2004...................................   $8,129     $(6,593)        81%       $(2,649)     33%          114%
2005...................................   $9,850     $(6,093)        62%       $(1,523)     15%           77%
----------------------------------------------------------------------------------------------------------------


    Question 5. You've all said profits are cyclical, and that your 
companies have also suffered from the volatility of the oil markets. 
Would your stockholders be better served if domestically produced oil 
was sold at a fixed rate that included a generous profit margin above 
the production, refining, and distribution costs?
    Answer. While reduced price volatility would make it a lot easier 
to run a business, shareholders have invested in our stock because they 
want to be exposed to energy price risk. Some of them may own our stock 
and other commodity stocks in order to hedge stock and bond portfolios, 
given that there has historically been a negative correlation between 
stocks and bonds and commodity prices.
    We would be uncomfortable making investments based on promises of 
``guaranteed'' returns because our projects often have lives of 20 
years or more, and we would not be certain that those fiscal terms 
would be upheld in a different political climate.
    Finally, this approach would not lower the average price of energy 
for consumers unless additional lower-cost reserves were made 
available.
    The best, and most transparent, way to ensure that supply matches 
demand is to let the market work.

    Question 6. Do you believe that global warming is occurring? Do you 
believe that man-made activities have a role in this phenomenon? How 
will global warming impact your companies in term of added costs for 
oil and gas development, or allow access to new areas for oil and gas 
development?
    Answer. ConocoPhillips recognizes that human activity, including 
the burning of fossil fuels, is contributing to increased 
concentrations of greenhouse gases (GHG) in the atmosphere, which can 
lead to adverse changes in global climate. While the debate continues 
over the extent of human contributions and the timing and magnitude of 
future impacts, we are committed to taking action now to begin 
addressing the issue.
    In 1997, an international conference on global warming concluded an 
agreement, known as the Kyoto Protocol, which called for reductions of 
certain emissions that contribute to increases in atmospheric 
greenhouse gas concentrations. The United States has not ratified the 
treaty codifying the Kyoto Protocol but may in the future ratify, 
support or sponsor either it or other climate change related emissions 
reduction programs. Other countries where we have interests, or may 
have interests in the future, have made commitments to the Kyoto 
Protocol and are in various stages of formulating applicable 
regulations. Because considerable uncertainty exists with respect to 
the regulations that would ultimately govern implementation of the 
Kyoto Protocol, it currently is not possible to accurately estimate our 
future compliance costs under the Kyoto Protocol, but they could be 
substantial.
    ConocoPhillips' U.K. and Canadian businesses are actively preparing 
for GHG regulations in those countries, beginning in 2005 and 2008, 
respectively. Since the start of 2005, ConocoPhillips' facilities 
across Europe have been subject to the European Union's emissions 
trading program. Our commercial organization is preparing to trade 
CO2 allowances in order to optimize ConocoPhillips' net 
emissions position for businesses in Europe. The trading group will 
focus on minimizing the cost of procuring any additional allowances 
required to meet compliance and maximizing the value of any excess 
allowances.
    In addition to regulation, other potential long-term risks 
associated with climate change include the impact of climate itself and 
climate policy on energy demand and commodity prices, increased 
operating expense due to rising fuel prices and a changing physical 
operating environment. There are also potential reputation and informal 
societal license-to-operate issues that could arise for businesses and 
industries whose products or processes are associated with high levels 
of greenhouse gas emissions.
    ConocoPhillips is pursuing several innovative business 
opportunities that could result in GHG emission reductions within the 
company, industry or for our customers. These include CO2 
sequestration, co-generation, coal/petroleum coke gasification, bio-
diesel manufacture and energy efficiency improvements.

    Question 7. Is it accurate that United States LNG terminals in 
Massachusetts and Maryland are only operating at half capacity? Do you 
believe if these plants were operated at a higher capacity it would 
change the market dynamics that determine the current price?
    Answer. ConocoPhillips does not own or operate any existing 
regasification terminals in the United States. However, it would not 
surprise us if existing regasification terminals are operating at low 
utilization rates. The reason lies in a combination of two factors.
    First, global LNG supply is currently constrained, so there is 
insufficient LNG supply available to meet potential worldwide demand. 
Natural gas demand has risen rapidly during 2005 in countries such as 
Spain, Italy, France, Korea and India. At the same time, LNG supplies 
have not grown as quickly as expected. In particular, operational 
problems at LNG supply projects in countries such as Nigeria, Egypt, 
Trinidad and Australia have resulted in supply shortfalls.
    Second, and more importantly, there is a world market for LNG 
supplies, so of the limited volumes available worldwide, those volumes 
that are not dedicated to a certain market under long term contract 
will flow to the market that results in the highest netback pricing. So 
far this year, we have seen a willingness of buyers in other countries 
(Japan and Spain) to pay LNG prices that exceed equivalent U.S. netback 
prices. As a consequence, owners and capacity holders of U.S. 
regasification terminals have not been able to secure sufficient LNG 
volumes to achieve high utilization. There are a number of projects 
presently underway to bring dedicated LNG supplies to the U.S. market. 
However, these projects will not be completed before the 2008-2009 time 
period.

    Question 8. Please state for the record your company position on 
fuel economy standards. Are there other incentives that you support 
that you feel are better for consumers than the Corporate Average Fuel 
Economy paradigm?
    Answer. When addressing what can be done to promote conservation 
and efficiency, there are few solutions that would have as much impact 
as higher fuel efficiency standards. This is an issue that should be 
kept on the table to determine if it makes sense. We would suggest 
prudence, and caution against overreaching, in view of the impact on 
the automobile industry and possible adverse economic consequences.

    Question 9. I understand that over the past 5 years companies in 
your industry have downsized significantly. Now there is a shortage in 
workers and equipment to increase drilling. Please explain that 
dynamic.
    Answer. The oil and gas industry has experienced significant price 
volatility over the past decades, which has led to shrinkage of the 
industry workforce. While the industry workforce today is smaller than 
in the early '80s, much of this reduction in human resource and 
equipment capacity has been offset with advances in technology. 
Continued advancements in seismic technology, reservoir simulation and 
drilling applications have not only made it possible to be more 
efficient with exploration and development resources (human resources 
and capital resources) but it has also enabled the opening of new areas 
where production previously was not technically or economically 
possible. Examples include deep water exploration and production, 
unconventional reservoirs that are being tapped through multi-lateral 
drilling and ``minimal footprint'' developments that have opened up 
arctic exploration and production.
    Increases in industry activity can, in the short term, strain the 
supply of fully trained workers and equipment availability. But the oil 
industry has previously demonstrated its ability to adapt to market 
forces, mobilize workforces, and increase investment in technology to 
access new oil and gas supplies. Opening up new resource-rich areas for 
exploration and production in which new technology can be applied is 
certainly an efficient action to help address U.S. supply concerns. 
Additionally, altering some of the restrictive visa requirements in the 
U.S. would help multinational companies mobilize trained human 
resources to the United States to assist in the increasing exploration 
and production activity.

    Question 10. As you probably know, Congress is likely to open up 
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas 
exploration. Do you have plans to bid for leases in this area? What 
does the price of oil have to be to make ANWR exploration and 
extraction economically viable?
    Answer. At any given time, ConocoPhillips is evaluating a number of 
prospective projects around the world. If Congress were to make such a 
decision, it would have to compete with other global opportunities that 
we are evaluating at the time and would involve comparisons of risk, 
potential reserve size, and development and operating costs. A decision 
on whether to drill there could only occur after those determinations 
are made.

    Question 11. I understand that many of your resources and equipment 
are working flat out to rebuild infrastructure in the Gulf of Mexico. 
If there is no capacity to expand oil and gas exploration, what good is 
opening up sensitive environmental areas to increased drilling going to 
do for the consumer in the short run?
    Answer. Opening up new areas for drilling will help the consumers 
over the longer term (3+ years). It typically takes several years for a 
new area in the Gulf of Mexico to be explored and, if commercial 
hydrocarbon deposits found, developed. There are ample industry 
resources (people and equipment) to pursue these opportunities now if 
these areas were made available. New production reduces U.S. dependence 
on imports, increases supply, and may moderate consumer prices, 
particularly for natural gas.

    Question 12. Given the growing demand for oil in Asia, do you 
believe that oil derived from the Arctic National Wildlife Refuge could 
be diverted to supply Asian markets? If drilling in the Arctic National 
Wildlife Refuge is authorized this year, when will it begin to have an 
impact on gasoline prices? What do you believe that effect will be?
    Answer. The primary market for Alaskan crude is likely to be the 
U.S. West Coast to replace declining supplies of Alaskan crude these 
refineries are presently using.
    Production from ANWR would likely come too late to relieve near-
term supply problems. Should leasing be permitted and subsequent 
commercial discoveries made, it will be an estimated 7-8 years or more 
before oil production from ANWR could reach the market. During this 
timeframe, the world will become increasingly reliant on fewer and 
fewer producing countries and having a secure domestic supply would 
improve U.S. and global energy security.
    We have not assessed in detail the impact of opening ANWR on the 
price of crude oil or gasoline. Adding new crude supply sources would 
directionally lower the world oil price. Directionally, it also makes 
sense that by replacing declining supplies to U.S. West Coast 
refineries, ANWR production would lower refiners' crude costs since 
their alternative is to replace this crude with higher-cost shipments 
from the Middle East and Asia. Likewise, reduced West Coast crude costs 
would likely lower West Coast gasoline costs.

    Question 13. Do you support more transparency in the oil and 
natural gas markets, as would be provided in my bill S. 1735?
    Answer. ConocoPhillips supports the concepts of transparency to the 
extent it is compatible with freely functioning competitive markets. We 
participate in providing data to generate natural gas price indices in 
the United States and are active in the Committee of Chief Risk 
Officers (a voluntary industry organization) working to develop 
industry best practices in risk management, part of which addresses 
market transparency.
    Section 8 of S. 1735 purportedly seeks to enhance transparency of 
crude, gasoline and petroleum distillates wholesale markets through 
enforcement efforts focused on monitoring ``companies with total United 
States wholesale or retail sales of crude oil, gasoline, and petroleum 
distillates in excess of $500,000,000 per year.'' We do not believe 
that there is cause to single out larger wholesale and retail 
operations. They are already publicly traded, thus making their 
earnings or losses a matter of public record vis-a-vis regular SEC 
filings, plus they have the greatest downside risk were they to engage 
in anti-competitive practices.
    A second cause for reservation is that compliance with Section 8 
could expose companies to increased antitrust risk and impede the 
natural functioning of market operations. Although Section 8 allows the 
FTC to refrain from publishing information that it thinks might harm 
competition, we are skeptical of any effort to collect and publicize 
transaction-level information that is currently confidential. Moreover, 
such an effort would leave those companies subject to antitrust laws in 
an awkward position not only with respect to compliance with 
potentially conflicting rules, but also with respect to the conduct of 
their competitive business operations. Finally, (aside from information 
that is already publicly available and information that the FTC will 
have to omit in order to avoid harm to competition), it is not clear 
exactly what benefit the public would derive from having access to the 
thousands of individual transactions done at the wholesale and retail 
levels for crude oil, gasoline, and petroleum distillates.

    Question 14. How have the last 3 years of escalating gasoline 
prices affected demand by American drivers? Have we seen a correlation 
between a certain level of price increase and less demand by American 
drivers? What is the actual level of reduced demand today compared to 3 
years ago (please respond in the context of a doubling of retail 
gasoline prices)?
    Answer. Year-to-date through August 2005, U.S. gasoline demand was 
9.2 million barrels per day versus 8.9 million barrels per day in 2003, 
representing a 2.9 percent increase. However, the adverse price effects 
on demand were probably masked by rising employment during this period, 
which increased driving. The consulting firm, PIRA Energy Group, 
recently estimated that between 2003 and 2004, with a 17 percent real 
increase of retail gasoline prices and an assumed marginal elasticity 
of about -.10, gasoline demand would have been reduced by about 150 
thousand barrels per day if it hadn't been for the growth in 
employment.\20\ PIRA used a higher elasticity than historical to 
reflect that in a high crude price environment, gasoline's share of the 
consumer basket increases such that consumers are more likely to reduce 
consumption than when it was a smaller share of the basket. Applying 
this higher elasticity to a doubling of real prices, it would 
theoretically shave 900 thousand barrels per day off demand if there 
wasn't offsetting employment growth. It is important to keep in mind 
that U.S. average retail gasoline prices year-to-date through October 
2005 ($2.32 per gallon) were 44 percent higher (not 100 percent or 
doubling) than the same period in 2003 ($1.61 per gallon). Thus, the 
impact would have been 400 thousand barrels per day of reduced demand 
if all else were equal. While the average retail gasoline price peaked 
at over $3.00 per gallon in September 2005, the November 28, 2005 price 
fell to $2.15 per gallon, well below pre-hurricane levels. This should 
have restored nearly 250 thousand barrels per day of demand based on 
PIRA's assumption about the price elasticity of demand. We believe 
driving behavior and the elasticity or responsiveness to price is also 
contingent on whether consumers perceive tighter market conditions are 
temporary or are more permanent. All prices and demand numbers quoted 
are from the U.S. Department of Energy.

    \20\ PIRA Energy Group, U.S. Gasoline Demand Elasticities are 
Higher at the Margin, July 2005.
---------------------------------------------------------------------------
    Question 15. What are the crude oil extraction costs for major oil 
producing countries, including our own? How does that compare with oil 
derived from shale or coal?
    Answer. The cost to find, develop and produce oil varies greatly 
both within and outside of the United States. Costs depend on the 
scale, depth and complexity of underground reservoirs; the nature of 
the oil in place; whether the oil fields are onshore or in shallow or 
deep coastal shelf areas; royalties, taxes and other forms of 
government take, among other factors.
    Published estimates of exploration, development and extraction 
costs show the cheapest oil is found in countries like Saudi Arabia, 
Iran, Kuwait and Iraq, with costs of approx $7-$8/bbl. U.S. onshore 
oil, Russia, U.S. deep water, Western Europe offshore and Canada 
conventional oil are increasingly more expensive, on average. However, 
companies make investment decisions based not on geographic averages, 
but on the individual circumstances of each opportunity, knowing that 
the actual price they will receive for the oil they extract will depend 
on market conditions many years in the future.
    Oil replacements costs are also deemed to be particularly high 
today. Goldman Sachs and Sanford Bernstein believe they are about $50 
per barrel per day, including host government take, which is a large 
percentage of the cost. This is the price that is needed to justify new 
investment today. We believe that some of that elevated cost is due to 
high prices and spending levels outpacing the service industry's 
capacity to supply rigs and services. Thus, costs will come down as 
prices come down.
    ConocoPhillips does not currently extract oil from shale or coal, 
so we have no operating knowledge of the related costs. A 2005 report 
(Oil Shale Development in the U.S.) by the Rand Corporation estimated 
that commercial development of shale oil using the mining/retort 
process will require prices of $70-90/barrel.

    Question 16. Regarding foreign exporting, inventory maintenance, 
and other practices of your company, please provide a response to each 
of the following questions and information requests: For each and every 
export shipment to a foreign country of gasoline, distillate fuel oil, 
propane, or liquefied natural gas occurring from January 1, 2005 to 
present, please provide the date, product type, volume, domestic port 
of exit, foreign destination, transportation costs, and the sale price 
or transfer value upon arrival at the foreign destination.
    Answer. The United States is a net importer of clean products. For 
example, in 2004, the United States exported 976 thousand barrels per 
day of finished petroleum products and blending components (excluding 
LPGs), but imported almost three times that amount or 2.8 million 
barrels per day of finished petroleum products and blending components. 
Thus, the U.S. is a net importer by 1.8 million barrels per day. The 
North American market is also highly interconnected. There is a 
significant volume of cross-border energy trade between the United 
States, Mexico and Canada. Nearly 20 percent of U.S. finished products 
and blending component imports are from these countries, and 32 percent 
of U.S. product exports are to these countries. Canada and Latin 
American sources also comprise half of U.S. crude imports, which 
highlights the importance of continued trade.
    Imports and exports play a very important role in balancing U.S. 
and global supply and demand. If there is a disruption in one place, 
prices rise and attract imports from other places. Similarly, exports 
allow companies to move product when logistically or economically it 
can't be moved to another domestic location, or if the product doesn't 
meet domestic specifications. Logistical reasons for exports include an 
inability to find Jones Act tankers and pipeline bottlenecks, which 
force the product to be put on the water. In some cases, exports are 
key to relieve containment issues and maintain refinery production 
rates.
    A recent example of a ConocoPhillips export due to a containment 
issue is the sale of 280,000 barrels of No. 2 heating oil from our 
Alliance, La. refinery. We originally contracted to sell this cargo FOB 
to Projector (Ecuador) on August 16, 2005 with a loading date of August 
27-29. Because of Hurricane Katrina, the ship couldn't load at 
Alliance. To meet our commitment, we agreed on August 30 to load the 
cargo at our Lake Charles, Louisiana refinery. If we didn't load this 
cargo at Lake Charles, we would have shutdown the refinery due to 
distillate containment since the main pipeline to move product to the 
East Coast (Colonial) didn't start up for at least three days after 
Hurricane Katrina.
    Given pipeline bottlenecks and costs, it is also sometimes cheaper 
(and more profitable) to export product. For example, on September 19, 
2005 with pipeline capacity utilization at its maximum, we sold 50,000 
barrels of diesel from our Ferndale, Washington refinery to Petro-
Canada that was exported to Vancouver. The profit on this sale exceeded 
the profit that could have been obtained in the U.S. market.
    ConocoPhillips wishes to provide the Committee with all information 
that the Committee considers important to its current inquiry. The 
nature and extent of the information requested regarding the sale price 
of the exports, however, is highly confidential and competitively 
sensitive. Disclosure of this data would reveal confidential marketing 
and sales strategies which, in the hands of marketplace rivals, would 
be harmful to the interests of both ConocoPhillips and consumers. In 
addition, revelation of such confidential transactional information, 
especially of relatively recent vintage, could be deemed 
anticompetitive and invite antitrust scrutiny by state or federal 
enforcement agencies and potential private plaintiffs.
    APPENDIX A * summarizes information provided by ConocoPhillips to 
the United States Census Bureau identifying certain product exports.
---------------------------------------------------------------------------
    * Appendixes A-C have been retained in committee files.
---------------------------------------------------------------------------
    In addition to this information, ConocoPhillips believes that there 
may be additional transactions with respect to which ConocoPhillips 
sold product to a buyer in the United States and the buyer then 
exported the product. In the time available to ConocoPhillips to 
prepare this response, it has not been possible to identify such 
transactions. However, the Federal Trade Commission has requested 
similar information, and ConocoPhillips expects to be able to review 
available electronic records prior to its response to the Federal Trade 
Commission and to identify additional transactions, if any, with 
respect to which it is reasonable to believe product was exported from 
the United States.

    Question 16a. Since January 1, 2001 to present, please identify the 
number of shipments wherein your company exported gasoline, distillate 
fuel oil or jet fuel and the sales price or transfer value received at 
the destination was less than the amount that would have been received 
had the product been marketed by your firm in the United States.
    Answer. ConocoPhillips' policy is to sell its refined products to 
realize the best netback in the marketplace. Because exports are often 
contracted in advance of loading, the product sold is often subject to 
logistical constraints or the product is not marketable in the relevant 
regional market, comparing the profitability of hypothetical 
alternative transactions is not possible.

    Question 16b. Since January 1, 2001 to present, please identify the 
date, product, volume(s), foreign port of origin, expected U.S. port of 
entry, and eventual port of final destination in each instance wherein 
your company basically ``turned a ship away'' (whether proprietary 
product or acquired from a third party) by changing the shipments 
expected arrival in a U.S. port to a foreign port.
    Answer. It is common industry practice to charter ships with a 
destination indicating ``Any Safe U.S. or European port'', ``Any Safe 
European or Mediterranean port'' or ``Any Safe European or Asian 
port'', etc. Ships are loaded at origin without a final decision being 
made as to the destination of the cargo. As the ship embarks, the only 
decision made is the general direction the cargo will travel, with the 
final destination designated only when a purchaser commits to the cargo 
or when the greatest netback for that cargo has been identified. As a 
result, the final destination is often one of many destinations which 
may or may not have been previously designated for the cargo.
    Answering this question requires the examination of thousands of 
chartering agreements and Bills of Lading and making an attempt to draw 
conclusions from the original entry in relation to the final port of 
discharge. We were unable to conduct this examination in the short time 
period set for response. However, the same information has been 
requested by the FTC and we will be examining the relevant documents 
over the next several weeks and providing the FTC with our analysis.
    We were able to identify a transaction that, while not a diversion 
of a cargo, represented the export of imported product. In August 2005 
(prior to Hurricane Katrina), we had imported 100,000 barrels of 
gasoline from Korea to the West Coast of the United States. The 
gasoline was intended for the Arizona market, and did not meet 
California's specifications. ConocoPhillips demand for gasoline in 
Arizona was lower than anticipated. Had we imported the entire cargo of 
300,000 barrels we would have tied up 500,000 barrels of storage that 
we use to bring Carb Gasoline from San Francisco to L.A. potentially 
jeopardizing the operating rates at our San Francisco refinery. 
Consequently we sold 200,000 of that cargo to the Mexican national oil 
company before it arrived in L.A., along with 100,000 barrels of 
premium (would not meet California specifications) from our Northern 
California refinery, which was the condition they placed on the deal. 
On net, there was no impact on the market. We imported 100,000 barrels 
of gasoline that met Arizona specifications and we exported 100,000 
barrels of gasoline that did not meet U.S. specifications.

    Question 16c. From 1995 until present, please identify by month the 
inventory levels maintained by your company for gasoline and distillate 
fuel oil in both barrels and converted to ``days of cover'' or ``days 
of supply'' for your firm's distribution and sales volumes within each 
of the Petroleum Allocation Defense Districts (PADDS) in the United 
States.
    Answer. ConocoPhillips reports its inventory levels on a weekly and 
monthly basis to the Department of Energy. APPENDIX B represents the 
data we had readily available from these reports. The same data have 
been requested by the Federal Trade Commission and ConocoPhillips has 
waived its confidentiality claim with the Department of Energy to 
provide the FTC with the inventory data it is requesting.
    APPENDIX B contains data from the period July 4, 2003 through April 
9, 2004 (first tab) and data from April 16, 2004 through November 18, 
2005 (second tab). The DOE changed its reporting format in April 2004, 
so we started a new report at that time incorporating the new format.

    Question 16d. From January 1, 2005 to present, provide the details 
of each ``spot market'' (as commonly referred to in the industry for 
bulk sales, in volumes exceeding 5,000 barrels per transaction) 
including the date, identity of both the seller and purchaser, location 
of the product being sold, and the selling price.
    Answer. ConocoPhillips wishes to provide the Committee with all 
information that the Committee considers important to its current 
inquiry. The nature and extent of the information requested regarding 
``spot market'' transactions, however, is highly confidential and 
competitively sensitive. As drafted, this question would reach tens of 
thousands of individual transactions and would require the 
identification of detailed information respecting pricing, 
participants, locations, and volumes. As such, it would reveal 
confidential marketing and sales strategies which, in the hands of 
marketplace rivals, would be harmful to the interests of both 
ConocoPhillips and consumers in vigorous spot market competition. In 
addition, revelation of such confidential transactional information, 
especially of relatively recent vintage, could be deemed 
anticompetitive and invite antitrust scrutiny by state or federal 
enforcement agencies and potential private plaintiffs. Consequently, we 
would hope to work with the Committee to explore an appropriate 
mechanism and format by which this information may be provided in order 
to accommodate the Committee's interest in obtaining the necessary 
information for its purposes without unnecessarily compromising 
ConocoPhillips' interest, or that of the consuming public, in 
preserving the confidentiality of this strategically sensitive 
competitive data. To that end, particularly in light of the Federal 
Trade Commission's role in advising the Congress during the current 
inquiry and the agency's familiarity with the underlying marketplace 
issues respecting disclosure of sensitive competitive information, 
ConocoPhillips would welcome the involvement of the Federal Trade 
Commission in consultations directed at identifying an appropriate 
mechanism and procedure by which the Committee may receive the 
information it deems necessary.

    Question 16e. Describe your company's use of ``in-house trading 
platforms,'' and identify all individuals in your company by name, 
address, email, and phone number that were authorized during 2005 to 
either exchange, trade, sell or purchase gasoline or distillate fuel 
oil on either the ``spot market'', NYMEX futures market, or via 
``forward paper'' purchase rights.
    Answer. ConocoPhillips does not use in-house trading platforms. 
However we do own a small interest in the Houston Street Exchange, Inc. 
trading platform. ConocoPhillips does a small volume of its trading via 
Houston Street.
    ConocoPhillips' Commercial group trades through the larger publicly 
available platforms normally used by open market traders. These include 
the NYMEX, Access, ICE (formerly known as IPE or International 
Petroleum Exchange), etc. We are providing a list of ConocoPhillips 
traders in the United States who are authorized to purchase or sell 
physical and derivatives. However, we have omitted individual employee 
contact information as part of the public record to protect their 
privacy.
         Clean (light) Products Traders (Gasoline & Distillate)
Argianas, Lynn

Chih, Patrick

Hooper, Maria

Kelley, Mark

Mandell, Brian

Smith, Paul

Sundberg, Katleen (Kat)

Bishop, Tracy

Handsborough, Sam

Horne, Tucker

Love, Chad

McHale, Chris

Sostek, Andrew

  

Chase, Christi

Hollerbach, Steve

Hunter, James

Mabey, Orson

Shingleton, Lox

Stuckey, Sam

  

                         Heavy Products Traders
Usatschew, Walt

Grimaldo, Carlos

Viens, Andrew

Love, Turkessa

Hayes, Patrick

Davis, Paul

Monsalve, Romulo

McIntyre, Kyle

Heskamp, Douglas

               Crude Traders Authorized to Trade Product
Allen, Mike

Evans, Matt

  


    Question 16f. Please identify all third party reporting services, 
including but not limited to Oil Price Information Service (OPIS), 
Lundberg Surveys, Platts, and Oil Intelligence that your company 
regularly supplies transaction data or marketing information and all 
individuals of the company by name, address, email, and phone number 
that were authorized during 2005 to provide the information or data to 
such third parties.
    Answer. The third-party reporting services to which we supply spot 
transaction data or marketing information in the United States are 
listed below. However, we have omitted individual employee contact 
information as part of the public record to protect their privacy.

Argus

Bloomberg

BTU

Natural Gas Intelligence

Platt's

IO Energy

OPIS

Reuters

Tellerate


    ConocoPhillips Marketing does not report branded and unbranded rack 
prices to any external services.
    The following individuals in U.S. Commercial operations were 
authorized during the referenced time period to report data to third 
party services. Most of them were located in Houston at ConocoPhillips' 
corporate headquarters.
                600 N. Dairy Ashford
                Houston, TX 77079
                281-293-1000
                               Crude Oil
John W. Wright

Mike Allen

Matt Evans

Robb Thomas

Mike Zigich

Jeff Kopp

Scott Erni

Rupak Sinha

John Eidman

Cherie Hancock

Michael Thomas

Bobby Morehead

Jon Weichbrodt

Bill Van Dyke

Ed Missik

Ed Nadler

Glenn Simpson

lain Singer

Chris Breen

Doug Heinzer

William Brown

Tom Jones

Scott Loosely

                             Clean Products
Jim Hunter

Maria Hooper

Heidi Fitch

Sam Stuckey

Christi Chase

Mark Kelley

Steve Hollerbach

Orson Mabey

Kat Sundberg

Brian Mandell

Sam Handsborough

Tracy Bishop

Christine McHale

Patrick Chih

Chad Love

Ed Schopf

Lox Shingleton

Lynn Argianas

Andy Sostek

Tucker Horne

Sam Handsborough

Paul Smith

                             Heavy Products
Viens, Andy

Knut Torvik

Monsalve, Romulo

McIntyre, Kyle

Omar Suby

Grimaldo, Carlos

Patrick Hayes

Heskamp, Doug

Post, Denise

Stillings, Owen

Usatschew, Walter

Love, Turkessa

Davis, Paul

                          Natural Gas Liquids
  United States

M.J. Morrison

J.C. Jewett

J.J. McLiverty

P.W. Burger

Kathy Watson

Cassidy Simmons

Adam Ellis

S. Weed

Cody Womack

J.S. Wilborn

R.E. Sommerstedt

M.W. Schwartje

S.R. Walton

R. Hahn

S. Stewart

H.J. Gump

D.G. Lipford

E.M. Lindsey

S.M. Merveldt

L.A. Bradshaw

E. Brandt

B. Oakes

Kent Nettleingham

Amanda Seaberg

  Calgary

C. Gleave

K. Robertson


    Natural gas and power prices were provided by only one individual:

          James Allison--Regional Risk Manager, Gas & Power--North 
        America

    Question 16g. Please identify the branded and unbranded ``rack 
prices'' that were reported by your company to third party reporting 
services such as OPIS and the branded and unbranded ``rack prices'' 
that were actually charged distributors or jobbers by your company each 
day, from January 1, 2005 to present, at the truck loading terminal(s) 
that typically supply gasoline stations in Houston, TX, Atlanta, GA, 
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR, and Seattle, 
WA.
    Answer. We do not send branded and unbranded rack price information 
to any third party service provider such as OPIS. OPIS gets 
ConocoPhillips' rack price from our independent marketers (customers).
    Attached hereto as APPENDIX C is the requested rack pricing data 
for regular unleaded gasoline.

    Question 16h. Will your company commit that it will take no efforts 
to retaliate against any firm or individual that is a potential witness 
before this Committee or cooperates with any investigation into the oil 
industry by Congress or another governmental authority?
    Answer. Yes.

    Question 16i. From January 1, 2005 to present, for each instance 
known to your company wherein a third party (not your company) exported 
gasoline, distillate fuel oil, propane, or liquefied natural to a 
foreign country, please provide any of the details known to your 
company including the identity of the exporter, date, product type, 
volume, domestic port of exit, foreign destination, transportation 
costs, and the sale price or transfer value upon arrival at the foreign 
destination.
    Answer. ConocoPhillips generally does not have knowledge about 
third-party activities except where we sold them the cargo and we were 
exporter of record as noted in response to question 16A (Cantwell).

    Question 16j. Since January 1, 2001 to present please identify the 
identity, date, product, volume(s), foreign port of origin, expected 
U.S. port of entry, and eventual port of final destination in each 
instance wherein your company is aware a third party (not your company) 
basically ``turned a ship away'' (whether proprietary product or 
acquired from a third party) by changing the shipments expected arrival 
in a U.S. port to a foreign port.
    Answer. ConocoPhillips generally does not have knowledge about 
third party activities except where we sold them the cargo and we were 
exporter of record as noted in response to question 16A (Cantwell).

    Question 16k. Please provide an itemized list of tax deductions and 
credits taken under the U.S. tax code for 2004, by your parent company 
and subsidiaries.

------------------------------------------------------------------------
                                                           U.S. tax code
                                                              section
------------------------------------------------------------------------
Deductions:
    Bad Debts...........................................             166
    Property Taxes......................................             164
    State and Local Income Taxes........................             164
    Franchise Tax Expense...............................             164
    Sales and Use Taxes.................................             164
    Payroll Taxes.......................................             164
    Production Taxes....................................             164
    Environmental Taxes.................................             164
    Other Taxes.........................................             164
    Excise Taxes........................................             164
    Interest............................................             163
    Charitable Contributions............................             170
    Depreciation........................................             167
    Depletion...........................................             611
    Expired and Surrendered Leases......................             165
    General and Administrative Expense..................         Various
    Selling Expense.....................................             162
    Financing Expense...................................             163
    Geological and Geophysical Expense..................             165
    Dry Hole Expense....................................             165
    IDC Expense.........................................             263
    Retirement of Assets................................             165
    Amortization........................................         Various
    Cost of Retirements.................................             165
    Exploration G&A Expense.............................             162
    Partnership Losses..................................         Various
    Miscellaneous.......................................         Various
    Lease Carrying Expense..............................             162
    ETI Exclusion.......................................             114
    Net Operating Loss Deduction........................             172
    Dividends Received Deduction........................             241
 
Credits:
    Foreign Tax Credit..................................              27
    General Business Credit.............................              38
    Credit for Prior Year Minimum Tax...................              53
------------------------------------------------------------------------

                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ken Salazar to 
                             James J. Mulva

    Question 1. The Agriculture Committee is looking at the impacts 
these high energy prices are having on agricultural producers around 
the country. To sum it up: they are hurting. It seems to me that there 
is tremendous potential for our country to grow fuels such as ethanol 
and bio-diesel. This approach offers many benefits to rural America as 
well as to the country as a whole. What type of investments is your 
company making (and planning to make) in these types of renewable fuels 
in the United States?
    Answer. We are currently investing in terminal tanks and equipment 
to allow blending of biodiesel where mandated by state law. 
Additionally we are conducting research in novel ways of using 
agricultural feed stocks to manufacture gasoline and diesel directly, 
as well as evaluating the methods of improving the economics of ethanol 
and biodiesel manufacture and distribution.
    ConocoPhillips was supportive of efforts to include a provision in 
the Energy Bill that encourages the use of animal fats and waste as a 
renewable feedstock to run our refineries. Our refining operations 
believe these feedstocks have potential and are looking at how to 
implement their use.
    We do not believe that additional Congressional efforts to enact 
mandates for biodiesel or other renewables are appropriate at this 
time, given the negative effect that such costly mandates would have on 
consumers who are already dealing with high energy costs.

    Question 1a. Rural America is crying out for investment in 
renewable fuels, and I encourage your companies to look at the 
potential of renewable fuels. In terms of a percentage of your capital 
expenditures, how much money did your company spend this year to 
develop renewable fuel sources in the United States? What will that 
percentage be going forward?
    Answer. Our company will spend approximately 1-2 percent of our 
research expenditures on renewable fuels this year, with approximately 
half of that spent in the United States. Our planned expenditures are 
similar until we identify an attractive technology, in which case we 
will increase our spending as needed to commercialize the technology.

    Question 1b. Will you also provide this committee with some 
examples of renewable fuel projects that your company is pursuing 
outside the United States?
    Answer. We recently completed a commercial scale test demonstrating 
a new technology for converting renewable feed into high quality diesel 
fuel at our Whitegate Refinery in Ireland. We are in the process of 
evaluating the data from this test, and modeling its applicability 
across our worldwide refining network.

    Question 2. As a few of you note in your testimony, diesel prices 
have remained high while unleaded gasoline prices have come down. It 
seems as if we are getting lower priced unleaded gas at the expense of 
diesel. Since diesel is the fuel of choice in agriculture, it is a sort 
of a double whammy on our producers. What is being done, or what can be 
done, to get diesel prices back in line with the price of gasoline?
    Answer. U.S. diesel prices are presently higher than gasoline 
prices due to a tighter global diesel supply-demand balance, which 
stems from the strong trend in Europe toward dieseling the passenger 
car fleet and robust diesel demand in Asia. Global and U.S. diesel 
demand have been and will likely continue to grow at a faster rate than 
gasoline demand. Thus, the trend of global diesel prices moving above 
gasoline prices is not likely to be reversed even when immediate supply 
losses from the hurricanes are restored.
    The longer-term trend of strengthening diesel prices was 
exacerbated by the hurricanes, which temporarily shut down nearly 30 
percent of U.S. refining capacity at the peak. While the United States 
made up lost gasoline supplies through imports and specification 
waivers, diesel fuel did not have the same options. Diesel demand and 
price strength in Europe made it difficult for the United States to 
attract as much diesel as gasoline supplies. European refineries have 
excess gasoline production capacity due to dieselization since gasoline 
demand is declining there. Thus, they were able to provide additional 
gasoline supplies to the United States. Another factor buoying present 
diesel prices is that they gain strength in the winter as diesel is 
blended and/or re-graded into the heating oil market.
   When the price of diesel for a given market location is 
        above cost of alternative sources of added supply, supplies 
        will flow into that market. This was the case immediately after 
        the hurricane, when the United States did attract additional 
        distillate imports. The diesel-gasoline price difference also 
        provided an economic incentive for refiners to change product 
        mixes towards maximum diesel production, although this switch 
        would likely have occurred anyway, since the fall season is the 
        normal period when refiners switch from maximum gasoline 
        (summer season) to maximum heating oil (winter season, 
        including diesel). However, there is only a limited ability for 
        refiners to switch between maximizing diesel vs. gasoline 
        production (10 percent). On average, refineries in the U.S. 
        have 46 percent gasoline yields (on total refined products 
        production) and 21 percent distillate yields (diesel and 
        heating oil).
   ConocoPhillips increased diesel supply by maximizing diesel 
        production over gasoline when economic, moving/drawing 
        inventory, deferring refinery turnarounds (increased 
        production), maximizing imports where feasible, and working 
        diligently to re-start its Gulf of Mexico refining capacity 
        shut down by the hurricanes. All these actions, combined with 
        the rest of the industry efforts, have very effectively 
        restored diesel supply and brought the price down dramatically 
        since the hurricanes made landfall.
   The temperature this winter will likely determine the degree 
        to which the spread between diesel and gasoline prices narrows. 
        In the short-term, if the cold winter forecast is incorrect, 
        this will tend to bring down all distillate prices, including 
        diesel. In the long-term, the solution is to encourage 
        increased domestic production of diesel through refinery 
        expansions. Looking ahead, the pending requirement to produce 
        ultra low sulfur diesel may adversely impact diesel supply 
        reliability next year. This could cause the diesel-gasoline 
        price inversion to widen for some period of time. The EPA 
        should adopt reasonable transition provisions and enforcement 
        protocols that enable the industry flexibility necessary to get 
        through U.S.-wide system conversion from low sulfur to ultra 
        low sulfur diesel without supply disruptions.

    Question 2a. If demand for diesel is so high in Europe and high 
prices don't attract the supplies necessary to lower prices, isn't that 
a good indicator that we should work to produce more diesel in the 
United States and look to biodiesel as an option?
    Answer. The high price of diesel in Europe is due to the tax on the 
fuel, which, depending on the country, varies from $1.50 to $3.50 a 
gallon higher than the U.S. tax of 34 cents per gallon. The taxes on 
gasoline in Europe are generally higher than those on diesel. 
Therefore, the high European tax structure gives the illusion of high 
diesel prices at $3.70 to $5.70 per gallon but makes diesel less 
expensive than gasoline for the consumer. The wholesale price of diesel 
fuel in Europe is similar to the U.S., which limits the ability for 
Europe to export to the United States.
    U.S. demand has historically been higher for gasoline; therefore 
U.S. refineries are geared toward making more gasoline. Diesel engines 
do offer some fuel efficiency benefits, but also have emissions and 
consumer acceptance barriers to overcome. A large scale 
``dieselization'' of the U.S. fleet would take broader consumer 
acceptance of diesel engines and solutions to emissions concerns. 
Refinery configurations would need to be altered in response to this 
change in fuel demand, and the overall effect on consumers of such a 
change is difficult to predict.
    We do anticipate growth in U.S. diesel demand and expect renewable 
diesel (biodiesel or other non-hydrocarbon diesel) to fulfill part of 
that demand growth.

    Question 3. For the record, will you tell me what your company has 
spent on capital expenditures in cash, not including write offs such as 
amortization or depreciation. Will you also provide the figures spent 
on cash dividends and stock buyback for the same time period?
    Answer. Since 2003, the company has spent about $24 billion in 
capital expenditures and investments, has paid $3.5 billion in 
dividends to shareholders and repurchased $1.2 billion in company 
stock. At the same time, the company decreased its debt balance by $6.3 
billion.

----------------------------------------------------------------------------------------------------------------
                                                                                      Dividends
                                                          Capital     Net increase/    paid on    Repurchases of
                        Year                           expenditures    (decrease)      company     company stock
                                                      and investment     in debt        stock
----------------------------------------------------------------------------------------------------------------
2003................................................      (6,169)        (1,986)       (1,107)
2004................................................      (9,496)        (2,778)       (1,232)
2005 *..............................................      (8,573)        (1,505)       (1,210)        (1,164)
                                                     -----------------------------------------------------------
  Total.............................................     (24,238)        (6,269)       (3,549)        (1,164)
----------------------------------------------------------------------------------------------------------------
* 2005 Information is through September 30.


    Question 4. On November 1st, Senator Grassley asked your companies 
to contribute 10 percent of your record profits to supplement LIHEAP 
funding for the less fortunate. Will your companies support Senator 
Grassley's proposal?
    Answer. ConocoPhillips is concerned about the impact of energy 
prices on consumers, particularly our customers who can't afford higher 
energy prices. LIHEAP has been in place since 1982 to help needy 
families pay their home energy bills and the Federal Government has 
traditionally had the primary responsibility of helping families in 
need. This long-standing role of the government is appropriate and 
should continue.
    ConocoPhillips is concerned that any additional taxes, whether 
mandated or requested, on the oil and gas industry will reduce 
investment, and therefore reduce the expansion of supplies. This will 
tend to extend the period of elevated prices.

    Question 5. I'd like to encourage you to actively work with the 
Department of Energy and any other relevant federal agency on 
initiating a public/private education campaign focused on energy 
education and conservation. In the meantime, will you tell me what your 
company has done on its own initiative?
    Answer. ConocoPhillips was a leader in helping API develop a $24 
million outreach program, which is currently ongoing, to address the 
pricing environment as well as provide education to lawmakers and the 
public on our industry. That program, along with the Alliance to Save 
Energy education effort (a broad energy industry effort) and individual 
company efforts, devote significant attention to public education and 
outreach. ConocoPhillips is very interested in discussing with DOE and 
the Federal Government the development of a public/private education 
campaign focusing on several areas, including conservation.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                             James J. Mulva

    Question 1. Did the existence of price gouging statutes in 
Louisiana, Mississippi and Alabama play any role in your decision to 
freeze prices after Hurricane Katrina?
    Answer. The existence of state price gouging laws had no 
substantial influence on our pricing decisions after the hurricanes. 
Our guiding concern in our decision to freeze prices in impacted areas 
after the hurricanes was concern for our reputation and our belief that 
any increases would be temporary.

    Question 2. In the last decade, has your company ever withheld 
supply of crude oil or refined product from the market in order to 
prevent prices from falling?
    Answer. ConocoPhillips has no information that the company ever 
withheld crude oil or refined products from the market in order to 
prevent prices from falling. In the United States ConocoPhillips is a 
significant net purchaser of crude oil for its refineries and has no 
economic incentive to prevent crude prices from falling. Regarding 
refined products, the company, like other U.S. refiners, has limited 
storage for refined products, and requires contemporaneous marketing of 
these products to maintain refinery operations. Thus, supplies must 
enter the market quickly and cannot be withheld for any reason.

    Question 3. Please describe any business relationship or 
transaction your company or any of its subsidiaries, wherever located 
and wherever incorporated, whether wholly owned or not, have had with 
Iranian nationals (except employment of Iranian expatriates), the 
Iranian government, individuals or corporations located or incorporated 
in Iran, or any representative of these people or companies.
    Answer. ConocoPhillips does not have any operations or investments 
in Iran, either directly or indirectly through foreign subsidiaries, 
nor is ConocoPhillips currently negotiating for business opportunities 
in Iran.
    In 1995, the National Iranian Oil Company (``NIOC'') awarded our 
foreign subsidiary, Conoco Iran N.V., a service contract to develop the 
Sirri Fields located offshore Iran adjacent to ConocoPhillips 
operations in Dubai, but the subsequent imposition of U.S. sanctions 
precluded our involvement in that project and we withdrew from that 
project after consultation with the U.S. Government. The Sirri Fields 
project was then awarded by NIOC to Total.
    In a separate matter, ConocoPhillips received on April 8, 2004, a 
pre-penalty notice from the Office of Foreign Assets Control (``OFAC'') 
stating that OFAC had reasonable cause to believe that two U.S. 
entities, Conoco Inc. and Conoco Middle East Ltd., had from March 1999 
until September 2000 engaged in prohibited facilitation of trade with 
Iran by Conoco (U.K.) Limited (``CUKL'', our primary U.K. operating 
subsidiary). OFAC indicated that it believed that the two U.S. entities 
had committed prohibited facilitation by: (1) providing CUKL with an 
opportunity to obtain and analyze (without charge) data from the 
Azadegan oil field in Iran and to share its interpretation of those 
data with NIOC in what the company views as a typical pre-contractual 
petroleum industry format for the purpose of furthering the possibility 
of participating in the future development of that field; and (2) 
providing CUKL with support and assistance in the performance of the 
technical analysis.
    In response to the pre-penalty notice, we informed OFAC that we 
believed that these activities did not constitute prohibited 
facilitation under the Iranian Transactions Regulations. First, we 
submitted that the referral to CUKL of the opportunity to analyze 
Azadegan data did not constitute or involve acts of ``facilitation'' 
within the meaning of the Iranian sanctions either as they existed at 
the relevant time or as they were subsequently amended on April 26, 
1999. Second, we argued that none of the activities performed by CUKL 
would have been prohibited if performed by a U.S. person. While the 
Iranian sanctions prohibit transactions by U.S. persons relating to 
Iranian-origin goods and services as well as exports of technology, 
goods and services to Iran by U.S. persons, unlike other OFAC 
regulatory regimes such as the Sudanese Sanctions Regulations, U.S. 
persons are not required to refrain from all ``transactions'' and 
``dealings'' in Iranian Government ``property.'' Third, we noted that 
OFAC has consistently stated that it cannot and does not regulate 
speech and informational discussions, which were the essence of what 
CUKL conveyed to NIOC in sharing its opinion of the NIOC data provided 
to CUKL. Finally, we pointed out that ConocoPhillips had voluntarily 
advised the U.S. Government as early as July 1999 of its interest in 
the Azadegan field and its intention to seek an OFAC license to 
negotiate an executory contract to develop the Azadegan field and had 
voluntarily supplied OFAC in September 2000 the facts concerning the 
NIOC discussions as soon as any public suggestion was made that there 
was an economic sanctions issue. We also noted that, ultimately, given 
OFAC's decision not to grant ConocoPhillips license request and 
ConocoPhillips' inability to pursue negotiations, NIOC awarded Azadegan 
field (which is potentially as large as the entire Alaskan North Slope) 
contracts to Japanese and European companies.
    Nevertheless, we determined that a settlement of the allegations in 
the pre-penalty notice was appropriate in order to avoid the cost of a 
protracted enforcement proceeding and potential litigation.
    In March 1999, the Office of Foreign Assets Control (``OFAC'') 
issued License No. IA-3706 (the ``License'') to ConocoPhillips 
(formerly Conoco Inc.), authorizing the company to participate in a 
joint venture with Petroleum Nasional Berhad (``Petronas'') to 
construct and operate an oil refinery in Melaka, Malaysia (the 
``Refinery'') pursuant to the joint venture contracts that were signed 
prior to the promulgation of the U.S. economic sanctions against Iran. 
While it was known that Petronas would process Iranian crude oil at the 
Refinery, it was a condition of the License that the company would not 
be involved in any way in the purchase, processing or refining of 
Iranian crude oil. ConocoPhillips has successfully participated in the 
operation of the Refinery within the scope of the License and has never 
purchased Iranian crude oil or been involved in any of Petronas' 
decision regarding its use.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                             Lee R. Raymond

    Question 1. I have introduced legislation that will offer an up to 
$500 tax credit to working low and middle income individuals for the 
cost of home heating expenses. According to the National Energy 
Assistance Directors Association, heating costs for the average family 
using heating oil are projected to hit $1,666 for the upcoming winter. 
This represents an increase of $403 over last winter's prices and $714 
over the winter heating season of 2003-2004. Meanwhile, profits of oil 
and gas rose 62 percent in the third quarter for companies in the 
Standard & Poor 500 index. I am proposing to offset the $500 tax credit 
for home heating expenses by curtailing the benefit large oil companies 
receive by using the LIFO accounting method. Do you think given budget 
deficits and record profits for oil companies that it is appropriate to 
divert tax benefits for large integrated oil companies such as yours to 
pay for such a measure?
    Answer. No. LIFO tax accounting is not a tax benefit. It is a 
standard accounting method that has been in use and allowable to a 
broad range of American businesses since the 1930s. It is poor tax 
policy and shortsighted to impose a tax or deny an otherwise allowable 
deduction or credit to one segment of industry simply because that 
sector is large and profitable at the moment. While oil industry 
profits are strong right now, when compared to sales, they are in line 
with the average of other industries. In addition, a change in LIFO 
would set a dangerous precedent by discouraging needed investment and 
negatively impacting investor confidence in the U.S. economy.

    Question 1a. Does this seem like an equitable approach given that 
the high cost of oil enables you to not only bank large profits, but 
also to use accounting methods to substantially reduce taxes? Is it 
fair to report less taxes when you're profiting the most?
    Answer. It would be inequitable to prohibit one segment of the oil 
industry from using the existing LIFO inventory accounting method. The 
LIFO method and rules are longstanding, well-accepted, SEC-sanctioned 
and properly match current costs with current revenues, consistent with 
generally accepted accounting principles. The LIFO method is available 
to and used by many industries, and is certainly not unique to the oil 
industry. It would be highly discriminatory to retroactively curtail a 
segment of the oil industry, alone, from using the existing LIFO 
accounting rules.

    Question 2. Your third quarter profits have certainly been a 
lightning rod that has riled consumers as they continue to pay 30 
percent more in Maine for their home heating oil for the winter.
    A. I realize that you reinvest some of these profits in exploration 
for more product. In each quarter, have you reinvested the same 
percentage of the profits to reinvestment? What have your reinvestment 
percentages been to your total profits? Do they vary from quarter to 
quarter or year to year?
    Answer. Over the last ten years, ExxonMobil's cumulative capital 
and exploration expenditures have exceeded our-cumulative annual 
earnings. Our average annual capital expenditures have been 
approximately $14.0 billion, while our average annual net income has 
been approximately $13.8 billion. See, Attachment A,* ExxonMobil Long 
Term Earnings and Investment History. Please refer to the table below 
of quarterly data. On average, for the seven quarters from 1Q2004 to 
3Q2005, ExxonMobil reinvested 66% of Upstream net income in Upstream 
capital and exploration expenditures and 44% of total consolidated net 
income. Comparing quarterly earnings to capex is not appropriate, since 
our capital investments take years to plan and execute, while quarterly 
earnings vary dramatically with current market conditions. If we varied 
our capital spending with our earnings, our capital investment 
implementation would be far less effective and would yield fewer 
production benefits for consumers.
---------------------------------------------------------------------------
    * Attachments A-K have been retained in committee files.

                                        REINVESTMENT %'s TO TOTAL PROFITS
----------------------------------------------------------------------------------------------------------------
                                                    1Q      2Q      3Q      4Q      1Q      2Q      3Q     Avg.
                                                   2004    2004    2004    2004    2005    2005    2005    1Q04-
                                                    $M      $M      $M      $M      $M      $M      $M    3Q05 %
----------------------------------------------------------------------------------------------------------------
Upstream capital & exploration expenditure         2,704   2,840   2,877   3,294   2,812   3,678   3,586
 (capex)........................................
Upstream net income after tax...................   4,013   3,846   3,929   4,887   5,054   4,908   7,349
Total consolidated net income after tax.........   5,440   5,790   5,680   8,420   7,860   7,640   9,920
 
Upstream capex as a % of upstream net income....     67%     74%     73%     67%     56%     75%     49%     66%
Upstream capex as a % of total consolidated net      50%     49%     51%     39%     36%     48%     36%     44%
 income.........................................
----------------------------------------------------------------------------------------------------------------
Data Source & Notes: Quarterly ExxonMobil Press Releases and associated 8-K.


    Question 3. To what non-profit organizations and academic research 
that address global climate change does your company donate financial 
support to and how much do you donate each year?
    Answer. ExxonMobil has committed to provide up to $100 million over 
a 10 year period to Stanford University's Global Climate and Energy 
Project (GCEP), which is the largest-ever investment in independent 
climate and energy research. GCEP is a major long-term research program 
designed to accelerate the development of commercially viable 
technologies that can meet global energy demand while dramatically 
lowering GHG emissions.
    GCEP is investigating a full spectrum of energy resources, 
environmental technology, and end uses that can be adopted globally 
for:

   Advanced transportation options;
   Improved electric power generation and transmission;
   Expanded use of hydrogen and biomass fuels;
   Next-generation coal, nuclear power, and renewable energy; 
        and
   Carbon dioxide capture and storage.

    GCEP projects initiated in 2003 and further developed in 2004 
include an integrated assessment of technology options, studies of 
hydrogen production and use, advanced combustion-system research, and 
studies of geologic sequestration of carbon dioxide. More recently, 
GCEP launched new research projects targeting fundamental breakthroughs 
in technologies, including renewable biomass, fuel cells, and solar 
cells.
    More information on the GCEP is provided at http://
gcep.stanford.edu/.
    Details of other individual ExxonMobil contributions are provided 
in our annual Worldwide Giving Report that is posted on ExxonMobil's 
website: http://www.exxonmobil.com/Corporate/Citizenship/gcr--
contributionsworldwide--report.asp.
    In 2004, contributions that were identified as being targeted to 
climate change research and education in the Giving Report totaled 
$2,245,000.

    Question 4. There has been much discussion about the skyrocketing 
costs of gasoline, heating oil, and other petroleum products over the 
past year, magnified by the three hurricanes which have hit the Gulf 
Coast region this year. In response to these inquiries into the rising 
prices and your soaring profits, you have asserted that these increases 
are tied to market forces, particularly the rising prices of crude oil.
    I've reviewed your financial filings from the Securities and 
Exchange Commission, and they paint a very stark picture when compared 
to the financial misery being experienced by millions of Americans. 
ExxonMobil, for example, has realized a net income of $25.42 billion in 
the first nine months of 2005, an increase of $8.5 billion over the 
first nine months of 2004. Exxon's third quarter net income this year 
was $9.92 billion, up a full 90%.
    Similarly, ConocoPhillips' net income for the third quarter of 2005 
was $3.8 billion, compared with $2.006 billion during the same time 
period in 2004. Conoco's filing attributes this jump in profit to 
``higher crude oil, natural gas and natural liquid gas prices,'' 
``improved refining margins,'' and ``equity earnings from our 
investment in LUKOIL.''
    In my State of Maine, the median state income is $17,044 per year. 
A full 78 percent of Mainers use heating oil to warm their houses in 
wintertime, and this, combined with gasoline prices of anywhere from 
$2.50 to $3.00 per gallon paints a harsh picture for Maine and New 
England this winter. Petroleum is not any run-of-the-mill commodity. It 
is the lifeblood of commerce in this country, with fuel costs being 
built into the price of every other good bought and sold on the market. 
And in places like New England where petroleum heats most homes, it's 
literally a life-and-death commodity. Your industry has taken the 
position in its SEC filings and at yesterday's hearing that the 
escalation of its fuel prices is the result of increases in crude oil 
prices. However, if your retail gas prices were raised simply to cover 
your increased costs in purchasing crude oil, your net profits would 
remain the same. Everyone knows this is not happening. Can you identify 
for this committee the reason that the rise in gasoline prices is far 
out-pacing the rise in crude oil prices?
    Answer. Generally, changes in the price of crude oil directly 
effect the price of gasoline. See, Attachment B, Price Per Gallon. 
Hurricanes Katrina and Rita created a highly unusual situation, 
however, in which the gasoline markets were reacting not so much to 
crude oil prices as to the hurricanes' unprecedented impact on gasoline 
supply and distribution logistics. Prior to Katrina, U.S. refineries 
were operating at 97.1% of capacity; just after Rita, U.S. refineries 
operated at 69.8% of capacity due primarily to damage done to 
refineries by the hurricanes, but also due to logistical problems 
(crude supply to refineries and product movements out). Almost 29 
percent of U.S. refining capacity was offline as a result of these 
natural disasters. In addition, both the Colonial and Plantation 
pipelines were non-operational for three days. In other words, although 
demand remained unchanged, supply was dramatically reduced. In fact, 
with decreased supply, the demand for gasoline actually increased 
significantly following Hurricane Katrina, perhaps reflecting 
consumers' fears that they would not be able to obtain gasoline at all, 
given the supply disruptions. In response, gasoline prices rose. This 
price increase had the affect of attracting sufficient additional 
supplies from other sources, such as imports from Europe and Asia, to 
meet demand.
    Although U.S. refineries currently are still operating well below 
historical levels--utilization is now about 86% of capacity--the 
industry is supplying almost as much gasoline as it was prior to the 
hurricanes. Capacity has been shifted from making other products to 
supply gasoline demand, and imports from Europe have increased 
substantially. As a result, gasoline prices are now below levels that 
existed prior to Hurricane Katrina in nearly all parts of the U.S. 
Gasoline prices have fallen further than have crude oil prices over the 
past few weeks.

    Question 4a. Even though crude oil prices have risen this year, 
your companies aren't actually incurring those costs, are they? Isn't 
the gasoline and heating oil that your firms are currently selling on 
the market actually being produced from inventories that your companies 
purchased when the price of crude oil was much lower?
    Answer. ExxonMobil is a net buyer of crude oil--we refine nearly 
three times as much crude as we produce. In 2004, we spent $139 billion 
buying crude oil for our operations. We pay the prevailing market price 
for crude to meet our refining needs. Our domestic crude inventories 
represent only about two weeks supply for our refineries, and some of 
this is used to fill equipment. We also purchase product at current 
market prices to meet our customers' needs. ExxonMobil does not engage 
in speculative activities.

    Question 4b. If you're producing oil from crude that you bought at 
$40 per barrel, but selling it at a price that is purportedly based 
upon a $70 per barrel cost to you, wouldn't that account for the 90% 
increase in profits we've seen?
    Answer. No. See previous answer. ExxonMobil is a substantial net 
buyer of crude oil and we pay the market price to meet our refining 
needs. We also purchase product at current market prices to meet our 
customers' needs.

    Question 5. I've alluded to the vital role petroleum plays in our 
economy and society, from the price of bread to the price of a plane 
ticket to the price of heating one's home. While you're obviously in 
the business for profit, there are other sectors of the economy where 
we put a limit on selling commodities at unconscionable prices. One 
example is usury law, where lenders are prohibited from charging 
unconscionable rates for borrowing money--because we recognize that 
access to cash is critical to enterprise. How much more of a toll do 
these fuel prices have to take on our society before Congress steps in 
and places similarly appropriate regulations on your industry?
    Answer. We don't accept the premise of your question. While 
Congress alone evaluates the factors impacting public policy options 
and legislates according to its judgment, we urge you to recognize the 
vital role petroleum plays in sustaining and expanding modern living 
standards and economic prosperity. Any decisions made about near-term 
action should properly consider the long term consequences on the 
economy of those decisions.
    Crude oil prices are established by a robust global market and 
those prices largely influence the price of petroleum products sold 
throughout the world. Historic market interventions by governments, 
through price controls or otherwise, have proven to be self-defeating 
and ineffective on many levels.

    Question 5a. Many consumers would say that raising the price of gas 
by $2 per gallon over the past 2 years, while reaping over $25 billion 
in profits is price gouging. Many lawmakers would agree. What do you 
say to them?
    Answer. ExxonMobil condemns price gouging. In the immediate 
aftermath of the storms, we acted responsibly in pricing at our company 
operated service stations and we also encouraged our independent 
retailers and distributors to do the same.
    Competition for retail sales is broad. For example, only about 7% 
of retail stores branded Exxon or Mobil are actually operated by 
ExxonMobil--the remainder are dealers and distributors, or in some 
cases resulting from FTC divestment requirements, other oil companies. 
Many distributors operate under multiple brands and there is 
significant competition to supply them. Retailers with no refining 
capacity, such as Racetrac, QuickTrip, WaWa, Sheetz, 7-11, and Stop-n-
Go sell a significant percentage of domestic gasoline.
    Gasoline prices in the U.S. are determined by supply and demand of 
crude oil and refined products. Oil company earnings per dollar of 
revenue from sales of these products are in line with other major 
industries. The scale of our industry is so huge, however, that the 
large total volume of sales results in a large total profit. Moreover, 
the recent historic highs need to put into the context of the cyclical 
nature of the oil business. For example, in 1998, crude prices were as 
low as $10 a barrel, and our full year earnings were correspondingly 
lower, at about $8 billion.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Pete V. Domenici to 
                             Lee R. Raymond

    Question 1. What are you doing to bring oil prices down?
    Answer. Oil is a globally traded commodity. See, Attachment C, Why 
is Global Oil Demand Increasing? and Attachment D, How Much Spare Oil 
Capacity Is There? Prices are established across a broad market, with 
many participants. Although ExxonMobil is the second-largest non-
government oil producer (slightly behind BP), we produce only 3% of the 
world's oil. In fact, we are a huge net purchaser of crude oil, 
refining nearly three times as much crude as we produce. In recent 
years, ExxonMobil is investing on average $15 billion per year to find 
and produce new oil supplies and expand refining and distribution 
capability. We are working to expand crude oil and gasoline refining 
capacity in a cost effective manner and we always focus on extremely 
efficient logistics. See e.g., Attachment E, ExxonMobil--What 
Percentage of the World Energy Market?

    Question 2. What is the relationship between the price of oil that 
Americans are paying and the profits you are making?
    Answer. In fact, the vast majority (approximately 70 percent) of 
ExxonMobil sales and profits are made outside of the United States. 
Because oil is a globally traded commodity, the absolute level of crude 
oil price, established on a global basis, is a key factor impacting 
American consumer costs and energy industry earnings. On a dollarfor-
dollar basis, our industry's profits are generally in line with the 
average of all U.S. industry. For the second quarter of this year, the 
oil and gas industry earned 7.7 cents for every dollar of sales 
compared to an average of 7.9 cents for all U.S. industry. See, 
Attachment F, How Do Oil Industry Earnings Compare to Other Industries?

    Question 3. The question I hear most from people is how is the 
price of oil set? Many Americans think oil companies are rigging prices 
to reap big profits. How would you respond to that?
    Answer. That perception is grossly incorrect and contradicted by 
numerous government studies. For example, See, Federal Trade Commission 
Report on The Petroleum Industry: Mergers, Structural Change, and 
Antitrust Enforcement (August 2004) (``Private oil companies have small 
shares of world crude oil production and reserves, limiting any 
influence on world oil price''). http://www.ftc.gov/opa/2004/08/
oilmergersrpt.htm
    Oil is a globally traded commodity. Prices are established across a 
broad market with many participants, so the ability of a single company 
to substantively impact prices is minimal. ExxonMobil produces less 
than 2 percent of the world's daily energy and only 3 percent of the 
world's oil.

    Question 4. Americans are being burdened with high oil, natural 
gas, and gasoline prices while you all are raking in record profits. 
What do you say to those people that blame you for this and say that it 
is unfair?
    Answer. We recognize that the increases in energy prices following 
Hurricanes Katrina and Rita put a strain on Americans' household 
budgets. In recent weeks, gasoline prices have come down to below pre-
Katrina prices as shut-in energy supplies have returned and refinery 
operations have been restored.
    ExxonMobil engages in cyclical, global, commodities-based 
businesses. Those cycles transcend the oil industry and are experienced 
by all commodity-based businesses, from orange juice to corn, coffee to 
gold. The high points of such market cycles are generally marked both 
by high prices and profits. However, the oil industry has experienced 
sustained periods of low prices and investment returns, throughout much 
of the 1980s and 1990s, for example. As recently as 1998, global oil 
prices hit $10 per barrel and gasoline sold in the United States for 
under a dollar per gallon. ExxonMobil nevertheless invested more than 
$15 billion in new capital expenditures and research in that year, 
nearly twice our earnings.
    Global crude oil markets largely determine petroleum product 
prices, although events such as the recent hurricanes, which caused 
outages at nearly one-third of our nation's refining capacity at one 
point, can also significantly influence product markets and prices. Our 
company is but a small part of the enormous global energy market, 
producing only 3 percent of the world's daily crude oil needs. Every 
day, our 85,000 employees work extremely hard to stay ahead of our 
global competition and provide energy supplies to consumers at 
competitive prices.

    Question 5. Americans want to know if it is not costing so much 
more to produce a barrel of oil, why are prices rising so high?
    Answer. While crude oil costs are a critical component of gasoline 
prices, other factors also affect the price of gasoline. See, 
Attachment G, What Affects Gasoline Prices? Both crude oil and gasoline 
are commodities that are traded globally in open and transparent 
markets. See, Attachment H, U.S. Sources of Crude Oil.
    Prices in these global markets reflect not only the cost of supply, 
but speculation by global commodities traders regarding future prices 
and competition among purchasers. For example, recent concerns about 
relatively low levels of global spare crude oil production capacity 
seem to be affecting the crude oil futures trading. ExxonMobil does not 
engage in speculative commodity trading activities in energy 
commodities.
    Generally, changes in the price of crude oil directly affect the 
price of gasoline. With regard to the post-hurricane increase in U.S. 
gasoline prices, Hurricanes Katrina and Rita created a highly unusual 
situation, however, in which the gasoline markets were reacting not so 
much to crude oil prices as to the hurricanes' unprecedented impact on 
gasoline supply and distribution logistics. Prior to Katrina, U.S. 
refineries were operating at 97.1% of capacity; just after Rita, U.S. 
refineries operated at 69.8% of capacity due primarily to damage done 
to refineries by the hurricanes, but also due to logistical problems 
(crude supply to refineries and product movements out). Almost 29 
percent of U.S. refining capacity was offline as a result of these 
natural disasters. In addition, both the Colonial and Plantation 
pipelines were non-operational for three days. In other words, although 
demand remained unchanged, supply was dramatically reduced. In fact, 
with decreased supply, the demand for gasoline actually increased 
significantly following Hurricane Katrina, perhaps reflecting 
consumers' fears that they would not be able to obtain gasoline at all, 
given the supply disruptions. In response, gasoline prices rose. This 
price increase had the affect of attracting sufficient additional 
supplies from other sources, such as imports from Europe and Asia, to 
meet demand.

    Question 6. What is your company's response to proposals for 
enactment of a Windfall Profits Tax?
    Answer. We strongly oppose it. The non-partisan Congressional 
Research Service (CRS) concluded that the ``windfall profits'' tax of 
the 1980s was harmful to the U.S. economy. According to the (CRS), the 
tax drained $79 billion in industry revenues during the 1980s that 
could have been used to invest in new oil production--leading to 1.6 
billion fewer barrels of oil being produced in the United States from 
1980-1988. The tax reduced domestic oil production as much as 6 
percent, and increased oil imports as much as 16 percent.
    It would be similarly counterproductive to impose such a tax today. 
Increasing the costs of oil and gas production in this country would 
undermine the urgent policy goal of expanding energy supplies to the 
American economy and people. Such a tax would not be imposed on oil 
production outside of the United States, significantly advantaging the 
foreign national oil companies with which we must compete. In a global 
marketplace, it would send capital investment for energy development, 
and jobs, overseas. It would undermine the American companies within 
the industry, making them less competitive, when political leaders and 
the American people are looking to them to expand supplies, which would 
tend to reduce long-term energy prices.
    Our investment decisions to fund projects are made five to ten 
years before they are realized, based upon assumptions about investment 
returns in our cyclical commodities businesses. We go through peaks and 
valleys, and our business plans assume that there will be peaks and 
valleys, so that, over the cycle, our shareholders see an adequate 
return on their investment. To lop off the peaks would undermine 
investor confidence and capital formation. The industry would then have 
more difficulty attracting and investing the amount of capital needed 
to continue to supply the energy needs of societies around the globe.

    Question 7. Do you believe that Americans are dangerously dependent 
on oil and its refined products?
    Answer. No. The emergence of abundant, affordable energy over a 
century ago provided a key foundation for the tremendous gains in 
living standards and quality of life achieved in the United States and 
throughout the world. In addition, the more recent emergence of the 
world's developing country economies has been based on vastly increased 
energy use, and particularly the use of oil and its refined products.

    Question 8. The International Energy Agency's recent Global Outlook 
report expresses concern about world energy supplies and reliance on 
the Middle East for oil. Do you think the IEA's anxiety is justified?
    Answer. The IEA's overall numerical projections are very similar to 
ExxonMobil's annual Energy Outlook. Much of the anticipated increases 
in crude oil production is expected to come from the Middle East where 
much of the global resource base is located. While the share of 
production from the Middle East will grow, other regions will still 
provide the majority of production. We do not view the projections for 
increases in production from the Middle East as a significant concern. 
ExxonMobil is working around the world to increase global hydrocarbon 
production, including in Africa, Russia, Canada, and South America.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Lisa Murkowski to 
                             Lee R. Raymond

    Question 1. In your agreement on an Alaska natural gas pipeline 
that you are negotiating with the State of Alaska under the state's 
Stranded Gas Act, do you anticipate making a firm commitment to develop 
the Alaska gas pipeline project or do you anticipate accepting an 
agreement that will only involve a series of spending and work 
commitments? If the latter is the case, how long will it be before a 
binding construction commitment deadline is reached?
    Answer. The details of the contract are still being negotiated with 
the State of Alaska. Discussions are well advanced. While significant 
progress has been made, additional work remains (such as completing 
fiscal negotiations, additional engineering, permitting, and other 
activities) before a final construction decision can be made.

    Question 2. If there is a concern about tying up your investment 
capital in a single project, if a pipeline company presented you with a 
proposal to take all of the risk of construction of the Alaska pipeline 
project and to ship your gas at a reasonable tariff, would you commit 
the gas you control to that pipeline within a reasonable time period? 
If not, why?
    Answer. ExxonMobil is involved in many capital intensive projects 
in the U.S. and around the world, and is capable of handling them at 
the same time. A pipeline, particularly of this scale, cannot be 
financed without the underpinning of creditworthy shippers. 
Consequently, a pipeline company would not be in a position to take all 
of the risk of construction.

    Question 3. In your companies' view, is it less risky to invest 
billions of dollars in new LNG facilities to import natural gas from 
foreign sources, than to invest in the Alaska gas line project? If not, 
why are you investing in LNG projects before making a firm commitment 
to the Alaska project?
    Answer. There is risk in every project that ExxonMobil develops and 
operates. ExxonMobil is very interested in and capable of developing 
viable projects that will provide additional energy to meet U.S. 
demand. Work remains to be done on an Alaska gas line (such as 
completing fiscal negotiations, additional engineering, permitting) 
before a final construction decision on that project can be made. The 
fiscal negotiations are well advanced. We are investing in a broad 
range of projects, including LNG, simultaneously and are capable of 
handling them at the same time.

    Question 4. While all of your companies are global in scope, this 
nation is concerned about its reliance on foreign sources of crude oil. 
Does it make sense for the United States to increase its reliance on 
foreign LNG while allowing Alaska's natural gas reserves to continue to 
remain in the ground?
    Answer. To meet its energy demand, the U.S. needs natural gas 
supplies from both domestic and international sources. It makes sense 
to progress projects that can economically provide energy to the U.S., 
such as LNG and Arctic gas, in order to provide reliable and 
competitive energy supplies to American consumers.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. James M. Talent to 
                             Lee R. Raymond

    Question 1. The recent hurricanes have highlighted the need for 
increasing refinery capacity, which was already operating at a tight 
margin of 97 percent. While that is laudible for efficiency purposes, 
it allows no room for error in case of sudden outages or demand 
increases. What is the optimal amount of spare refining capacity to 
ensure a reliable supply of finished petroleum products at stable 
prices?
    Answer. Although hurricane and flooding damage, transportation 
logistics, employee safety, and personnel dislocations contributed to 
the supply shortage following Hurricanes Katrina and Rita, the most 
critical contributing factor was the loss of electric power to run 
pipelines and refineries. A more reliable power system would help 
ensure that the product distribution infrastructure is sufficient to 
deliver fuels to the market place.
    Refinery capacity utilization reflects optimization of many 
factors--for example, maintenance schedules, raw material availability 
and cost, and product demand. Refining is a global business, and the 
U.S. has routinely imported petroleum products for decades to balance 
supply and demand. As a global integrated company, ExxonMobil uses its 
worldwide resources to re-supply areas that experience shortages due to 
local or regional supply problems. In response to the recent 
hurricanes, the markets worked even under the most extraordinary 
circumstances.

    Question 2. How has industry consolidation impacted the amount of 
spare production and refining capacity?
    Answer. We believe that recent consolidations in the U.S. refining 
sector have improved the efficiency and capacity of U.S. refining, thus 
benefiting consumers. In our own merger, we have seen improvements from 
sharing the best practices of each of the parent companies with the 
refineries of the other. Several refineries have been sold to 
independent/smaller refiners as part of FTC conditions for allowing 
mergers to proceed. For example, independent refiner Valero is now the 
largest U.S. refiner.

    Question 3. Describe the degree of competition between refineries 
for crude oil supplies and sales to retailers. What percentage of crude 
oil processed in the U.S. is processed by integrated companies (i.e., 
those produce and refine) versus refined by independent refining 
companies?
    Answer. Domestic refineries must compete on the world market for 
the majority of crude that they process--in 2004, per the EIA, U.S. 
refiners processed 2 barrels of imported oil for every barrel of 
domestically-produced oil.\1\ As of year-end 2004 per the Annual 
Refining Survey in the Oil and Gas Journal, major international 
integrated refiners operated 56% of the U.S. refining capacity, and 
smaller integrated refiners operated an additional 13%. The remaining 
31% is operated by independent refiners.
---------------------------------------------------------------------------
    \1\ Per EIA, 15.4 MBD of total crude processed, 5.4 MBD of domestic 
crude production, and 0.02 MBD of crude exports.
---------------------------------------------------------------------------
    Competition for retail sales is much broader than it might appear. 
For example, only about 7% of retail stores branded Exxon or Mobil are 
actually operated by ExxonMobil--the remainder are dealers and 
distributors, or in some cases resulting from FTC divestment 
requirements, other oil companies. Many distributors operate under 
multiple brands and there is significant competition to supply them. 
Retailers with no refining capacity, such as Racetrac, QuickTrip, WaWa, 
Sheetz, 7-11, and Stop-n-Go sell a significant percentage of domestic 
gasoline. About 15% of ExxonMobil's U.S. gasoline sales are through the 
unbranded wholesale market, generally to such retailers.

    Question 4. How has the amount of refining capacity tracked changes 
in demand for gasoline and diesel over the last 30 years?
    Answer. Domestic production has supplied the vast majority of 
gasoline and diesel demand growth over the last 30 years. U.S. refining 
output has increased by 30 percent over the past 30 years.

    Question 5. Explain to me your company's plan to increase refining 
capacity in the U.S. to meet the need for new refinery capability.
    Answer. ExxonMobil is studying expansions at some of its U.S. 
refineries and we would like to continue to invest in the U.S. if there 
are attractive economic opportunities to do so. Over the last decade 
ExxonMobil has increased its U.S. refining capacity by the equivalent 
of three average-sized refineries through expansions and efficiency 
gains at existing U.S. refineries. Decisions on refinery investments 
are based on long-term economics.

    Question 6. EPAct 2005 removed the requirement to include 
oxygenates from gasoline, largely because of concerns over the use of 
MTBE. What is the impact on the price of removing oxygenates from 
gasoline?
    Answer. Ultimately, prices will be determined by the conditions in 
the marketplace.
    ExxonMobil used significant quantities of MTBE as the only 
practical solution to the Federal Government's 2% oxygenate mandate. 
Assuming EPA completes its rulemaking to remove the oxygenate 
requirement, this mandate will be repealed effective May 2006.
    ExxonMobil will be able to maintain current gasoline production 
capability without the use of MTBE, but we cannot speak for others in 
the industry. Since Congress eliminated the oxygenate mandate but 
refused to provide limited liability protection from defective product 
suits, there is a possibility that MTBE use might be reduced even at 
the expense of gasoline production.

    Question 7. Are there other oxygenates that can be used in place of 
MTBE, such as using ethanol to make ETBE, and how does the cost of such 
alternative additives compare to the cost of gasoline?
    Answer. Many U.S. states have banned the use of MTBE, with some 
states banning other ethers such as ETBE. ETBE has similar properties 
to MTBE in terms of taste and smell thresholds. To replace MTBE with 
ETBE would therefore not address the concerns that are associated with 
MTBE.

    Question 8. Have you studied the use of ETBE, the cost of 
converting MTBE plants and how long it would take to do so, and whether 
ETBE avoids the leakage/water contamination problems that were caused 
by MTBE? How do the costs of retrofitting MTBE plants to produce ETBE 
and use it to increase the volume of gasoline produced by a barrel of 
oil compare to the cost of expanding existing or adding new refinery 
capability?
    Answer. ExxonMobil has no plans to use ETBE in the U.S. See 
previous answer.

    Question 9. What, if anything, is preventing your company from 
using ETBE in place of MTBE?
    Answer. See previous answer.

  Response to Written Questions Submitted by Hon. Gordon H. Smith to 
                             Lee R. Raymond

    Question 1. I have a bill, S. 1743, to give the Federal Trade 
Commission, additional authority to prevent and punish price gouging in 
the aftermath of a major disaster. My bill provides effective authority 
to the Federal Trade Commission to protect consumers from being 
victimized in the wake of a disaster without hampering the normal 
functioning of the free market. It even recognizes that there are 
legitimate reasons why prices may increase.
    Do you think that this consumer protection authority should be 
available to the FTC?
    Answer. Although the intentions of this legislation are 
understandable, we believe that, if implemented, this type of 
legislation could harm consumers. As FTC Chairman Majoras testified:

          ``Regardless of how repugnant price gouging is, a law that 
        prohibits it is a form of price control, which might seem 
        attractive . . . in the short run, but is likely to harm 
        consumers more in the long run. . . . We should not ignore what 
        we know. In the 1970's price controls that were established to 
        deal with the energy crunch resulted in massive shortages and 
        endless lines at the pump. . . . The choice during times of 
        emergency--high price gasoline or no gasoline at all--is not a 
        good one, but unfortunately, it's a choice that must be made.'' 
        [Energy Pricing and Profits, Joint Hearing of the Senate 
        Commerce, Science, and Transportation Committee and the Senate 
        Energy and Natural Resources Committee, 109th Cong., 9 (Nov. 9, 
        2005) (Statement of Deborah Platt Majoras, Chairman, Federal 
        Trade Commission).]

    We agree with Chairman Majoras.
    Would this serve as a deterrent to price gouging by individual 
retailers?
    Answer. As noted in the question above.

    Question 2. Can you tell me why diesel prices continue to remain 
significantly higher than gasoline prices in Oregon?
    Answer. Our market share in Oregon is very small and, therefore, we 
cannot comment specifically on diesel versus gasoline prices in Oregon.

    Response to Written Questions Submitted by Hon. Jim Bunning to 
                             Lee R. Raymond

    Question 1. Some analysts believe that OPEC is approaching its 
current oil production capacity. Given this, are oil companies looking 
at alternative sources of energy, such as liquid fuels made from coal, 
in order to expand their business and maintain energy supplies for the 
United States? Please include a review of the level of investment your 
company is making this year and the projected investment over the next 
three years in coal to liquid fuels initiatives.
    Answer. ExxonMobil's long term Energy Outlook, which includes a 
detailed assessment of global production through 2030, anticipates 
increasing OPEC (and global) production over the next 25 years. While 
alternative sources will grow, we believe they will continue to be a 
small percentage of the world's total energy. See, www.exxonmobil.com/
corporate/Citizenship/Corp--citizenship--energy--outlook.asp, See also: 
Attachment I, Will Energy Demand Continue to Increase?
    ExxonMobil has a proprietary technology applicable to the 
conversion of coal to liquids, and we continue significant research 
expenditures to further advance this technology. Specifically, this 
technology provides for the conversion of ``syngas'' to hydrocarbon 
liquids, such as diesel. We envision employing this technology to 
produce liquids from natural gas in Qatar around the end of this 
decade.
    Technology is commercially available today to convert coal to 
``syngas.'' In fact, ExxonMobil operates a commercial unit today in 
Texas producing syngas for chemical feedstocks from carbon sources. The 
combination of coal-to-syngas technology with syngas-to-liquids 
technology would allow the production of liquids from coal. However, we 
do not foresee that coal to liquids will be cost-competitive with 
conventional petroleum for many years to come.

    Question 2. I have been concerned with the lag time between the 
wholesale cost of a barrel of oil and the retail price of a gallon of 
gasoline. As we saw following the hurricane, in an ascending market 
where wholesale oil prices increase, there is a lag period of a few 
days before retail gas prices reflect this change. Similarly one would 
expect a lag in a descending market. My concern is that retail prices 
are not dropping as quickly as they rose, relative to the change in oil 
prices. Could you explain why price movements vary during a complete 
market cycle and whether you believe any part of the energy industry is 
unfairly profiting from this price lag?
    Answer. We believe the gasoline markets following Hurricanes 
Katrina and Rita were reacting not so much to crude oil prices as to 
the hurricanes' unprecedented impact on gasoline supply and 
distribution logistics. Prior to Katrina, U.S. refineries were 
operating at 97.1% of capacity; just after Rita, U.S. refineries 
operated at 69.8% of capacity due primarily to damage done to 
refineries by the hurricanes, but also due to logistical problems 
(crude supply to refineries and product movements out). Moreover, there 
was an unprecedented reduction in our ability to transport gasoline 
from the Gulf Coast to other parts of the country. For example, both 
the Colonial and Plantation pipelines, which supply the East Coast and 
Midwest, were non-operational for three days. In conjunction with 
decreased supply, the demand for gasoline increased dramatically 
following Katrina, perhaps reflecting consumers' fears that they would 
be unable to obtain gasoline, given the supply disruptions. These 
events occurred in a very short time, and prices thus rose very 
quickly.
    Because it has taken much more time for supply to increase than it 
took for supply to decrease, prices fell more slowly than they rose. 
Although U.S. refineries currently are still operating well below 
historical levels--utilization is now about 86%--the industry is 
supplying almost as much gasoline as it was prior to the hurricanes. 
Almost 29 percent of U.S. refining capacity was offline as a result of 
these natural disasters. Capacity has been shifted from other products 
to supply gasoline demand, and imports from Europe have increased 
substantially. As a result, gasoline prices are now at or below the 
levels that existed prior to Hurricane Katrina.

    Question 3. Boosting our domestic energy production is vitally 
important not only to our economy but also to our national security. 
Many of the countries we import oil from today are unstable, 
jeopardizing the reliability of sustained production. Please provide a 
chart for each of the last five years reflecting the percentage of your 
exploration and production budget that invested in the United States 
versus that invested overseas. Please also provide a chart reflecting 
your current projections of the percentage of your exploration and 
production budgets that will be allocated to projects in the United 
States versus overseas for the next five years.
    Answer. Please refer to the table below. Capital & Exploration 
expenditures depend on the availability of opportunities and the timing 
of many individual projects. We expect global Upstream expenditures to 
average $14-15 billion per year in the coming years. The proportion 
spent in the U.S. will depend on the availability of attractive options 
in this country. Unlike almost all other countries in the world, the 
U.S. puts much of its most promising hydrocarbon-bearing areas 
currently out of bounds for development, as a matter of policy.

     PERCENTAGE OF U.S. UPSTREAM CAPITAL & EXPLORATION EXPENDITURES
------------------------------------------------------------------------
                                2000    2001
                                 $M      $M    2002 $M  2003 $M  2004 $M
------------------------------------------------------------------------
Upstream Capital &
 Exploration Expenditures
    U.S......................   1,865   2,423    2,357    2,125    1,922
    Non-U.S..................   5,068   6,393    8,037    9,863    9,793
                              ------------------------------------------
Upstream Capital &              6,933   8,816   10,394   11,988   11,715
 Exploration Expenditures....
U.S. Capital & Expl. Exp. As      27%     27%      23%      18%      16%
 a % of Total Upstream.......
------------------------------------------------------------------------
Data Sources & Notes: Exxon Mobil Corporation Annual Report--Form 10-K
  and Financial & Operating Review.


    Question 4. The disruption caused by the recent hurricanes 
displayed the United States' vulnerability when it comes to domestic 
energy supply and production. What suggestions do you have to 
strengthen our energy supply and production capability?
    Answer. The hurricanes also displayed the resilience of our 
domestic petroleum industry and the power of markets to respond 
efficiently and effectively to major supply disruptions.
    Part of meeting the challenge of our future energy needs should be 
new policies authorizing exploration and production of abundant 
domestic oil and gas resources that are now closed to development. This 
is particularly true with respect to oil and gas deposits in the Outer 
Continental Shelf, the Rocky Mountain region, and in Alaska. Another 
part should be a streamlined process to permit and expedite the 
construction of facilities to import liquefied natural gas (and not 
exclusively on the Gulf Coast) that can be used to heat homes, generate 
electricity and provide the essential feedstock for many American 
manufacturing sectors, such as chemicals and fertilizer.
    In addition, achieving recent production gains at our U.S. 
refineries generally has not been facilitated by federal policies. 
Specifically, federal laws and regulations could more efficiently 
sustain the gains in environmental quality that we have achieved 
historically than is now possible under several Clean Air Act programs. 
ExxonMobil, and many others in industry, support reforms in the area of 
permitting for more efficient refinery expansions and reductions in the 
number of ``boutique fuels'' that hamper supply flexibility. Regulatory 
constraints on supply flexibility can lead to greater market volatility 
in emergency situations, and we therefore also support efforts to 
strengthen the Federal Government's waiver authorities in such cases.

    Question 5. It has been suggested that the United States consider 
developing a strategic gasoline and natural gas reserve, similar to 
Strategic Petroleum Reserve we currently have. Some analysts suggest 
that such reserves may minimize price spikes in these commodities 
during periods of market supply disruptions. What are your views on 
whether a strategic natural gas or gasoline reserve would be feasible 
and whether they might help minimize price increases during periods of 
market uncertainty?
    Answer. ExxonMobil agrees with both the California Energy 
Commission and the National Petroleum Council (which advises the 
Secretary of Energy), which have concluded in recent times that such 
fuel reserves are not appropriate for the U.S. Product reserves are 
costly and complex due to, among other factors, product degradation 
from extended storage, many current fuel specifications, and logistical 
challenges of maintaining storage in multiple locations. The fastest 
and most efficient response to temporary supply imbalances is to let 
markets function. Refiners have rapidly responded to temporary supply 
challenges without the need for government intervention. Although 
hurricane and flooding damage, transportation logistics, employee 
safety, and personnel dislocations contributed to the supply shortage 
following Hurricanes Katrina and Rita, the most critical contributing 
factor was the loss of electric power to run pipelines and refineries.
    Creating a strategic natural gas reserve could be 
counterproductive, potentially interfering with and discouraging the 
market's creation of important seasonal inventories. The U.S. currently 
has the most robust system of natural gas inventories of any 
industrialized nation. The system works to provide prompt supplies of 
natural gas during the peak winter heating season and facilitates 
maximum production of natural gas during the low demand months. The 
purchasers of gas held in inventory take market risk on the interval 
between purchases made during the spring and summer months (April thru 
October) and the gas sold during the winter season (November thru 
March). The normal build of inventory may be disrupted if it is 
perceived that there is too much price risk due to the uncertainty of 
how strategic inventories may be released.
    Building strategic product or gas reserves when markets are tight 
will put further upward price pressure on the market and remove 
necessary operational supply from the market.

    Question 6. China is becoming a bigger world oil player. This not 
only has tightened the world oil market but also has produced national 
security concerns for us. What concerns or problems do you see have 
arisen since China became a bigger world energy player?
    Answer. World energy demand has grown because of economic growth. 
Demand has grown in the U.S., as well as China, India and the rest of 
the developing world. This economic growth is necessary to improve the 
standard of living in these areas. The oil market is global and 
transparent. Supporting the efficient use of energy, not only in the 
U.S. and other mature economies, but in growing economies as well will 
allow for continued development while minimizing the demand on energy 
sources.

    Question 7. While there have been expansions and efficiency gains 
at existing refineries, no refinery has been built in the United States 
in 30 years. Since the oil companies are now making record earnings, 
are there plans to build new refineries in the United States?
    Answer. ExxonMobil is studying expansions at some of its U.S. 
refineries and we would like to continue to invest in the U.S. if there 
are attractive economic opportunities to do so. Over the last decade 
ExxonMobil has increased its U.S. refining capacity by the equivalent 
of three average-sized refineries through expansions and efficiency 
gains at existing U.S. refineries. Decisions on refinery investments 
are based on long-term economics. See, Attachment J, How Do Fewer 
Refineries Affect Supply?

    Question 8. The 2005 Energy Bill implemented a controlled phase-out 
of MTBE. Many companies, however, are planning on completely halting 
its use. How will a sudden halt of the use of MTBE affect the gasoline 
market and refineries?
    Answer. ExxonMobil used significant quantities of MTBE as the only 
practical solution to the Federal Government's 2% oxygenate mandate. 
Assuming EPA completes its rulemaking to remove the oxygenate 
requirement, this mandate will be repealed effective May 2006.
    ExxonMobil will be able to maintain current gasoline production 
capability without the use of MTBE, but we cannot speak for others in 
the industry. Since Congress eliminated the oxygenate mandate but 
refused to provide limited liability protection from defective product 
suits, there is a possibility that MTBE use might be reduced even at 
the expense of gasoline production.

    Question 9. I have noticed very large differences between the price 
of gasoline in different areas of the country. For example, I recently 
saw gasoline in northern Virginia that was much more expensive than 
gasoline in northern Kentucky. Please explain why there can be such a 
significant difference in gasoline prices in different areas of the 
country.
    Answer. ExxonMobil does not market directly in Kentucky and, 
therefore, cannot comment specifically on the variances in retail 
prices between Kentucky and Northern Virginia. However, generally 
speaking, the disparity between prices of fuel in different parts of 
the country is due to the differences in required gasoline 
formulations, transportation costs, local competitive conditions, and 
state taxes.

    Question 10. Below are several questions on oil and the commodities 
futures market:

   When was oil first traded on the world-wide commodities 
        futures market?
   Would the price of oil be affected if oil was taken off the 
        commodities futures market and no longer traded?
   Would oil then be bought and sold as a true supply and 
        demand product?

    Answer. The NYMEX website reports that their crude futures trading 
began in 1983.
    We do not participate in the petroleum futures market to any 
significant extent. Conceptually, we would expect that futures trading 
would increase the liquidity and therefore the efficiency of the market 
for oil just as it does for many other commodities, including most 
American agricultural production. Eliminating the futures markets for 
petroleum would likely reduce the transparency of pricing. Thus, as 
with the agricultural futures markets, the petroleum futures markets 
should be beneficial overall to buyers and sellers.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Jeff Bingaman to 
                             Lee R. Raymond

    Question 1. Section 392 of the Energy Bill, which was negotiated 
with the involvement of the Chairman and Ranking Member of the Energy 
and EPW Committees, contains permitting streamlining language. The 
Energy Policy Act of 2005 permits the EPA Administrator to enter into a 
refinery permitting cooperative agreement with a state. Under such an 
agreement, each party identifies steps, including decision timelines, 
it will take to streamline the consideration of federal and state 
environmental permits for a new refinery. I want to ask you several 
questions about that provision, since you have supported streamlining: 
Have you requested that EPA issue any regulations or take any action to 
implement these new provisions?
    Answer. No.

   If yes, when?
   If no, when do you anticipate you will do so?

    Answer. ExxonMobil is evaluating this provision and whether it can 
be beneficial to our plans.

    Question 1a. Have you worked with any state to encourage them to 
enter into an agreement with EPA under Section 392 of EPAct?
    Answer. No. ExxonMobil is evaluating this provision and whether it 
can be beneficial to our plans.

    Question 1b. Do you support the EPAct streamlining provisions?
    Answer. Yes. There are, however, more effective steps that could be 
taken to facilitate domestic fuel production. These include extending 
the NAAQS ozone attainment deadlines for refining areas such as Houston 
and Philadelphia; codifying comprehensive New Source Review reform; 
reducing the number of state specific ``boutique'' fuels; and expanding 
federal EPA fuel preemption authority to state fuel requirements.
    All of these steps were emphasized in reports in 2000 and 2004 from 
the National Petroleum Council to the Department of Energy.

    Question 1c. Do you have any examples of where a state came to EPA 
and said we want to work closely with you on permitting a new refinery 
or refinery expansion and EPA refused to provide technical assistance 
and even financial resources under existing law to that state?
    Answer. No.

    Question 2. In answer to several of the questions at today's 
hearing (Nov. 9) the witnesses have noted that the market for petroleum 
and petroleum products is a global one and should be viewed in that 
context. Please list all planned refinery construction that your 
company plans to undertake globally. Please list them by country and 
include the projected size of the facility, including the projected 
capacity for all units and their potential product yields in addition 
to the project's total investment cost.
    Answer. Refining is a global business, and the U.S. has routinely 
imported petroleum products for decades to balance supply and demand. 
ExxonMobil is studying expansions at some of its U.S. refineries. 
Decisions on refinery investments are based on long-term economics. 
ExxonMobil is currently participating in a joint venture to construct a 
multi-billion dollar refining/chemical operation at Fujian, China to 
meet anticipated demand for petroleum products in the region. When 
completed, it will process 240 KBD of crude oil. Other expansion 
projects are also under consideration but are confidential at this 
point.

    Question 3. The International Energy Agency (IEA) has just released 
its World Energy Outlook 2005. It contains a piece on the global 
refining picture. (Please see the summary below.) The study notes a 
lack of investment in upstream and downstream capacity has contributed 
to the extreme tightness in global oil markets. What are your thoughts 
in response to this? What is your company doing in response (actions)? 
What is your company doing (investments/analysis) in the ``MENA'' 
regions? Do you agree with the IEA's projections?
    Answer. The IEA's global demand projections are similar to those 
found in ExxonMobil's long term Energy Outlook. The Outlook envisions 
growing demand for oil through 2030. The growth in supply will require 
significant investment on a global basis.
    ExxonMobil is pursuing opportunities where available globally. We 
have brought on significant new crude oil production in Africa and we 
have major LNG investments underway in the Middle East. However, 
private (non-government owned) oil company investment opportunities in 
crude oil production are limited in many areas of the world.

    Question 4. World Energy Outlook 2005: IEA Projects Growth in 
Middle East and North Africa Oil and Natural Gas Sectors through 2030 
but a Lack of Investment would Push up Prices and Depress GDP Growth 
11/7/2005 London--``The importance of the Middle East and North Africa 
(MENA) to global oil and gas markets cannot be underestimated. These 
countries have vast resources, but these resources must be further 
developed. Investment should not be delayed,'' said Mr. William C. 
Ramsay, Deputy Executive Director of the Paris-based International 
Energy Agency, as he presented findings from the World Energy Outlook 
2005: Middle East and North Africa Insights (WEO-2005) today in London. 
Noting that a lack of investment in upstream and downstream capacity 
has contributed to the extreme tightness in the global oil market in 
recent months, Mr. Ramsay highlighted the critical role that this 
region will play in meeting growth in global energy demand.
    The WEO-2005 expects global energy markets to remain robust through 
2030. If policies remain unchanged, world energy demand is projected to 
increase by over 50% between now and 2030. World energy resources are 
adequate to meet this demand, but investment of $17 trillion will be 
needed to bring these resources to consumers. Oil and gas imports from 
the Middle East and North Africa will rise, creating greater dependence 
for IEA countries and large importers like China and India. Energy-
related CO2 emissions also climb--by 2030, they will be 52% 
higher than today. ``These projected trends have important implications 
and lead to a future that is not sustainable--from an energy-security 
or environmental perspective. We must change these outcomes and get the 
planet onto a sustainable energy path,'' added Mr. Ramsay.
    WEO 2005 focuses on the energy prospects in the Middle East and 
North Africa to 2030, covering in detail developments in Algeria, 
Egypt, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United 
Arab Emirates. Internal demand, resources, policies, investment, 
production, exports, even energy use for water desalination, all are 
examined. ``To our knowledge, this is the first time that any 
publication with a focus on the Middle East and North Africa has 
undertaken such an extensive, country-by-country review of the energy 
sector of the region. At a time when experts debate whether the world 
will run out of energy, these results are particularly relevant,'' Mr. 
Ramsay said.
    In the MENA region, domestic energy demand is driven by surging 
populations, economic growth and heavy energy subsidies. Primary energy 
demand more than doubles by 2030. At the same time, MENA oil production 
will increase by 75% by 2030 and natural gas production will treble, 
allowing more gas exports. The region's share in global oil production 
will increase from 35% today to 44% in 2030. However, this means the 
countries of the Middle East and North Africa would need to invest, on 
average, $56 billion per year in energy infrastructure. The level of 
upstream oil investment required will be more than twice that of the 
last decade.
    But what if adequate investment is not made or consuming countries' 
policies change? To assess these risks, WEO 2005 develops two other 
scenarios, each of them far from unlikely: a Deferred Investment 
Scenario, in which investment in the producing countries is delayed, 
whether deliberately or inadvertently; and a World Alternative Policy 
Scenario, in which energy-importing countries take determined action to 
cut demand and change the pattern of fuel use, driven by high prices, 
environmental or security goals, or all three.
    The two scenarios have significant implications for MENA countries. 
In the Deferred Investment Scenario, energy prices rise sharply. Global 
energy-demand growth falls, cutting the region's oil and gas export 
revenues by more than $1 trillion from 2004-2030. World GDP growth 
slows down. Deferred investment could be the result of many factors, 
but whatever the cause, the results are higher prices, greater 
uncertainty and market inefficiencies.
    The WEO World Alternative Policy Scenario examines the consequences 
of new policies under consideration in consuming countries. ``The G8 
Plan of Action, agreed at the Gleneagles Summit in July 2005, launched 
detailed initiatives to promote cleaner energy and combat the impact of 
climate change. The IEA was asked to play an important role. This 
strong global commitment indicates that governments are already 
adopting alternative policies--such as those in the World Alternative 
Policy Scenario--to achieve the G8 goals,'' explained Mr. Ramsay. Under 
this Scenario, global oil and gas demand growth is lower, but the world 
continues to rely heavily on MENA oil and gas. CO2 emissions 
fall 16% below the level of the Reference Scenario--but still increase 
around 30% by 2030.
    Assumptions about international energy prices have been revised 
significantly upwards in WEO-2005, as a result of changed market 
expectations after years of underinvestment in oil production and the 
refinery sector. The average IEA crude oil import price, a proxy for 
international prices, averaged $36.33 per barrel in 2004 and peaked at 
around $65 (in year-2004 dollars) in September 2005. In the Reference 
Scenario, the price is assumed to ease to around $35 in 2010 (in year-
2004 dollars) as new crude oil production and refining capacity comes 
on stream. It is then assumed to rise slowly, to near $39 in 2030. In 
the Deferred Investment Scenario the oil price reaches $52 in 2030.
    The World Energy Outlook 2005 contains over 600 pages of detailed 
statistics and in-depth analysis. The study was produced by the IEA 
with input from many international experts from producing countries, 
industry and organizations including OPEC. The IEA's prestigious annual 
WEO series has long been recognized as the authoritative source for 
global long-term energy market analysis and has received honors for 
analytical excellence including awards from the Russian Academy of 
Sciences, the U.S. Department of Energy and numerous public and private 
organizations.
    Voluntary standards--Post hurricanes, what is the industry doing to 
come up with voluntary standards/best practices for back-up power 
supply to critical energy infrastructure (refineries, pipelines, etc.) 
and natural disaster recovery? Will the API undertake such an effort? 
If not, what is your company doing?
    Answer. 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 the electric power utilities during outages is critical. A 
more reliable power system would help ensure that the product 
distribution infrastructure is sufficient to deliver fuels to the 
marketplace. ExxonMobil is working closely with industry and government 
to assess the impact of the hurricanes, as well as to identify 
improvements for the future. Additionally, ExxonMobil is conducting a 
review of learnings from Hurricanes Katrina and Rita events and will be 
incorporating findings into future pre-hurricane season checklists and 
business continuity plans.

    Question 5. A number of witnesses testified that failure of the 
electricity system resulting from hurricanes Rita and Katrina 
contributed in great part to the inability to get refineries restarted, 
or to get natural gas pipelines restarted. What are the arrangements 
for backup power in case of such emergencies at your critical 
facilities?
    Answer. All ExxonMobil pipeline operations where power was 
interrupted worked closely with electric power providers to restore 
power as quickly as possible. Where a rapid restoration of power supply 
by the provider was not possible, portable rental power generation 
equipment was obtained with up to 2MW capacity being typical. This 
easily-transportable power generation equipment is more flexible and 
practical than permanent facilities for the size of the pump stations 
in our pipeline system. A more reliable power system would help ensure 
that the product distribution infrastructure is sufficient to deliver 
fuels to the market place.
    ExxonMobil self-generates approximately 50% of our total 
electricity demand. This self-generation is located at our refineries, 
chemical plants and production facilities around the world. Back-up 
power is a commercial arrangement negotiated between ExxonMobil and a 
third-party supplier. When required, back-up power is delivered over 
the transmission grid. This commercial arrangement is meant to `back-
up' our self-generation capabilities in the event this generation is 
unavailable. Because, at most of our facilities, cogeneration supplies 
only part of a site's total demand, these facilities cannot operate at 
or near full capacity without an operating transmission grid. A 
dedicated power generation plant to supply emergency power to a 
specific refinery in the event of an emergency is not practical since 
it would require a dedicated transmission interconnection system.

    Question 6. How many of your plants have on site cogeneration 
facilities? Which plants have these facilities?
    Answer. ExxonMobil has interests in 85 cogeneration facilities at 
more than 30 locations around the world representing a capacity of 
approximately 3,700 MW. Within the U.S., cogeneration facilities exist 
at six U.S. locations including the Baytown Texas refinery and 
petrochemical complex, Baton Rouge Louisiana refinery and petrochemical 
complex, Beaumont Texas refinery and petrochemical complex, Billings 
Montana refinery, Torrance California refinery and the Joliet Illinois 
refinery. In addition we have cogeneration at three upstream production 
facilities in Alabama and California.

    Question 7. Are there regulatory barriers at either the state or 
federal level that prevent the installation of cogeneration plants at 
your facilities that do not have them?
    Answer. There are a number of regulatory barriers impacting 
cogeneration development, including multiple and overlapping permit 
programs--federal and state New Source review, Title V (federal Clean 
Air Act) operating permits, and stormwater pollution prevention and 
discharge elimination permits. Permit applications may also require 
Endangered Species Act reviews. Potentially, acid rain permits may be 
needed also, depending on output to the grid. Governments wanting to 
promote cogeneration investments, that benefit both industry and the 
public alike, must also develop markets and market rules with several 
characteristics, namely: 1) dispatch priority as electricity and steam 
cannot be made independently and steam is integral to site operations; 
2) non-discriminatory access to the transmission grid allowing 
cogeneration investors access to markets and customers; 3) use-based 
transmission / ancillary / back-up power charges--charges based on 
actual use to support net internal load. Even in the United States, not 
all markets possess these characteristics.

    Question 8. Would the presence of cogeneration facilities at your 
refineries reduce the recovery time during such emergencies?
    Answer. The presence of cogeneration capability at our refineries 
reduced some startup times in the aftermath of the hurricanes.
    Cogeneration facilities provide for high efficiency electricity 
supply that is controlled by the individual sites. Whether they 
facilitate a reduced recovery time during these stated emergencies 
depends upon the damage sustained at our own facility and whether that 
damage could be evaluated / repaired sooner than the damage sustained 
within the utility / grid operator's system or facility. Secondly, fuel 
(i.e. from a natural gas pipeline system) would have to be available in 
order to operate the cogeneration facility. Lastly, the cogeneration 
facility must have been designed such that it can operate isolated from 
the public transmission grid. Advanced turbine technology, when 
combined with advanced NOX emissions control technology as 
required in numerous locations, could prohibit operation in a ``stand 
alone'' mode. Startup of these cogeneration facilities may require 
electric power from the grid or generators.

    Question 9. Witnesses at earlier hearings testified that there are 
a number of modern natural gas generation facilities in the Louisiana/
Texas area that are not used to their full capacity. Are there natural 
gas generation facilities in close proximity to your refinery 
facilities that could be used for backup generation at the refineries?
    Answer. Not to our knowledge, but this idea is likely not 
practical. Many generators do not have ``black start'' capability and 
thus require a functioning transmission grid in order to start their 
generation facilities. Even if the generator has the ability to operate 
isolated from the grid, extensive interconnection investments would be 
required to connect the generation facility directly (and only) to an 
individual refinery.

    Question 10. Would use of generators that are in close proximity to 
refineries to provide backup power during such emergencies mean that 
recovery times might be shortened, since the restoration time for a 
nearby facility might be less than the restoration time for the 
transmission facilities for traditional utilities?
    Answer. No, for the reasons outlined in the previous question. This 
approach would require a dedicated transmission interconnection between 
a specific generator(s) and a specific refinery (or other facility). 
This would be neither practical nor cost effective. Generally, 
generators are not sufficiently sized to supply the total power needed 
to operate a refinery.
                              environment
    Question 11. Please specify exactly which, if any, Federal or State 
environmental regulations have prevented your company from expanding 
refinery capacity or siting a new refinery, and documentation on the 
exact details of the project prevented.
    Answer. There are a number of federal, state and even local 
regulations that impact or even restrict refinery expansion. A major 
component of these is EPA's New Source Review (NSR). EPA's NSR program, 
especially prior to the recent NSR reforms, created significant 
impediments to expanding refinery capacity. As originally conceived, 
facilities seeking to construct a new major source or make major 
modifications were subject to this program. However, EPA significantly 
expanded this program as it applies to small changes to existing 
sources. For example, under EPA's ``past actual to future potential 
emissions increase test'', many projects which did not increase actual 
emissions still became subject to NSR. Given the costs associated with 
NSR emission controls, unless the project had a very large return, the 
project was often not progressed.
    For example, recently one of our refineries had spare crude unit 
capacity. A minor physical modification (a new section of piping) could 
have been installed that would have allowed importation of an 
additional 5,000 barrels per day of crude to help fill some of the 
spare capacity. However, the refinery did not implement this project 
because, under EPA's ``past actual to future potential test'', this 
project would have required Prevention of Significant Deterioration/NSR 
permitting. Permitting costs alone were estimated at twice the 
expansion project cost and NSR permitting would likely cause a 1-2 year 
delay and trigger emissions controls investment requirements on the 
crude unit. Consequently the refinery was unable to capture this 
opportunity to refine approximately 1.8 million barrels (75 million 
gallons) of crude oil during the year into gasoline and other products.
    How much have so-called ``boutique fuel'' requirements added to the 
average retail price, where applicable, and the average wholesale price 
per gallon of the gasoline sold by your company?
    Answer. It is very difficult to quantify an exact impact of 
boutique fuels on the average price per gallon of gasoline. States have 
promulgated unique fuel specifications (``boutique fuels'') to meet 
federal air quality standards, and the resulting proliferation of 
differing fuel specifications increases costs. Further, these differing 
fuel specifications complicate supplying fuel to the affected areas. 
This tightened supply situation amplifies even minimal supply 
disruptions. Ultimately, prices are determined by the market.
    If the EPA or the Congress were to act to minimize the number of 
``boutique fuel'' formulations required by the states to protect air 
quality, how many should there be and what should the specifications of 
each be in order to maintain air quality and improve fungibility?
    Answer.
    1. Existing gasoline boutique fuel designations should be 
rationalized to five formulations: a. California RFG for California 
only; b. Federal RFG; c. 7.8 RVP (Reid Vapor Pressure) volatility-
control gasoline for modest non-attainment areas; d. 7.0 RVP 
volatility-control gasoline for areas with a more significant non-
attainment problem; and e. conventional gasoline.
    2. Diesel fuel should be limited to two formulations: a. CARB 
diesel for California only; and b. EPA diesel for the rest of the 
country.
    3. Home heating oil formulations should be limited to the grades 
that are currently in the market place.

    Question 12. Streamlining New Source Review (NSR) permitting 
constraints was mentioned as an incentive that would encourage refiners 
to supply more product to the U.S. market. How many air quality permit 
applications for refinery expansions has your company submitted for NSR 
over the last ten years? How long did it take the EPA, or the 
applicable State, to approve or deny each permit application, after 
receipt of a complete permit application? What was the expected 
percentage increase in product output of the expansion?
    Answer. All capital projects, including capacity expansions, are 
evaluated for permitting requirements. The number of NSR air quality 
permit applications is not readily available. However, the permit 
applications have tended to be associated with relatively large 
capacity increase projects on average every few years. They require, on 
average, a year longer to obtain versus other permits. Although it is 
possible under the NSR regulations to offset the increase in emissions 
resulting from new construction, cost-effective emission offsets at 
many sites are no longer available. Consequently, the restrictive 
interpretation of NSR requirements has the potential to subject even 
small debottlenecks to NSR permitting. Without the NSR reforms, 
refineries will be limited in their ability to improve efficiency, 
reliability, and production capability.

    Question 12a. How would you propose to streamline NSR and still 
maintain local air quality and prevent any increase in total annual 
emissions from such expansions?
    Answer.
    1. Include the NSR reforms finalized in 2002 and 2003 (relating to 
emission calculation methodology, changes that would not trigger NSR, 
etc.) in legislation to provide certainty and flexibility for U.S. 
manufacturing operations. NSR reforms were originally envisioned by the 
Clinton Administration; implementation of reforms by the current 
Administration has been held up by litigation.
    2. Each state should incorporate federal NSR reforms into state 
regulations. Such action would provide for a more rapid and certain 
permitting of refinery expansions.
    3. Establish an annual facility-wide or partial-facility allowable 
emission limitation based on current permit limits. This would allow 
facilities to make any changes necessary without going through 
permitting, as long as the ``cap'' is not exceeded, thereby maintaining 
local air quality and preventing any increases in total allowable 
emissions.
    4. Adopt an hourly rate of emissions increase as the first step in 
determining whether or not NSR is triggered; include a significance 
test.

    Question 13. How much did the fuel specification waivers that have 
been granted by EPA to date, due to the supply disruptions caused by 
the hurricanes, reduce the average retail price of the gasoline or 
other refined products made by your company?
    Answer. Prices are determined by the market. The EPA waivers of 
certain federal fuel requirements allowed prompt increases in fuel 
supplies to areas that otherwise would have experienced product 
shortages or run-outs.

    Question 14. One witness indicated that ``getting two 100-year 
hurricanes in four weeks'' caused a great deal of chaos and disruption 
in the gasoline supply chain. The National Oceanic and Atmospheric 
Administration has projected that the country and the Gulf of Mexico 
have entered a cyclical period of 20-30 years during which the Gulf and 
coastal areas are likely to experience a greater frequency of 
hurricanes and higher odds of those hurricanes making landfall in the 
U.S. What preparations has your company made to deal with a greater 
hurricane frequency to decrease repetition of the supply disruption 
that occurred this year?
    Answer. Whether there will be a greater hurricane intensity or 
frequency in the future remains unclear, with views differing among 
experts. In any event, evaluating the future frequency and impact of 
weather events is an imprecise and uncertain area of science.
    ExxonMobil places a premium on safety and reliability, and has 
comprehensive emergency-response and business-continuity plans in place 
at all our facilities. Safety factors are incorporated over and above 
the base platform design that results in structures designed for events 
more severe than a 100 year event.
    We are working closely with industry and government to assess the 
impacts of the hurricanes, as well as to identify improvements for the 
future.

    Question 15. Over the last 50 years, average annual sea surface 
temperatures have increased in the Gulf of Mexico and, according to the 
National Academy of Sciences and other similar scientific expert 
bodies, are expected to continue increasing as the oceans continue 
warming due to accelerating global climate change. The Administration's 
Climate Action Report (2002) stated ``model simulations indicate that, 
in a warmer climate, hurricanes that do develop are likely to have 
higher wind speeds and produce more rainfall.'' What preparations has 
your company made to deal with a greater likelihood of greater 
hurricane intensity so as to decrease repetition of the disruption that 
occurred this year?
    Answer. See previous answer.

    Question 16. How has your company disclosed to shareholders and 
investors the risks associated with the potential impacts on your 
company's assets in the Gulf of Mexico or indirect impacts on its 
assets elsewhere, of either the expected greater frequency of 
hurricanes making landfall in the U.S. or the probable greater 
intensity of hurricanes in the region?
    Answer. While ExxonMobil may not agree with the premise of your 
question, we do acknowledge that weather can impact our results. 
ExxonMobil's disclosure of ``Factors Affecting Future Results'' notes 
that the operations and earnings of the Corporation and its affiliates 
throughout the world are affected by local, regional and global events 
or conditions that affect supply and demand. These events or conditions 
include weather, including severe weather events, that can disrupt 
operations. We provide the information on ``Factors Affecting Future 
Results'' to shareholders and investors both in our annual report on 
Form 10-K and on our website.
                  finances, production, imports, etc.
    Please provide for each of last ten years your company's--

   Gross revenue of U.S. operations
   Total capital expenditures in the U.S.
   Net profit of U.S. operations
   Total taxes paid to the Federal government
   Total taxes paid to State governments

    Answer. Please refer to the table below.

                                                      TEN YEAR U.S. SELECTED FINANCIAL DATA SUMMARY
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                1995 $M  1996 $M  1997 $M  1998 $M  1999 $M  2000 $M  2001 $M  2002 $M  2003 $M  2004 $M
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gross Revenue--U.S............................................   51,013   55,103   55,665   45,783   53,214   70,036   63,603   59,675   70,128   88,382
Total capital & exploration expenditure-U.S...................    3,618    3,716    3,889    4,195    3,402    3,338    3,942    3,957    3,766    3,025
Net income after tax--U.S.....................................    3,134    3,951    4,523    2,841    3,157    6,750    6,255    3,601    5,634    8,154
Income, excise and other taxes
  Total income taxes to Federal Government--U.S...............    1,294    1,729    1,840    1,040      608    3,132    2,532    1,048    2,589    3,353
  Total income taxes to State governments--U.S................      232      205      207      141      148      309      229      121      346      406
  Excise taxes--U.S...........................................    6,328    6,701    7,063    7,459    7,795    6,997    7,030    7,174    6,323    6,833
  All other taxes and duties--U.S.............................    1,297    1,238    1,163      967    1,021    1,253    1,177    1,120    1,209    1,223
                                                               -----------------------------------------------------------------------------------------
Total income, excise and other taxes..........................    9,151    9,873   10,273    9,607    9,572   11,691   10,968    9,463   10,467   11,815
--------------------------------------------------------------------------------------------------------------------------------------------------------
Data Sources:
    Exxon Corporation Annual Report--Form 10-K and Financial & Operating.
    Review Mobil Corporation Annual Report--Form 10-K and Fact Book.
    Exxon Mobil Corporation Annual Report--Form 10-K and Financial & Operating Review.

    Question. Total donated to charity:
    Answer.

    EXXON MOBIL CORPORATION--CONTRIBUTIONS AND COMMUNITY DEVELOPMENT
                         EXPENDITURES--1995-2005
------------------------------------------------------------------------
                           Year                              $ millions
------------------------------------------------------------------------
1995.....................................................         $79.5
1996.....................................................          85.9
1997.....................................................          90.3
1998.....................................................         104.0
1999.....................................................          97.6
2000.....................................................          97.1
2001.....................................................         125.9
2002.....................................................          98.5
2003.....................................................         103.0
2004.....................................................         106.5
2005 (estimate)..........................................         138.7
                                                          --------------
    Total 1995-2005......................................      $1,130.0
------------------------------------------------------------------------


    Question 17. How much additional petroleum refining capacity do you 
expect your company to install in the United States over the next 10 
years?
    Answer. Refining is a global business, and the U.S. has routinely 
imported petroleum products for decades to balance supply and demand.
    Over the last decade ExxonMobil has increased its U.S. refining 
capacity by the equivalent of three average-sized refineries through 
expansions and efficiency gains at existing U.S. refineries. ExxonMobil 
is studying expansions at some of its U.S. and international 
refineries. Decisions on refinery investments are based on long-term 
economics. It should be noted that U.S. refining output has increased 
by 30 percent over the past 30 years.

    Question 18. What percentage of profits over the last 10 years has 
your company re-invested in capital, exploration, drilling, and 
production in the United States? Please provide an annual total for 
those U.S. expenditures and a clear breakdown.
    Answer. Please refer to table 1 below which provides details of our 
Upstream capital & exploration expenditure and Upstream net income. We 
would emphasize that capital expenditures depend on the availability of 
attractive opportunities, both in the United States and throughout the 
world. Also, the amounts for capital investment among business lines 
within the industry depend upon the relative opportunities they 
present.

    Question 19. What percentage of profits over the last 10 years has 
your company re-invested in non-petroleum energy supply and production 
in the United States? Please provide a total and the results of such 
investment.
    Answer. A negligible amount of ExxonMobil's company profits has 
been re-invested in non-petroleum (non crude oil and natural gas) 
energy supply and production.

    Question 20. On average for the last ten years, please compare your 
company's overall capital expenditures in the United States to its 
expenditures elsewhere.
    Answer. Please refer to the table 2 below.

    Question 21. What percentage of your company's gross revenue was 
collected in the United States in each of the last 10 years?
    Answer. Please refer to the table 3 below.

                                              Table 1.--% OF PROFITS REINVESTED IN U.S. UPSTREAM ACTIVITIES
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                  10-yr.
                                                                  1995    1996    1997    1998    1999    2000    2001    2002    2003    2004    total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Upstream--U.S. Only
  Capital & exploration expenditure (capex)--$M................   1,685   1,625   2,008   2,174   1,729   1,865   2,423   2,357   2,125   1,922   19,913
Total upstream--U.S. only
  Net income after tax--$M.....................................     954   2,518   2,331     850   1,842   4,542   3,933   2,524   3,905   4,948   28,347
Upstream Capex
  As % of Upstream U.S. Net Income After Tax...................    177%     65%     86%    256%     94%     41%     62%     93%     54%     39%      70%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Data Sources & Notes:
    Exxon Corporation Annual Report--Form 10-K and Financial & Operating.
    Review Mobil Corporation Annual Report--Form 10-K and Fact Book.
    Exxon Mobil Corporation Annual Report--Form 10-K and Financial & Operating Review.


                                               Table 2.--CAPITAL & EXPLORATION EXPENDITURE--LAST 10 YEARS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          10-yr.
                                               1995 $M  1996 $M  1997 $M  1998 $M  1999 $M  2000 $M  2001 $M  2002 $M  2003 $M  2004 $M   total      %
                                                                                                                                            $M
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total capital & exploration expenditure
  U.S........................................    3,618    3,716    3,889    4,195    3,402    3,338    3,942    3,957    3,766    3,025    3,685     26%
  Non-U.S....................................    9,953   12,306   10,228   11,340    9,905    7,830    8,369    9,998   11,759   11,860   10,355     74%
                                              ----------------------------------------------------------------------------------------------------------
Total capital & exploration expenditure......   13,571   16,022   14,117   15,535   13,307   11,168   12,311   13,955   15,525   14,885   14,040    100%
U.S. Capital & Expl. Exp. as a % of total....      27%      23%      28%      27%      26%      30%      32%      28%      24%      20%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Data sources:
    Exxon Corporation Annual Report--Form 10-K and Financial & Operating Review.
    Mobil Corporation Annual Report--Form 10-K and Fact Book.
    Exxon Mobil Corporation Annual Report--Form 10-K and Financial & Operating Review.


                                                      Table 3.--TOTAL GROSS REVENUE--LAST 10 YEARS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                         10-yr.
                                    1995  $M  1996  $M  1997  $M  1998  $M  1999  $M  2000  $M  2001  $M  2002  $M  2003  $M  2004  $M   ave $M      %
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total gross revenue
  U.S.............................    51,013    55,103    55,665    45,783    53,214    70,036    63,603    59,675    70,128    88,382    61,260     29%
  Non-U.S.........................   146,161   157,943   142,070   119,844   129,315   158,403   145,814   141,274   166,926   202,870   151,062     71%
                                   ---------------------------------------------------------------------------------------------------------------------
Total gross revenue...............   197,174   213,046   197,735   165,627   182,529   228,439   209,417   200,949   237,054   291,252   212,322    100%
U.S.% of total gross revenue......       26%       26%       28%       28%       29%       31%       30%       30%       30%      30%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Data Sources
    Exxon Corporation Annual Report--Form 10-K and Financial & Operating Review.
    Mobil Corporation Annual Report--Form 10-K and Fact Book.
    Exxon Mobil Corporation Annual Report--Form 10-K and Financial & Operating Review.


    Question 22. How much of your company's revenue collected in the 
United States was used to pay for purchasing crude oil from OPEC 
countries?
    Answer. ExxonMobil's 2004 purchases of crude oil from OPEC 
countries into the U.S. were $8.8 billion.

    Question 23. Do you support S. 1794 or something like it create 
gasoline and jet fuel reserves to ensure stability of price and supply? 
Should it be extended to diesel and other fuels like natural gas?
    Answer. Product reserves are costly and complex due to, among other 
factors, product degradation from extended storage, many current fuel 
specifications, and logistical challenges of maintaining storage in 
multiple locations. Both the California Energy Commission and the 
National Petroleum Council (which advises the Secretary of Energy) have 
concluded in recent times that such fuel reserves are not appropriate 
for the U.S. The fastest and most efficient response to temporary 
supply imbalances is to let markets function. Refiners have rapidly 
responded to temporary supply challenges without the need for 
government intervention. Although hurricane and flooding damage, 
transportation logistics, employee safety, and personnel dislocations 
contributed to the supply shortage following Hurricanes Katrina and 
Rita, the most critical contributing factor was the loss of electric 
power to run pipelines and refineries.
    Creating a strategic natural gas reserve could be 
counterproductive, potentially interfering with and discouraging the 
market's creation of seasonal inventories. The U.S. currently has the 
most robust system of natural gas inventories of any industrialized 
nation. The system works to provide prompt supplies of natural gas 
during the peak winter heating season and facilitates maximum 
production of natural gas during the low demand months. The purchasers 
of gas held in inventory take market risk on the interval between 
purchases made during the spring and summer months (April thru October) 
and the gas sold during the winter season (November thru March). The 
normal build of inventory may be disrupted if it is perceived that 
there is too much price risk due to the uncertainty of how strategic 
inventories may be released.
    Building strategic product or gas reserves when markets are tight 
will put further upward price pressure on the market and remove 
necessary operational supply from the market.

    Question 24. On average for the last ten years, how much of what is 
refined by your company in the U.S. stays in the U.S.?
    Answer. ExxonMobil is typically a net seller of gasoline and 
distillates since its refinery production exceeds its U.S. marketing 
demand. Typically exports are less than 3% of total production and 
volumes are about balanced with imports, but can vary for a variety of 
market and supply/demand factors. ExxonMobil has imported products to 
the U.S. and has exported products to longstanding customers in Mexico, 
South/Central America and the Caribbean. This approach balances 
refinery production in an efficient manner.
    We do not have 10 years worth of data readily available. However, 
ExxonMobil has exported YTD 2005 (mostly to Mexico) about 9 million 
barrels of gasoline 3 million barrels distillates and 0.5 million 
barrels of jet kerosene. We sold 97.8% of our domestic production 
within the U.S. In 2004 97.6% of ExxonMobil's domestic production was 
also sold in the U.S.

    Question 24a. What amount of refined product did your company 
import in 2004 and in 2005?
    Answer. ExxonMobil has imported about 12.5 MB of gasoline and 
blending components, 1.5MB of distillates and 0.5MB of jet kerosene 
so far in 2005. Corresponding imports in 2004 were 1.5MB of gasoline, 
and 0.1MB of jet kerosene. There were no imports of distillate in 
2004.

    Question 24b. What are your assumptions about demand growth in 
India in China?
    Answer. In ExxonMobil's Energy Outlook, Asia-Pacific total energy 
demand is anticipated to grow in excess of 2% annually between today 
and 2030.

    Question 24c. How have your investments in the United States 
increased the energy security of the country?
    Answer. ExxonMobil's global investments, averaging $15 billion 
annually in recent years, continue to increase the diversity and 
reliability of supply. This diversity increases the energy security of 
all importing nations, including the U.S. Recent projects have added 
production not only in the U.S., but in Europe, Africa, Russia and the 
Caspian region.

    Question 25. What market signals will occur in advance of peaking 
world oil production and what is the appropriate policy or set of 
policies for the U.S. government to adopt when such signals occur?
    Answer. ExxonMobil's detailed assessment of global energy supply 
and demand through 2030 anticipates increasing global oil production 
over the next 25 years. Advancements in technology, both anticipated 
and unanticipated, would indicate that consideration of policy options 
in response to peak oil is premature.
                                 ______
                                 
     Response to Written Questions Submitted by Hon. Ron Wyden to 
                             Lee R. Raymond

    Question. All over America, the oil industry drives up the price at 
our gas pumps by redlining and zone pricing. ``Redlining'' is when your 
companies draw a phony line around a community to lock out competition 
and raise prices for the consumers. ``Zone pricing'' is plain old 
discrimination and it takes place when one oil company supplies gas to 
several gas stations located near each other and one station is charged 
much more than the others for the same type of gas. This drives 
stations out of business, reducing choice and raising prices for 
consumers. To help hurting consumers at our gas pumps, will you company 
commit to stop redlining and zone pricing? Yes or no?
    Answer. No. For a more detailed discussion of the pro-competitive 
effects of territorial restraints, see ``The Economics of Price Zones 
and Territorial Restraints in Gasoline Marketing,'' (Federal Trade 
Commission, March 2004), at pp. 31-35.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Maria Cantwell to 
                             Lee R. Raymond

    Question 1. I'm aware that the cost of crude oil is driven by the 
world market and that its cost is currently significantly above 
historic averages. But I'm not aware of any substantive increases in 
the cost of producing crude oil, the cost of refining it into various 
petroleum products such as gasoline and diesel, and the cost of 
transportation of refined products to markets. Through the end of 
September 2005, the price of crude had increased 40 percent in 2005 
while gasoline prices increased almost 80 percent. If the percent 
difference in the prices isn't pure profit, please explain to me how 
you account for the difference in the substantially lower increase in 
crude oil when compared to gasoline.
    Answer. Crude oil and gasoline prices are determined by the actions 
of willing buyers and willing sellers in the global, transparent market 
place based on their outlook of various market factors. See, e.g., 
Attachment K, International Comparison of Gasoline Price. Compared to 
the previous year, in 2005, crude prices are up, transportation costs 
are up, refinery costs are up and various mandated product 
specification changes continue to increase costs.

    Question 2. Between 1981 and 2003, U.S. refineries fell from 321 to 
149. Further, no new refineries have been built in the U.S. since 1976. 
In 1981, the 321 refineries had a capacity of 18.6 million barrels a 
day. Today, the remaining 149 refineries produce 16.8 million barrels a 
day. I recognize the difficult financial, environmental, and legal 
considerations associated with the location and construction of new 
refineries. But I fail to understand the closure of existing refineries 
even if they required investment to enhance their efficiency and 
production capability unless, of course, this mechanism is being used 
to increase the price of gasoline and other refined products. Please 
help me understand why you would shut down refineries in the face of 
the supply and demand situation. What conditions would have to exist 
for you to invest in new refining capacity? I have heard the industry 
claim that up to $48 billion has been used on capital expenditures for 
existing refineries. If those investments were not used for capacity 
increases, what were they used for?
    Answer. U.S. refining output has increased by 30 per cent over the 
past 30 years. The number of refineries in the U.S. has fallen as 
smaller or less efficient plants were closed. Over the last decade 
ExxonMobil has increased its U.S. refining capacity by the equivalent 
of three average-sized refineries through expansions and efficiency 
gains at existing U.S. refineries.
    ExxonMobil has invested $3.3 billion over the last five years in 
its U.S. refining and supply system. A substantial portion of this 
investment has been directed towards environmental improvement 
projects.
    Refining is a global business, and the U.S. has routinely imported 
petroleum products for decades to balance supply and demand. ExxonMobil 
is currently participating in a joint venture that is developing plans 
to construct a multi-billion dollar refining/chemical operation at 
Fujian, China to meet anticipated demand for petroleum products in the 
region, and ExxonMobil is studying expansions at some of its U.S. 
refineries. Decisions on refinery investments are based on long-term 
economics.

    Question 3. The recent hurricanes resulted in the need to import 
substantial refined products such as gasoline, diesel fuel and aviation 
fuel to meet U.S. demand. The question has been raised as to whether 
the country should develop a strategic reserve of finished petroleum 
products. What would be your reaction if the Federal government either 
directly or by way of contract with the private sector sought to create 
a strategic reserve of finished petroleum products? Since these 
products have a limited shelf-life, one proposal is to obtain and 
operate a number of refineries and have the products be used by the 
Federal government. Appreciate your comments on this proposal.
    Answer. The fastest and most efficient response to temporary supply 
imbalances is to let markets function. Although hurricane and flooding 
damage, transportation logistics, employee safety, and personnel 
dislocations contributed to the supply shortage following Hurricanes 
Katrina and Rita, the most critical contributing factor was the loss of 
electric power to run pipelines and refineries. Both the California 
Energy Commission and the National Petroleum Council (which advises the 
Secretary of Energy) have concluded in recent times that such fuel 
reserves are not appropriate for the U.S. ExxonMobil does not believe 
that the entry of the government into the U.S. refining business would 
be a sound strategy.

    Question 4. Given the recent profitability of the oil industry, I 
am interested to learn more on the disposition of these profits, 
particularly to enhance both production and refining capacity. Are any 
of these profits being used to enhance production and refining capacity 
for the benefit of other countries? What fraction of your profits is 
being invested for production and for refining? What percentage of 
profits have been used for stock buybacks and mergers and acquisitions?
    Answer. Yes, but the benefits of capital investment in one country 
are not limited to that country, when you are dealing with global 
commodities such as petroleum products. Approximately 70 percent of our 
profits come from outside the U.S.
    Please refer to the table below. Over the last ten years, 
ExxonMobil's cumulative capital and exploration expenditures have 
exceeded our cumulative annual earnings. Our average annual capital 
expenditures have been approximately $14.0 billion, while our average 
annual net income has been approximately $13.8 billion. See Attachment 
A, ExxonMobil Long Term Earnings and Investment History.

               PROFITS INVESTED FOR PRODUCTION & REFINING
------------------------------------------------------------------------
                                                          2004     2003
                                                           $M       $M
------------------------------------------------------------------------
Capital & Exploration Expenditure Production &
 Refining
  Production
    U.S...............................................    1,669    1,842
    Non-U.S...........................................    8,629    8,758
                                                       -----------------
                                                         10,298   10,600
  Refining
    U.S...............................................      550      998
    Non-U.S...........................................      774      768
                                                       -----------------
                                                          1,324    1,766
Capital & exploration expenditure--production &          11,622   12,366
 refining.............................................
Total consolidated net income after tax...............   25,330   21,510
% net income invested in production & refining........      46%      57%
------------------------------------------------------------------------
Data Sources:
    Exxon Mobil Corporation 2004 Financial & Operating Review.

    Answer. Please refer to the table below.

         PROFITS USED FOR STOCK BUYBACKS, MERGERS & ACQUISITIONS
------------------------------------------------------------------------
                                                          2004     2003
                                                           $M       $M
------------------------------------------------------------------------
Common stock acquired.................................    9,951    5,881
Mergers...............................................  .......  .......
Acquisitions..........................................  .......  .......
                                                       -----------------
                                                          9,951    5,881
Total consolidated net income after tax...............   25,330   21,510
% net income used for stock buybacks, mergers &             39%      27%
 acquisitions.........................................
------------------------------------------------------------------------
Data Sources:
    Exxon Mobil Corporation 2004 Form 10K--Consolidated Cashflow
  Statement & Consolidated Statement of Income.


    Question 5. You've all said profits are cyclical, and that your 
companies have also suffered from the volatility of the oil markets. 
Would your stockholders be better served if domestically produced oil 
was sold at a fixed rate that included a generous profit margin above 
the production, refining, and distribution costs?
    Answer. No. The oil market is global in nature. Price controls 
introduce distortions and inefficiencies in the market. Stockholders, 
like all energy consumers, are best served by a free and efficient 
market. The U.S.'s previous experience with price controls resulted in 
reduced domestic production and increased dependence on imports.\2\
---------------------------------------------------------------------------
    \2\ Congressional Research Service Report 90-442 E, The Library of 
Congress, The Windfall Profit tax on Crude Oil: Overview of the Issues, 
September 12, 1990.

    Question 6. Do you believe that global warming is occurring? Do you 
believe that man-made activities have a role in this phenomenon? How 
will global warming impact your companies in term of added costs for 
oil and gas development, or allow access to new areas for oil and gas 
development?
    Answer. Attached as Appendix A is ExxonMobil's recent ``Report on 
Energy Trends, Greenhouse Gas Emissions and Alternative Energy,'' * 
which addresses our approach to the complex topic of global climate 
change.
---------------------------------------------------------------------------
    * Appendix A-C have been retained in Committee files.

    Question 7. Is it accurate that United States LNG terminals in 
Massachusetts and Maryland are only operating at half capacity? Do you 
believe if these plants were operated at a higher capacity it would 
have changes the market dynamics that determine the current price?
    Answer. ExxonMobil does not have a financial or operating interest 
in either terminal so we cannot comment on operational matters there. 
If the facilities were at 100% of capacity there would likely be a 
nominal market impact if any since the natural gas markets served by 
these two facilities are very large relative to the capacity of both.

    Question 8. Please state for the record your company position on 
fuel economy standards. Are there other incentives that you support 
that you feel are better for consumers then the Corporate Average Fuel 
Economy paradigm?
    Answer. Our position has been and continues to be in favor of 
efficient use of our products, both internally and by our customers. We 
have made substantial improvements in the energy efficiency of our 
operations in the past and expect to continue to do so.
    We have been and continue to be involved in joint research with 
selected automakers on efficiency and emissions improvement. We expect 
that the automakers will continue to seek efficiency improvements in 
response to market forces. High fuel efficiency vehicles are available 
to consumers today.

    Question 9. I understand that over the past 5 years companies in 
your industry have downsized significantly. Now there is a shortage in 
workers and equipment to increase drilling. Please explain that 
dynamic.
    Answer. Demand for drilling equipment and crews fluctuates based on 
the amount of drilling activity. There are continual improvements in 
technology and other efficiencies that enhance the ability of industry 
to effectively explore for, develop, and produce energy supplies.

    Question 10. As you probably know, Congress is likely to open up 
the Coastal Plain of the Arctic National Wildlife Refuge to oil and gas 
exploration. Do you have plan to bid for leases in this area? What does 
the price of oil have to be to make ANWR exploration and extraction be 
economically viable?
    Answer. If ANWR is ultimately opened for leasing, ExxonMobil would 
look at potential opportunities there in the same manner we would look 
at opportunities in the U.S. and elsewhere around the globe. We do not 
have sufficient information or data needed to properly answer the 
second question. In addition, given the scale and long-term nature of 
the energy industry, there are no quick fixes or short-term solutions. 
We have ongoing investment programs to develop future supply and to 
advance energy-producing and energy-saving technologies. If we are to 
continue to serve our customers and your constituents, corporate and 
government leaders alike cannot afford to simply follow the ups and 
downs of energy prices. We must take a longer-term view.

    Question 11. I understand that many of your resources and equipment 
are working flat out to rebuild infrastructure in the Gulf of Mexico. 
If there is no capacity to expand oil and gas exploration, what good is 
opening up sensitive environmental areas to increased drilling going to 
do for the consumer in the short run?
    Answer. The size, scale, and timeframe of the energy industry are 
immense. It is not appropriate to compare the activities associated 
with repairing Gulf of Mexico infrastructure with those required to 
study, explore, develop, and produce oil and gas from a new geologic 
basin. The time horizons are much different, and many of the 
contracting companies involved are different as well. Access to new 
energy supplies is needed to help meet projected U.S. energy demand. It 
requires significant time, risk, and resources to develop energy 
resources. Industry experience and proven technologies demonstrate that 
these resources can be developed in an environmentally responsible 
manner.

    Question 12. Given the growing demand for oil in Asia, do you 
believe that oil derived from the Arctic National Wildlife Refuge could 
be diverted to supply Asian markets? If drilling in the Arctic National 
Wildlife Refuge is authorized this year, when will it begin to have an 
impact on gasoline prices? What do you believe that effect will be?
    Answer. Oil is a globally traded commodity. It is our understanding 
that proposed ANWR legislation would require that its oil production be 
used in U.S. markets. Energy resources obtained from ANWR would 
increase diversity of U.S. energy supplies, and would add to the 
supplies needed to meet projected world energy demand. New supplies 
assist in helping meet energy demand, and have a positive effect on 
prices for the U.S. consumer. Given the scale and long-term nature of 
the energy industry, there are no quick fixes or short-term solutions.

    Question 13. Do you support more transparency in the oil and 
natural gas markets, as would be provided in my bill S. 1735?
    Answer. ExxonMobil supports open and liquid markets that are free 
from government intervention. We are continuing to assess S. 1735 in 
order to establish a company position.

    Question 14. How has the last 3 years of escalating gasoline prices 
affected demand by American drivers? Have we seen a correlation between 
a certain level of price increase and less demand by American drivers? 
What is the actual level of reduced demand today compared to 3 years 
ago (please respond in the context of a doubling of retail gasoline 
prices)?
    Answer. The price effect on demand (``price elasticity'') is 
notoriously difficult to assess reliably over short time periods, and 
we are not able to respond quantitatively to the specific three year 
time frame posed. We note that historically, elasticity is very low in 
the short term--the ability of individuals to adjust their consumption 
day-to-day is limited. Certainly, one can adjust the thermostat and 
avoid unnecessary car trips, and this can have a real but limited 
effect. Over a period of years, the effects of choices in new car 
purchases, where to live versus work, and other lifestyle decisions can 
have a larger effect on total energy demand.

    Question 15. What is the crude oil extraction costs for major oil 
producing countries, including our own? How does that compare with oil 
derived from shale or coal?
    Answer. The cost of extracting oil varies widely depending upon the 
particular field in question and in some cases, the cost of energy 
itself which can be a major component of production cost. Even with 
this wide variation, we expect that the cost of producing oil from 
shale or coal would be substantially higher still. ExxonMobil had a 
shale oil venture in the 1980s that was determined to be non-economic 
at the time when oil prices dropped significantly from prior levels.

    Question 16. Regarding foreign exporting, inventory maintenance, 
and other practices of your company, please provide a response to each 
of the following questions and information requests: For each and every 
export shipment to a foreign country of gasoline, distillate fuel oil, 
propane, or liquefied natural gas occurring from January 1, 2005 to 
present, please provide the date, product type, volume, domestic port 
of exit, foreign destination, transportation costs, and the sale price 
or transfer value upon arrival at the foreign destination.
    Answer. ExxonMobil has exported YTD 2005 (mostly to Mexico) about 
9MB of gasoline, approximately 3MB distillates and 0.5MB of jet 
kerosene. We sold 97.8% of our domestic production within the United 
States. We do not export LNG or propane.
    All exports were essentially at market prices at the time of 
delivery and were sold to achieve the highest value for the product. 
Export sales prices exceed domestic prices, at the time of the deal 
adjusted for quality and location difference. Cargo-specific pricing 
and other data are proprietary.

    Question 16a. Since January 1, 2001 to present, please identify the 
number of shipments wherein your company exported gasoline, distillate 
fuel oil or jet fuel and the sales price or transfer value received at 
the destination was less than the amount that would have been received 
had the product been marketed by your firm in the United States.
    Answer. None at the time of the deal.

    Question 16b. Since January 1, 2001 to present, please identify the 
date, product, volume(s), foreign port of origin, expected U.S. port of 
entry, and eventual port of final destination in each instance wherein 
your company basically ``turned a ship away'' (whether proprietary 
product or acquired from a third party) by changing the shipments 
expected arrival in a U.S. port to a foreign port.
    Answer. None.

    Question 16c. From 1995 until present, please identify by month the 
inventory levels maintained by your company for gasoline and distillate 
fuel oil in both barrels and converted to ``days of cover'' or ``days 
of supply'' for your firm's distribution and sales volumes within each 
of the Petroleum Allocation Defense Districts (PADDS) in the United 
States.
    Answer. The ExxonMobil supply chain and inventories are managed on 
a global, efficient basis to ensure reliable supplies for our 
customers. Consistent data are readily available from 2003 on a U.S. 
basis (we do not typically segregate by PADD) and is listed below for 
each year. The annual average reflects operations and avoids the 
volatility in monthly data caused by operating events such as 
turnarounds, pipeline delivery timing and sales flucuations.

------------------------------------------------------------------------
                                                                   2005
                                                    2003   2004   (YTD)
------------------------------------------------------------------------
Inventory, MB *..................................   63.0   62.1    60.7
Days of sales **.................................     29     28    27
------------------------------------------------------------------------
* Includes finished plus intermediates.
** Sales based on finished.


    Question 16d. From January 1, 2005 to present, provide the details 
of each ``spot market'' (as commonly referred to in the industry for 
bulk sales, in volumes exceeding 5,000 barrels per transaction) 
including the date, identity of both the seller and purchaser, location 
of the product being sold, and the selling price.
    Answer. Details of spot market transactions are proprietary 
information.

    Question 16e. Describe your company's use of ``in-house trading 
platforms,'' and identify all individuals in your company by name, 
address, email, and phone number that were authorized during 2005 to 
either exchange, trade, sell or purchase gasoline or distillate fuel 
oil on either the ``spot market'', NYMEX futures market, or via 
``forward paper'' purchase rights.
    Answer. ExxonMobil does not use ``an in-house trading platform'' as 
we understand the term. ExxonMobil does not engage in speculative 
trading in the futures market. ExxonMobil uses derivatives for 
transactions in the U.S. market to match the market price with the 
timing of physical delivery. The use of derivatives represents less 
than 2.5% of our total trading activity.

    Question 16f. Please identify all third party reporting services, 
including but not limited to Oil Price Information Service (OPIS), 
Lundberg Surveys, Platts, and Oil Intelligence that your company 
regularly supplies transaction data or marketing information and all 
individuals of the company by name, address, email, and phone number 
that were authorized during 2005 to provide the information or data to 
such third parties.
    Answer. ExxonMobil did not communicate transaction data, marketing 
information, or any other related information to OPIS, Lundberg, Platts 
or other third-party reporting services for U.S. gasoline, distillates 
or jet kerosene in 2005.

    Question 16g. Please identify the branded and unbranded ``rack 
prices'' that were reported by your company to third party reporting 
services such as OPIS and the branded and unbranded ``rack prices'' 
that were actually charged distributors or jobbers by your company each 
day, from January 1, 2005 to present, at the truck loading terminal(s) 
that typically supply gasoline stations in Houston, TX, Atlanta, GA, 
New York, NY, Chicago, IL, Los Angeles, CA, Portland, OR, and Seattle, 
WA.
    Answer. ExxonMobil does not report prices to OPIS.

    Question 16h. Will your company commit that it will take no efforts 
to retaliate against any firm or individual that is a potential witness 
before this Committee or cooperates with any investigation into the oil 
industry by Congress or another governmental authority?
    Answer. Yes. Exxon Mobil does not make business decisions based 
upon anyone's testimony before Congress or cooperation with 
Congressional or government agency investigations. That being said, the 
Company cannot guarantee that no one who testifies or cooperates in an 
investigation will be unhappy about a business decision the Company 
makes and allege that the Company is retaliating against them.

    Question 16i. From January 1, 2005 to present, for each instance 
known to your company wherein a third party (not your company) exported 
gasoline, distillate fuel oil, propane, or liquefied natural to a 
foreign country, please provide any of the details known to your 
company including the identity of the exporter, date, product type, 
volume, domestic port of exit, foreign destination, transportation 
costs, and the sale price or transfer value upon arrival at the foreign 
destination.
    Answer. ExxonMobil sold 0.5MB in 2005 to Defense Energy Support 
Center which we understand was exported. We have no direct knowledge of 
exports by third-parties.

    Question 16j. Since January 1, 2001 to present please identify the 
identity, date, product, volume(s), foreign port of origin, expected 
U.S. port of entry, and eventual port of final destination in each 
instance wherein your company is aware a third party (not your company) 
basically ``turned a ship away'' (whether proprietary product or 
acquired from a third party) by changing the shipments expected arrival 
in a U.S. port to a foreign port.
    Answer. We do not have knowledge about any third-party actions 
regarding ``turning any ships away.''

    Question 16k. Please provide an itemized list of tax deductions and 
credits taken under the U.S. tax code for 2004, by your parent company 
and subsidiaries.
    Answer. Similar to all other industries, our parent company and 
subsidiaries took the deductions and credits appropriate to our 
business as provided for in the Internal Revenue Code. Information on 
tax returns is confidential and we will not comment on the specifics of 
our return. However, the following is a general listing of the 
deductions and credits that we took on our 2004 U.S. Federal Income Tax 
Return.
          A. Deductions claimed on 2004 Federal income tax return:
                  1. Cost of Goods Sold
                  2. Salaries and Wages
                  3. Repairs and Maintenance
                  4. Bad Debts
                  5. Rents
                  6. Taxes and Licenses
                  7. Interest
                  8. Charitable Contributions
                  9. Depreciation
                  10. Cost Depletion
                  11. Advertising
                  12. Pensions, Profit-sharing, etc., plans
                  13. Employee Benefit Programs
                  14. Other allowable deductions including, but not 
                limited to:
                        --Amortization expenses
                        --Freight and delivery expenses
                        --Insurance expenses
                        --Office supplies expenses
                        --Relocation expenses
                        --Research and development expenses
                        --Utilities
          B. Credits Claimed on the 2004 Federal Income Tax Return:
                        --Foreign Tax Credit
                        --General Business Credit
                        --Credit for Federal Tax on Fuels
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ken Salazar to 
                             Lee R. Raymond

    Question 1. The Agriculture Committee is looking at the impacts 
these high energy prices are having on agricultural producers around 
the country. To sum it up: they are hurting. It seems to me that there 
is tremendous potential for our country to grow fuels such as ethanol 
and bio-diesel. This approach offers many benefits to rural America as 
well as to the country as a whole. What type of investments is your 
company making (and planning to make) in these types of renewable fuels 
in the United States?
    Answer. ExxonMobil's primary focus with regard to renewable fuels 
is on research to identify options that are commercially viable, as for 
example through the Global Climate and Energy Project (GCEP) and other 
such initiatives, to which ExxonMobil plans to contribute over $100 
million. ExxonMobil has an ambitious research program and we examine 
renewable fuels as part of this effort. At present, ExxonMobil blends 
almost a million gallons of ethanol into our gasoline products every 
day in the U.S. This has required investment throughout our supply 
system. Renewable fuels manufactured by today's technologies are 
generally more costly than petroleum-derived fuels and require 
government subsidies to be competitive.

    Question 1a. Rural America is crying out for investment in 
renewable fuels, and I encourage your companies to look at the 
potential of renewable fuels. In terms of a percentage of your capital 
expenditures, how much money did your company spend this year to 
develop renewable fuel sources in the United States? What will that 
percentage be going forward?
    Answer. As a percentage of total investment, the amount currently 
being invested is inconsequential at less than 0.1 percent of our total 
capital spending. However, through our funding and participation in the 
research partnership with Stanford University--the $100 million Global 
Climate and Energy Project--we are supporting research into 
breakthrough renewable energy sources.
    We are investing in facilities to blend ethanol at selected 
terminals in the U.S. in 2005, but the amount of this capital is very 
small in relation to our total spending. We expect to continue to 
invest in additional ethanol blending facilities in the coming years to 
meet the expanded renewables requirements imposed by this year's energy 
bill.

    Question 1b. Will you also provide this committee with some 
examples of renewable fuel projects that your company is pursuing 
outside the United States?
    Answer. Similar to our U.S. activity, we are making investments to 
support blending of renewable fuels in other countries where renewable 
fuel use is required.

    Question 2. As a few of you note in your testimony, diesel prices 
have remained high while unleaded gasoline prices have come down. It 
seems as if we are getting lower priced unleaded gas at the expense of 
diesel. Since diesel is the fuel of choice in agriculture, it is a sort 
of a double whammy on our producers. What is being done, or what can be 
done, to get diesel prices back in line with the price of gasoline?
    Answer. Prices are determined by the market. From time to time 
diesel prices have been higher than gasoline prices, depending on 
market factors of supply and demand. New grades of diesel are being 
required in the U.S. such as the introduction of low-emission diesel in 
Texas in 2005 and the planned initial introduction of ultra-low sulfur 
diesel nationwide in 2006. These changes affect the amount of motor 
fuels that can be produced in the U.S. and potentially the availability 
of refined product imports, adding further challenges to the supply 
chain.

    Question 2a. If demand for diesel is so high in Europe and high 
prices don't attract the supplies necessary to lower prices, isn't that 
a good indicator that we should work to produce more diesel in the 
United States and look to biodiesel as an option?
    Answer. Prices are determined by the market. Directionally higher 
prices will attract increased supplies which may then moderate prices 
compared to what the prices would have been without those increased 
supplies. Biodiesel, however, is generally more costly to produce than 
petroleum-derived diesel and requires subsidies to be competitive.

    Question 3. For the record, will you tell me what your company has 
spent on capital expenditures in cash, not including write offs such as 
amortization or depreciation. Will you also provide the figures spent 
on cash dividends and stock buyback for the same time period?
    Answer. Please refer to the table below.

          CAPITAL EXPENDITURES, CASH DIVIDENDS, STOCK BUYBACKS
------------------------------------------------------------------------
                                                          2004     2003
                                                           $M       $M
------------------------------------------------------------------------
Total capital & exploration expenditures..............   14,885   15,525
Cash dividends to ExxonMobil shareholders.............    6,896    6,515
Common stock acquired.................................    9,951    5,881
------------------------------------------------------------------------
Data sources:
    Exxon Mobil Corporation 2004 Form 10-K.


    Question 4. On November 1st, Senator Grassley asked your companies 
to contribute 10% of your record profits to supplement LIHEAP funding 
for the less fortunate. Will your companies support Senator Grassley's 
proposal?
    Answer. No. On November 7, 2005, the American Petroleum Institute 
(API) responded formally to Senator Grassley's inquiry. API stated its 
strong support for Congress to provide full funding for this important 
program, which it established in 1982. API observed that higher oil and 
natural gas prices have resulted in significantly increased royalty 
payments and income taxes to the Federal Government.

    Question 5. I'd like to encourage you to actively work with the 
Department of Energy and any other relevant federal agency on 
initiating a public/private education campaign focused on energy 
education and conservation. In the meantime, will you tell me what your 
company has done on its own initiative?
    Answer. Through its membership in the American Petroleum Institute, 
ExxonMobil has supported a major advertising campaign this Fall 
emphasizing energy education and conservation as a major theme. This 
continuing campaign has been implemented nationally in the print, radio 
and television media. Enclosed as Appendix B are API's print media 
advertisements.
    Additionally, ExxonMobil has its own external communications 
program, a substantial part of which is designed to communicate some of 
the tough energy challenges facing the U.S and the rest of the world 
and describing some of the company's actions to address those 
challenges. We have used and continue to use a broad range of 
communications channels (television, newspapers, magazines, on-line) to 
reach people and energy efficiency has taken a high profile in the 
content of these programs. For example, we run 26 opinion editorials 
annually in the New York Times, Washington Post and other publications 
and energy efficiency is widely covered in these, including several 
specifically on the subject. In addition, a large portion of our U.S. 
advertising in 2005 featured energy efficiency content. [Examples are 
included in Appendix C.] Information on our website, 
www.exxonmobil.com, provides more detail supporting the advertising.
    Following Hurricanes Katrina and Rita, the company placed print 
advertisements in newspapers across the country, describing 
ExxonMobil's actions to maintain fuel supplies and asking Americans to 
help by using fuel wisely; we also provided some energy saving tips.
    We have a range of communications initiatives designed to help 
people understand energy issues. For example, we prepare annually--and 
have done so for decades--a detailed, long-range outlook of global 
energy supply and demand trends. See, www.exxonmobil.com/corporate/
Citizenship/Corp--citizenship--energy--outlook.asp. These are 
communicated widely through publications and presentations to 
audiences, as well as posted on our website.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                             Lee R. Raymond

    Question 1. In the last decade, has your company ever withheld 
supply of crude oil or refined product from the market in order to 
prevent prices from falling?
    Answer. No.

    Question 2. Please describe any business relationship or 
transaction your company or any of its subsidiaries, wherever located 
and wherever incorporated, whether wholly owned or not, have had with 
Iranian nationals (except employment of Iranian expatriates), the 
Iranian government, individuals or corporations located or incorporated 
in Iran, or any representative of these people or companies.
    Answer. ExxonMobil believes it is in compliance with the laws and 
executive order dealing with contacts with Iran and has in place 
procedures to help ensure future compliance.
    In addition to a copy of ExxonMobil's `Special Review Procedures 
for Transactions Involving Sensitive Countries,' we have attached a 
copy of a letter the company received this year from the Office of 
Foreign Assets Control (``OFAC'') which we believe demonstrates the 
care the company is taking to ensure compliance with the law.

[Attachment.]
                                Department of the Treasury,
                                  Washington, DC, February 2, 2005.
Case No. IA-7041

Peter D. Trooboff, Esquire,
Covington & Burling, 1201 Pennsylvania Avenue, N.W., Washington, DC. 
        20004-2401
    Dear Mr. Trooboff: This responds to your letters of December 21, 
2004, and January 10, 2005, on behalf of Exxon Mobil Kazakhstan Inc. 
and its affiliates (collectively, ``ExxonMobil''), requesting 
confirmation that certain transactions by ExxonMobil in connection with 
its participation in current and proposed activities relating to the 
North Caspian Production Sharing Agreement are not prohibited by the 
Iranian. Transactions Regulations, 31 C.F.R. Part 560 (the ``ITR''). 
You explain that in November 1997, the Government of Kazakhstan entered 
into a Production Sharing Agreement (``PSA'') with a consortium of 
international petroleum companies (the ``Consortium''), which entitles 
Consortium members to explore for oil, develop discovered reserves, and 
produce oil from several blocks in the northern Caspian Sea. Agip KCO, 
a subsidiary of ENI, a company based in Italy, is the Consortium 
operator. ExxonMobil holds a 16.67 percent ownership interest in the 
Consortium. The Government of Iran is not a shareholder or participant 
in the Consortium. You further explain that pursuant to the PSA, each 
member of the Consortium will take its equity share of oil production 
in kind at the field's delivery point.

                               BACKGROUND

    The ITR prohibit the exportation, reexportation, sale or supply, 
directly or indirectly, from the United States or by a U.S. person, 
wherever located, of any goods, technology or services to Iran or the 
Government of Iran. This prohibition also applies to the exportation, 
reexportation, sale or supply of goods, technology or services to a 
person in a third country undertaken with knowledge or reason to know 
that the goods are intended specifically for supply, transshipment or 
reexportation, directly or indirectly, to Iran or the Government of 
Iran, ITR, Sec. 560.204. ITR Sec. 560.410(a) makes clear that the 
Sec. 560.204 prohibition on the exportation of services to Iran applies 
to services performed by U.S. persons outside the United States on 
behalf of the Government of Iran, or where the benefit of such services 
is otherwise received in Iran.
    As noted in your letter, the prohibition in ITR Sec. 560.204 on 
exports to Iran or the Government of Iran does not apply to the 
exportation to any country of information and informational materials, 
ITR, Sec. 560.210(c). The term information and informational materials 
is defined in ITR Sec. 560.315 to include publications, films, posters, 
phonograph records, photographs, microfilm, microfiche, tapes, compact 
disks, CD ROMs, artworks, and news wire feeds.
    In addition, Sec. 560.210(c)(2) of the ITR provides that the 
informational materials exemption does not apply to transactions 
related to information and informational materials not fully created 
and in existence at the date of the transactions, or to the substantive 
or artistic alteration or enhancement of informational materials, or to 
the provision of marketing and business consulting services.
    The ITR also prohibit U.S. persons, wherever located, from engaging 
in any unauthorized transactions or dealings in or related to (1) goods 
or services of Iranian origin or owned or controlled by the Government 
of Iran; or (2) goods, technology or services for exportation, 
reexportation, sale or supply, directly or indirectly, to Iran or the 
Government of Iran. ITR, Sec. 560.206. The term ``transaction or 
dealing'' includes, without limitation, purchasing, selling, 
transporting, swapping, brokering, approving, financing, facilitating, 
or guaranteeing. ITR, Sec. 560.206(b). The prohibition against 
facilitation in the ITR bars, without a license, a U.S. person, 
wherever located, from approving, financing, facilitating, or 
guaranteeing any transaction by a foreign person where the transaction 
by that foreign person would be prohibited by the ITR if performed by a 
U.S. person or within the United States. Additionally, a U.S. 
corporation may not modify its policies or procedures or those of a 
foreign affiliate or subsidiary to enable that entity to enter into a 
transaction that would be prohibited if performed by a U.S. person or 
within the United States. ITR, Sec. Sec. 560-208 and 560.417.

                                 ISSUES

    The first issue raised in your letter relates to ExxonMobil's 
participation in studies and possible construction of a pipeline from 
Atyrau, Kazakhstan, to the Aktau region of Kazakhstan in order to 
transport the crude oil produced in the Kashagan field to market. We 
understand that in January of 2003, ExxonMobil notified the non-U.S. 
members of the Consortium that ExxonMobil would neither fund nor 
participate in planning any study or portion of a study that analyzes 
issues regarding the subsequent transportation of Kashagan crude oil to 
or across Iran. You assert that the ITR do not prohibit ExxonMobil's 
participation in studies of the proposed Atyrau-Aktau pipeline and 
terminal or in the construction, partial ownership and operation of 
such a new pipeline and terminal, as such activities would take place 
in Kazakhstan and all of the pipeline and terminal construction 
activities would be located and operated in Kazakhstan. Additionally, 
you advise that ExxonMobil would not be involved in any shipments of 
oil to or through Iran by non-U.S. Consortium members, although non-
U.S. Consortium members may independently decide to ship their portion 
of the oil through Iran.
    Based on the facts you have presented regarding the ownership 
structure of the Consortium and the proposed activities to be engaged 
in by ExxonMobil, and independent of the issues discussed below, we do 
not regard ExxonMobil's participation in the Atyrau-Aktau pipeline 
study and its participation in the ownership, construction and 
operation of the pipeline and related facilities to be prohibited by 
ITR Sec. Sec. 560.206 and 560.208 per se. However, this conclusion does 
not relieve ExxonMobil from the responsibility of ensuring that it does 
not engage in related activities that are prohibited by the ITR. In 
particular, before engaging in transactions involving the PSA and the 
Consortium, ExxonMobil must ascertain whether such transactions would 
provide goods or services to the Government of Iran or a person in 
Iran, or involve a dealing in or related to goods or services of 
Iranian origin or owned or controlled by the Government of Iran. For 
example, ExxonMobil would be prohibited from providing any consulting 
or other services to the Consortium in connection with transportation 
activities involving Iran. In addition, any activity by ExxonMobil 
involving the Atyrau-Aktau pipeline, including among other activities 
the development, construction and/or operation of the pipeline, that 
would directly or indirectly benefit Iran or the Government of Iran or 
promote the trading or dealing in Iranian-origin goods or services 
would be prohibited by ITR Sec. 560.204 or Sec. 560.206.
    Secondly, you raise the issue of ExxonMobil's proposed receipt of 
Iranian transportation studies prepared for and funded by the non-U.S. 
Consortium members for ExxonMobil's internal purposes. The studies are 
described as pre-existing materials created by third parties that are 
not publicly available. You explain that it is common practice in the 
oil industry for members of a consortium to share with other consortium 
members relevant studies they prepare, even though some consortium 
members have not contributed to funding the studies or otherwise 
participated in their preparation. In your letter of January 10, you 
describe the accounting arrangement that was created to ensure that the 
U.S. members of the Consortium are not funding or otherwise involved in 
the Iran transportation studies. This arrangement provides that a 
portion of Agip KCO's overhead will be allocated to such studies and 
charged exclusively to the non-U.S. Consortium members.
    You confirm that the U.S. Consortium members are not indirectly 
funding such costs by disproportionately funding other work in return 
for not paying for the Iran export option costs. You explain that 
although ExxonMobil has not yet received any studies or reports from 
the non-U.S. Consortium members concerning any specific study that may 
have been undertaken regarding an Iranian export option, ExxonMobil 
expects eventually to see high-level summaries of that data and 
information included in the joint transportation studies and reports. 
You further explain that ExxonMobil will not comment on or discuss the 
studies with Agip KCO, or other non-U.S. Consortium members that funded 
the studies. In addition, ExxonMobil will not enhance the quality or 
usefulness of these studies for the non-U.S. Consortium members. 
Rather, you expect that the studies may enable ExxonMobil to permit 
better planning and support for the non-Iranian transportation option.
    With regard to the receipt by ExxonMobil of pre-existing 
transportation studies created and funded by the non-U.S. Consortium 
members that are not publicly available, it appears from the 
information you have provided that such materials would constitute 
informational materials that are exempt under ITR Sec. 560.210(c). 
Accordingly, ExxonMobil's receipt of such transportation studies would 
not be prohibited by the ITR, provided that ExxonMobil does not 
directly or indirectly provide any goods or services, including 
marketing or consulting services, to the non-U.S. Consortium members in 
connection with the creation or such studies and provided further that 
such transactions do not involve either the development, production, 
design, or marketing of technology specifically controlled by the 
International Traffic in Arms Regulations, 22 C.F.R.. parts 120 through 
130, the Export Administration Regulations, 15 C.F.R. parts 730 through 
774, or the Department of Energy Regulations set forth at 10 C.F.R. 
part 810, or exchanges of information that are subject to regulation by 
other government agencies. We note that ExxonMobil's receipt of such 
information will assist it in making further determinations as to 
whether its participation in the development, construction, ownership 
and/or operation of the Atyrau-Aktau pipeline may be prohibited by the 
ITR unless authorized by OFAC.
            Sincerely,
                                          Robert W. Werner,
                        Director, Office of Foreign Assets Control.

June 24, 2004
                        Exxon Mobil Corporation

    SPECIAL REVIEW PROCEDURES FOR TRANSACTIONS INVOLVING SENSITIVE 
                               COUNTRIES

    Introduction. Exxon Mobil Corporation generally seeks to pursue 
promising business opportunities, regardless of location, as long as 
all applicable legal requirements are met. Even when lawful, however, a 
transaction may have public affairs sensitivities that warrant prior 
review by the Public Affairs Department and, in some cases, endorsement 
by the appropriate Corporate Contact Executive. These Special Review 
Procedures cover selected transactions that require such reviews and 
endorsements. These Special Review Procedures do not cover all proposed 
transactions that should receive special review because of unusual 
public affairs sensitivities. If a business unit is considering a 
transaction that does not fall literally within the transactions 
described below but that could involve similar sensitivities, the 
business unit should obtain appropriate advice, reviews, and 
endorsements.
    Legal Compliance. In many countries, but particularly in the U.S., 
significant legal restrictions exist on transnational commercial 
transactions. For example, currently more than seventy countries are 
subject to some kind of U.S. economic sanctions. This statement of 
Special Review Procedures is not intended to be a summary of applicable 
legal requirements and prohibitions or a guide to determining whether a 
proposed transaction is lawful. The Law Department is available to make 
those determinations in all cases, including cases where the applicable 
laws of different countries may conflict with respect to a proposed 
transaction.
    Definition of ``Transactions Involving a Country''. These Special 
Review Procedures cover selected transactions with Category A or B 
countries listed below. As used in this statement of Special Review 
Procedures, ``transactions involving a country'' are defined broadly to 
include any business dealing with the government or nationals of the 
country; with any company or other entity in the country; or with any 
entity anywhere directly or indirectly owned or controlled by, or 
acting for, such government, nationals, company or other entity. 
Transactions include activities such as exporting and delivering goods 
to a country or its government, nationals, or other entities referred 
to above; importing and procuring goods from them; providing services 
to or accepting services from them; contracting with them; investing in 
them; and transmitting funds to or receiving funds from them.
    Implementation. The responsible business unit should carefully 
consider all transactions that might involve a Category A or B country 
and should follow these Special Review Procedures for all such 
transactions. Questions regarding the interpretation or implementation 
of these Special Review Procedures should be referred to the Public 
Affairs Department.
    Future Revisions. Revisions to the Special Review Procedures must 
be endorsed by the Contact Executive for the Public Affairs Department 
following review by the Vice President-Public Affairs and by the Vice 
President and General Counsel.

                        CATEGORY A TRANSACTIONS

    Transactions involving a Category A country would typically involve 
a high degree of public affairs sensitivity. Trade between the United 
States and these countries typically is subject to significant legal 
and political restraints.
    Procedure. Subject only to the following two exceptions, no 
transaction involving a Category A country should be initiated, 
committed to, or entered into until the responsible business unit has 
obtained endorsement from its Corporate Contact Executive. Prior to any 
review by a Corporate Contact Executive, Corporate Public Affairs, the 
Law Department and the business unit's leadership should review the 
proposed transaction.
    The exceptions are the two types of transactions described below.

          1. Lawful transactions involving informational materials, 
        patents, trademarks or copyrights, provided such transactions 
        are licensed, authorized, or exempt under U.S. law.
          2. Lawful transactions for bunkering of Cuban non-military 
        vessels and fueling of Cuban non-military aircraft by non-U.S. 
        affiliates, provided such activities do not involve any 
        individual who is located in the U.S., or is a national or 
        permanent resident of the U.S.

    The excepted transactions described above do not require Corporate 
Contact Executive endorsement. The Law Department is available to 
provide advice on whether a particular transaction that appears to meet 
the conditions described above is lawful.
    For all other transactions involving a Category A country, review 
by the Corporate Public Affairs Department, the Law Department, and the 
business unit's leadership, and endorsement by Corporate Contact 
Executive are required. In some instances, that review and endorsement 
may make the proposed transaction unlawful with the result that the 
transaction should not be entered into. The Law Department can advise 
on when such circumstances apply, and such proposed transactions should 
be declined by the business unit without additional review.

                        CATEGORY B TRANSACTIONS

    Transactions involving a Category B country would typically involve 
heightened public affairs sensitivities, although the sensitivities 
normally are not as great as those involving a Category A country. 
Trade between the United States and these countries typically is 
subject to legal restrictions, but certain types of commercial activity 
are permitted. Alternatively, they are countries for which there are 
special political sensitivities.
    Procedure. Transactions involving a Category B country which 
entail:

          1. Commitments extending more than one year; or
          2. A significant loan or unusual credit terms; or
          3. Significant capital investment

should not be initiated, committed to, or entered into before the 
responsible business unit has obtained endorsement from its Corporate 
Contact Executive. Prior to any review by a Corporate Contact 
Executive, the Corporate Public Affairs Department, the Law Department, 
and the business unit's leadership should review the proposed 
transaction. As with Category A transactions, in some instances that 
review and endorsement may make a proposed transaction unlawful with 
the result that the transaction should not be entered into. The Law 
Department can advise on when such circumstances apply, and such 
proposed transactions should be declined by the business unit without 
additional review.
                        Exxon Mobil Corporation

  ATTACHMENT TO STATEMENT OF SPECIAL REVIEW PROCEDURES APPLICABLE TO 
          TRANSACTIONS INVOLVING PUBLIC AFFAIRS SENSITIVITIES

Category A
    Cuba
    Iran
    Iraq
Syria
North Korea
Sudan
Category B
    Burma (Myanmar)
Libya
      
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Olympia J. Snowe to 
                             Terry Goddard

    Question 1. The Department of Energy established a 1-800 phone 
number as well as web form for consumers to report possible instances 
of price gouging. According to the DOE, the information they receive is 
forwarded to the Department of Justice, the Federal Trade Commission, 
and the affected States' Attorney General. Have you been receiving this 
information? Is it helpful? What do your offices do with this 
information once it is received?
    Answer. The Department of Energy periodically sends my Office e-
mails containing summary information about complaints it receives from 
Arizona consumers regarding high gasoline prices charged by gasoline 
stations within the state. The information is helpful to the extent 
that it provides price information for specific gasoline stations. 
However, since the identity of the complainant is not disclosed and the 
information arrives well after prices have changed, it is difficult for 
us to corroborate the complaints. Additionally, because Arizona does 
not have a price gouging statute, we cannot take legal action regarding 
the reported high prices. Nonetheless, we monitor the Department of 
Energy's summaries for evidence of severe price spikes, which may 
indicate abnormal supply or demand issues and necessitate an antitrust 
or consumer fraud investigation.

    Question 2. As a former Attorney General, I recognize the enormity 
of the job that you perform with limited resources. In September, I 
wrote to Attorney General Gonzales and asked the Department of Justice 
to provide technical and financial support to state Attorneys General 
to investigate price gouging. What, if any, assistance have you 
received from the DOJ? What, if any, additional assistance could the 
Federal Government provide to your offices?
    Answer. In May 2004, many other state Attorneys General and I asked 
the President and several federal agencies to investigate the causes of 
high gasoline prices. On June 2, 2004, R. Hewitt Pate of the Department 
of Justice's Antitrust Division wrote us a letter stating that the 
Department of Justice investigates and prosecutes criminal antitrust 
activity. He made it clear that the Department of Justice does not 
investigate ``price gouging''. Mr. Pate also clarified the Federal 
Trade Commission's (``Commission'') role in investigating and 
prosecuting civil antitrust activity in relation to gasoline pricing 
issues, but not price gouging per se. Since receiving Mr. Pate's 
correspondence, my Office has not attempted to contact the Department 
of Justice regarding price gouging or gasoline issues, because we did 
not have evidence of criminal antitrust activity.
    It would be helpful for states to receive assistance from the 
Federal Government in analyzing the economic conditions that affect 
prices in local markets.
    For example, in 2003, when Arizona experienced severe price spikes 
resulting from a gasoline pipeline break between Tucson and Phoenix, my 
Office contacted the Commission regarding gasoline pricing issues. The 
Commission responded by providing my Office with helpful information 
about gasoline industry market structure. In September 2004, my staff 
and I also discussed Arizona gasoline pricing issues with Chairman 
Majoras and Commissioner Jones Harbour. Chairman Majoras agreed to 
investigate the reasons for Arizona price spikes that had been 
attributed to the pipeline break. The Commission reported its findings 
in its June 2005 report: Gasoline Price Changes: The Dynamic of Supply, 
Demand and Competition.
    On several occasions, my Office has provided the Commission with 
information for its Gasoline Price Monitoring project.
    Other than these contacts, my Office has not received any direct 
support or involvement with federal agencies.

    Question 3. Are you aware of price gouging for fuel or other 
commodities in your state following Hurricane Katrina? Are there any 
investigations underway? Do you have adequate state authority?
    Answer. Although Arizona's gasoline supply is not directly 
connected with the Gulf areas affected, in the days and weeks following 
Hurricane Katrina, hundreds of Arizona consumers complained to my 
Office about the significant price increases at Arizona gasoline 
stations in advance of and following Hurricane Katrina. Simultaneously, 
representatives of my Office found, through the course of our regular 
gasoline price monitoring, that the average price of gasoline in 
Arizona had actually climbed about 8 cents higher than California 
during this period. This is an extremely unusual phenomenon. Though 
Arizona receives much of its gasoline supply from California, our 
prices are usually at least 10 cents less than California's, due to 
California's higher gasoline taxes.
    As a result of consumer complaints, the California price disparity, 
and other credible information my Office received regarding the Arizona 
gasoline market, I launched antitrust and consumer fraud investigations 
to look for potential market manipulation and/or deceptive practices. 
While the investigations are not complete, we have learned that some 
Arizona gasoline retailers' and wholesalers' post-Katrina profit 
margins were two to three times higher than they were before the 
hurricane hit.
    In Arizona, we do not have the authority to prosecute price 
gouging, because Arizona does not have a price gouging law. If the 
current investigations do not turn up illegal anticompetitive or 
deceptive activity, my Office has no authority to take action against 
the companies that increased their profits so greatly at consumers' 
expense during the Hurricane Katrina disaster.

    Question 4. State of Emergency as Trigger for Price Gouging--Most 
state price gouging laws are applicable only in situations arising from 
a declared emergency. My home state of Maine is different in that the 
law applies in any instance where there is evidence of ``unjust and 
unreasonable profits in the sale, exchange or handling or 
necessities.'' Why did your state legislature choose to limit its law's 
impact to declared states of emergency?
    Answer. The Arizona Legislature has not passed an anti-price 
gouging law, even though bills, which I supported, were introduced in 
the 2004 and 2005 sessions.
    However, I recommend to our Legislature that the trigger for a 
price gouging law not be limited to declared states of emergency within 
the state. At times, there may be a major supply disruption of an 
essential good or service absent a disaster or emergency. I support 
price gouging legislation that also includes, as triggers, declarations 
of ``Abnormal Market Disruption'' or ``Supply Emergency.'' I believe 
these additional triggers would have provided important consumer 
protection against price gouging in states like Arizona that were 
indirectly affected by Hurricane Katrina. If states are affected by 
regional disasters, it is my opinion that the most effective anti-price 
gouging laws would include the additional triggers.

    Question 4a. How frequently do states declare a state of emergency?
    Answer. According to Arizona's Department of Emergency and Military 
Affairs, there have been 167 Gubernatorial Declarations of Emergency in 
Arizona in the 40 years since 1966. A table listing the declared 
emergencies is attached for your reference.

    Question 4b. Has there ever been a situation where there is 
evidence of unconscionable increase in price outside of a declared 
emergency?
    Answer. Since Arizona has no law defining ``unconscionable price 
increase,'' it is difficult to answer this question. In the period 
after Katrina, Arizonans saw profits of some suppliers and retailers 
triple. The Governor did not declare an emergency in connection with 
Hurricane Katrina.

    Question 5. Have you ever uncovered any evidence that oil companies 
deliberately kept their oil products off the market in order to raise 
prices?
    Answer. We received allegations of withholding gas in 2003, after 
the Kinder Morgan pipeline from Texas to Arizona ruptured, and in 
September 2005, after Hurricane Katrina. In both cases, my Office 
issued Civil Investigative Demands to investigate the validity of these 
allegations.
    In 2003, my investigation shed light on the complexity of the 
private and opaque gasoline supply and distribution system in Arizona, 
particularly in the Phoenix metropolitan area. However, that 
investigation was inconclusive due to uncontrolled variables, such as 
the scarcity of tanker trucks, long lines at the racks, and elaborate 
supply contracts. These variables made it impossible to determine 
whether gasoline suppliers were deliberately withholding product. It is 
possible that suppliers were unable to distribute product due to 
blockages at the racks, or unavailability of tanker trucks. It is also 
possible that suppliers were rationing supply in an uncertain market in 
order to comply with their supply contracts. My Office simply did not 
have enough information, nor the resources or jurisdiction to gather 
all of the necessary information to make a final determination as to 
causes of the shortages.
    In 2005, my Office received allegations that a local retail chain 
was withholding gasoline from the market for the purpose of driving up 
prices. Because the investigation is ongoing, I cannot definitively 
answer the question at this time.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                             Henry McMaster

    Question 1. State of Emergency as Trigger for Price Gouging--South 
Carolina's price gouging statute is triggered by a declaration of a 
state of emergency by the Governor of South Carolina or the President 
of the United States. After a declaration, it is unlawful to sell most 
commodities for or to raise rental rates to an unconscionable price. An 
unconscionable price is a price that (1) represents a gross disparity 
over the average price received in the usual course of business for the 
previous thirty days or (2) grossly exceeds the average price in the 
trade area for the preceding thirty days.
    Legislation has been proposed in South Carolina to make the price 
gouging statute apply when the President or the governor of any other 
state of the United States declares a state of emergency and the basis 
for that declaration is causing an abnormal disruption of the market in 
South Carolina. Why did your state legislatures choose to limit its 
law's impact to declared states of emergency?
    Answer. The market needs to be free to set prices and allocate 
scarce resources as it does in the usual course of business in the 
United States without merchants being afraid to make necessary pricing 
decisions.

    Question 1a. How frequently do states declare a state of emergency?
    Answer. The Governor of South Carolina declared hurricane related 
states of emergency for Hurricanes Hugo (1989), Fran (1996), Bonnie 
(1998), Floyd (1999), and Charley (2004). A state of emergency was 
declared for a winter storm in 2002.

    Question 1b. Has there ever been a situation where there is 
evidence of unconscionable increase in price outside of a declared 
emergency?
    Answer. South Carolina investigators interviewed employees in 100 
plus gasoline retailers post-Hurricane Katrina. Follow-up 
investigations are being conducted of four of these retailers. Though 
final conclusions have not been reached, it appears that some of these 
stations may have been susceptible to prosecution for price gouging if 
South Carolina's price gouging statute had been activated by a declared 
state of emergency.

    Question 2. The Department of Energy established a 1-800 phone 
number as well as a web form for consumers to report possible instances 
of price gouging. According to the DOE, the information they receive is 
forwarded to the Department of Justice, the Federal Trade Commission, 
and the affected State's Attorney General. Have you been receiving this 
information? Is it helpful?
    Answer. Yes.

    Question 2a. What do your offices do with this information once it 
is received?
    Answer. The information is used to identity potential problem 
retailers for investigation.

    Question 3. As a former Attorney General, I recognize the enormity 
of the job that you perform with limited resources. In September, I 
wrote to Attorney General Gonzales and asked the Department of Justice 
to provide technical and financial support to state Attorneys General 
to investigate price gouging. What, if any assistance have your 
received from the DOJ?
    Answer. South Carolina did not request assistance from DOJ.

    Question 3a. What, if any additional assistance could the Federal 
Government provide to your offices?
    Answer. South Carolina's resources were sufficient to investigate 
these issues at the retail level. We believe the appropriate federal 
role is to investigate the producers and refiners for anti-trust and 
unfair trade practices.

    Question 3b. Are you aware of price gouging for fuel or other 
commodities in your state following Hurricane Katrina?
    Answer. Though final conclusions have not been reached, it appears 
that a small number of gasoline retailers (four or less) may have been 
susceptible to prosecution for price gouging if South Carolina's price 
gouging statute had been activated by a declared state of emergency.

    Question 4. Are there any investigations underway?
    Answer. South Carolina investigators interviewed employees in 100 
plus gasoline retailers post-Hurricane Katrina. Follow-up 
investigations are being conducted of four of these retailers.

    Question 4a. Do you have adequate state authority?
    Answer. Legislation has been proposed in South Carolina to make the 
price gouging statute apply when the President or the governor of any 
other state of the United States declares a state of emergency and the 
basis for that declaration is causing an abnormal disruption of the 
market in South Carolina. If this legislation is adopted, we will have 
adequate authority.
                                 ______
                                 
  Prepared Statement of Hon. Bill Richardson, Governor, State of New 
                                 Mexico

    Chairman Domenici, Chairman Stevens, Ranking Member Bingaman, 
Ranking Member Inouye, and members of the committees, I appreciate the 
opportunity to submit this written testimony on the subject of today's 
joint committee hearing: energy pricing and corporate profits.
    As you may know, several Democratic Governors sent the President 
and Congressional leaders a letter on September 20, 2005 requesting an 
investigation into possible price-gouging by oil companies. I commend 
you for responding favorably to this request, as well as that of the 
growing number of Americans who want answers to their questions about 
record corporate profits at a time of exorbitant energy prices.
    We stated in our letter, ``If gas prices remain at artificially and 
unexplainably high levels, American families will see the effects not 
only at the pump, but in their grocery bills and prescription drug 
costs.'' \1\ Unfortunately, our concerns have been borne out. The 
recent spike in gas prices has placed an extraordinary financial burden 
on families, and there is no relief in sight. Although we have seen a 
slight decrease recently in gasoline prices, home heating costs are 
projected to increase dramatically this winter. According to an Energy 
Information Administration (EIA) Short Term Energy Outlook report 
released yesterday, American families who heat their homes with natural 
gas are expected to spend 41% more for fuel this winter than they did 
last winter.\2\ This is an increase of $306--a large burden for working 
families.\3\ The EIA further projects that the utility bills for 
families using heating oil will grow this winter by 27% ($325) and that 
propane users will pay on average 21% ($230) more this winter than 
last.\4\ If the weather is colder than expected, these costs will rise 
even further.\5\
---------------------------------------------------------------------------
    \1\ Letter from Democratic Governors to President Bush, Majority 
Leader Frist, and Speaker Hastert (Sept. 20, 2005).
    \2\ Energy Information Administration Short-Term Energy Outlook 
(Nov. 8, 2005), at http://www.eia.doe.gov/emeulsteo/pub/contents.html.
    \3\ Ibid.
    \4\ Ibid.
    \5\ Ibid.
---------------------------------------------------------------------------
    As a Governor of a state with a diverse population, I have seen the 
toll that high energy costs takes on working families. Americans don't 
spend money on energy and fuel because they want to; they spend it 
because they have to. Even worse, while high energy costs affect all 
Americans, they disproportionately affect the neediest Americans, who 
are often forced to choose among basic needs.
    What's most troubling is that as our citizens are forced to bear 
this financial burden, our nation's oil companies are turning out 
record profits. Exxon Mobil recently posted a $9.9 billion quarterly 
profit--the largest in U.S. corporate history.\6\ To put this number in 
perspective, this one company's quarterly profit could pay for all 
Social Security benefits for a three-month period, an Ivy League 
education for 60,000 kids, or more than 160 Boeing 737s.\7\ Likewise, 
Royal Dutch Shell reported third quarter profits of $9 billion and 
ConocoPhillips earned $3.8 billion, roughly double its profits from a 
year earlier.\8\ Overall, the industry is expected to post a record $96 
billion in corporate profits for 2005.\9\
---------------------------------------------------------------------------
    \6\ Terence O'Hara, Oil Industry Seeks to Cast Huge Profits as No 
Big Deal, Wash. Post, Oct. 28, 2005, at D1.
    \7\ Ibid.
    \8\ H. Josef Hebert, Oil Execs to Be Asked to Justify Profits, 
Wash. Post, Nov. 2, 2005, at http://www.washingtonpost.com/wp-dyn/
content/article/2005/11/01/AR2005110101432.html.
    \9\ Ibid.
---------------------------------------------------------------------------
    Corporate profitability should be encouraged--unless it is obtained 
by illegal price gouging on the backs of working families. In our 
September 20th letter, we cited a study published by Dr. Don Nichols, 
economist and director of the Robert M. La Follette School of Public 
Affairs at the University of Wisconsin Madison, showing that gas prices 
outstripped crude oil prices.\10\ Dr. Nichols explained that gasoline 
prices of $3.00 per gallon--which much of our country saw for months--
would only be expected if crude oil were costing $95.00 per barrel.\11\ 
At their peak, however, crude oil prices were in the range of $70.00 
per barrel. Thus, the question for your committee is: where did the 
additional money go? Many Americans suspect that it went right into 
corporate pockets.
---------------------------------------------------------------------------
    \10\ Donald A. Nichols, Professor of Economics and Public Affairs; 
Director, The La Follette School of Public Affairs; Co-Director, the 
Center for World Affairs and the Global Economy, The University of 
Wisconsin-Madison, ECONOMIC OUTLOOK FOR LATE 2005 AND 2006: STRONG 
GROWTH WITH A BIT OF INFLATION FED BY THE KATRINA BOOM (Sept. 16, 
2005), http://www.lafollette.wisc.edu/calendar-news/2005/
outlooksepo5.pdf, at 5-7.
    \11\ Ibid.
---------------------------------------------------------------------------
    And if companies did price-gouge and profiteer illegally, then 
commensurate fines and surrender of those ill-gotten gains should be 
considered and those monies redirected to helping families with energy 
costs.
    I applaud you for following up on this matter. However, I encourage 
you to consider this the beginning of a long process of finding ways to 
help alleviate the burden of rising energy costs. As you investigate 
the relationship between corporate profits and high energy prices, I 
also encourage you to draw on Governors' first-hand knowledge and 
experience. Across the country, Governors have shown leadership in 
investigating price gouging and promoting energy efficiency. In 
addition to launching our own investigations and lawsuits, we have 
spearheaded multi-state cooperative efforts to reduce energy costs, 
proposed utility sales tax holidays, initiated campaigns to weatherize 
homes, and distributed tax rebate checks. New Mexico families are 
receiving rebate checks ranging from $64 to $298 to help cover rising 
energy costs. We have also expressed our strong support for additional 
emergency LIHEAP funding, and we'll continue to fight for these 
critical funds. Through these experiences, we have gained valuable 
insight into how to best assist Americans in this time of need.
    Again, on behalf of our nation's Democratic Governors, I urge you 
to remain vigilant on this critical matter. The American people will 
not tolerate being held hostage to corporate profit. They deserve 
answers and they deserve economic relief. Democratic Governors stand 
ready to assist in any effort aimed at protecting Americans from rising 
energy costs. Thank you.
                                 ______
                                 
                                               U.S. Senate,
                                  Washington, DC, November 8, 2005.
Hon. Ted Stevens,
Chairman, Committee on Commerce, Science and Transportation, U.S. 
        Senate, Hart Building, Washington, DC.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Dirksen Building, Washington, DC.
    Dear Chairmen Stevens and Domenici: Thank you for convening 
tomorrow's joint hearing on energy prices and supply. As members of the 
Senate Energy and Commerce Committees, we write to request that the 
witnesses at tomorrow's hearing--specifically, the CEOs of the five 
major oil companies expected to attend be sworn in, to offer testimony 
under oath.
    We are aware that Majority Leader Frist called for this hearing as 
part of the effort ``to investigate high energy prices.'' Many of us 
have previously called for similar investigations and believe such an 
effort is long over due, given factors such as the oil companies' 
record profits, complaints from across the nation about potential price 
gouging in the wake of Hurricanes Katrina and Rita, and other long-
standing controversies about the pricing policies and business 
practices of these corporations.
    In order for the Senate to play its proper oversight role, we 
believe it would be most appropriate for these witnesses to be 
administered the oath. Not only will this give us and our constituents 
the utmost confidence in the testimony that is offered, it will also 
provide us a reasonable opportunity to request additional information 
to aid in this investigation.
    If the American people are to find this inquiry credible, it is 
essential that the oil executives testify under oath. Anything less 
would undermine the integrity of this Congress and these committees. 
Thank you for your attention to this request.
            Sincerely,
                    Maria Cantwell, Bill Nelson, Jay Rockefeller, Frank 
                            R. Lautenberg, Ron Wyden, Barbara Boxer, 
                            Byron L. Dorgan, Tim Johnson, Mark L. Pryor
                                 ______
                                 
    Prepared Statement of Red Cavaney, President and CEO, American 
                          Petroleum Institute

    API is a national trade association representing more than 400 
companies involved in all aspects of the oil and natural gas industry, 
including exploration and production, refining, marketing and 
transportation, as well as the service companies that support our 
industry. Its mission is to advocate public policy in support of a 
strong, viable U.S. oil and natural gas industry essential to meet the 
energy needs of consumers in an efficient and environmentally 
responsible manner. API advocacy efforts on positions are based on the 
consensus of its members.

                              INTRODUCTION

    The oil and natural gas industry recognizes the concerns across the 
country over the higher energy costs American consumers and businesses 
have been facing this year. Until recently, the focus has been on 
gasoline and other motor fuels. As the colder weather approaches, 
however, attention is shifting to the cost of heating fuels, 
particularly natural gas and heating oil. This statement is intended to 
address these concerns. The industry is also cognizant of the criticism 
leveled at it for what may appear to others as unreasonable or 
unjustified prices and high earnings. This statement will attempt to 
address those concerns and to offer the proper context in which to view 
both prices and earnings.

                    FACTORS IN THE COST OF GASOLINE

    Hurricanes: The catastrophic impact of Hurricanes Katrina and Rita 
on our industry cannot be overstated. Because the Gulf Coast is the 
heartland of our industry--particularly the area between New Orleans 
and Houston--the two storms challenged our industry as it has not been 
challenged in decades. The men and women of the oil and natural gas 
industry not only responded to Katrina and Rita, they lived it. 
Thousands of our employees and their families and friends are also 
suffering the hardships of living in New Orleans, Lake Charles, 
Beaumont, Port Arthur and Pascagoula, and throughout this devastated 
region they call home. Many were left homeless. In concert with fire 
and police officials, neighbors, suppliers, and government authorities, 
our companies worked to restore oil and natural gas 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 natural gas processing plants, 
and hundreds of 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.
    Over the last two months, our companies have made much progress in 
recovering from the hurricanes, but much remains to be done. Almost 67 
percent of oil production in the Gulf of Mexico is shut down and 50 
percent of natural gas production in the Gulf is shut down. 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 at reduced levels, 
posing a more difficult challenge for our companies to keep up with 
demand for gasoline and other products.
    Imports of gasoline have helped ease the tightness of gasoline 
supply, as has consumer response to calls for wiser use of energy. 
Nevertheless, we continue to face tight supplies.
    Wiser and more efficient use of energy in this time of tight supply 
is crucial--as important as our efforts to bolster supply. Companies 
are working night and day 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.
    While we will attempt to provide you with the latest information we 
have, we 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.
    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 costs: Crude oil is the single largest component of the 
price of a gallon of gasoline. Before Hurricanes Katrina and Rita 
struck, the price of gasoline was rising primarily because U.S. 
refiners have been paying more for crude oil. 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.

    It is important to remember that oil companies do not set the price 
of crude oil. Crude oil is bought and sold in international markets and 
the price paid for a barrel of crude oil reflects the market conditions 
of the day. There is a fragile balance between the world's supply and 
demand for crude oil. Because of this tight market, any disruption of 
oil supply--or even the threat of disruption--can push prices upward as 
buyers and sellers in the worldwide marketplace look to secure supplies 
for their customers. Obviously, the disruptions caused by the 
hurricanes were significant, as were the effects of these disruptions 
on fuel prices.
    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 an average of 46 
cents in federal and state taxes per gallon of gasoline. State taxes 
range from 26 cents to 63 cents per gallon. The remainder is the cost 
to refine, distribute and sell the gasoline, and profits.
    Returning to normal operations: 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 EIA notes in its October Short-Term Energy Outlook, ``The impact of 
the hurricanes on oil and natural gas production, oil refining, natural 
gas processing, and pipeline systems has further strained already-tight 
natural gas and petroleum product markets on the eve of the 2005-2006 
winter heating season.'' EIA anticipates crude oil prices to average 
about $64.50 per barrel though the end of 2006. And, EIA estimates that 
natural gas heating costs will be about 50 percent higher this winter, 
assuming the winter is not colder than normal. 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 to around $60 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 November 7, nationwide gasoline prices (for all 
grades) averaged $2.38 per gallon. Natural gas prices have declined, 
closing at $11.4125 per million Btu (MMBtu) on November 4. That is 
about a 20 percent decrease from the record of $14.338 per MMBtu set on 
October 25. However, $11.4125 per MMBtu is 43.5 percent higher than 
last year. And, it was only 4-5 years ago that natural gas prices 
averaged in the $2-3 MMBtu range.
    EIA now forecasts that typical per-household expenditures for home 
heating oil will be significantly higher this winter when compared with 
last year: $350 (48 percent) more for natural gas users; $378 (32 
percent) more for heating oil users; and $325 (30 percent) more for 
propane users. To help the most economically vulnerable cope with 
higher bills during this time of crisis, we urge Congress to fully fund 
the Low-Income Home Energy Assistance Program (LIHEAP).

                    ZERO TOLERANCE FOR PRICE GOUGING

    In the aftermath of Hurricanes Katrina and Rita and their effects 
on gasoline prices, we have seen repeated accusations that the oil and 
natural gas industry is engaging price gouging. Nothing could be 
further from the truth. In fact, API and its member companies condemn 
price gouging. We have said so repeatedly, including in nationwide 
advertising. 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. Of the 
more than 30 investigations, none has ever found evidence that our 
companies have engaged in any anti-competitive behavior to drive up 
fuel prices.
    Marketing complexity: 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, compete in the marketplace and serve consumers. 
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, has fueled 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 
average 1.8 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 only about 1 percent of world demand. 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: in late 1998, 
crude oil was selling under $11 per barrel--and gasoline was selling 
for less than $1 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.

                              NATURAL GAS

    Natural gas fuels our economy--not only heating and cooling homes 
and businesses but also generating electricity. It is used by a wide 
array of industries--fertilizer and agriculture; food packaging; pulp 
and paper; rubber; cement; glass; aluminum, iron and steel; and 
chemicals and plastics. And, natural gas is an essential feedstock for 
many of the products used in our daily lives--clothing, carpets, sports 
equipment, pharmaceuticals and medical equipment, computers, and auto 
parts. Only 4 to 5 years ago, natural gas prices were in the $2 to 3 
per million Btu (MMBtu) range. Recently, prices have settled in the 
$12-14 per MMBtu range, setting record levels in October. Higher 
natural gas prices have taken their toll--more than 2.8 million U.S. 
manufacturing jobs have been lost since 2000, and chemical companies 
closed 70 facilities in the year 2004 alone and have tagged at least 40 
more for shutdown.
    Unlike oil, natural gas imports in the form of liquefied natural 
gas (LNG) are limited by the lack of import terminals. There are only 
five operating in the United States. A number of additional terminals 
have been proposed but many have run into not-in-my-backyard opponents 
and complex permitting requirements. While natural gas imports from 
Canada have been important, Canada's own needs are growing. Expanding 
our ability to tap into global natural gas supplies is essential.
    The National Petroleum Council (NPC) study, ``Balancing Natural Gas 
Policy: Fueling the Demands of A Growing Economy'' (2003) highlighted 
the significant costs associated with current policies--such as access 
restrictions on the OCS and process impediments to development in the 
West--that do not support the development of America's abundant natural 
gas resources. The NPC estimated that continuing on our current policy 
path could result in $300 billion more in consumer costs over 20 years.
    More than 60 million homes are heated by natural gas. A cold winter 
will make already high costs even higher for consumers.

                                EARNINGS

    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.
    It should not be forgotten that 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. reinvestment 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 
will reach nearly $66 billion. A single deepwater production platform 
can cost in excess of $1 billion.
    The industry's earnings are very much in line with other 
industries--and often they are lower. This fact is not well understood, 
in part, because the reports typically focus on only half the story--
the total earnings reported. Earnings reflect the size of an industry, 
but they're not necessarily a good reflection of financial performance. 
Earnings per dollar of sales (measured as net income divided by sales) 
provide a more relevant and accurate measure of a company's or an 
industry's health, and also provide a useful way of comparing financial 
performance between industries, large and small.
    For the second quarter of 2005, the oil and natural gas industry 
earned 7.7 cents for every dollar of sales compared to an average of 
7.9 cents for all U.S. industry.\1\ Many industries earned better 
returns in the second quarter than the oil and natural gas industry. 
For example, banks realized earnings of 19.6 cents on the dollar. 
Pharmaceuticals reached 18.6 cents, software and services averaged 17 
cents, consumer services earned 10.9 cents and insurance saw 10.7 cents 
for every dollar of sales. (For the third quarter, the oil and natural 
gas industry earned 7.4 cents for every dollar of sales. The average 
figure for all U.S. industry is not yet available.) Last year, the oil 
and natural gas industry realized earnings of 7 percent, compared to an 
average of 7.2 percent for all U.S. industry. Over the last five years, 
the oil and natural gas industry's earnings averaged 5.7 cents compared 
to an average for all U.S. industry of 5.5 cents for every dollar of 
sales.
---------------------------------------------------------------------------
    \1\ Earnings equal profits divided by sales calculated from 
``Corporate Scorecard,'' Business Week, August 22/29, 2005; and from 
company financial reports for oil and natural gas figures.
---------------------------------------------------------------------------
                          WINDFALL PROFITS TAX

    Along with the charges of unjustified high fuel prices we are also 
hearing calls for reinstatement of a windfall profits tax (WPT) as a 
response to the nation's energy challenges. Such demands ignore one 
very basic fact: by any reasonable standard, our industry's earnings 
cannot be categorized as ``windfall,'' as can be seen by the figures 
above. To single out one industry for earnings that are in line with 
other industries--or lower--would send a dangerous message to America's 
business community and to the hundreds of thousands of individual and 
institutional investors--including pension funds--who trust our 
industry with a significant portion of their financial future.
    Strong earnings enable our industry to remain competitive globally, 
where they must compete with government-owned national oil companies, 
and benefit millions of shareholders. These earnings 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, (``China Does 
Carternomics,'' August 19), ``A windfall profits tax only discourages 
increases in supply by disincentivizing further production.''
    Again, we should let history be our guide. The WPT was enacted in 
1980 to raise revenue and to ensure that oil companies did not benefit 
unduly as domestic price controls were removed in a period of 
relatively high crude oil prices. While it failed to raise the revenues 
predicted due to declining oil prices in the 1980s, the WPT did drain 
$79 billion in industry revenues that could have been used to invest in 
new oil and gas production, according to the Congressional Research 
Service (CRS). In fact, as many as 1.6 billion fewer barrels of oil 
were produced domestically due to the WPT, according to CRS. This 
lesson is particularly important to remember as the nation continues to 
experience very tight energy markets, combined with ever-rising demand 
for petroleum products.
    Clearly, a WPT was a bad idea in the 1980s, and it is an even worse 
idea today in light of the tremendous capital investment that will be 
needed in the nation's oil and natural gas sector to meet the 
accelerating growth in U.S. energy demand.
    The Windfall Profit Tax remains a bad idea for several reasons:

   As stated above, the oil and natural gas industry is not 
        earning ``windfall profits.'' The reality is that the 
        industry's earnings have been very much in line with other 
        industries, and often they are lower. According to Business 
        Week and Oil Daily, the oil and natural gas industry earned 5.7 
        cents for every dollar of sales compared to an average of 5.5 
        cents for all U.S. industry over the past five years.
   The oil industry uses its earnings to invest in new 
        technology, new production, refining and product distribution 
        infrastructure, and environmental and product quality 
        improvements. According to the Congressional Research Service 
        (CRS), before the WPT was repealed in 1988, it generated about 
        $79 billion in gross revenues--money that could have been used 
        by the oil industry to invest in new energy production and 
        infrastructure.
   The National Petroleum Council projects that producers will 
        have to invest almost $1.2 trillion through 2025 to fund U.S. 
        and Canadian natural gas exploration and production activities 
        and $200 million for infrastructure. Investments of this 
        magnitude require long-term fiscal stability, while a WPT would 
        establish a precedent that could discourage investment in 
        domestic energy production.
   Crude oil prices, which are set on the world market, and 
        natural gas prices fluctuate substantially and unpredictably. 
        The industry must manage its business in the face of these 
        severe price fluctuations, riding out the low prices in 
        anticipation of recovering during higher prices. In fact, as 
        recently as 1999, the petroleum industry was weathering 
        depressed oil prices of around $10 per barrel.
   A WPT taxes away the benefits of better times and offers no 
        help to oil and gas companies during bad times. This 
        discourages investment in domestic production and increases 
        U.S. dependence on imported oil. The CRS concluded that between 
        1980 and 1986 the WPT reduced American oil production by as 
        much as 1.6 billion barrels.
   The WPT is an overly complex tax. Administering the WPT cost 
        oil companies an estimated $100 million per year and the 
        government an additional $15 million per year. These costs 
        continued to be incurred even after the tax had ceased to 
        produce any meaningful revenues.

    Proposals for energy industry funding of LIHEAP: In recent weeks, 
we have heard numerous proposals that the oil and natural gas companies 
be forced to turn over some of their earnings to fund low-income 
heating assistance programs. The oil and natural gas industry 
recognizes the hardship on families of high energy costs and has 
consistently supported full funding of the Low Income Home Energy 
Assistance Program (LIHEAP) program each year. Congress should continue 
to provide full funding for the program.
    LIHEAP is funded by Congress each year and those funds are then 
provided as block grants to the states, U.S. territories, the District 
of Columbia and recognized American Indian tribes and tribal 
organizations for their use in assisting families. The Federal 
Government traditionally has had the primary responsibility of helping 
families needing energy assistance. In addition, LIHEAP provides 
assistance for all types of home energy bills including electricity 
(whether produced from natural gas, nuclear, coal, hydro, or renewable 
fuels).
    LIHEAP is a vital program that is designed to respond to problems 
that result from a variety of market forces, including tight supplies. 
Congress needs to address the supply problem directly by providing 
access to the oil and natural gas reserves that are off limits in non-
park lands in the West and under the waters off our coasts. These 
recoverable reserves would provide enough natural gas to heat 125 
million homes for 120 years, and 131 billion barrels of recoverable 
oil, enough to produce gasoline for 73 million cars and fuel oil for 30 
million homes for 60 years.
    As noted earlier, the hurricanes devastated the Gulf Coast states, 
their communities, their farms and their businesses. The region's oil 
and gas production and refining facilities were particularly hard hit, 
cutting deeply into normal supplies of energy. The Congressional Budget 
Office estimates the damage to the energy industry along the Gulf coast 
to have been $18-$31 billion. API member companies continue to be 
heavily engaged in efforts to get fuels flowing to consumers across the 
country. The companies will continue to increase supply as they spend 
billions of dollars to restore production and refining capacity in the 
region. These companies have donated tens of millions of dollars to 
charitable organizations working in the Gulf Coast recovery and 
restoration effort, while joining hand-in-hand with those non-profit 
organizations and government agencies to rebuild lives and communities.
    For government to insist that one industry give extra funds to an 
appropriately government sponsored program--above and beyond what it 
has already contributed through its taxes, and through its private 
charitable contributions--would set a dangerous precedent, allowing 
government to shift its responsibilities to various segments of the 
private sector, depending on the political winds of the day.

                    ENERGY PRICES: WHAT CAN BE DONE?

    The solution to high prices is more supply of crude oil and 
gasoline and natural gas, 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 Energy Policy Act of 2005, signed by the 
President in August, 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; 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 United States. 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. That is 125 Tcf that is 
restricted--enough to heat 60 million homes for 30 years. On the OCS, 
the Atlantic, Pacific and Alaskan offshore, and most of the Eastern 
Gulf of Mexico are off limits to development.
    The OCS resources off the lower 48 states alone are enough to 
provide gasoline for 1116 million cars and heating oil for 47 million 
homes for 47 years, plus enough natural gas to maintain current 
production levels for almost 70 years. 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, 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, from 1980 to1999, 7.4 billion barrels of oil were 
produced in federal offshore waters, with less than 0.001 percent 
spilled, less than the volumes of natural seeps that occur on the sea 
floor. The industry's leak prevention performance in offshore 
production during three major hurricanes (Ivan, Katrina and Rita)--two 
of them back-to-back--within 12 months, featuring 170 miles-per-hour 
winds and seas of up to 100 feet, 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 the Capitol is all that would be 
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 up to nearly 1,000 
additional stipulations to further protect resources.
    The recently enacted Energy Policy Act of 2005 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 opening offshore 
areas, ANWR and resource-rich lands in the West to encourage the flow 
of more American 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 United States 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.

                               REFINERIES

    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 meet various environmental requirements and to produce 
cleaner burning fuels.
    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 13.4 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.
    Reflecting unprecedented infrastructure damage incurred by 
Hurricane Katrina, refiner margins \2\ peaked on August 31st at levels 
nearly 3 times higher than pre-hurricane margins. These margins peaked 
again with the arrival of Hurricane Rita, this time at a lower level, 
and then returned to pre-hurricane levels within a week or two.
---------------------------------------------------------------------------
    \2\ Refiner margins measured by the difference between the 
wholesale price of gasoline and the price of light sweet crude oil 
traded on the NYMEX.
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    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. 
U.S. refining capacity has expanded from 14.7 million barrels per day 
in 1994 to 17.1 million barrels a day today, or 2.4 million barrels a 
day. This expansion is the equivalent of about 12 new 200,000 a day 
capacity refineries. Based on publicly available data on announced 
refinery capacity expansion plans, at least 1 million barrels/day of 
additional refinery capacity projects are either planned or under 
strong consideration for the years 2005-2009.
    We can see this in the decline in the refiner/marketer 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. All Americans benefit every day from these improvements and 
efficiency gains.
    Removing 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 U.S. refining industry has been expanding a little more than 1 
percent per year over the past decade--the equivalent of a mid-size 
refinery being built each year. 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.''
    The 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.
    For example, new-source review (NSR) requirements of the Clean Air 
Act need to 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 administrative 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.
    While taking these factors into account, 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.

          REFINERY AND PIPELINE INFRASTRUCTURE RECOMMENDATIONS

    Assessing hurricane impacts: The Department of Energy, with 
assistance from the National Petroleum Council, should conduct a 
comprehensive study of the impact of the recent hurricanes and the 
market response to determine whether there are measures that could be 
put in place to lessen the impact of such events.
    Streamline permitting process: Streamline the permitting process 
for refineries, storage facilities, and pipelines so that new or 
expanded capacity and repairs are not held up by regulatory 
bottlenecks. A lead agency should be established for permit reviews--
DOE for refining and DOT for pipeline. Congress should consider actions 
to facilitate expansion of oil pipeline capacity.
    Lifting barriers to capacity expansion: Barriers need to be lifted 
from existing refineries so that the outlook for domestic capacity 
expansions and crude/product flexibility projects can improve where the 
infrastructure is already in place.

   It is important to reconsider NAAQS PM2.5 and ozone 
        attainment deadlines in major refining areas (Houston/
        Philadelphia) which will act as a constraint to the growth of 
        such capacity.
   Given that the current standards are being implemented now, 
        and the significant health science uncertainties, Congress 
        should defer the current standard review process until the next 
        statutory review cycle (2010-2012). The current ozone and PM2.5 
        quality standards should remain in effect for now.
   New Source Review reforms should be codified to add 
        certainty around when the permit reviews are triggered.

    Allow federal preemption in emergencies: The Federal Government 
should be given absolute federal fuel preemption authority to waive 
both federal and state environmental and product quality fuel 
requirements. The period of waivers should be extended from 90 to 120 
days.
    Reduce number of state ``boutique fuels'' requirements: There are 
many local fuel specifications that require special production and 
handling, causing inefficiencies in the distribution system and 
increased volatility when refining or supply interruptions occur. 
Congress could improve this situation by reducing the number of 
``boutique fuels.''
    Establish emergency powers authorities: This would facilitate an 
effective response to future emergencies. Give federal agencies 
authority to grant short-term relaxation of federal and state 
requirements in the event of emergencies to expedite bringing pipelines 
and distribution facilities back on-line. Policymakers should consider 
establishing emergency powers authorities for priority power 
restoration for all components of the oil and natural gas 
infrastructure to be used in emergency situations.
    Improve electric system reliability: Improvements that enhance the 
reliability of electric power supply will significantly enhance the 
availability of petroleum products during periods of temporary 
emergency, such as that which occurred in the Gulf Coast region post-
hurricane.
    Reasonable pipeline operations: Support legislative and 
administrative action by FERC that would facilitate emergency response 
to disasters by pipeline operators and that would encourage expansion 
of existing infrastructure and new service.
    Reduce likelihood of imports bottlenecks: The Coast Guard and the 
Minerals Management Service should assess the marine infrastructure and 
identify current and potential future bottlenecks to imports, 
particularly in emergency situations when above-normal import levels 
may be desirable.

                      NATURAL GAS RECOMMENDATIONS

    Given the importance of natural gas throughout the economy and the 
approach of the winter heating season, attention has begun to focus not 
only on ways to use natural gas more wisely, but also on how to enhance 
future supplies. America's oil and natural gas industry supports the 
following actions:
    Low-Income energy assistance: Congress should fully fund the Low 
Income Home Energy Assistance Program (LIHEAP), and it should release 
LIHEAP funds early. Providing early funds to those in need can help 
prevent defaults on home heating bills and service curtailments.
    Offshore Development: The OCS inventory required by the Energy 
Policy Act of 2005 should be promptly conducted to allow states and the 
nation as a whole to fully appreciate the sizable resources off our 
coasts that have been placed ``off limits'' to development. While 
current estimates indicate substantial resources, these are based on 
older data and are likely to be conservative. Using advanced computers 
and programs to review the resource base will enable policymakers and 
their constituents to more fully understand the true costs of OCS 
moratoria.
    Lifting moratoria. Restrictions on federal lands off the Atlantic 
and Pacific coasts, Alaska and most of the Eastern Gulf of Mexico have 
put 77 billion barrels of oil and 420 trillion cubic feet (Tcf) of 
natural gas off limits. That is enough natural gas to heat more than 
100 million homes for over 60 years. And, it is three times the natural 
gas resources of Canada and Mexico combined.
    Giving states greater authority: States deserve the right to opt 
out of moratoria by choosing to develop resources off their coasts. 
This could help supply additional, critically needed natural gas and 
oil supplies to American consumers. Natural gas resources off the lower 
48 states alone are estimated to be enough to maintain current natural 
gas production for almost 70 years and could supply current industrial 
and commercial needs for 29 years.
    Adopting expansive 5-year lease sale program: The Minerals 
Management Service (MMS) is in the process of preparing its next 5 year 
plan. The first step in this process, its recent call for information, 
drew record support for OCS development. To maximize future supplies of 
natural gas, MMS should include all areas (not under moratoria) in 
their leasing program; expand OCS acreage offered for sale in Alaska, 
including the Beaufort and Chukchi seas and Bristol Bay; and schedule 
an early sale for the remaining Sale 181 acreage. The Sale 181 area is 
particularly important as it has substantial resource potential and 
access to existing infrastructure that could speed delivery of its 
resources to energy users. And, an early sale would send a powerful 
signal to energy markets.
    Streamlining Coastal Zone Management process: Uncertainties that 
can impede/deter resource development can be reduced if: a deadline of 
120 days (from filing of an appeal) is set for review and decisions on 
state appeals of consistency findings; initial action is taken to reach 
federal and state agreement on information needed for the decision-
making process; and a single consistency finding is allowed. The CZM 
process has proved to be a major impediment, allowing states to 
challenge oil and gas projects more than a hundred miles off their 
shores and leaving some projects in limbo as approval decisions can 
take years.

              DEVELOPING ONSHORE RESOURCES RECOMMENDATIONS

    Onshore lands in the Mountain West and Alaska hold great potential 
for additional domestic supplies if access is allowed and permitting 
and regulatory process impediments removed. Alaska has significant 
resource potential--estimates of 69 Tcf of natural gas and 18 billion 
barrels of oil. For example, the mean estimate of oil in the Arctic 
National Wildlife Refuge (ANWR) is 10 billion barrels (EIA), enough to 
replace current levels of imports from Saudi Arabia for 20 years. 
Actions needed include:
    Expanding access to Alaskan resource-rich areas: Congress should 
open ANWR. In an area the size of South Carolina (19 million acres) 
exploration and production activity would likely only affect an area 
comparable to Dulles airport (2,000 acres). We should also expand 
leasing in the National Petroleum Reserve-Alaska, and we should provide 
support for the building of the necessary infrastructure to bring 
Alaska natural gas supplies to consumers in the lower 48 states.
    While Alaska's onshore resources will be critical to sustaining a 
healthy energy future, it will take a while to develop them. In the 
shorter term (2-5 years) the abundant natural gas resources in the 
Mountain West can provide much needed domestic supplies. However, vast 
areas of multiple-use federal lands have been withdrawn from 
development directly or indirectly through restrictions and constraints 
on operations. In assessing these non-park, non-wilderness federal 
lands, the NPC concluded that 125 TCF of natural gas was effectively 
off limits to development and/or significantly affected by access-
related regulatory requirements such as no surface occupancy and 
prohibitions on drilling at certain times of the year. The regulatory 
process is complicated and duplicative and constitutes an impediment to 
production of the nation's energy resources. And, legal challenges by 
antidevelopment groups are growing. In 1999, about 4.5 percent of the 
leases offered were protested. By 2005, that had grown to 50 percent. 
For example, in 2004 every lease sold in Utah was protested resulting 
in delays of up to 18 months.
    Improving regulatory process: Measures should, be taken to protect 
the environment, wildlife and historical and cultural properties, but 
the regulatory process can be improved by removing process impediments. 
We should allow joint filing of right-of-way and drilling permits for 
federal lands to expedite the permitting process. We should expand the 
use of categorical exclusions or sundry notices for minimal disturbance 
activities, including categorical exclusions for wells and rights of 
way with minimal surface disturbance in existing fields and sundry 
notices instead of Applications for Permit to Drill (APDs) for 
successive wells on multi-well drill pads. Categorical exclusions do 
not remove the required environmental protections but rather apply to 
those minimal surface operations where an impact is negligible.
    We should also implement Bureau of Land Management's (BLM's) 2003 
Process Improvement Memoranda. We should conduct an independent review 
of agency practices and interpretation of criteria for determining site 
significance, including establishment of standards for cultural 
resource reports and eliminating duplicate survey requirements. And we 
should monitor BLM lease stipulations and conditions of approval to 
determine their effectiveness and removing them as appropriate.
    Providing adequate agency funding: We should have updated resource 
management plans (RMPs). All activity on BLM lands is managed through 
RMPs. New lease sales cannot be held without updated RMPs. Further, 
activities not anticipated in an earlier RMP cannot occur until the 
plan is updated or amended. Reasonably foreseeable development 
scenarios should be used as planning tools, not to establish caps on 
the number of wells or other limits on surface activities. We should 
improve data sharing by federal and state land management agencies, 
encourage the use of joint APD/Right-of-Way applications for wells and 
ensure regulatory compliance through vigorous inspection and 
enforcement programs. In addition, we should administer the National 
Environmental Protection Act (NEPA) process effectively; and provide 
timely resolution of appeals and protests.
    Additional measures: If implemented, the above policy suggestions 
can help result in additional future oil and natural gas supplies 
essential to our energy security and economic growth. However, with 
significant amounts of oil and gas production still shut down in the 
Gulf of Mexico in the aftermath of the recent hurricanes, there are 
additional measures that could be taken by BLM to expedite onshore 
production now, including:

   Exercising existing authority to allow year-round drilling 
        and completions to proceed;
   Issuing permits immediately for all applications in areas 
        where existing NEPA requirements have been met;
   Proposing new fast track, emergency response rules when 
        there is a national energy emergency in order to significantly 
        reduce permit review and approval times.

    Additionally, the Endangered Species Act (ESA) and National 
Environmental Policy Act (NEPA) impose an array of regulatory 
requirements and have provided opportunities for antidevelopment groups 
to litigate with the intention of delaying or preventing energy 
projects.
    Updating Endangered Species Act: Recent legislation reported out by 
the House Resources Committee contains a number of process 
improvements. Industry supports an ESA process that is based on sound 
science using peer-reviewed data, includes an evaluation of the 
economic and social impacts of threatened or endangered species 
designation, encourages the use of voluntary agreements, and recognizes 
that different levels of protection can be appropriate for different 
species.
    Reforming National Environmental Protection Act (NEPA): Duplicative 
environmental documentation in the NEPA process should be eliminated, 
the Environmental Assessment process should be strengthened to help 
reduce the need for Environmental Impact Statements, and interagency 
consultation and cooperation should be improved. The NEPA process 
should be made more objective and timely through the use of best 
available scientific evidence and clear definitions of information 
needed for decision-making. In addition, agency monitoring and 
enforcement should be enhanced.
    Tapping global supplies through Liquefied Natural Gas: Despite the 
growth of alternative fuels, oil and natural gas are expected to 
provide nearly two-thirds of the energy America consumes in 2025. And, 
natural gas demand is forecast to grow 34 percent by 2025, according to 
Energy Information Administration. While additional domestic supplies 
can and should be developed, the United States also needs to tap into 
global supplies of natural gas through liquefied natural gas (LNG) 
shipments. There are only five LNG receiving terminals currently in 
operation. To support growth in LNG supplies, LNG project permit 
applications should be processed within one year. This will require 
coordinating and streamlining permitting--LNG project sponsors face 
multiple, often-competing state and local reviews, as well as federal 
reviews, which result in permit delays. It will also call for setting 
clear review deadlines and conducting concurrent reviews also can 
streamline the process. Adequate regulatory agency funding should be 
provided. Additional funding and staff will be needed to promptly 
process increased applications for LNG terminals and to administer 
regulatory programs for these terminals once they are operational. 
Finally, public education programs on the safety and security of LNG 
operations should be conducted.

                               CONCLUSION

    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. The 
industry also recognizes the frustration and hardship felt by consumers 
as a result of higher prices and a basic misunderstanding of industry 
earnings.
    If we all do our part--industry providing supplies and repairs as 
expeditiously as possible, government facilitating needed approvals, 
and consumers adjusting their energy-use habits to consume less fuel--
Americans can overcome this challenge as we have others in our nation's 
history.

                                  
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