[Senate Hearing 109-1012]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 109-1012
 
         OVERSIGHT TO EXAMINE TRANSPORTATION FUELS OF THE FUTURE

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                      WEDNESDAY, NOVEMBER 16, 2005

                               __________

  Printed for the use of the Committee on Environment and Public Works


      Available via the World Wide Web: http://www.access.gpo.gov/
                            congress.senate

                               __________


                     U.S. GOVERNMENT PRINTING OFFICE
39-524 PDF                 WASHINGTON DC:  2008
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001


               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                       ONE HUNDRED NINTH CONGRESS
                             FIRST SESSION

                  JAMES M. INHOFE, Oklahoma, Chairman
JOHN W. WARNER, Virginia             JAMES M. JEFFORDS, Vermont
CHRISTOPHER S. BOND, Missouri        MAX BAUCUS, Montana
GEORGE V. VOINOVICH, Ohio            JOSEPH I. LIEBERMAN, Connecticut
LINCOLN CHAFEE, Rhode Island         BARBARA BOXER, California
LISA MURKOWSKI, Alaska               THOMAS R. CARPER, Delaware
JOHN THUNE, South Dakota             HILLARY RODHAM CLINTON, New York
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
JOHNNY ISAKSON, Georgia              BARACK OBAMA, Illinois
DAVID VITTER, Louisiana
                Andrew Wheeler, Majority Staff Director
                 Ken Connolly, Minority Staff Director

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

                              HEARING DATE
                           OPENING STATEMENTS

Boxer, Hon. Barbara, U.S. Senator from the State of California...     6
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...     1
Jeffords, Hon. James M., U.S. Senator from the State of Vermont..     4
Obama, Hon. Barack, U.S. Senator from the State of Illinois......     8
Thune, Hon. John, U.S. Senator from the State of South Dakota....     5

                               Witnesses

Cavaney, Red, president and CEO, American Petroleum Institute....     9
    Prepared statement...........................................    32
    Responses to additional questions from Senator Obama.........    36
Goodstein, Richard, Washington Representative, Air Products and 
  Chemicals, Inc.................................................    13
    Prepared statement...........................................    38
Holmes, Jack B. Jr., president and CEO, Syntroleum Corporation...    17
    Prepared statement...........................................    70
    Responses to additional questions from Senator Obama.........    93
Honnef, Bill, vice president of sales and marketing, Verasun 
  Energy.........................................................    15
    Prepared statement...........................................    67
    Response to an additional question from Senator Obama........    70
McDougall, Jeffrey, JMA Energy Company, LLC......................    11
    Prepared statement...........................................    37

                          Additional Material

Charts & Photos:
    Air Products and Chemicals, Inc.............................. 43-66
    Syntroleum Corporation....................................... 73-92
Statements:
    American Forest and Paper Association........................    94
    National Mining Association..................................   102


        OVERSIGHT TO EXAMINE TRANSPORTATION FUELS OF THE FUTURE

                              ----------                              


                      WEDNESDAY, NOVEMBER 16, 2005

                                       U.S. Senate,
                 Committee on Environment and Public Works,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m. in room 
406, Senate Dirksen Building, Hon. James M. Inhofe (chairman of 
the committee) presiding.
    Present: Senators Inhofe, Chafee, Thune, Jeffords, Boxer, 
Carper, and Obama.
    Senator Inhofe. Good morning. The hearing will come to 
order. We always start promptly. We have the important people 
here, so we will get started.

 OPENING STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM 
                     THE STATE OF OKLAHOMA

    This oversight hearing is to consider transportation fuels 
in the future. I am especially pleased to welcome two witnesses 
from my State of Oklahoma, Mr. Jeffrey McDougall of JMA Energy 
out of Oklahoma City and Mr. Jack Holmes from my hometown of 
Tulsa, with Syntroleum.
    With higher prices at the pumps and a great reliance on 
foreign sources of oil, it is important for Members of Congress 
to know what else is out there. This is not a new concept. The 
United States has sought to develop alternative approaches in 
the past and should continue to do so. In a 1979 nationally 
televised speech, former President Carter claimed that the 
Nation, and this is a quote now, ``The Nation was facing a 
crisis that was morally equivalent to war.'' He instituted a 
number of market control programs that sent the economy into a 
tailspin. Twenty-five years later, we have hopefully learned 
something from those mistakes.
    Historically, the American people have chosen oil over 
other options for two important reasons. First, oil can be 
refined to meet the environmental requirements and automotive 
performance of the public demands; and second, oil is the most 
affordable option.
    That said, the President and Congress have worked together 
to develop alternatives to supplement oil. Most recently, the 
Energy bill established a Renewable Fuel Standard. Currently, 
the EPA and affected industries are working toward 
implementation, and this committee will ensure that happens. 
Also, this committee included in the Energy bill a new 
Cellulostic Ethanol Loan Guarantee Program that could diversify 
biofuels use even more.
    Unfortunately, too many of my colleagues today would rather 
gloss over or even ignore the facts, and instead choose and 
make sensational populist statements that suggest similar 
economy shrinking and price increasing policies that helped to 
sink the Country in the late 1970's. The fact is that oil can 
be explored for and produced in environmentally responsible 
ways and refined into clean fuels. It can be done relatively 
cheaply.
    Although some members may think it politically beneficial 
or even fun to criticize and deride oil companies, I think it 
is incredibly short-sighted and exhibits a certain amount of 
arrogance on the part of Congress. Americans demand and deserve 
solutions and results, not bluster and hot air.
    My colleagues should think beyond the major national 
corporations. Small independent oil and gas producers have 
played and continue to play a critical role in meeting our 
domestic needs. In fact, independents produce 68 percent of the 
Nation's oil. Not many people are aware of that. It is a very 
significant fact that they produce 68 percent of all the 
Nation's oil. The independent producer is often times a small 
business person, more like a family farmer than the Archer 
Daniels Midland.
    Like agriculture, oil is the foundation on which several 
States were built and has provided jobs for generations of 
people. Perhaps, this is most evident in my home State where 
some believe that oil made Oklahoma. In fact, oil did make 
Oklahoma.
    I am excited to learn about developing syn fuels technology 
like Syntroleum's coal to liquids demonstration plant in my 
hometown of Tulsa. Some years ago, I looked at the national 
security benefits of deriving diesel and jet fuel from domestic 
oil and domestic coal, and initiated a program at the 
Department of Defense. As long as it is price-competitive, coal 
to liquids is something that we should be encouraging and 
doing.
    In my recent Chairman's mark of the Gas Price Act, I 
broadened our concept of refining to include coal to liquids 
and renewable fuels. I put a plan that does not change 
environmental laws, one that is well supported by a number of 
State and local groups. It is a shame that partisan rhetoric 
frustrated the advance of the reasonable and responsible 
legislation. I am hopeful that my friends will consider pro-
economy, pro-jobs policy, rather than a frightening return to 
the Carter Era approach that failed then and would fail now.
    Let me just say also that it is important that we in 
Washington recognize that there is a difference between the 
majors and the independents that happens. I am not sure that 
some of my colleagues are aware of this, that I started out 
when I was very, very young in the independent oil business. In 
fact, I think I dare say I am a little older than anybody on 
this panel.
    You may not remember this technology, but I was a tool 
dresser on a cable tool rig, and there is nothing hotter and 
more difficult than that. That was back in Oklahoma where it 
wasn't uncommon to have temperatures, normal temperatures of 
100 degrees down in that Arkansas River bottom and up in the 
Osage Hills, and I can recall having to sharpen that bit in 
front of a forge. The forge had to be going. It was always 
about 120 degrees in front of that forge. So it was very 
difficult.
    I also remember when I was working for a famous man named 
A.W. Swift, who was kind of a father of the marginal well 
business in that area. He had one son. The well blew up that we 
were working on. I lived; he died. So I almost at that point 
decided to get into that business as his adopted son. I always 
wondered where I would be today if I had done that. So I do 
come here with some background in this industry, and I look 
forward to sharing the knowledge that I have from this industry 
with my colleagues.
    I can assure you that even though our numbers are few in 
terms of the Senators here, all the staff is here, and your 
testimony will be listened to and read very carefully.
    [The prepared statement of Senator Inhofe follows:]

   Statement of Hon. James M. Inhofe, U.S. Senator from the State of 
                                Oklahoma

    Today's oversight hearing is to consider transportation fuels of 
the future. I am especially pleased to welcome two witnesses from the 
great State of Oklahoma Mr. Jeffrey McDougall of JMA Energy out of 
Oklahoma City, and Jack Holmes of Syntroleum of Tulsa.
    With higher prices at the pump, and a greater reliance on foreign 
sources of oil, it is important for members of Congress to know what 
else is out there. This is not a new concept--the United States has 
sought to develop alternative approaches in the past, and should 
continue to do so.
    In a 1979 nationally televised speech, Former President Carter 
claimed that ``the Nation was facing a crisis that was the moral 
equivalent of war,'' and instituted a number of market control programs 
that sent the economy into a tailspin. Twenty-five years later, we have 
hopefully learned something from those mistakes.
    Historically, the American people have chosen oil over other 
options for two important reasons. First, oil can be refined to meet 
the environmental requirements and automotive performance the public 
demands. Second, oil is the most affordable option. That said, the 
President and Congress have worked together to develop alternatives to 
supplement oil.
    Most recently, the Energy bill established a renewable fuels 
standard. Currently, the EPA and affected industries are working toward 
implementation, and this committee will ensure that happens. Also, this 
committee included in the Energy bill a new cellulosic ethanol loan 
guarantee program that could diversify biofuels use even more.
    Unfortunately, too many of my colleagues today would rather gloss 
over or even ignore the facts, and instead choose to make sensational 
populist statements that suggest similar economy-shrinking and price-
increasing policies that helped to sink the country in the late 1970s.
    The fact is that oil can be explored for and produced in 
environmentally responsible ways, and refined into clean fuels. It can 
be done relatively cheaply.
    Although some members may think it politically beneficial or even 
fun to criticize and deride oil companies, I think it is incredibly 
short-sighted and exhibits a certain amount of arrogance on the part of 
Congress. Americans demand and deserve solutions and results, not 
bluster and hot air.
    My colleagues should think beyond the major national corporations. 
Small, independent oil and gas producers have played, and continue to 
play, a critical role in meeting our domestic needs. In fact, 
independents produce 68 percent of the Nation's oil. The independent 
producer is oftentimes a small businessman--more like a family farmer 
than ADM.
    Like agriculture, oil is the foundation on which several States 
were built, and has provided jobs for generations of people. Perhaps, 
this is most evident in my own state where some believe that oil made 
Oklahoma.
    I am excited to learn about developing syn-fuels technologies like 
Syntroleum's coal-to-liquids demonstration plant. Some years ago, I 
looked at the national security benefits of deriving diesel and jet 
fuel from domestic coal and initiated a program at the Department of 
Defense. As long as it is price competitive, coal-to-liquids is 
something that we should be encouraging and doing.
    In my recent Chairman's mark of the Gas PRICE Act, I broadened our 
concept of refining to include coal-to-liquids and renewable fuels. I 
put forward a plan that does not change environmental laws, one that is 
well-supported by a number of State and local groups.
    It is a shame that partisan rhetoric frustrated the advance of this 
reasonable and responsible legislation. I am hopeful that my friends 
will consider pro-economy, pro-jobs policy rather than a frightening 
return to the Carter-era approach that failed then, and will fail now.
    I look forward to hearing from the witnesses.

    Senator Jeffords.

OPENING STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM 
                      THE STATE OF VERMONT

    Senator Jeffords. Thank you, Mr. Chairman.
    I want to extend a welcome to the witnesses. I appreciate 
the time they have taken to appear before us today.
    Today's hearing is on transportation fuels for the future. 
As the Ranking Member of this committee, I agree that it is 
important that we have oversight hearings like this one that 
allow the panel and members alike to peek into the future and 
make educated guesses on what we will find there. Given that we 
are now in the new millennium, it seems to be natural but human 
inclination to wonder what the future will bring.
    Particularly given the high pump prices we are now 
experiencing, we need to help shape that future into one that 
will provide stable, clean, domestic supplies of transportation 
fuels at affordable prices. Our lifestyle and our economy in 
this Country is based on an abundant supply of petroleum in the 
forms of gasoline and diesel. Today, the internal combustion 
engine powers most of our vehicles.
    However, nothing lasts forever, and we are seeing our 
plentiful oil and low prices disappear. The outlook for 
petroleum reserves in the United States is not cozy. As the oil 
supply decreases, especially of clean burning sweet or low 
sulfur crude, prices will increase. We need to make sure that 
we have a good idea where we go next. We need to continue to 
increase our efficiency and reduce pollution in existing 
internal combustion engine designs and ultimately transition 
from a petroleum-based economy into a new clean fuel-based 
economy. Such a transition will be crucial to our national well 
being into the next century and beyond.
    I do not mean to suggest that a solution is easy. There are 
incredible complexities involved in forming a well rounded and 
flexible approach to meeting the Nation's fuel requirements, 
while at the same time protecting our environment, but we have 
taken important steps. Our efforts to reducing harmful 
components, such as sulfur in fuels, and to boost the use of 
ethanol while maintaining refinery flexibility has worked well. 
It should be a model for our pollution policies today and in 
the future.
    When I visited Iceland last year, I rode on a fuel cell bus 
and saw firsthand the promise of that technology. The fuel cell 
holds the possibility of marrying low or non-polluting engines 
with renewable fuels. This opens the possibility of a future 
free of the constraints of limited fuel and production. It is 
exactly the kind of environmentally friendly solution I have 
always advocated. These innovations have the potential to 
propel us into an era when driving a car or truck will no 
longer mean polluting the environment or using scarce 
resources.
    Thank you, Mr. Chairman, and I look forward to the hearing.
    [The prepared statement of Senator Jeffords follows:]

  Statement of Hon. James M. Jeffords, U.S. Senator from the State of 
                                Vermont

    Thank you Mr. Chairman. I want to extend a welcome to the 
witnesses. I appreciate the time they have taken to appear before us 
today.
    Today's hearing is on transportation fuels for the future. As the 
Ranking Member of this committee, I agree that it is important that we 
have oversight hearings like this one that allows the panel and members 
alike to peek into the future and make educated guesses on what we will 
find there.
    Given that we are now in a new millennium, it seems to be a natural 
human inclination to wonder what the future will bring. But, 
particularly given the high pump prices we are now experiencing, we 
need to help shape that future into one that provides stable, clean 
domestic supplies of transportation fuels at affordable prices.
    Our lifestyle and economy in this country is based on the abundant 
supply of petroleum in the form of gasoline and diesel. Today, the 
internal combustion engine powers most of our vehicles. However, 
nothing lasts forever, and we are seeing our plentiful oil and low 
prices disappear.
    The outlook for petroleum reserves in the United States this 
century is not rosy. As the oil supply decreases, especially of clean 
burning sweet or low sulfur crude, prices will increase. We need to 
make sure that we have a good idea where we go next.
    We need to continue to increase our efficiency and reduce pollution 
in existing internal combustion engine designs and ultimately 
transition from a petroleum-based economy into a new clean fuel-based 
economy. Such a transition will be crucial to our national well-being 
into the next century and beyond.
    I do not mean to suggest that such a solution is easy. There are 
incredible complexities involved in forming a well-rounded and flexible 
approach to meeting the nation's fuel requirements, while at the same 
time protecting our environment. But, we have taken important steps. 
Our efforts to reduce harmful components, such as sulfur in fuels, and 
to boost the use of ethanol while maintaining refiner flexibility have 
worked well. It should be a model for our fuel and pollution policies 
today and in the future.
    When I visited Iceland last year, I rode on a fuel cell bus and saw 
first hand the promise of this technology. The fuel cell holds the 
possibility of marrying low or non-polluting engines with renewable 
fuels. This opens the possibility of a future free of the constraints 
of limited fuel and pollution. It is exactly the kind of 
environmentally friendly solution I have always advocated. These 
innovations have the potential to propel us into an era when driving a 
car or truck will no longer mean polluting the environment or using up 
scarce resources.
    Thank you, again, Mr. Chairman, and I look forward to hearing from 
the witnesses.

    Senator Inhofe. Thank you, Senator Jeffords.
    Senator Thune, one of the witnesses is from your State. You 
may want to make a recognition of that, and you are recognized.

  OPENING STATEMENT OF HON. JOHN THUNE, U.S. SENATOR FROM THE 
                     STATE OF SOUTH DAKOTA

    Senator Thune. Thank you, Mr. Chairman, and I want to 
express my appreciation to you for holding this hearing. This 
is an important hearing.
    There is no bigger economic issue facing the Country right 
now than the cost of energy. It is having a profound economic 
impact all across this Country and is extremely acute in States 
like South Dakota that are very energy-dependent. I appreciate 
your leadership in helping us with the Energy bill that we 
passed last summer to include a Renewable Fuel Standard which 
will increase and provide a market for ethanol going forward.
    So I think it is important that the energy policy that we 
have in this Country be a balanced energy policy, that it 
include a robust Renewable Fuel Standard, and I appreciate your 
assistance and help in helping us achieve that goal.
    We do have with us today Bill Honnef with VeraSun Energy. 
He is the Director of Sales and Marketing or Vice President, I 
should say, of Sales and Marketing for that company. They are 
the No. 2 producer of ethanol in the Country.
    Mr. Chairman, one of the things that Bill will testify to 
here in a few moments is the pioneering work that they are 
doing in forging partnerships with other parts of the industry 
in order to promote the use of renewable fuels. VeraSun has 
been on the leading edge when it comes to working with 
manufacturers, auto manufacturers, both General Motors and 
Ford, with retailers, fuel retailers across the Country in 
getting more use of E85.
    We have a number of stations in Sioux Falls, SD, that now 
market E85. In fact, the Energy bill has a provision in there 
that provides a tax credit for those fuel retailers that will 
install E85 pumps, and basically what that is, is 85 percent 
ethanol. We want to see more of those across the Country.
    More of the manufacturers now are producing fuel flex 
vehicles, which again provides an incentive for more use of 
renewable fuels and moves us in a direction where we lessen our 
dependence upon the very unreliable partners we have in the 
Middle East. We would rather see our partners be the corn 
farmers of the Midwest than the sheiks and the mollahs in the 
Middle East.
    So Mr. Chairman, I appreciate your holding this hearing. I 
am delighted to be able to welcome Bill Honnef to be one of our 
panelists today. I think that you will enjoy and appreciate the 
light that he will shed on this issue and the, as I said, 
innovative and pioneering strategies that they are bringing to 
our Country in terms of further promoting the use of renewable 
fuels.
    Thank you, Mr. Chairman. I look forward to the other 
panelists as well this morning and hearing their testimony.
    Senator Inhofe. Thank you, Senator Thune.
    Senator Boxer.

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

    Senator Boxer. Thanks so much, Mr. Chairman, for holding 
this hearing. It is really a wonderful thing that you have done 
this, and I really look forward to working with you because you 
and I know we have our differences, but when we do agree, it is 
a good combination. I think this is an area where we can really 
move forward. It was wonderful to hear Senator Jefford's 
statement this morning.
    You are right about this. We need to take a look at what 
else we can do to make our economy stronger and, of course, 
with energy independence comes, I think, much better national 
security for our Country. So it is such a win-win to look at 
these other options.
    You did reference some confrontational hearings that were 
held in another committee. I happened to be there, and I am 
sure I was on the side that you would call populist. I won't go 
into that hearing, because I don't want to irritate you in any 
way, shape, or form.
    [Laughter.]
    Senator Boxer. What I would like to say is that it was 
contentious, and it wasn't satisfying for anybody there. It was 
just one of these things where everyone was talking past each 
other, and I think we have to do better than that.
    The way I look at things is that right now we are in a 
transition. First, I think we were in denial about the fact 
that we have to look at alternatives. Now we know we must do 
that. In the meantime in this transition, I see hybrid 
vehicles, for example, as one way to reduce the demand with a 
very good technology. My family owns about three hybrid cars, 
and the latest one we got is 52 miles to the gallon easy, and 
that is terrific. I know a number of colleagues on this 
committee actually drive those cars.
    However that is not the long-term solution. The long-term 
solution is to look for these alternative fuels. On the ethanol 
issue, California has always had problems with ethanol, 
although we go against the grain. I know I am saying that on 
purpose. We go against the grain of a lot of our Midwestern 
friends, but we just know that it is going to be costly for us 
because you have to ship the ethanol from the Midwest to 
California. Then we have certain requirements.
    What we are excited about is the possibility, and Senator 
Inhofe mentioned this, of getting that ethanol from, for 
example, rice straw, getting that ethanol from agricultural 
products. What we did together is we put an incentive in the 
Energy bill to give more credit if you use, or your State would 
get more credit if it uses this type of ethanol.
    So, in any event, I will put the rest of my statement into 
the record. Mr. Chairman, I am very happy that you have had 
this hearing. I am looking forward to hearing from the 
witnesses.
    [The prepared statement of Senator Boxer follows:]

    Statement of Hon. Barbara Boxer, U.S. Senator from the State of 
                               California

    Thank you, Mr. Chairman, for holding this hearing today. This 
hearing is very relevant with the skyrocketing gasoline prices that the 
American public is confronting.
    Last week, the Commerce and Energy Committees had before us the 
CEOs of the major oil companies. They took no responsibility for our 
struggles with energy prices--shifting the blame to others--and were 
unwilling to make sacrifices, at a time when middle-class Americans are 
suffering at the gas pump.
    I believe we ought to be doing more to control the price of 
gasoline such as imposing a windfall profits tax and giving the FTC 
more authority to go after the price gougers.
    I also believe we need to reduce our dependence on oil by 
increasing CAFE standards, by promoting the use and further development 
of hybrid cars, and by strengthening our Nation's public transportation 
systems. This year's Highway bill, spearheaded through the Senate by 
Chairman Inhofe, actually contained many provisions that will benefit 
public transportation, and thereby reduce our consumption of oil.
    In addition to those efforts, we can, as today's witnesses will 
testify, reduce America's dependence on oil by providing consumers with 
alternatives to gasoline when they fill up their tanks.
    That is why we need to promote promising new fuels such as 
hydrogen. California has been a leader in this area with its Hydrogen 
Highway, a program that will put 50-100 hydrogen fueling stations in 
service throughout the State by 2010. In addition, several California 
transit Agencies are, or soon will be, demonstrating and operating 
buses powered by fuel cells.
    Another potential future fuel is ethanol. Although it is not ideal, 
and although all potential health effects are not clear, ethanol does 
reduce emissions of toxic air pollutants, such as benzene, a cancer 
causing chemical. It can also lower smog forming emissions.
    Mr. Chairman, we have the technical know-how to reduce our reliance 
on fossil fuels. The question is, do we have the political will?
    I hope so. It was clear from last week's hearing that Big Oil will 
do nothing to help the American people pay their energy bills and 
reduce their dependence on oil. Congress must.
    Thank you, Mr. Chairman.

    Senator Inhofe. Thank you, Senator Boxer.
    Senator Obama.

 OPENING STATEMENT OF HON. BARACK OBAMA, U.S. SENATOR FROM THE 
                       STATE OF ILLINOIS

    Senator Obama. Thank you very much, Mr. Chairman. I think I 
share the view of most of the committee here, that you couldn't 
have scheduled a more timely hearing. I think this is an 
absolutely critical issue for us to face our future.
    In a committee hearing several weeks ago, I made the point 
that if the United States were serious about reducing its 
dependence on imported oil and insulating our economy from 
future supply and disruption shocks, then we have to start 
looking at alternative fuel use as part of our strategy. 
Actually, thanks in part to your help, Mr. Chairman, I think 
that we have actually made some progress this year. With your 
support, we enacted a Renewable Fuel Standard that requires 7.5 
billion gallons of ethanol in our gasoline supply in 7 years.
    I should add, by the way, that I think that support for 
corn-based ethanol and improving technologies there is in no 
way contradictory to Senator Boxer's interest and concern in 
making sure that we look for additional efficient ways of 
manufacturing cellulose-based ethanol.
    I worked with Senator Baucus and others to include a tax 
credit in the Energy bill that promotes the installation of 
more E85 pumps at gas stations. One of the problems we have 
right now is distribution. A lot of gas pumps don't provide 
E85, the ethanol-based blend that can significantly cut down 
gasoline use. So, we have got some incentives there. These 
measures by themselves, it is estimated will reduce oil 
consumption by an estimated 6 percent in 7 years.
    There is a problem, though. Despite this significant 
progress, United States oil consumption during this period will 
far exceed the reductions that we are making, the increases in 
oil consumption. So we still have a lot more to do.
    I recently introduced a bill with Senator Carper to create 
a Renewable Diesel Standard, calling for 2 billion gallons of 
diesel substitutes in our 40 billion National diesel pool by 
2015. Last week I joined Senators Harkin and Lugar in calling 
for all our Nation's cars and trucks to be ethanol capable in 
10 years, and I have worked to encourage new technologies that 
would convert coal into diesel.
    So, as we embark on a search for new transportation fuels, 
we need to understand, as I know you do, Mr. Chairman, that 
realistically petroleum will not be eliminated from our economy 
anytime in the foreseeable future. However we can pursue 
existing proven technology that can provide a bridge, as 
Senator Boxer indicated, to energy diversity that will begin us 
down the path of energy independence.
    I know this will be a challenge, but this hearing is a 
useful place to start, and I appreciate your taking the time to 
hold this hearing.
    [The prepared statement of Senator Obama follows:]

Statement of Hon. Barack Obama, U.S. Senator from the State of Illinois

    Mr. Chairman, thank you for scheduling this important hearing on 
transportation fuels. It's certainly a very timely topic.
    At a committee hearing several weeks ago, I made the point that if 
the United States were serious about reducing its dependence on 
imported petroleum and insulating our economy from future supply 
disruption shocks, then increasing alternative fuel use should be part 
of that strategy.
    I am pleased that over the past year, we've made some progress on 
this front.
    With the support of Chairman Inhofe, we enacted a Renewable Fuels 
Standard to require 7.5 billion gallons of ethanol in our gasoline 
supply in 7 years. I worked with Senator Baucus and others to include a 
tax credit in the energy bill to promote the installation of more E85 
pumps at gas stations. These measures, by themselves, will reduce oil 
consumption by an estimated 6 percent in 7 years.
    Although this is significant progress, we need to remember that the 
growth in United States oil consumption during this period will far 
exceed this small reduction. So, much more needs to be done.
    Recently, I introduced a bill with Senator Carper to create a 
Renewable Diesel Standard, calling for 2 billion gallons of diesel 
substitutes in our 40 billion national diesel pool by 2015. Last week, 
I joined Senators Harkin and Lugar in calling for all our Nation's cars 
and trucks to be ethanol-capable in 10 years. I have worked to 
encourage new technologies that would convert coal into diesel fuel.
    As we embark on a search for new transportation fuels, we need to 
understand that realistically, petroleum will not be eliminated from 
our economy any time in the foreseeable future. We can, however, pursue 
existing, proven technologies that will provide a genuine bridge to 
energy diversity that will begin us down the path of energy 
independence.
    No doubt, this will be a challenge, but I look forward to working 
with my colleagues on both sides of the aisle in moving our country in 
this direction.
    Thank you.

    Senator Inhofe. Thank you very much, Senator Obama.
    We will go ahead and start. We will start over here with 
you, Mr. Cavaney, and then work across. Your entire statements 
will be made a part of the record. If you could abbreviate them 
and try to hold your comments down to maybe 5 minutes, it would 
be very helpful.
    Mr. Cavaney.

STATEMENT OF RED CAVANEY, PRESIDENT AND CEO, AMERICAN PETROLEUM 
                           INSTITUTE

    Mr. Cavaney. Thank you, Mr. Chairman and members of the 
committee.
    API appreciates this opportunity to discuss the future of 
transportation fuels. Our industry has met the transportation 
needs of Americans for more than a century and will continue to 
rely on state-of-the-art technology to do so in the decades to 
come.
    Looking ahead, we believe that advances in technology, 
consumer preference, and the workings of the marketplace will 
best determine the fuels of the future. We need to rely on 
these forces to shape our energy future rather than attempt to 
dictate what fuels are to be used. Past efforts by Government 
involving non-market mechanisms have only complicated the 
search for solutions to our energy problems.
    While it may come as a surprise to some, gasoline, diesel 
fuel, and other petroleum products have provided energy for 
consumers for well over a century. Why have these fuels endured 
for so long? There are a couple of reasons. First, hydrocarbons 
have been the choice of consumers worldwide because they 
contain more than twice the energy per gallon as many other 
energy sources.
    A second reason is that technology has reduced dramatically 
the environmental impact of their use, enabling the production 
of cleaner, more efficient, and environmentally responsive 
fuels. For example, the average sulfur content in gasoline has 
been reduced by more than 90 percent to less than 30 parts per 
million. A new car today, running on the latest low sulfur 
gasoline and equipped with the most advanced emissions 
reduction technology, has 97 percent less emissions than had a 
new vehicle in 1970.
    There is a misperception by some about the time and cost 
involved in any transition to the next generation of fuels. 
Consider what would be involved in replacing the dominant role 
of oil with a substitute like hydrogen or solar power. Most 
agree that such a transition would require dramatic advances in 
technology, and massive capital investments, and take several 
decades to accomplish. The United States and the world cannot 
afford to leave the Age of Oil before realistic alternatives 
are fully in place.
    It is important to remember that man left the Stone Age not 
because he ran out of stones. Someday we will leave the Age of 
Oil, but it won't be because we will have run out of oil. Yes, 
eventually, oil will be replaced, but clearly not until 
practical alternatives are found, alternatives that are proven 
more reliable, more versatile, and more cost competitive than 
oil.
    We expect that the dominant transportation fuels will 
remain gasoline and diesel for at least two or three more 
decades. That is the minimum amount of time required to fully 
retire any existing and still growing fleet of automobiles and 
trucks powered by these fuels, and to deploy any replacement 
fuel source throughout the United States fully. We cannot 
afford to prematurely retire these century-old champions of 
gasoline and diesel without full and complete assurances that 
worthy successors are, in fact, in place to serve the consumer.
    Those who write off gasoline and diesel fuels fail to 
recognize how advanced technology is providing new and more 
efficient ways of using these time-tested products. As was 
mentioned by Senator Boxer, hybrid vehicles, powered partly by 
gasoline and partly by electricity, are a star that has 
actually arrived on the scene. Already they are moving 
aggressively into the market, and their rate of growth will 
depend in large part on their price and ultimate performance.
    In addition to hybrids and advanced internal combustion 
engines, ICEs if you will, oil companies are working alone and 
with auto makers and have invested millions and millions of 
dollars researching new fuel cell technologies. Some of these 
companies have also partnered with the Federal Government 
through the Department of Energy's Freedom Car and Fuel 
Partnership, which is a public-private effort to examine the 
precompetitive research required to develop technologies for a 
full range of affordable vehicles as well as the fueling 
infrastructure to support them. These technologies hold the 
potential for up to double the fuel efficiency of the current 
gasoline powered automobiles and essentially with zero tailpipe 
emissions.
    However, creating and maintaining a national fleet of such 
vehicles will face significant technical, economic, primary 
energy source availability, and infrastructure challenges.
    So the bottom line at the moment is that gasoline and 
diesel will likely remain the dominant transportation fuels for 
a number of decades to come. In view of the history of its 
reliability and environmental progress, gasoline's continued 
dominant role should be reassuring to the American public.
    Thank you very much.
    Senator Inhofe. Well, thank you, Mr. Cavaney.
    Mr. McDougall.

    STATEMENT OF JEFFREY MCDOUGALL, JMA ENERGY COMPANY, LLC

    Mr. McDougall. Good morning. My name is Jeffrey McDougall, 
and I am the owner of JMA Energy Company located in Oklahoma 
City. I appreciate the opportunity to appear before this 
committee today.
    I will offer my remarks from the perspective of an 
independent oil and natural gas explorer and on behalf of the 
Oklahoma Independent Petroleum Association, which is an 
association of more than 1,600 independent oil and natural gas 
producers. Although our membership includes some publicly 
traded companies, the majority of our members are small, family 
owned businesses. Our members explore for and produce oil and 
natural gas. We do not refine oil into gasoline or heating 
fuels, and we do not market gasoline.
    I entered the oil and natural gas industry in 1984 after 
receiving a degree in Petroleum Engineering. I was laid off in 
1986 when energy prices plummeted. I subsequently started my 
own company and have built my business from the ground up by 
drilling for oil and natural gas. I currently have 35 
employees. In the last 4 years on a cumulative basis, I 
reinvested more than 113 percent of my cash-flow through 
participation drilling of over 350 new wells. My share of this 
drilling has found enough energy equivalence to supply this 
Nation's natural gas energy needs for one day.
    Oklahoma has a rich history in energy production. During 
World War I, we were the largest oil producing region in the 
world. We were responsible for supplying critical energy 
resources needed for our war effort. Although oil production is 
still important to Oklahoma, it has declined through the years. 
Oklahoma's exploration focuses turned to natural gas, making it 
the No. 2 State in the Nation in natural gas production.
    Independent producers are responsible for more than 85 
percent of the oil and natural gas production in the State. 
Nearly half of this production is from marginal wells which 
account for 42 million barrels of oil annually or an average of 
slightly more than 2 barrels per day from each of the 48,000 
marginal wells. The overwhelming majority of this production is 
owned by small family businesses.
    I want to emphasizes the independent oil and natural gas 
producers reinvest their cashflows back into the ground here in 
the United States to find vitally needed domestic reserves of 
oil and natural gas. In fact, a recent study shows that 
independent oil and natural gas producers reinvest more than 
100 percent of their cashflow back into the domestic oil and 
natural gas development. The result is the independent oil and 
natural gas producers drill 90 percent of the domestic oil and 
natural gas wells in the United States while producing 70 
percent of the domestic oil and 82 percent of the domestic 
natural gas.
    Twenty-five years ago a windfall property tax was imposed 
upon this industry, and domestic production decreased while 
energy exports increased. The $80 billion taken from the 
industry during that 8 years the tax was collected prevented 
producers from investing in the industry's infrastructure, 
resulting in an energy network unable to keep up with growing 
United States demand.
    A new tax on energy producers today could be expected to 
produce the same domestic supply destruction. The domestic 
industry is currently hampered by a shortage of experienced and 
technically trained employees as well as shortage of drilling 
rigs and well servicing capacity, but this infrastructure is 
being rebuilt by market forces. The domestic rig count has been 
climbing since the Spring of 2002 in response to higher product 
prices.
    Independent producers are now, more than ever, aggressively 
searching for more oil and natural gas reserves. Independent 
producers are using new technology to enhance mature oil 
fields, exploit unconventional resource plays; and drill to 
depths in excess of 20,000 feet at costs approaching $8 million 
per well. We are doing what we can to make our Country more 
energy secure and less reliant on foreign sources of energy, 
and in the process, we are creating American jobs and buying 
American products.
    While our greatest contribution is finding more oil and 
natural gas, we should emphasize that independent producers 
have a history of giving back in other ways as well. A majority 
of the foundations, endowments, museums, and community projects 
in Oklahoma's history have been created primarily through the 
generosity of the State's independent oil and natural gas 
industry. We are also environmental stewards. We comply with a 
myriad of local, State, and Federal environmental requirements.
    In Oklahoma, oil and gas producers instigated the creation 
of the Oklahoma Energy Resources Board 16 years ago. Through 
the OERB, producers have voluntarily contributed over $30 
million to clean up more than 6,300 abandoned sites and an 
additional $30 million for science-based education projects. 
Currently, the Oklahoma Energy Resources Board and the Oklahoma 
Independent Petroleum Association are addressing the impact of 
high energy prices on the State's low income citizens, 
encouraging the State to fully fund the LIHEAP program with 
additional dollars collected from the State's 7 percent gross 
production tax on producers. We are producing conservation 
messages to inform the public of higher heating costs this 
winter and advise them of ways to save on their heating bills.
    In conclusion, independent producers are reinvesting their 
profits to help Americans become less dependent on foreign 
supplies. However, we must face the fact that we may never 
achieve energy independence. The energy industry is technically 
complex and capitally intensive, and an effective energy policy 
will require intelligent and realistic people to work together.
    We must learn to do a better job of conserving energy. We 
must also look to alternative fuels to supply a larger portion 
of our Nation's energy needs. At the same time, we must develop 
policies that encourage, not discourage, the expansion of our 
energy supplies here at home.
    Thank you.
    Senator Inhofe. Thank you, Mr. McDougall.
    Mr. Goodstein.

STATEMENT OF RICHARD GOODSTEIN, WASHINGTON REPRESENTATIVE, AIR 
                  PRODUCTS AND CHEMICALS, INC.

    Mr. Goodstein. Chairman Inhofe, and Senator Jeffords, and 
Senators Thune, and Chafee, and Boxer, and Carper, and Obama, 
thank you very much for the opportunity to speak with you today 
about the promise of hydrogen as a fuel of the future, the role 
in our economy that hydrogen already plays, and ways in which 
this committee and Congress generally can accelerate progress 
toward a hydrogen economy.
    I am the Washington Representative for Air Products and 
Chemicals, the world's largest supplier of third party 
hydrogen. Air Products is an $8 billion a year company with 
operations throughout the world. We have over 60 hydrogen 
generating and processing facilities, more miles of hydrogen 
pipeline than anyone else, an unparalleled safety record, and 
50 percent of the market share. So I say that Air Products is 
the E.F. Hutton of hydrogen, and I appreciate the opportunity 
to be here.
    You will recall that President Bush heartily embraced the 
role of hydrogen in his State of the Union Address in 2003. He 
vowed that the first car of a child born that year could be--
should be--a hydrogen fuel cell vehicle. Air Products was 
excited by such a strong endorsement from the White House, as 
were our friends in the auto industry and among fuel cell 
manufacturers.
    There are many reasons, of course, and some of you have 
referenced them, why a hydrogen economy is such an important 
goal. Energy independence will free us from the whims and power 
of the oil cartel. It will render the United States less 
vulnerable to terrorists. We will no longer need a defense 
posture predicated on maintaining open sea lanes for the 
movement of oil. Renewable hydrogen will radically clean the 
air and will end such an unsustainable trade imbalance.
    Hydrogen is spoken of as if it is very futuristic, but in 
fact hydrogen is generated in enormous quantities for 
industrial purposes today. You will see attached to my 
testimony, if you have it handy, a map showing hydrogen 
facilities around the Country.
    [The referenced map can be found on page 44.]
    I will just hold it up in case you don't have it handy. It 
shows that virtually every State in the Union has a hydrogen 
facility within it or nearby. Hydrogen is used by oil 
refineries to make cleaner burning gasoline and in a wide 
variety of other industries: steel, glass, semiconductors, food 
processing, and many others.
    Air Products has a large number of hydrogen generating 
facilities as well. Again, let me hold up a photo of one. It 
kind of looks like an oil refinery. Again, it is attached to my 
testimony.
    [The referenced photo can be found on page 43.]
    What it says at the bottom is that this hydrogen production 
facility, of which Air Products has many in the United States, 
generates enough hydrogen to fuel 50,000 vehicles per day.
    Currently, there are all of about 100 hydrogen fuel cell 
vehicles on the roads of the United States today. The point is 
that it will be many, many years before the demand for hydrogen 
fuel reaches levels that are even detectable at a single plant, 
let alone put a dent in the amount of hydrogen generated 
nationally. The point is we have got hydrogen.
    Most hydrogen is generated by reforming natural gas, but 
one benefit of hydrogen is that it can be derived from oil, 
coal, biomass, from waste heat from nuclear, and therefore 
whatever alternatives to conventional fuels are pursued, 
hydrogen is quite compatible with it. The holy grail in the 
hydrogen world is totally renewable hydrogen, where renewable 
energy sources such as wind and solar are used to generate the 
electricity that separates the hydrogen from the oxygen in 
water. As has been said, the only emission from a hydrogen fuel 
cell vehicle is water vapor.
    Air Products is the leader in the design and deployment of 
hydrogen fueling stations, in particular mobile hydrogen 
fuelers. Mobile fuelers dispense hydrogen but function 
independently of utilities. They don't have to be hooked up to 
water or power. Again, I have attached a photo in my testimony. 
The advantage of these mobile fuelers is that we don't have to 
invest in a permanent fueling station on the ground, waiting 
for the auto companies to decide where they want to 
commercialize their fuel cell vehicles.
    If auto companies want to test vehicles in San Francisco, 
we can move a mobile hydrogen fueler there, and, indeed, we 
already have. However if they want to test them in Tulsa, or 
Burlington, or Warwick, or Wilmington, you get the point, these 
mobile fuelers can be moved there, too. One of these mobile 
fuelers, I might add, costs less than a single hydrogen fuel 
cell car does today.
    I have also attached photos of stationary hydrogen fueling 
stations which dispense compressed hydrogen into fuel tanks in 
a gaseous form.
    [The referenced photos can be found on pages 45-46.]
    You don't need a moonsuit or a long instruction manual to 
use one. There is one two miles away at a Shell station here on 
Benning Road that I am sure they will allow you to use just 
like they did President Bush with the hydrogen that he pumped 
into a car that was generated actually at a facility in 
Delaware.
    The point is, that between the existence of technology to 
dispense hydrogen and the existing network of hydrogen 
facilities around the Country, the development of a hydrogen 
infrastructure is quite feasible. But because the benefits, 
energy security and a clean environment, are embraced by 
society as a whole, individual consumer decisions aren't 
working with the free market and are probably not enough to get 
us where we want to get. The Government is going to play an 
important role.
    This committee can help through its Public Works 
jurisdiction by encouraging Government purchase of hydrogen 
fuel cell vehicles, by supporting hydrogen infrastructure in 
the next Highway bill--I realize the ink is just barely dry on 
this past one, but it is not too early to be thinking about the 
next one--and by encouraging the development of codes and 
standards applicable to hydrogen production and dispensing.
    Congress generally can advance the ball through tax 
preferences, robust R&D at the Department of Energy, and even 
creative ways to use hydrogen-based technologies for soldiers 
on the battle field who don't have to haul around tons of 
batteries, and hydrogen fuel cells are totally quiet. So there 
is no imprint for the enemy to find.
    Hydrogen has great promise and is more here and now than 
many think.
    Thank you for spending the committee's time on this 
important subject, and I look forward to any questions.
    Senator Inhofe. Thank you, Mr. Goodstein.
    Mr. Honnef.

     STATEMENT OF BILL HONNEF, VICE PRESIDENT OF SALES AND 
                   MARKETING, VERASUN ENERGY

    Mr. Honnef. Good morning, Mr. Chairman and members of the 
committee.
    My name is Bill Honnef. I work for VeraSun Energy 
Corporation. We are based in Brookings, SD. We are the second 
largest ethanol producer here in the Country. We have a 120 
million gallons a year plant in Brookings, SD; we have a 110 
million gallons a year plant in Fort Dodge, IA, that just 
opened up a couple of months ago.
    I greatly appreciate the opportunity to testify today as 
the committee examines transportation fuels of the future. With 
crude oil and gasoline costs at near record highs and the 
potential for natural gas shortages across the Country, it is 
clear the Nation needs to do more to promote the increased 
production of alternative fuel sources and domestically 
produced renewable fuels, like ethanol, which can build a 
sustainable energy future.
    Mr. Chairman, I am happy to report the United States 
ethanol industry today is playing an increasing role in 
achieving this objective. As a result of the Energy Policy Act 
of 2005, which includes a historic Renewable Fuel Standard, 
domestic ethanol production is expanding at an unprecedented 
rate. I would like to start my comments by first commending 
Congress, this committee, and specifically Senator Thune for 
your support in passing that very meaningful legislation.
    As a direct consequence of that bill, today there are 24 
new ethanol plants under construction and several others under 
expansion, that when completed will add 2 billion gallons of 
ethanol capacity to our current production capacity. This 
represents a 50 percent increase in domestic ethanol supply 
over what we had just last year. In addition, there are 
literally scores of ethanol plants seeking various forms of 
financing in various stages of development. This is a fantastic 
success story unfolding, and it is happening as a result of 
your actions.
    The challenge now is to assure that the legislation is 
implemented as intended by Congress. Our objective is to make 
the program work effectively for our customers in the refining 
industry, including specifically a credit trading mechanism to 
lower the overall costs of the program. Our understanding from 
EPA is that they assume we will issue an interim rulemaking 
that we believe will maximize flexibility for refiners and 
allow this program to be successfully implemented and on time.
    While the RFS provides a baseline for ethanol demand, the 
ethanol industry is working hard to create additional demand 
through E85. E85 is a blend of 85 percent ethanol and 15 
percent gasoline. It is designed for use in flexible fuel 
vehicles or FFVs, for short. With approximately 5 million FFVs 
on the road today, E85 has great potential as an alternative 
fuel. However because flexible fuel vehicles can run on both 
gasoline and E85, most owners are not aware they are driving an 
FFV and simply use gasoline. Our research indicates that nearly 
70 percent of the flexible fuel vehicle owners are unaware they 
are driving one.
    Based on these research findings, we launched VeraSun E85 
or VE85, for short, the Nation's first branded E85 earlier this 
year. The program was founded on three basic principles. First, 
E85 must be widely available in the target market. Second, E85 
must be priced fairly to the consumer. Third, an E85 rollout 
must be accompanied by a comprehensive consumer awareness 
campaign.
    In May, we began the program with the conversion of 35 
pumps in the Sioux Falls, SD metro area. Simultaneously, we 
launched a marketing program to raise awareness to the benefits 
of FFV ownership and E85 use. VeraSun enlisted the support of 
General Motors, various local car dealerships, the National 
Ethanol Vehicle Coalition, and other organizations across the 
State to assist with the rollout of the program. The program 
includes elements such as advertising, direct mail, point of 
purchase marketing, and retailer education.
    Jonathan, if you will show these.
    I brought a couple of samples just to show you some forms 
of advertising that we are using, which are creating quite a 
stir within the community and quite a bit of support around 
E85. Here is one billboard that you would see if you drove 
around Sioux Falls, SD, or various areas in eastern South 
Dakota, Fuel Up For Freedom, obviously playing on energy 
independence, the fact that it is 85 percent renewable fuel 
that is produced right in the State of South Dakota. People 
very much support this.
    This is just another example of another billboard, Fuel Up 
For The Future. Obviously, we are trying to do this not only 
for the here and now but for the future generations. Again, 
this has stirred quite a bit of interest.
    As a result, E85 awareness has increased, E85 fuel cells 
are on the rise, and demand for flexible fuel vehicles in the 
local market is up. The community is embracing the fuel as a 
viable alternative gasoline. The program is working, and it is 
working today.
    The success of the program attracted national attention and 
the attention of Ford Motor Company. Just 10 days ago, we 
announced a first of a kind partnership with Ford to expand 
VE85 to other markets throughout the United States with a 
public commitment to the partnership from none other than Bill 
Ford himself. The initiative will serve to convert existing 
fuel pumps to E85 in select markets. A consumer awareness 
campaign, like the one shown here, will promote the benefits 
and use of E85 and FFV ownership. Local gasoline stations and 
Ford dealerships will be asked to participate in the campaign.
    Increasing FFV production and E85 use represent the best 
near term solutions to significantly reducing our dependence on 
our foreign oil, but today only about 500 of the nearly 180,000 
retail stations offer E85. In order for retailers to more 
widely adopt E85, station owners must have confidence that 
there will be sufficient consumer demand. The demand must come 
from FFV owners. Today FFVs represent approximately 2 percent 
of all vehicles. Without a significant ramp-up in the 
production of FFVs, E85 use will remain relatively small.
    Auto manufacturers clearly hold the keys to the future of 
greater E85 use. With Ford, General Motors, and potentially 
auto manufacturers as partners, we believe we can make great 
strides in boosting FFV production and E85 use. We are very 
optimistic.
    In conclusion, Mr. Chairman, as the committee contemplates 
future motor fuels markets, please recognize that ethanol is a 
viable bridge to the future. Today ethanol is blended into one-
third of our Nation's fuel as a clean blend component. As we 
see growth in FFV production, ethanol will play a larger role 
in the gasoline replacement market.
    In the future, ethanol shows great promise as renewable 
feedstock for hydrogen fuel cells. VeraSun Energy Corporation 
and the Renewable Fuels Association are committed to working 
with you and members of your committee to promote the expanded 
use of domestically produced renewable fuels.
    Thank you.
    Senator Inhofe. Thank you, Mr. Honnef.
    Well, Mr. Holmes, welcome from what used to be the oil 
capital of the world, the city of Tulsa.
    Mr. Holmes. We are going to make a comeback, Senator.
    Senator Inhofe. Good. Good.

STATEMENT OF JACK B. HOLMES, JR., PRESIDENT AND CEO, SYNTROLEUM 
                          CORPORATION

    Mr. Holmes. Good morning, Mr. Chairman and other members of 
this committee.
    Syntroleum appreciates the opportunity to speak to you 
today about transportation fuels of the future. My name is Jack 
Holmes, and I am the President and CEO of Syntroleum, a Tulsa 
based company that is focused on developing ultra-clean fuels 
using Fischer-Tropsch technology. The Syntroleum process 
produces a superior quality diesel fuel, jet fuel, or home 
heating oil.
    Across the world, we continue to see energy demand increase 
at rates greater than the growth of their domestic supplies. 
Recently we witnessed the immediate negative impacts of 
unexpected disruptions of our Nation's refineries along the 
Gulf of Mexico as the result of Hurricanes Katrina and Rita. 
Our future economic and energy security rely upon our ability 
effectively to utilize our domestic sources of fuels. The world 
supply and demand balance dictates that we use our clean coal 
technology for development of secure domestic transportation 
fuel.
    We often categorize Fischer-Tropsch technology as going 
back to the future because it was developed in the 1920's in 
Germany to produce liquid fuels from coal. Other countries, 
such as South Africa, have also utilized Fischer-Tropsch 
technology to produce over 1.5 billion barrels of fuel from 
coal over the last 50 years.
    With over 270 billion tons of proven reserves, the United 
States is the Saudi Arabia of coal. Much of this coal is 
located in remote areas of Western and Midwestern States. Our 
plan is to build the plant at or near the mine to maximize 
transportation savings. If we convert just 5 percent of the 
estimated proved coal reserves in the United States to ultra-
clean fuel, it would double our proved oil reserves without 
drilling a single well. Also, these projects won't require 
additional refining capacity because our technology produces 
finished fuels onsite.
    Syntroleum's 20 years and $200 million of Fischer-Tropsch 
research and development have shown our fuels are among the 
cleanest in the world with virtually no aromatics and no 
sulfur. They are non-toxic and biodegradable. Here, I have got 
a sample of Fischer-Tropsch diesel. It is as clear as water and 
has no aroma. It is the cleanest fuel in the world.
    This chart behind me shows the dramatic reduction in 
pollutants achieved in tests using our fuel. This includes 
hydrocarbons, carbon monoxide, C02, NOx, and 
particulate matter. Our fuels are compatible with existing 
energy infrastructure and run well in current diesel engines 
with no modifications necessary.
    Finally, our fuel is of interest to the military where we 
have done extensive research with the Department of Defense to 
test a single battlefield fuel. We want to thank Senator Inhofe 
for his leadership in this effort.
    Congress does not need to fund this new industry forever. 
However, support from the U.S. Government for the first coal to 
liquid plants will be critical. Syntroleum applauds you for 
your action in passing the Energy Policy Act of 2005. This bill 
was a major step in the right direction by providing funding 
for research and development of clean coal technology and loan 
guarantees for construction of commercial scale coal to liquids 
plants.
    We urge the Government quickly to follow through with its 
commitment to dedicate money for loan guarantees and to 
encourage long-term contracts to purchase Fischer-Tropsch 
fuels. We are sure that the first commercial coal to liquids 
plants will have significant impact on the capital markets to 
fund additional plants. As we say, everyone wants to be the 
first to build the second plant.
    Recently, this committee held hearings on the proposed Gas 
Price Act, Senate bill 1772. By introducing this bill, Senator 
Inhofe has recognized the benefit to this Country in bringing 
clean fuels to the market soon.
    Americans today are worried about the high cost of fuel and 
rightfully so. The effects of Katrina alone are estimated at 
several billion dollars in increased energy costs. Whether it 
is filling their automobile tanks or heating their homes, 
Americans are being hit in their pocketbook because of our 
Nation's dependency on foreign oil and our limited refining 
capacity. We don't have to continue down this path of energy 
insecurity. We have the resources and technology today.
    In summary, ultra-clean coal-based Fischer-Tropsch fuels 
can have a significant impact on the energy security and supply 
balance in this Country and add high paying jobs here at home.
    Mr. Chairman, members of the committee, thank you for 
allowing me this time to speak about transportation fuels of 
the future.
    Senator Inhofe. Thank you, Mr. Holmes.
    We will do a series of 5 minutes, maybe two rounds. We will 
try to see how we come with votes.
    I appreciate, Mr. Holmes, your making a reference to the 
refinery bill that we, unfortunately, were not able to get out 
of committee. It was a very modest bill. It was one that I 
think would have been very helpful, and we are still hoping 
that there is some way of doing this to get this out and make 
that a reality.
    Mr. McDougall, right now, things are pretty good in the 
industry for independents, but it wasn't long ago things 
weren't so good. So, you have the ups and the downs. As one who 
has lost his job during one of the low periods, how do you 
react when you hear people in Washington making allegations 
about the oil industry and wanting to make it harder for you to 
do business? What is your response?
    Mr. McDougall. Well, Chairman, my first response would be 
let the market forces work. That is spoken by people that 
probably are uninformed about our industry. They haven't 
studied us as close during the down time as they have the up 
time.
    We are an industry that is heavily regulated. We are 
heavily taxed. We take tremendous risks. One thing that we do 
is spend our own money. There are lots of nights during the 
slow times that I lost a lot of sleep, spending my own money to 
try to survive in the slow times. There has also been during 
that same period that they weren't experiencing, it was a slow 
destruction of the industry and the infrastructure that was 
there. Now that prices are up, people are affected by the 
consequence of that.
    Senator Inhofe. Well, I think it is pretty heroic of you to 
make the statement, let the market work, having lost your job 
at one time. So I appreciate that very much.
    Mr. Cavaney, the President recently signed a bill that 
establishes a historic and sizable renewable fuels mandate, yet 
some people are already advocating that we have more mandates 
for other biofuels. I would just like to know in your opinion 
what new mandates would do to the economy. Do you have any 
thoughts about that?
    Mr. Cavaney. Yes, sir, Mr. Chairman. First of all, we 
appreciate the work of this committee in helping craft together 
a renewable fuels mandate that had the kind of flexibility that 
would allow us to absorb significantly more of the ethanol and 
biofuels without a lot of the constraints that we faced when we 
used to be on a per gallon basis. I think what we will find is 
that is a pretty ambitious amount to absorb. I think we will be 
able to do that well.
    However if we now, on top of an existing structure, tend to 
build more mandates or structures that are less flexible, I 
think what will happen is our capacity to move fuel quickly 
when tight conditions arrive, whether it is because of a 
failure of a pipeline or a problem in a refinery or something 
God forbid as terrible as the two hurricanes that hit us down 
in the Gulf, you really see the problems.
    For example, boutique fuels which is a phenomenon that has 
developed over the last 10 years, are all individual fuels that 
are mandated by certain municipalities and certain regions. Had 
the Government not been willing to grant waivers as a result of 
Katrina, we would not have been able to have the gasoline there 
where people needed it.
    So, Mr. Chairman, I think we need to move with caution. 
There is an incentive for the industry. We, in the oil and gas 
business, feel that we can use all the energy we can get. Right 
now, we are actually out with strong conservation and energy 
efficiency messages. Biofuels will have a good place in the 
industry. I think this was mentioned earlier.
    You are going to see ethanol expand beyond just corn into 
other areas. We welcome that addition. I think there is plenty 
of room for everyone. So let the market and let the consumer 
make those choices and put the fuels where the demand is, and I 
think everyone will end up benefiting from that.
    Senator Inhofe. Yes, I think so too, Mr. Cavaney. I 
appreciate your remarks about it is important to realize that 
we were at 100 percent refinery capacity before Katrina. So, 
this is something that Washington needs to hear from you.
    Mr. Holmes, there are some members who are suspicious of 
the coal to liquids for two reasons. One is that it would not 
be price competitive, and second, that it is a fossil fuel and 
therefore should not be encouraged. How do you respond to those 
two criticisms?
    Mr. Holmes. Well to answer the first question, we believe 
in the current energy price environment that we are cost 
competitive, and we have done a lot of work on economics. We 
believe that we think what we need is a little push to get the 
first plant built and can demonstrate that. I would remind you 
that the LNG industry, for example, the early plants that were 
built some 20 years ago, they are much cheaper now.
    In fact, a new LNG liquefaction plant today is probably one 
third the cost of an original LNG plant. So we believe if we 
can get the industry started, demonstrate its viability, that 
there will be improvements over time.
    Second, it is a fossil fuel, but, as was mentioned earlier, 
this Nation is going to need fossil fuels for years to come in 
the future. It is a fossil fuel, but it is the cleanest fossil 
fuel, if you recall the chart that I put up here. We believe it 
is an ideal bridging fuel to get to the future. As we said, 
there is such a vast amount of coal in this Country, that just 
a very small fraction of our coal could have a big, big effect 
on our energy supply. Not only diesel fuel on the road but jet 
fuel and, more importantly, home heating oil can be made using 
our process.
    So we think there is a very bright future for it, and we 
look forward to participating and helping America solve its 
energy problems.
    Senator Inhofe. Thank you, Mr. Holmes.
    Senator Jeffords.
    Senator Jeffords. Mr. Cavaney, you stated that refining 
capacity grew between 1994 and the present, and that currently 
planned expansions will result in increase in capacity of at 
least one million barrels per day from 2005 to 2009. These 
expansions will allow us to refine a greater quantity of oil 
into transportation fuels. Are similar technological advances 
occurring with respect to refining efficiency that will allow 
us to get more refined product from each barrel of oil?
    Mr. Cavaney. Yes, Senator. What we find is increasingly 
these refineries, some of them as many as 50 and 60 years of 
age, constantly with each improvement, whether it is for an 
environmental improvement or for increased capacity, they go 
back in and put in new state-of-the-art technology. So, the 
yields that are coming out of refineries as well as the energy 
efficiency have moved quite significantly. That is what has 
allowed us to be able to take these earlier generation, smaller 
refineries and continue to add onto them.
    What we have found is that it is much easier, quicker, and 
less expensive, ultimately benefiting the consumer, by adding 
existing capacity to make more and more capacity in a similar 
place. If you start a new greenfield refinery today, you are 
generally going to be going to a community that is not familiar 
with you; you have a lot of problems with the permitting 
process; and you have no guarantee that you are ultimately 
going to be able to get permission to do that.
    Where if you go to an existing refinery that has been 
geared toward accepting incremental increases in capacity, you 
are in a community that generally appreciates you, looks at the 
value of the jobs, and the tax payments that come to the local 
community. For about 60 percent of the cost, we can add 
additional barrels of capacity, and again at about half the 
time. About 4 years would be about the maximum to add to an 
existing refinery as opposed to maybe eight or more if you were 
going to build a new greenfield mill. So most of the additions 
have come incrementally.
    The amounts that we have talked about, a little over a 
million barrels here, will represent about 1 1/2 percent growth 
per year which exceeds the traditional growth. So we not only 
will be taking care of the built-in growth, but we will be 
adding a little more spare capacity. These also, I might say, 
are not likely to be the only additions that will be announced. 
These are the ones we have on the docket right now that we know 
about. There may well be others, and therefore we will continue 
to see capacity grow.
    Senator Jeffords. Thank you. That is very helpful.
    Mr. McDougall, you talked a good deal about the investments 
that independent oil producers in your State are making in 
order to be able to continue to recover more from existing 
wells. It is clear you have made significant investments, but 
you can't rival the financial investments the major oil 
companies are making in research into new technologies. Should 
the Federal Government be doing more to research drilling 
techniques that improve recovery, reduce losses of oil, and 
protect the surrounding environment?
    Mr. McDougall. Senator, I believe yes on that. Anything 
that promotes efficiencies, promotes additional recoveries, 
that would provide more of our product to the Nation, we would 
be for that. As an independent producer, when we are out 
spending capital, as I referred to earlier, we drilled 90 
percent of the new wells.
    The majors have been through an exodus from the continental 
United States The moneys that we bring to bear are the lion's 
share of all the spending in the Country. Ninety percent of the 
drilling is done by independents. If the research wants to be 
done by the Government to recover the mature production, we 
would be all for that.
    Senator Jeffords. Mr. Goldstein, you stated in your 
testimony that the Clean Air Act's requirements to remove 
sulfur from petroleum benefits hydrogen producers. Will you 
clarify for the committee why this is the case?
    Mr. Goodstein. Well, crude oil has sulfur compounds in it. 
Hydrogen reacts with that sulfur to form hydrogen sulfide, 
which is removed by adding something like sand that bonds to 
it. Basically, hydrogen is used to take the sulfur out of the 
crude, and then it actually gets sent on to a chemical plant to 
make a usable product like sulfuric acid.
    But the fact of the matter is beyond that. Not just insofar 
as hydrogen is used as an input to the refinery process, as I 
mentioned, hydrogen fuel itself has the promise of clean air, 
both with respect to being used in a fuel cell and being used 
in a hydrogen internal combustion engine. There are some auto 
makers that are going in that route.
    So not only would we have no particulates, but if we have 
totally renewable hydrogen, we wouldn't even have to worry 
about carbon dioxide. How nice would that be to do that in a 
way for which there was a market and demand as opposed to 
having to turn the screws on industry?
    So there are a lot of benefits from the standpoint of 
hydrogen, both with respect to serving our friends in the 
refinery business but also insofar as hydrogen becomes a stand 
alone fuel, again in fuel cells, stationary and mobile.
    Senator Jeffords. I have two more questions. Is that all 
right?
    Senator Inhofe. It will be all right.
    Senator Jeffords. Mr. Honnef, you testified that ethanol 
producers are expanding at an unprecedented rate and that there 
are 24 plants and 7 expansions under construction today. I just 
want to be clear. Is it correct that this expansion is 
occurring in compliance with the existing environmental law and 
with the acceptance of the local communities in which the 
plants are located?
    Mr. Honnef. Absolutely, and furthermore, communities are 
encouraging ethanol plants to come to their communities, unlike 
our brethren in the oil industry and the refining industry that 
face real challenges with siting refineries, and those issues 
need to be dealt with. With ethanol plants, communities 
actually encourage ethanol plants to come to the communities, 
because our feedstock is obviously in most cases corn. By 
pulling corn from the local market, we create demand for the 
corn and increase rural economic development. So, in some 
cases, communities are actually competing to get plants to come 
to their town.
    Senator Jeffords. Mr. Holmes, I just want to clarify some 
figures presented in your written statement. You stated that if 
the United States converted 5 percent of its recoverable coal 
reserves to oil, it would be the equivalent of the existing 29 
million barrels of proven oil reserves in the United States. 
Five percent of the reserve amounts, in your testimony, to 14 
billion tons. As I understand it, most processes for converting 
coal into liquids turn a ton of coal into a little more than a 
barrel's worth of oil or refined product such as gasoline or 
diesel. Have you developed a process that is more efficient in 
the way it converts coal to oil?
    Mr. Holmes. No, sir. Our research shows that approximately 
two barrels of oil are created per ton. It varies. For lignite 
coal, for example, it is about 1.5; for bituminous coal, it is 
about 2.5. So a weighted average of the coal in the United 
States is about two barrels per ton, and that is the basis of 
that calculation.
    Senator Jeffords. Thank you.
    Thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Jeffords.
    Senator Chafee.
    Senator Chafee. Thank you very much, Mr. Chairman and 
panelists for being here this morning.
    I am curious as to the break-even point in each of your 
proposals for, say, ethanol, or for marginal wells, or for 
hydrogen, or for coal-based fuels. What is the cost per barrel 
where you start to make money?
    Maybe I will start with you, Mr. McDougall. It seems when 
you left in 1985, the price per barrel at $11 or $12 was really 
low, but you went into marginal wells, it sounds like. Can you 
make money at $11 or $12 a barrel, or do you need it higher?
    Mr. McDougall. Senator, first of all, I am primarily a 
natural gas producer.
    Senator Chafee. Maybe I have my dates wrong. At one point, 
it was down.
    Mr. McDougall. Yes, it was $11.15, I think is what the 
number was, somewhere in that area.
    First of all, I am a natural gas producer primarily, so I 
think of economics in terms of MCFs. You know, at that time, it 
seemed like finding costs were near 85 cents, and then there 
were some lifting costs. We have to add on the lifting, and the 
processing, and everything else. Gas prices seemed to be about 
$1.25 at that time. It was very thin. I would say then that the 
rate of returns were probably in the 10 to 15 percent range 
would be probably the good ones that were steady.
    Today, the break-even for natural gas is probably somewhere 
in the $5 range, $6 range, would be my guess. Now that is for a 
company that doesn't carry a lot of debt and all the other 
things that go with that. That is just straight up without 
having that as a cost component.
    Senator Chafee. Thank you.
    Mr. Goodstein.
    Mr. Goodstein. I think from the hydrogen standpoint FE--
    Senator Chafee. By the way, thanks for remembering all our 
hometowns. I like that.
    Mr. Goodstein [continuing]. Yes, thanks. I think from the 
hydrogen standpoint, it is not so much a barrel price as it is 
a dollar per gallon of gas price. Right now, say in southern 
California, we have a hydrogen pipeline that links a couple 
large hydrogen generating plants to a number of oil refineries 
south of LAX Airport. Hydrogen off that pipeline is now 
appreciably less on a per gallon equivalency than gasoline is 
today.
    The reason, though, that for us to get it basically 
delivered to service stations or to these mobile fueling 
stations and so forth, then we have to load up a truck and put 
it on the road. You are looking at labor costs. You are looking 
at the trucking costs and so forth. Economies of scale, as I 
mentioned there are all of 100 fuel cell cars in the Country 
roaming around. So there is just not much demand.
    I guess the point is, though, when we have demand, I think 
it has already been demonstrated, and certainly the Department 
of Energy is gearing toward about $1.50, $2 a gallon equivalent 
for hydrogen as being very feasible. I think you would hear 
from a company like Air Products that that is not beyond the 
realm of the possible by any means.
    Again, what stands between us getting there now is just 
that there is not adequate demand, and therefore it is very 
expensive, kind of a onesies and twosies basis, to move 
hydrogen around in a metropolitan area.
    Senator Chafee. Thank you.
    Mr. Honnef.
    Mr. Honnef. On an ethanol basis, a break-even is somewhere 
in the neighborhood of $1.10 to $1.15 per gallon of ethanol to 
produce. The majority of that cost, about 66 percent of that 
cost, is represented in the cost of corn that we purchase to 
make the ethanol. As these plants get larger, similar to ours, 
the 100 plus million gallon a year plants, even drop that price 
lower. So the larger the plants, the more efficiencies that are 
brought into the industry which are seen today. That price 
continues to come down.
    Senator Chafee. So if the price of oil were to drop again, 
it is unlikely but if it does, and thus the price of gas were 
to drop below $1.10 or $1.15, you cannot compete?
    Mr. Honnef. If it drops below $1.10, we could compete up to 
a point, especially with the Renewable Fuel Standard that is in 
place. There will be a market for ethanol up to 7.5 billion 
gallons by 2012. So we would continue to compete. What may 
happen is some plants, if they are above that, may end up 
closing down for a period of time until prices came back.
    Senator Chafee. Mr. Holmes, any comparison to coal to gas?
    Mr. Holmes. Yes, sir. First of all, one of the things that 
a lot of people don't realize is that with higher prices come 
higher costs. One of the things that the industry is facing 
today is there is a demand for equipment and people, and so 
forth. The capital costs of building a new plant, drilling a 
new well, or whatever is significantly higher today than it was 
2 years ago. So there is a little bit of a ratcheting effect. 
But at current costs, as we look at it, and I am going to 
compare mine to crude oil prices, somewhere in the $35 to $40 a 
barrel range gives an adequate rate of return.
    If prices were to go down below that, first of all, if you 
have already amortized your capital investment and you are just 
paying operating costs, you can still stay in business and make 
money. Second, we would hope that the capital costs for 
construction would go down with that. So it is fairly flexible.
    One of the ways we look at it is if energy prices drop 
significantly from where they are today, I think most people in 
this Country would be pretty happy. We wouldn't be happy in our 
industry if energy prices drop significantly, but that wouldn't 
be a bad thing for the Country.
    Senator Chafee. These capital costs, your investors must be 
apprehensive about the swings in the price of energy and the 
price of oil.
    Mr. Holmes. Well, that is always there, but one thing I 
would point out is that the high energy prices that the world 
faces today, in our opinion, are a result of a true supply 
demand balance situation. What this Country experienced in the 
seventies and eighties was an artificially high price that 
resulted from political decisions made by the producing 
countries.
    If you artificially close a valve, you can open it up just 
as easily. That is what happened to oil prices, and that is why 
a lot of the projects that were underway in the seventies and 
eighties turned out to be a problem.
    If you look at the future price for oil today, it is a lot 
higher, a lot further out than it was in the past. So I think 
most people in our industry believe that this higher level of 
oil prices and energy prices, resulting from true demand in the 
world, will probably stay longer. Second, in financing these 
projects, typically the lenders insist that you hedge your 
prices, so that you take out some of that risk. If you can lock 
in your forward prices at a high enough level to service your 
debt, that is generally what people do.
    Senator Chafee. Part of the testimony was about India and 
China coming on line.
    Mr. Holmes. Absolutely.
    Senator Chafee. That must give some confidence to higher 
energy costs for your investors.
    Mr. Holmes. We run into the Indian companies and the 
Chinese companies all over the world. Our other business is gas 
to liquids which we use stranded gas around the world to try to 
develop. Everywhere we go, if there is an Indian company 
competing for a project or a Chinese company, they set the 
price pretty high.
    Senator Chafee. Mr. Goodstein, I don't know much about 
hydrogen, but Mr. Cavaney testified that it comes from natural 
gas. On page 11, he says, most hydrogen must come from natural 
gas which, from an energy security standpoint, is in limited 
domestic supply. Is that a problem for you?
    Mr. Goodstein. Well, it is certainly true today that 
hydrogen, by and large, is generated by reforming natural gas. 
As I mentioned, hydrogen can also be derived from oil, coal, 
biomass, and renewables. It is true that if the only answer on 
hydrogen was natural gas, whether domestic or imported, OPEC 
would have us, or some other natural gas cartel would kind of 
have us in the same grip that they have us now.
    But there is research that is being pursued at DOE and 
within the private sector to get to, as I said, the holy grail 
of renewable hydrogen, which is a ways off, but nonetheless the 
science is there. Taking renewable energy--wind, solar, or 
nuclear--and using the electricity generated from that to 
separate the hydrogen from the oxygen molecules in water.
    That is not going to happen overnight, but once that 
happens, you have no emissions in the electricity generation 
process and no emissions at the car because the only emission 
out of a hydrogen fuel cell vehicle is water vapor.
    So it is true. If all we had was a static world, and 
natural gas was our only source for hydrogen, and we made no 
progress going forward, no question. We see the world evolving 
in a way that actually gives a lot of hope.
    Senator Chafee. I know more about hydrogen than I did a few 
minutes ago.
    [Laughter.]
    Senator Chafee. Mr. Honnef, Brazil went from 80 percent 
importing to self-sufficiency, pretty much based on sugar 
conversion to fuel. How different is corn than sugar?
    Mr. Honnef. Well, it certainly is a different process with 
sugar. Essentially, the ethanol process is in Brazil, they take 
the sugar; they convert that into ethanol. Here, we take starch 
from corn, but we first have to convert that starch to sugars, 
and then that sugar then we ferment to make alcohol. So there 
is one additional step in the process.
    Sugar to ethanol is clearly a more efficient process. 
Brazil's market is approximately the same size as ours. We are 
about a four billion gallon a year industry here in the 
Country. I think Brazil is somewhere between four and five 
billion gallons a year.
    What is interesting is what has happened in Brazil is there 
has been a growth in what they call total flex vehicles. They 
are vehicles that can run anywhere from zero percent ethanol, 
all gasoline, up to 100 percent ethanol, similar to the 
flexible fuel vehicles that I spoke of earlier. Those are 
growing in demand. Next year, 70 percent of the vehicles that 
will be purchased in Brazil will be total flex vehicles.
    So they have really committed themselves, not only from a 
government standpoint but consumers have committed themselves 
to ethanol as a viable source of renewable energy. We are 
seeing some of that happen here in the United States now with 
the growth in E85 and flexible fuel vehicle production.
    Senator Chafee. Thank you, Mr. Chairman, and good luck, 
gentlemen, on your research in helping us become more diverse.
    Senator Inhofe. Thank you, Senator Chafee.
    Well, it seemed when you made your opening statement, Mr. 
Goodstein, that you were a little surprised when the President 
back in 2003 made the statement about that someone who was born 
then would be driving a fuel cell at driver's age. That puts it 
at, what, 2019. Is that realistic?
    Mr. Goodstein. Well, you will have to ask the auto 
companies. We feel a little bit like the Maytag repairman. We 
have got hydrogen, and we are waiting for there to be demand. 
However the auto companies, their line is that they will be 
able to commercialize fuel cell cars in the 2015 to 2020 
timeframe. I have heard them testify to that effect before 
Congress, and I haven't heard them back down from that.
    I will say that I think, apropos to Senator Chafee's 
question, a lot of where advances are going to be made is 
China. I think there are some notions that they are going to 
leapfrog--I gather their environment is not a big selling point 
at this point, but I think they recognize it--in connection 
with a lot of technologies and perhaps autos being one of them, 
and they plan to showcase a little bit during the Olympics. So 
I think if you asked a lot of the auto companies to the extent 
that they are talking about commercializing, I bet China is a 
big market that they have in mind.
    Will that United States child born in 2003 be able to have 
a hydrogen fuel cell car? Probably if they are very wealthy. I 
think we are talking a few decades. This is less than a 2050 
timeframe, but as I said, 2020, they are going to have to know 
somebody to probably drive a hydrogen fuel cell car on a 
regular basis.
    Senator Inhofe. Mr. Honnef, you made a reference, and I 
think all of you did, to the Gas Price Act. That was a great 
disappointment to me that we were not able to get that through. 
We have a huge refinery problem. If you remember, during the 
markup of that bill, your Senator, Senator Thune, had an 
amendment of the biorefinery amendment. Knowing that there is 
going to have to be a lot of the ethanol plants built, how 
would that bill have helped your industry?
    Mr. Honnef. Well, clearly stream FE--
    Senator Inhofe. With the Thune amendment attached to it.
    Mr. Honnef [continuing]. Absolutely. Clearly, supporting 
streamlining the permitting process would help, help 
considerably, not only in the refining industry but also in the 
biorefining industry. As we grow this industry at a rapid pace, 
permitting is always an issue that we have to deal with. So 
anything to help streamline that process, we look for it. As 
long as it is not at the detriment of the environment, of 
course, we look at it as a positive step forward.
    Senator Inhofe. I will tell my fellow Senators, I do have 
one last question. I will be asking it for Mr. Cavaney and Mr. 
McDougall. But why don't you go ahead and ask any other 
questions you might have, Senator Jeffords and then you, too, 
Senators.
    Senator Jeffords. I just have one more.
    Senator Inhofe. Yes.
    Senator Jeffords. Mr. Goldstein, am I correct in my 
understanding that the Clean Air Act not only promotes the use 
of hydrogen in producing low sulfur petroleum fuels, but it 
also supports the use of hydrogen as a transportation fuel?
    Mr. Goodstein. Yes, that is absolutely correct, Senator. 
Again, because the Clean Air Act has the requirements that 
gasoline be clean, there is demand for hydrogen to take that 
sulfur out. But because the Clean Air Act, again, is looking to 
get cities free of the particulates that they deal with now, 
let us put carbon dioxide off to the side for current purposes. 
Again, a hydrogen fuel cell car or bus has only water vapor as 
an emission.
    So clearly, to the extent that the Clean Air Act is trying 
to promote, and it does, it is effective in cleaning up urban 
air and air outside of cities, hydrogen is very much going to 
be used. Indeed, even today, hydrogen is used in conjunction 
with compressed natural gas, largely in an experimental basis 
but in some buses around different universities and other 
areas. California is somewhat on the cutting edge in this, but 
there are certainly other areas.
    So, yes, the Clean Air Act very much drives the utilization 
of hydrogen. Hydrogen, I think indisputably, is used to clean 
up the air at present, and I think more so for the future.
    Senator Jeffords. Thank you.
    Senator Inhofe. Thank you, Senator Jeffords.
    Let me just kind of wind up by acknowledging that we are 
developing a lot of technologies right now. We recognize that, 
and it has been very helpful to have this on record, although 
we still have a serious supply problem with crude oil and gas.
    It goes all the way back, I say to my good friend, Senator 
Jeffords, to the Reagan administration. I can remember back 
then I was trying to get the Reagan administration, which was a 
Republican Administration, to accept, to put together some type 
of an energy program, the cornerstone of which would be some 
maximum amount that we could be reliant upon foreign countries 
for our ability to fight a war.
    So Don Hodel, at that time, well, actually he was two 
secretaries; he was Secretary of Energy and Secretary of 
Interior at different times. We had a dog and pony show. We 
would go around the Country to the consumption States and try 
to impress upon them that our reliance upon foreign countries 
was not really an energy issue; it was a national security 
issue.
    And we failed. So he did not establish a policy. I thought 
surely when Bush the First came along, coming from the oil 
fields, that he would, but that didn't work either. Of course, 
it didn't work during the Clinton administration. But this 
President has paid a lot of attention to it.
    We do need an energy policy. One of the things we have to 
recognize, and certainly after everything that has happened in 
the Middle East, is that we need to achieve more independence. 
This is a serious problem that we have now.
    China was mentioned several times during the course of this 
hearing. One of the things that bothers me the most about China 
is not just the fact that they have had military buildups in 
conventional weapons exceeding ours at about a 10 to 1 ratio, 
but they now are the No. 2 country in terms of reliance upon 
foreign countries for their ability to survive.
    We see what they are doing. We see the $70 billion deal 
that they made with Iran, and now they are importing 13 percent 
of their oil from that country. We have seen the fact that they 
did not join us in our sanctions against Khartoum, and now they 
are importing some 7 percent of their oil from Sudan.
    As I go around, a lot of people are aware of this, I have 
kind of a mission. I have been in Africa for many, many years. 
As I go around the countries, particularly around the Gulf of 
Guinea and the areas where they have huge oil reserves, I see 
everything that is new and shiny is built by the Chinese. So, 
they are making inroads, and there is where our competition is.
    We can't ignore the fact that we are facing a crisis. With 
all the technologies coming along, we still are going to have 
to have some energy independence. At the time we started this 
back in the Reagan administration, we were dependent upon 
foreign countries for 35 percent of our oil, and now it is at, 
what, 65 percent. So it is a serious problem.
    I would like to wind this up. We will start with you, Mr. 
Cavaney and then with you, Mr. McDougall.
    One of the things that I have observed in the years that I 
have been here and having coming from the oil patch is that 
there is a lack of knowledge on Capitol Hill, that oil is not 
just oil. The majors, which you are representing here, Red, 
today and the independents, where I actually started out, are 
kind of two different industries. So I would like to ask the 
two of you to define the differences between your part of the 
energy or the oil industry as opposed to the independents.
    We will start with you, Mr. Cavaney, and then the different 
types of problems that you are facing.
    Mr. Cavaney. Well, the biggest challenge we have is that 
our companies tend to be larger, and therefore their 
comparative advantage is to tackle the world's most complex 
engineering problems. Therefore, they need to be huge in terms 
of scale. Seventy-seven percent of the world's oil resources 
belong to foreign governments and national oil companies. Those 
are the people that the investor-owned oil companies have to 
compete with, whether they are U.S., European, or Chinese.
    So, as a result, what you need to do, the big challenge is 
to find significant locations where oil and natural gas are. 
Partner up with others so you can minimize your risk, but use 
your comparative brains to bring that product, that might not 
otherwise have gotten to market, to market. Finding the 
resources and having access is very important.
    One of our big problems that the majors have had in the 
United States is that so much of the potentially attractive 
remaining reserves are off limits. They are not available. So, 
in order to get the product, there has been more of a 
concentration in the deep water Gulf, in both the Central and 
Western areas, which is the only area that is really left that 
is attractive that majors can use their technology to 
advantage, and then the rest of the world.
    What we think is needed is we will always be able to get, 
in one form or another, crude oil because crude oil is a global 
commodity, and what you can't get from one part, you can get 
from the other.
    But the bigger problem we have is natural gas. That is not 
a global market. That is a regional market, and it has a huge 
disadvantage for American consumers and American workers. Most 
of the world pays a couple of dollars for the MCFs of natural 
gas. Here in the United States, we are at about $11, and the 
reason it is so high is because there aren't very many 
opportunities to get access to that. Of course, the hurricane 
put a premium on it for a couple dollars, and that is probably 
going to come down over time.
    But our point being that we have lots. The Government says 
we have over 1,000 TCF, trillion cubic feet, of natural gas 
that is undiscovered within the United States. That is enough 
to heat 125 million homes for 120 years. We have got the 
natural gas. So, we need to look to using LNG, liquefied 
natural gas, imports to help us. We need to bring what we call 
the Arctic Pipelines, the one from Alaska and also the one from 
Canada down.
    But we also need to access the natural gas that we have 
here because not only do people pay a high heating bill, 
natural gas is so often used in many important industries like 
the fertilizer industry and like the chemical industry as a 
feedstock.
    What we have done is we have been exporting jobs as 
companies had to close their operations here for non-
competitive reasons and move jobs elsewhere. One chemical 
company owner told me he never thought he would live to see the 
day when he had to close a chemical plant in Louisiana and move 
his production to Germany, but that is what is actually going 
on.
    Mr. Chairman, discussing access and discussing an 
opportunity where we can bring some of that great technology to 
look into some of these new fields, and do it in an 
environmentally responsible way, is clearly the opportunity 
that is available for the Country if we want to take advantage 
of trying to make ourselves competitive again in the natural 
gas and products arenas.
    Senator Inhofe. Well, Mr. Cavaney, Senator Voinovich, who 
couldn't be here today, will be very proud that you brought 
that up because his favorite, his major concern is what is 
happening to jobs. I think in Ohio maybe he is feeling it a 
little more than some of the other States. But the flight of 
the chemical companies to Western Europe is something.
    Did I understand you right there? Compare the price of 
natural gas at current market between here and Western Europe.
    Mr. Cavaney. It is a difference that over there, on the 
high end, you could say $4; here, I think it is $11 and a 
little bit of change.
    Senator Inhofe. Yes.
    Mr. Cavaney. You can't take a raw material and have to pay 
two or three times more than your competition does in 
businesses that are essentially commodity and expect to stay in 
business, and that is the challenge.
    Senator Inhofe. Sure. That is really important for us to 
know, and not many people are aware of that. That gets to you, 
Mr. McDougall, because you could be part of that solution.
    During the time, and I know you were asked a question by 
Senator Chafee on lifting a barrel of oil or producing gas, and 
how expensive it is, and how much more difficult it is for the 
smaller companies to be able to afford that, where your break-
even margin is. But it is very significant.
    I have heard that if we had all of the wells that were 
plugged in the last 10 years flowing today, it would equate to 
more than we are currently importing from Saudi Arabia. Now I 
am talking about crude oil, but the same thing applies. Draw 
that distinction that I asked you to draw, that Mr. Cavaney was 
referring to, between the majors and the independents.
    Mr. McDougall. Thank you, Senator. First, I would like to 
clarify a point. The $2 gas price that they find in other 
nations and the price that is perceived in this Country is 
$11.98 which NYMX Net printed today or yesterday. Over the past 
weekend, I received around $5.10 in MCF for gas. The next day, 
when I picked up the telephone, they paid me $7.25 for gas. 
Even at those numbers, I have a basis of almost $5 under the 
NYMX.
    So I would like everyone to understand that just because 
those numbers are printed on the NYMX board, we do not receive 
those numbers. The October contract went off $3 under the NYMX 
print at close there. So when you look at some of these 
percentages, some of those percentages are 40 and 50 percent 
less than what the public perceives that we are receiving for 
gas. So what producers receive and what is speculated on the 
NYMX are different. I wanted to make that point.
    As to the contrast between the majors and the independents, 
the No. 1 contrast I would start out with is that as 
independents, we spend our own money. We drill 90 percent of 
the current wells in the Country. We are literally the foot 
soldiers of production growth in this Nation. As we go forward, 
all we do is produce. We employ Americans. We buy American 
products. We pay American taxes. The majority, and for our case 
maybe up to 100 percent in my case, is all done domestically.
    As far as majors go, they have shareholders. They have 
refineries. They refine gasoline; they refine heating oil; and 
they retail gas at the pump to you. We do not do that. I can 
only say from what I have read, but my perception is that the 
majority of majors' capital is spent outside the Country. That 
would be my summary.
    Senator Inhofe. All right, well, thank you, Mr. McDougall. 
Do you have anything else?
    Let me just go ahead. The remaining three of you who didn't 
get quite as long a shot on that last question, if you have 
anything that you are just dying to share with this committee 
before we draw it to a close. We will start with you, Mr. 
Goodstein, and then work down to Mr. Honnef and Mr. Holmes.
    Mr. Goodstein. I actually want to buttress the very point 
that you were making and that Mr. Cavaney was making because 
Air Products is also in the chemical business. We probably have 
about a third of our revenues on the chemical side. 
Notwithstanding the variability in the price of natural gas, it 
is brutal for those of us in the chemical industry to have to 
deal with these prices. Forget the fact that natural gas is a 
raw material for hydrogen. It is a raw material for the 
chemicals that we manufacture.
    So even putting that aside, even from the standpoint of Air 
Products as an industrial gas company, again, our companies 
that we list as our customers are Procter and Gamble, and 
General Motors, and companies that manufacture glass, and 
steel, and so forth. If natural gas prices remain anywhere 
close to where they are now, there is going to be this de-
industrialization of the United States economy.
    It sounds draconian, but I think it is almost kind of hard 
to rebut. That means our customers are going to go away, 
putting aside the fact that we make chemicals and need natural 
gas as a raw material, even from the standpoint of being a 
natural gas supplier.
    I realize there is a lot behind this whole natural gas 
issue in terms of what Congress can and can't do about it, not 
all of which is easy, but I can't overstate the fact that it is 
a huge, huge problem.
    Senator Inhofe. You want to put into that equation also the 
plight of the farmers because I had occasion last Saturday to 
address the Farm Bureau in Oklahoma. The price of fertilizer 
and the relationship between natural gas is huge. It is a 
killer for them.
    Mr. Honnef.
    Mr. Honnef. Yes, I just would like to reiterate my 
appreciation for your support for the Renewable Fuel Standard 
and the Energy bill. I know Congress took a lot of heat after 
the Energy bill was passed that it was meaningless and didn't 
do much. I am here to tell you that it is making a difference, 
and it is making a difference in the renewable energy industry. 
Your support and leadership for the Renewable Fuel Standard and 
the Energy bill is much appreciated.
    Senator Inhofe. Thank you.
    Mr. Holmes, any last comment?
    Mr. Holmes. Senator, thank you very much. I have been in 
the energy industry for 36 years and seen the very good times 
and the very bad times. There is a feeling that I have that 
this Congress and the people here in Washington are recognizing 
that something needs to be done and moving in that direction. 
So I am very encouraged about that.
    The one thing I would say is there is no silver bullet; we 
need to do it all. I am not here saying that our solution is 
the only solution. I think that this Nation is so great, and we 
have so many resources, and there is so much capital out there 
available to do these projects, that with the leadership that 
you all are providing, I am very confident that we are going to 
do a very good job of that.
    Thank you.
    Senator Inhofe. I think that is an excellent statement to 
make, and we have often said we need it all, too. I mean when 
we look at energy, and don't leave out nuclear, we need it all. 
I appreciate that very much.
    Well, we thank you so much, all of you, for taking your 
time, for coming the distances that you have to testify before 
us today. We appreciate you very much, and it has been very 
helpful.
    We are adjourned.
    [Whereupon, at 11:05 a.m., the committee was adjourned.]

    Prepared Statement of Red Cavaney, President and CEO, American 
                          Petroleum Institute

    I am Red Cavaney, President and CEO of the American Petroleum 
Institute (API) the national trade association of the United States oil 
and natural gas industry, representing all sectors of the industry, 
including companies that make, transport, and market gasoline.
    API very much appreciates this opportunity to discuss the future of 
transportation fuels. Our industry has met the transportation needs of 
Americans for more than a century, and we will continue to rely on 
state-of-the-art technology to do so in the decades to come.
    Looking ahead, we believe that advances in technology, consumer 
preference, and the workings of the competitive market will determine 
the fuels of the future. We need to rely on these forces to shape our 
energy future and not attempt to impose fuels on the marketplace. Past 
efforts by government to interfere with the marketplace have only 
complicated and delayed solutions to energy problems, particularly in 
times of tight supplies and constrained operations.
    We should also recognize that petroleum-based fuels are likely to 
continue to be the dominant transportation fuels well into this 
century. It is critically important that government not attempt to 
force a transition away from these fuels until affordable, reliable 
substitutes are available in ample supply. At present, such a 
transition would involve extremely high costs and a massive commitment 
of resources--with no assurance of success in meeting the broad-based 
and growing energy needs of United States consumers.

                    HYDROCARBON FUELS AND TECHNOLOGY

    It may come as a surprise to some, but gasoline, diesel fuel, and 
other petroleum products have provided power for well over a century. 
Why have these hundred-year-old fuels endured for so long?
    There are a few basic reasons. First, hydrocarbons have been the 
choice of consumers worldwide, because they contain more than twice the 
energy per gallon as many other energy sources. Thanks to advances in 
technology and market forces, our hydrocarbon-based economy is getting 
more and more energy efficient. In 1970, the United States used about 
1.4 barrels of oil for each thousand dollars of real GDP. By 2000, that 
had fallen almost in half to about seven-tenths of a barrel of oil for 
each thousand dollars of GDP. By 2025, the U.S. Energy Information 
Administration projects our nation will consume only about one-half a 
barrel of oil for each thousand dollars of GDP.
    An additional reason why hydrocarbon fuels have endured so long is 
that technology has reduced dramatically the environmental impact of 
their use, enabling the production of cleaner, more efficient and 
environmentally responsible fuels. Seventy million more drivers--70 
percent more--are on the road today in the United States than there 
were 30 years ago, driving 143 percent more miles. However, despite 
this enormous increase in drivers and miles, vehicle emissions are down 
41 percent.
    Gasoline improvements have helped bring about this sharp decline in 
auto emissions. A major contributor was the phase-out of leaded 
gasoline, completed in the 1980s, which cut lead emissions by 98 
percent. Further, the introduction of reformulated gasoline has led to 
significant reductions in ozone precursors and toxics emissions.
    In addition, the average sulfur content in gasoline has been 
reduced by more than 90 percent to less than 30 parts per million. A 
new car today running on the new low-sulfur gasoline and equipped with 
the most advanced emissions reduction technology has 97 percent less 
emissions than had a new vehicle in 1970. It takes 33 vehicles running 
on low-sulfur gasoline today to equal the pollution emissions of just a 
single 1970 vehicle.
    API and the industry worked with biofuels manufacturers during this 
year's debate in Congress on the energy bill recently signed by the 
President. We recognized and agreed to a significant role for biofuels 
in the transportation fuels market. While there was debate about the 
extent of the role of biofuels, such as ethanol, at the end of the day, 
we agreed to support a significant role for these fuels. We assume that 
continued advances in technology and growing consumer acceptance will 
reduce the costs of producing biofuels, make them more competitive with 
conventional fuels, and reduce the need for Government subsidies.
    United States refiners are working hard to keep up with the 
steadily growing fuel needs of United States consumers. Technological 
advancements have helped refineries produce more from existing 
facilities than they did in the past. Even though a new United States 
refinery has not been built from the ground up in 30 years, existing 
refineries are continually being upgraded and reworked to improve 
efficiency and output. United States refinery capacity has expanded 
from 14.7 million barrels per day in 1994 to 17.1 million barrels a day 
today, or 2.4 million barrels a day. This expansion is the equivalent 
of about 12 new 200,000 barrels a day capacity refineries. Based on 
publicly available data on announced refinery capacity expansion plans, 
at least 1 million barrels per day of additional refinery capacity 
projects are either planned or under strong consideration for the 4 
years 2005 to 2009.

                           LESSONS OF HISTORY

    If history has taught us anything, it is that markets work, and 
free markets--including the free flow of oil, products and technology 
with legal protections--work best. When Governments have allowed 
markets to function unhindered, the laws of supply and demand have 
ensured that supply meets demand at affordable prices over the longer 
term. Moreover, free markets spur competition--and competition advances 
technology to the benefit of consumers and society as a whole.
    However, when Government has interfered with markets, the result 
has been price volatility, supply shortages, and other disruptions. In 
the early 1970s, many United States energy policymakers were ``sure'' 
that the reserves of oil and natural gas would soon be exhausted, and 
government policy was explicitly aimed at ``guiding'' the market in a 
smooth transition away from these fuels to new, more sustainable 
alternatives. Price controls, allocation schemes, limitations on 
natural gas, massive subsidies to synthetic fuels, and other measures 
were funded heavily and implemented.
    Unfortunately, the key premises on which these programs were based, 
namely that oil and natural gas were nearing exhaustion, and that 
Government ``guidance'' was desirable to safely transition to new 
energy sources, are now recognized as having been clearly wrong and to 
have resulted in enormously expensive mistakes. For example, Congress 
created the Synthetic Fuels Corporation in 1980, but, in 1986, it was 
terminated by legislation signed by President Reagan. In less than six 
years, billions of dollars had been spent, plants constructed, and, in 
some cases, fuel produced. But the effort was judged a failure due to 
noncompetitive economics, project inefficiencies, and delays.

                     UNDERSTANDING ENERGY REALITIES

    We need to understand the energy realities our world faces. Given 
the current and projected worldwide demand, we need all sources of 
energy. We do not have the luxury of limiting ourselves to a few 
sources to the exclusion of others. Nor can we afford to write off our 
leading source of energy before we have found cost-competitive and 
readily available alternatives.
    There is a misperception by some about the time and costs involved 
in any transition to the next generation of fuels. Consider what would 
be involved in replacing the dominant role of oil with a substitute 
like hydrogen or solar power. Most experts agree that such a transition 
will require dramatic advances in technology and massive capital 
investments and take several decades to accomplish, if at all.
    Despite the energy realities we face, we still frequently hear that 
we are ``running out of oil'' and that we must find other sources for 
the transportation fuels of the future. Nothing could be more at odds 
with reality.
    The U.S. Energy Information Administration projects conventional 
oil alone is sufficient to supply increasing quantities to consumers 
each year through 2044. Conventional oil is recoverable oil using 
today's technology and does not include vast unconventional supplies, 
such as tar sands and oil shale. Moreover, energy analyst Daniel Yergin 
and his Cambridge Energy Research Associates recently completed a 
field-by-field global analysis that forecasts a 20 percent oil 
production capacity increase between 2004 and 2010, based on projects 
already planned.
    It is interesting to note that forecasts about ``running out of 
oil'' have been made many times over the years but have been 
consistently wrong.
    Back in 1874, the chief geologist of Pennsylvania predicted we 
would run out of oil in 4 years just using it for kerosene. Thirty 
years ago, groups, such as the Club of Rome, predicted an end of oil 
well before the current day. These forecasts were wrong because, nearly 
every year, industry has found more oil than used, resulting in 
reserves that have continued to grow.
    The key factor here is technology. Advances in exploration and 
production technology have enabled our industry to find and develop oil 
and gas reserves that would have been far beyond our reach several 
decades ago. We can now find more and produce more--and we can increase 
the yield of our existing reserves.
    These changes have been dramatic. Thirty years ago, ``deepwater'' 
operations meant those in 500 feet--today it can mean 10,000 feet. 3D 
seismic technology was still on the drawing board in the 1970s. Today, 
it is used widely in offshore operations, enabling drillers to better 
``see'' underground oil and natural gas deposits, greatly improving 
their ability to develop these deposits.
    Primarily due to these advances, the U.S. Geological Survey (USGS), 
in its 2000 World Petroleum Assessment, increased by 20 percent its 
estimate of undiscovered, technically recoverable oil. USGS estimates 
there are 649 billion barrels of undiscovered, technically recoverable 
oil outside the United States. But, importantly, USGS also estimates 
that there will be an additional 612 billion barrels from ``reserve 
growth''--nearly equaling the undiscovered resources.
    Looking into the distant future, the Age of Oil will end when 
technology finds a more cost-competitive, more desirable fuel. We can 
only speculate as to when and how that day will come about. For 
example, there is an even bigger hydrocarbon resource that can be 
developed to provide nearly endless amounts of energy--methane 
hydrates--methane frozen in ice crystals. The deposits of methane 
hydrates are so vast that when we develop the technology to bring them 
to market, we will have clean-burning energy for over a thousand years. 
It is just one of the exciting scenarios we may see in the far-off 
future. But, we won't be getting there anytime soon, and, until we do, 
oil and natural gas will likely remain our leading energy sources.
    The United States and the world cannot afford to leave the Age of 
Oil before realistic alternatives are fully in place. It is important 
to remember that man left the Stone Age not because he ran out of 
stones. We will not leave the Age of Oil because we ran out of oil. 
Yes, someday oil will be replaced, but clearly not until alternatives 
are found, alternatives that are proven more reliable, more versatile, 
and more cost-competitive than oil. We must rely on the energy 
marketplace to determine what the most efficient alternatives will be, 
and technology will be a key determinant in that regard.

                   FUELING AUTOMOBILES OF THE FUTURE

    We expect that the dominant transportation fuels will remain 
gasoline and diesel for at least two or three decades--the minimum 
amount of time required to fully retire any existing and still growing 
fleet of automobiles and trucks powered by these fuels and to deploy 
any replacement fuel source throughout the United States. We cannot 
afford to prematurely retire these century-old champions, without full 
and complete assurances that worthy successors are in place.
    In considering our future energy needs, we need to understand that 
gasoline-powered automobiles have been the dominant mode of transport 
for the past century and the overwhelming preference of hundreds of 
millions of people throughout the world. Regardless of fuel, the 
automobile--likely to be configured far differently from today--will 
remain the consumer's choice for personal transport for decades to 
come. The freedom of mobility and the independence it affords consumers 
is highly valued.
    Rather than being phased out, gasoline and diesel are likely to be 
the leading fuels well into the future thanks to such advances in 
technology as advanced internal combustion engines (ICEs) and rapidly 
evolving ``hybrid'' vehicles. Those who write off gasoline and diesel 
fuels fail to recognize how advanced technology is providing new and 
more efficient ways of using these hundred-year-old products.
    For example, significant improvements in internal combustion engine 
technology have been made, and advancements will continue to provide 
higher mileage efficiency and lower emissions. Enhanced vehicle 
emission control technologies, made possible by the introduction of 
low-sulfur fuels, will be an important component of future conventional 
systems.
    Another advancing technology is the hybrid vehicle powered partly 
by gasoline and partly by electricity. Hybrids are already moving 
aggressively into the market; their rate of growth will depend in large 
part on their price and performance. Even though hybrids still face 
technological challenges, such as battery size and life, there is a 
high probability of hybrids being a significant, though possibly not 
dominant, part of the United States vehicle population in the not too 
distant future. Additionally, low-sulfur, modern day diesel engines, 
utilized in hybrid configurations, may hold even greater promise.
    Hybrids already provide significant reductions in energy use and 
greenhouse gas emissions. Commercially available, they use the existing 
fuel infrastructure. Depending upon the hybrid technology and consumer 
driving patterns, efficiencies are up to about 1.5 times that of 
today's conventional internal combustion engine vehicles. From the 
standpoint of total useful lifecycle, hybrids are currently the most 
efficient and among the cleanest commercially available technologies. 
Moreover, additional cost reductions should make hybrids increasingly 
competitive.
    In addition to hybrids and advanced ICEs, oil companies--working 
alone or with automakers--have invested millions of dollars researching 
new fuel cell technologies. Some energy companies have also partnered 
with the Federal Government through the Department of Energy's Freedom 
CAR & Fuel Partnership, a public/private effort to examine the pre-
competitive research required to develop technologies for a full range 
of affordable vehicles and the fueling infrastructure to support them. 
These technologies hold the potential for up to double the fuel 
efficiency of current gasoline-powered autos. Fuel cell vehicles have 
essentially zero tailpipe emissions. However, maintaining a national 
fleet of such vehicles would face significant technical, economic, 
primary energy source availability, and infrastructure challenges.
    Present fuel cell costs are at least 10 times greater than for 
internal combustion engines, based on current fuel cell technology 
being produced on a large, commercial scale. Long-term fuel cell 
durability must be improved and demonstrated. Safe, efficient, and 
cost-effective hydrogen storage solutions are needed to make possible 
acceptable driving ranges. The current delivered cost of hydrogen fuel 
to transportation markets is substantially greater than the energy 
provided by units of gasoline or diesel. Making hydrogen widely 
available will require extremely large infrastructure investments. Even 
hydrogen made from gasoline using an on-board reformer, which would 
take advantage of the existing refueling infrastructure, faces many 
challenges. Nonetheless, all options should be thoroughly evaluated, 
and it is premature to exclude any option at this point.
    Our industry takes a balanced view of hydrogen. Like electricity, 
hydrogen is an energy carrier, not an energy source. To succeed in the 
market, it must be produced in large volumes at reasonable cost. But, 
without major breakthroughs, most hydrogen must come from natural gas, 
which--from the energy security standpoint--is in limited domestic 
supply. Present circumstances notwithstanding, to provide large amounts 
of hydrogen, United States producers will need to have access to the 
potentially large natural gas reserves on non-park, government lands in 
Alaska and the lower-48 States.
    We believe consumer preference should and will play the key role in 
the choice of these new competing vehicle technologies. That preference 
will be based, in large part, on fuel supply availability, cost 
affordability, consumer acceptance and environmental compatibility.
    We strongly believe that the private sector should continue to play 
a major role in applied research and that both the government and the 
private sector should be involved in basic theoretical research. The 
automobile and oil industries have made tremendous progress over the 
years, introducing a range of new products and technologies to improve 
emissions, fuel economy, and performance. We fully expect this trend to 
continue, both with respect to improvements to today's technologies and 
to the introduction of advanced vehicle technologies.
    Moreover, whatever role Government plays on advanced vehicle and 
fuel technologies, including fuel cell development, it should be a 
broad one. Government should not pick winners and losers. It should not 
focus prematurely on just one approach which may not prove effective, 
while discouraging others that may ultimately have more potential in 
the long-term. While technological change can be encouraged by both 
public and private industry policies, it must not be forced by 
Government mandates. We can learn from the experience in California 
several years ago where electric vehicles were mandated by the State 
Government. They were not accepted by the driving public for a variety 
of reasons and, ultimately, the mandate failed and was withdrawn.
    Consumers' acceptance is the key to the success of any vehicular 
system, and industry competition for their dollars is the fastest means 
of bringing forward the next generation of transportation options. 
Societal goals are best attained by setting performance standards. 
Government mandates, subsidies, preferential taxation, and the 
premature official selection of one technology over another cannot 
produce advances as swiftly, or as effectively, as market competition.

                               CONCLUSION

    The intensive use of the latest, most advanced technology to 
provide transportation fuels has made the century-old oil and natural 
gas industry an innovative, visionary, and highly effective new 
industry. Our industry has been producing, and intends to continue 
producing, both the fuels and feedstocks that make life simpler and 
safer, more comfortable and more convenient for society.
    The reality is that gasoline, the time-tested champion fuel of 
motor vehicle transportation, is likely to remain the dominant fuel for 
many years to come. Its composition may change and its uses may be 
shaped by evolving technology, but gasoline, in fact, will be the fuel 
of the future--at least for the near-term. In view of its history of 
reliability and environmental progress, gasoline's continued dominant 
role should be a reassuring prospect for United States consumers.
                                 ______
                                 
  Responses by Red Cavaney to Additional Questions from Senator Obama

    Question 1. Are you aware of any branded petroleum companies that 
have internal business policies or practices that may discourage the 
construction, installation or operation of E85 fueling pumps?
    Response. API is not aware of individual member company policies or 
practices regarding E85. However, API members have in the past marketed 
alternative fuels and many are currently working to determine how to 
bring hydrogen, for example, to the retail gasoline station.

    Question 2. Are there branded petroleum companies that prohibit the 
sale of E85 in certain ways such as:

    -prohibiting the dispensing of E85 from a branded pump
    -prohibiting the location of an E85 pump under a branded canopy
    -discouraging the location of an E85 pump within the refueling 
area?

    Response. API is not aware of individual member company policies or 
practices regarding E85.

    Question 3. Would API be willing to issue a directive to its 
members that they should not discourage the use of E85, with 
recommendations or steps outlining best practices to accomplish greater 
access to E85?
    Response. The decision on whether to use E85 would need to be made 
on an individual company basis. Therefore, it would not be appropriate 
for API to issue any directive on the marketing of E85.
    In addition to API's answers above, we thought it may be helpful to 
provide the following information regarding E85:
    E85 fuel is a blend of 85 percent ethanol (alcohol) and 15 percent 
gasoline. Because it is 85 percent alcohol, it has significantly 
different chemical properties than both straight petroleum gasoline and 
E10 gasoline (a blend of 10 percent ethanol and 90 percent gasoline). 
The chemical properties of E85 make it incompatible with most existing 
gasoline station petroleum equipment. This equipment can be modified or 
replaced to allow the storage and dispensing of E85. However, it would 
require significant changes to the existing gasoline station 
infrastructure.
                                 ______
                                 
    Prepared Statement of Jeffrey McDougall, JMA Energy Company, LLC

    The following testimony is submitted in advance of the November 16, 
2005 hearing before the U.S. Senate Environment and Public Works 
Committee, which will focus on the future of transportation fuels.
    My name is Jeffrey McDougall, and I am the owner of JMA Energy 
Company located in Oklahoma City. I will offer my remarks from the 
perspective of an independent oil and natural gas explorer and on 
behalf of the Oklahoma Independent Petroleum Association, which is an 
association of more than 1,600 independent oil and natural gas 
producers. Although our membership includes some publicly traded 
companies, the majority of our members are small, family owned 
businesses. Our members explore for and produce oil and natural gas. We 
do not refine oil into gasoline or heating fuels and we do not market 
gasoline.
    I have built my business from the ground up by drilling for oil and 
natural gas. After being laid off in 1986 when energy prices plummeted, 
I started my own business by drilling shallow wells. I currently have 
30 employees and most would characterize our company as a small 
business. In the last four years, on a cumulative basis, we have 
invested more than 113% of our cash flow into the drilling of over 350 
new wells. Putting this in perspective, we have found enough energy 
equivalents to supply this nation's natural gas needs for one day.

                     PROFILE OF OKLAHOMA PRODUCTION

    Oklahoma has a rich history in energy production. During World War 
I, we were the largest oil producing region in the world, and were 
responsible for supplying critical energy resources needed for our war 
effort. Although oil production is still important, it has declined 
through the years. Oklahoma's exploration focus has turned to natural 
gas, making it the number two state in the nation in natural gas 
production. Independent producers are responsible for more than 85 
percent of the oil and natural gas production in the state. Nearly half 
of this production is from marginal wells, which account for about 42 
million barrels of oil per year, or an average of 2.35 barrels per day 
from each of the 48,000 marginal wells. The overwhelming majority of 
this production is owned by small family businesses.

             INDEPENDENT PRODUCERS RE-INVEST THEIR EARNINGS

    I want to emphasize that independent oil and natural gas producers 
re-invest their profits back into the ground here in the United States 
to find badly needed domestic reserves of oil and natural gas. In fact, 
a recent study shows that independent oil and natural gas producers re-
invest more than 100 percent of their cash flow back into domestic oil 
and natural gas development. The result is that independent oil and 
natural gas producers drill 90 percent of the domestic oil and gas 
wells, produce nearly 70 percent of domestic oil and 82 percent of 
domestic natural gas.
    Independent producers are now, more than ever, aggressively 
searching for more oil and natural gas reserves. New technology is 
helping independents find and recover more domestic oil and natural 
gas. Small oil operators are using new technology to enhance mature oil 
fields, unconventional plays are receiving new attention and companies 
like mine are drilling to depths in excess of 20,000 feet at costs 
approaching $8 million per well. We are doing what we can to make our 
country more energy secure and less reliant on foreign sources of 
energy.

      INDEPENDENT PRODUCER ENVIRONMENTAL/PHILANTHROPIC ACTIVITIES

    While our greatest contribution is finding more oil and natural 
gas, we should emphasize that independent producers have a history of 
giving back in other ways as well.
    Almost every foundation, endowment, museum and numerous community 
projects in our State's history have been created primarily through the 
generosity of the state's independent oil and natural gas industry.
    Also, we are environmental stewards. We comply with a myriad of 
local, state and federal environmental requirements, and in Oklahoma, 
oil and gas producers instigated the creation of the ``Oklahoma Energy 
Resources Board'' 16 years ago. Producers have voluntarily contributed 
approximately $30 million to clean up more than 6,300 abandoned well 
sites and an additional $30 million for science-based education 
programs in schools.
    Currently the Oklahoma Energy Resources Board and the Oklahoma 
Independent Petroleum Association are addressing the impact of high 
energy prices on our state's low income citizens, encouraging the state 
to fully fund the LIHEAP program with additional dollars collected from 
the state's 7 percent gross production tax. We are producing 
conservation messages to inform the public of higher heating costs this 
winter and advising them of ways to save up to 35 percent on their 
heating bills.

                               CONCLUSION

    Independent producers are re-investing profits to help America 
become less dependent on foreign supplies. However, we must face the 
fact that we may never achieve energy independence. We must learn to do 
a better job of conserving energy. We must also look to alternative 
fuels to supply a larger part of our nation's energy needs. At the same 
time, we need policies that encourage, not discourage, the expansion of 
energy supplies to further harvest the resources we have within our own 
borders.
                                 ______
                                 
Prepared Statement of Richard Goodstein, Washington Representative, Air 
                      Products and Chemicals, Inc.

                              INTRODUCTION

    Mr. Chairman, Senator Jeffords, thank you very much for the 
opportunity to testify on the subject of hydrogen and its role as an 
important transportation fuel, not just of the future, but indeed of 
the present as well. I am the Washington Representative for Air 
Products and Chemicals, Inc., which is an $8 billion per year company 
in the industrial gases and chemicals business. Air Products has 
operations throughout the United States and abroad in thirty countries. 
Air Products has previously testified before Congress on the subject of 
hydrogen and is regularly a key participant in domestic and 
international conferences on hydrogen and the hydrogen economy.

                                SUMMARY

    My testimony will make the following points: (1) Hydrogen is not 
some futuristic concept. It is widely and safely used throughout 
industry today. (2) The public policy reasons for moving toward a 
hydrogen economy--energy security and environmental protection--are 
extremely compelling. (3) Technology for dispensing hydrogen into 
vehicles already exists and is being deployed, albeit slowly, today. 
(4) Hydrogen, mainly generated by reforming natural gas today, can also 
be derived from oil, coal, biomass, waste heat from nuclear reactors, 
and renewable energy such as wind or solar power, so it is compatible 
with all alternative fuels. (5) The federal government must play an 
important role in the development of a hydrogen economy.

                 AIR PRODUCTS: WORLD LEADER IN HYDROGEN

    Air Products is the world leader in third-party hydrogen production 
and distribution of hydrogen, with approximately a 50 percent market 
share globally. Air Products safely operates sixty hydrogen production 
and processing facilities throughout the United States and the world, 
including Asia and Europe. Air Products is recognized as the industry 
leader in safety. The company maintains over 350 miles of hydrogen 
pipelines worldwide, and has been operating pipeline systems for over 
35 years without a single recordable incident. Air Products alone has 
supplied liquid hydrogen to NASA since its earliest launches.
    Air Products supplies hydrogen through a variety of supply modes. 
The company operates hydrogen pipelines domestically in Texas, 
Louisiana, and southern California; delivers hydrogen--both liquid and 
gaseous--in tanker trucks throughout the country; and produces hydrogen 
on-site, at oil refineries and steel and glass plants. In short, Air 
Products is a fully-integrated supplier of hydrogen and also has 
unparalleled know-how in handling hydrogen safely.
    Air Products has formed collaborations and alliances with the full 
range of automotive companies worldwide that are committed to 
developing hydrogen-fueled vehicles, whether fuel cell or internal 
combustion vehicles. Air Products also works closely with companies 
that manufacture fuel cells, and with energy companies looking to 
dispense hydrogen fuel at their service stations. The company works 
closely with the Department of Energy in its research and development 
of the hydrogen economy, with many state and local governments, and 
with a range of universities that are moving the country more rapidly 
down the path toward a hydrogen economy.

                         WHY EMBRACE HYDROGEN?

    Those of us in the hydrogen world were very excited when President 
Bush heartily embraced the role of hydrogen in his State of the Union 
address in 2003. He vowed that the first car driven by a child born 
that year would be a hydrogen fuel cell vehicle. Such a strong 
endorsement of a hydrogen economy from the White House was very big 
news for Air Products, and for our ``partners'' who manufacture fuel 
cells and hydrogen fuel cell cars as well as many in the petroleum 
industry.
    The case for moving toward a hydrogen economy has been stated often 
in recent years, but it bears repeating. Nothing could be more 
important than energy security. To be free of the pricing power of the 
oil cartel would have tremendous value to the American economy. A 
hydrogen economy, especially once the hydrogen is totally renewable, 
will enable the United States to escape the stranglehold of the oil 
cartel.
    Along with energy independence will come the savings from no longer 
having to maintain a defense posture predicated on maintaining open sea 
lanes for the shipment of oil. The hemorrhaging trade deficit would 
also be addressed in large part by eventually ending our dependence on 
foreign oil.
    A hydrogen economy also provides a high degree of domestic security 
because it can be predicated on a system that delivers both electricity 
and hydrogen as fuel for vehicles. No one quite knows exactly how the 
hydrogen economy will develop, but there are likely to be several 
``right'' answers to hydrogen production and delivery, depending on 
regional dynamics. One can imagine a series of regional hydrogen-
generating facilities operating in hub-and-spoke networks. The natural 
gas lines that already exist in a city can be used to feed a hydrogen-
generating plant. This plant, in turn, could be the starting point for 
the distribution of hydrogen within a metropolitan area. Such a system 
could free the United States from the fears of disasters, natural 
(consider the havoc wrought by Hurricane Katrina on our Nation's energy 
supply) or man-made (such as a terrorist attack on the originating 
point of oil pipelines).
    Of course, the environmental benefits from a hydrogen economy are 
significant too. The only emission from a hydrogen fuel cell vehicle is 
water vapor. No carbon dioxide is generated in the production of 
renewable hydrogen, nor would there be particulates. A number of United 
States cities are currently experimenting with hydrogen fuel cell buses 
to help them address urban air quality degradation. While hydrogen 
today is generated mainly by reforming natural gas, the vision shared 
by hydrogen proponents is of a totally renewable fuel that would rely 
on renewable sources of energy to separate the hydrogen from the oxygen 
molecules in water and then use that hydrogen in a fuel cell or an 
internal combustion engine.

                        CURRENT ROLE OF HYDROGEN

    A review of hydrogen production will help the committee understand 
its promise. Thanks to the Clean Air Act's requirement for cleaner 
burning gasoline, hydrogen--which removes sulfur from petroleum 
distillates such as gasoline and diesel--is generated at or near oil 
refineries nationwide. (See attached photo of hydrogen generating 
plant.) Hydrogen is thus widely available in the United States today. 
(See attached map.)
    Hydrogen has many other industrial purposes. It is used in 
processes to make steel, glass, semiconductors, detergent, and an 
enormous variety of other products. For the most part, hydrogen is made 
by reforming natural gas. But a huge advantage of hydrogen is that it 
can be obtained from a wide variety of other energy sources, including 
oil, biomass, coal, and nuclear. As mentioned earlier, renewable 
sources such as solar and wind can generate the electricity to separate 
the hydrogen and oxygen atoms in water. Therefore, research and 
development into hydrogen should not be seen as taking away from 
alternative energy technologies, but instead as dovetailing perfectly 
with them. In a hydrogen economy, hydrogen will be derived from several 
major sources.
    Once generated, hydrogen can be distributed by pipeline, as a 
compressed gas in truck trailers, or as a cryogenic liquid in tanker 
trucks, as well as by ship and by rail.
    The hydrogen used in vehicles today typically is dispensed in a 
compressed gaseous form. One challenge for hydrogen is how to store 
enough hydrogen in a vehicle to provide the driving range that 
consumers demand. The Department of Energy and the private sector are 
working on this storage issue, and considerable strides have been made 
just within the past few years. Some auto companies have decided to 
utilize hydrogen in an internal combustion engine and store hydrogen 
onboard in cryogenic (super-cooled) form. Municipal buses are turning 
to a mixture of compressed natural gas and hydrogen as their fuel. 
Others use hydrogen in fuel cells. Air Products works closely with all 
end users.
    High-profile use of hydrogen and fuel cells is not new. NASA 
incorporated fuel cells into its early spacecraft, and liquid hydrogen, 
furnished by Air Products, has been used in space launches since the 
inception of the space program. While most of the current attention is 
on hydrogen to fuel vehicles, there is also a parallel effort to 
develop hydrogen fuel cells for everything from batteries for cell 
phones and laptops to backup power for hospitals and office buildings.

        NO CHICKEN-AND-EGG PROBLEM: HYDROGEN IS AVAILABLE TODAY

    In hydrogen circles it is often said that a chicken-and-egg problem 
exists: auto companies wonder whether they can assume the risk of 
putting large numbers of hydrogen-powered cars on the roads without an 
existing hydrogen infrastructure, whereas hydrogen generators question 
the wisdom of deploying a hydrogen infrastructure without enough 
hydrogen-powered vehicles to generate sufficient demand for hydrogen.
    Air Products believes this argument is a red herring. Because an 
extensive hydrogen-generating network exists throughout the country, 
hydrogen is very much available today--not in a dispensable form, 
perhaps, but it is certainly available to be tapped by the auto 
industry for many years to come as we make the transition into a fully 
deployed hydrogen economy.
    Moreover, Air Products has developed mobile hydrogen fueling 
stations devices that are approximately the size of one or two large U-
haul trailers that can hold enough hydrogen to fuel 15-50 cars per 
week. (See attached photos of mobile fuelers.) They are self-contained 
and require no utility hook-ups. Air Products currently deploys a 
number of these throughout the United States, but nothing precludes 
rural deployment. Therefore, if an auto company decides to experiment 
with hydrogen fuel cell cars in Oklahoma or Vermont, for example, 
rather than Florida or California, no technical reason prevents a 
mobile fueler from being deployed to service these autos. What's more, 
one of our mobile hydrogen fueling stations actually costs less than a 
hydrogen fuel cell car does today.
    Air Products also has developed a number of stationary hydrogen-
dispensing facilities that look much like a standard gasoline pump at 
the corner gas station today. (See attached photos of hydrogen fueling 
products.) Indeed, the hydrogen that is used at the Shell station on 
Benning Road in Washington, DC (where a number of General Motors 
hydrogen fuel cell cars are fuelled) is generated by Air Products in 
Delaware and trucked to Washington. The dispensing equipment at this 
station is a proprietary design developed by Air Products. I encourage 
everyone on the committee to visit that Benning Road station to see 
that hydrogen is here and now, not simply some futuristic fantasy.
    Air Products has deployed hydrogen fueling station equipment 
throughout the country. Seventeen of our fueling stations will have 
been deployed in California by the end of 2005, in part to meet 
Governor Schwarzenegger's call for a statewide ``hydrogen highway.'' We 
also have hydrogen generation and fueling equipment in Las Vegas, in 
three California municipalities, at the University of California at 
Irvine and at Davis, and at Penn State University, among other 
locations. Air Products' stationary hydrogen fueling dispensers are in 
place with each of the Big Three auto makers in Michigan, and 
internationally in Japan, Korea, Singapore, China, Taiwan Germany, and 
Italy. Beijing is trying to use the 2008 Olympics as an opportunity to 
showcase a move toward cleaner technologies and we should expect to see 
a variety of hydrogen fueling stations and hydrogen fuel cell cars 
flitting about Beijing during the Olympics.
    Of course, there are only about 100 hydrogen fuel cell cars 
currently deployed in the United States. It will be many, many years 
before hydrogen fuel cell cars number in the thousands, let alone in 
the millions. Given the enormous amount of hydrogen generated for 
industrial purposes today, it will be at least a decade in the United 
States before hydrogen-fuelled vehicles make a dent in the overall 
amount of hydrogen generated for industrial purposes.
    The price of hydrogen fuel has come down substantially in the past 
few years. Hydrogen generated off our pipeline in Los Angeles, for 
example, can be competitive with gasoline in Los Angeles on a per 
gallon equivalent. Hydrogen delivered over the road gets more expensive 
than gasoline today because of the specialized hauling equipment that 
is required. Novel methods of hydrogen delivery that would reduce the 
distribution cost are being examined by Air Products. Once economies of 
scale are reached, those costs will drop. Moreover, the most commonly 
used hydrogen fuel cell is more than twice as efficient as a gasoline 
internal combustion engine.

 LEGISLATIVE ACTIONS TO FACILITATE HYDROGEN GOVERNMENT'S ROLE IS VITAL

    Government has a special role in proceeding toward a hydrogen 
economy. The goals to be accomplished--energy security, a clean 
environment--are unlikely to be ones that will affect most consumer 
behavior. Individual consumers do not purchase our national defense. 
The nation as a whole does that through taxation. Similarly, we should 
not expect the private sector solely to assume the cost of developing 
technologies that benefit society at large rather than any individual 
consumer. While the free market will certainly play a role in 
responding to consumer choice, government action will be indispensable 
to accomplishing the very meritorious objectives of the hydrogen 
economy.

        THE CLEAN AIR ACT IS A PREDICATE TO THE HYDROGEN ECONOMY

    Oil refineries presently use large quantities of hydrogen to comply 
with the Clean Air Act. Some in the petroleum industry counsel relaxing 
certain provisions of the Clean Air Act for a variety of reasons. To 
the extent that this committee believes that movement in the direction 
of a hydrogen economy is a worthy goal for the United States, we 
strongly advise that the Clean Air Act requirement to remove sulfur 
from petroleum distillates not be weakened (nor is anyone seriously 
suggesting that is should be).
    Air Products, among others, has invested billions of dollars in 
building and maintaining hydrogen-generating facilities and the 
beginnings of a hydrogen pipeline infrastructure. This was largely in 
response to the requirement that oil refineries produce cleaner-burning 
fuels. Relaxing or negating these requirements would leave companies 
like Air Products with enormous stranded assets and would represent a 
huge setback regarding the deployment of a hydrogen fueling 
infrastructure in the United States.
    We hope the Air Products hydrogen investments, originally intended 
to help our refinery customers meet their Clean Air Act and clean fuel 
requirements, will pave the way for a robust domestic hydrogen 
infrastructure. Indeed, the areas in which Air Products has major 
hydrogen generating and pipeline facilities--southern California and a 
Houston to Lake Charles corridor--are seen by some as opening up the 
possibility of a ``Silicon Valley'' for hydrogen: not just the 
widespread introduction of hydrogen-fueled cars and buses, but 
factories, dwellings, and commercial establishments that could be 
powered by hydrogen fuel cells.

                    ESTABLISHING CODES AND STANDARDS

    Establishing codes and standards applicable to hydrogen storage, 
dispensing, and the operation of hydrogen-fueled vehicles is important 
to assure public confidence in this new technology. At present, local 
fire marshals--given very little guidance--are left to their own 
devices to establish setbacks or other requirements applicable to 
hydrogen fueling stations. Standardizing hydrogen dispensing 
equipment--to assure compatibility between the dispenser and the 
vehicle--is obviously essential, but not a forgone conclusion. 
Establishing requirements for pressurizing hydrogen, to assure 
uniformity, is vital. Given this committee's jurisdiction, to the 
extent that hydrogen-fueled cars and buses will be used at or near 
public buildings and grounds, the committee can have a major role in 
requiring the implementation of codes and standards that can be adopted 
throughout the country--indeed, throughout the world.

             GOVERNMENT PROCUREMENT CAN BE A MAJOR CATALYST

    Air Products, along with others in the hydrogen and fuel cell 
industries, encourages the federal government to be as aggressive as 
possible regarding procurement of hydrogen-fueled vehicles, including 
mass transit buses. There is particular value in having the government 
in this role. Until full-blown hydrogen fueling infrastructure exists, 
filling hydrogen-fueled vehicles will be easiest at centralized 
locations, where fleets are housed. Government fleets tend to fit this 
bill quite well. Whether the vehicles are buses that might run among 
Government buildings or serve a community, or cars used by Government 
employees during the day, we encourage the Federal Government to 
procure hydrogen-fueled vehicles wherever possible. To date, automobile 
companies have leased hydrogen fuel cell vehicles at costs comparable 
to other mid-range vehicle leases, so the high cost of hydrogen fuel 
cell vehicles need not necessarily be borne by the Federal Government.

                THE NEXT HIGHWAY BILL WILL BE IMPORTANT

    While we recognize that the ink on the Highway bill is barely dry, 
we encourage this committee to begin thinking of ways to pave the way 
for broader use of hydrogen-fueled vehicles in the next iteration of 
this legislation. Demonstration of hydrogen fuel cell vehicles in 
various contexts--high altitude versus low altitude, dry versus wet, 
hot versus cold climates, for example--is likely to still be necessary.
    By the time of the next Highway bill, a consensus on the best way 
to develop a hydrogen fueling infrastructure is still unlikely. 
Therefore, we recommend that the committee consider supporting various 
hydrogen production mechanisms for purposes of generating hydrogen as a 
fuel--hydrogen generators at individuals' homes or at places of work, 
large-scale hydrogen production facilities as the hub of a network of 
regional hydrogen pipelines, perhaps, or other methods for assessing 
the applicability of different hydrogen fuel production methods. 
Certainly the next highway bill will be a welcome opportunity to 
integrate hydrogen-powered buses into municipal transportation systems.

              TAX PREFERENCES INFLUENCE CONSUMER BEHAVIOR

    Legislation beyond the jurisdiction of this committee can certainly 
help as well. Tax preferences for the production of hydrogen used as a 
fuel will certainly encourage the establishment of a robust network of 
hydrogen fueling stations. Any reasonable tax preference that 
encourages consumer purchase of hydrogen-powered equipment--whether 
mobile or stationary--will provide an incentive for the full 
development of a hydrogen fueling infrastructure.
    The Department of Energy continues to perform essential research 
and development on reliable and long-lasting fuel cells, hydrogen 
storage, and other essential ingredients of a hydrogen economy. We 
encourage Congress to fund this effort as robustly as possible. We 
recognize that the federal budget has limits. We merely urge the 
Congress to recognize that the closer we get to a fully deployed 
hydrogen economy, the more rapidly we will reduce our enormous trade 
deficit, expenditures on foreign oil and on the defense posture needed 
to facilitate importing foreign oil, and the expensive health impacts 
of polluted urban air.

                               CONCLUSION

    On behalf of Air Products, I thank you for the opportunity to share 
with you this perspective on hydrogen, its current applications, and 
promise for the future. Hydrogen is not some pie-in-the-sky concept. It 
has been shown to work, yet needs the federal government's support to 
overcome the remaining technical hurdles and be widely integrated in 
society. We very much look forward to working with you, with the entire 
committee, and with staff and all stakeholders in achieving a reliable 
hydrogen economy as soon as possible.

[GRAPHIC] [TIFF OMITTED] T9524.001

[GRAPHIC] [TIFF OMITTED] T9524.002

[GRAPHIC] [TIFF OMITTED] T9524.003

[GRAPHIC] [TIFF OMITTED] T9524.004

[GRAPHIC] [TIFF OMITTED] T9524.005

[GRAPHIC] [TIFF OMITTED] T9524.006

[GRAPHIC] [TIFF OMITTED] T9524.007

[GRAPHIC] [TIFF OMITTED] T9524.008

[GRAPHIC] [TIFF OMITTED] T9524.009

[GRAPHIC] [TIFF OMITTED] T9524.010

[GRAPHIC] [TIFF OMITTED] T9524.011

[GRAPHIC] [TIFF OMITTED] T9524.012

[GRAPHIC] [TIFF OMITTED] T9524.013

[GRAPHIC] [TIFF OMITTED] T9524.014

[GRAPHIC] [TIFF OMITTED] T9524.015

[GRAPHIC] [TIFF OMITTED] T9524.016

[GRAPHIC] [TIFF OMITTED] T9524.017

[GRAPHIC] [TIFF OMITTED] T9524.018

[GRAPHIC] [TIFF OMITTED] T9524.019

[GRAPHIC] [TIFF OMITTED] T9524.020

[GRAPHIC] [TIFF OMITTED] T9524.021

[GRAPHIC] [TIFF OMITTED] T9524.022

[GRAPHIC] [TIFF OMITTED] T9524.023

[GRAPHIC] [TIFF OMITTED] T9524.024

    Prepared Statement of Bill Honnef, Vice President of Sales and 
                 Marketing, VeraSun Energy Corporation

    Good morning, Mr. Chairman and members of the committee. My name is 
Bill Honnef, and I am Vice President, Sales and Marketing of VeraSun 
Energy Corporation, a renewable energy company headquartered in 
Brookings, SD The company is the Nation's second largest ethanol 
producer. We operate a 120-million gallon per year production facility 
in Aurora, SD and a 110-million gallon per year production facility in 
Fort Dodge, IA.
    VeraSun Energy Corporation is a member of the Renewable Fuels 
Association, the national trade association for the domestic ethanol 
industry. The RFA represents the 92 ethanol producing companies located 
in 20 States across the United States.
    I greatly appreciate the opportunity to testify today as the 
committee examines transportation fuels of the future. With crude oil 
costs at record highs, declining gasoline inventories and natural gas 
shortages across the country, it is clear the nation needs to do more 
to promote the increased production and use of additional energy 
sources other than petroleum, including domestic renewable sources like 
ethanol that can help build a sustainable energy future.
    Mr. Chairman, I can tell you the United States ethanol industry is 
already doing its part. The domestic ethanol industry has doubled in 
size in just the last four years. Today, there are 92 ethanol 
production facilities with the capacity to process more than 1.5 
billion bushels of grain into four billion gallons of fuel ethanol 
annually. Ethanol today is the third largest consumer of corn, behind 
only feed and export uses, providing the single most important value-
added market for farmers today.
    Ethanol is also becoming a ubiquitous component of the United 
States motor fuels market. Today, ethanol is blended into more than a 
third of the Nation's gasoline. This level of ethanol production and 
use is providing significant economic and energy benefits for the 
Nation.

     In 2004, the ethanol industry added more than $25 billion 
to the Nation's gross economic output through annual operating spending 
and capital spending for new plants.
     The industry is now responsible for over 147,000 jobs 
across all sectors of the economy.
     Ethanol producers spent more than $3.1 billion on grain, 
using 13 percent of the corn and sorghum crops and becoming the third 
largest consumer of each, behind only feed and export. In fact, at a 
time when export markets are stagnating or declining, ethanol is 
providing farmers a critically important value added market.
     Another $4.4 billion went directly to consumers this past 
year through increased economic activity and new jobs--money that will 
go to pay for school shoes and college tuition and putting food on the 
table.
     And Federal and State Governments collected almost two-
and-a-half billion dollars in needed tax revenues from the ethanol 
industry.

    Domestic ethanol production displaced approximately 400,000 barrels 
of oil a day in 2004, about the volume of oil the United States 
imported from Iraq prior to the war. And the environmental benefits are 
significant also. According to Argonne National Laboratory, the use of 
ethanol in 2004 reduced greenhouse gas emissions by 7 million tons, or 
the equivalent of taking more than a million cars off the roads.

                            INDUSTRY GROWTH

    Mr. Chairman, the tremendous growth in ethanol production 
continues. As a direct result of the Energy Policy Act of 2005, which 
includes an historic renewable fuels standard (RFS), ethanol producers 
are expanding at an unprecedented rate. There are 24 plants and seven 
expansions under construction today that when complete will add nearly 
two billion gallons of additional production capacity. This represents 
nearly a 50 percent growth in ethanol production capacity. And, there 
are literally scores of additional projects seeking financing or in 
various other stages of development.
    Mr. Chairman, last week you heard from the oil industry about the 
challenges associated with expanding domestic oil refining capacity. 
Those challenges are real. But it is important to realize that new 
ethanol refineries are coming online throughout the country at a pace 
of almost one per month. We are expanding domestic fuel supplies. 
Unlike the issues that face oil refinery sighting, communities are 
encouraging and sometimes competing to have new refineries to be built 
in their back yard. This is due to the simple fact that these 
communities benefit from the additional demand for the feed source for 
ethanol production, corn. Processing corn into fuel creates local 
demand for corn, increasing the price of corn in the local market, 
which creates local economic development. It is a clear win-win.
    As the industry grows, it is changing. The industry is no longer a 
Midwest phenomenon. Ethanol plants are now under construction from 
California to Texas to New York. There is even a great deal of interest 
in producing ethanol in Oklahoma! The industry is also no longer 
dominated by a few large agribusinesses. Indeed, taken as a whole, the 
single largest ethanol producer today is the farmer-owned ethanol 
plant, as farmers have recognized the benefits of being energy 
producers and not just energy consumers.
    Importantly, today's ethanol industry is becoming more and more 
energy efficient with new production facilities using the latest and 
most efficient technologies. According to the most recent analysis by 
the U.S. Department of Agriculture, ethanol now yields 167 percent of 
the fossil energy used to grow, harvest, transport and refine grain 
into ethanol. That represents a 24 percent improvement in efficiency 
since USDA completed a similar analysis just four years ago.
    There will be other changes as well, including perhaps new 
feedstocks. Indeed, I would like to take this opportunity to thank you, 
Chairman Inhofe, for your leadership in supporting efforts to speed the 
commercialization of technologies that will allow us to expand the 
feedstocks from which we can produce ethanol. The inclusion of the 
Cellulosic Biomass Ethanol and Municipal Solid Waste Loan Guarantee 
Program in your committee's fuels bill and in the final Energy bill 
will help our industry with the commercial demonstration of these 
promising technologies.
    Commercialization of the technologies needed to produce ethanol 
from agricultural residues (wheat straw, corn stover, etc.) could add 
significantly to the amount of fuel currently produced from domestic 
resources. As they develop, cellulose conversion technologies will 
allow more energy to be extracted from each acre of energy crop. These 
new biorefineries would also bring hundreds of permanent, high-paying 
jobs to rural America. We hope you will encourage the Department of 
Energy to commit funds to using the authority they were given by your 
legislation.

                  ENERGY BILL/RENEWABLE FUELS STANDARD

    As noted, virtually all of this growth and the positive changes 
occurring in the industry are as a result of the energy bill and the 
RFS passed earlier this year. I would like to commend Congress for its 
foresight in creating this important program. If the terrible events 
along the Gulf Coast taught us anything this past summer, it is that we 
must diversify and expand our domestic energy resources. Congress had 
done that with the RFS, but Congress can and should do more. I must 
specifically praise the leadership of Senator John Thune, who has seen 
first hand the efficacy of expanded ethanol production as South 
Dakota's economy has been transformed over the past several years by 
the value-added benefits of ethanol.
    The RFS included in the Energy Policy Act of 2005 boosts the demand 
for renewable fuels such as ethanol and biodiesel to 7.5 billion 
gallons by 2012. It provides certainty to farmers and ethanol producers 
that markets will exist for their product while providing refiners with 
the flexibility they have sought in meeting Clean Air Act requirements 
by eliminating the federal RFG oxygen standard. The law maintains the 
existing clean air benefits of Federal reformulated gasoline (RFG) with 
strong anti-backsliding provisions.
    Importantly, the RFS does not require that any renewable fuels be 
used in any particular area, allowing refiners to use these fuels in 
those areas where it is most cost-effective. Moreover, there are 
several provisions allowing the requirement to be adjusted or 
eliminated if supply problems occur. Small refiners are exempted from 
the RFS for several years, allowing those companies an easier 
transition to the program.
    The ethanol industry is well prepared and on track to produce more 
than the 4 billion gallons of renewable fuels required in 2006 under 
the law. The Renewable Fuels Association is currently working with EPA 
and other stakeholders to expedite an interim rulemaking that will 
allow the RFS to be implemented on schedule without unnecessarily 
complicating the marketplace for refiners. The industry intends to work 
to assure the RFS credit trading program is implemented as intended, 
providing maximum flexibility to refiners.
                                  e85
    E85 is a blend of 85 percent ethanol and 15 percent gasoline. It is 
designed for use in flexible fuel vehicles (FFVs). With approximately 
five million flexible fuel vehicles on the road today, E85 has great 
potential as an alternative fuel. But, because flexible fuel vehicles 
can run on both gasoline and E85, most owners are not aware they are 
driving an FFV and simply use gasoline. Our research indicates that 
nearly 70 percent of flexible fuel vehicle owners are unaware they are 
driving one.
    Based on these research findings, we launched VeraSun E85, or VE85 
for short, the Nation's first branded E85 early this year. The program 
is founded on three basic principles:

     E85 must be widely available and convenient to the 
consumer;
     E85 must be priced fairly; and,
     An E85 rollout must be accompanied by a comprehensive 
consumer awareness campaign.

    In May, we began the program with the conversion of 35 pumps at 
stations throughout the Sioux Falls, SD metro area. Simultaneously, we 
launched a marketing program to raise awareness to the benefits of FFV 
ownership and E85 use. The program is still ongoing today and includes 
elements such as adverting, direct mail, point of purchase marketing, 
and retailer education. The community is embracing the fuel as a viable 
alternative to gasoline.
    VeraSun enlisted the support of General Motors, various local car 
dealerships, the National Ethanol Vehicle Collation, and other 
organizations across the state to assist with the rollout of the 
program. As a result, E85 awareness has increased, E85 fuel sales are 
increasing, and the demand for flexible fuel vehicles is up in the 
local market.
    The success of the program attracted national attention, and the 
attention of Ford Motor Company. In early November, we announced a 
first-of-a-kind partnership with Ford to expand VE85 to other markets 
in the Midwest. The initiative will serve to convert existing fuel 
pumps to VeraSun's branded E85 -VE85- in existing retail outlets. A 
consumer awareness campaign to promote the benefits and use of E85 and 
FFV ownership will also be launched. Local retail outlets and Ford 
dealerships will be asked to participate in the campaign.
    Increasing FFV production and E85 use represent the best near-term 
solution to significantly reduce our dependence on foreign oil. But a 
complex interplay between four constituent groups must be recognized 
before E85 will succeed as a mainstream alternative:

     Auto Manufactures-Auto manufactures hold the keys to the 
future of greater E85 use. Today FFVs represent approximately two 
percent of all vehicles. Without a significant ramp up in the 
production of FFVs, E85 use will remain relatively small.
     Ethanol Producers-The ethanol industry must continue to 
rapidly expand production of ethanol to assure that ample supplies will 
be available.
     Fuel Retailers-Today only 500 of the nearly 180,000 retail 
stations offer E85. In order for retailers to offer E85, the owner must 
have confidence that the product will be priced appropriately and that 
there will be sufficient consumer demand. Without greater FFV 
production and ample supplies of ethanol, the retailer will not see the 
value.
     Consumer-Consumers are demanding alternatives. Consumer 
must be made aware that today they have a choice when purchasing a 
vehicle and filling the vehicle. The fact that nearly 70 percent of 
these vehicle owners are not aware that they have a choice indicates 
that much more work needs to be done.

    With Ford as a partner, we believe we can make great strides in all 
areas.

                               CONCLUSION

    Mr. Chairman, as this committee contemplates future motor fuel 
markets, please recognize that ethanol is a viable bridge to the 
future. Today ethanol is blended into one-third of the nation's fuel as 
a clean blend component. As we see growth in FFV production, ethanol 
will play a larger role in gasoline replacement. And in the future, 
ethanol shows great promise as a renewable feedstock for hydrogen fuel 
cells.
    VeraSun Energy Corporation and the Renewable Fuels Association are 
committed to working with you and members of the committee to promote 
the use of alternative, renewable fuels such as ethanol and biodiesel 
to ensure a reliable fuel supply, lower consumer fuel costs, protect 
the environment and stimulate further growth and development in 
communities across rural America. We are also committed to the expanded 
use of E85 to further reduce the nation's deepening dependence of 
foreign oil.
    Thank you.
                                 ______
                                 
  Response by Bill Honnef to an Additional Question from Senator Obama

    Question 1. Are you finding obstacles in your efforts to expand the 
availability of E85 at local retail locations, particularly branded 
retail stations? Could you share some examples? What changes would you 
recommend to the business policies of retail stations that would 
encourage greater availability of E85 to consumers?
    Response. While the recently enacted Renewable Fuels Standard 
provides a baseline for ethanol demand in the United States, VeraSun 
Energy believes that we must work hard to do more to lessen our 
dependence on foreign oil and expand the use of renewable fuels like 
ethanol.
    As my testimony highlighted, VeraSun is aggressively working to 
increase the usage of ethanol by increasing the availability of and 
demand for E85. To this end, we launched VeraSun E85, or VE85 for 
short, the Nation's first branded E85 with the conversion of 35 pumps 
at stations throughout the Sioux Falls, SD, metro area in May 2005. 
More recently we added 20 stations in the Chicago metro area. We are 
now aggressively seeking to expand to additional metropolitan areas.
    We have found that independent branded gas stations (those neither 
owned by a large oil company nor governed by one of their franchise 
agreements) are much more receptive to offering E85 than those carrying 
a major oil company brand. In a recent survey of just over 300 of the 
approximately 580 gas stations in the United States that offer E85, it 
was found that 91 percent of those stations offering E85 are 
independent stations. Only nine percent were branded retail stations, 
either directly owned and operated or franchised by a major oil 
company.
    This fact is consistent with our experience and is why we are 
currently focusing our efforts on expanding the use of E85 at 
independent gas stations. After our successful launch in Sioux Falls, 
franchise owners of a specific major brand were told by their 
franchisor that non-branded fuels could not be sold or distributed to 
consumers at branded fuel islands or under branded canopies at their 
stations.
    As my testimony at the hearing indicated, one of the fundamental 
principles of expanding E85 use is that it must be widely available and 
convenient to the consumer. This major oil company's policy creates an 
artificial barrier to increasing the availability of E85 by forcing 
station owners to install new equipment outside of normal traffic 
patterns. This artificial hurdle obviously impacts the franchise 
owner's ability to offer E85 at their stations since the major oil 
company does not provide E85 fuel.
    While we will continue to aggressively market E85 across the 
country, it may take pressure from elected officials to convince the 
major oil companies to embrace E85 in a meaningful way. Anything that 
can be done at the Federal level to help facilitate the sale of E85 at 
the same pump as other blends of gasoline at branded gasoline stations 
will help in the promotion and growth of the use of E85 in the United 
States.
    The State of Iowa specifically prohibits a franchisor (i.e., major 
oil company) from prohibiting a franchisee from purchasing ethanol-
blended gasoline from a source other than the franchisor or limiting 
the quantity to be purchased when the franchisor does not normally 
supply the franchisee with ethanol-blended gasoline. We think this line 
of reasoning has merit. If a major oil company is going to offer a 
competitively priced branded E85 product to its franchisees, then they 
may have a right to ask that a competitor's E85 not be sold under the 
canopy. But if they are not going to offer E85, they should not be 
allowed to block the sale of E85 if a station owner wishes to offer it.
    Our goal should be to decrease our dependence on foreign oil and 
increase our energy independence. We believe that E85 provides a real 
opportunity to do so, but we must dramatically increase the percentage 
of gas stations in the country that offer E85 from .3 percent, and the 
major oil companies must be involved in this effort.
                                 ______
                                 
Prepared Statement of Jack B. Holmes Jr., President and CEO, Syntroleum 
                              Corporation

    Good morning Mr. Chairman and good morning to other members of this 
committee. Syntroleum appreciates the opportunity to speak to you today 
about transportation fuels of the future. My name is Jack Holmes, and 
I'm the president and CEO of Syntroleum, which is a company based in 
Tulsa, Oklahoma that is focused on developing ultra-clean fuels 
utilizing Fischer-Tropsch technology.
    Syntroleum would like to touch on several areas this morning, which 
include:

     The supply and demand issues across the world.
     Our nation's dependency on foreign energy.
     Benefits of Fischer-Tropsch fuels.
     And finally, coal-to-liquids opportunities in the United 
States.

    Across the world, we continue to see energy demand increase at 
rates greater than the growth of their domestic supplies. This trend is 
especially true in the United States, China and India. Eight years ago, 
China was a crude oil exporter. According to the U.S. Department of 
Energy, China alone faces major oil shortages of 5.9 to 8.8 million 
barrels per day by 2015. This problem will not get better, it will only 
get worse.
    Recently, we witnessed the immediate negative impacts of unexpected 
disruptions to our Nation's refineries and natural gas processing 
facilities in the Gulf of Mexico as the result of Hurricanes Katrina 
and Rita. It's apparent that our Nation needs additional energy 
resources, and we need to diversify our energy infrastructure away from 
the Gulf of Mexico.
    Our Nation is too dependent on foreign energy. The United States 
currently imports about 60 percent of its crude oil and refined product 
requirements. It doesn't have to be this way.
    Our future economic and energy security rests upon our ability to 
effectively utilize our domestic sources of fuels. The world supply and 
demand balance dictates that we use our clean coal technology for 
development of secure domestic motor fuel.
    Syntroleum has spent 20 years advancing Fischer-Tropsch technology 
to produce ultra-clean transportation fuels.
    Syntroleum often categorizes Fischer-Tropsch technology as going 
back to the future because it was developed in the 1920s in Germany. 
Back then, Germany was facing decreasing domestic energy supplies, so 
researchers developed Fischer-Tropsch technology to allow companies in 
Germany to convert coal into fuel.
    Other companies in places such as South Africa have also utilized 
Fischer-Tropsch technology to develop fuels, where over 1.5 billion 
barrels of Fischer-Tropsch fuels have been produced from coal over the 
last 50 years. Our technology is real and now this country needs it.
    With over 270 billion tons of proven reserves, the United States is 
the Saudi Arabia of coal. Much of this coal is located in remote areas 
of western and midwestern states. Our plan is to build at or near mine 
mouths to maximize transportation savings. If we convert just 5 percent 
of the estimated recoverable coal reserves in the United States, it 
would be equivalent to the existing 29 billion barrels of proven oil 
reserves in the United States. This data is significant for our country 
and can no longer be ignored. We could virtually double our motor fuel 
supply without drilling a single well. And, we wouldn't need to build 
another refinery because our technology demonstrates that the ultra-
clean middle distillate fuel can be developed on site, where the coal 
reserves are located. A growing coal-to-liquids industry would produce 
good, high-paying jobs for decades to come.
    Because most of this coal is disbursed throughout the heartland of 
the United States, it removes concerns about hurricanes in the Gulf of 
Mexico and potential terrorist acts by sea.
    Based on our 20 years and $200 million of Fischer-Tropsch research 
and development, Syntroleum is prepared to deploy its cobalt-based 
Fischer-Tropsch technology together with existing coal gasification 
technology for the production of ultra-clean transportation and home 
heating fuels. Our research has revealed significant findings about the 
products, including:

     Our fuels have virtually no aromatics, no sulfur and are 
non-toxic and biodegradable. You can actually drink this fuel.
     Our fuels can be used as a blending stock to meet 
environmental requirements and dramatically extend the volume impact.
     Our fuels are completely compatible with today's 
infrastructure, meaning no hidden infrastructure cost.
     Our fuel will work in today's diesel engines with no 
modifications.
     And, our fuel can be used by the military. In fact, we 
have done extensive research with the U.S. Department of Defense to 
test single battlefield fuels.

    (See attachments for environmental properties of fuel)
    The Government does not need to fund this new industry. However, 
support from the U.S. Government for the first coal-to-liquids plants 
will be critical. Syntroleum applauds this Congress for their actions 
this year in passing the Energy Policy Act of 2005. This bill was a 
step in the right direction in developing a long-term energy strategy 
by providing funding for research and development of clean-coal 
initiatives and loan guarantees associated with the construction of 
commercial scale coal-to-liquids plants. The recorded vote shows the 
bipartisan support for the need to research alternative forms of energy 
and the growing interest in clean coal and coal to liquids 
technologies.
    Syntroleum urges the Government to follow through with its 
commitment to dedicate money for loan guarantees and mandate long-term 
contracts to purchase Fischer-Tropsch fuels. We believe that the first 
coal-to-liquids plant will have a significant impact on the capital 
market to fund additional plant projects.
    Recently, this committee held hearings on the proposed Gas PRICE 
Act, S. 1772. As a revolutionary industry still in its infancy, coal-
to-liquids technology can look forward to many advances in the years 
ahead. Improvements already under evaluation will continue to reduce 
capital and operating costs, increase plant energy and carbon 
efficiency, and permit continued scale-down of plant size. By 
introducing this bill, Senator Inhofe recognizes the benefit this 
country would receive in bringing clean fuels to the market sooner 
rather than later.
    We encourage government to accelerate the rule making to enable the 
energy bill to take effect and continue down the path of supporting 
innovators to meet today's energy needs, which can be done by creating 
an environment of regulatory certainty and favorable market conditions 
for the development of alternative energy supplies. The downstream 
effect translates into more jobs in this country, not overseas, and 
heads us toward a future reduction in our dependence on foreign sources 
of supply.
    Americans today are worried about the high cost of fuel, and 
rightfully so. The effects of Katrina alone are estimated at several 
billion in increased motor fuel cost. Whether it's filling their 
automobile tanks or heating their homes, Americans are being hit in 
their pocketbooks because of our nation's dependency on foreign oil and 
our limited refining capacity. But, we don't have to continue down this 
path of energy instability. Ultra-clean, coal-based Fischer-Tropsch 
fuels can have a significant impact on the energy supply balance in the 
United States.
    In closing, Syntroleum believes that consumers, regulators, policy 
makers, environmentalists and progressive energy companies can agree on 
one crucial point--responsible use of our resources and the protection 
of the environment is not the job of just one, but of everyone. 
Focusing on alternative energy--such as coal-to-liquids development--
will not only enhance and diversify our energy supply and offer a 
cleaner product, but can provide thousands of jobs and boost our 
national security. There are significant opportunities to create new 
sources of energy right in front of us here at home. Now is the time to 
embrace these proven technological advancements and start securing our 
energy independence.
    In summary, we depend on motor vehicles in this country. We need to 
depend less on foreign supply and create jobs utilizing our own 
technology and natural resources.
    Mr. Chairman, members of the committee, thank you for allowing me 
this time to speak about the transportation fuels for the future.

[GRAPHIC] [TIFF OMITTED] T9524.025

[GRAPHIC] [TIFF OMITTED] T9524.026

[GRAPHIC] [TIFF OMITTED] T9524.027

[GRAPHIC] [TIFF OMITTED] T9524.028

[GRAPHIC] [TIFF OMITTED] T9524.029

[GRAPHIC] [TIFF OMITTED] T9524.030

[GRAPHIC] [TIFF OMITTED] T9524.031

[GRAPHIC] [TIFF OMITTED] T9524.032

[GRAPHIC] [TIFF OMITTED] T9524.033

[GRAPHIC] [TIFF OMITTED] T9524.034

[GRAPHIC] [TIFF OMITTED] T9524.035

[GRAPHIC] [TIFF OMITTED] T9524.036

[GRAPHIC] [TIFF OMITTED] T9524.037

[GRAPHIC] [TIFF OMITTED] T9524.038

[GRAPHIC] [TIFF OMITTED] T9524.039

[GRAPHIC] [TIFF OMITTED] T9524.040

[GRAPHIC] [TIFF OMITTED] T9524.041

[GRAPHIC] [TIFF OMITTED] T9524.042

[GRAPHIC] [TIFF OMITTED] T9524.043

[GRAPHIC] [TIFF OMITTED] T9524.044

                                 ______
                                 
 Responses by Jack B. Holmes Jr. to Additional Questions from Senator 
                                 Obama

    Question 1. I understand that the Energy bill provides loan 
guarantees for the construction of coal-to-liquids facilities.
    Response. Yes. The loan guarantees as outlined in the Energy Policy 
Act of 2005 (``Energy bill''), specifically TITLE XVII ``Incentives for 
Innovative Technologies'' provide the foundation for technologies, such 
as Syntroleum's proprietary Fischer-Tropsch process, to develop a 
domestic coal-to-liquids (``CTL'') industry to assist in meeting our 
Nation's long-term energy requirements.

    Question 2. Is it essential for the commercial success of your 
technology within a reasonable timeframe?
    Response. Yes. It is essential that Congress fully fund the loan 
guarantees and the research and development programs as outlined in 
TITLE IX of the Energy bill to expedite the development of a domestic 
CTL industry to make the necessary first steps to reduce our reliance 
on foreign sources of energy. These provisions provide a crucial 
component required for small United States based companies to compete 
in the most capital intensive industry.
    To facilitate the development of a CTL industry within a reasonable 
timeframe strong consideration should be given to a loan guarantee 
program specifically outlined for CTL projects similar to the 
legislation enacted by the Congress to develop the ethanol industry 
during this session. It is critical to move forward quickly as 
commercial scale CTL plants have a construction schedule of 4 to 5 
years.

    Question 3. Is it your sense that the Department of Energy intends 
to move forward with this loan guarantee? Is it as the speed that you 
find helpful, and if not, do you have recommendations as to how 
Congress can encourage the Department of Energy to pursue swifter 
implementation?
    Response. Yes. Based upon my meetings with Department of Energy 
officials I am encouraged that the current DOE administration is 
supportive of the development of CTL plants. The success of this 
program will depend upon the Congressional funding received by the DOE 
for both the loan guarantee and research and development programs.
    As previously mentioned, the speed of implementation specific to 
CTL would significantly benefit from Congressional direction to the 
Department specific to the development of CTL plants, similar to the 
ethanol loan guarantee provisions in-place. In addition, legislation to 
expedite the permitting process would reduce the overall timeframe for 
project implementation. These additional provisions would reduce the 
timeframe required to initiate the development of a domestic CTL 
industry to make the necessary first steps to reduce our reliance on 
foreign sources of energy.

    Question 4. Would the economics of commercialization suggest a 
collaborative effort between your company, Rentech, or Sasol?
    Response. Syntroleum welcomes the opportunity to collaborate with 
other knowledgeable companies in our industry. However, the nature of a 
developing industry, such as the Fischer-Tropsch industry, does not 
readily lend itself to a collaborative effort due to the proprietary 
nature of the technology and the competitive marketplace. The 
intellectual property of a company, such as Syntroleum, is critical to 
its success. Any efforts toward collaboration must be tempered to 
protect the independent growth and development of one's technology. We 
continue to examine opportunities for collaboration with other parties, 
provided appropriate safeguard are implemented.

    Question 5. I know that Fischer Tropsch diesel can be used as a 
home heating oil substitute; is your company involved in efforts to 
address the supply issues associated with seasonal shortages typically 
faced in the home heating oil industry, and how?
    Response. Currently, Syntroleum operates a small natural gas based 
feedstock (70 barrel per day) Fischer Tropsch demonstration plant 
located near Tulsa, OK, making this noncommercial facility 
inappropriate to address this shortage. Our domestic efforts are 
focused on extending our Fischer Tropsch technology to domestic plants 
utilizing coal as a feedstock. However, we believe that investment in 
CTL plants, such as fully funded legislative efforts on loan guarantees 
and research and development programs, make the necessary first steps 
to create solutions for this supply issue and other sin the 
transportation fuels market.

[GRAPHIC] [TIFF OMITTED] T9524.045

[GRAPHIC] [TIFF OMITTED] T9524.046

[GRAPHIC] [TIFF OMITTED] T9524.047

[GRAPHIC] [TIFF OMITTED] T9524.048

[GRAPHIC] [TIFF OMITTED] T9524.049

[GRAPHIC] [TIFF OMITTED] T9524.050

[GRAPHIC] [TIFF OMITTED] T9524.051

[GRAPHIC] [TIFF OMITTED] T9524.052

[GRAPHIC] [TIFF OMITTED] T9524.053

[GRAPHIC] [TIFF OMITTED] T9524.054

[GRAPHIC] [TIFF OMITTED] T9524.055

[GRAPHIC] [TIFF OMITTED] T9524.056

      

                                    
