[Senate Hearing 110-259]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-259
 
   RECENT SUPPLY SHORTAGES OF GASOLINE AND DIESEL IN THE UPPER GREAT 
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=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                    NOVEMBER 20, 2007--BISMARCK, ND

                               __________

         Printed for the use of the Committee on Appropriations


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html

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                      COMMITTEE ON APPROPRIATIONS

                ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont            TED STEVENS, Alaska
TOM HARKIN, Iowa                     ARLEN SPECTER, Pennsylvania
BARBARA A. MIKULSKI, Maryland        PETE V. DOMENICI, New Mexico
HERB KOHL, Wisconsin                 CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             MITCH McCONNELL, Kentucky
BYRON L. DORGAN, North Dakota        RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         JUDD GREGG, New Hampshire
RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island              SAM BROWNBACK, Kansas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
BEN NELSON, Nebraska                 LEMAR ALEXANDER, Tennessee

                    Charles Kieffer, Staff Director
                  Bruce Evans, Minority Staff Director
                                 ------                                

              Subcommittee on Energy and Water Development

                BYRON L. DORGAN, North Dakota, Chairman
ROBERT C. BYRD, West Virginia        PETE V. DOMENICI, New Mexico
PATTY MURRAY, Washington             THAD COCHRAN, Mississippi
DIANNE FEINSTEIN, California         MITCH McCONNELL, Kentucky
TIM JOHNSON, South Dakota            ROBERT F. BENNETT, Utah
MARY L. LANDRIEU, Louisiana          LARRY CRAIG, Idaho
DANIEL K. INOUYE, Hawaii             CHRISTOPHER S. BOND, Missouri
JACK REED, Rhode Island              KAY BAILEY HUTCHISON, Texas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado

                           Professional Staff

                               Doug Clapp
                             Roger Cockrell
                         Franz Wuerfmannsdobler
                        Scott O'Malia (Minority)
                         Brad Fuller (Minority)

                         Administrative Support

                              Robert Rich










































                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Byron L. Dorgan.....................     1
Statement of Dr. Howard Gruenspecht, Deputy Administrator, Energy 
  Information Administration, Department of Energy...............     3
    Prepared Statement...........................................     5
Refinery Outages.................................................     9
Outage Safeguards................................................    10
Energy Bill......................................................    11
Pipeline.........................................................    11
Statement of Leon Westbrock, Executive Vice President and Chief 
  Operating Officer, CHS, Inc....................................    12
    Prepared Statement...........................................    14
Statement of Kim Penner, Senior Vice President of Light Products, 
  Flint Hills Resources..........................................    15
    Prepared Statement...........................................    16
Statement of Bruce W. Heine, Director, Government and Media 
  Affairs, Magellan Midstream Partners, LP.......................    19
    Prepared Statement...........................................    20
Statement of Mike Rud, President, North Dakota Retail Petroleum 
  Marketers Association..........................................    23
    Prepared Statement...........................................    27
Statement of Dawna Leitzke, Executive Director, South Dakota 
  Petroleum and Propane Marketers Association....................    28
    Prepared Statement...........................................    30
Home Heating Fuel................................................    31
Supply System....................................................    32
Grand Forks......................................................    33
Refinery Outages.................................................    34
North Dakota Refining Capacity...................................    36
Remedies.........................................................    37
Supply Solution..................................................    38
Petroleum Consumption............................................    38
Pipeline.........................................................    39
Biodiesel........................................................    39
Ethanol..........................................................    40
Oil Prices.......................................................    41
Energy Bill......................................................    42
North Dakota Market..............................................    43
Government Role..................................................    44
Prepared Statement of Curt Anastasio, President and CEO, NuStar 
  Energy L.P.....................................................    45


   RECENT SUPPLY SHORTAGES OF GASOLINE AND DIESEL IN THE UPPER GREAT 
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                       TUESDAY, NOVEMBER 20, 2007

                               U.S. Senate,
      Subcommittee on Energy and Water Development,
                               Committee on Appropriations,
                                                      Bismarck, ND.
    The subcommittee met at 2:30 p.m., in the Missouri Room, 
Student Union at Bismarck State College, 1500 Edwards Avenue, 
Bismarck, North Dakota, Hon. Byron L. Dorgan (chairman) 
presiding.
    Present: Senator Dorgan.


              opening statement of senator byron l. dorgan


    Senator Dorgan. I'll call the hearing to order today. This 
is the hearing of the Energy and Water Subcommittee of the U.S. 
Senate Appropriations Committee. I'm Senator Byron Dorgan, 
chairman of the subcommittee and I appreciate all of you being 
here today, especially those who are appearing as witnesses.
    The purpose of this hearing is to explore the origin of a 
problem that has occurred in North Dakota and what I understand 
has caused the problem and what some solutions might be to 
prevent this from occurring again.
    I want to put up a couple of charts for you to show some of 
the headlines that we have witnessed in this State, farmers and 
drivers and many have experienced what these headlines mean. A 
fuel shortage, worst in 30 years. The diesel shortage this 
summer and fall has been the worst. The Fargo Petro USA manager 
said it's as bad as he's seen in 30 years, in an article in the 
Fargo Forum. Here's one in the Bismarck Tribune. Diesel supply 
is low during peak use seasons. The ability of farmers to pick 
up the phone in the morning and get a load of diesel by the 
afternoon has all but dried up.
    The third chart shows another example of what we have seen 
and heard and what we understand of that experience. The diesel 
fuel supply low is in Jamestown. Carl Ketchmark, who drives for 
Bloom Oil, said he waited 44 hours in his truck at the NuStar 
terminal. One load, that's all I got, he said.
    A number of weeks ago, I was driving from Fargo to Bismarck 
and I saw 18-wheelers lined up at a terminal facility, lined up 
for perhaps three quarters of a mile, end to end, waiting--just 
waiting because apparently some diesel had arrived and they 
were there to try to find out, could they get some of it?
    Now, we are a State that uses a substantial amount of fuel, 
gasoline and diesel fuel. As I began reading and hearing about 
these problems, I met with gasoline dealers across the State, a 
couple of times this year. I talked to many of them as they 
traveled and many of them described for me the difficulty of 
accessing an adequate supply of fuel. We know that during this 
year, it was reported that North Dakota had the second highest 
price for retail gasoline, next to the State of Hawaii. We know 
that the consequences of not having a supply of fuel when you 
need it means that prices rise. It means that many independent 
dealers are struggling to find a way to keep alive and to 
survive at a time when they can't find adequate product or have 
to pay much, much more for the product and pass that along to 
their customers.
    As I indicated, North Dakota is a State that uses a lot of 
fuel. We are an agricultural State. When farmers need diesel 
fuel, they need diesel fuel. When it's time for spring's work, 
when it's time for harvest, when it's time to get in the fields 
to do the various things they need diesel fuel--farmers need 
it. And the inability to have an adequate supply of fuel, 
diesel fuel and gasoline when we need it is not an acceptable 
consequence for our State.
    So the question is what has happened? What does it mean? 
And what are the potential solutions to that? What might we do 
to try to make sure it doesn't happen again? I've read and some 
that I have talked to said, ``well Byron, this is just a 
perfect storm,'' meaning apparently that a number of things 
happened this year--maintenance at various refineries and other 
things happened in a way that they normally don't happen in the 
same circumstance and this year it did and this year it caused 
us some problems. But likely this may not happen again.
    Well, if I can prevent it, it will not happen again and 
should not happen again. Now there are interesting and serious 
questions, it seems to me, about this so-called perfect storm 
but I want next year for us at this time not to be asking 
questions about whether we had adequate supplies of fuel at 
reasonable prices during the year when there was not a national 
shortage with respect to the supply of fuel.
    So I have asked at this hearing to have testimony from Leon 
Westbrock, the executive vice president and chief operating 
officer of Cenex Harvest States; Kim Penner, the vice president 
of Light Industries, Flint Hills Resources; Bruce Heine, 
director of government and media affairs, Magellan Midstream 
Partners; Mike Rud, president of North Dakota Retail Petroleum 
Marketers and Ms. Dawna Leitzke, executive director of the 
South Dakota Petroleum Marketers Association.
    First we will hear from Dr. Howard Gruenspecht, the Deputy 
Administrator of the Energy Information Administration at the 
U.S. Department of Energy in Washington, DC. That is the agency 
that tracks refinery outage information on an ad hoc basis 
across this country. We appreciate Dr. Gruenspecht--perhaps I'm 
pronouncing it wrong. It may be Gruenspecht. We appreciate Dr. 
Gruenspecht coming to North Dakota to present some thoughts.
    Following that, I will ask for the second panel to present 
and then I would like to ask a series of questions and Dr. 
Gruenspecht, if you would, following offering your testimony, 
if you would be willing to stay at the table, I would like then 
to have the other testimony and then be able to answer--be able 
rather, to ask you questions as well, with the other witnesses.
    Dr. Gruenspecht. Okay.
    Senator Dorgan. So Dr. Gruenspecht, thank you very much for 
coming. I understand your role at the Department of Energy. I 
understand basically what the Energy Information Administration 
does but I hope you will tell us as well, in the context of the 
things I have just described about what North Dakota has 
experienced during the last year. Dr. Gruenspecht, you may 
proceed.
STATEMENT OF DR. HOWARD GRUENSPECHT, DEPUTY 
            ADMINISTRATOR, ENERGY INFORMATION 
            ADMINISTRATION, DEPARTMENT OF ENERGY
    Dr. Gruenspecht. Thank you. I will try, sir. I appreciate 
the opportunity to appear before you today. The Energy 
Information Administration is the independent statistical and 
analytical agency within the Department of Energy. We don't 
promote, formulate or take positions on policy issues and our 
views should not be construed as representing those of the 
Department of Energy or the administration.
    My written testimony outlines the national context that 
drives the crude oil and petroleum product prices this year. 
Turning to the recent situation in North Dakota, which I know 
is your primary interest, the best place to start is with 
regional data for the Midwest that is consistently available 
across weekly, monthly and annual EIA oil data surveys. 
Petroleum Allocation for Defense District No. 2, also referred 
to as PADD 2, covers the entire Midwest and is served not only 
by refineries in the Midwest but also by refineries on the gulf 
coast. About 25 percent of the gasoline and diesel used in the 
Midwest comes from the gulf coast. One major pipeline, the 
Explorer, moves product from the gulf to Midwest areas east of 
the Mississippi. Another pipeline, the Magellan System, serves 
areas mainly west of the Mississippi, including North Dakota. 
It is fed mostly by refineries in Oklahoma, Kansas, Minnesota 
and Wisconsin, with some limited supplies from the gulf. Figure 
2 of my testimony shows the portion of the Magellan System 
serving the Midwest.
    For the first half of 2007, refining outages on the gulf 
coast and in the Midwest were about half a million barrels a 
day higher than the averages for the 5 years from 2001 through 
2005--2006 was sort of a special case because that was post-
Katrina.
    Outages continue to affect these areas. In September and 
October, the information that we have indicates that Midwest 
outages average about 370,000 barrels per day, which is more 
than twice the 5-year historical level for that time of year.
    Midwest gasoline demand typically peaks during the months 
of June, July and August, while distillate demand peaks in 
September and October, varying somewhat depending on the 
harvest season. The unusually large refinery outage situation 
in 2007 resulted in the cutoff of product flow to terminals at 
the pipeline extremes, which means trucks must travel further 
to reach terminals with product. Additionally, inventories were 
drawn down as gasoline and then distillate demand peaked.
    The areas that generally experience the most supply 
problems when supply is limited are those that are at the ends 
of the distribution system. I'm sorry to say that North Dakota 
is one of those places. Michigan would be an analog in the 
other part of the Midwest.
    For example, from 2003 through 2006, gasoline prices in 
Michigan and North Dakota on average tended to fluctuate a 
penny or two around the national average. For instance, in 
2006, both States averaged about one cent a gallon below the 
national average gasoline price. However, from June through 
early November 2007, they averaged about 16 and 15 cents per 
gallon over the national average, respectively.
    North Dakota receives supplies from the Magellan, as I've 
already indicated, and NuStar pipeline systems. It also 
receives product from a number of northern refineries such as 
the Tesoro refinery located in Mandan, North Dakota--I don't 
know if I pronounced that right but I hope so----
    Senator Dorgan. You did.
    Dr. Gruenspecht [continuing]. And some of the other 
refineries in Montana.
    A number of the refineries that provide supplies to North 
Dakota experienced outages, both planned and unplanned. The 
Coffeyville refinery in Kansas that flooded this past summer 
feeds directly into Magellan. Outages outside the system that 
is directly feeding the upper Midwest also had an impact, 
because any area needing supply will draw on areas that have 
supply, affecting all prices. Some of the largest Midwest 
refinery outages were at refineries that serve areas further 
east, such as the outage at BP's Whiting, Indiana refinery, 
which began this past summer and has continued. This leads to 
increased competition for product from refineries in the upper 
Midwest that can move product into areas served by Whiting. 
Second, there's increased competition for supply from pipelines 
like the Explorer that move product up from the gulf. If you're 
on the gulf, you could put product into Magellan. You also 
could put product into Explorer to serve more of the area 
served by Whiting and other refineries as well. There is 
competition, so that's a way in which, even though Whiting 
doesn't serve the upper Midwest, this part of the Midwest, the 
outage there had an impact here.
    Under such circumstances, the Federal and State governments 
look for options to relieve the situation. A waiver was granted 
in August to North Dakota to use some gasoline from Canada that 
was slightly off specification for the United States. Diesel 
prices were also very high. The State and Federal government 
officials looked at the matter and determined that a diesel 
waiver would not provide any relief since no supplies were 
available. That's an EPA decision, but it was looked at and I 
think some of the DOE people were involved.
    Terminal outages in the summer and early fall required 
truck drivers to travel long distances. North Dakota and other 
affected States issued executive orders extending service hours 
for truck drivers--and the Federal Government, the Motor 
Carrier Safety Administration, approved them--to help make that 
situation more practical. So again, the Federal and State 
governments do try to work together.
    Demand is starting to wind down. It's still relatively 
strong, particularly in North Dakota. There were still some 
outages in early-November but we understand the situation is 
starting to improve. I'll let the refineries talk about their 
own situation. Right now, we're out of turnaround at Flint 
Hills. That refinery has some good news for you.
    Refineries are returning to more normal operation. Prices 
in North Dakota have backed down somewhat relative to the 
national average. As of Sunday, North Dakota had the 24th 
highest gasoline prices in the Nation and the 8th highest 
diesel prices. I know this is the race that you would like to 
be 50th and 49th in, not 24th and 8th. But it's better than 
being first, indicating some improvement in the balance. But 
with crude prices pushing up all prices throughout the Nation, 
gasoline and diesel prices remain high in the State and that's 
something to keep in mind. Prices in the rest of the country 
have risen a lot. You haven't gotten that much relief in North 
Dakota but, relative to the rest of the country, you are in a 
somewhat better situation than you were.


                           prepared statement


    We expect things to get somewhat better in 2008. Gasoline 
and diesel prices should reflect that trend. That concludes my 
statement, Mr. Chairman, and I'd be happy to answer any 
questions you may have. Thank you very much.
    [The statement follows:]
              Prepared Statement of Dr. Howard Gruenspecht
    Mr. Chairman and members of the committee, I appreciate the 
opportunity to appear before you today to discuss supply and price 
concerns in the upper Midwest, including North Dakota.
    The Energy Information Administration (EIA) is the independent 
statistical and analytical agency within the Department of Energy. 
While we do not promote, formulate, or take positions on policy issues, 
we do produce objective, timely, and relevant data, projections, and 
analyses that are meant to assist policymakers, help markets function 
efficiently, and inform the public. Our views are strictly those of EIA 
and should not be construed as representing those of the Department of 
Energy or the administration.
    Before turning specifically to the Midwest and North Dakota, I will 
briefly discuss the national market situation that was affecting the 
entire United States. This past year has brought unusually tight market 
situations both in the upstream (crude production) areas as well as the 
downstream (refining). As the lowest line in Figure 1 shows, crude oil 
prices have climbed steadily throughout the year, pushing prices up to 
average nearly $34 per barrel higher in November than they were in 
January 2007.
    Retail petroleum product prices have not only reflected this crude 
oil price increase, but rose even faster than crude during the spring 
and early summer, reflecting tightness in the gasoline supply-demand 
balance. From late January through the middle of May, national average 
retail gasoline prices rose from $2.17 to $3.22 per gallon, an increase 
of $1.05. Crude oil, however, only rose about 30 cents per gallon 
during this same time period.
    The main reason for the surge in gasoline price over crude oil 
seemed to be unusually extensive U.S. refinery outages, which also 
pushed the limits of gasoline import availability. In the face of 
rising demand for gasoline and distillate products (e.g., diesel fuel 
and heating oil), supply was not able to keep up, drawing product 
inventories down, while the price differential to crude oil increased.
    Turning to the Midwest, refinery outages affected this region more 
than usual. One useful regional breakdown of oil data that is used 
consistently across weekly, monthly, and annual EIA oil data is the 
Petroleum Allocation for Defense Districts, often referred to as 
``PADDs.'' PADD 2, which covers the entire Midwest, is served not only 
by refineries in the Midwest, but also by refineries in the gulf coast 
that move products into the Midwest through pipelines. About 25 percent 
of the gasoline used in the Midwest comes from the gulf coast. For 
example, one major pipeline, the Explorer, moves product from the gulf 
to areas east of the Mississippi. Another pipeline, the Magellan 
system, serves areas mainly west of the Mississippi, including North 
Dakota, and is fed mostly by refineries in Oklahoma, Kansas, Minnesota, 
and Wisconsin rather than by gulf coast refineries. The Magellan system 
runs from Texas and has branches through Oklahoma, Kansas, Missouri, 
Nebraska, South Dakota, North Dakota, Minnesota, Wisconsin, Iowa, and 
Illinois. Figure 2 shows the portion of the Magellan system serving the 
Midwest. The Magellan system connects to the Explorer Pipeline in 
Glenpool, Oklahoma, allowing some additional access to refineries on 
the gulf coast.
    For the first half of 2007, refining outages on the gulf coast and 
in the Midwest averaged 1.2 million barrels per day, which is 500,000 
barrels per day higher than average for the 5 years from 2001 through 
2005. The gulf coast (PADD 3) refineries had outages that were about 50 
percent higher than their 5-year average outages, affecting supplies 
into the Midwest as well as other areas, and PADD 2 refineries ran 30 
percent over their 5-year average outages. Outages have continued to 
affect these areas. In September and October, preliminary information 
indicates Midwest distillation unit outages averaged about 370,000 
barrels per day, which is more than twice the 5-year historical levels 
for that time of year.
    Midwest gasoline demand typically peaks in the months of June, 
July, and August, while Midwest distillate demand peaks in September 
and October, varying somewhat depending on the harvest season. The 
unusually large refinery outage situation in 2007 resulted in the 
cutoff of product flow to terminals at the pipeline extremes, which 
means trucks must travel further to reach terminals with product. 
Additionally, inventories were drawn down as gasoline and then 
distillate demand peaked. Towards the end of August, EIA weekly data 
showed Midwest gasoline inventories had dropped to their lowest level 
in 7 years. The areas that generally experience the most supply 
problems are those that are at the ends of the distribution system, 
such as North Dakota and Michigan. For example, from 2003 through 2006, 
gasoline prices in those States on average tended to fluctuate a penny 
or two around the national average. In 2006, both States averaged about 
1 cent per gallon below the national average gasoline price. However, 
from June through early November 2007, they averaged about 16 and 15 
cents per gallon over the national average, respectively.
    North Dakota receives supplies from the Magellan and the NuStar 
pipeline systems. In addition, it receives product from a number of 
northern refineries such as the Tesoro refinery located in Mandan, 
North Dakota, and the Cenex refinery in Laurel, Montana, via a 
proprietary pipeline.
    A number of the refineries that provide supplies to North Dakota 
experienced outages, both planned and unplanned. The Coffeyville 
refinery in Kansas that flooded this past summer feeds directly into 
the Magellan system. Outages in other refineries affected the area as 
well. Any area needing supply will draw on areas that have supply, 
affecting all prices. Some of the largest Midwest refinery outages were 
at refineries that serve areas further east, such as the outage at BP's 
Whiting, Indiana, refinery, which began this past summer and has 
continued. This has several impacts. First, there will be increased 
competition for product from refineries in the upper Midwest that can 
move product into areas served by Whiting. Second, there will be 
increased competition for supply from pipelines like the Explorer that 
move product up from the gulf coast. This pull on supply competes with 
volumes that might otherwise move further west.
    Planned outages can be less disruptive than unplanned outages, but 
still can contribute to tighter supplies. Refiners generally try to 
schedule planned outages during off-peak demand seasons in late winter 
and again in the fall. Refiners usually line up alternative supplies to 
meet their contractual needs in advance of a planned outage, but this 
still can leave less supply in an area than might otherwise be the case 
because many refineries also provide opportunistic or non-contractual 
volumes to wholesalers that rely at least partially on spot purchases. 
A refiner planning an outage generally would not arrange alternative 
supplies for potential spot buyers. In addition, sometimes the duration 
of a planned outage will be longer than originally expected. One reason 
is that unanticipated problems may be discovered when maintenance 
begins. When a planned outage goes into overtime, the supply that had 
been arranged may not be adequate to cover the additional time out of 
operation, causing the refiner to buy more product on the spot market, 
adding to short-term price pressure. Also, when unplanned outages and/
or unusual demand overlap with planned outages, the planned outages 
cannot always be postponed. The outage may be necessary for safety 
reasons, and tight supply of the skilled labor required to perform the 
maintenance may preclude rescheduling.
    During times such as we've seen this past summer, the Federal and 
State governments look at options to relieve the situation. At the end 
of August, the Federal Government granted North Dakota's request for a 
waiver to use some gasoline supplies from Canada that were thought to 
be slightly ``off-spec'' from U.S. summer gasoline requirements. Still, 
gasoline supplies remained tight. Meanwhile, diesel prices were also 
rising with growing harvest demand. I understand that State and Federal 
government staff discussed the distillate supply and determined that a 
waiver would not provide any relief since distillate supplies were not 
available to respond to a waiver. In addition, refinery supply from 
some of the outage loss was returning. Terminal outages this past 
summer and early fall required truck drivers to travel long distances 
to find product. As a result, North Dakota and other affected States 
issued executive orders extending service hours for truck drivers 
delivering fuel supplies (also approved by the Federal Motor Carrier 
Safety Administration) to help make this situation more practical.
    While demand will be winding down in the Midwest, we understand it 
still is relatively strong, particularly in North Dakota. Early-
November PADD 2 outages were high in the Midwest and, while the 
situation is now starting to improve, we are aware that North Dakota is 
still experiencing terminal and retail shortages. Refineries are 
returning to more normal operation, which will ease the tight balance 
in North Dakota, but we cannot predict exactly when the problems will 
cease. Prices in North Dakota have backed down somewhat, relative to 
the national average, indicating an improvement in the balance, but 
with crude prices pushing up all prices, gasoline and diesel prices 
remain high in the State.
    Looking ahead into 2008, both crude prices and refinery constraints 
should ease somewhat. Today's very high crude prices are expected to 
fall back to average close to $80 per barrel in 2008. At the same time, 
refinery availability should improve. Both BP's Whiting and Texas City 
refineries may return to more normal operations, adding as much as 
325,000 barrels per day of capacity to PADDs 2 and 3 next summer over 
this past summer. In addition, the United States could see another 
100,000 barrels per day of capacity from more normal reliability and 
some small expansions. Increased use of ethanol in gasoline should also 
add to U.S. gasoline supply in 2008. EIA is projecting that overall 
regular gasoline prices may average $2.97 per gallon in 2008, which is 
18 cents per gallon higher than the 2007 average mainly due to higher 
crude prices, but lower than the $3.11 seen on November 12. Similarly, 
2008 diesel prices are projected to average $3.09 per gallon, which is 
23 cents per gallon higher than in 2007, but lower than the $3.42 
reported by EIA on November 12.
    This concludes my statement, Mr. Chairman, and I will be happy to 
answer any questions you and the other members may have. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Dorgan. Dr. Gruenspecht, thank you very much. I'm 
going to ask you a couple of questions and then I'm going to 
hold other questions for you until later.
    Dr. Gruenspecht. Okay.

                            REFINERY OUTAGES

    Senator Dorgan. What do you anticipate and what do you see 
looking forward to next year with respect to refinery outages 
and the kinds of things that you described that had caused the 
disruptions and the problems this year in supply?
    Dr. Gruenspecht. Well, we certainly see no reason why we 
should have unusually high refinery outages next year. Our 
expectation would be something closer to the 2001 through 2005 
experience, which would be a lot better than what we had this 
year. We'll also have the benefit of some expansion that I 
think you will hear about.
    Senator Dorgan. The EIA is an agency that observes, is that 
correct? I mean, you essentially observe and then what you have 
done today is you have reported and used that to present to the 
Congress, in various reports. Is that essentially a good 
description of what you do?
    Dr. Gruenspecht. I think that is a fair statement. We are 
not a policy agency.
    Senator Dorgan. Right. And your observations, for example, 
if they describe regional problems, outages that can be 
troublesome and so on, does that information from the EIA go to 
the Secretary of Energy or is there anything done with that 
information, other than just providing the information 
generally across the country by published reports?
    Dr. Gruenspecht. We have not provided a lot of information 
on outages. There is a provision in a bill that is pending 
before the Senate that would require us to review available 
information on outages and determine if those planned outages 
would have a significant impact on prices. This asks us to look 
at commercially available data to compare outage plans with 
typical historical outages and with other factors. We'd have to 
do it at least twice a year and maybe more, as needed. If we 
see potential for extra price or supply pressure, which an 
unusually large outage might cause, we are then to alert the 
Secretary of Energy and the Secretary will consider the need 
for further action.
    There are a couple things to keep in mind. Refiners really 
can't coordinate among themselves--they can't call each other 
up--you know, are you going to be out here and there? But there 
is some implicit coordination, I think, that goes on because 
there's a limited availability of skilled specialized labor for 
outage maintenance and that already tends to reduce some of the 
overlap across projects.
    There are also always going to be outages that are so-
called forced outages, unplanned outages rather than planned 
ones, for safety reasons or a problem with a unit, just like 
what happens in a powerplant. It also happens to refineries, 
which are very complex systems. Those can occur and they, maybe 
for legal, safety or other reasons, they wouldn't be 
discretionary action.
    It's very difficult, I think, to determine whether planned 
outages will impact prices because it's often hard to connect 
the outage of a particular unit with the loss of production 
from a refinery. For example, Exxon Mobil had a big refinery 
when they lost their distillation tower. It is the first unit 
at the front of the refinery that takes crude oil and then 
breaks it up and feeds the other refinery units. But they were 
actually able to keep all those downstream units going, 
including the gasoline production units, because they arranged 
for other intermediate supplies to keep those units operating.
    So just because you see something is going to be out, you 
don't necessarily know for sure that that's going to translate 
into this much gasoline loss, this much diesel loss, if a plan 
has been made to go around that problem. So it's not 
straightforward to analyze outages. But again, this is 
something that the Senate bill is supposed to deal with and 
should that become law, we would certainly be doing that.

                           OUTAGE SAFEGUARDS

    Senator Dorgan. I don't suggest that any outages were 
coordinated or planned or there was anything with respect to 
any disruption in supply anywhere that raised questions. I must 
tell you that I chaired the hearings in the Senate Commerce 
Committee with respect to Enron and had Ken Lay in front of me 
and he took the Fifth Amendment. We later found out that there 
were planned outages with respect to electricity in 
southwestern America. We have the transcripts. We have all of 
the evidence that they had planned outages to jack up prices 
and to extract billions of dollars from customers.
    Now, I don't suggest that has happened here but what kind 
of safeguards do we have put in place to make sure that doesn't 
happen or are there any safeguards if most of the refineries or 
too many of the refineries close down for maintenance at the 
same time, which could have an impact on supply and price? Is 
there anything in the Department of Energy that relates to 
those issues?
    Dr. Gruenspecht. I think that the primary jurisdiction over 
those issues would be the Department of Justice or the Federal 
Trade Commission. I think they kind of split the jurisdiction 
over industrial competition issues. I believe that the Federal 
Trade Commission does more with the oil industry.
    Senator Dorgan. Well, we're still looking for the people 
that we're paying at the Federal Trade Commission. We can't 
find them on most issues.
    Dr. Gruenspecht. By the way, when I use the term planned 
outages, I meant not in terms of coordination planned--in terms 
of let's all shut down together. I meant in terms of--we know 
we have to change the catalyst in this unit or we have to 
upgrade that piece of equipment, and by unplanned outages, I 
meant something went wrong unexpectedly and we need to shut 
down and fix it.

                              ENERGY BILL

    Senator Dorgan. In this energy bill that is now through the 
Senate there are about 8 or 10 of us, between the House and 
Senate, negotiating on the final bill. Hopefully we get that in 
December. The provision you described is, I believe, section 
280 of that bill and that provision will direct your agency to 
take whatever refinery outage information that you can collect 
on an ad hoc basis and present it to the Secretary of Energy 
if, in fact, it appears there's information that would suggest 
there would be regional or national supply shortages. Has the 
Department of Energy taken a position on that provision, do you 
know?
    Dr. Gruenspecht. I think that the Department of Energy is 
interested in working with the Senate to improve that provision 
but I think it's a provision that could be helpful. I was 
trying to point out in my earlier answer that it's not always 
so easy to determine if a unit being out will translate into a 
particular shortage. But we would like to work with the Senate 
and try to make that language work and we would be happy to 
take on that role. I mean, we take on the roles the Congress 
directs.

                                PIPELINE

    Senator Dorgan. Dr. Gruenspecht, I have heard previously 
about where we are in the pipeline, the end of the pipeline. 
You describe it as a pipeline extreme, which I had not heard 
used before. Maybe perhaps others use pipeline extreme. But it 
seems to me like the pipeline is the pipeline and all that are 
served by the pipeline are competing for all the product in the 
pipeline. Is that a naive assumption? I mean, you do indicate 
in your testimony that when anywhere on that pipeline there is 
a shortage, it affects the price of everyone on that pipeline 
because those that are short are going to have to pay a higher 
price to extract the product somewhere else on that pipeline. 
Is that correct?
    Dr. Gruenspecht. I think that's correct, though I notice 
you have a couple of pipeline witnesses on this panel. I don't 
have operational experience with pipelines but my understanding 
is that is what is done when the pipeline is very low on 
supply, it actually will shut down certain terminals and people 
will have to drive their trucks further. So in that sense, 
there is a difference between being at the pipeline extreme and 
being attached to the electricity grid. Unlike an electricity 
grid, physical volumes of a product matter, and filling up the 
line becomes an issue as well.
    So I believe that in several cases, certain terminals 
become operational and serve as best they can in a tight supply 
situation. The terminals toward the extreme ends of the 
pipeline may not get product, that does happen, I believe. But 
I would project that the pipeline witnesses might be able to do 
a better job than I can in explaining how that works.
    Senator Dorgan. Yes. The pipeline is the common carrier, 
right? Well, I'll ask those questions of the other witnesses. 
If you don't mind, I have other questions I want to ask you but 
I think what I'd like to do is ask those in the setting of some 
of the discussions from the pipelines and others. So if you 
would be willing to stay at the table and I would ask others to 
come forward and we would take the other testimony.
    Dr. Gruenspecht. Shall I move to the side?
    Senator Dorgan. No, why don't you just stay where you are, 
if you would and we will ask others to join you. We may need 
another chair. I guess we're all right.
    We have Leon Westbrock, who is the executive vice president 
and chief operating officer of CHS, Inc., which is formally the 
Cenex Harvest State Cooperative. You own an 85,000 barrel per 
day refinery in rural Montana and have a partnership in the 
Kansas-based Coffeyville refinery. CHS fuels are sold at more 
than 1,600 retail outlets, including Cenex convenience stores. 
You also operate about 1,200 miles of pipeline and are the 
third largest propane retailer in the country. Mr. Westbrock, 
thank you very much for being here.
STATEMENT OF LEON WESTBROCK, EXECUTIVE VICE PRESIDENT 
            AND CHIEF OPERATING OFFICER, CHS, INC.
    Mr. Westbrock. Thank you, Senator and just one correction--
its 55,000 barrel a day in Laurel and 85,000 barrel a day in 
McPherson.
    Senator Dorgan. Thank you.
    Mr. Westbrock. Senator Dorgan and members of the audience, 
I am Leon Westbrock. I'm an officer of the Nation's largest 
member-owned business and its largest cooperative energy 
business, which in the scale of things, is still pretty small 
but I'm a cooperative business ownership at large. Our board 
consists of 17 full-time members and farmers, 3 of whom are 
from North Dakota.
    As a background, I grew up in Minnesota, just south of 
Fairmont, North Dakota. During my 32-year career with Cenex and 
now CHS, I spent a year working in North Dakota at Michigan, 
North Dakota. I understand all the energy needs of your State's 
consumers. For nearly 65 years, CHS has owned a petroleum 
refinery in Laurel, Montana, just west of Billings. Much of the 
gasoline and diesel fuel produced in Laurel is shipped via our 
pipeline, beginning in Laurel and ending in Fargo, North 
Dakota. CHS also owns terminals at Laurel, Grand Forks and 
Minot. Nearly 2 years ago, CHS approved a $325 million upgrade 
project at Laurel, which when it concludes early in 2008, will 
result in production of up to an additional 150 million gallons 
of gasoline and diesel from the same amount of crude oil.
    Part of the plan 2\1/2\ years ago was to schedule a 
complete shutdown of the refinery in June 2007 to conduct major 
maintenance and to install all piping and valves essential for 
the connection to this new upgrade called the coker. We had to 
do this while the refinery was ``cold.''
    Earlier this year, we realized that we could not hire 
enough skilled labor to complete the entire maintenance project 
in June and had to schedule another unplanned shutdown in 
August. Despite these challenges, during the late summer and 
fall of 2007, CHS did its best to deliver.
    Brandon, North Dakota customers received 123 percent of 
August 2006 volume, 96 percent of September 2006 volume and 101 
percent of October 2006 volume. In total for these 3 months, we 
supplied 6 percent, more branded product in North Dakota than 
in the previous year when our refinery was operating.
    It was not easy and often times these deliveries were not 
made from preferred terminals closer to the customer, resulting 
in additional costs to our customers as well as the CHS. 
However, I believe our staff made extraordinary efforts to 
supply this volume and no Cenex branded customers were without 
product.
    Much has been said and will be said about a combination of 
events that led to the supply situation just experienced in 
North Dakota. North Dakota is not alone. We at CHS have 
experienced the impact that planned and unplanned maintenance 
problems the refining industry have had in Kansas, Nebraska, 
Colorado and Iowa this past year. There is no quick solution to 
the current U.S. refining capacity, given the significant lead 
times and investment needed to increase production.
    Multiple efforts are underway in the industry. We find 
these projects higher in progress with some coming on stream 
soon, like our Laurel facility. Capacity increases are being 
planned and funded, like our 5 year project at our refinery in 
Kansas. We know--it is under construction by several companies, 
including U.S. Bioenergy, of which we own 20 percent. U.S. 
Bioenergy's 100 unit a gallon per your ethanol facility in 
Hankinson, North Dakota scheduled for completion in April.
    These efforts by the industry will help but then again, it 
will not immediately solve the dilemma. I do not pretend to 
have the complete answer to these supply issues. I trust, 
however, that a combination of manufacturing expansion, both 
petroleum based and renewable based, along with fuel 
conservation and imports will play a role in addressing them. 
Conservation may happen with higher prices. Capacity will grow 
as the name grows and imports will respond to the market. I do 
not expect the supply issues in recent time could heal soon but 
I believe they will in time, as the market adjusts to the 
demand.
    But new challenges lie around the corner. Specifically, as 
the immediate need for diesel fuel eases with the approaching 
winter, the acute need for heating fuel will surface. If the 
industry scrambles to meet the diesel demand, it may be 
similarly challenged with the heating fuel supply. As demand 
grows and unplanned interruptions continue, regional supply 
issues will surface. The market will respond to these outages 
as best as it can but seldom in a timely manner.
    At CHS, we are trying to provide for both the power demand 
and heating demand. CHS will work with these multiple 
challenges and will meet the needs of our Cenex branded 
customers. I can think of no quick additional solutions to this 
spike in demand and unplanned interruptions that aren't already 
being practiced. I believe industry experts are trying to 
safely operate the refineries for maximum production, to 
increase storage and holding tanks, to protect customers, to 
get customers an inventory, to further capacity growth, to 
capture investment in renewable manufacturing and to import 
product on a global scale.

                           PREPARED STATEMENT

    I'm confident that we at CHS and the overall energy 
industry will continue these efforts. We ask for your 
understanding as we work through these challenges. I will 
welcome any questions, Senator.
    [The statement follows:]
                  Prepared Statement of Leon Westbrock
    Senator Dorgan and members of the audience: I am Leon Westbrock, 
executive vice president and chief operating officer of the energy 
division of CHS Inc., the Nation's largest member-owned business and 
its largest cooperative energy company. Our board consists of 17 full-
time farmers, 3 of whom are from North Dakota.
    As background, I grew up on a farm near Browns Valley, Minnesota--
just south of Fairmount, North Dakota. During my 32-year career with 
Cenex and now CHS, I spent a year working in North Dakota. I understand 
well the energy needs of your State's consumers.
    For nearly 65 years, CHS has owned a petroleum refinery in Laurel, 
Montana, just west of Billings. Much of the gasoline and diesel fuel 
produced at Laurel is shipped via our pipeline--beginning at Laurel and 
ending in Fargo. CHS also owns terminals at Laurel and Glendive, 
Montana, and Minot, North Dakota.
    Nearly 3 years ago, CHS approved a $325 million upgrade project at 
Laurel which, when completed early in 2008, will result in the 
production of up to an additional 150 million gallons of gasoline and 
diesel fuel from the same number of crude oil barrels we are refining 
today.
    Part of the plan 2\1/2\ years ago was to schedule a complete 
shutdown of the refinery in June 2007 to conduct major maintenance and 
to install all piping and valves essential for the connection to the 
new coker. We had to do this while the refinery was cold.
    Earlier this year, we realized that we could not hire enough 
skilled labor to complete the entire maintenance project in June and 
had to schedule another unplanned shutdown in August.
    Despite these challenges, during the late summer and fall of 2007, 
CHS did its best to deliver. Our Cenex-branded North Dakota customers 
received 122 percent of August 2006 volumes, 96 percent of September 
2006 volumes and 101 percent of October 2006 volumes. In total for 
those 3 months, we supplied 6 percent more branded product in North 
Dakota than the previous year.
    It was not easy. Oftentimes, these deliveries were not made from 
preferred terminals closer to the customer, resulting in additional 
costs to our customers, as well as CHS. However, our staff made 
extraordinary efforts to supply this volume and no Cenex-branded 
customers went without product.
    Much has been or will be said about the combination of events that 
led to the supply situation just experienced in North Dakota. North 
Dakota is not alone. We at CHS have experienced the impact that planned 
and unplanned maintenance problems plaguing the refining industry have 
had in Kansas, Nebraska, Colorado and Iowa. There is no quick solution 
to given current U.S. refined capacity given the significant lead times 
and investment needed to increase production.
    Multiple efforts are underway in the industry. Refinery projects 
are in progress, with some coming on stream soon like at our Laurel 
facility. Capacity increases are being planned and funded like the 5-
year project at our other facility in McPherson, Kansas. Renewable 
energy capacity is under construction by several companies including US 
BioEnergy of which we own 20 percent. US BioEnergy's 100 million gallon 
per year ethanol facility in Hankinson, North Dakota, is scheduled for 
completion in April 2008. These efforts by the industry will help, but 
these alone will not immediately solve our supply dilemma.
    I do not pretend to have the complete answer to these supply 
issues. I trust, however, that a combination of manufacturing 
expansion, both petroleum-based and renewable-based, along with fuel 
conservation, and imports will play a role in addressing them. 
Conservation may happen with higher prices, capacity will grow as 
demand grows, and imports will respond to the market.
    I do not expect the supply issues in diesel to heal soon, but I 
believe they will in time, as the market adjusts to the demand. But new 
challenges lie around the corner. Specifically, as the immediate need 
for diesel fuel eases with the approaching winter, the acute need for 
heating fuel will surface. Just as the industry scrambled to meet the 
diesel demand, it may be similarly challenged with the heating fuel 
supply. As demand grows and unplanned interruptions continue, regional 
supply issues will surface. The market will respond to these outages, 
as best it can, but seldom in a timely manner.
    At CHS, we are trying to both provide for the power demand needed 
now and the heating demand needed soon. CHS will work through these 
immediate challenges and will meet the needs of our Cenex-branded 
customers.
    I can think of no quick additional solutions to these spikes in 
demand and unplanned interruptions that aren't already being practiced. 
I believe the industry and those connected to it are trying to safely 
operate the refineries for maximum production, to increase storage and 
inventories, to use hedging tools to protect customers, to get 
customers to carry more inventory, to fund capacity growth, to capture 
investment in renewable manufacturing, and to import product on a 
global scale.
    I'm confident that we at CHS and the overall energy industry will 
continue these efforts and more. We ask for your understanding as we 
work through the challenges. I welcome your questions.

    Senator Dorgan. Mr. Westbrock, thank you very much. You've 
obviously now raised my interest in the question of will there 
be a supply of heating fuel that is adequate and what will the 
price of heating fuel be this winter but I will ask you about 
that in a moment.
    Let me call on Kim Penner, vice president of Light 
Industries, Flint Hills Resources--Koch Industries, Flint Hills 
Resources operates the Minnesota based Pine Bend Refinery that 
also serves North Dakota and has a total production capacity of 
280,000 barrels per day of crude oil. Flint Hills owns other 
refining assets in Alaska and Texas, with a combined crude oil 
processing capacity of about 800,000 barrels of crude oil per 
day. I hope that was a reasonably good estimate. Hello, Mr. 
Penner and I thank you very much for being here.
STATEMENT OF KIM PENNER, SENIOR VICE PRESIDENT OF LIGHT 
            PRODUCTS, FLINT HILLS RESOURCES
    Mr. Penner. Thank you, Senator--can you hear me now?
    Senator Dorgan. Much better.
    Mr. Penner. Okay. I understand the focus of today's hearing 
is the recent supply situation in North Dakota and what can be 
done to prevent problems in the future.
    Into the inquiry into this subject, we'll start with what 
the industry as a whole with what safety and environmental 
performance plays in operating refineries. I notice on 
[inaudible] in our motion, demand that we operate our refinery 
so frequently. That's an expectation we take very seriously and 
hails resources.
    Over the last 10 years, we have garnered numerous awards 
from EPA, OSHA and others for safety and environmentally 
responsible operation of our refineries. Safe and clean 
operations require regular maintenance and regular maintenance 
usually results in less fuel being produced during that time. 
We understand that our fall maintenance reduced the amount of 
fuel available in North Dakota. Our turn-around at Pine Bend 
this fall was especially challenging because of the tank 
rupture that occurred about 2 weeks before the scheduled start 
of maintenance. It prevented us from producing as much fuel as 
we would have liked before the maintenance began. The industry-
wide fuel shortages resulted in hardship for the people of 
North Dakota and we think it is our responsibility to help to 
look for solutions in the future.
    But it is important to remember that these oil resources 
can only be a part of the solution. We sell approximately 10 to 
15 percent of the fuel used in North Dakota. We would like to 
be a larger part in the future. We are also putting the 
finishing touches on a project that will increase our current 
distillation capacity by approximately 50,000 barrels a day. 
That's about an 18 percent increase.
    In 2006, we created the new hydro-tractor. That allows us 
to produce ultra-low sulfur diesel and more gasoline. In the 
midst of that, our company has done a major pipeline expansion 
in Minnesota that is going to bring more crude oil into our 
Pine Bend refinery. Between these projects and others, we will 
have invested close to $1 billion in a 5-year period to serve 
the grand demands of consumers in the upper Midwest.

                           PREPARED STATEMENT

    I would like to compliment the chairman on hosting this 
important meeting. I've been with the other key stakeholders 
from the industry and government to better understand the 
issues and work toward solutions. I look forward to talking 
with you and exploring solutions. Thank you.
    Senator Dorgan. Mr. Penner, thank you very much.
    [The statement follows:]
                    Prepared Statement of Kim Penner
    Mr. Chairman: Thank you for your invitation to participate in 
today's hearing and to discuss the refined products supply situation in 
North Dakota. My name is Kim Penner and I am senior vice president of 
light products for Flint Hills Resources. In that role, I am 
responsible for all marketing activities related to gasoline, diesel 
and jet fuel for our company.
    Flint Hills Resources is based in Wichita, Kansas, and is a leading 
producer of fuels, petrochemicals and other petroleum products such as 
base oils for lubricants and asphalt. Our company employs more than 
3,700 people who strive every day to create value for our customers and 
their communities. We primarily operate in the upper Midwest, Texas and 
Alaska. Since 2002, the company has expanded its operations through a 
number of capital projects totaling more than $3 billion. Our focus is 
to operate facilities with a long-term perspective by reinvesting 90 
percent of our profits back into the business, with a primary focus on 
compliance and safety.
    Flint Hills Resources' culture is based on Principled 
EntrepreneurshipTM, which means it strives to combine a 
solid commitment to acting with integrity and an unwavering desire to 
anticipate and cost-effectively satisfy customer needs and grow its 
businesses.
    Our company has been supplying customers in the North Dakota market 
for many years. When compared to other fuel providers within the State, 
however, Flint Hills Resources is a relatively small supplier. Unlike 
others for whom North Dakota is a core market, our company's gasoline 
and diesel market share in the State is only 10-15 percent.
    Refined products are produced at our Pine Bend refinery, which is 
located on the Mississippi River near Rosemount, Minnesota. The Pine 
Bend Refinery serves markets in Minnesota, Wisconsin, Iowa, Nebraska 
and South Dakota, in addition to North Dakota. This refinery has 
recently completed a larger-than-usual turnaround, which is what our 
industry calls scheduled repairs, replacements and additions. This 
recent turnaround at Pine Bend also included a major expansion to 
increase crude oil distillation capacity by approximately 50,000 
barrels per day to help meet growing fuel demands in the Upper Midwest. 
Turnarounds generally result in a short-term reduction of output for a 
long-term increase in output.
    Before directly addressing our recently completed turnaround, I 
would like to provide a broad picture of the North Dakota supply and 
demand balances to establish some greater clarity regarding the market. 
While subject to seasonal variations and production variances, the 
following estimates offer an overview of the inflow and outflow of 
gasoline and diesel supplies in the State.
  --In addition to Tesoro's Mandan refinery there are three refined 
        products pipelines that import product into the North Dakota 
        market. There also is a pipeline that originates at the Tesoro 
        facility with delivery points located in North Dakota and 
        Minneapolis.
  --We estimate in-state production at about 38,000 barrels per day of 
        gasoline; the State's entire demand is estimated at 24,000 
        barrels per day, resulting in an excess inventory of about 
        14,000 barrels a day;
  --Gasoline imports into the State average about 14,000 barrels per 
        day, while exports out of North Dakota account for an estimated 
        28,000 barrels a day;
  --Estimated diesel production in the State runs at about 21,000 
        barrels per day, while demand is estimated at about 27,000 
        barrels a day, presenting a shortfall of about 6,000 barrels a 
        day; and
  --Diesel imports into the State average about 18,000 barrels per day, 
        while exports out of North Dakota account for an estimated 
        12,000 barrels per day.
    These figures are subject to a host of circumstances, scheduled and 
unscheduled events, marketing decisions and production variances, but I 
wanted to share them with you because they are generally relevant in 
understanding North Dakota's recent supply difficulties.
    Flint Hills markets products via two terminals owned and operated 
by Magellan. Our company delivers products into the Magellan pipeline 
at our Pine Bend refinery. Magellan delivers product to terminals in 
Fargo and Grand Forks, North Dakota, as well as other States in the 
region. We do not control physical delivery decisions for those 
terminals. Those decisions are made by Magellan.
    The pipeline operators themselves are also subject to external 
supply rigors as well such as available supply, scheduled and 
unscheduled refinery turnarounds, natural events and increased 
consumer/commercial demand. For example, the increased number of 
unplanned weather-related refinery shutdowns earlier this year in the 
Midwest and Rocky Mountain region compounded terminal supply problems.
    As I mentioned, we recently completed an extensive turnaround at 
our Pine Bend facility. While this project was indeed large, it was by 
no means unprecedented for this site or our company. However, we did 
face unforeseen challenges during this turnaround. A tank rupture in 
the summer prevented us from accumulating the amount of product 
inventory that we had planned and rain delayed our unit startup by 10 
days at the end.
    Our planning for a turnaround generally begins five or more years 
in advance of the activity. Extensive planning is required to minimize 
production down-time without compromising safety or compliance with 
laws. Extensive planning is also needed to arrange for the necessary 
skilled workforce. While the Pine Bend refinery typically employs about 
700 individuals, the size of the on-site workforce grew to 1,700 or 
more during sustained periods due to the addition of contractors needed 
for turnaround activities. With such demand for skilled workers, the 
companies we work with must also make substantial commitments to field 
a workforce of this size. If they have pre-existing commitments to 
other refiners, they may simply tell a refiner that they are unable to 
do the work at the time requested.
    By the third year preceding the turnaround activity, the company 
begins ordering long lead time equipment and piping. Reactor vessels, 
cokers and other components of refineries that may be replaced during a 
turnaround are special order items that require substantial engineering 
and manufacturing lead time. Some of the equipment is massive, and must 
be delivered as close to the time of the turnaround as possible because 
of space and transportation logistics. In addition, an abbreviated 
period between the end of high summer fuel demand and the onset of 
winter also play a role in when turnarounds can optimally be scheduled.
    As the time for the turnaround draws closer, the schedule of 
activities becomes more precise and the opportunities to change the 
schedule become more limited. By this time, the sequence of activities 
is set, the staging of contractors is set, and the arrival of equipment 
is set. Deciding to postpone at this point doesn't usually mean a delay 
of days or weeks, it generally means a delay of months, a year or even 
more. Such extended delays may simply be unacceptable from the 
perspective of safety and environmental compliance.
    The goal of a turnaround is to replace equipment and materials 
before they fail, with an ample margin for safety. Monitoring of metal 
loss rates and unit performance is done regularly to determine when 
equipment and materials should be replaced, again with an ample margin 
for safety. As a refining and petrochemical company, Flint Hills 
Resources' first responsibility is to ensure that its employees, 
contractors and neighbors are safe, and that its operations comply with 
all laws and regulations. Thus, timely turnarounds are critical to 
maintaining safe, reliable operations--and supplying markets 
efficiently.
    Flint Hills Resources, as well as the refining industry represented 
by trade groups such as the National Petrochemical & Refiners 
Association, understand that Senator Dorgan wants to explore ways for 
the Federal Government to approve and/or coordinate all refinery 
shutdowns. We are concerned that an effort to prevent multiple, 
simultaneous shutdowns, no matter how sincere and carefully considered, 
ultimately result in delays to successful refinery turnarounds and 
could potentially result in refinery accidents or an unplanned shutdown 
that further decreases production.
    Legitimate questions have been raised as to how we and other 
refiners communicate with customers and pipeline companies about 
turnarounds, and how we allocate limited supply among customers. While 
we do not communicate turnaround activity with our competitors on 
advice of legal counsel that this communication would be a breach of 
anti trust laws--we do certainly discuss that information with our 
customers and pipeline companies in advance. We have contractual 
commitments to many of our customers, and they are alerted and served 
first, on an equitable basis, when supply is not sufficient to serve 
all customers. Other customers prefer the freedom to shop for the best 
price each day among Flint Hills Resources and its competitors, and do 
not have contractual commitments to purchase set supplies from our 
company. These customers are served after our contractual commitments 
are met, if there is sufficient supply.
    In closing I want to commend Senator Dorgan for chairing and 
hosting this important hearing. By bringing together key stakeholders 
from industry and government, we can better understand the issues and 
work toward solutions. We look forward to talking with Senator Dorgan 
on his policy goals in this area and we hope to give him a boots-on-
the-ground perspective of how regulations in this area might affect 
this market.
    From Flint Hills Resources' perspective, we believe that many of 
these issues can be addressed through increased production capacity 
both regionally and nationally. To this end we are uniquely proud to 
have completed the expansion at our own Pine Bend Refinery and of the 
ability it provides us to supply additional products throughout the 
Upper Midwest.
    Mr. Chairman, thank you for the opportunity to participate in this 
important hearing. I look forward to answering any questions you may 
have.

    Senator Dorgan. Next we will hear from Mr. Bruce--is it 
Heine?
    Mr. Heine. Heine.
    Senator Dorgan. Bruce Heine. Mr. Bruce Heine is the 
director of government and media affairs in Magellan Midstream 
Partners. They own gasoline and diesel terminals and storage in 
Fargo and Grand Forks. Their U.S. assets consist of an 8,500 
mile refined petroleum products pipeline system, including 47 
terminals, seven marine terminal facilities, 27 inland 
terminals and a 1,100 mile ammonia pipeline system. Mr. Heine, 
thank you very much for being here. You may proceed.
STATEMENT OF BRUCE W. HEINE, DIRECTOR, GOVERNMENT AND 
            MEDIA AFFAIRS, MAGELLAN MIDSTREAM PARTNERS, 
            LP
    Mr. Heine. Thank you, Senator, for that nice introduction 
of our company and we're out there in 22 States but none more 
important than the State of North Dakota. We own assets in 
North Dakota, in Fargo and Grand Forks so there are two 
petroleum distribution terminals and indeed, our pipeline 
system does end in Grand Forks, with only 88 miles of pipe here 
in North Dakota. But as you mentioned, we have some 8,500 miles 
of pipe throughout 13 Midwestern States.
    We own another refiner. We don't own the products that we 
transport in our system. Those products are owned by others, 
primarily refiners, petroleum traders and marketers that ship 
out on our pipeline system.
    Before I go into our operations and a description of what 
we do and how we earn our money, let me also tell you that our 
company is indeed a trailblazer as it relates to looking at new 
and creative methods to transport and blend renewable fuels. 
For example, in North Dakota, we were one of the willing 
investors in installing biodiesel blending infrastructure 
inside of our petroleum gates to provide quality blends 
anywhere from 2 percent to 20 percent biodiesel and a number of 
blends in between.
    In regards to ethanol, our terminals in North Dakota are 
able to dispense anywhere from E10 blends to E85 very well. 
We're looking also as a pipeline company with opportunities to 
move renewable fuels more into the mainline distribution system 
of petroleum products and by that, I mean they're looking at 
the technical issues that have essentially prevented the 
transportation of ethanol and ethanol blended fuels over the 
past generations. Now that ethanol production has continued to 
increase, we're looking at the possibility of transporting 
ethanol blends and potentially crude ethanol via pipeline in 
the future.
    There are indeed opportunities for the Senate to help and 
for the House of Representatives to help with all the sort of 
efforts to move that along. But our pipeline business is indeed 
a common failure pipeline, meaning that we take the loads from 
any shipper that wants to put product into the system. We 
strive to minimize outages but we're dependent upon the supply 
that we receive from refiners and other pipelines, which are 
connected to our system. Mechanically, our pipeline system has 
operated fine. The terminals connected to the pipeline system 
are operating fine. It's essentially a lack of supply, which 
has created the system--the circumstances that we're in today.
    So what are we going to do? Have terminals without product 
or gasoline or diesel fuel? If there are maintenance programs 
and as my colleague with the EIA has adequately stated in his 
testimony, both planned and unplanned refinery down time due to 
maintenance or due to unexpected events such as the disastrous 
flood in Coffeyville, Kansas, that will, indeed, have a domino 
impact on our ability to fire a system.
    In North Dakota, we generally are able to supply terminals 
with product out of the Northern Tier refineries. In times when 
there is maintenance or other unexpected outages, then we rely 
on product coming in from as far away as Texas, Oklahoma or 
Kansas refineries.
    If an outage does occur, we have a number of different 
notification systems in place, which are driven to notify our 
customers quickly and on a real time basis, to indicate that 
we've got an outage so they can plan accordingly. And we do 
operate the system on what we refer to as a hub and spoke 
system, trying to maximize the most product that we have in our 
pipeline system to be delivered to a terminal and ultimately 
into transport trucks.

                           PREPARED STATEMENT

    So with that, I look forward to addressing any questions 
that you may have regarding our operations in North Dakota or 
South Dakota or elsewhere in our system.
    Senator Dorgan. Mr. Heine, thank you very much.
    [The statement follows:]
                  Prepared Statement of Bruce W. Heine
    Good afternoon Senator Dorgan and subcommittee staff. On behalf of 
our CEO and our North Dakota based employees, thank you for inviting 
Magellan to testify on the important subject of fuel availability in 
the State of North Dakota. Magellan owns and operates the Nation's 
longest refined product pipeline system along with 81 petroleum 
distribution terminals in 22 States. In North Dakota, we have 
distribution terminals in Fargo and Grand Forks. We also have two 
terminals in South Dakota and five in Minnesota. While we are neither a 
refiner nor are we affiliated with any petroleum company, we do have an 
important role in the transportation and distribution sector of our 
industry.
    Along with our petroleum transportation and distribution 
infrastructure, Magellan has been a trailblazer in developing new 
infrastructure dedicated to renewable fuel distribution at our 
terminals throughout the Midwest. In fact, we were an industry leader 
with the installation of state-of-the-art biodiesel blending systems at 
our terminals in North Dakota. These systems allow us to provide our 
customers with quality biodiesel blends from B2 to B20. Our North 
Dakota terminals also have ethanol blending infrastructure. These 
sophisticated ``sequential-blending'' systems allow us to provide our 
customers with blend options ranging from E10 to E85.
    We are also exploring new cost efficient methods to transport 
biofuels. Later this year, we are planning to transport a B5 biodiesel 
blend on our pipeline system. In addition, we are active with industry 
and governmental efforts to find solutions to technical challenges 
associated with the transportation of ethanol blended gasoline and neat 
ethanol via pipeline. Indeed, we see commercial opportunities in the 
future to transport biofuels within the mainstream petroleum 
transportation system.
    As an open access common carrier pipeline company, we do not own 
the commodities we ship through our system. The gasoline, diesel fuel, 
and other refined products that we transport in our pipeline are owned 
by the refiners, traders, and wholesale marketers that are shippers on 
Magellan's pipeline. In other words, we are a company that transports 
the refined products from refineries to terminals. We constantly strive 
to minimize product outages, but our ability to achieve our goal is 
dependent on the volume of refined products we receive from refineries 
and at our connections with other pipelines.
    Our pipeline system and our petroleum distribution terminals in 
Fargo and Grand Forks are operating normally from a mechanical 
standpoint. From our perspective, recent short term outages at our 
distribution terminals are not related to pipeline or distribution 
terminal operations. Quite simply, it's the lack of available supply. 
The majority of gasoline and diesel fuel delivered into our Fargo and 
Grand Forks terminals generally originates from refineries and 
pipelines connected to the northern tier \1\ of our pipeline system. We 
also have the capability to supply our North Dakota terminals with 
volume from refineries in Texas, Oklahoma and Kansas. However, to meet 
demand in the Upper Great Plains, we need supply from northern tier 
refineries.
---------------------------------------------------------------------------
    \1\ The northern tier includes refineries located in Minnesota and 
Wisconsin.
---------------------------------------------------------------------------
    Recent outages at our North Dakota and other terminals in the Upper 
Great Plains have been due to lower supply from regional refinery 
origins and strong seasonal demand. If a refinery connected to our 
pipeline system has an expected or unexpected disruption in operations, 
we receive a lower volume of product to deliver to our terminals. In 
the case of an expected or planned operational disruption \2\ 
(typically the result of required refinery maintenance), we are 
generally able to build inventory in advance and/or transport refined 
products from alternative origins to compensate for the shortfall in an 
effort to supply terminals. However, when several refineries connected 
to our system are down for maintenance at the same time or are 
encountering unexpected operational issues, we cannot always prevent 
short term outages at our terminals. Refiners connected to our pipeline 
system generally make us aware of their plans but they are by no means 
required to share their plans with us.
---------------------------------------------------------------------------
    \2\ A planned operational disruption in production is generally 
referred to as a refinery ``turnaround''.
---------------------------------------------------------------------------
    Last, recent demand for gasoline and diesel fuel has exceeded 
available supply at several of our terminals in the Upper Great Plains. 
During a time when available demand exceeds supply which results in a 
terminal outage, we notify the inventory owners (shippers) on a real-
time basis of the outage. In addition, we update our ``Terminal 
Information System'' (TIM) \3\ on a real-time basis. Our TIM system is 
a voluntary, value added service to our shippers, petroleum jobbers and 
their drivers. We believe the structure of this system is one of the 
best in the industry and we have received positive feedback from a 
variety of sources.
---------------------------------------------------------------------------
    \3\ TIM is an audio system that provides updates regarding product 
availability at our terminals.
---------------------------------------------------------------------------
    When the terminal is resupplied, we may initiate an allocation 
procedure which was developed with feedback from our shippers. The 
allocation procedure provides product availability based on historical 
volumes at a terminal. We believe this procedure provides equitable 
allocation of fuel.
    Thank you again for the opportunity to comment on these important 
subjects and I would he pleased to answer questions.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Dorgan. Next we will hear from Mike Rud, the 
President of North Dakota Retail Petroleum Marketers 
Association in North Dakota, comprised of 425 petroleum 
marketers from 162 different cities across the State. Mr. Rud?
STATEMENT OF MIKE RUD, PRESIDENT, NORTH DAKOTA RETAIL 
            PETROLEUM MARKETERS ASSOCIATION
    Mr. Rud. Thank you, Senator. On behalf of the 400 or so 
members of our associate members and marketer members, we thank 
you for taking the time to come to North Dakota and hear 
firsthand the dilemma facing our great State's retail petroleum 
suppliers and dealers regarding the fuel shortages.
    How bad is the supply in North Dakota? That's a question 
I've been asked many times in the past few months by 
journalists from across the United States. I've come under fire 
from some officials in this State when I told reporters several 
of our long-time members call it worse than the oil embargoes 
of the 1970s.
    People who have been in this business for 40 and 50 years 
will tell you that this is a very difficult situation and 
probably has been worse than what they faced in the 1970s with 
the oil embargo.
    The North Dakota Petroleum Marketers and Suppliers have 
been fighting a lot to supply since late May and early June. It 
was at this time the NDPMA received information that up to 
eight refineries would be down in the Great Plains region for 
scheduled maintenance during the course of the summer and fall. 
Our association immediately began working with Governor 
Hoeven's office to secure an hours of service waiver for 
procuring and transporting product that started out mainly as a 
gasoline hours of service, then quickly turned into a diesel 
fuel hours of service which is still in effect at this time, 
through November 30. It's basically designed to bring product 
back from across State lines and back into our State.
    It was again at this time when shipments in June, shipments 
in Grand Forks and Fargo became very sporadic at best. The 
Governor again took a proactive response and helped us greatly 
before the July 4th weekend, as he continued to help us with 
the hours of service waiver by extending that and helping us 
get through the traveling season, which was in full gear at 
that time.
    The diesel shortages became more apparent as we moved 
closer to the harvest season. The hours of service waiver has 
allowed North Dakota gas retailers to get through the summer 
with very few outages reported. This only happened because of 
the great dedication and professionalism of the North Dakota 
Petroleum Marketers and Transport companies. Everyone paid a 
price, Senator, during this process. We saw prices in North 
Dakota probably running between 20 to 30 cents a gallon higher 
than what the rest of the country was and I think at one time, 
we had the highest priced gas in the country outside of Hawaii. 
So while the public did pay a severe price at the pumps, the 
general public had no idea transport drivers, many of them 
retail gas business owners themselves, were driving anywhere 
from 800 to 1,000 miles round trip just to secure product.
    Sir, if I may, I would just like to deviate a little bit 
from my testimony and share with you a letter that I received 
from a marketer in Mandon, North Dakota last week. Her and her 
husband run a mom-and-pop business and have been in the 
industry since 1964. They're unbranded dealers so they don't 
fly a Cenex flag or anything of that sort. The lady goes on to 
say, the year was the worst for high prices and shortages of 
produce that she can recall. July and August gas was very hard 
to get. We were able to get product in Fargo Morehead but we 
had to work hard to get a load, sitting in line 6 to 7 hours, 
waiting to get a load, sometimes coming home empty.
    At the end of the August, the nightmare of diesel fuel 
shortages began. September 1, they were able to get two loads 
of diesel fuel from Fargo from a friend who was branded Cenex, 
however did not have product again until September 14 and that 
again was Cenex product only. That product lasted about a day 
and then Fargo was out for the next 3 weeks.
    Morehead had a product they would release at 8 a.m. in the 
morning. Her husband would get in line at 3 a.m. Every day, he 
had to get in line earlier. It got to be where he was leaving 
the house at 3:30 in the afternoon and was in line by 5 o'clock 
that night and then waited until the product was released until 
8 o'clock the next morning.
    Her husband would sit in line for 15 to 16 hours at a time 
to get one load of product. In a 2-week period, he slept at 
home three nights. He didn't have a sleeper in the truck so he 
put a board between the seats and tried to get some sleep. Most 
of our marketers in North Dakota, their transport systems 
aren't really equipped with sleepers because of the gas 
industry, the way the product is moved on a daily basis. If you 
call in the morning in a normal situation, you probably could 
have a load by the afternoon. That obviously hasn't been the 
case here this summer and that's what most of our guys resorted 
to, I think. Kyle Ketchmark there will tell you the same thing. 
He slept on a board more times than he'd care to reveal.
    Each day, Morehead released three to maybe nine loads of 
diesel fuel. Sometimes again, he'd sit in line for 15 or 16 
hours and come home empty. So by September 25, there was no 
product in Morehead or Fargo. Trucks had to go to Alexandria, 
Minnesota; Sioux Falls or Roseville, Minnesota. Grand Forks has 
been out of product most of the summer.
    Product is still very short but most of the crop is off and 
things are starting to slow down. There is no number 1 diesel 
in that area at this time. Our customers were never without 
fuel but we prayed for rain many days so we could get our 
supply built up. If we would not have our own semi and my 
husband sitting in line for hours, some customers would have 
been without product.
    Please help the fuel dealers of North Dakota. We can't go 
through another year like this one. The unbranded dealers 
really need help. We have to be able to get product to our 
customers. And that, I think, would be the sentiment of many 
marketers out there in North Dakota right now. From an 
unbranded standpoint, it was especially hard in terms of coming 
up with product.
    Again, the list goes on, Senator. I can share with you one 
of the sentiments that came into my office as the summer wore 
on, was well maybe we should let people run out of product and 
someone would stand up and take notice. That's easier said than 
done, I think. While a lot of people maybe had that thought to 
the fact that in a smaller State like North Dakota, a lot of 
our rural marketers would be sharing church with their 
customers. The kids would be playing ball together. They're 
going to school together so you just can't walk away from a 
friend.
    So instead of doing that, the North Dakota petroleum 
marketers did essentially the opposite during this whole 
ordeal. They worked with the Governor's office to get an EPA 
waiver on Canadian gasoline and the Canadians have been very 
cooperative with us and we certainly appreciate that. The 
refiners have done all they can, I think, up in that part of 
their county, to help us stem off some of the supply issues.
    Governor Hoeven has been very good to work with regarding 
the hours of service waivers and I know he has continued to put 
pressure on refiners and terminals to try to bring product into 
the States and keep as much product in the State as possible. 
Again, the North Dakota marketers have worked with Canadian 
petroleum refineries in securing rail car shipments of gas and 
diesel to help ease the crunch down here in the United States.
    Our marketers procured allocations of diesel with Canadian 
outlets. Some of this had to be trucked 12 hours in one 
direction to bring it back to the States but we got it back 
there and tried to keep people rolling down the road. Our 
members were forced to allocate product to farmers, ensuring 
the harvest season can be successfully completed in a timely 
manner by all ag producers. This did create some hardship with 
some of our larger farmers in the State who probably had 
ordered 10,000 gallons but only got 3,000 to 5,000 gallons but 
it was what our marketers felt they had to do in order to keep 
everybody happy and keep the harvest rolling forward so that 
everybody had a chance to get the crop off the field.
    So that was very important as well. We had competitors who 
helped out fellow marketers who didn't have product. Sometimes 
that made the difference between keeping the school buses 
rolling on certain days or not. Those are the kind of lengths 
we went to, to keep this whole process working and at the same 
time, we've tried to be as price competitive as possible at the 
pump.
    This has been hit. Like I say, it was 20 to 30 cents a 
gallon normally that we were above probably the national 
average but we did all we could to keep the price in line, 
given the fact that the high freight costs we were facing and 
the amount of labor that was being involved in sitting in a 
line at a terminal for 15 to 16 hours.
    How long can we maintain this level of service excellence? 
I don't know. We've got tired marketers out there. We need to 
hopefully get this thing wrapped up as soon as possible. I can 
share with you a few more stories. I had a wife call me the 
other day in tears because her husband is older and she's 
worried if he's going to be hold up under the stress and 
pressure of what we've faced in the last 6 months and I think 
that's a real concern for a lot of marketers out there. 
Transport owners will tell you that they've had drivers who've 
been with them 20 to 25 years who have come back in from a few 
days off and said I can't do this anymore. I don't know if I 
want to continue down this road and keep sitting in lines, 
sleeping in a truck.
    Those are all key issues. Small retail outlets have been 
drastically affected because of not only the supply issue in 
terms of getting the product but also the fluctuation in price 
because of depending on where the product was coming from and 
on what day. Lord only knows how much they're going to pay for 
that product and how they can pass that on to their consumers 
and still be price competitive in the market.
    I have several marketers who had called me about high 
priced diesel fuel. What should I do? I've got a 25 cent 
freight charge on my diesel fuel. You have to pass that on. You 
can't just give that away. I mean, it's just part of doing 
business but it's very hard to do, to remain price competitive 
when you're probably only going through a load a week or a load 
a month, some of these guys, in a very volatile fuel market.
    Where do we go from here? We're still facing the shortages. 
We're starting to see the light at the end of the tunnel, which 
is a positive because the harvest is wrapping up but we've got 
marketers who are scrambling to find No. 1 diesel and heating 
oil as the winter nears. We've got marketers who are dealing 
with the EPA, trying to look at ways to maybe use jet fuel or 
kerosene and combine it with number 1 as a heating source. So 
we're looking at all--and continue to look at all different 
avenues that are out there that we can explore.
    We desperately need product in the eastern part of the 
State in those terminals and on a regular basis as soon as 
possible. It has to happen, though. We can't continue down this 
road and more importantly, we need to try to work together to 
make sure this product shortfall doesn't happen again. The 
petroleum marketers are completely on board with section 280 of 
the energy bill that would call for some type of coordination 
of refinery maintenance. I'm with you. I'm not accusing anyone 
in this room or on this panel, of getting together and deciding 
on planned maintenance to drive the price of gas or fuel up. I 
have no desire to do that.
    We've got great working relationships with Cenex as well as 
Tesoro and we want to maintain those working relationships 
along with Magellan and all the other people who are here at 
the table today. But it is a huge concern. If we can find a 
liaison, a clearing house agent that can do this work for us so 
that the refiners don't have to talk to one another but there's 
a coordinator that would be a huge plus for us in terms of the 
planned maintenance for that. We can't afford to have eight 
refineries going down sharp in the summer and fall when we're 
on the end of the pipeline. We can no longer stand by and just 
deal with taking the crumbs and the leftovers of what's in that 
pipeline. We can't do it and the public can't keep doing it 
either and paying the price that we're paying at the pumps.

                           PREPARED STATEMENT

    Above all else, I would join you with GFCC oversight, 
stopping the speculation, the manipulation, and the over-
speculation of the market in guiding a barrel of oil through 
the rough spots. Someone needs to explain to us how we went 
from $65 barrels on Labor Day to the $95 or $96 we're at today.
    So with that, sir, I would answer any questions you might 
have.
    Senator Dorgan. Mr. Rud, thank you very much.
    [The statement follows:]
                     Prepared Statement of Mike Rud
    Chairman Dorgan and members of the committee, for the record, my 
name is Mike Rud. I'm the president of the North Dakota Petroleum 
Marketers Association. On behalf of our nearly 400 member marketers and 
associate members, I thank you for taking the time to come to North 
Dakota and hear first hand the dilemma facing our great State's retail 
petroleum suppliers and dealers regarding fuel supply shortages.
    How bad is the fuel supply shortage in North Dakota? That's a 
question I've been asked many times in the past few months by 
journalists from across the United States. I came under fire from some 
when I told reporters several of our long time members called it worse 
than the oil embargo of the 1970s. Here's a brief synopsis.
    North Dakota petroleum marketers and suppliers have been fighting a 
lack of supply since late May and early June. It was at this time, 
NDPMA received information that up to 8 refineries in the Great Plains 
region would be going down for scheduled maintenance during the course 
of the summer and early fall.
    Our association immediately began working with Governor Hoeven's 
Office securing an Hours of Service waiver for procuring and 
transporting product (mainly gasoline and later diesel fuel) from 
across State lines back into North Dakota. It was about this time when 
gas shipments to terminals in Grand Forks and Fargo became sporadic at 
best. The Governor's proactive response to this issue paid big 
dividends as the July 4 weekend rolled around and the peak summer 
traveling season swung into full gear. The diesel fuel shortages would 
start to become apparent as the harvest season neared.
    The HOS waiver has allowed North Dakota gas retailers to get 
through the summer with very few outages reported. This only happened 
because of the great dedication and professionalism of the North Dakota 
petroleum marketers and transport companies. Aside from rising gas 
prices, the average person never felt the pinch of the supply issue 
because of the tireless work of the transport industry.
    The general public had no idea transport drivers, some of them 
owners of the retail gas businesses themselves, were driving anywhere 
from 800-1,000 miles roundtrip in the process sitting in line for up to 
12 hours or sleeping on boards laid across the truck seats hoping they 
might get a truckload of product before the terminal ran dry.
    Unfortunately, the long days are taking a toll on marketers. 
Marketers and transport operators have called the association office 
saying maybe we should just let people run out of product so someone 
will take notice. Instead North Dakota petroleum marketers have done 
just the opposite throughout this whole ordeal. We've worked with the 
Governor's Office to get an EPA waiver on Canadian gasoline. Governor 
Hoeven continues to support the HOS waivers. NDPMA marketers have 
worked with Canadian petroleum refiners in securing rail car shipments 
of gas and diesel fuel to help ease the demand at local terminals. Our 
marketers have procured allocations of diesel with Canadian outlets and 
sent trucks up to 12 hours in one direction to bring this product back 
to the State. Our members have been forced to allocate product to 
farmers ensuring the harvest season can be successfully completed in a 
timely manner by all ag producers. Competitors have even joined forces 
at times to help out a fellow marketer who couldn't get product. In 
several cases, it's made the difference in whether school buses would 
run or not on certain days.
    During this entire time the North Dakota gas retailer has worked to 
remain as price competitive as possible in giving the public the best 
deal at the pumps. How long can this level of service excellence 
continue? I don't know.
    I had an independent retailer whose wife called me in tears saying 
she was worried about her husband holding up under all the stress and 
pressure. Transport owners talked to me about veteran drivers coming 
back from a few days off, coming into the office and telling the boss 
they didn't know if they wanted to drive anymore. Small retail outlets 
were looking for buyers or contemplating closing the doors because of 
the high costs of product due to soaring freight costs. A small 
marketer called my office one day panicking about how to price a load 
of fuel that carried a 25 cent per gallon freight charge. When you may 
only go through one load per month, it becomes extremely tough to be 
price competitive in this volatile fuel market. Where are we now and 
where do we go from here?
    North Dakota retailers are still facing severe diesel fuel 
shortages. While we are beginning to see light at the end of tunnel 
regarding the harvest, we now face the prospect of finding No. 1 diesel 
fuel or heating oil as the winter months near. We desperately need some 
product to start flowing into the terminals in the eastern part of 
North Dakota immediately and on a regular basis.
    More importantly, we need to make sure this product shortfall 
doesn't happen again. We can't afford and nor can the motoring public 
afford to have a large number of Midwest refineries going down at the 
same time, especially when you're on the end of the supply line. North 
Dakota can no longer stand by and just settle for the leftovers or 
crumbs when it comes to petroleum supplies.
    Thank you for your time and consideration. I will do my best to 
answer any questions you might have regarding this issue.

    Senator Dorgan. Finally, we are joined by a neighbor from 
the south. Ms. Dawna Leitzke from South Dakota who represents 
some 600 retail, wholesale and bulk fuel terminal operators in 
South Dakota. She's executive director of the South Dakota 
Petroleum and Propane Marketers Association.
STATEMENT OF DAWNA LEITZKE, EXECUTIVE DIRECTOR, SOUTH 
            DAKOTA PETROLEUM AND PROPANE MARKETERS 
            ASSOCIATION
    Ms. Leitzke. Good afternoon, Mr. Chairman. Thank you for 
the opportunity to come up here and talk to you.
    Again, I am Dawna Leitzke. I am the executive director of 
the South Dakota Petroleum and Propane Marketers and I just 
wanted to give you a little view of what's happening in the 
State of South Dakota. It is much like North Dakota but a 
little bit different.
    In May 2007, petroleum wholesalers and marketers started to 
see major outages at pipelines throughout the State of South 
Dakota. These outages where most apparent in Sioux Falls, South 
Dakota and that is where our population center is in our State. 
The first week of May, wholesalers and marketers had no 
gasoline to load from the pipelines because there simply was no 
product available. This outage continued for about 10 days. 
Since May 2007, our supply issue has only gotten worse.
    Marketers and wholesalers have continued to struggle to 
find gasoline and diesel fuel at all the pipeline terminals in 
South Dakota and throughout the entire region. My members have 
experienced long waits at the terminals. In some cases, they 
wait up to 12 to 15 hours, sitting in lines to load the 
product.
    In early of June 2007, I went to Governor Rounds and asked 
for an hours of service waiver for marketers who enduring these 
conditions. Our first waiver was issued on June 15 and we have 
one in effect yet today. We will have one in effect until 
December 7, which is 6 months, which is unprecedented. 
Unfortunately, the hours of service waivers do not aid our 
members in receiving the products. All they do is enable them 
to not get tickets for sitting in long longs and waiting and 
sleeping in their trucks.
    My members or I have been in daily contact with pipelines 
and/or the refiners and have been asking the same questions. 
When will we get fuel in South Dakota? The answer is always the 
same. No one knows. Our marketers do understand that this 
spring, summer and fall, there have been many challenges for 
refiners--floods, fires, and maintenance issues have all 
contributed to the supply problem.
    South Dakota is slightly different than North Dakota and 
other States in our region. We don't have a refinery in our 
State and we are at the end of the pipe with small volumes as 
compared to other States and marketers and we have fewer brands 
than most markets. I'm not sure if you're aware and this also 
has kind of happened in North Dakota but August 3, we lost 
Conoco Phillips and April 1, 2008, we will lose DP as a 
supplier in our State.
    All these factors contribute, in my opinion, to the lack of 
fuel being prepared and shipped to South Dakota. The majority 
of the motoring public has no idea what wholesalers and 
marketers face every day in their quest to keep gas stations, 
truck stops, farmers, State and local governments and bulk 
facilities from running out of gas or diesel. I commend my 
marketers and wholesalers for waiting in those long lines and 
long hours to ensure that our State's citizens and visitors do 
not run out of product.
    My marketers travel to Kansas, Colorado, Montana, Wyoming, 
Nebraska, Minnesota, Iowa and North Dakota in search of this 
fuel. These drivers worked very hard all through the summer and 
into the beginning of the fall. Most marketers and their 
drivers were optimistic that this situation was going to 
resolve itself. It did not. In early October, Governor Rounds 
wrote letters to all refiners who supply South Dakota and 
requested that they put more wet barrels into the pipelines in 
order to get more product and that's gasoline and diesel, into 
South Dakota. Unfortunately, that did not happen.
    In the last 2 weeks, our situation and lack of fuel supply 
has hit an all time low. Marketers and wholesalers who have 
been in the business since the 1960s have told me that this was 
worse than the oil embargo of the 1970s. Many tell me they have 
never seen supply or lack of supply this bad. We have had gas 
stations, truck stops and bulk facilities running out of 
product almost every day.
    Last week I once again asked for the assistance of Governor 
Rounds. I also made personal visits to our congressional 
delegation in Washington, DC. Governor Rounds and our 
congressional delegation did make personal phone calls, asking 
refiners to help in this crisis situation because we actually 
consider this a crisis in South Dakota. I am requesting that 
product be sent up the pipeline.
    I continue to receive daily phone calls from marketers, 
State agencies within the State of South Dakota, and other fuel 
consumers, asking me when the situation is going to improve. I 
honestly tell them I do not know and that I don't any good news 
for them. It has been very frustrating for everybody involved.
    I also have 100 stories just like Mike has told you. My 
most recent tragedy is a station in a saw town, White River, 
South Dakota, closed their doors on Friday. They simply could 
not afford the product anymore and they just couldn't get the 
product in their station. They're a mom-and-pop and who knows 
if they'll ever reopen those doors. Once they are closed, you 
know how hard it is restart. Their competitor actually told me 
that story because they were so sad and they were worried about 
that person's children, whether they'd be able to feed their 
children through winter.

                           PREPARED STATEMENT

    So on behalf of the petroleum marketers, gas station 
owners, truck stops, bulk fuel haulers and fuel wholesalers in 
the State of South Dakota, we ask to help alleviate the 
continuing supply problem in our State. I just have to close 
with saying that every person on this panel kind of knows 
what's going on and we're all in the same situation and we're 
all struggling. Two things really keep me awake at night and 
every night I wake up and I say a prayer that the whole day 
will go well; that is, that none of my drivers get in an 
accident because they are sleep deprived. They're waiting in 
those long lines and hope that it doesn't get cold. As I drove 
up here today, it was snowing and I had a pit in my stomach 
because we don't have the heating fuel. We had an ice storm 2 
years ago in South Dakota this exact weekend. We didn't have 
any fuel. We were running out. We were commended for helping 
each other out. We were getting fuel from the National Guard, 
the State of South Dakota. So I've been through it. We've been 
through this tragedy in South Dakota and this is not a good 
situation and it's not getting better. So I will stand by for 
any questions and I thank you for your time.
    [The statement follows:]
                  Prepared Statement of Dawna Leitzke
    Good Afternoon Chairman Dorgan and members of the committee. My 
name is Dawna (Dawn-a) Leitzke (Light-ski) and I am the executive 
director of the South Dakota Petroleum and Propane Marketers 
Association. I appreciate the opportunity to provide you with a picture 
of the fuel supply situation in South Dakota.
    In May 2007, petroleum wholesalers and marketers started to see 
major outages at pipelines throughout the State of South Dakota. These 
outages where most apparent in Sioux Falls, South Dakota. The first 
week of May, marketers/wholesalers had no gasoline to load from the 
pipelines because there simply was no product available. This outage 
continued for about 10 days. Since May 2007 our supply issue has only 
gotten worse. Marketers/wholesalers have continued to struggle to find 
gasoline and diesel fuel at all the pipeline terminals in South Dakota 
and throughout the region. My members have experienced long waits at 
the terminals--in some cases they have had to wait up to 12-16 hours 
sitting in line just to load a transport.
    In early June 2007, I went to Governor Rounds and asked for an 
hours of service waiver for marketers enduring these conditions. The 
first waiver was issued by Governor Rounds on June 15th. Since that 
day, South Dakota has had an almost continuous HOS waiver. Our present 
waiver is due to expire on December 7th. Unfortunately, the HOS waiver 
does not aid my members in receiving product.
    My members or I have been in daily contact with pipelines and/or 
refiners asking the same question. When will we get fuel in South 
Dakota? The answer is always the same. No one knows. Our marketers do 
understand that this spring, summer and fall there have been many 
challenges for refiners--floods, fires, maintenance issues have all 
contributed to this supply problem.
    I feel that South Dakota is in a slightly different situation than 
other States in our region. We have no refineries, we are at the end of 
the pipelines, we have small volumes as compared to other States and 
marketers, and we have fewer brands than most markets. All these 
factors contribute, in my opinion, to the continued lack of fuel being 
shipped to South Dakota.
    The majority of the motoring public has no idea what wholesalers/
marketers face every day in their quest to keep gasoline stations, 
truck stops, farmers, State and local governments, and bulk facilities 
from running out of either gasoline or diesel. I commend my marketers/
wholesalers for working long hours, waiting in long lines at the 
pipelines to ensure that our State's citizens and visitors do not run 
out of product. My marketers/wholesalers travel to Kansas, Colorado, 
Montana, Wyoming, Nebraska, Minnesota, Iowa and North Dakota in search 
of fuel. These drivers worked very hard all through the summer and into 
the beginning of the fall. Most marketers and their drivers were 
optimistic that the situation would resolve itself.
    It did not. In early October 2007, Governor Rounds wrote letters to 
all refiners who supply South Dakota and requested that they put more 
wet barrels into the pipelines in order to get more product (gasoline 
and diesel) into South Dakota. Unfortunately, that did not happen.
    In the last 2 weeks, our situation and lack of fuel supply has hit 
an all time low. Marketers/wholesalers who have been in the business 
since the 1960s have told me that this is worse than the oil embargo of 
the 1970s. Many tell me they have never seen supply or lack of supply 
this bad. We have had gas stations, truckstops and bulk facilities 
running out of product almost every day.
    Last week I once again asked for the assistance of Governor Rounds. 
I also made personal visits to our Congressional delegation in 
Washington, DC. Governor Rounds and our Congressional delegation made 
personal phone calls asking refiners to help with this crisis 
situation--requesting product be sent to the pipelines in South Dakota.
    I continue to receive daily calls from marketers, State agencies 
within the State of South Dakota, and other fuel consumers asking me 
when the situation is going to improve. I honestly tell them I don't 
know and that I do not have any good news for them. It has been very 
frustrating for everyone involved.
    I also have many stories from my members that are similar to what 
Mike Rud has just told you.
    On behalf of the petroleum marketers, gas station owners, truck 
stops, bulk fuel haulers, and fuel wholesalers in the State of South 
Dakota, we ask for your help in alleviating this continuing supply 
problem.
    Thank you for your time and I will stand by for any questions.

                           HOME HEATING FUEL

    Senator Dorgan. Ms. Leitzke, thank you very much for being 
here. Let us start with where you finished with respect to home 
heating fuel because Mr. Westbrock raised the question of home 
heating fuel supplies and price. Mr. Westbrock, what can you 
tell us would be your expectations this winter with respect to 
the supply of home heating fuel in North and South Dakota?
    Mr. Westbrock. Senator, I'm making the assumption that the 
diesel fuel situation hasn't resolved itself, which then means 
that more likely, we aren't building supplies of two oil and we 
certainly aren't building supplies of one oil. Should we have 
an unplanned interruption basically anywhere in the PADD 2 or 
PADD 3 arena or if we have severe weather--I don't believe 
we're healthy enough yet to overcome that immediately and 
therefore, we'll be running the wheels off these trucks again 
to find product to bring into the States that are most 
affected.
    Should the weather remain mild and should there not be any 
unplanned interruptions, I would guess that two oil probably 
will be adequate but as referenced over there, by the two 
marketing associations, one oil is critical. Fortunately, there 
aren't a lot of people that use one oil but there are certainly 
a lot of trucks that use one oil to blend with their two oil to 
get through the cold climate up here in North Dakota.
    Senator Dorgan. Dr. Gruenspecht, what do you expect we will 
face with respect to the heating fuel in North Dakota?
    Dr. Gruenspecht. I don't have much North Dakota specific 
information on heating fuel. It is a very closely related 
product to diesel fuel so many of the same issues are--I think 
people still use diesel fuel, at least in my part of the 
country on the east coast, essentially as heating fuel, which 
has sometimes the highest sulfur content.
    The prices are a big concern, I think nationally and 
probably in this region as well, about heating fuel. We did our 
Winter Fuels Outlook and customers using oil as heating fuel 
will, we expect, see very significant increases in their 
heating costs this year. I happen to be such a person myself, 
which is unusual in the Washington, DC area, and I can tell you 
that it's pretty expensive. In the Midwest, in PADD 2, we track 
prices on a weekly basis and prices as of a week ago were up to 
$3.18 a gallon, I believe, for residential heating oil.
    We've mostly been looking at the price issue, not the 
supply issues, but it is closely related to diesel fuel and to 
the extent you have diesel fuel problems, I think it would be a 
concern for heating oil.
    Senator Dorgan. Ms. Leitzke, let me ask you--you've already 
touched on this but it seems to me that you suggested that we 
may run into a significant problem with respect to home heating 
fuel. Is that your assessment?
    Ms. Leitzke. Senator Dorgan, I do believe that we are going 
to run into a problem. I have a report from NuStar Pipeline, 
which I get every day and now, just referring to my South 
Dakota terminals, which are basically at the end of the 
pipeline, there's no diesel. We had no diesel yesterday in our 
State, none.
    As for the loads of y-grade, which is number 1 diesel, that 
came up the pipe a couple of weeks ago, you have marketers who 
are starting to blend that fuel but it's a little warm yet so 
they're kind of playing that waiting game. But they get in a 
situation where they don't have any place to store it. So it's 
kind of a use or lose situation right now.
    I also use home heating fuel. I'm paying about $3.15 a 
gallon and I can afford that. But there are a lot of people in 
Pierre, South Dakota that cannot afford that and I do worry 
about that almost more than the supply of it.
    Senator Dorgan, I just have to echo Dawna's comment. We're 
in the same boat here. I was just visiting with Hal Anderson 
from Tesoso. He says they've built supply up to 80,000 barrels 
at this point in time but we all know how quickly that can go. 
I mean, this summer, 650 loads of diesel fuel were going out of 
Alexandria in the span of 2 or 3 days. So it will certainly be 
a concern in North Dakota. It is right now and as I said 
before, we've got marketers already who are trying to take a 
look at using jet fuel or kerosene and blending that down with 
number one in terms of one, supplying people with a heating 
source and two, trying to find something that could be somewhat 
price competitive to take the financial pinch off the average 
consumer out there that is still using heating fuel in North 
Dakota.

                             SUPPLY SYSTEM

    Senator Dorgan. Mr. Heine, let me ask, if I might, a 
question about this end of the pipeline issue, end of the 
pipeline distribution system and how States are treated when 
the supply system is constrained due to outages or lack of 
supply. It seems to me that a pipeline is a circular product 
and a pipeline contains the product that moves where it is 
commanded by a market price and I don't understand the notion 
of the extremes or the end of the pipeline in how a product is 
allocated in those circumstances. Let me ask this in one more 
saying. It's fascinating to me and kind of disappointing to me 
to hear about our problems. We rank sixth in the Nation in 
energy production in North Dakota. I was trying to think how 
many barrels we produced--Dr. Heine, do you know that number?
    Mr. Heine. About 2 percent of crude oil production.
    Senator Dorgan. Yes and so we produce about 120,000 to 
125,000 barrels a day of crude oil. We refine in our State, 
about 60,000 barrels a day and we have a need for about 25,000 
barrels a day. So think through that again. We produce 125,000 
barrels. We refine 60,000 barrels and we have a need for 25,000 
barrels and we're sitting here talking about how we don't have 
any fuel.
    Now, you know, one might ask the question, what the hell is 
going on? I understand the issue of refining different 
products, different marketing systems and so on but I still 
don't understand the circumstances of how we find ourselves in 
this position. So Mr. Heine, explain to me, if you will, how 
product is transported by common carriers and to which markets 
and why does the so-called end of the pipe matter and how does 
that affect us?
    Mr. Heine. Thank you, Senator for the question. It always 
becomes relevant when you have limited supply and that's the 
circumstance in which we find ourselves today. When we have 
limited supply, we don't choose one State over another based on 
boundaries, on which terminals to supply. Those decisions are 
very methodically made and there are a number of factors that 
go into considering as we determine, with limited supply and 
where that limited supply should go, to service the maximum 
amount of trucks, we'd ultimately go to service stations or 
truck stops. When they make those decisions, we see back from 
our shippers on our pipeline, on their aspirations and their 
desires and that's how we developed what I referred to earlier, 
Senator, as a hub and a spoke system.
    Let me give you an example of that. A hub terminal for us 
would be Minneapolis, and once we're able to keep Minneapolis 
supplied, then we supply a second tier hub terminal, which in 
this case would be either Sioux Falls or Alexandria, Minnesota, 
and once we satisfy demand there, then we supply Fargo and 
Grand Forks. That decision is not based on State boundaries. 
That decision is based on a number of factors that are 
ultimately designed to provide the maximum amount of product--
and what group--if we tried to supply both Alexandria and Fargo 
with limited supply, we could end stranding some of that 
valuable product and locking it in a pipeline system.
    The pipeline, an 8-inch diameter pipeline between 
Alexandria and Fargo, is approximately 1.5 million gallons or 
36,000 barrels in size. That equates to approximately 190 
trucks. So it is in everyone's best interests to make sure that 
if we've got to keep that product at one terminal, like 
Alexandria, because it has additional tankage, because it has 
closer proximity to an origin, because it has the additional 
line capacity to feed it quicker and because it has the ability 
to load more trucks at the same time. That's the reason that 
that terminal would be chosen versus one further up the line.

                              GRAND FORKS

    Senator Dorgan. But let me ask you a question about this. 
If Grand Forks--I think you said Grand Forks doesn't have 
diesel? It doesn't have diesel or somebody said here----
    Mr. Heine. Yes, Senator. Grand Forks was out of gas for 
most of the summer and they've got a little gas in there right 
now but as far as diesel goes, I don't know anything about it.
    Senator Dorgan. So why--in a circumstance like Grand Forks, 
which is at the end of the pipeline, why is it less deserving 
of a stream of product in a circumstance where it has none than 
any intermediate place along the pipeline distribution system?
    Mr. Heine. Senator, all of the answer to that question is 
it's the desire of all stakeholders to provide the maximum 
amount of product that is available for truck delivery. If we 
ended up trying to supply all of the terminals on our system, 
with limited supply, we would lose volume that would be 
available to take for everyone. So it's been our hub and spoke 
system, which has, in most cases produced very well over the 
last 3 years and this is a system that we're constantly re-
evaluating to make sure that we've got the right terminals in 
the mix.
    Senator Dorgan. You know, I guess I just, at this moment, 
finally understood. I mean, we've been on the hub and spoke 
system for airlines for years and if you're lucky enough to 
live in a hub, you can at least get reasonable prices for 
airline service. If you're unlucky enough to live on a spoke, 
you pay through the nose for airline service. I have never 
connected that but if you're saying that this is a hub and 
spoke system, then I understand why we are ill served because 
the whole notion of the spoke is that it is somehow a 
contributor to a hub but perhaps less deserving of the hub 
because there's less business in the spoke.
    But with respect to a common carrier and the distribution 
of fuel that is needed in its system, I guess I don't quite 
understand how that allocation exists. Maybe one of you can 
help me when you talk about the shipper. We are advantaged by 
having Tesoro here. Tesoro is a first-rate business, great 
refinery. We're proud to have it in our State. It refines about 
60,000 barrels a day. I don't know where Tesoro's contracts 
are, where their fuel moves but my guess is they have contracts 
and their fuel moves in a pipeline with trucks and so on, but I 
guess I don't quite understand the circumstance of how, with as 
much as we produce and refine, that we are considered the end 
of the road. It seems to me, a State that is producing every 
day, five times more than it needs every day, isn't at the end 
of the pipeline; it's at the beginning of the pipe. I'm just 
trying to understand all this.
    Let me ask Mr. Westbrock, this issue of outages. I'll come 
back to this issue of the hub and spoke. Mr. Westbrock, do you 
provide information to other refiners and to the general public 
if you're going to have a planned outage or shut down 
information?

                            REFINERY OUTAGES

    Mr. Westbrock. We do now. We do not communicate to other 
refiners about a planned shutdown or turn-around.
    Senator Dorgan. Do you communicate to anyone that you're 
going to have----
    Mr. Westbrock. Generally, the industry finds out pretty 
well because the supply of labor is pretty difficult. We all 
have to kind of schedule a year ahead of time when we're going 
to bring in these people and these people pretty much serve all 
of the other refiners. So it becomes fairly accurate knowledge 
but it is not a direct communication between one refiner and 
the other.
    Senator Dorgan. But in your letter to me--I wrote letters 
to all of the refiners that serve North Dakota--in your letter 
to me, you said that unlike competitors--I don't know if you 
said unlike competitors but at least my observation of the 
letter said that you indicated you share your outage schedules 
with your customers as a matter of business practice.
    Mr. Westbrock. Yes, with our customers.
    Senator Dorgan. With your customers?
    Mr. Westbrock. I believe you asked other refiners.
    Senator Dorgan. I did, in fact but it becomes public 
knowledge that you----
    Mr. Westbrock. Yes.
    Senator Dorgan [continuing]. You share your outage 
practices or planned practices with your customers so they know 
what you're about to do.
    Mr. Westbrock. Yes. For example, because of this turn-
around, we knew 2\1/2\ years ago. This spring, we started 
communicating with our customers, saying, we've got this major 
turn-around we thought we would be in June, which it was. We 
didn't realize it was also going to be in August. Get your 
tanks filled; get your customers' tanks filled. Let's get ready 
for this. We talked quite a bit about it. So it was well 
communicated and we can document that as well.
    Senator Dorgan. But in fact, sharing this information with 
your customers is the same as sharing it with your competitors, 
is it not? Or do you have customers that say nothing?
    Mr. Westbrock. I would guess that the competitors will find 
out about it, yes.
    Senator Dorgan. I mean it becomes public knowledge.
    Mr. Westbrock. Yes.
    Senator Dorgan. Mr. Penner, your company does not; at least 
as I understood your letter to me, your company does not 
provide such information to customers or to competitors, is 
that right?
    Mr. Penner. Senator, we do provide information to our major 
customers when we are going into some type of plant turn-
around. We're in the same boat as Mr. Westbrock that we don't 
go out and seek out competitors and tell them what our plans 
are. But we do talk to customers and we do talk to pipelines 
that we're supplying and let them know, in advance, if we're 
going to have less supply.
    Senator Dorgan. Here's what's going to happen. I mean, 
that's the----
    Mr. Penner. Yes, we'll give them--we go through a planning 
process and we define how much product we believe we're going 
to be producing and then let those individuals know how much we 
would have available during that period.
    Senator Dorgan. So if you already do that, both of you 
already do that, you both essentially say to your customers--
you said major customers, but you say to your customers, here's 
what's going to happen, we think, in July. We're going down for 
some planned maintenance. And that is not proprietary 
information--it can't be proprietary once you tell your 
customers. I assume your competitors are going to know.
    If that is not proprietary information that is going to 
hurt you, why do I hear from refineries--we can't really 
provide any information that would be sharing with respect to 
when someone might have a shutdown, when someone might not have 
a shutdown. I don't understand the argument. I understand the 
anti-trust issues but I don't understand the proposition that 
there is some sort of propriety disadvantage to sharing 
information about when one might have planned outages.
    Because if both of your customers know what you're doing--
and yet I'm told you really can't know what each other is doing 
because it's a disadvantage from a business standpoint and 
proprietary information. That seems at odds with what I 
understand here.
    Mr. Penner. Well Senator, when we--we don't communicate 
with our competitors. I think when we talk about antitrust 
concerns, that's one. The other issue that I guess is implied 
is that if others knew and then the next question would be can 
you move the turn-around? That is extremely difficult and many 
times--there are lots of complex issues that come into play 
that make it difficult for us to move one. So that's another 
reason why. I'm not sure it does a lot of good to share that 
information.

                     NORTH DAKOTA REFINING CAPACITY

    Senator Dorgan. North Dakota is disadvantaged apparently, 
not because we have a lack of refining capacity or a lack of 
production but because for whatever reason, that product 
doesn't come back into our State or doesn't stay in our State 
in sufficient quantity to meet our needs. Do we need increased 
refining capacity in North Dakota? Mr. Rud?
    Mr. Rud. I think, Senator, everything we've studied 
anywhere from--it's an issue we've looked at and I'm no expert 
by any means but just a little bit of research I've done, it's 
anywhere from $11,000 to $15,000 per barrel for a new refinery. 
So rather than thinking that there is something that the State 
of North Dakota can do, I think we need to take a look at 
expansion of the existing refineries because that's going to 
solve the problem a lot quicker than trying to put a new 
refinery online and then deal with the environmentalists and 
deal with all those issues. There are folks at the API that I 
visited with that said it takes up to 10 years to build a new 
refinery. I think Frontier has put 60,000 barrels on line in a 
matter of, what? Two months? Somewhere in that area and I don't 
know exactly the whole process of what they go through and how 
long it took them to get to that point but if you can put 
60,000 more barrels online in North Dakota and do it at an 
existing facility right now, that would be a huge plus, I 
think.
    Senator Dorgan. Yes. My question wasn't should the State of 
North Dakota build a refinery. My question was, is there 
sufficient refining capacity in North Dakota, given our 
circumstances?
    Mr. Rud. At this point, Senator, I would say it's 
definitely an issue, given the fact of what we've gone through 
this summer. I think it's something that needs to be looked at. 
We may need more refining capacity in order to keep up with the 
growing demand, not only in North Dakota but in the oil patch 
as well. We've seen a huge push out there and it's going to 
take more product out there. I have a marketer who is trying to 
secure further allocations out in the western part of the 
State, who is asking for 10 to 15 percent more in allocations 
at his site to deal with the oil patch and he's being told he's 
not, in all likelihood, unless something changes drastically, 
he's not going to see that next year. So he's faced with trying 
to deal with the oil patch and provide product for their energy 
needs out there with the same amount of product that he's had 
for the last few years and given the fact of what we've seen in 
the oil patch, we may need more refining capacity in North 
Dakota to continue to grow this State.

                                REMEDIES

    Senator Dorgan. What are the remedies at this point? As you 
see them as Ms. Leitzke sees them and then I will ask some 
others as well. Is this a circumstance where it's a big set of 
issues and what is, is and we're short of product and we're 
short of home heating fuel? We got hurt with diesel and we're 
still short of diesel. We got hurt with gas supplies but you 
know what? That's the way it is so, let's have a meeting and 
complain about it and we'll go home. Or are there solutions 
that you believe ought to be employed in public policy and if 
so, what are they?
    Mr. Rud. Senator, I think first and foremost, in order to 
get price down, we need CFTC oversight. That's one of the 
issues I think we need to continue to address and I think it's 
getting a lot of attention in Washington at this point in time. 
I'm still on the board in Sarasota, North Dakota Petroleum 
Marketers Association with some type of refining coordinator 
for the planned outages and again, I can't speak to the 
refining industry and how difficult that will be but there has 
to be a liaison to do this job and do it without a whole lot of 
issues about collusion and antitrust. I think this could be 
done and done in a proper manner that would hopefully stop this 
from happening again, the way we've seen it this past summer.
    Senator Dorgan. Are you familiar with the provision that I 
described that's in the energy bill we're now negotiating?
    Mr. Rud. Section 280, yes.
    Senator Dorgan. And your impression of that?
    Mr. Rud. Again, I think it's something that could be done. 
I think it's something that probably needs to be done. We need 
something here in North Dakota that's going to help us so we 
don't see another situation like this. We're strapped for 
truckers. We're strapped for transport drivers. We're strapped 
for a lot of things and when we have to start stretching out 
and doing 15 and 16 hour days, just sitting in line, sooner or 
later, people are just going to say, there's a lot of jobs out 
there right now that I can go in a different direction and 
maybe only work 8 to 10 hours a day and still get a good 
paycheck. Those are concerns out there right now that we need 
to address.
    So first and foremost, we can't keep taking the crumbs in 
North Dakota at the end of this pipeline. We've got to find 
some way for there to be a steady flow of product into the 
eastern terminals, even under a crisis situation.
    Senator Dorgan. Ms. Leitzke?
    Ms. Leitzke. Senator, I would concur with what Mike had to 
say about some of those but in addition, for the State of South 
Dakota, like I said, our Governor and our representing Senators 
in Congress have asked for immediate product in a pipe to get 
through the harvest time.
    Additionally, I think it would be great if Congress could 
get make it easier for oil companies to build refineries 
because our refining capacity in this country has diminished 
greatly in the last 25 years and when you get to the end of the 
day, our real problem is we do not have enough refining 
capacity.
    Ironically, we're trying to build a refinery in South 
Dakota. We really hope that it gets done. It might take some 
time but any refinery that can get built in this country is 
going to help all of us at this table. Every single person and 
the consumer would benefit if we can get refining capacity up.

                            SUPPLY SOLUTION

    Senator Dorgan. Dr. Gruenspecht, is that the solution? That 
we need additional refining capacity or do you see this as 
regional imbalances in supply?
    Dr. Gruenspecht. I think there is a need for some 
additional refining capacity and I think there is some planned. 
One thing that's happened is that the cost of the capacity 
addition has gotten very high and I think of course, a lot of 
the large companies--energy system capital costs in general--
have gotten high. The cost of building a coal-fired powerplant 
has gotten high. The cost of building an oil rig or an oil 
refinery has increased a lot. But despite the really 
significant constraints in the industry, I think that some of 
the gentlemen over here said there are a lot of opportunities 
to expand existing capacity and Flint Hills has done one and 
Cenex has done one.
    In terms of the balance between the current supply and 
demand, I think you actually do consume a little more than you 
refine in North Dakota--some, although not a tremendous amount, 
but I think you are a net consumer of products, at least 
according to the information that I have.
    Senator Dorgan. What information do you have?
    Dr. Gruenspecht. That you consumed about 25 million barrels 
a year of petroleum products in 2005 and probably a little more 
than that. That's pretty old data and your demand has risen a 
lot. That translates into more than 70,000 barrels a day and I 
think your refining capacity is about 50,000 to 58,000 barrels 
a day.
    Again, I don't know that each State has to be self-
sufficient. You know, I think there really are advantages in--
and again, more refining capacity would definitely help. I 
think that's right.
    Senator Dorgan. That's not the number I have but if that's 
your number, that's one day's consumption in this country. We 
produce 85 million barrels of oil a day in the world and we use 
one-fourth of it in this country, every day.
    Dr. Gruenspecht. We use about 20 million barrels a day in 
this country.
    Senator Dorgan. Twenty-one million barrels.
    Dr. Gruenspecht. In this country, that's correct, sir.
    Senator Dorgan. So you're suggesting that our total yearly 
demand is 1 day's worth of consumption for the United States?
    Dr. Gruenspecht. Personally, my mind is not working well 
but I will--let me check it out and get back with you on that.
    [The information follows:]
                         Petroleum Consumption
    The Energy Information Administration has 2006 data for North 
Dakota on prime supplier sales volumes, which include six categories of 
petroleum products. These data show that North Dakota purchased 20.5 
million barrels of these six categories of petroleum products in 2006. 
The prime supplier sales volumes constitute about 80 percent of total 
petroleum product consumption in the State, which would make the total 
consumption in 2006 about 25.6 million barrels. This can be compared 
with U.S. 2006 petroleum consumption of about 20.7 million barrels per 
day.

    Dr. Gruenspecht. Another thing--and listening to some of 
the conversation, it is a problem. I think what Mr. Heine was 
trying to tell you is that to the extent that--there's a pipe 
fill aspect to this as well. What it takes to get product to a 
terminal is that you have to fill the pipe that leads to the 
terminal and that's in the pipe, it's not accessible. You can't 
empty the pipe, if you're going to fill the pipe between the 
refiner and let's say, Grand Forks. You fill that pipe and I 
think what he was trying to tell you was that nobody really 
benefits in a case of limited supply, if you have these 
supplies filling the pipe where they're not accessible to 
anybody.
    So the common issue that I think these guys have is that if 
they have tight supply, they're reluctant to fill the pipe 
between the last section that they had filled and the ultimate 
terminal--maybe my language is indelicate but the one that's 
further up the line or at the extreme or whatever, because to 
fill that final section of pipe doesn't really serve anybody. 
It's only when they fill the pipe and then push another gallon 
through, which pushes another gallon out at the terminal, that 
somebody could actually drive up with a truck and take a gallon 
off at that terminal.

                                PIPELINE

    Senator Dorgan. But that pipeline is pretty worthless then 
if it doesn't contain product that provides delivery to the end 
of the pipeline.
    Mr. Gruenspecht. Right. And under normal circumstances, 
they would keep the pipeline full and push stuff in, which--you 
know, again, this is the difference between oil pipelines and 
electricity lines, I think. And that's what I was trying to say 
but it's hard for me to say it well. But there is this aspect 
of just filling that pipeline--if you only had enough to fill 
that pipeline but not enough to push another gallon that would 
actually put something in the terminal, you haven't done 
anybody any good by filling that pipeline and I think that's 
what my colleague was trying to say.
    Again, I'm not speaking for the terminals but it's not like 
filling that pipeline is a thing that has no adverse 
consequences for consumers. I don't want to give that 
impression. It's just that discretionary decisions not to fill 
a pipeline are not being made because operators don't like 
people on the one end of it as much as they like people on the 
other end of it. I just want to make sure that that's clear.

                               BIODIESEL

    Senator Dorgan. A couple of you have talked--I think Mr. 
Westbrock, you talked about--maybe it was Mr. Penner, you 
talked about moving ethanol blends and I want to talk about 
biofuels, biodiesel especially in the context of what we're now 
facing. We just dedicated a biodiesel plant. Tell me what you 
all see with respect to the production of biodiesel and is that 
going to be helpful to us and how soon will enough come online 
to be helpful?
    Mr. Penner. Well, unfortunately, the biodiesel production 
is having such a severe loss per gallon as it exits today, 
because of the cost of soybeans and its relationship to the 
cost of diesel fuel that I don't--unless there is certainly 
even more incentives or if you renew the incentives, I don't 
see how this industry can continue to expand at the rate it has 
been. It's just a severe loss. You're going to have some pretty 
deep pockets. I think longer term, that's going to have to play 
a role. Maybe a 2 percent, 5 percent in the United States, 
somehow a small role in the total supply but boy, today, there 
isn't much appetite that I can see, why someone would go build 
a biodiesel plant today, in my opinion.

                                ETHANOL

    The other thing you referenced, I think that was Mr. Heine 
that made a comment about the need for tier ethanol in a 
pipeline.
    Senator Dorgan. About what?
    Mr. Penner. The tier ethanol in a pipeline.
    Senator Dorgan. My understanding is that's problematic. 
Right? Piping ethanol because of certain kinds of degradation 
of the pipeline? You might explain that to me.
    Mr. Penner. It's a challenge today, Senator. Back in the 
late 1970s when Congress enacted the ethanol tax credits, no 
one really envisioned that we'd be talking someday that the 
industry would expand as much as it has, to think that it would 
be economical to build a dedicated pipeline system to ship it. 
A dedicated pipe, say from the Midwest to the east coast could 
be as much as $2 billion or more to construct a system capable 
of handling 100,000 barrels a day of ethanol.
    But before we get to the point of going through the 
commercial implications of where a line may go and where would 
it originate, those types of issues that could potentially 
benefit ethanol producers in North Dakota, is that the industry 
have to overcome a phenomenon that ethanol creates inside of 
steel pipelines and that is one referred to as stress corrosion 
cracking. In other words, Senator, what it means is, you have a 
liquid material, which is somewhat corrosive, such as ethanol 
and under stress, the pipeline has a tendency to develop cracks 
on the internal wall of the pipe much more so than gasoline or 
diesel fuel will create.
    And in places we're familiar with stress corrosion cracking 
but it's only outside of the pipe. So our engineers in 
conjunction with the Department of Transportation has been 
undertaking studies to look at how we can manage stress 
corrosion cracking, both for ethanol blends and for a dedicated 
ethanol pipeline system.
    The first answer regarding the ethanol blends will come to 
rest in 2008 and we see commercial opportunities to put a 90 
percent gasoline, 10 percent ethanol blend in the pipe and that 
can be very beneficial. Today, for example, if we wanted to 
install ethanol at a new terminal in the southeastern United 
States, it would probably range between $2 to $3 million for us 
to install a tank and a blending system for ethanol. If we were 
able to transport a blended product into that terminal, we 
eliminate the need for that additional infrastructure and we 
eliminate the need for additional manpower to offload the 
product as well.
    So there are a number of benefits that we see for the 
commercialization of transporting the blend and potentially 
move ethanol via pipeline. But we've got to get through the 
technical side of it first.
    Senator Dorgan. And the blends, the higher blend, higher 
than 10 percent are really important if we're going to begin to 
market this in the quantity that we need to market it at. Let 
me make a comment about ethanol because the biofuels, I think, 
have to be a part of our solution. Not in the short term, not 
this winter perhaps and not in a significant way for just a bit 
but what's happening to us is the cost of feedstock is 
increasing but I think that's going to measure out over time 
because more people are planting that feedstock.
    But we do not have the capability to market as we should. 
We use 145 billion gallons of fuel a year in this country. We 
only blend half of it at 10 percent. So we blend half of 145 
billion gallons at 10 percent ethanol. We need to blend the 
other half as well so we have another market there for half of 
the fuel to blend at 10 percent.
    So that's a conceivable total market of ethanol, of 14\1/2\ 
billion gallons, total market unless we're blending at higher 
than 10 percent. And we need to blend at, I think, 20, 30, 40 
percent. There are new experiments going on out there, there 
are new studies just having been completed about the 
performance of those blends. And then we also need to be 
marketing the E85. It has to be priced right. We've got to move 
it. We've got to do all these things. But the fact is, if 
you're not running this fuel through carburetors and fuel 
injectors, then you're going to have a supply and that supply 
is going to move up and your demand isn't going to meet it and 
it's going to collapse and we're going to set this industry 
back 10 years or more.
    So we've got a real challenge in front of us and Senator 
Lugar and I have just introduced some legislation to try to 
create the infrastructure so that we're marketing more of this. 
But I don't want this industry to fail. This industry has to 
expand. I mean, the President wants 35 billion gallons a year. 
Congress is going to embrace that. The question is how do we 
get there and how do you market? You can't produce what you 
don't market. So we've got big issues with respect to that.

                               OIL PRICES

    But getting back to the moment, we've got a situation where 
I think the price of oil is maybe at $97 a barrel. A leading 
energy analyst for Oppenheimer last week said there isn't any 
reason that it ought to be a dime over $55 a barrel. Not one 
reason. And he's referring to some research that I know of that 
projects that we have people hip-deep now in the energy futures 
market, the oil futures market. We've got hedge funds in the 
oil futures market. We have investment banks buying in the oil 
futures market and in fact, they're buying tanks to store 
because they believe the future price will be greater than 
today's price. So they're taking oil off the market to store--
investment banks, mind you.
    I think there's rampant speculation in the futures market 
that has driven up the price of oil. I don't know whether it's 
$20 or $30 a barrel or $40 a barrel but I don't think it is 
healthy for this country. I don't think it ought to drop to $20 
a barrel. I think there ought to be stability of pricing so 
that you have significant investment capability in the long 
term to find additional energy. But we've got a lot of these 
issues that combine and conspire to cause us lots of problems 
at this point.
    At the moment, I'm interested in trying to figure out what 
we do to fix this problem and to make sure it doesn't happen in 
the future. So what I hear you say now is, yes, we had gasoline 
problems. We still have a little bit. We have diesel problems. 
They still exist in a significant way and we're likely to face 
problems with home heating fuel. Well, that's not much of a 
report. I appreciate your candor but the question is how do we 
address this? And Mr. Gruenspecht, I come back to you again. It 
seems to me that not long ago some people came to the Congress 
in the last decade, wanting to abolish the Department of 
Energy. I wasn't among them. I felt there was a good reason to 
have a Department of Energy of this country, given as important 
as energy is to our future but it seems to me the purpose of 
having a Department of Energy is to have it there, performing 
important functions with respect to the significant public 
policy issues and I understood when I invited you your role in 
the Department of Energy. Your role is to develop energy 
information and dispense that, distribute it so that all of us 
speak from the same base of knowledge.

                              ENERGY BILL

    But I come back to this question as we're trying very hard 
between now and Christmas to get this energy bill passed, 
between the House and the Senate, get it to the President for 
signature and at least one portion of that would change your 
role and would provide a requirement that you provide to the 
Secretary an evaluation of what is happening so that the 
Secretary, in these circumstances, can see clearly the problem 
that we've got to try to find a way to resolve and deal with. I 
hope very much that we can pass that provision and do other 
things to try to make sure that we're not in this situation in 
the middle of the winter, next spring, next summer.
    You know, again, I guess I'm trying to understand and learn 
about this end of the pipeline. I like pipelines but empty 
pipelines mean very little to me and I'm just trying to 
understand how a State that is a significant producer of energy 
can be in a situation where we don't have energy. You know? We 
need fuel. We produce more of it than we need. Why don't we 
have it? That's the question. Mr. Gruenspecht, tell me why, 
before you leave North Dakota.
    Dr. Gruenspecht. I'll start out by saying, I don't speak 
for the Department of Energy but I'm sure that the Department 
feels----
    Senator Dorgan. I'll ignore that. The fact is you're here 
because you're from the Department of Energy so when you say--
I'll obviously ignore that.
    Dr. Gruenspecht. I understand that and I'm sure that the 
Secretary would share your views on the role of the Department. 
We certainly look forward to working with you on this 
provision. I think the Department is not opposing the 
provision; the EIA is not opposing the provision. We want it to 
work. We've been in contact with the folks on the Energy 
Committee to try to make it work. It seems like there are many 
other Washington problems to solve to enact an energy bill but 
we're not one of them and this provision is not one of them. We 
are prepared to take on that role.
    We think the information role is a valuable role, although 
it is certainly not the only role of the Department of Energy. 
EIA makes up, I think, between three-tenths and four-tenths of 
1 percent of the budget of the Department of Energy. I do think 
it's a good investment, what we provide, but again, there's 
another 99.7 percent of the Department of Energy and your 
concerns, I think, are legitimate.
    Some of the points that you make about ethanol are very 
interesting. I think there will be a greater effort to at least 
move from the blending of about 50 percent of the gasoline 
stock with 10 percent ethanol to a much higher level. I think 
now the economics are pretty compelling for folks to put in the 
blending terminals to increase their use of ethanol. Right now, 
taking the tax credit into account and the price of ethanol 
relative to the price of gasoline, a gallon of ethanol, with 
tax credit taken into account, is about a dollar cheaper than 
the wholesale price of gasoline.
    That's a tremendous incentive for someone who is supplying 
conventional gasoline in some of the areas that don't use a lot 
of ethanol to think really hard about how they're going to use 
more ethanol in their gasoline. So I think the market will help 
you on that over a period of time.

                          NORTH DAKOTA MARKET

    I guess I had better answers on that score, perhaps, than 
on some of the questions that we're trying address here today, 
unfortunately. You know, North Dakota is booming. That's good 
news. It's good news that one of the things that's happened is 
that--as I understand it, North Dakota's demand is about 10 
percent higher than last year. There was some discussion about 
the western part of the State where you have a lot of the oil 
development and it's correct, in terms of crude oil, that 
you're producing 2 percent of the Nation's crude oil. You're 
consuming, and you're right, 0.3 percent of the oil product 
consumption.
    But certainly the crude oil producer--you're producing a 
lot more than you consume. Refining, you're a little bit under 
what you consume. But again, that's not a problem. The idea 
isn't to have each state self-sufficient in refining capacity. 
That would be crazy. You wouldn't want to pay the price 
associated with that.
    Senator Dorgan. But there is something wrong with a system 
in which a State that produces six times more than it consumes 
doesn't have the product it needs for its economic opportunity 
and its economic needs. There's something wrong with that--you 
don't fix that overnight--but now that we know there's a 
significant potential for shortage at the end of the pipeline, 
we need to figure out how we resolve that, how we deal with it. 
I have written to all the refineries that serve our State. I 
received responses from all of them. We're going through those 
responses to try to understand what has happened here. Some 
have--they did not use the term, ``perfect storm,'' as a 
description but I've heard the description, perfect storm. You 
know, the fact is, a big storm or perfect storm, it doesn't 
matter very much. We can't continue to be in this situation. 
Our State is booming, at least in part--the economy is booming 
at least in part because of robust activity in the production 
of oil and it's a cruel irony that that which you describe as 
broke is that which is retarding our opportunity. That is, the 
lack of the very thing we produce.
    When I get back, I'm going to meet with Secretary Bodman 
and review the materials I've received from the refineries and 
the discussion here and try to think through, what might we do 
to get out of this cycle somehow, in the Dakotas, if we, in 
fact, are at the end of the pipeline.
    Your being here is helpful to me, just to think through and 
try to understand what we face and I know that you've come from 
some distance, Mr. Westbrock and I appreciate you being here 
and Mr. Heine and Leitzke and Mr. Rud, you didn't travel very 
far but we're still glad you're here. And Dr. Gruenspecht, 
thank you very much.
    I hope all of you all understand my interest in this is not 
to denigrate any part of a system, it's to try to understand 
how this system can work for the benefit of everyone, because 
clearly it is not at the moment working if we are deciding, 
well, if we have product, we stop it here and then again down 
here and if we're at the end of that, we're not going to get 
product. So maybe this all gets resolved at some point but I'm 
not very happy just saying, well let's wait and see. I mean, I 
don't think we can wait and see. I think we have to find ways 
to stimulate and try to force solutions so that we're not 
continuing to be in this problem.
    Is anyone not going to sleep if you don't have the last 
word? If there's something else that's on your mind and you 
wish to say today, I want to give you that opportunity.
    Mr. Heine. Senator, I won't miss it. The one thing I would 
like to tell you is it's the end of the pipeline for Magellan 
specifically. But we're not the only pipeline in the State and 
I've done my best to explain the regional approach that we take 
and that that's intended to maximize the amount of product that 
is available to go to consumers and the motorists that need it.

                            GOVERNMENT ROLE

    In regards to what can be done and what role is there for 
the Government? In our view, there is a role. And some of it is 
wrapped up in your Senate energy bill and refiners that have 
the desire to expand need stable tax policy. Pipelines that 
have desires to continue to invest millions and millions of 
dollars in expanding their infrastructure need a stable tax 
policy to be able to make those decisions for the long term.
    As I mentioned to you, putting an ethanol pipeline in could 
be a multi-billion dollar project but as a master limited 
partnership and I'll leave you with this note, Magellan is one 
of a growing number of companies that are structured as a 
master limited partnership. More and more pipeline companies 
that are independents like us today are structured not as a 
corporation but as a master limited partnership. There is a 
need in regards to breaking down another barrier that's 
necessary to transport ethanol blends in the pipe and transport 
ethanol in the pipeline. Our income needs to be derived from 
transporting products such as gasoline, diesel and jet fuel. 
Ninety percent of the income from a master limited partnership 
needs to be derived from moving those types of products.
    Back when Congress wrote the tax code in 1987 to allow the 
development of master limited partnerships, they didn't 
envision that ethanol would find its way in the pipeline 
system. So if we transport ethanol or ethanol blends in the 
pipeline system today, that's non-qualifying income for a 
master limited partnership. And we have a provision that 
hopefully make it into your bill that will resolve that 
problem. But until it is resolved, it's unlikely that a master 
limited partnership will be motivated to find technical 
solutions to move in vehicles and pipes can do it and the same 
provision calls for biodiesel as well. Thanks for letting me 
say that.
    Senator Dorgan. Mr. Heine, thank you very much. We are 
going to follow closely in the weeks and months ahead, the 
supply of product and the urgency and the need for supply and 
I've requested a meeting with Secretary Bodman the week after 
next, when Congress reconvenes. I will use information I have 
learned here and the letters that I've received from all of the 
refineries serving our State to talk with Secretary Bodman and 
others about what we face and how we might try to address these 
shortages. So I appreciate very much the attention that you 
have all paid to this today and I look forward to further 
information from you as things develop in the fuel market.

                     ADDITIONAL SUBMITTED STATEMENT

    In addition, I would like to include in the record the 
statement of Curt Anastasio, president and CEO of NuStar Energy 
L.P.
    [The statement follows:]
Prepared Statement of Curt Anastasio, President and CEO, NuStar Energy 
                                  L.P.
    I appreciate the opportunity to submit written testimony related to 
recent fuel shortages in North Dakota. I first would like to take this 
opportunity to explain NuStar's role in the supply chain in the region. 
NuStar is in the petroleum product pipeline, terminal and storage 
business, so our company transports, stores and distributes petroleum 
products owned by our customers. Our North Dakota operations include 
pipelines that make intrastate deliveries from Tesoro's Mandan 
refinery, and bring fuel to your State from refineries in the lower 
Midwest region.
    As you know, there have been supply constraints throughout the 
State since the summer due in large part to refinery issues in the 
Midwest, Rocky Mountain and Texas panhandle areas that supply North 
Dakota, and the fact that North Dakota is the endpoint of the product 
pipelines that deliver fuel from that region. And while some of those 
refinery issues were resolved, other refineries that supply your region 
are now undergoing planned maintenance, which has continued to 
constrain product supply for the Dakotas. As a result, we have supply 
inventories that are below our historical average because the supply 
available to us is below the historical average. And on top of that, 
the region is faced with consumer demand that is above the historical 
average. Obviously, all of this combines to intensify fuel shortages 
throughout the region.
    NuStar has no refining operations in North Dakota or anywhere else, 
so I regret that I am unable to directly address your specific 
questions about refinery shutdowns and related issues. But I can tell 
you that in an effort to meet the strong demand, we have been moving 
every batch of product that we can obtain through our pipelines. In 
fact, we have had record volumes on our pipelines this year. This is an 
instance where our financial interests are completely aligned with 
consumer interests because it is positive for our bottom line to move 
as much product as possible.
    And, recognizing the need to move more product into this area, we 
have invested nearly $15 million in our pipelines over the past 5 
years. We have also improved our operating procedures. For example, we 
have increased the horsepower on the pumps that move product through 
the pipeline, and introduced a drag reduction agent to eliminate 
friction and allow products to move more easily. We have also optimized 
the product mix to better meet demand. And at our terminals, we have 
completed rack automation upgrades that enable carriers to complete 
their transactions more quickly.
    We have also invested in a very effective communication system for 
keeping our customers up-to-date regarding the supply picture 
throughout our system. Our Internet Stock Inventory System (ISIS) 
enables our customers to access a real-time inventory of supply at all 
of our terminals 24 hours a day, 7 days a week. What's more, each of 
our terminals has a hotline that carriers can call to get updated 
information on the product slate. If there are any product outages, 
they can quickly get an update on when those products are expected to 
be replenished. And, we have implemented an inventory management 
initiative at our Geneva, Nebraska fuels terminal in which we are 
allocating supply of gasoline and diesel to ensure there is product 
supply at downstream terminals in Iowa, South Dakota and North Dakota. 
As you can see, we have taken a lot of steps to try to assist our 
customers in supplying petroleum products to the Dakotas.
    From our perspective, the most effective way to ease the supply 
constraints would be to have one consistent specification for gasoline 
across the Dakotas. As you likely know, there is a different 
specification for gasoline supplied to the western region. Having 
varied product grades slows down both production and transportation, so 
having one specification would allow for increased production and more 
movement of product into the area.
    I hope this information helps explain the challenges that we face 
and the measures we've taken to minimize supply disruptions in the 
region. Please let us know if we can provide further assistance as the 
committee continues to explore potential solutions to the tight supply-
demand balance in North Dakota. Thank you for giving us the opportunity 
to tell you more about our operations.

                         CONCLUSION OF HEARING

    Senator Dorgan. This hearing is recessed.
    [Whereupon, at 4:30 p.m., Tuesday, November 20, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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