[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
 THE IMPLICATIONS OF REFINERY CLOSURES FOR U.S. HOMELAND SECURITY AND 

                     CRITICAL INFRASTRUCTURE SAFETY

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


                             FIELD HEARING

                               before the

                    SUBCOMMITTEE ON COUNTERTERRORISM

                            AND INTELLIGENCE

                                 of the

                     COMMITTEE ON HOMELAND SECURITY

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 19, 2012

                               __________

                           Serial No. 112-76

                               __________

       Printed for the use of the Committee on Homeland Security
                                     

[GRAPHIC] [TIFF OMITTED] CONGRESS.#13


                                     

      Available via the World Wide Web: http://www.gpo.gov/fdsys/

                               __________



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                     COMMITTEE ON HOMELAND SECURITY

                   Peter T. King, New York, Chairman
Lamar Smith, Texas                   Bennie G. Thompson, Mississippi
Daniel E. Lungren, California        Loretta Sanchez, California
Mike Rogers, Alabama                 Sheila Jackson Lee, Texas
Michael T. McCaul, Texas             Henry Cuellar, Texas
Gus M. Bilirakis, Florida            Yvette D. Clarke, New York
Paul C. Broun, Georgia               Laura Richardson, California
Candice S. Miller, Michigan          Danny K. Davis, Illinois
Tim Walberg, Michigan                Brian Higgins, New York
Chip Cravaack, Minnesota             Cedric L. Richmond, Louisiana
Joe Walsh, Illinois                  Hansen Clarke, Michigan
Patrick Meehan, Pennsylvania         William R. Keating, Massachusetts
Ben Quayle, Arizona                  Kathleen C. Hochul, New York
Scott Rigell, Virginia               Janice Hahn, California
Billy Long, Missouri                 Vacancy
Jeff Duncan, South Carolina
Tom Marino, Pennsylvania
Blake Farenthold, Texas
Robert L. Turner, New York
            Michael J. Russell, Staff Director/Chief Counsel
               Kerry Ann Watkins, Senior Policy Director
                    Michael S. Twinchek, Chief Clerk
                I. Lanier Avant, Minority Staff Director

                                 ------                                

           SUBCOMMITTEE ON COUNTERTERRORISM AND INTELLIGENCE

                 Patrick Meehan, Pennsylvania, Chairman
Paul C. Broun, Georgia, Vice Chair   Brian Higgins, New York
Chip Cravaack, Minnesota             Loretta Sanchez, California
Joe Walsh, Illinois                  Kathleen C. Hochul, New York
Ben Quayle, Arizona                  Janice Hahn, California
Scott Rigell, Virginia               Vacancy
Billy Long, Missouri                 Bennie G. Thompson, Mississippi 
Peter T. King, New York (Ex              (Ex Officio)
    Officio)
                    Kevin Gundersen, Staff Director
                 Zachary D. Harris, Subcommittee Clerk
               Hope Goins, Minority Subcommittee Director


                            C O N T E N T S

                              ----------                              
                                                                   Page

                               STATEMENTS

The Honorable Patrick Meehan, a Representative in Congress From 
  the State of Pennsylvania, and Chairman, Subcommittee on 
  Counterterrorism and Intelligence:
  Oral Statement.................................................     1
  Prepared Statement.............................................     4
The Honorable John Carney, a Representative in Congress From the 
  State of Delaware..............................................     6
The Honorable Michael G. Fitzpatrick, a Representative in 
  Congress From the State of Pennsylvania........................     7
The Honorable Brian Higgins, a Representative in Congress From 
  the State of New York, and Ranking Member, Subcommittee on 
  Counterterrorism and Intelligence:
  Prepared Statement.............................................     7

                               WITNESSES
                                Panel I

Mr. Howard Gruenspecht, Acting Administrator, Energy Information 
  Administration, Department of Energy:
  Oral Statement.................................................     9
  Prepared Statement.............................................    11
Mr. Brandon Wales, Director, Homeland Infrastructure Threat and 
  Risk Analysis Center, Department of Homeland Security:
  Oral Statement.................................................    14
  Prepared Statement.............................................    16

                                Panel II

Mr. Charles Drevna, President, American Fuel and Petrochemical 
  Manufacturers:
  Oral Statement.................................................    30
  Prepared Statement.............................................    32
Mr. Robert Greco, Group Director, Downstream and Industry 
  Operations, American Petroleum Institute:
  Oral Statement.................................................    39
  Prepared Statement.............................................    40


 THE IMPLICATIONS OF REFINERY CLOSURES FOR U.S. HOMELAND SECURITY AND 
                     CRITICAL INFRASTRUCTURE SAFETY

                              ----------                              


                         Monday, March 19, 2012

             U.S. House of Representatives,
                    Committee on Homeland Security,
         Subcommittee on Counterterrorism and Intelligence,
                                                         Aston, PA.
    The subcommittee met, pursuant to call, at 10:11 a.m., in 
the Mirenda Center for Sport, Spirituality, and Character 
Development at Neumann University, One Neumann Drive, Aston, 
Pennsylvania, Hon. Patrick Meehan [Chairman of the 
Subcommittee] presiding.
    Member present: Representative Meehan.
    Also present: Representatives Carney and Fitzpatrick.
    Mr. Meehan. The Committee on Homeland Security, 
Subcommittee on Counterterrorism and Intelligence will come to 
order. The subcommittee is meeting today to hear testimony 
regarding the implications that refinery closures have on 
homeland security and critical infrastructure safety.
    First, I would like to thank everybody including the 
witnesses for attending this morning. I appreciate the effort 
that has been taken on behalf of all of those involved to have 
this important field hearing. This is an official Congressional 
hearing as opposed to a town hall meeting, and as such, we must 
abide by certain rules on the Committee of Homeland Security 
and the House of Representatives, and I kindly wish to remind 
our guests today that demonstrations from the audience, 
although I suspect and know that you will be behaved, including 
applause and outbursts, as well as those of other decorum 
issues, would be the same as if we were in the House of 
Representatives, so I ask that you keep those an appropriate 
control as it is important that we respect the decorum and 
rules of the committee. I have also been requested to state 
that according to those rules, photography and cameras are 
limited to accredited press only.
    Now that we have those housekeeping issues behind us, 
before we begin, I would like to ask unanimous consent that 
Congressman Mike Fitzpatrick from Pennsylvania's 8th 
Congressional District and Congressman John Carney of Delaware 
be permitted to participate in today's hearing. Although they 
do not sit fully as Members of the Homeland Security 
Subcommittee, they have requested and I am very, very grateful 
to have their participation here today on this committee, and 
Congressman Fitzpatrick spoke to me just a few minutes ago, and 
here he is. He has just arrived.
    I would also like to express my deep appreciation to 
President Rosalie Mirenda and the family here at Neumann 
University for allowing us to take advantage of this beautiful 
facility, and I guess it is the right time of year to be in a 
basketball court, but I am thankful for all of their 
hospitality, and I know that President Mirenda considers 
herself a real neighbor to the area, which is so dramatically 
affected by the proposed closings. So what I would like to do 
is reserve myself a moment to make an opening statement.
    I would like to welcome everyone to today's Subcommittee on 
Counterterrorism and Intelligence field hearing. I look forward 
to hearing from today's witnesses on the impact the refinery 
closures will have on the security of our critical 
infrastructure and the continued safety of the homeland. This 
issue is not only important locally but the closure of these 
refineries will have powerful repercussions for the entire 
Northeast region and the entire country. For these reasons, I 
am glad to have today's witnesses to delve deeper into these 
issues and to determine the potential vulnerabilities in the 
event of a terrorist attack or a natural disaster.
    At today's hearing, I hope to gain answers to the following 
critical questions. What are the reasons that refineries are 
closing in the United States? If the Northeast is the largest 
gasoline market in the United States, why are particularly East 
Coast refineries being closed? What are the consequences of the 
recent refinery closures in the Northeast on the immediate and 
long-term oil supply? How will these resulting shortages be 
addressed? What are the security issues raised by greater 
reliance on pipelines, shipping, and rail for product delivery 
to the Northeast? What are the National security implications 
if the loss of refining capacity and expertise that we have 
here in the United States is allowed to dwindle? What is being 
done to address those security issues and stresses on our 
critical infrastructure systems?
    As we all well know at the local level, the decline of 
domestic regional refining in our Nation is alarming, and in my 
view will affect our National and homeland security. On 
September 6, 2011, Sunoco announced that they would be idling 
their Marcus Hook and Philadelphia refineries by July 1, 2012, 
if a buyer could not be found. Just 3 weeks later, 
ConocoPhillips announced that they planned to idle and sell 
their refinery in Trainer, Pennsylvania. These three area 
refineries represent 50 percent of the total East Coast 
refining capacity. If the recent decision to close the HOVENSA 
facility in St. Croix is included, these closures represent a 
production loss of more than 1 billion barrels a day from our 
region.
    The economic impact of these closures is obvious and 
devastating. Our local workforce is among the best in the world 
with a demonstrated record of excellence and safety. Thousands 
will lose their jobs. Some already have.
    As a lifelong resident of the greater Philadelphia area, I 
know the role that the refineries have played, a major role in 
our local economy. Our family and friends work at the 
refineries and support local businesses. Moving forward, our 
entire delegation remains committed fully to helping secure a 
buyer so that these facilities can continue operations, but as 
we deal with the local implications, it is proper to ask: What 
is the impact of disruptions to oil distribution systems, 
particularly natural disasters like hurricanes or earthquakes? 
The Gulf Coast is the largest supplier of domestic refined 
products and a major source of important crude for the United 
States.
    Our country relies on a complex and modern infrastructure 
system to distribute energy domestically. This reliance is 
critical to delivering necessary supply to meet demand in the 
Northeast as well as in all regions of our country. Any minor 
disruption in this system can create major problems for many of 
the very things that we depend on every day, from heating our 
homes to fueling our vehicles. A major disruption can cause 
serious issues for our Nation and our security.
    If a buyer is not found for the Philadelphia refinery and 
the facility is closed, over half the refining capacity in the 
Northeast will be removed in a span of only 6 months. I have 
serious concerns as to how much stress this puts on the current 
infrastructure system and the increased risk in the event of a 
natural disaster, terrorist attack, or other geopolitical 
event.
    After Hurricanes Katrina and Rita hit the Gulf Coast, we 
witnessed just how vulnerable the reliance on the Gulf Coast 
and pipeline infrastructure for energy supplies can be. Five 
days after Hurricane Katrina struck, the U.S. Minerals 
Management Service reported that 88\1/2\ percent of Gulf crude 
oil production was shut down or off-line. This amounted to 25 
percent of the total Federal off-shore crude production, 
leaving many platforms evacuated or destroyed. Less than a 
month later, Hurricane Rita made landfall in the Gulf, 
resulting in significant damage. The cumulative effect of these 
two storms resulted in the temporary suspension of operations 
at 10 refineries, a loss of over 2 million barrels per day from 
the market, and significant pipeline disruption. The Colonial 
pipeline, a critical artery for the Northeast to receive our 
refined fuel products from the Gulf, was temporarily closed, 
along with Capline and Plantation pipelines.
    Of similar concern is the threat to oil facilities from 
acts of terrorism. Since the September 11, 2001, terrorist 
attacks, there has been great concern about the security of the 
Nation's critical infrastructure including oil refineries and 
pipelines. Al-Qaeda and its affiliate networks have previously 
expressed interest in attacking critical infrastructure in the 
homeland including oil and gas facilities. Last year, the 
Department of Homeland Security and the FBI warned State and 
local police across the United States that al-Qaeda has a 
continued interest in attacking oil and natural gas targets. In 
fact, this information came directly from intelligence that was 
seized during the raid of Osama bin Laden's compound in 
Abbottabad. Al-Qaeda targeting the oil infrastructure has long 
been a part of the al-Qaeda playbook.
    In 2002, the group claimed responsibility for the bombing 
of a French oil supertanker off the coast of Yemen. In a brazen 
February 2006 operation, al-Qaeda attacked the Abqaiq facility 
in eastern Saudi Arabia. The facility is one of the world's 
largest and it produces 13 million barrels of oil per day. 
Although the damage inflicted by the attack was quickly 
contained, the mere news of an attack pushed oil prices up by 
$2. Perhaps more significantly, experts believe that attacks on 
oil and gas infrastructure could be an increasingly common 
likelihood as al-Qaeda changes its target set to an area that 
would garner the most attention and inflict the most damage on 
the United States' economy. Relatedly, the Department of 
Homeland Security recently warned about cyber attacks against 
the oil and gas sectors by the hacker group Anonymous.
    In closing, the threat to our energy distribution system is 
very real. Accidents, natural disasters, and terrorist attacks 
have proven to disrupt oil facilities' operations in the past. 
I expect that they will also do it in the future. That is 
partly why I am concerned about further pressuring our delivery 
systems to accommodate in the event of Philadelphia refinery 
closures.
    I look forward to hearing from today's witnesses on how 
these closures will impact the region and the country and how 
we can provide for the continuing security of our oil 
distribution systems and the safety of our homeland.
    [The statement of Mr. Meehan follows:]
             Prepared Statement of Chairman Patrick Meehan
                             March 19, 2012
    I would like to welcome everyone to today's Subcommittee on 
Counterterrorism and Intelligence field hearing.
    I look forward to hearing from today's witnesses on the impact the 
refinery closures will have on the security of our critical 
infrastructure and the continued safety of the U.S. Homeland.
    This issue is not only important locally but the closure of these 
refineries will have powerful repercussions for the entire Northeast 
region and the entire country.
    For these reasons, I am glad to have today's witnesses to delve 
deeper into these issues and to determine the potential vulnerabilities 
in the event of a terrorist attack or a natural disaster.
                immediate questions on refinery closures
    At today's hearing, I hope to gain answers to the following 
critical questions:
   What are the consequences of the recent refinery closures in 
        the Northeast on immediate and long-term oil supply?
   How will the resulting shortages be addressed?
   What are the security issues raised by greater reliance on 
        pipelines, shipping, and rail for product delivery to the 
        Northeast?
   What is being done to address those security issues and 
        stresses on our critical infrastructure systems?
                  background information on the issue
    As we all well know at the local level, the decline of domestic 
regional refining in our Nation is alarming, and in my view, will 
affect our National and homeland security.
    On September 6, 2011, Sunoco, Inc. announced that they would be 
idling their Marcus Hook and Philadelphia refineries by July 1, 2012, 
if a buyer could not be found. Just 3 weeks later, ConocoPhillips 
announced that they planned to idle or sell their refinery in Trainer, 
Pennsylvania.
    The economic impact of these closures is obvious. Our local 
workforce is among the best in the world with a demonstrated record of 
excellence and safety.
    As a lifelong resident of the greater Philadelphia area, I know the 
refineries have played a major role in our local economy. Our family 
and friends work at the refineries and support local business.
    Moving forward, I remain fully committed to helping secure a buyer 
so these facilities can continue operations.
           impact of disruptions to oil distribution systems
    The Gulf Coast is the largest supplier of domestic refined products 
and a major source for imported crude for the United States. Our 
country relies on a complex and modern infrastructure system to 
distribute energy domestically. This reliance is critical to delivering 
necessary supply to meet demand in the Northeast, as well as in all 
regions of our country. Any minor disruption in this system can create 
major problems for many of the very things that we depend on every day 
from heating our homes to fueling our vehicles. A major disruption can 
cause serious issues for our Nation and our security.
    If a buyer is not found for the Philadelphia refinery, and the 
facility is closed, over half of the refining capacity in the Northeast 
will be removed in a span of only 6 months. I have serious concerns as 
to how much stress this puts on the current infrastructure system and 
the increased risk in the event of a natural disaster, terrorist 
attack, or other geopolitical event.
    After Hurricanes Katrina and Rita hit the Gulf Coast, we witnessed 
just how vulnerable the reliance on the Gulf Coast and pipeline 
infrastructure for energy supplies can be.
    Five days after Hurricane Katrina struck, the U.S. Minerals 
Management Service (MMS) reported that 88.5 percent of Gulf crude oil 
production was shut-in, or ``off-line''. This amounted to 25 percent of 
the total Federal offshore crude production, leaving many platforms 
evacuated or destroyed.
    Less than a month later Hurricane Rita made landfall in the Gulf 
resulting in significant damage. The cumulative effect of these two 
storms resulted in the temporary suspension of operations at 10 
refineries, a loss of over 2 million barrels per day from the market, 
and significant pipeline destruction. The Colonial pipeline, an artery 
for the Northeast to receive our refined fuel products from the Gulf, 
was temporarily closed, along with Capline and Plantation pipelines.
               the threat to oil facilities from attacks
    Since the September 11, 2001 terrorist attacks, there has been 
great concern about the security of the Nation's critical 
infrastructure, including oil refineries and pipelines.
    Al-Qaeda and its affiliate networks have previously expressed 
interest in attacking critical infrastructure in the homeland, 
including oil and gas facilities.
    Last year, the Department of Homeland Security and the FBI warned 
State and local police across the United States that al-Qaeda has a 
``continuing interest'' in attacking oil and natural gas targets. In 
fact, this information came directly from intelligence seized during 
the raid on Osama bin Laden's compound in Abbottabad, Pakistan. Al-
Qaeda targeting of oil infrastructure has long been a part of the al-
Qaeda playbook.
    In 2002, the group claimed responsibility for the bombing of a 
French oil supertanker off the coast of Yemen.
    In a brazen February 2006 operation, al-Qaeda attacked the Abqaiq 
facility in Eastern Saudi Arabia. This facility is one of the world's 
largest and produces 13 million barrels of oil per day.
    Although the damage inflicted by the attack was quickly contained, 
the mere news of an attack pushed oil prices up by $2. Perhaps more 
significantly, experts believe that attacks on oil and gas 
infrastructure could be an increasingly common likelihood, as al-Qaeda 
changes its target set to an area that will garner the most attention 
and inflict the most damage on the U.S. economy.
    Relatedly, the Department of Homeland Security recently warned 
about attacks against the oil and gas sector by the hacker group 
Anonymous.
                                closing
    The threat to our energy distribution system is very real. 
Accidents, natural disasters, and terrorist attacks have proven to 
disrupt oil facilities' operations in the past. I expect they will also 
do so again in the future.
    That is partly why I am so concerned about further pressuring our 
delivery systems to accommodate for the Philadelphia refinery closures.
    I look forward to hearing from today's distinguished witnesses on 
how these closures will impact the region and the country, and how we 
can provide for the continued security of our oil distribution systems 
and the safety of our homeland.

    Mr. Meehan. At this point in time, I would like to 
recognize the gentleman from Delaware, Mr. Carney, for any 
statement that he may have.
    Mr. Carney. Thank you very much, Congressman Meehan. It is 
a privilege to have the opportunity to join you and Congressman 
Fitzpatrick at this field hearing today for the U.S. Homeland 
Security and Critical Infrastructure Safety Committee. I want 
to thank you for obtaining unanimous consent, which I know is 
required of the committee for a Member of the House who is not 
on the committee to participate, and I know that that is not 
always easy, particularly even getting the votes from your own 
side.
    But this is an issue that you and I, Congressman 
Fitzpatrick and the rest of our regional delegation including 
Congresswoman Schwartz, Congressman Brady, and Congressman 
Fattah have been working on since the news broke several months 
ago, and our efforts have been really fairly simple, and that 
is to work with refineries, their employees, and other 
interested parties in keeping these facilities open and 
operating. Those efforts have included meeting with prospective 
buyers trying to sort out some of the issues that we are going 
to delve into today in terms of the reasons that the refineries 
are closing and are finding themselves non-competitive in the 
global oil markets and those are some of the questions that I 
have today.
    But our goal throughout has been really pretty simple. 
This, I think, is a different attack really to the problem as 
we look at trying to sort through some of these issues, and 
some of the issues that you identified in your opening 
statement in terms of the reasons that the East Coast 
refineries in particular are closing. We had the misfortune 
down the road in Delaware of having the Delaware City refinery 
close for some time and then be reopened. Of course, we have 
had long discussions about how that experience may apply up 
here in southeastern Pennsylvania.
    I am interested in hearing about what drives pricing and 
what drives the ability of refineries to make a profit. Sunoco 
leaders have told us for some time that they have been losing 
large amounts of money on a monthly basis, and of course, my 
constituents just see the price at the pump going up and don't 
quite understand how that doesn't flow through to the refinery 
and the folks that work there.
    I am particularly concerned, as you are, Congressman 
Meehan, about the effects of a shutdown like this or reduced 
refining capacity in our region on our economic assets in this 
region and on price stability for our consumers, our 
constituents, and the businesses that we represent.
    All the industries that I talk to, and I know that my 
colleagues talk to, tell me today that the most important 
component of being successful is quality of the workforce. We 
know here that for generations of families in the area where I 
grew up in Claymont, Delaware, and other places in New Castle 
County and of course here in Pennsylvania have manned those 
facilities with a quality workforce that is necessary to get 
the job done. It is disturbing to see these refineries at risk 
when we know that the work there is being done by a quality 
workforce.
    One of the other issues that you identified, Mr. Chairman, 
in your opening statement is the fact that our region, if and 
when these refineries close, will depend then on the logistics 
of pipelines and ships moving product in and out of our region 
and that raises questions about the security of those logistics 
to attack by terrorist groups and others.
    So I want to just close by thanking you again for including 
me in this field hearing, for getting the approval to have the 
hearing in the first instance, and I look forward to having a 
dialog with the experts, and I want to thank the witnesses for 
coming. It is a lot more difficult, I am sure, for you to get 
here maybe than it would be to get to our hearing rooms on the 
Hill. It is a hell of a lot easier for me to get here from 
Wilmington than it is to get to the District of Columbia.
    So thank you very much and I look forward to our 
discussions this morning.
    Mr. Meehan. Thank you, Mr. Carney.
    Now I would also like to turn to our colleague in the 
House, the gentleman from Pennsylvania's 8th Congressional 
District, Mr. Fitzpatrick, for any opening comments he may 
have.
    Mr. Fitzpatrick. Good morning, and I would like to thank 
the Chairman, Mr. Meehan, for convening this critically 
important hearing here in Pennsylvania and this part of the 
country and for inviting Representative Carney and me also the 
opportunity to be here to listen to these witnesses and to ask 
the questions that really are on the minds of so many 
Americans.
    The rising cost of energy of course is dominating the 
headlines and impacting so significantly our budgets, our 
business budgets, and our family budgets, demonstrating, I 
think, for all of us how economic security, energy security, 
and National security are all really inextricably intertwined 
in this industry.
    There were riots because of rising fuel prices back in the 
late 1970s. I remember 1979 when I was growing up in Bucks 
County, some of the first gas riots occurred in the Five Points 
section of Levittown, my hometown in southeastern Pennsylvania, 
and it was a very difficult time in our Nation's history, but 
to put things in perspective, in 1979, the price of a gallon of 
gas was 85 cents, which adjusted for inflation to today's 
numbers, that would be $2.50 a gallon, and I noticed over the 
weekend we are getting very close now to $4 a gallon, today's 
numbers.
    So this is a very timely hearing. This is an important 
hearing, and it is important, as I said, not just for family 
budgets and business budgets but for our National security and 
for, you know, not to forget the important issue of jobs in 
southeastern Pennsylvania, especially in this region.
    So Congressman, thanks for convening the hearing and for 
letting us participate.
    Mr. Meehan. Thank you, Mr. Fitzpatrick.
    Other Members of the committee who are not here today but 
who may wish to submit opening statements, they may be 
submitted for the record.
    [The statement of Ranking Member Higgins fllows:]
           Prepared Statement of Ranking Member Brian Higgins
    I would like to thank the Chairman for holding a hearing on this 
very important matter. This is a matter that impacts not only the 
Chairman's district, but also the entire Northeast, including Western 
New York. That is why I am very interested in today's topic and the 
testimony that will be presented.
    Northeastern oil refineries supply about 40% of the region's 
gasoline, 60% of the region's Ultra Low Sulfur Diesel, and 45% of its 
heating oil. Replacing this region's supply demand with additional 
domestic and foreign imports could pose logistical challenges. I hope 
that testimony will indicate what these challenges are and how this 
region can handle them. Further, will these challenges cause the price 
of gasoline and heating oil products to increase?
    What are the other options for getting oil to this area? Are the 
ports in this area equipped to both handle crude oil? Are any nearby 
ports able to handle waterborne oil products? Even if there are ports 
that can handle waterborne oil products, will there be an ability to 
inject oil into the pipelines used by the refineries?
    Furthermore, we also need to look at the security issues involved 
in relying on cargo ships and pipelines to supply oil to this region. 
We know that before his death, Osama Bin Laden asked al-Qaeda 
operatives to target pipelines, oil tankers, and dams in the United 
States. Since bin Laden's death, however, is this still a threat? What 
exactly are the Department of Homeland Security and the Department of 
Transportation doing to ensure that these pipelines are not vulnerable 
to terrorist attacks?
    In addition to terrorist attacks, what are the Department of 
Homeland Security and the Department of Transportation doing to ensure 
that in the event of a natural disaster, oil will reach the Northeast 
if the Pennsylvania refineries are closed? After Hurricanes Katrina and 
Rita, we witnessed just how vulnerable these pipelines can be. We need 
to know how to be prepared in the event of a natural disaster.
    All in all, we also need to realize the reality of this situation. 
There are ordinary, everyday people involved in these decisions to 
close the refineries. Not only will the closures affect the thousands 
of people that work in this area, but also the closures will affect the 
people of the Northeastern region. The people that want to drive or 
heat their homes this fall. However, according to the Energy 
Information Administration, until companies know whether or not the 
Sunoco plant will close they are not planning to make significant 
investments in new logistical arrangements. Not having logistical 
arrangements in place could yield dire consequences for this region.
    Mr. Chairman, I would like to reiterate that this is not just a 
local issue. This is an issue that reaches far beyond Pennsylvania. I 
look forward to receiving testimony that will address how we will deal 
with the reality of these oil refinery closures, and how this will 
impact our security.

    Mr. Meehan. In addition, the United Steel Workers have 
asked whether they can submit testimony for the record, and 
without objection, that is so ordered.*
---------------------------------------------------------------------------
    * The information was not received at the time of publication.
---------------------------------------------------------------------------
    So we are pleased today to have two panels that we will be 
hearing from. The first panel has witnesses before us today who 
bring expertise from their service on behalf of agencies within 
the United States Government. The first is Dr. Howard 
Gruenspecht, who was named Deputy Administrator for the United 
States Energy Information Administration in March 2003. Since 
July 2011, he has also served as EIA's Acting Administrator 
with responsibility for collecting, analyzing, and 
disseminating independent and impartial energy information to 
promote sound policymaking, efficient markets, and public 
understanding of energy and its interaction with the economy 
and the environment. Over the past 30 years, Dr. Gruenspecht 
has worked extensively on electricity policy issues including 
restructuring and reliability, regulations affecting motor 
fuels and vehicles, energy-related environmental issues, and 
economy-wide energy modeling. Before joining EIA, Dr. 
Gruenspecht was a Resident Scholar at Resources for the Future. 
From 1993 to 2000, he served as the Director of Economic, 
Electricity, and Natural Gas Analysis in the Department of 
Energy's Office of Policy. I would also like to express my 
personal appreciation on behalf of our entire delegation. I 
know that we on a couple of occasions have asked for the EIA to 
make available to us expeditious review of studies that would 
give us a sound basis to understand his interpretation or the 
agency's interpretation of the impact of refinery closings, and 
I am grateful for the timely response with which the 
administration worked.
    In addition, we have with us today Mr. Brandon Wales, who 
is the director of the Homeland Infrastructure Threat and Risk 
Analysis Center at the Department of Homeland Security. Under 
Mr. Wales' leadership, the center has grown to become a robust, 
all-hazards analytical resource for public- and private-sector 
partners covering the full array of risks and challenges facing 
the infrastructure community. Mr. Wales also oversees the 
Department's Advanced Modeling, Simulation, and Analysis 
program at the National Infrastructure Simulation and Analysis 
Center. Mr. Wales was asked to lead the review of the 
Counterterrorism and Analysis program at the National 
Infrastructure Simulation and Analysis Center. Mr. Wales was 
asked to lead the review of the Counterterrorism and 
Cybersecurity Mission Area during the first Quadrennial 
Homeland Security Review. Prior to joining the Department, Mr. 
Wales served as the principal national security advisor to 
United States Senator Jon Kyl and was a senior associate at the 
Washington-based Foreign Policy and National Security Think 
Tank.
    So for both panels, we would greatly appreciate it if you 
would summarize your submitted testimony and do your best to 
keep your opening statements within the 5 minutes that are 
allotted under the rules. So I now recognize Dr. Gruenspecht 
for your testimony. Dr. Gruenspecht.

 STATEMENT OF HOWARD GRUENSPECHT, ACTING ADMINISTRATOR, ENERGY 
        INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY

    Mr. Gruenspecht. Thank you, Mr. Chairman and Members. I 
appreciate the opportunity to appear before you today.
    The Energy Information Administration, as you pointed out, 
is a statistical and analytical agency. We don't promote or 
take positions on policy issues, and we have independence with 
respect to the information and analysis we provide. Therefore, 
our views should not be construed as representing those of the 
Department or other Federal agencies.
    We have been following changes in the East Coast refining 
market closely, as described in the reports that accompany my 
testimony. ConocoPhillips' Trainer and Sunoco's Marcus Hook 
refineries were closed during 2011 but were partially offset by 
the restart of PBF Energy's Delaware City refinery, which is 
about the same size of Trainer. HOVENSA's U.S. Virgin Islands 
export refinery, which supplied the East Coast, also closed in 
February 2012. The impacts of that closure are just beginning, 
but by itself, it is not expected to be a major problem.
    Sunoco also announced plans to idle Sunoco Philadelphia, 
its remaining refinery in the Philadelphia area, in July 2012 
if no buyer is found. As shown in table 1 of my testimony, 
again, this refinery alone represents roughly one-quarter of 
East Coast refining capacity as of August 2011.
    As indicated in our latest report, all of these closures 
would create a shortfall of about 240,000 barrels per day for 
gasoline and 180,000 barrels per day of ultra-low-sulfur 
diesel, ULSD for short, by 2013 when both existing demand and 
expected demand growth are considered.
    A new requirement in New York State that heating oil meet 
the ULSD specification starting in July 2012 will effectively 
boost Northeast ULSD demand by an estimated 70,000 barrels per 
day, or 20 percent on an annual basis, with the impact 
concentrated in the winter.
    In recent years, Northeast refineries supplied about 40 
percent of the gasoline, 60 percent of the ULSD, and 45 percent 
of the heating oil consumed in the Northeast. Product imports 
and receipts from refineries on the Gulf Coast made up most of 
the remainder, and would need to be increased to compensate for 
reductions in refining capacity. Extra barrels may also be 
brought in from the Midwest but the main problem is less 
defined replacement supplies and the logistics of moving them 
to locations in the Northeast market.
    Two distinct bottlenecks bear watching. The first regards 
product movements from the Gulf Coast to the Northeast, whether 
by pipeline or water. The Colonial pipeline that delivers 
products from the Gulf Coast to the Northeast is at or near 
capacity. Under the Jones Act, waterborne shipments between 
U.S. ports must use U.S.-flagged vessels built in the United 
States and manned by U.S. crews, and the availability of such 
vessels for new routes is unknown.
    The second constraint regards moving products from East 
Coast ports onto the smaller product pipelines that originate 
in the Philadelphia area to serve inland Pennsylvania and 
western New York. From a supply standpoint, ULSD will likely be 
the most challenging fuel to replace, reflecting the global 
tightness in distillate markets. Conventional and reformulated 
gasoline is more broadly available than ULSD but replacement 
volumes may still come at higher prices. If Sunoco Philadelphia 
refinery closes, prices would likely rise, but specific price 
impacts are uncertain. If parts of the region cannot be 
adequately supplied in the short term, prices can spike. In the 
longer run, we would also expect higher prices and maybe higher 
price volatility to result from longer supply chains, as 
alluded to in your opening statement. Industry participants 
have yet to identify a single solution that would address all 
of the logistical hurdles in the short term. Third parties are 
definitely looking into options.
    Since our report was written, Sunoco has indicated that 
should its Philadelphia refinery be idled, its Eagle Point, New 
Jersey, terminal, which has been converted from a refinery, 
would be fully functioning at that time. The terminal would be 
able to bring in product from the Delaware River and deliver 
significant volumes into the pipelines moving inland into 
Pennsylvania and western New York. Sunoco has also informed us 
of its ability to move limited product volumes across the 
Marcus Hook and Philadelphia dockets into these inland systems.
    In addition, the American Waterways Operators has indicated 
that Jones Act tankers and barges should be able to pick up 
extra volumes that may be needed from the Gulf Coast. We hope 
to learn more about this in the coming weeks.
    Over the longer term, significant adjustments in East Coast 
and Caribbean transportation, storage, and terminal 
infrastructure will help cope with reduced refining capacity 
and accommodate longer supply lines. But these facilities will 
not all become immediately operational. Also, to the extent 
these facilities are located outside the United States and do 
not have the same reporting requirements as U.S. facilities, 
the markets will be less transparent.
    The situation is evolving. Our reports have already 
generated further discussion and information, and we plan to 
continue to monitor the situation.
    This concludes my testimony, Mr. Chairman and Members, and 
I would be happy to answer any questions you may have.
    [The statement of Mr. Gruenspecht follows:]
                Prepared Statement of Howard Gruenspecht
                             March 19, 2012
    Mr. Chairman and Members of the committee, I appreciate the 
opportunity to appear before you today. The Energy Information 
Administration (EIA) is the statistical and analytical agency within 
the Department of Energy. EIA does not promote or take positions on 
policy issues, and has independence with respect to the information and 
analysis we provide. Our views should not be construed as representing 
those of the Department or other Federal agencies.
    EIA has been following the changes in the East Coast market closely 
as described in the reports that accompany my testimony. Significant 
capacity serving Northeast petroleum product markets was recently 
idled. ConocoPhillips' Trainer and Sunoco's Marcus Hook refineries were 
closed during 2011, but were partially offset by the restart of PBF 
Energy's Delaware City refinery, which is about same size as Trainer. 
(Table 1) HOVENSA's U.S. Virgin Islands export refinery, which supplied 
the East Coast, also closed in February 2012. The impacts of that 
closure are just beginning, but by itself it is not expected to be a 
major problem for Northeast product markets.
    Sunoco also announced plans to idle its remaining refinery in 
Philadelphia (Sunoco Philadelphia) in July 2012 if no buyer is found. 
This refinery represents roughly one-quarter of East Coast refining 
capacity as of August 2011.
    As indicated in the report attached to this testimony, all these 
closures would create a shortfall of about 240,000 bbl/day for gasoline 
and 180,000 bbl/d for ultra-low-sulfur diesel (ULSD) by 2013, 
representing the need to both make up for lost production and meet 
expected demand growth. A new requirement in New York State that 
heating oil meet the ULSD specification starting in July 2012 will 
effectively boost Northeast ULSD demand by an estimated 70,000 bbl/d, 
or 20%, on an annual basis. Because heating demand is seasonal, the 
impact is concentrated in winter.
    In recent years, Northeast refineries supplied about 40% of the 
gasoline, 60% of the ULSD, and 45% of the heating oil consumed in the 
Northeast. Product imports and receipts from refineries on the Gulf 
Coast made up most of the remainder, and would need to be increased to 
compensate for reductions in refining capacity. Extra barrels may also 
be brought in from the Midwest. But the main problem is less to find 
replacement supplies than the logistics of moving them to locations in 
the Northeast market. Logistics and transportation constraints could 
raise price levels and volatility if Sunoco Philadelphia is idled.
    Two distinct bottlenecks bear watching. The first regards product 
movements from the Gulf Coast to the Northeast, whether by pipeline or 
water. The Colonial Pipeline that delivers products from the Gulf Coast 
to the Northeast is at or near capacity. Waterborne shipments within 
the United States require vessels meeting Jones Act requirements (U.S.-
flagged vessels built in the United States and using U.S. crews). These 
vessels are in use and availability for new routes is unknown. The 
second constraint regards moving products from East Coast ports onto 
the smaller product pipelines that originate in the Philadelphia-area 
to serve inland Pennsylvania and western New York.
    From a supply standpoint, ULSD will likely be the most challenging 
fuel to replace, reflecting the global tightness in distillate markets. 
Conventional and reformulated gasoline is more broadly available than 
ULSD, but replacement volumes may still come at higher prices.
    If Sunoco Philadelphia refinery closes, prices would likely rise, 
but specific price impacts are uncertain. If parts of the region cannot 
be adequately supplied in the short term, prices can spike. In the 
longer run, higher prices and higher price volatility may result from 
longer supply chains.
    Industry participants have yet to identify a single solution that 
would address all of the logistical hurdles in the short term. Third 
parties are looking into options, but are unlikely to commit large 
investments in new logistical arrangements until the status of Sunoco 
Philadelphia is known.
    Since our report was written, Sunoco has indicated that should its 
Philadelphia refinery be idled, its Eagle Point, New Jersey, terminal 
(which has been converted from a refinery) would be fully functioning 
at that time. The terminal would be able to bring in product from the 
Delaware River, and deliver significant volumes into the pipelines 
moving inland into Pennsylvania and Western New York. Sunoco has also 
informed us of its ability to move some product volumes across the 
Marcus Hook docks into these inland systems.
    In addition, the American Waterways Operators, a trade association 
for Jones Act vessels, has indicated that Jones Act tankers and barges 
should be able to pick up extra volumes that may be needed from the 
Gulf Coast. We hope to learn more about this in the coming weeks.
    Over the longer term, significant adjustments in East Coast and 
Caribbean transportation, storage, and terminal infrastructure will 
help cope with reduced refining capacity and accommodate longer supply 
lines, but these facilities will not all become immediately 
operational. Also, to the extent these facilities are located outside 
the United States and do not have the same reporting requirements as 
U.S. facilities, the market will be less transparent.
    The situation is evolving. Our report has already generated further 
discussion and information, and EIA will continue to monitor this 
situation.
    This concludes my testimony, Mr. Chairman and Members of the 
committee. I would be happy to answer any questions you may have.

                             TABLE 1.--U.S. EAST COAST REFINERIES OPERATING CAPACITY
----------------------------------------------------------------------------------------------------------------
                                                                        Operating
                                                                       Crude Unit     Percent
             Owner                     City              State       Capacity (bbl/  of Region       Status
                                                                      calendar day)
----------------------------------------------------------------------------------------------------------------
Operating and Idled
 Refineries:
    ConocoPhillips............  Linden...........  NJ..............         238,000        17%  Operating.
    PBF Energy Co. LLC........  Delaware City....  DE..............         182,200        13%  Operating.
    PBF Energy Co. LLC........  Paulsboro........  NJ..............         160,000        12%  Operating.
    United Refining Co........  Warren...........  PA..............          65,000         5%  Operating.
    American Refining.........  Bradford.........  PA..............          10,000         1%  Operating.
    Ergon-West Virginia.......  Newell/Congo.....  WV..............          20,000         1%  Operating.
    Hess Corp.................  Port Reading.....  NJ..............           \1\ 0         0%  Operating.
    Sunoco Inc................  Philadelphia.....  PA..............         335,000        24%  Operating, For
                                                                                                 Sale.
    Sunoco Inc................  Marcus Hook......  PA..............         178,000        13%  Idled 12/2011,
                                                                                                 For Sale.
    ConocoPhillips............  Trainer..........  PA..............         185,000        13%  Idled 9/2011,
                                                                                                 For Sale.
                               ---------------------------------------------------------------------------------
      Total Operating and       .................  ................       1,373,200       100%
       Idled.
                               =================================================================================
Recently Shut Refineries:
    Western Refining..........  Yorktown.........  VA..............          66,300  .........  Shut 9/2010.
    Sunoco Inc................  Eagle Pt/          NJ..............         145,000  .........  Shut 2/2010.
                                 Westville.
----------------------------------------------------------------------------------------------------------------
\1\ Hess Port Reading has a production capacity of 70,000 bbl/calendar day but no crude unit capacity.
Notes: Yellow shading indicates operating refineries for sale and at risk of shutdown. Orange shading indicates
  idled refineries for sale and at risk of shutdown. Red shading indicates shut refineries. Total refinery
  capacity excludes two refineries that primarily produce asphalt, as well as the Yorktown, VA and Eagle Point
  refineries that were shut down in 2010.
Source: U.S. Energy Information Administration.




    Mr. Meehan. Thank you, Mr. Gruenspecht.
    Now I turn to Mr. Wales. Mr. Wales, I look forward to your 
testimony.

 STATEMENT OF BRANDON WALES, DIRECTOR, HOMELAND INFRASTRUCTURE 
    THREAT AND RISK ANALYSIS CENTER, DEPARTMENT OF HOMELAND 
                            SECURITY

    Mr. Wales. Thank you, Chairman Meehan and distinguished 
Members of Congress, for inviting me to address the issue of 
refinery closures in the Mid-Atlantic Region. The availability 
of refined petroleum products is an important issue for the 
Department of Homeland Security, and I appreciate the 
opportunity to discuss this with you.
    I am the Director, as you stated, of the Homeland 
Infrastructure Threat and Risk Analysis Center, known as 
HITRAC, which is charged with analyzing risks to the Nation's 
critical infrastructure from threats and hazards both natural 
and man-made. As you know, in the last 6 months, two 
Philadelphia-area refineries have ceased production, and the 
third refinery in the region announced that it will close by 
July if a buyer is not found. These refineries represent 50 
percent of the region's refining capacity, but a simple 
examination of these refineries does not tell the complete 
story as there are other sources of refined product for the 
region including the Colonial pipeline system, which moves 
refined product from refineries on the Gulf Coast to cities on 
the eastern seaboard. Additionally, major East Coast ports 
receive refined product from various points in Europe and the 
Gulf Coast.
    At HITRAC, we have examined whether the loss of capacity 
represented by the closing of the Mid-Atlantic refineries 
significantly affects the resilience of regional or National 
petroleum supply system. In other words: Is there sufficient 
capacity to supply the East Coast with refined petroleum 
products? HITRAC's initial analysis shows that the refinery 
closures should not have homeland security impacts due to this 
loss of supply.
    In order to put our analysis into context, it is important 
to understand HITRAC's role in supporting the Homeland Security 
mission. HITRAC serves as the analytic arm of the Department's 
Office of Infrastructure Protection and provides strategic, 
operational, and tactical analysis to our public- and private-
sector partners so that they can make more-informed decisions 
regarding the management of risk. Our work supports homeland 
security-related exercises, training activities, contingency 
and security planning, and response to real-world incidents 
that affect the Nation's infrastructure. Modeling complex real-
world systems such as the petroleum network underpins all of 
the analysis performed by HITRAC.
    A massive and complex network of refineries, transmission 
pipelines, tank farms, and terminals produce and deliver 
refined petroleum products. Because the network is so 
interconnected, interruption of any of these components could 
cascade into other parts of the system causing imbalances and 
shortages. However, the system is dynamic. In the event of a 
disruption in one part of a pipeline network, for example, flow 
can sometimes be diverted to functioning pipelines or 
production can be surged at another refinery while consumers 
respond to shortages and resulting price increases by limiting 
consumption.
    Because of the significant role that petroleum plays in our 
economy, HITRAC has undertaken a number of capability 
development efforts to better understand the domestic and 
international fuel supply. In 2011, for example, we completed a 
model of the National transportation fuel system, which helps 
analysts estimate the effects from damage or disruption to 
components of this system.
    In examining the potential implications of the closure of 
the Marcus Hook and Trainer refineries, and the planned closure 
of Sunoco's Philadelphia refinery, HITRAC executed a simplified 
analysis of these closures. Initial analysis suggests the 
closure of these three refineries will have a negligible impact 
on the overall availability of refined petroleum product in the 
supply chain. Additional refined product moving through the 
Colonial and Plantation pipelines from spare capacity at 
refineries in Texas, Louisiana, and other locations in the Gulf 
Coast is in sufficient supply to meet demand.
    HITRAC also tested our analysis against a major hurricane 
disrupting Gulf Coast petroleum infrastructure. Analysis there 
suggests that in this case, there would be supply shortages 
irrespective of whether the three Mid-Atlantic refineries 
operate, though those shortages would appear no farther north 
than Washington, DC. These types of effects were witnessed in 
the aftermath of Hurricanes Katrina and Rita, where elevated 
gas prices were seen in cities like Atlanta. The Northeast does 
have sufficient refined petroleum product in terminals, 
tankers, and the supplies from Europe to mitigate the 
hurricane's impact.
    I would like to make an important caveat. Our analysis 
focuses on refined product as a whole rather than on individual 
products. As such, local supply and storage of individual fuels 
and distillates along the supply chain might lead to localized 
shortages not captured in the aggregate. The model does not 
give any insight, for example, into the specific availability 
of low-sulfur heating oil, ultra-low-sulfur diesel, or gasoline 
with additives for particular cities. These specialized 
products could be in short supply under some conditions.
    Our vision is a safe, secure, and resilient critical 
infrastructure based on and sustained through public-private 
partnerships to mitigate risks to, strengthen the protection 
of, and enhance the all-hazard resilience of the Nation's 
critical infrastructure.
    Thank you for holding this important hearing, and I would 
be happy to respond to any questions.
    [The statement of Mr. Wales follows:]
                  Prepared Statement of Brandon Wales
                             March 19, 2012
    Thank you Chairman Meehan, Ranking Member Higgins, and 
distinguished Members of the Subcommittee on Counterterrorism and 
Intelligence for inviting me to address the issue of refinery closings 
in the Mid-Atlantic Region. The availability of refined petroleum 
products is an important issue for the Department of Homeland Security 
(DHS), and I appreciate the opportunity to discuss this with you.
    I am the director of the Homeland Infrastructure Threat and Risk 
Analysis Center (HITRAC), which is charged with analyzing potential 
threats to, and consequences and vulnerabilities of, the Nation's 
critical infrastructure. Our work examines both natural disasters and 
terrorist threats that can disrupt critical infrastructure systems, 
including the petroleum fuel network, in order to improve security and 
enhance the resilience of these infrastructure systems.
    Today, I am here to discuss DHS' views on how the planned closure 
of the Marcus Hook refinery might affect broader critical 
infrastructure resilience. In the last year, two Philadelphia-area 
refineries have been idled, which means they have ceased production. 
The first, owned by ConocoPhillips, located in Trainer, Pennsylvania, 
with an operating capacity of 185,000 barrels per day, was idled in 
September 2011 and currently remains for sale. The second, owned by 
Sunoco Inc., located in Marcus Hook, Pennsylvania, with a capacity of 
178,000 barrels per day, was idled in December 2011. Recently, Sunoco 
announced plans to close a third refinery in the region, a 335,000 
barrels-per-day refinery in Philadelphia, Pennsylvania, if no buyer is 
found by July 2012. These three refineries represent 50 percent of the 
region's refining capacity. Coupled with the closing of other 
refineries in the region (Western Refining in Yorktown, Virginia, at a 
capacity of 66,300 barrels per day, shut down in September 2010; Sunoco 
Inc., Westville, New Jersey, at a capacity of 145,000 barrels per day, 
shut down in February 2010) and refineries that supply the region 
(HOVENSA LLC, St Croix, U.S. Virgin Islands, at a capacity of 335,000 
barrels per day, shut down in February 2012) a significant portion of 
the region's ability to produce refined product will be shuttered.
    A simple examination of refineries does not tell the complete 
story, however, as there are other sources of refined product for the 
region. These include the Colonial and Plantation pipeline systems, 
which move refined product from refineries on the U.S. Gulf Coast to 
cities on the eastern seaboard. In addition, the major East Coast ports 
receive refined product via tanker from various points in Europe and 
via barge from U.S. Gulf Coast refineries using the Intracoastal 
Waterway.\1\
---------------------------------------------------------------------------
    \1\ For additional analysis, see U.S. Energy Information 
Administration, ``Potential Impacts of Reductions in Refinery Activity 
on Northeast Petroleum Product Markets,'' February 2012, at http://
www.eia.gov/analysis/petroleum/nerefining/update/pdf/neprodmkts.pdf, 
accessed March 7, 2012.
---------------------------------------------------------------------------
    At HITRAC, we have examined whether the loss of capacity 
represented by the closing of the Mid-Atlantic refineries significantly 
affects the resilience of the regional or national petroleum supply 
system. In other words, is there sufficient capacity to supply the East 
Coast with refined petroleum products? HITRAC's initial analysis, which 
included analyzing a major disruption of refineries in Louisiana 
coupled with the closure of the Bayway Refinery in Linden, NJ, for an 
unspecified reason, shows that the closing of Sunoco's Marcus Hook 
refinery, combined with the closing of Sunoco's Philadelphia and 
ConocoPhillips Trainer refineries should not result in shortages of 
refined products as a whole, in the Northeast or elsewhere.
    Before presenting our analysis and conclusion, I would like to make 
an important caveat. The model focuses on refined products as a whole 
rather than on individual products. For example, the model does not 
give any insight into the specific availability of low sulfur heating 
oil, ultra-low sulfur diesel, or gasoline with additives for particular 
cities. The focus of this analysis is the availability in the Northeast 
of refined products in the aggregate to meet overall energy needs. The 
availability of these energy sources constitute the potential National 
security issue that may arise due to the idling of the three 
Philadelphia area refineries. The fact that the model does not indicate 
the availability of all grades of fuel limits its utility for a more 
detailed analysis of potential economic impacts, but not for 
identifying National security concerns.
    The Energy Information Administration has analyzed energy market 
implications of the situation in detail in its February 2012 report 
``Potential Impact of Reduction in Refinery Activity on Northeast 
Petroleum Product Markets.'' In contrast to the HITRAC analysis, that 
report did explore the potential impacts of the Philadelphia refinery 
closures on individual products such as ultra-low sulfur diesel, and 
discussed a range of specific logistical challenges associated with 
moving replacement products into certain areas of Pennsylvania and New 
York.
                         organization overview
    In order to put our analysis in context, it is important to 
understand HITRAC's role in risk mitigation, consequence analysis, and 
the building of resilience in critical infrastructure. Within the DHS 
National Protection and Programs Directorate (NPPD), the Office of 
Infrastructure Protection (IP) is responsible for leading and 
coordinating the National effort to strengthen the protection and 
enhance the resilience of critical infrastructure.
    HITRAC serves as the analytic arm of IP and provides timely 
strategic, operational, and tactical analysis to our public- and 
private-sector partners so that they can make more informed decisions 
regarding the management of risk. HITRAC's analytic products provide 
actionable information to stakeholders and decision makers at DHS; 
partner agencies in Federal Government; State, local, Tribal, and 
territorial governments; and the private sector. Our work supports 
homeland security-related exercises, training activities, security and 
contingency planning, and response to real-world incidents that affect 
the Nation's critical infrastructure.
    HITRAC also manages the National Infrastructure Simulation and 
Analysis Center (NISAC), which was created by Congress to be the 
``source of national competence to address critical infrastructure 
protection and continuity.''\2\ NISAC is a partnership between Los 
Alamos National Laboratory and Sandia National Laboratories that brings 
together the laboratories' expertise in modeling, simulation, and 
analysis to problems of system vulnerability and consequence analysis.
---------------------------------------------------------------------------
    \2\ Section 1016(d)(1) of the USA PATRIOT Act; Public Law 107-56; 
October 26, 2001.
---------------------------------------------------------------------------
    Through the work of analysts and modelers at NISAC, HITRAC is able 
to provide decision makers with high caliber analysis of infrastructure 
failures and disruptions and accurate representations of how those 
disruptions propagate from one infrastructure to another.
                            hitrac analysis
    In the past 2 years, HITRAC has provided support to decision makers 
during a wide variety of real-world incidents, including flooding in 
the Midwest, Hurricane Irene, the Japanese earthquake and ensuing risks 
of tsunami and radiation fallout, wildfires in the Southwest, 
earthquakes in Peru and Haiti, and industrial accidents including the 
BP Oil Spill. HITRAC analytic products associated with these supported 
Executive Branch decision makers as well as decision makers at the 
State and local level and in the private sector. Decision makers expect 
HITRAC to provide information on:
   Critical infrastructure in the impacted region, prioritized 
        by importance;
   Expected length of time before electric power is restored to 
        90% of the outage area;
   Expected economic impact of the incident;
   Cascading impacts to regions outside the direct impact area; 
        and
   The importance of any supply-chain disruptions.
    HITRAC analysts consider the direct and indirect impacts of a 
disruption--real or hypothetical--on population, critical 
infrastructure, and the economy. Additional analysis can include 
cascading impacts over time to a region and to the Nation as a whole. 
In the case of the oil, lubricant, and petroleum network, an example of 
direct impacts might be hurricane damage, which would force a temporary 
refinery or pipeline closure, such as when Hurricane Irene closed the 
Bayway Refinery in New Jersey for a few days in August 2011. Resulting 
temporary shortages of oil or petroleum products in other regions would 
be considered indirect impacts. Shortages, in turn, would drive up 
prices so that supply could meet demand and could affect companies or 
operations heavily dependent on these products. A further impact might 
be seen in the regional or National economy. I should note that we do 
not always see indirect impacts, and did not in the case of the Bayway 
closure.
    The crude oil and petroleum product network forms a complex and 
integrated supply chain, which is global in its scope. Supply-chain 
analysis examines the ways individual firms make operational decisions 
in response to disruptions, including how they purchase goods, produce 
products, sell them in markets, and ship them via different modes of 
transportation. Disruptions within these chains can affect the ability 
of some infrastructure entities to provide their products or service to 
the population. Foreign facilities and foreign sources of materials are 
of particular concern because they are farther away, are outside of 
U.S. Federal assistance, and may be more prone to disruption than 
domestic sources and facilities.
                   prior petroleum industry analysis
    A massive and complex network of refineries, transmission 
pipelines, tank farms, and terminals produces and delivers refined 
petroleum products in the United States. Because the network is so 
interconnected, interruption of any of these components can quickly 
cascade into other parts of the system, causing imbalances and 
shortages. However, the system is also dynamic: Companies and consumers 
make decisions as conditions change. For example, in the event of a 
disruption in one part of the pipeline network, flow can sometimes be 
diverted to functioning pipelines or production can be surged at 
another refinery, and imports can increase, while consumers can respond 
to shortages and resulting price increases by limiting consumption.
    Because of the significant role that petroleum plays in our 
economy, we have undertaken a number of capability development efforts 
to better understand the domestic and international oil markets. As an 
example, in 2011 we completed a model of the National transportation 
fuel system. This dynamic model includes estimates of how corporations 
and individuals would respond to a disruption in some part of the 
petroleum system. This model is designed to help analysts estimate the 
availability of transportation fuel in the event that a component 
(e.g., refineries, pipelines, or storage tanks) of the National fuel 
supply chain is damaged or disrupted. In the event of an unforeseen 
disruption, analysts can use this model to determine:
   Which regions of the United States will experience shortages 
        of transportation fuel, given the specific disruption to one or 
        more components of the fuel infrastructure.
   What the duration and magnitude of the shortages will be.
                 mid-atlantic refinery closure analysis
    In examining potential implications of the closure of the Marcus 
Hook Refinery, in addition to the closure of the Trainer refinery and 
the planned closure of the Philadelphia refinery, HITRAC executed a 
simplified analysis of the potential closures. The analysis included a 
determination as to the availability of transportation fuels throughout 
the Mid-Atlantic and Northeast States. The analysis included:
   A baseline assuming that no refineries close;
   Analysis assuming that all of the specified refineries close 
        with shortfalls made up through the Colonial Pipeline and 
        imports from other parts of the United States and Europe; and
   Analysis assuming that a major hurricane, similar to 
        Hurricane Katrina (2005) or Hurricane Gustav (2008), strikes 
        Louisiana and disrupts impacted Gulf Coast refineries, 
        associated storage terminals, and Colonial Pipeline shipments 
        to the Mid-Atlantic and Northeast States.
    The model assumed that no additional refined product supplies above 
normal deliveries would be available from Europe, and that all 
shortfalls would have to be filled domestically.
    The initial analysis we conducted suggests the closure of the three 
refineries in the Mid-Atlantic region will have a negligible impact on 
the availability of refined petroleum products as a whole along the 
East Coast. Again, our analysis does not focus on individual products. 
We estimate that refined product from various sources with spare 
capacity will be sufficient to meet demand. This is comprised of some 
combination of spare capacity in Northeast and Mid-Atlantic refineries 
or additional refined product moving via various transportation modes 
from refineries in Texas, Louisiana, and other locations on the U.S. 
Gulf Coast.
    The hurricane analysis suggests that there would be supply 
shortages, irrespective of whether the three Mid-Atlantic refineries 
operate. Montgomery, Alabama; Knoxville, Tennessee; Nashville, 
Tennessee; Columbus, Georgia; Bainbridge, Georgia; Augusta, Georgia; 
Roanoke, Virginia; and Raleigh, North Carolina would experience some 
unmet demand during this period. Washington, DC, would not able to meet 
its demand in the disruption scenarios, falling approximately 35 
percent short for a period of 6 days. The analysis shows that the 
Northeast does have sufficient inventories of refined petroleum 
product, transportation capacity from unaffected domestic sources, and 
normal supplies from Europe and thus would not be impacted by a 
hurricane in this case.
    It should be noted that HITRAC's initial analysis should not be 
misconstrued as a full study of all of the implications of these 
refinery closures, but it does give us a preliminary estimate of how 
these closures impact the Nation's fuel supplies. Should more detailed 
work be required, we will consult with our partners to ensure that our 
analysis is based upon the full expertise contained throughout the 
Government. Our analysis also does not cover particular blends of 
transportation fuels refined for certain markets or ultra-low sulfur 
distillates. There may be shortages of these types of products.
                               conclusion
    Our vision is a safe, secure, and resilient critical infrastructure 
based on and sustained through strong public and private partnerships 
to mitigate risks to, strengthen the protection of, and enhance the 
all-hazard resilience of the Nation's critical infrastructure. Thank 
you for holding this important hearing. I would be happy to respond to 
any questions you may have.

    Mr. Meehan. Thank you, Mr. Wales. I thank both of the 
witnesses for their testimony, and I will recognize myself for 
5 minutes of questioning.
    Mr. Wales, you have suggested that there is sufficient 
capacity within the United States to be able to supply in the 
event of demands here in the Northeast the sufficient fuel for 
this region, appreciating that 50 percent of the refining 
capacity is now going to exit this region if all of these 
refineries close down. Is that capacity in your estimation 
currently solely within the United States? In other words, we 
have the refining capacity here within the United States?
    Mr. Wales. Our assumption is that some of that capacity 
would be outside the United States, particularly in refineries 
in Europe where the Northeast may be purchasing additional 
supply.
    Mr. Meehan. So in effect, what we are talking about is not 
just refineries in Louisiana or otherwise, we would be required 
now to move over and get refined product from foreign countries 
that would fill the current gap?
    Mr. Wales. That is correct. We would assume that some of 
the capacity would be based on Gulf Coast refineries increasing 
their production, using some of their spare capacity and 
additional supplies we purchased from Europe.
    Mr. Meehan. That dramatically expands the supply chain for 
us then as well because one of the things we have been talking 
about is the logistics of this situation in terms of its impact 
here on this region. It is one thing to get crude product that 
comes up to the region but we are now looking at refined 
product as well. Does this push the issue--what percentage of 
it in your estimation is going to be pushed further offshore?
    Mr. Wales. We don't have an estimate for the exact 
percentage. I am not sure if my colleague from EIA may have a 
better sense of what that import may look like.
    Mr. Meehan. Dr. Gruenspecht, do you have any opinion with 
respect to the implications our pushing more of the actual 
product needs to other parts of the country?
    Mr. Gruenspecht. Yes. Thank you, Mr. Chairman. The United 
States has traditionally and the Northeast has traditionally 
imported product as well as crude, particularly a lot of 
product going into New York Harbor and some other ports as 
well, up and down the East Coast. What is potentially I think 
of interest or of concern relates to the specific parts of the 
Northeast that are supplied from the Philadelphia-area 
refineries and those are connected through a series of smaller 
product pipelines that originate in this area, and, you know, 
being able to serve a larger region easily may not consider in 
some sense some of the specific logistical issues associated 
with the way certain parts--inland Pennsylvania, western New 
York--have been supplied historically.
    Mr. Meehan. I would like to follow up on those points with 
regard to logistics, because you mentioned in your testimony 
the idea that logistical challenges still have not been worked 
out, and one of the ways in which, as I understand it, the 
capacity will be realized will be to use the pipelines, 
particularly the Colonial pipeline, and as I have been reading 
on this, the Colonial pipeline is expecting at some point in 
time to increase the current flow some 30 barrels per day, 
about a third of it in the next 3 months, and then about 
120,000 additional barrels per day that will flow, but at a 
certain point aren't we going to see a capacity in which that 
pipeline is maximized?
    Mr. Gruenspecht. Yes, I would have to get back with you on 
the specifics. I would want to be sure to get them right. But 
our view of the situation has been that the Colonial is pretty 
tight right now because some of the same forces that--you know, 
some of the refineries that are at the origin point of the 
Colonial might be more economically competitive than some of 
the ones----
    Mr. Meehan. In other words, what is going to happen is, we 
are looking right now at an expectation that oil can flow here 
but there could be demands in other parts of the country. Could 
there be demands in other parts of the world that would lead 
refined oil to be moved to another location rather than here to 
the Northeast?
    Mr. Gruenspecht. Well, I think it will move here if the 
price is right. I don't know right for who, right for the 
suppliers or right for the consumers, which tend to have 
different perspectives on this, but, you know, our view is that 
supplies can flow into this region. I think limited capability 
right now on the long-distance product pipeline, particularly, 
the Colonial that serves this region, some opportunity for 
products to flow into marine terminals including the new marine 
terminal and a refinery that was closed earlier because this 
thing did not begin just this year. Eagle Point in New Jersey, 
also a Sunoco refinery, I believe that is being--well, I know 
that is being converted into a pretty big terminal. Again, 
Sunoco since our report has come out, they have been a little 
more open, I think, about, you know, whether that terminal will 
be fully operational. So there is the opportunity to bring in 
shipborne product into Eagle Point but again, the issue of the 
Jones Act tankers and other such issues arise and what the cost 
of those shipments would be. So it is a pretty--I know it is a 
lot of detail but it is a pretty complex situation.
    Mr. Meehan. I see my time is expired, but I would like to 
ask to follow-up in addition to the idea of there being a point 
in which we will maximize the capacity in the principal 
pipelines, you also mentioned that there are distribution 
issues sort of at the point of access here locally which the 
oil-refined capacity has to go down, and so would you explain 
that and tell me what the implications of that are?
    Mr. Gruenspecht. Yes. There are parts of particularly 
Pennsylvania and New York State that are served by smaller 
product pipelines again that originate in this area and are 
tied into all of the refineries in this area and are also tied 
in, I think, to the Colonial pipeline, and pipelines are a very 
efficient way to move petroleum products, and the concern would 
be that if you can get the product but you can't get it into 
those pipelines which were originally designed to be fed by the 
output of the refineries in this region, then you might have a 
situation where more expensive means of moving product might be 
required and that would be reflected in the prices of product.
    Mr. Meehan. If I can indulge in one last question, but we 
are also talking about pipelines, but I am seeing more 
discussion about reversing pipelines as we are looking at 
different energy resources and other kinds of things. Is it 
possible that any of the pipelines that we are currently 
anticipating to be available for the flow of the gasoline to 
our region or other kinds of refined products would be rerouted 
either in terms of their direction or would be utilized as a 
right-of-way, the access to that pipe would have more value for 
another commodity and therefore be dedicated to that?
    Mr. Gruenspecht. As you obviously follow these matters very 
closely, as your question suggests, there has been talk, and 
there is often talk about changing the direction of pipelines. 
For instance, some of the pipelines that went from the Gulf 
Coast to feed crude oil up into the mid-continent, there is 
this talk about reversing those because there is significant 
amounts of petroleum production in the mid-continent and those 
are being reversed. What you may be referring to is the growth 
in natural gas and natural gas liquids production in 
Pennsylvania, and there is at least one project that I believe 
had talked about using an existing pipeline to move natural gas 
liquids from producing areas in the Marcellus throughout 
Pennsylvania toward the Port of Philadelphia. So that would 
again be a re-utilization of a pipeline. I don't know that that 
will come to fruition. I suspect that probably will not be 
immediately coming to fruition.
    Mr. Meehan. My time is expired, and I will recognize the 
gentleman from Delaware, Mr. Carney.
    Mr. Carney. Thank you, Mr. Chairman.
    Dr. Gruenspecht, I would like to explore with you a little 
bit the economics of these petroleum markets and what in 
particular in those economies have affected the ability of 
these particular refineries to be profitable. I think you know 
a little bit about that, and I would like to explore what those 
factors are. I must say that in the several months that we have 
been working on this issue, I have been struggling to 
understand how prices of these refined products don't seem to 
track the price of gasoline at the pump and of the end-users 
like maybe they do in other markets. Could you explain for me 
the dynamics of these pricing mechanisms and what has been at 
play here in the last year or so that have caused the problem 
for the profitability of these facilities? I know that is 
probably more than one or two issues. There are a number of 
issues that are in play.
    There is something in our material here that shows the 
price of end product of gasoline at the pump that has 
fluctuated from a low of just under $2 in March 2009 to a high 
during the summer of 2008 of $4.11 to the National average 
today at $3.82 and up and down and around over that whole 
course of time. Obviously the cost associated with refining and 
with the extraction of petroleum from the ground doesn't 
fluctuate like that. I wouldn't think so. What is driving this 
and what has squeezed the refining piece of it? You are making 
faces at me.
    Mr. Gruenspecht. I am making faces because there is no 
video, hopefully, but that is a pretty tough question. I am not 
sure. I will try but it will be hard because you could talk for 
hours on this and still not get to the bottom of it.
    I think the factor that is most affecting the price of 
gasoline and other refined products is in fact the price of 
crude oil. The price of crude oil has been moving a lot, you 
know, in recent history. I think we hit a peak of like $147 a 
barrel in July 2008. I think it was down to about $30 a barrel 
by the end of that year--$35 a barrel by the end of 2008, 
beginning of 2009, in part as the world economy ran into some 
very tough situations and global demand for oil crashed. Prices 
have been on a roller coaster ever since, certainly began to 
take off at the beginning of 2011, a significant upward moving 
associated with some of the events surrounding the Arab Spring 
and certainly the Libya disruption.
    Mr. Carney. So events that really aren't a function of cost 
of extraction?
    Mr. Gruenspecht. I don't think it is a function of the cost 
of extraction. Costs of extraction are not changing as 
radically as the price----
    Mr. Carney. Fairly consistent, wouldn't you say?
    Mr. Gruenspecht. It varies. Cost of extraction varies 
across the projects. There are some places where it is 
relatively cheap to extract oil. Some of the more marginal 
places are more expensive. But I think it would be hard to sit 
here with a straight face and argue that the cost of extraction 
has been ping-ponging around.
    Mr. Carney. It might move consistently up at some level but 
not up and down.
    Mr. Gruenspecht. No, it is not moving like that. I mean, 
clearly what is going on is more the view of the supply-demand 
balance in the world which certainly the demand side is very 
driven by economic conditions in the world. As you know, I 
think the growth in oil demand in the world is really in the 
developing countries, not in places like the United States. In 
fact, our demand is perhaps falling off slowly.
    Mr. Carney. I see my yellow light is on so let me just move 
to another question. So the profitability of refining really is 
a function of the spread between the price of crude and the 
price at the pump or the price of the end-user. Is that 
correct?
    Mr. Gruenspecht. In part, but I would say one of the things 
that has been very interesting is that different crude streams 
have moved in different directions--well, they don't move in 
different directions but the prices of different crude sources 
have separated a bit and I think that has been particularly 
difficult for the refineries in this area because they had 
tended to use light sweet crude oil imported from Africa and 
they have been at a relative competitive pressure because the 
refineries that they are competing with are using crude----
    Mr. Carney. Like Delaware City.
    Mr. Gruenspecht. Delaware City somewhat but particularly 
some of the refineries in Texas using heavier crude, some of 
the refineries in the Midwest using I guess crude that is sort 
of stuck in the Midwest and is sold at a discount. So I think 
that is----
    Mr. Carney. It is a cheaper crude.
    Mr. Gruenspecht. Cheaper crude selling the same product. 
That is very tough. If you are running a store and, you know, 
your inputs cost more than the inputs of your competitors, that 
could be very tough.
    Mr. Carney. So the end-user--one last question if the 
Chairman will allow. So the end-user price, you know, one could 
see where the price at the pump or the price for heating oil, 
whatever it might be, would just track crude oil prices but 
that doesn't seem to be the case, so what is the differential 
there?
    Mr. Gruenspecht. Again, it depends. I mean, if you were in 
the Rockies now, your gasoline price is lower than in other 
parts of the country, in part because their crude is cheap. But 
if you are receiving products from refiners in a variety of 
different places, as the East Coast does, then it is going to 
be the most expensive refiner that serves the area that is 
going to set the price in that region, and the refiners who 
have access to lower-cost crude are going to make higher 
profits.
    Mr. Carney. One of the concerns I have had all along is the 
fact that some of these factors may be temporary conditions and 
yet we are looking at a permanent shutdown, if you will, that 
would have long-term effects when those price differentials are 
going to fluctuate over time and it causes me considerable 
heartburn. I thank you, Mr. Chairman.
    Mr. Meehan. Thank you, Mr. Carney. The Chairman now 
recognizes the gentleman from Bucks County, Mr. Fitzpatrick.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Dr. Gruenspecht, how great a price impact would you foresee 
your predicted ultra-low-sulfur diesel shortfall have on, say, 
the price of home heating oil or diesel for trucks or other 
vehicles?
    Mr. Gruenspecht. Again, I think it really does remain to be 
seen. If in fact, if you look at the differentials between 
ultra-low-sulfur diesel in various markets, the East Coast has 
traditionally been cheaper than some of the markets we would 
need to attract supply from should Sunoco Philadelphia close, 
so there might be a few cents there. Again, there are some 
questions associated with the logistics of transportation, 
which may be the larger issue in getting it to the specific 
locations, particularly the inland locations. So we did not 
hazard a guess as to what might happen. I mean, there can be 
localized shortages, and when you get localized shortages, you 
get localized price spikes, but we are not smart enough to 
project, you know, when those might occur, if they will occur, 
and where they might be. Perhaps my colleague at Homeland 
Security could take that one on. I don't think he wants to.
    Mr. Fitzpatrick. Do you care to comment, Mr. Wales?
    Mr. Wales. We generally don't look from our perspective at 
individual products in markets and the effect on prices. You 
know, it is really an issue for an independent group like EIA 
to kind of evaluate the market conditions. Our primary concern 
as I described during my testimony is can a region have enough 
product, and in particular, can they have enough product even 
if it is not necessarily the product that they want or that 
they need. So in some cases, we have seen in the past during 
natural hazards like hurricanes where EPA waives certain rules 
related to fuel mixtures and additives in order to mitigate 
potential shortages of specific distillates or specific fuel 
mixtures.
    Mr. Fitzpatrick. Doctor, in your testimony when you talked 
about moving supply from other areas, in particular, say, the 
Gulf up to this region, you indicated that the pipelines were 
at or near capacity, and in connection with potential shipping, 
that there were some issues including the Jones Act, which you 
have mentioned a couple of times. Can you expand on that a 
little bit about what you think the potential is for price 
impact to try to get the product back up here?
    Mr. Gruenspecht. Well, it is probably hard to go beyond--
you know, there are potential issues related both to some 
extent to getting the product here, being the Port of 
Philadelphia, and then the issue of getting it inland. You 
know, we have had some, I guess with respect to that, although 
it is not particularly good news essentially from the point of 
view of people who worked, you know, in the refineries here but 
there has been--we have been concerned that it would be 
difficult to move things into some of the smaller pipelines 
that Sunoco Logistics operates that move stuff west toward 
Pittsburgh and up into central Pennsylvania and western New 
York. It seems that with the Eagle Point terminal, you know, we 
are learning more from Sunoco Logistics and it seems that there 
is a pretty good capability there via those pipelines, so that 
is good news. There is some limited capability to move product 
across the docks at Marcus Hook and Philadelphia that we have 
become aware of. Again, those were clearly set up to receive 
crude oil to refine so, you know, but there is a limited 
capability to move product across those docks. Then, you know, 
the question of the shipping. We are still looking into how 
much capacity there is really available, you know, a question 
of bringing supplies in from Europe, perhaps. One could almost 
imagine a trade where Gulf sends distillate products to foreign 
markets and then foreign markets supply distillate products to 
the United States. You know, there is a lot of extra movement 
involved in that so there is probably some price impact 
involved, but it is really hard to tell. I would not want to 
give you an impression that I knew the answer when I don't.
    Mr. Fitzpatrick. I appreciate your time. Thank you.
    Mr. Meehan. Thank you, Mr. Fitzpatrick.
    I just have a couple of follow-up questions for the 
panelists, and I will certainly invite my colleagues if they 
have a follow-up question or two to ask it as well. Dr. 
Gruenspecht and Mr. Wales, both of you had testified that the 
price of crude oil was really the thing that affected cost the 
most, the actual cost here, but we have recently begun to see 
the development of new oil resources in North Dakota, among 
other places, and certainly access to Canadian oil. You 
testified, Mr. Wales, that we have sufficient capacity right 
now, refining capacity. In fact, my recollection from your 
written testimony is we have excess capacity here in the 
country, even if we were to lose these refineries in the East. 
But would that change if in fact we fully developed and 
exploited the opportunities that exist in North Dakota and some 
of the other places right here in the continental United 
States? Do we have enough refining capacity to be able to 
handle the opportunity that has been realized by these new oil 
finds?
    Mr. Wales. We have not explored the issue of the capacity 
of the markets to respond to future growth in crude oil 
exploration and production. My colleague may have looked into 
that issue more than we have.
    Mr. Meehan. Dr. Gruenspecht, have you looked at that issue?
    Mr. Gruenspecht. We have looked at it, I would say broadly. 
You know, one of the questions or issues is the level of demand 
in the United States for petroleum for what we call liquid 
fuels because increasingly what we use as gasoline actually 
almost universally across the country now contains 10 percent 
ethanol and could contain more ethanol. That reduces the demand 
for the components that come out of the refinery. It is also 
the case that the country has, you know, increasing fuel 
economy standards for new vehicles, which many people, you 
know--and I wouldn't take a position on it because I don't have 
to, but many people, you know, view that as a very good thing. 
That also affects the future demand for petroleum products. So 
the United States really for the first time in the last 60 
years, in 2011 we were actually a net exporter of petroleum 
products, which is very unusual. I mean, we were bringing--you 
know, 5 or 6 years ago, we were bringing tremendous amounts of 
petroleum products into the country. We still do bring 
tremendous amounts of petroleum products in but we are sending 
a lot of petroleum products to South America, to other markets. 
Again, the refineries that are doing this are primarily the 
ones that have access to the advantaged crews like the ones on 
the Gulf Coast.
    Mr. Meehan. Well, my recollection is that 90 percent of the 
oil that we refine here is imported while some of it in the 
United States the overall we get oil from, you know, within. 
When I say exported, I mean imported. It could be imported from 
Canada and Mexico as well, not necessarily imported from Europe 
and Asia. But my concern is, if we push this further off into 
India and places like that, we are creating, Mr. Wales, not 
only just a need now in which our National security is related 
to stability over in those nations for crude oil but in 
addition, we are now needing stability not just for crude oil 
but also for refining capacity. So it is not just getting the 
oil over here but their refineries have to be operating, which 
is the frustrating thing to me that we are shutting them down 
here and watching expansion in India. Have you calculated the 
potential impact if we have instability in some of those 
foreign markets about what would happen here?
    Mr. Wales. Congressman, we have not yet conducted analysis 
like that. I think part of that reflects the fact that to date, 
we haven't seen disruptions to that part of the supply chain 
and it reflects that the market is not yet fully mature in 
terms of how it will all shake out, where we will likely get 
more of our supplies. As we get more of that information, we 
will start rolling that into our analysis. We can better 
understand what a more mature oil and gas supply chain is for 
the United States and how it would actually affect our homeland 
and National security.
    Mr. Meehan. Well, just a follow-up question and the last 
question with respect to this area, but I do--I mean, this 
committee deals with the issue of terrorism, and one of the 
great concerns that we have is the vulnerability of pipelines 
and other kinds of systems, you know, other kinds of assets 
within the network from refineries to transmission pipeline to 
tank farms and terminals to the most vulnerable presumably 
among them, pipelines themselves, and we know, I mean, just 
historically, I just did sort of a quick off the back of the 
cuff look just going through January 2006, we had a jihadist 
website that linked al-Qaeda that encouraged attacks on the 
United States pipelines. That was in January 2006. In June 
2007, the jet fuel pipelines at JFK were targeted and attacked. 
In July and September 2007, we had the Mexican rebels detonated 
bombs along the pipelines along the Mexican coast. In November 
2007, we had a United States citizen that was convicted of 
trying to conspire to blow up a pipeline from here in the 
middle district of Pennsylvania. We had testimony earlier this 
morning that bin Laden in Abbottabad had created an 
identification of pipelines as one of the principal targets. 
What is the vulnerability that we have to the sureness of 
supply here if a pipeline like the pipeline that is servicing 
us that will be used as the substitute to serve the capacity 
here can be impacted? Can it be impacted and will it have a 
downstream implication for our region?
    Mr. Wales. Congressman, you are raising an excellent issue. 
I would like to talk about that for a couple of minutes because 
it is something that the Office of Infrastructure Protection 
had spent a lot of time on over the past several years, in one 
case, because of the potential threat posed by international 
terrorist groups to the oil and gas infrastructure of the 
country and because of the criticality of pipelines to the 
overall economy.
    Over the past several years, the Office of Infrastructure 
Protection has conducted over 60 vulnerability assessments on 
pipeline infrastructure throughout the country. In some cases, 
in conjunction with that, we have conducted over 80 buffer-zone 
protection plans. That is, working with State and locals and 
the private sector on integrated planning related to the 
security and resilience of those pipelines, and as part of 
those buffer-zone plans have given out over $10 million in 
grant funds to local communities to execute the planning and 
improve security around pipelines.
    In addition, during the fiscal years of 2012 and 2013, the 
Office of Infrastructure Protection will be executing a 
regional resiliency assessment of the Colonial and Plantation 
pipelines because they are a real critical artery in our 
overall energy infrastructure on the East Coast and in some 
cases because of the closing of these refineries they are 
becoming even more critical. We would say that part of that 
regional resiliency assessment will have us conducting detailed 
assessments of various critical chokepoints along those 
pipelines both hydraulically critical pumping stations as well 
as control centers and others. We will be conducting analysis 
to better understand how disruptions of the Colonial pipeline 
and Plantation pipeline could affect the broader critical 
infrastructure questions. We will be working with customers of 
the Colonial pipeline as well as with some of the 
infrastructure that the Colonial pipeline depends upon, for 
example, electric infrastructure that may be critical to 
operating the pumping stations and terminals along its stretch. 
So this is an issue that we are taking very seriously and it is 
an issue that we are going to continue to work on, and we would 
be happy to come back and brief you and your staff on our plan 
for the Colonial and Plantation pipelines and our results as 
they materialize.
    I will say that our initial work over the past couple years 
looking at things like the Colonial pipeline shows that they 
are very critical but they are pretty resilient in terms of 
bouncing back and being able to repair damage to pipelines very 
quickly. Our primary concern would be a prolonged damage to the 
pipeline that kept it down for more than a week, more than 2 
weeks. I think, you know, once you start getting beyond a week 
or 2, the ability for the excess inventory and terminals along 
its route starts to be diminished and then you could start to 
have more serious impacts, but we would be happy to come 
provide further information on that.
    Mr. Meehan. Well, I am grateful for your efforts in that 
area, and I would ask if you could, you can appreciate the 
implications of that study, that we are sort of currently 
dealing with the questions of what will happen if we lose this 
refining capacity. That pipeline is not going to be quite so 
significant to us in the event that we continue to have 
refining capacity in this region, but if we lose that refining 
capacity, it is going to be a critical link. So the 
vulnerability ties right into the most energy-dependent sector 
in the entire Nation and I imagine the implications for that, 
particularly during a particular season, a heating season, and, 
you know, the Pennsylvania, New York, New England area would 
have remarkable implications not only to people but to our 
economy as well. So anything that could be done to expedite 
that among the many priorities you have would be greatly 
appreciated by this panel and by our region. So thank you, Mr. 
Wales.
    I will turn to my colleague, Mr. Carney.
    Mr. Carney. Thank you, Mr. Meehan. I think you have 
identified the main homeland security risk with respect to the 
concentration of refining capacity here in the United States, 
and it is hard for me to imagine that our homeland security is 
not threatened in some way by that, by concentrating the 
facilities that will deliver refined products or petroleum 
products to regions in the country as opposed to having a more 
distributed network.
    In addition, the discussion this morning has centered 
around the off-shoring frankly of refining capacity, which 
would then make the United States, in my opinion, less 
independent, less energy-independent and more at risk to 
overseas attacks on whatever facilities. I appreciate the fact 
that you are going to do an analysis of those pipelines in 
particular because it seems to me that it is a little bit hard 
to wrap my head around the fact that Dr. Gruenspecht has 
indicated that the Colonial pipeline is near capacity and we 
are going to be relying on it to move product here to our 
region, that that won't have a negative impact. But setting 
that aside, will your study include the risks associated with 
relying more on refined product coming from overseas where 
facilities in other parts of the world that we can't protect, 
so to speak, are at risk?
    Mr. Wales. Sir, the study that I was discussing in response 
to the Chairman's question was really focused on the resilience 
of those pipelines, Colonial and Plantation. It wasn't a more 
expansive study looking at the risks associated with the 
global----
    Mr. Carney. So it might be important for somebody to take a 
look at that question, particularly as it relates--as the 
Chairman has said, you know, this is a decision that is coming 
at us pretty quickly. Two of the refineries have already 
closed. So we are talking about long-term implications of our 
own energy independence as a Nation as well as the security of 
that network, and it is hard for me to imagine that it is not 
going to be a greater risk. It is a little disturbing to hear, 
Dr. Gruenspecht, that a lot of these facilities are basically 
taking domestic supplies and exporting refined products in a 
world where we are importing such a big part of our petroleum 
needs, that the market drives certain of these products 
overseas. In fact, my understanding is, a lot of those refined 
products out of the Gulf Coast are for export. Is that 
accurate?
    Mr. Gruenspecht. We have been exporting increasing amounts 
of product from the Gulf Coast. Obviously the Gulf Coast also 
is a major source of supply to other parts of the country. It 
is the major refining center in the country. Roughly half of 
the refining capacity in the country is on the Gulf Coast.
    Mr. Carney. So at a time when we are putting in policies 
that are having negative implications for our demand for end-
products, i.e., the use of ethanol and other biofuels, to help 
the Nation be more energy-independent, because of the way the 
markets work, we are still exporting product, which is making 
us less independent. Is that a fair statement?
    Mr. Gruenspecht. I think we are exporting products. You 
know, I mean----
    Mr. Carney. Whether it makes us more independent is----
    Mr. Gruenspecht. I don't know the----
    Mr. Carney. Well, let me give you a real----
    Mr. Gruenspecht. We import airplanes and we export 
airplanes.
    Mr. Carney. Let me give you a real-world example of where 
this is in operation around the world. One of the biggest 
threats that we face in the world right now is the threat of a 
nuclear-armed Iran, and one of the actions that we have taken 
in the Congress is to impose sanctions on Iran, which have been 
putting significant pressure, economic pressures on the 
country. One of those sanctions is to attack their need for 
refined petroleum products because they don't have refining 
capacity in the country, and it is having devastating impacts. 
Can't you just flip that around? Obviously it is not a 
comparable situation but it is the same kind of risk, is it 
not, Dr. Gruenspecht?
    Mr. Gruenspecht. There is no question that Iran is short on 
gasoline and that sanctions on providing gasoline to Iran have 
had an impact on their----
    Mr. Carney. So the question really is: Are we setting 
ourselves up for that same kind of vulnerability?
    Mr. Gruenspecht. I guess it is possible but--yes, I guess 
the concern is--again, it is a hard question to answer but if 
some of our capacity is turning out not to be economically 
competitive, then there is a cost in terms of maintaining it, 
so it is a very tough question.
    Mr. Carney. The question is: What do you do?
    Mr. Gruenspecht. What do you do, right, and that is more 
for the policymakers.
    Mr. Carney. Thank you.
    Mr. Meehan. Well, thank you, Mr. Carney, and I want to 
thank our two original panelists for their testimony. The 
Members of the committee may have some additional questions for 
the witnesses, and if they do and if they are submitted to you, 
I ask that you will respond in writing within 10 days. So I 
want to dismiss this panel. I thank you for your preparation 
and your participation by both gentlemen. We are grateful for 
the attention you have paid to these issues and for your 
continuing work and effort in helping us to better understand, 
and I hope we can count on your continued diligence and 
attention because as Mr. Carney pointed, the very implications, 
the decisions that are being made in theory have real-time 
implications to this community because people are making 
decisions today based on their assessments of the overall 
market, and those decisions impact people's lives, people's 
jobs, and this community. Thank you for the work that you have 
done and will continue to do.
    I now at this point in time would like to call to the chair 
Mr. Drevna and Mr. Robert Greco. Mr. Greco and Mr. Drevna, we 
are going to take about a 3-minute break. Mr. Carney has a 
question he wants to ask somebody, and we will hold for a 
moment. Thank you.
    [Recess.]
    Mr. Meehan. The committee will now reconvene. I would like 
to recognize the two additional witnesses that we have before 
the committee today. Mr. Fitzpatrick, I am grateful for his 
participation this morning. Mr. Fitzpatrick has to participate 
in his own hearing in Washington, DC, later on today, and I am 
grateful for him taking the time to be with us for the first 
half of the hearing this morning, and I will be joined by Mr. 
Carney for this final panel.
    First, let me introduce to you Mr. Charles Drevna. He has 
been the president of the American Fuel and Petrochemical 
Manufacturing Trade Association since 2007. He joined the 
association in 2002 as executive vice president and director of 
Policy and Planning. Mr. Drevna has worked with the executive 
committee, board of directors, and staff to implement a 
rebranding effort that emphasizes the way association members 
serve American consumers and increase America's economic and 
National security. Before joining the association, Mr. Drevna 
had multiple positions focused on United States energy 
production including the director of State and Federal 
Government Relations for Tosco, the director of Government 
Regulatory Affairs for Oxygenated Fuels Association, the vice 
president at the Jefferson Waterman international consulting 
firm, the director of Environmental Affairs for the National 
Coal Association, and the supervisor of Environmental Quality 
Control for the Consolidated Coal Company.
    I would like to also recognize Mr. Robert Greco. Mr. Greco 
is the group director for Downstream and Industry Operations at 
the American Petroleum Institute where he is responsible for 
managing oil and natural gas issues pertaining to exploration, 
production, marine, and related industry operations. Prior to 
his ascension to group director, Mr. Greco served as the 
American Petroleum Institute's director for Policy Analysis. 
During his more than 20-year career at the American Petroleum 
Institute, he also served as the director of Global Climate 
Programs and as the director of Marine Transportation Segment. 
Before joining the American Petroleum Institute, Mr. Greco was 
an environmental engineer with the United States Environmental 
Protection Agency with expertise in automotive emission control 
technologies.
    For each of the panelists, once again I would appreciate if 
you would summarize your submitted testimony and do your best 
to keep your statements within the time allotted. So I now 
recognize Mr. Drevna for your testimony.

   STATEMENT OF CHARLES DREVNA, PRESIDENT, AMERICAN FUEL AND 
                  PETROCHEMICAL MANUFACTURERS

    Mr. Drevna. Chairman Meehan and Congressman Carney, thank 
you for giving me the chance to testify here at the hearing 
today.
    I am Charlie Drevna. I am President of AFPM. Until 
recently, we were the National Petrochemical and Refiners 
Association. We represent high-tech American manufacturers who 
use oil and natural gas to make almost all the fuels, heating 
oil, and petrochemicals used in our Nation. In total, we 
represent over 98 percent of U.S. refining capacity as an 
industry.
    Our industry is a very competitive business. Our members 
not only compete with each other but with foreign refiners who 
are able to competitively sell finished petroleum products to 
areas in the United States. The increased competition, market 
and regulatory costs coupled with the decreased demand have 
created significant challenges for refiners throughout the 
country. The effects of such challenges have been seen first-
hand here in the Northeast.
    So the question is: Why, and what can we do about it? Well, 
as I mentioned, the high cost of crude oil, the struggling 
economy, foreign competition, new Government regulations, 
uncertainty about future Government regulations and U.S. 
monetary policy have all been factors in the refinery closures. 
Just on one example, the U.S. monetary policy, a May 2011 
report from the Joint Economic Committee found that weakening 
of the dollar since 2008, which declined 14 percent, added 
$17.04 per barrel to the price of oil. So I think that might be 
able to answer some of the questions that were asked earlier 
about what is the difference between 2008 and now. It has been 
a significant global pressure. Remember, the value of oil is 
based on the value of the dollar.
    The recent U.S. Energy Information Administration report 
notes that the refinery closures leave the Northeast dependent 
on imports from outside of the region. Some of this supply can 
be replaced by refineries in the United States. However, EIA 
notes that significant logistical challenges make it difficult 
to get finished product, finished petroleum products to the 
Northeast. Such challenges could eventually lead to supply 
disruptions and increase our need to import gasoline from 
Europe and Asian markets, most notably, India.
    The United States must work to ensure that it has the 
critical refining infrastructure necessary to not only produce 
the fuels that this country needs but could get them where they 
need to go. The erosion of such infrastructure raises the same 
energy concerns that we have with crude oil. Government policy 
debates often focus on our heavy reliance on crude oil imports. 
We don't want a similar trend to occur in relation to finished 
petroleum products. The fact that the EIA notes a significant 
portion of the new supply to the Northeast could come from 
Europe and Asia highlights the fact that U.S. refineries, 
especially here in the Northeast, is becoming less competitive 
in the global market.
    Given the critical nature of petroleum-based fuels to our 
economy, the competitiveness of our domestic refining assets is 
certainly an important energy security issue, but there is also 
a homeland security issue too, and it is these good people 
sitting behind me. We need to keep people working in this 
country. That is a National security issue. We have to do 
everything we can jointly to work together to figure a way out 
of this and work on policies that make us stronger, not weaker.
    So the technological advancements in developing 
unconventional crude from shale plays like Utica, Bakken, and 
Eagle Ford can significantly increase light sweet crudes 
available to Northeast refiners.
    Again, going back to some of the Q&A from the first panel, 
these refineries that are closing have to use the Brent crude. 
They have to use light sweet crude. They are not capable as 
some of the refineries in the Midwest and in the Gulf Coast of 
using a wider array of crude oil, and again, if you go back to 
2008 where the price of crude went to $147 a barrel, all crudes 
went up accordingly. Here in 2011, 2012, we have seen the price 
of Brent, because of what we talked about earlier, all the 
unrest and the global demand, other crudes haven't gone up as 
much. Therefore, the Midwest and the Gulf Coast are much more 
competitive in the global market.
    So these policy decisions regarding shale production need 
to encourage the development of infrastructure that will 
facilitate greater access to these crudes. Additionally, our 
regulatory structure needs to be realigned to mitigate some of 
the overly costly and conflicting regulatory challenges 
American refineries face.
    If I may go over another 15 seconds, and I hope we can get 
into this more, Congressman, you talked about the renewable 
fuels and the Energy Independence and Security Act of 2007, it 
is hurting American refiners. It is hurting employment in these 
refineries and it is not doing anything to help National 
security. We have got better ways to do it, and I hope we can 
talk about that in Q&A too.
    Thank you for your time, and I look forward to your 
questions.
    [The statement of Mr. Drevna follows:]
                  Prepared Statement of Charles Drevna
                             March 19, 2012
                            i. introduction
    Chairman Meehan, Ranking Member Higgins, and Members of the 
subcommittee, thank you for giving me the opportunity to testify at 
today's hearing on the implications of refinery closures for U.S. 
homeland security and critical infrastructure safety. I'm Charlie 
Drevna and I serve as president of AFPM, the American Fuel & 
Petrochemical Manufacturers.
    AFPM is a 110-year-old trade association that was known as the 
National Petrochemical & Refiners Association until earlier this year. 
Our association represents high-tech American manufacturers that use 
oil and natural gas liquids as raw materials to make virtually the 
entire U.S. supply of gasoline, diesel, jet fuel, other fuels, and home 
heating oil, as well as the petrochemicals used as building blocks for 
thousands of vital products in daily life. Most of our members do not 
have any crude oil and natural gas production operations. While we do 
not specifically represent the units of companies that explore and 
develop oil and natural gas reserves, our refining and petrochemical 
manufacturer members require a steady, secure supply of oil and natural 
gas, which is vital to our businesses and our Nation's economy and 
National security.
    AFPM members make modern life possible and keep America moving and 
growing as we meet the needs of our Nation and local communities, 
strengthen economic and National security, and support 2 million 
American jobs. The entire oil and natural gas sector--including the 
producers of oil and natural gas--supports more than 9 million American 
jobs and pays more than $31 billion a year in taxes to the U.S. 
Government, plus additional funds to State and local governments. 
According to a recent report from the World Economic Forum/HIS CERA, 
the oil and gas extraction industry added 150,000 jobs in 2011--9 
percent of all jobs created in the United States that year--many of 
which were created here in Pennsylvania.
    Contrary to what one might read in the headlines, however, the 
refining industry is a very competitive business and our members 
compete not only with each other to provide the highest quality fuels 
at the lowest cost, but also with foreign refiners, who are able to 
competitively market fuels in some areas of the country. Increased 
competition and costs--including both market and regulatory costs--
coupled with falling demand have created new challenges for American 
refineries. Unfortunately, the Northeast has experienced the effects of 
these challenges first-hand, as three Northeast refineries have closed 
due to a combination of the factors in the last 3 months alone. For the 
2,000 employees and about 750 contractors associated with those 
facilities, and more than 36,000 jobs supported by the refineries 
economic activity including restaurants and other small businesses, 
these closures are a tragedy. AFPM urges Congress and the 
administration to ensure an overly burdensome regulatory environment 
does not worsen the economic situation and lead to further refinery 
closures, layoffs, and weakened U.S. energy security.
      ii. refining sector challenges that are leading to closures
    High crude oil costs, a struggling economy, foreign competition, 
new Government regulations, and an uncertain regulatory future have 
created significant challenges for an already competitive refining 
industry and led to the announced idling and potential closure of 
several East Coast refineries.
    The three East Coast refineries represent more than 713,000 barrels 
per day 
(b/d) of domestic refining capacity. In addition, Sunoco announced that 
it will have to close its 335,000 b/d Philadelphia refinery if it 
cannot be sold by July. In an Open Letter to the Community published as 
a newspaper advertisement, Sunoco President and Chief Executive Officer 
Brian P. MacDonald wrote: ``Despite the best efforts of Sunoco's 
refinery employees, our Northeast refinery business has lost nearly $1 
billion in the past three years.'' The primary factors contributing to 
Northeast refining closures include both market conditions and 
Government policies:
   Crude Costs.--Crude oil feedstock costs are a refiner's 
        largest expense and not all crude oil is the same. Northeast 
        refineries were built to use light sweet crude oil as their 
        feedstock to manufacture fuels and other refined products. 
        Absent a multi-billion dollar investment in new equipment and 
        procuring the environmental permits authorizing such 
        modifications, these refineries cannot use lower-cost sour 
        crude, making them uncompetitive with refineries using the more 
        affordable crude. There are many factors driving up the price 
        of crude oil, including global unrest, increasing demand, 
        tightening supplies, speculation, and a weakened U.S. dollar. A 
        May 2011 report from the Joint Economic Committee (JEC) found 
        that the weakening of the dollar since 2008, which declined 14 
        percent, added $17.04 per barrel to the price of oil (Brent 
        Crude) (Exhibit A).
   Decreased Demand.--Fuel demand is down in the United States. 
        U.S. gasoline demand peaked at 9.29 million barrels per day in 
        2007 and is projected to decline 16 percent in the next few 
        years. This decline in demand has created 2.4 million barrels 
        per day of excess capacity in American refineries. Such demand 
        drops are attributable to the recession, higher Corporate 
        Average Fuel Economy (CAFE) Standards and the Renewable Fuel 
        Standard (RFS). The RFS alone has displaced 10 percent of 
        Northeast gasoline supply and nearly 10 percent of the U.S. 
        gasoline supply. Increasing CAFE standards will likely generate 
        an additional 13 percent reduction in demand Nation-wide, or an 
        amount equivalent to 18 refineries.
   Regulatory Expenditures.--The U.S. refining sector is facing 
        a blizzard of costly, and in some cases conflicting, 
        regulations that threaten its competitiveness in a global 
        marketplace. Many of these regulations carry little 
        environmental benefit. A Department of Energy report issued in 
        March 2011 concluded that the cumulative burden of Federal 
        regulations was a significant factor in the closure of 66 
        petroleum refineries in the United States in the past 20 years 
        (Exhibit B). The impact of regulations will be discussed in 
        more detail later on in this testimony.
    In a recent report, the U.S. Energy Information Administration 
(EIA) notes that these refinery closures will leave the Northeast and 
other parts of the East Coast dependent on refined product imports from 
outside of the region. Some of this lost supply could be replaced by 
refineries in other regions, since there actually is more than ample 
supply of finished petroleum products in the United States. However, 
EIA notes significant logistical challenges pose sizeable hurdles to 
getting finished petroleum products to the Northeast. Such a reality 
could create supply disruptions and require increased imports from 
Europe and Asia, ``notably India.''
    Gasoline supply in the midcontinent faces a different set of 
factors. New oil discoveries on private lands in the Bakken region 
spanning North Dakota and Montana have provided midcontinent fuel 
manufacturers with a more affordable (but still expensive) source of 
crude oil. Lack of port access or infrastructure throughout the region 
can also somewhat mitigate the threat of foreign competition.
    Compared to the rest of the Nation, consumers in the midcontinent 
area have actually benefitted from this abundant crude supply, 
experiencing gasoline prices much lower than the National average in 
many States (see Exhibit C). However, these costs are still high and 
the region is also not without its challenges. The rapid expansion in 
regional crude oil production has actually created a bottleneck in the 
region's main crude oil distribution point of Cushing, Oklahoma. This 
bottleneck has made the actual crude oil slightly less expensive for 
refiners in this region, but the bottleneck has created a lack of 
pipeline capacity needed to get the oil out of the distribution center. 
Given these circumstances, crude oil has had to be sent out of Cushing 
via rail cars at a cost significantly higher than pipeline shipments. 
Such costs, as well as time lags in crude shipments, have contributed 
to area prices being higher than the historical average. TransCanada 
recently announced plans to build a portion of the Keystone XL pipeline 
expansion, from Cushing to the Gulf Coast. This will help alleviate 
some of the bottleneck in Cushing, but will be inadequate in the long 
term.
    The market policy and infrastructure factors impacting the American 
fuel supply have created a high-cost environment that hampers our 
Nation's economic recovery and threatens our critical refining 
infrastructure. Unfortunately, Government overregulation is making 
matters even worse. Proposed new regulations and unnecessary tightening 
of existing standards threaten to raise energy costs for every American 
consumer, with little or no environmental benefit. They would also have 
the unintended consequence of strengthening the competitive position of 
foreign refineries and petrochemical manufacturers, which may lead to 
additional job losses for America, weaken the U.S. economy, make 
America more reliant on nations in unstable parts of the world for 
vital fuels and petrochemicals, and ultimately endanger our National 
security.
         iii. impacts of regulation on american competitiveness
    AFPM supports sound and sensible environmental and other 
regulations. Our members are strongly committed to clean air and water, 
have an outstanding record of compliance with Environmental Protection 
Agency and other regulations, and have invested hundreds of billions of 
dollars to dramatically reduce emissions measured by EPA.
    As a result of these emissions reductions by our members and by 
other industries, America's air today is cleaner than it has been in 
generations. Refiners have cut sulfur levels in gasoline by 90 percent 
just since 2004. We have also reduced sulfur in diesel fuel by more 
than 90 percent since 2005 and reduced benzene in conventional gasoline 
by 45 percent since 2010.
    EPA data shows that total emissions of the six principal air 
pollutants in the United States have dropped by 57 percent since 1980 
and ozone levels have decreased by 30 percent. These reductions 
occurred even as industrial output and the number of vehicles on the 
road have increased. EPA data indicates there will be continued 
reductions in the years ahead under regulations already in place.
    Despite the substantial progress we have made in environmental 
stewardship under the Clean Air Act and other laws, we are concerned 
that EPA and other agencies have, at times, made unreasonable and often 
conflicting demands on our members without a full cost-benefit 
analysis. In particular, our members spend a great deal of capital 
complying with regulations that generate little to no benefit for the 
environment, capital that could be used to strengthen our Nation's 
refining infrastructure and create new American jobs.
    The three recent refinery closures are, unfortunately, just the 
latest examples of a long-term trend. As previously mentioned, a 
Department of Energy report issued in March 2011 concluded that the 
cumulative burden of Federal regulations was a significant factor in 
the closure of 66 petroleum refineries in the United States in the past 
20 years (Exhibit B). The manufacturers of fuels are being hit with a 
regulatory blizzard that poses a significant threat to both refinery 
operations and our Nation. Some of these regulations involve what are 
called Tier 3 regulations to reduce sulfur in gasoline, greenhouse gas 
regulations under the Clean Air Act, lengthy permitting delays, 
requirements under the Renewable Fuel Standard involving ethanol and 
other biofuels, and logistical hurdles involved with transporting fuel 
(such as the Jones Act) to name a few. While each of these regulations 
poses significant individual costs, many of these requirements conflict 
with one another, creating compliance issues and increasing fuel costs.
Tier 3 & CAFE
    The Obama administration is considering a mandate to lower the 
amount of sulfur in fuels in order to achieve its greenhouse gas (GHG) 
tailpipe and CAFE standards, known as Tier 3 gasoline standards. The 
industry has been successful in reducing sulfur levels in gasoline by 
90 percent since the EPA Tier 2 standard was implemented in 2004. While 
achieving this level of performance came at a high cost--nearly $10 
billion--achieving the next additional small incremental reduction EPA 
is contemplating could come at a much steeper price tag with little to 
no environmental benefit. In fact, EPA's own data indicates air quality 
will continue improving under the existing Tier 2 standards. 
Furthermore, achieving the incremental sulfur reduction would require 
massive new capital investments in equipment that emits more carbon 
dioxide, which is in direct conflict with EPA's mission of reducing 
GHG. As a result of these new costs, independent analysis indicates 
Tier III sulfur reductions could result in a 9 to 25 cents per gallon 
increase in the cost of manufacturing gasoline. In addition, these 
costs could lead to as many as seven additional refinery closures.
    Recent EPA testimony indicated the agency is considering scaling 
back its Tier 3 proposal to focus solely on sulfur reductions. While 
EPA's statement is encouraging, the tailored rule would still impose a 
high-cost, minimal-benefit regulatory requirement on America's already 
heavily regulated fuel supply. It could lead to significant domestic 
fuel supply reductions, higher petroleum product imports, potentially 
increased consumer costs, increased refinery emissions, closed U.S. 
refineries, and reduced energy security. As Americans struggle with 
high gas prices and high unemployment, EPA should not promulgate any 
new regulations that will exacerbate either situation.
    AFPM fully supports market-driven efficiency gains for fuel 
economy. Consumers want more fuel-efficient vehicles, but they also 
want affordable vehicles. Unfortunately, Government-imposed CAFE 
standards are driving up the cost of vehicles and placing new demands 
on U.S. refiners. In particular, while auto makers are given 
``offramps'' if standards are unachievable, refiners are nonetheless 
forced to make massive capital investments to produce new fuels for a 
fleet of vehicles that may never exist. The 2004 requirements for 
refiners to produce 15 parts per million (ppm) ultra low sulfur diesel 
(ULSD), for example, was to enable the widespread adoption of nitrogen 
oxides (NOx) absorbers on trucks. Ultimately, the vehicle manufacturers 
determined that those absorbers would not work and instead chose an 
alternate technology that could function with 50 ppm sulfur fuel. Yet 
refiners were still required to produce 15ppm ULSD, resulting in much 
higher costs to achieve identical environmental benefits. Government's 
involvement in the fuels market always creates unintended consequences, 
and the impacts are felt by U.S. refiners and consumers alike.
EPA GHG Regulations
    Although the Clean Air Act (CAA) was never intended to regulate 
global emissions of greenhouse gases (GHGs), EPA is nevertheless moving 
forward in regulating such emissions within the framework of this 
statute. The agency is proceeding with these regulations even though 
EPA Administrator Jackson has said several times that they will do 
nothing to address global concentrations of GHG emissions. In the 
absence of a comprehensive global approach to GHG emissions, imposing 
these burdens on the United States would unilaterally cripple the 
ability of U.S. manufacturers to compete on a world market against 
other nations--notably India, China, and Brazil--with less stringent 
environmental regulations.
    EPA's regulations will encourage companies to export jobs rather 
than products, and in the case of fuel, force the United States to 
increase its dependence on imports. EIA's report on East Coast refining 
indicates America's competitiveness is already at risk. The report 
notes supply shortfalls in the Northeast are more likely to be made up 
through Indian imports than from other U.S. refiners due to U.S. 
infrastructure restraints, such as the saturated Colonial Pipeline that 
supplies the Northeast fuels market with products from the Gulf Coast. 
Overregulation is a significant factor in this threatening trend. 
Losing American manufacturing jobs and weakening our vital 
manufacturing sector will harm the American economy and American 
workers.
Permitting Delays
    The existing permitting process delays important projects for years 
and significantly increases costs, oftentimes making it uneconomical to 
pursue new projects. The most recent victim of regulatory delay is the 
Keystone XL pipeline, which has been studied by Federal reviewers for 
more than 3 years, and which is being required by President Obama to 
undergo yet further study.
    Getting more U.S. and Canadian oil--along with oil from North 
Dakota and Montana--delivered to Gulf Coast refineries via Keystone XL 
would add to the world oil supply and make us less reliant on oil from 
unstable parts of the world, increasing U.S. energy security and by 
extension our National security. This would help remove the uncertainty 
about future supplies that is a factor in the recent rise of oil 
prices. Unfortunately, the administration has held up approval for the 
pipeline for more than 3 years. After President Obama rejected approval 
of the full Keystone XL pipeline until a new study is completed, Canada 
is now investigating construction of a pipeline from oil sands deposits 
in Alberta to the Pacific to ship its oil to Chinese and other Asian 
ports. The cost of crude oil is the single largest cost for refineries, 
and every additional dollar our members spend on an expensive supply 
limited by Government's (in)action is a dollar our members cannot spend 
upgrading facilities to handle new types of crude or building out other 
infrastructure. Streamlining permitting processes and increasing 
domestic production are vital to keeping American refineries running 
and creating jobs.
General Burden of Continuously Tightening CAA and Other Environmental 
        Regulations
    The $128 billion that U.S. refiners have spent since 1990 to comply 
with Federal environmental regulations adds significantly to their 
costs of manufacturing fuel. Refiners supported, and continue to 
support, many of these regulations that were clearly beneficial to the 
environment. However, as environmental standards are tightened, often 
with de-minimus effects on emissions, the cost to meet those standards 
increases exponentially, threatening the global competitiveness of 
American fuel manufacturers.
    Sunoco notes in its Open Letter to the Community regarding its 
Northeast refinery closures that environmental regulatory costs 
consumed approximately 15 percent of its operating budget. Similarly, 
over the last 10 years ConocoPhillips invested 100 percent or more of 
its profit into its Trainer refinery in the Philadelphia area to meet 
regulatory requirements before idling the refinery last year. The 
refinery also lost money in each of the previous 3 years. Finally, a 
Hovensa refinery that shut down in the U.S. Virgin Islands was located 
in a region that was in attainment with the Clean Air Act. EPA was 
nevertheless requiring the company to spend an additional $700 million 
replacing turbines. After losing $1.3 billion in last 3 years, the 
refinery could not afford the additional regulatory compliance costs 
and decided to instead close its doors.
    Finally, there has been a great deal of attention recently on the 
future of electric vehicles as the ``future of transportation.'' It was 
recently reported that the United States is pursuing a trade case 
against China over its practices related to rare earth minerals, a 
vital component of hybrid car batteries. The same reports note that 
China controls 97 percent of the world's supply of rare earth minerals. 
As Congress and the administration seek ways to increase our energy 
security, economic security, and National security, AFPM urges 
policymakers to weigh the full spectrum of trade-offs. While weaning 
the United States off oil is a good talking point, artificially forcing 
the market to adopt expensive new technologies that rely on the fair 
trade practices of China could bring a new set of challenges. In the 
meantime, the United States can instead develop its own abundant supply 
of energy, which can increase our energy, economic, and National 
security. The United States can do so without subsidies or mandates, 
all our industry needs is the room to do it. As we look to diversify 
our energy sources, we must not turn our back on petroleum-derived 
fuels that we will continue to depend upon for decades to come. To do 
so would simply disadvantage the consumer, harm our National economy, 
and erode our energy security.
  iv. domestic supply developments could revive struggling northeast 
                               refineries
     The increased production of domestic unconventional oil and gas, 
along with the growth of Canadian oil sands shipments to U.S. refiners, 
creates the potential for a resurgence of petroleum production and 
refined petroleum products throughout the United States. The 
technological advancements in developing these unconventional resources 
could, as early as 2016, increase North American output by 3 million 
barrels per day (mmb/d) and decrease waterborne crude imports by 4 
million barrels per day (mmb/d). The increases in upstream production 
creates opportunities for U.S. refiners to improve the security of 
crude oil supplies, reduce operating costs, and increases their 
likelihood of being competitive in the global marketplace.
    Increased access to competitively priced North American oil from 
unconventional domestic shale plays in areas such as Utica, as well as 
Williston Basin, Bakken, and Eagle Ford, could increase access to light 
sweet crude oils for Northeast refiners, replacing more costly imports 
from less stable regions. Additionally, the increase in natural gas 
production is not only providing greater feedstocks for petrochemical 
facilities, but is helping refineries decrease their operating costs 
due to less expensive energy costs.
    While some hurdles still remain, further development of 
unconventional shale formations in Ohio could provide northeast 
refineries with low cost domestic light sweet crude oil. Preliminary 
estimates by Ohio's Department of Natural Resources (ODNR) suggest that 
the recoverable reserves within the Utica formation are between 1.3 and 
5.5 billion barrels of oil in addition to 3.8 to 15.7 trillion cubic 
feet of natural gas. Increased interest in Utica shale oil and natural 
gas formation, along with the proper pipeline infrastructure, could 
significantly increase access of light sweet crudes for purchase by 
refiners in the Northeast region of the United States.
                             v. conclusion
    The U.S. refining and petrochemical industries are American success 
stories that are nevertheless facing new challenges. Despite supporting 
millions of jobs and positively impacting our trade balance, a storm of 
high crude costs, increased competition, decreased domestic demand, and 
overreaching Government regulations have forced several refineries to 
close.
    Still, these challenges are not insurmountable, and with the help 
of Congress and the administration, America's oil and gas industry can 
lead to a resurgence in U.S. manufacturing, increase our energy 
security, and continue to create jobs here at home. AFPM recommends:
   Fully develop domestic supplies of energy.--Contrary to the 
        claims of the critics of fossil fuels, America is not energy-
        poor; rather, we are energy-rich. There is a treasure trove of 
        oil and natural gas under our feet and off our shores--enough 
        to make America the biggest energy producer in the world. Our 
        challenge is not to find this buried treasure or to extract it, 
        but rather to convince the Federal Government to reverse its 
        current energy policy and allow the development of these 
        resources in a safe and environmentally responsible manner.
   Reduce the impacts of overregulation.--AFPM recognizes that 
        Government has the responsibility to balance the demands of 
        protecting public health while fostering the competitiveness of 
        U.S. business. AFPM supports sound environmental and other 
        regulations that strike the appropriate balance between 
        environmental and economic stewardship. Unfortunately, the 
        size, scope, and cumulative burden of current and impending 
        regulatory activity is creating both significant regulatory 
        uncertainty and a slew of conflicting regulations that will 
        impose significant burdens on domestic fuel manufacturers, 
        which further decreases our National security and makes 
        American refiners less competitive.
    A robust domestic fuel industry is vital to U.S. National security. 
AFPM and its members stand ready to work with Congress in the 
administration to grow our domestic energy security, strengthen our 
National security, and create jobs while protecting our environment to 
build a better life for Americans today and a better future for the 
generations that come after us.
                               Exhibit A 


                               Exhibit B


                               Exhibit C


   Rocky Mountain States Are Currently Paying $0.50 Less Per 
        Gallon of Gasoline Than National Average.--National Avg: $3.74/
        gal, Wyoming $3.17/gal (-$0.56), Colorado: $3.19/gal (-$0.55), 
        Montana $3.28/gal (-$0.46) (AAA, 3/1/12).
   Lower Gasoline Prices Due to Access to American and Canadian 
        Crude Oil.--According to a report by the U.S. Energy 
        Information Administration (EIA), low gas prices in Rocky 
        Mountain States are because of their easy access to cheap crude 
        oil produced in the U.S. Bakken region or imported from Canada 
        (EIA, 2/14/12).
   North American Oil Boom Is Driving Down Prices v. Rest of 
        World.--North American crude oil sells at a discount compared 
        to world prices. West Texas Intermediate (WTI) is averaging $18 
        less per barrel than the international North Sea Brent price. 
        Bakken crude has sold as much as $28 per barrel less than WTI 
        crude (EIA, 2/29/12).
   East Coast States Rely on Higher Priced International Crude 
        Supplies.--Because they lack the pipeline infrastructure to 
        access cheaper U.S. and Canadian crude, East Coast refineries 
        must use more expensive international Brent crude to make 
        gasoline (IntlBusinessTimes, 3/1/12).
   Higher East and West Coast State Gas Taxes Do Not Explain 
        Higher Prices.--For example, New York drivers pay $0.27 per 
        gallon more in State gas taxes than Colorado drivers. Yet, 
        gasoline costs $0.78 more per gallon in New York than Colorado. 
        That is still a $0.52/gal. difference.

    Mr. Meehan. Thank you, Mr. Drevna.
    Now I turn to Mr. Greco for testimony.

   STATEMENT OF ROBERT GRECO, GROUP DIRECTOR, DOWNSTREAM AND 
       INDUSTRY OPERATIONS, AMERICAN PETROLEUM INSTITUTE

    Mr. Greco. Good morning, Mr. Chairman and Mr. Carney. My 
name is Bob Greco and I am Downstream Group Director for the 
American Petroleum Institute, API. Thank you for the 
opportunity to testify today.
    The API represents all aspects of America's oil and natural 
gas industry. The industry supports 7.7 percent of our economy, 
9.2 million jobs, and millions of Americans who hold ownership 
stakes through pension funds, retirement accounts, and 
investments.
    Refineries are critically important to our Nation. They 
make the fuels that virtually all Americans use and that drive 
our economy. They contribute to our energy and National 
security, and they provide jobs for tens of thousands of 
Americans and substantial revenue to local, State, and Federal 
governments.
    The recent refinery closures here in Pennsylvania are of 
great concern. They have the potential to impact families, 
communities, and other manufacturing industries, and to reduce 
tax revenues. We very much regret that situation. It is also 
important, however, to understand the reasons why refining is 
such a challenging business and why closures sometimes occur, 
and to also know that the refining industry is resilient and 
will continue to supply the products people in this area and 
all Americans need.
    Refining is highly competitive. It has also historically 
been a low-profit-margin industry faced with a heavy slate of 
regulations involving many billions of dollars in environmental 
investment and compliance costs. Because of these and other 
factors, some refineries often after sustained periods of 
financial losses had to shut down. About 75 U.S. refineries 
have closed since 1985. As this has happened, however, the 
remaining larger, more efficient facilities have expanded 
capacity so the total U.S. refining has actually increased by 
13 percent. The ability of our industry to add capacity and 
deliver larger amounts of gasoline and other products over a 
flexible distribution network and to also draw on imported 
products when necessary will help us continue to provide 
Americans the fuels they need.
    The higher prices we see now also have been a challenge for 
refineries. Rising global demand and Middle East tensions have 
pushed the cost of crude oil higher. This cost is the single 
biggest factor in the price of gasoline, accounting for about 
three-quarters of the price at the pump, excluding gas taxes, 
and is the largest cost incurred by refineries. Refiners have 
struggled to pay these high raw material costs to make products 
for Americans when demand has been relatively weak because of 
the recession. This has severely pushed down margins and has 
negatively affected all refineries.
    Good policy choices mean sensible regulations, fair taxes, 
and sufficient access to crude oil from all of the refined 
products that we make. Decisions made in Washington, DC, are a 
big part of the equation but so are those made by local and 
State governments. Excessive rules can help raise cost and make 
it harder for our refineries to compete and stay in business. 
Policies such as those embraced by the current administration 
that limit crude oil production in the United States or prevent 
ready supplies from being imported from Canada can help drive 
up crude oil prices that eventually affect refineries and those 
who consume the gasoline, diesel, and other products they make.
    That is why we have been calling on the administration for 
a change of course. We have urged them to expand access to 
America's vast oil and natural gas resources on public lands 
that could also add supplies to markets and help drive down 
prices. We have urged them to approve the Keystone XL pipeline, 
which could deliver from Canada very large additional supplies 
of crude oil to U.S. refineries that serve U.S. markets. We 
have called for more sensible, cost-effective regulations that 
show a practical regard for the potential impacts on the 
industry, its employees, and those who depend on the products 
they make. We have asked the EPA in particular to reconsider a 
virtual blizzard of new, poorly-thought-out or unnecessary 
rules that affect our refiners including, for example, a rule 
that forces refiners to blend into gasoline advanced biofuels 
that do not yet exist or pay a fee for not doing so. We have 
challenged billions of dollars in proposed tax increases on an 
industry that already pays vast sums to the Government at far 
higher effective tax rates than most other industries.
    In conclusion, America's refineries are a critical part of 
the Nation's industry bedrock and part of the fabric of the 
communities in which we operate. They make products that are 
absolutely indispensable to America and they are vital to our 
National security. Our policymakers must understand this for 
this vital sector of our economy to continue serving America 
the best that it can.
    Thank you, and I look forward to your questions.
    [The statement of Mr. Greco follows:]
      Prepared Statement of The American Petroleum Institute (API)
                             March 19, 2012
    Good morning. My name is Bob Greco and I am group director of 
Downstream and Industry Operations for the American Petroleum Institute 
(API). Thank you for the opportunity to speak at this hearing today.
    API represents all aspects of America's oil and natural gas 
industry. The industry supports 7.7 percent of our economy, 9.2 million 
jobs, and millions of Americans who hold ownership stakes through 
pension funds, retirement accounts, and investments.
    Refineries are critically important to our Nation. They make the 
fuels that virtually all Americans use and that help drive our economy. 
They contribute to our energy and National security. And they provide 
jobs for tens of thousands of Americans and substantial revenue to 
local, State, and Federal Governments.
    The recent refinery closures here in Pennsylvania are a matter of 
great concern. They have the potential to impact families, communities, 
and other manufacturing industries, and to reduce tax revenues. We very 
much regret that.
    It's also important, however, to understand the reasons why 
refining is such a challenging business and why closures sometimes 
occur--and to also know that the refining industry is resilient and 
will continue to supply the products people in this area and all 
Americans need.
    Refining is highly competitive. It has also traditionally been a 
low-profit margin industry faced with a heavy slate of regulations over 
the decades involving many billions of dollars in environmental 
investment and compliance costs. Because of these and other factors, 
some refineries--often after sustained periods of financial losses--
have had to shut down. About 75 U.S. refineries have closed since 1985.
    As this has happened, however, the remaining larger, more efficient 
facilities have expanded capacity so that total U.S. refining capacity 
has actually increased by 13 percent. This has allowed the sector to 
continue to reliably provide Americans with the fuels they need.
    The ability of our industry to add capacity and to produce and 
deliver larger amounts of gasoline and other products over a flexible 
distribution network--and also to draw on imported products when 
necessary--will help us continue to supply markets here.
    The higher prices we see now also have been a challenge to our 
refineries. Rising global demand and Middle East tensions have pushed 
the cost of crude oil higher. The cost of crude oil is the single 
biggest factor in the price of gasoline--accounting for about three-
fourths of the pump price excluding gasoline taxes--and is the largest 
cost incurred by refineries.
    Refiners have struggled to pay these high raw material costs to 
make products for American markets at a time when demand has been 
relatively weak because of the recession. This has severely pushed down 
margins and has negatively affected all refineries.
    Refining is a difficult business. But we can make better energy 
policy choices that can help the industry remain a reliable, stable 
supplier of affordably-priced fuels and keep its workers employed.
    Good policy choices mean sensible regulations, fair tax policies, 
and sufficient access to the crude oil from which all refined products 
are made. Decisions made in Washington, DC, are a big part of this 
equation, but so are those made by local and State governments.
    Excessive rules can raise costs and make it harder for our 
refineries to compete and stay in business. Policies--such as those 
embraced by the current administration over the past 3 years--that 
limit crude oil production in the United States or prevent ready 
supplies from being imported from Canada can help drive up crude oil 
prices that eventually affect refineries and those who consume the 
gasoline, diesel fuel, and other products they make.
    That's why we have been calling on the administration for a change 
of course.
    We've urged them to expand access to America's vast oil and natural 
gas resources on public lands that could also add supplies to markets 
and help drive down prices.
    We've urged them to approve the Keystone XL pipeline, which could 
deliver from Canada very large additional supplies of crude oil to U.S. 
refineries that serve U.S. consumers.
    We've called for more sensible, cost-effective regulations that 
show a practical regard for potential impacts on industry facilities 
and to the people who work there or who depend on the products they 
make.
    We've asked the EPA in particular to reconsider a virtual blizzard 
of new, poorly-thought-out or unnecessary rules affecting our refining 
sector, including, for example, a rule that forces refiners to blend in 
gasoline--or pay a fee for not doing so--advanced biofuels that do not 
yet exist.
    And we've challenged billions of dollars in proposed tax increases 
on an industry that already pays vast sums to the Government at far 
higher effective rates than most other industries.
    The U.S. oil and natural gas industry's earnings are in the 
billions, it is true, but the industry's profit margins, or earnings 
per dollar of sales, are in line with other U.S. manufacturing 
industries. What our companies earn goes to investing in new production 
and new facilities, running our companies, paying our employees, and 
delivering more than $86 million a day to the Federal Government in 
revenue. These earnings also provide a fair return on investments to 
our owners--the tens of millions of Americans who own our companies in 
their 401(k)s and IRAs or receive income from Government pension funds 
invested in oil and gas stock.
    America's refineries are a critical part of the Nation's industrial 
bedrock and a part of the fabric of the communities in which they 
operate. They make products that are absolutely indispensable to 
America. They are vital to our National security.
    Our policy makers must understand this for this vital sector of our 
economy to continue serving America the best it can.
    Thank you.

    Mr. Meehan. Thank you, Mr. Greco. Thank you, Mr. Drevna. I 
now recognize myself for 5 minutes of questioning.
    We just had the analysts on whose responsibility it is to 
sort of dispassionately assess the facts. You work in this 
industry. I want to understand why is it that we are seeing 
global demand for energy increase, greater utilization of these 
natural resources in developing countries as well, and yet 
right here in the United States here on the East Coast, here in 
Marcus Hook, we are losing our refineries. Mr. Drevna.
    Mr. Drevna. Well, fortunately, I cannot be dispassionate 
about it because the industry that I represent and the people 
we employ are all part of the big picture, so there is going to 
be a little bit of passion. The problem, sir, is that we do--we 
can't separate ourselves, the global economy from the local 
economy. As Bob said, 76 percent of the cost at the pump is the 
barrel. Another 12 percent or so is taxes. So we are married to 
the price of crude. Now, when you look at what happened, as the 
other economies around the world are expanding right now, as a 
matter of fact, if you look at what is happening in India, look 
at what is happening in China, and even with 54 nuclear 
reactors being down in Japan, they are adding another 286,000 
to 300,000 barrels a day of demand just in Japan, so that again 
is--there is not that much of a cushion between world-wide 
production of crude and the demand.
    Now, here in the United States, we have an ample supply of 
fuel. Why? Well, because we went through a--we have gone 
through a recession. Who knows what the real unemployment 
number is? People aren't driving. They are changing their 
driving habits. We are adding 10 percent ethanol and other 
things to the gasoline, which took away 10 percent of our 
market right off the top. So when you add up all those things, 
the simple answer is, these refineries are in a very, very 
tough competitive business and going forward they are looking 
at the capital investment they would have to make just to stay 
even with environmental--I mean, Sunoco itself said they lost 
how many billions of dollars over the past----
    Mr. Meehan. Are they making similar kinds of investment in 
India and other places?
    Mr. Drevna. Oh, India has made a huge investment in taking 
that reliance refinery upwards to a million barrels a day but 
they are not doing it under U.S. rules. Right now, if I may use 
the term, they are salivating at what they can do.
    Mr. Meehan. But you pointed out that what we have is 
roughly a global balance at this point in time. While we may 
have a little bit of excess currently because we are in a 
situation in which we curtailed our utilization of energy here 
in the United States. I am sorry, did I misstate it?
    Mr. Drevna. No, you are right. Well, there is roughly a 
balance of crude supply in the world. We have more than ample 
supply in the United States right now to service the needs as 
the economy is today. Now, we hope the economy increases.
    Mr. Meehan. As the economy is today, but what happens--and 
I will get to you, Mr. Greco, because I want you to answer that 
question I asked initially, but I want to follow up on this 
line of questioning. What happens right now if we are in a 
circumstance in which we now have to rely more on these 
refineries overseas and they make the determination that they 
want to steer this product towards another country, towards 
their own--India is refining more for India. China is refining 
more for China. We are now not only trying to compete for 
global access to the oil but, once we get the oil, we have to 
go someplace else to get it refined.
    Mr. Drevna. That is a situation that I don't want to find 
ourselves in, Congressman. It is a terrible situation. You 
know, if we want as a Nation, as we should, to be less reliant 
on foreign sources of crude oil, why would we want to put 
ourselves in a predicament of being more reliant on foreign 
sources of refined product. So, you know, but it is not a 
simple yes or no. It is what can we do as a Nation working 
together to make sure that that is minimized and the things 
that I have outlined, opening up access to our own resources, 
taking a look at these regulations--Bob hit on a couple of 
them--let us sit down and say which ones are necessary, which 
ones have gone too far, and for our industry, which ones are 
conflicting. Greenhouse gases versus tier 3 sulfur. Can't do 
both. It is a dichotomy of the regulatory scheme. So let us sit 
down and figure out how to keep Americans working, how to keep 
refineries running, and how to make our country economically 
and Nationally secure.
    Mr. Meehan. Mr. Greco, I didn't give you a chance. I asked 
a question and then I got into a long litany with Mr. Drevna, 
but I would like you to respond to that particular question I 
asked at the outset or any comments with regard to Mr. Drevna's 
observation.
    Mr. Greco. I will just add to what Charlie said. You have 
to look at the long-term prospects for growth in the United 
States. Even though our economy is recovering, the EIA and 
others have projected basically flat U.S. demand or dropping 
U.S. demand for refined products. So when you are looking at 
refineries who are investing for 10, 20, 30 years out, they are 
looking at what their future demand looks like, and they are 
looking at a plateau, maybe a drop-off after that.
    Mr. Meehan. I see testimony from you that you expect the 
demand for refined products to decrease here in the United 
States by some 18 percent.
    Mr. Greco. Well, this is EIA testimony. I am citing EIA 
projections. We don't project future growth but EIA and others 
have projected a flattening demand, and some a decrease. So 
when you have a surplus of refining capacity, which we do in 
the United States, you can understand why we have had a trend 
of refinery closures for the past 30 years. The refineries are 
growing, the more efficient ones are growing, but those that 
are at risk will continue to be at risk because of the outlook 
going forward.
    Mr. Meehan. Is that a flattening demand due to things like 
the CAFE standards which are going to generate as well as I am 
assuming the second factor of a flattened demand. When we are 
talking about demand, when we are talking about demand for 
refined products so that does not include the ethanol, which 
is----
    Mr. Greco. That is one of the primary drivers is the fact 
that you have a 10 percent ethanol mandate that is increasing 
over time. You also have CAFE standards. The fuel economy 
standards have gotten tighter so vehicles will get more 
efficient and continue to get more efficient over time. So the 
combination of increased renewables and increased vehicle 
efficiency are going to offset the economic----
    Mr. Meehan. Let me ask one point. At what point in time do 
we start to--you know, we have reduced sulfur emissions almost 
90 percent since we began these. But at what point in time do 
we keep making demands of higher and higher standards at which 
point some of them stop gaining their advantage but what we are 
losing the ability here to keep our refineries open.
    Mr. Greco. Well, we have already reduced 90 percent of the 
sulfur in gasoline. As Charlie mentioned, there is a tier 3 
proposal that EPA is working on that would reduce gasoline 
sulfur even further. We have not seen a justification for that 
rule or any cost-benefit analysis. So our feeling is that this 
is yet another cost that hasn't been justified to the industry. 
Let us see a justification for this before we go ahead and move 
forward with such an expenditure.
    Mr. Meehan. My time is expired. I will turn to my 
colleague, Mr. Carney.
    Mr. Carney. Thank you, Mr. Chairman.
    I have been scratching my head all morning about the 
economics of these global petroleum markets and how they really 
affect what we are here today to talk about, which is the 
refineries here along the Delaware River, and I am still 
scratching my head. I thought I just heard you say that supply 
is up, demand is down in the United States, you know, basic 
economics, prices should be down, prices are going up. You also 
said that the refining industry is basically tied directly to--
married, I think you said--was to the price of crude oil. So it 
seems to me the issue really is the divergence between local 
supply and demand versus global supply and demand for crude oil 
as well as the divergence between the kinds of crude, because 
otherwise, everything ought to--first of all, they shouldn't be 
going up. Basic economics. This seems like health care. It is 
the only other market that doesn't work like a market where 
driven by supply and demand. So why is it, if supplies are up 
and demand is down, prices are going up?
    Mr. Drevna. Well, again, Mr. Carney, you have to 
differentiate----
    Mr. Carney. It can't be related to things that are 
happening, you know, prospectively, right? It has to be related 
to things that are happening today.
    Mr. Drevna. Well, first of all, again, you have to make the 
differentiation. We talked about supply and demand. You have to 
differentiate the supply and demand of the global crude market, 
which dictates 76 percent of the cost at the pump----
    Mr. Carney. Right. So given the price of crude, that would 
suggest that demand is far outstripping supply because the 
prices just----
    Mr. Drevna. Well, there are a lot of things that go into 
the price of crude on the global market, none of which we 
control.
    Mr. Carney. So it not an operating market that we learned 
about in our economics class where supply and demand determines 
price?
    Mr. Drevna. No. You mentioned earlier, you know, you had 
the Arab Spring, you have the potential for something happening 
sometime this June in the Middle East. We don't know exactly 
what that is. The price today is dictated upon what people 
believe is going to be in the future.
    Mr. Carney. So given that reality, so then the concept of 
energy independence should be a good goal, right? You said 
yourself that--why we would want to be dependent on supply of 
foreign crude? For the same reason, why would we want to be 
dependent for the supply of foreign refined products? I happen 
to agree with you on both cases.
    Mr. Drevna. I agree. Now, let me give you an ``if.'' Right 
now all the imports that we take in of crude oil, and let us 
differentiate crude from finished product. Crude oil, 53 
percent non-OPEC, 47 percent OPEC, and that 53 percent non-OPEC 
is mostly from Canada, etc. If we would just have the President 
sign a document that says we can build the Keystone pipeline 
that adds 700,000 barrels a day, that will knock off 12 percent 
of OPEC crude coming into this country.
    Mr. Carney. Well, as I understand--we had this conversation 
with the first panel--is that those supplies are going to go to 
the Gulf Coast and be exported.
    Mr. Drevna. They are not going to be exported. What is 
going to be exported is--the 700,000 barrels a day will be 
refined in the United States by United States refineries 
operated by United States citizens and workers. It will be 
distributed----
    Mr. Carney. How is that going to help these refineries 
right here along the Delaware River?
    Mr. Drevna. Well, again, they are----
    Mr. Carney. The answer is: It is not, because the problem 
is not that. The problem is the difference between the cost of 
refining the different types of crude, correct?
    Mr. Drevna. That is true.
    Mr. Carney. So explain to me what has happened over the 
last several years that have made these refineries lose money 
and other refineries obviously not lose money that enabled them 
to stay open.
    Mr. Drevna. The difference in the price of crude in the 
regions. If you look at----
    Mr. Carney. That doesn't make any sense, because if the 
crude is the same----
    Mr. Drevna. It is not the same.
    Mr. Carney [continuing]. It is a function of the price that 
are you are getting from the refined product minus the cost of 
refining.
    Mr. Drevna. But it is not same the crude, sir. It is not 
the same crude. East Coast refineries are, as I said, relying 
upon Brent crude, most of it coming from either the west coast 
of Africa or whatever. It is Brent. It is the highest-priced 
crude in the world. If you look at my testimony, the chart that 
says why there is a differential in crudes, why there is a 
differential in pump prices, the map that says--the last page 
of the testimony, the map that says where the different crudes 
are coming from and how they are priced, that is the 
difference. In 2008, there wasn't a difference. Everything went 
up. Every refinery was hurt.
    Mr. Carney. So that is the issue, the divergence between 
certain kinds of crude, right?
    Mr. Drevna. Yes, sir.
    Mr. Carney. What is driving that?
    Mr. Drevna. International affairs. Again, the refiners and 
oil companies have absolutely no control over what the price of 
crude is. We are the first customer. We have absolutely no 
control over the price of crude.
    Mr. Carney. Mr. Greco, one of the impacts or one of the 
factors that determines the cost of refining is what has to be 
done in that process, and you mentioned in your testimony some 
of the environmental requirements that drive that. Could you 
talk about the things that exist today that are driving that, 
that have negatively impacted the refineries right here along 
the Delaware River?
    Mr. Greco. Well, we can talk generally. The fact is, we----
    Mr. Carney. No, I want to talk specifically because I want 
to talk about the requirements that have affected the jobs of 
the people who are sitting behind you and the refineries in 
particular here. Because we just determined that in fact there 
is a difference. If you are down in Delaware City, they are 
able to make a profit, and somebody has come in and has 
reopened that refinery because they refine a different kind of 
crude. So tell me specifically--I see my time has run out.
    Mr. Meehan. No, please feel free.
    Mr. Carney. Tell me specifically what it is that is 
affecting these refineries in terms of that refining process 
and those environmental requirements.
    Mr. Greco. As Charlie pointed out, refineries have varying 
degrees of efficiency and complexity. Some refineries are more 
able to handle the cheaper crudes than others. When you start 
layering on environmental regulations, you are increasing the 
cost of compliance for every refinery. Some refineries because 
they are more efficient or can take advantage of other 
synergies such as cheaper crude may remain more competitive. 
But at some point the least competitive in any industry to the 
extent that more and more requirements are layered on those, 
the least competitive players are going to drop off, and that 
is what I think we are seeing in the United States.
    Mr. Carney. So I heard that when Mr. Drevna said that in 
his--I am sorry. My time is up.
    Mr. Meehan. No, go ahead. Proceed with your question.
    Mr. Carney. So I heard Mr. Drevna say that in his opening 
remarks, and that suggested to me that there was some 
investments that maybe weren't made in these refineries to make 
them efficient, competitive, or some differentiation between 
these refineries and other refineries, low sulfur, sweet crude, 
that were picking up the slack and that were able to be 
successful. Are you aware of those investments or the reasons 
they are not competitive?
    Mr. Greco. We can't comment about individual companies who 
made individual decisions to invest or not invest. What we have 
seen is that there has been----
    Mr. Carney. But you would say that they must not have made 
investments or they must not have done what was necessary to 
make them as efficient and as competitive as somebody else in 
the marketplace, without naming names.
    Mr. Greco. Each refinery is unique. They each have their 
own unique processes, the types of crude they buy. So you can't 
compare individual refineries. The companies that own those 
refineries are making the decisions to determine for the next 
20, 30 years what do I need to do to remain competitive. In 
some cases, you had refineries expand. There have been a number 
of expansions in the Gulf Coast in the Midwest where companies 
spent billions of dollars to increase the size of the 
refineries. Some of those are to take advantage of the heavier 
crudes coming from Canada, the ones that Charlie mentioned that 
are sold at a discount. Because they are already configured to 
handle these heavier crudes, they are taking advantage of their 
size and also their complexity to maximize their 
competitiveness. Again, other refineries have made other 
decisions to close.
    Mr. Carney. Thank you. I see my time is long expired. Thank 
you, Mr. Chairman.
    Mr. Meehan. I didn't want to stop you. You were on a roll, 
Mr. Carney. I appreciate your questioning.
    I want to ask a follow-up question or two, but before I do 
so, the Chairman wants to recognize State Representative Maria 
Donatucci is here today. She has been a great partner from 
among the many elected officials on the State and the local 
level who have worked in collaboration addressing this issue, 
and I thank you for being here.
    Let me ask a question. You talked about the discrepancy 
that exists or the valuation difference that exists because we 
have a large deposit of the Bakken crude that is in the mid-
continental region that is stranded to some extent and 
therefore, as I understand it, they are charging less at this 
point in time, and, you know, a gallon of gasoline in Colorado 
is 35 to 50 cents cheaper than it is here, maybe 25 cents 
cheaper, but it is cheaper there. What are opportunities are 
there for our refineries to take advantage of this kind of an 
asset and be able to take the town workforce and the resources 
that we have to develop that deposit and compete in the same 
manner that is being done mid-continent?
    Mr. Drevna. Mr. Chairman, we need to be serious about 
developing our own infrastructure. Again, if you look at that 
map, we are pretty good going north-south here with oil crude 
transportation with the noted exception of the bottleneck at 
Cushing which we hope in a short time frame will be alleviated 
somewhat, but if look east-west, we don't have a great 
transportation system, and you really don't have to go as far 
as Bakken, and as I understand, they have already railed Bakken 
crude into Albany and then piped it down to some refinery here 
for test runs. But you have Utica in Ohio, which is the same 
quality, and it is right there. You know, will it keep these 
refineries open? I can't predict anything like that. Can it? 
Would it be a significant impact if the refineries on the East 
Coast could have access to domestic sweet crude? Yes, I think 
we could do some good things, and that is why I say, develop 
our own resources and build our own shovel-ready 
infrastructure.
    Mr. Meehan. So it would be a factor of infrastructure would 
be the kind of a thing. Any other policy issues with respect to 
things that would make it conducive for us to be able to 
compete for the opportunity to access that?
    Mr. Drevna. Well, it is on private land so it is being 
developed, but, you know, getting pipelines, getting rights-of-
way, permitting. If anybody wants to stop it and delay it, they 
can and they have.
    Mr. Meehan. Mr. Greco, do you have any thoughts on that?
    Mr. Greco. One additional comment. As Charlie mentioned, 
most of the development is currently on private lands. That is 
where we have seen the tremendous growth. We could use 
administration support for further development on the public 
lands, the off-shore, the on-shore public lands. Markets react 
to signals from the administration and others as to future 
supply. So not just the current supply, but if we see a 
willingness to increase and be committed to developing our own 
resources, markets will react. We have a good example of that 
back in 2008 when crude was averaging $130 a barrel. President 
Bush announced that he was lifting the moratorium, the 
Presidential moratorium on off-shore development. Over the next 
6 weeks, the price of crude oil dropped by $16 a barrel. I am 
sure there were other factors involved in that but markets 
react to price signals. They react to the intent and what they 
see for future expectations of supply, and this administration 
could be much more supportive and send similar types of signals 
to the market.
    Mr. Meehan. I don't know the answer to this, but I do know 
that Virginia was talking about developing or seeking 
permission to develop their energy resources off-shore. Is that 
the same kind of a crude? Do we know if that the same kind of a 
crude as the Bakken crude that would then be able to be perhaps 
even closer to a resource like our refineries here on the East 
Coast?
    Mr. Greco. It could be. We have not had the opportunity to 
explore. We can't even assess the resource.
    Mr. Meehan. How do we know that there is oil down there?
    Mr. Greco. We have information from the USGS that is going 
on 10, 20 years old about potential resources. What happens 
then is we open up areas for leasing. Companies have a 
financial incentive to go in there and actually assess the 
resource to make a decision whether they should drill or not. 
But with 90 percent of our coastlines off-limits, we don't even 
have the opportunity to explore those areas.
    Mr. Meehan. Do you have any thoughts, Mr. Drevna? Do you 
have a comment?
    Mr. Drevna. As a matter of fact, not only the opportunity 
but Congress passed a law forbidding us to even inventory. That 
was 2002 or 2003.
    The other thing, and to expand a little bit on what Bob was 
referring to about sending the market a signal, well, twice now 
in the past 11 months or so, there was a signal sent to the 
market, albeit I would suggest it was the wrong signal when we 
released 30 million barrels of crude oil from the SPR last July 
and the price of oil went down $2, $3 a barrel in 1 day. It 
lasted for a couple days because we released 30 million 
barrels, which is like 9 hours on a global market. Last week, 
the President and Prime Minister Cameron were talking about 
releasing some oil from the SPR, and the price went down $2 
like that. Imagine----
    Mr. Meehan. But is that all just for people who are sort of 
speculating and trying to play the game as to what is going to 
happen?
    Mr. Drevna. Well, but that sends a signal to the market. 
Imagine if we would do Keystone, if we would open up access, if 
we would, as Congressman Carney and I talked about, really 
focused on our own energy, if not independence, on our own 
energy security, what kind of message that sends to the 
international markets, that A, America is determined to be 
energy and economically and Nationally secure, and B, we are 
going to be something about it now. You know, we could have 
this same conversation, Congressman, next year because it is 
going to take 4 years to do it, and we could be having the same 
conversations as more and more refineries are closing 
throughout the country.
    Mr. Meehan. I am concerned about the earlier testimony that 
suggests that we may be looking at even additional refinery 
closings, but I am struggling with this concept that we keep 
off-shoring this capacity because once we lose this capacity, 
we will be dependent upon, to the extent that we are able to 
access our own, but to the extent that we have to turn to 
foreign countries for the ability to refine it even if we get 
it here is a concern of mine, unless you tell me that we are 
continuing to develop capacity sufficient to meet our supply.
    Mr. Drevna. I watched steel mills in my hometown up and 
down the Monongahela and Ohio River close when I was growing 
up. We don't want that to happen anymore.
    Mr. Meehan. Mr. Carney, do you have any follow-up 
questions?
    Mr. Carney. Well, I would just mention the fact that I am 
pleased that the steel mill that is in the town that I grew up 
still exists right down the right here in Claymont, and it is 
not run by an American company anymore but it still operates 
and produces steel in global markets that maybe are somewhat 
uncompetitive.
    I am still scratching my head. You mentioned that markets 
react to price signals. The problem seems to be that prices 
don't seem to react to markets in the way that we were taught 
in the textbooks in the petroleum industry, and that is why I 
am still at a loss to explain or to understand why these 
refineries that are here in our region are not competitive, 
that were losing money, according to Sunoco management at the 
rate that they were, and other refineries around the country 
refining, as you just said, the same kind of crude were more 
efficient and were able to make a profit or at least stay in 
operation.
    What concerns me the most particularly this morning, 
because this hearing is a Homeland Security hearing, we are 
having it here because Congressman Meehan has prevailed upon 
his colleagues on the committee to allow us to do that, and I 
have been able to participate because he was able to get 
unanimous consent for that. So I come back to the one thing 
that you said a minute ago, Mr. Drevna, which is: Why? If we 
are trying not to be reliant on foreign crude oil and all of 
the National security implications that that has had and all 
the problems it has created for our country going back as long 
as I have been paying attention, and in fact the impact it has 
on the value of the dollar. If there is one thing that affects 
the dollar, it is the fact that tens of hundreds of billions, 
trillions of dollars flow out of this country to countries 
around the world and affecting the value of the dollar more so 
than I would argue than some of the impacts that you mentioned.
    I think the issue for this morning, though, is: What does 
the closure of these facilities mean for our own security here 
in our country? My conclusion is that it is not a good thing, 
that it is going to make us more reliant, not just on crude 
coming from overseas but also in refined products and that 
those supply chains are going to be subject to terrorist 
attack. They could be subject to political shutdown just like 
we imposed on the state of Iran with respect to their 
activities there in that region, and I don't see how you can 
conclude--I know we had the Homeland Security representative in 
the first panel--that this is not a really negative thing for 
the security of our country. Mr. Drevna, I agree with you that 
we ought to be doing what we can to make sure that these 
facilities are able to operate here and operate profitably. But 
it appears that we are subject to the whims of the marketplace 
that don't seem to be driven by the supply-demand price 
equations that I am familiar with, and that doesn't require any 
response, but I want to thank you. What I would ask you, 
though, I guess Mr. Greco in particular, to list those things, 
you know, environmental constraints and imposed costs on the 
refining process, particularly ones that do not give us any 
kind of benefit or a benefit that justifies the cost that they 
impose on the system.
    Mr. Greco. I would certainly be happy to respond.
    Mr. Carney. Thank you.
    Mr. Greco. Also, we can give you some information that does 
show that diesel and gas prices do mirror crude oil prices. If 
you look at NYMEX, it is very much a stair-step--so when you 
talk about the markets don't react like a typical market does, 
in reality, it really does mirror the price of crude oil.
    Mr. Carney. You don't agree with that statement?
    Mr. Greco. I would prefer to clarify it for you.
    Mr. Carney. Fair enough. I am not an expert, but I just 
watch what happens at the pump.
    Mr. Meehan. Well, thank you, Mr. Carney, and I thank our 
panelists, the witnesses for your valuable testimony. Either 
these Members or other Members from the committee may have 
questions, and if they do and they are submitted to you, I ask 
that you respond in writing. The hearing record will be open 
for 10 days to do so, and so without objection, the committee 
stands adjourned.
    [Whereupon, at 12:11 p.m., the subcommittee was adjourned.]

                                 
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