[House Hearing, 112 Congress]
[From the U.S. Government Printing 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/
__________
U.S. GOVERNMENT PRINTING OFFICE
76-603 WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
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.
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
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
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Exhibit B
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Exhibit C
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
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.]
|
NEWSLETTER
|
|
Join the GlobalSecurity.org mailing list
|
|
|
