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Speeches/TestimonyWritten Statement of the National Petrochemical & Refiners Association
before the House Energy & Commerce Subcommittee on Energy and Air Quality
concerning the Status of the OverviewMr. Chairman and members of the Subcommittee, thank you for the opportunity to appear today to discuss the factors impacting current gasoline markets, especially U.S. refining capacity and boutique fuels. I am Bob Slaughter, President of NPRA, the National Petrochemical & Refiners Association. NPRA is a national trade association with 450 members, including those who own or operate virtually all U.S. refining capacity, and most U.S. petrochemical manufacturers. To summarize our message today, we urge policymakers in Congress and the Administration to support policies that encourage the production of an abundant supply of petroleum products for U.S. consumers. We believe that a diverse and healthy domestic refining industry is a necessary foundation to attain that objective. We also believe that government actions, especially in the environmental area, can and must do a better job of balancing energy supply impacts and other policy objectives. NPRA supports requirements for the orderly production and use of cleaner-burning fuels to address health and environmental concerns, while at the same time maintaining the flow of adequate and affordable gasoline and diesel supplies to the consuming public. Refiners have made important contributions to national efforts to improve the environment. Since 1970, clean fuels and clean vehicles account for about 70% of U.S. emission reductions from all sources, according to EPA. Over the past 10 years, U.S. refiners have invested about $47 billion in environmental improvements, much of that to make cleaner fuels. And also according to EPA, the new Tier 2 low sulfur gasoline program, which began in January 2004, will have the same effect as removing 164 million cars from the road when fully implemented in 2006. As for current gasoline market conditions, there are no silver bullet solutions to the current tight supply/demand balance. The two most significant factors in today's gasoline market are the high price of crude oil and strong year to date demand for gasoline because of the improving U.S. economy. U.S. refineries are responding quite effectively to this challenge by producing record amounts of gasoline and distillates so far this year. Here is a summary of the key factors affecting the current gasoline market:
Refiners understand that increased costs for gasoline can cause difficulties for consumers, despite the fact that gasoline prices have actually declined over the past two decades when adjusted for inflation. However, NPRA urges Congress, the Administration, and the motoring public to have continued patience with the free market system. Refiners are working hard to meet strong demand for their products while complying with extensive regulatory controls that affect both refining facilities and products. To summarize our policy recommendations, we first urge Congress to pass the Conference Report on HR 6. This is the most important action that can be taken to improve U.S. energy security. Putting the conference report on the President's desk is the best way to move energy policy forward into the 21st century. Congress should also support the New Source Review (NSR) reforms which have been considered by two Administrations. These reforms will encourage capacity expansions and efficient operation of existing refineries by encouraging installation of new technologies. Congress should resist any new "federal fuel recipes" or hasty action on the subject of boutique fuels. Even the experts can't agree on the definition of a "boutique fuel." We need more data before acting on this issue, and the study in H.R. 6 is a necessary first step. Congress should also act to repeal the 2% RFG oxygenation requirement and support California and New York's waiver requests pending repeal. Today's Gasoline Market: Refiners Face High Feedstock Prices; Strong DemandThe most significant factor affecting gasoline costs is the higher price of crude oil. This input currently accounts for 40% of the cost of a gallon of gasoline, while taxes add another 21% to the price. Thus, over 60% of the retail cost of gallon of gasoline is attributable to two components that are beyond the control of refiners. (See Attachment 1) Higher crude oil prices, set on international markets, are responsible for most of the increased gasoline costs. When crude oil prices are above $40 per barrel, refiners are paying around $1.00 for each gallon of crude oil used to make a gallon of gasoline. Thus, crude oil and gasoline costs closely track each other. (See Attachment 2) Since April of 2003, crude oil prices have escalated roughly 52%. Factors driving crude prices include: (1) high demand, spurred by significant economic growth in Asia, (2) decisions by OPEC regarding output, and (3) recurring uncertainties about worldwide crude and product production capabilities due to political instability in some producing nations. According to the International Energy Agency (IEA), economic expansion is behind the largest increase in world oil demand in 16 years. In the U.S., oil demand is up 2.8 percent over a year ago. International demand is projected to be up 2.9 percent this year. China's demand saw a 23 percent year-on-year increase during the second quarter. Last year, China's crude oil imports grew 36 percent, making China the second largest importer of crude oil in the world, after the United States. India and other Asian countries have also seen strong demand growth. A tight supply/demand balance in the U.S. gasoline market is a second significant factor affecting current gasoline costs. As the U.S. economy improves, Americans are consuming more gasoline, with demand up almost three percent compared with last year. U.S. refiners are producing record amounts of the fuel, but strong demand and an earlier reduction in gasoline imports have tightened supply. Thus, even with refineries running flat-out at 96% average capacity utilization rates, strong demand has kept gasoline inventories below average. Gasoline demand currently averages approximately 9 million barrels per day. Domestic refineries produce about 90 percent of U.S. gasoline supply, while about 10 percent is imported. Increased gasoline demand can be met only by increasing domestic refinery production or by relying on more foreign gasoline imports. Unfortunately, the need for more domestic gasoline production capacity has run up against government policies and public attitudes that make it difficult and sometimes impossible to increase domestic refining capacity. Public Policy Should Encourage a Healthy Domestic Refining Industry and U.S. Capacity ExpansionDomestic refining capacity is a scarce asset. Currently 149 U.S. refineries, owned by almost 60 companies, operate in 33 states. (See Attachment 3) Their total crude oil processing capacity is 16.9 million barrels per day. In 1981, there were 325 refineries in the U.S. with a capacity of 18.6 million barrels per day. Thus, while U.S. demand for petroleum products has increased over 20% in the last twenty years, U.S. refining capacity has decreased by 10%. (See Attachment 4) No new refinery has been built in the United States since 1976, and it is unlikely that one will be built here in the foreseeable future, due to the combined impact of economic, government policy and "not in my backyard" NIMBY public attitudes. (Major economic factors include siting costs, environmental requirements, and industry profitability.) During this time, however, refiners have upgraded and modernized existing facilities by installing new technologies and enhanced emissions controls. The result is that refineries have improved their environmental performance, despite the many challenges posed by major investments in new fuels programs. Of course, refiners will continue to invest to improve the environmental performance of these facilities. U.S. refining capacity increased slightly in the past decade, with minimal increase in the past three years. Because new refineries have not been built, refiners have sought to increase capacity at existing sites to offset increasing demand and the closure of some U.S. refineries. Unfortunately, it is becoming harder to add capacity at existing sites, due in part to more stringent environmental regulations and the impact of a complex and often lengthy permitting process. Proposed refinery projects can become difficult and contentious at the state or local level, even when necessary to produce cleaner fuels under new regulatory programs. One NPRA member company encountered more than a year's wait for an ethanol tank necessary to comply with California's de facto ethanol mandate. In another instance, a group of investors has been trying to build a new refinery in Arizona where population and product demand are growing fast. So far, they have little to show for their determined efforts. NPRA believes that two policy initiatives in particular could help address some of the obstacles to capacity expansion. First, Congress should enact legislation that streamlines the permitting process for refinery expansion projects, new refineries, and other key refining projects. Congress should consider declaring expansion of U.S. refining capacity a national priority, and provide guidelines for consideration of refining permits. These guidelines should provide significant but finite opportunities for public input and enforceable deadlines for decisions. The legislation should also create incentives for federal, state and local permitting authorities to make refining-related projects a priority. EPA or other federal authorities could be directed to offer assistance to states to assist them in permit review. Second, NPRA urges policymakers to support New Source Review (NSR) reform so that domestic refiners can continue to meet the growing public demand for gasoline and comply with new environmental programs. These reforms have been under consideration since 1996 by two Administrations, and reflect significant public review and comment. The two reforms which have been completed respond to a widespread consensus that the unreformed program lacked clarity and certainty, discouraging refiners and other manufacturers in their attempts to modernize or even to repair existing facilities. NSR reforms should facilitate new domestic refining capacity expansions. They will encourage the installation of more technologically-advanced equipment and provide greater operational flexibility while maintaining a facility's environmental performance. Unfortunately, the much-needed NSR reforms are currently caught up in litigation, when refiners and U.S. consumers are most in need of their immediate implementation. It is clearly in our nation's best interest to manufacture the vast majority of petroleum products for U.S. consumption in domestic refineries. Nevertheless, we currently import more than 62% of the crude oil and petroleum products we consume. Limited U.S. refining capacity affects the U.S. supply of refined petroleum products and the flexibility of the supply system, particularly in times of unforeseen disruption or other stress. Unfortunately, the U.S. Energy Information Administration (EIA) currently predicts "substantial growth" in refining capacity in the Middle East, Central and South America, and the Asia/Pacific region, not the U.S. The Domestic Refining Industry is Diverse and Highly CompetitiveToday's U.S. refining industry is highly competitive. Despite this fact, some have suggested that past mergers are responsible for higher prices. The data do not support such claims. Companies have become more efficient and continue to compete fiercely. There are almost 60 refining companies in the U.S., and the largest refiner accounts for only about 13 % of the nation's total refining capacity. The Federal Trade Commission (FTC) thoroughly evaluates every industry merger or acquisition and subjects these proposals to a strict review for any adverse impact on competition. Once the transaction is complete, the FTC continues to subject the industry to a high level of ongoing scrutiny. State and federal investigations of price spikes have consistently cleared the industry of any wrongdoing. For example, after a 9-month FTC investigation into the causes of price spikes in local markets in the Midwest during the spring and summer of 2000, former FTC Chairman Robert Pitofsky stated, "There were many causes for the extraordinary price spikes in Midwest markets. Importantly, there is no evidence that the price increases were a result of conspiracy or any other antitrust violation. Indeed, most of the causes were beyond the immediate control of the oil companies." On April 25, 2002, Chairman Pitofsky appeared before the Senate Commerce Committee. His testimony detailed the Commission's efforts to review proposed oil industry mergers, including requiring significant assets sales to eliminate competitive concerns. He said, "… the merger wave reflects a dynamic economy which, on the whole, is a positive phenomenon." A recent U.S. General Accounting Office (GAO) report concluded that mergers and acquisitions have increased average wholesale gasoline prices by one-half cent per gallon. However, even this modest figure is strongly suspect. FTC chairman Timothy J. Muris strongly criticized the reliability of the GAO report, citing "major methodological mistakes that make its quantitative analyses wholly unreliable; …critical factual assumptions that are both unstated and unjustified; and …conclusions that lack any quantitative foundation." Other evidence appears to undermine the GAO's conclusions. A comparison of EIA price data for the six years before the mergers (1990-1996) and a similar period after (1997-2003), indicates a reduction of five cents on average in retail prices occurred during the latter period. Merger critics sometimes suggest that the industry can affect prices because it has become much more concentrated, with a handful of companies controlling most of the market. This is untrue. According to data compiled by the U.S. Department of Commerce and by Public Citizen, in 2003 the four largest U.S. refining companies controlled a little more than 40 % of the nation's refining capacity. In contrast, the top four companies in the auto manufacturing, brewing, tobacco, floor coverings and breakfast cereals industries controlled between 80% and 90% of the market. Refiners are Working Hard to Keep Pace with Growing Demand for Gasoline and Other ProductsRefiners are addressing supply challenges and working hard to supply sufficient volumes of gasoline and other petroleum products to the public. During the four-week period ending July 2, 2004, the EIA reported that refiners produced 8.7 million barrels per day of gasoline, a 2.6% increase over the same period last year. Refineries are running at record levels, producing record amounts of gasoline and distillate for this time of year. Refiners have operated at an average utilization rate of 96% since before the start of the summer driving season. To put this in perspective, peak utilization rates for other manufacturers average about 82 %. At times during the summer, refiners operate at rates close to 98%. However, such high rates cannot be sustained for long periods. In addition to coping with the higher fuel costs and growing demand, refiners are implementing a transition to cleaner gasoline across most of the nation. The sulfur level in gasoline was reduced from an average of 300 parts per million (ppm) to a corporate average of 120 ppm effective January 1, 2004, giving refiners an additional challenge in both the manufacture and distribution of fuel. Average gasoline sulfur content will be further reduced to 90 ppm on January 1, 2005, and to 30 ppm on January 1, 2006 (California already has a 30 ppm sulfur cap). Refiners across the industry are investing $8 billion dollars to achieve these significant reductions in gasoline sulfur, a source of harmful air emissions. The industry is investing another $8-10 billion to achieve equally significant reductions in the sulfur content of diesel fuel. Of equal importance, California, New York and Connecticut bans on use of MTBE went into effect January 1. This is a major change affecting one-sixth of the nation's gasoline market. Where MTBE was used as an oxygenate in reformulated gasoline, it accounted for as much as 11% of RFG supply at its peak, and substitution of ethanol for MTBE does not replace all of the volume lost by removing MTBE. (Ethanol's properties limit its ability to substitute for lost MTBE volume; it actually replaces less than 50% of the volume lost when MTBE is removed.) That missing portion of supply must be replaced by additional production of gasoline or gasoline blendstocks. Apparently due to these changes in gasoline specifications, the volume of gasoline imports declined roughly 7% year-to-date, although import volumes have recently increased. Gasoline imports account for about 10% of the U.S. market. They are especially important to PADD 1 (the East Coast) where imports constitute 20% of supply. As U.S. fuel specifications change, foreign refiners may not be able to supply the U.S. market without making expensive upgrades at their facilities. They may eventually elect to do so, but a time lag may occur, with potentially adverse impacts on gasoline supply in the meantime. Refiners have also completed the annual switch to summer gasoline blends, a process which was complicated by the new ethanol mandate in markets like New York, Connecticut and California that previously experienced little ethanol use. These complications reflect the need to adjust the gasoline blend for increased emissions of ozone precursors in warm weather. Even without this complication, the seasonal switching sometimes impacted the market in recent years because storage tanks must be completely drained to accommodate summer fuel. Obviously, refiners face a daunting task in rationalizing all these changes to provide the fuels that consumers and the nation's economy depend on. But they are succeeding. And regardless of recent press stories, we need to remember that American gasoline and other petroleum products remain a bargain when compared to the price consumers pay for those products in other large industrialized nations. Refiners are Heavily Regulated; They Face a Blizzard of New Environmental Requirements for Both Facilities and ProductsRefiners currently face the massive task of complying with fourteen new environmental regulatory programs with significant investment requirements, all in the same 2002 - 2010 timeframe. (See Attachment 5) For the most part, these regulations are undertaken pursuant to the Clean Air Act. Some will require additional emission reductions at facilities and plants, while others require further changes in clean fuel specifications. NPRA estimates that refiners are in the process of investing about $20 billion to sharply reduce the sulfur content of gasoline and both highway and off-road diesel (These costs do not include significant additional investments needed to comply with stationary source regulations affecting refineries). And refiners may also face additional investment requirements to deal with limitations on ether use, as well as compliance costs for controls on Mobile Source Air Toxics and other limitations. On the horizon are still other potential environmental regulations which could force additional large investment requirements. They are: the challenges posed by increased ethanol use, possible additional changes in diesel fuel content involving cetane, and potential proliferation of new fuel specifications driven by the need for states to comply with the new eight-hour NAAQS ozone standard. The new 8-hour standard could also result in more regulations affecting facilities such as refiners and petrochemical plants. The industry must also supply two new mandatory RFG areas (Atlanta and Baton Rouge) under the "bump up" policy of the current one-hour ozone NAAQS. These are only some of the pending and potential air quality challenges that the industry faces. Refineries are also subject to extensive regulations under the Clean Water Act, Toxic Substances Control Act, Safe Drinking Water Act, Oil Pollution Act of 1990, Resource Conservation and Recovery Act, Emergency Planning and Community Right-To-Know (EPCRA), Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), and other federal statutes. The industry also complies with OSHA standards and many state statutes. A complete list of federal regulations impacting refineries is included with this statement. (See Attachment 6) The American Petroleum Institute (API) estimates that, since 1993, about $89 billion (an average of $9 billion per year) has been spent by the oil and gas industry to protect the environment. This amounts to $308 for each person in the United States. And more than half of the $89 billion was spent in the refining sector. A Key Government Advisory Panel Urged Regulators to Pay More Attention to Supply ConcernsIn 2000, the National Petroleum Council (NPC) issued a landmark report on the state of the refining industry. Given the limited return on investment in the industry and the capital requirements of environmental regulations, the NPC urged policymakers to pay special attention to the timing and sequencing of any changes in product specifications. Failing such action, the report cautioned that adverse fuel supply ramifications could result. Unfortunately, this warning has been widely disregarded. On June 22, 2004, Energy Secretary Abraham asked NPC to update and expand its refining study with a completion date of September 30, 2004. Information in this new study could be used to improve energy policy. Unfortunately, there is little evidence that the NPC's 2000 recommendations were implemented. Some policymakers seem to recoil from the obvious fact that clean fuel proposals that do much good also involve significant costs. They are not free. Those costs do affect refining industry economics and fuel production capacity. We would point to the public rulemaking record illustrating recommendations industry has made on environmental regulations over the past eight years. The refining industry has consistently supported continued environmental progress, but cautioned regulators to balance environmental and energy goals by considering the supply implications of multiple new regulatory requirements, often overlapping and poorly coordinated. We have commented on many new stationary source and fuel proposals, urging adoption of reasonable and effective standards with appropriate lead times to facilitate investment and maintain supply. Many times, if not most, industry recommendations have been rejected, as regulators opt to promulgate more stringent standards without leaving a margin of safety for energy supply security. At the same time, when the domestic industry has made the significant capital expenditures required by the regulations, it is important that final regulations not be changed except in cases of absolute necessity. Stability and certainty in regulatory implementation is needed to encourage and recognize the investment of the regulated industry in the new regulations. A much better approach than granting waivers is to develop regulations that reflect from the outset the need for attention to fuel supply concerns before regulations are finalized, not during the implementation period after investments have already been made. Refiners are sometimes unfairly accused of seeking a "rollback" of environmental programs. This is not true. They favor implementation on schedule once the regulation is final and investments are made. This year, as gasoline markets began to reflect the implementation of Tier 2 gasoline sulfur reduction, policymakers seemed to consider easing the new gasoline sulfur specifications for some gasoline importers as a "relief valve" for the market, despite conflicting indications whether or not any real problems existed. This would have adversely affected the refining industry, which has already made substantial investments in gasoline sulfur reductions and is in the process of making equally large investments in diesel sulfur reductions. Even more importantly, this program change would have eliminated part of the environmental benefits of the Tier 2 program, for the benefit of foreign suppliers who did not invest, and to the detriment of U.S. refiners who did. Fortunately, EPA decided to take no action to waive gasoline sulfur requirements for importers. And of course, when any party suggests that regulatory relief is needed on a rule of this type, it is important that EPA consult with and work closely with the EIA, which has expertise in gasoline supply and demand analysis, along with other stakeholders who will be affected by such requirements. Waivers may merit consideration on rare occasions, and they are tools available to regulators. But there should be a high burden of proof for waiver proponents. Waivers, by their very nature, raise uncertainty and threaten unfair loss of investment in the affected market. However, where there is universal agreement that a particular rule or policy is no longer valid, or better options exist for reaching desired objectives, then certainly that policy should be reconsidered. An excellent example is the 2% oxygenate requirement for reformulated gasoline (RFG), which should be repealed. In the meantime, NPRA supports the waiver of the 2% requirement requested by California and New York. Refiners Will Do Their Best to Meet Continuing Supply Challenges; Mergers, Acquisitions and Some Closures Will ContinueDomestic refiners will rise to meet the supply challenges in the short and the long term with the help of policymakers and the public. They have demonstrated the ability to adapt to new challenges and maintain the supply of products needed by consumers across the nation. But certain economic realities cannot be ignored and they will impact the industry. Refiners will, in most cases, make the investments necessary to comply with the environmental programs outlined above. In some cases, however, where refiners are unable to justify the costs of investment at some facilities, facilities may close or be sold or the refiner may exit certain product markets. These are economic decisions based on facility profitability relative to the size of the required investment needed to stay in business either across the board or in one product line, such as U.S. highway diesel fuel. In the case of a refinery sale, a new owner may be able to invest and keep a facility operating that would otherwise have closed. In some cases, however, it may be difficult or impossible to find a buyer. EIA has addressed the subject of past and future refinery closures: "Since 1987, about 1.6 million barrels per day of capacity has been closed. This represents almost 10% of today's capacity of 16.8 million barrels per calendar day…The United States still has 1.8 million barrels of capacity under 70 MB/CD (million barrels per calendar day) in place, and closures are expected to continue in future years. Our estimate is that closures will occur between now and 2007 at a rate of about 50-70 MB/CD per year." (EIA, J. Shore, "Supply Impact of Losing MTBE & Using Ethanol," October 2002, p. 4.) Refining Industry Economics are Widely MisunderstoodRefining industry profitability is also not well understood. According to data compiled by EIA (Performance Profiles of Major Energy Producers), the ten-year average return on investment in the industry is about 5.5%; this is about what investors could receive by investing in government bonds, with little or no risk. It is also less than half of the S&P Industrials figure of a 12.7% return. In 2002, the return was a negative 2.7% for refining, compared to a positive 6.6% for the S & P Industrials. This relatively low level of refiners' return, which incorporates the cost of capital expenditures required to meet environmental regulations, is another reason why domestic refinery capacity additions have been modest and helps explain why new refineries are less likely to be constructed here in the U.S Refining industry profits as a percentage of operating capital are relatively modest. In dollars, they appear to be large due to the massive scale needed to compete in the world's largest industry. A new medium-scale refinery (100,000 to 200,000 barrels/day capacity) would cost $2 to $3 billion. And, over the last decade, companies spent about $5 billion per year on environmental compliance with refinery and fuels regulations. While they significantly improved air quality, these investments also help explain the low percentage return on refinery investment. An important reason the industry's profitability is not well understood is because the media typically report only half the story-the dollars in profits earned. Oil companies may earn a lot of money, but only after they spend huge sums to produce and market the products they sell, and only by selling in extremely high volumes. It is by looking at "profit margins"-how much money is earned on each dollar of sales-that a more complete "profits" story is told. This year, for example, higher gasoline prices have contributed to company revenues, but average profit margins (measured as net income divided by sales) were below those of other industries in the first quarter, as reported last May in Oil Daily and Business Week. In short, industry revenues can be in the billions, but so, too, are the costs of operations. For the first quarter of 2004, the U.S. oil and gas industry, which includes producers, refiners and marketers, earned an average of 6.9 cents on every dollar of sales. This was below the U.S. all-industry average, which was 7.5 cents. Independent refiners and marketers earned an average of just 1.8 cents on every dollar of sales, even though their profits increased 50% over the previous year. In short, it is important to keep the full story in mind when reading reports about oil industry profits. There Are No "Quick Fixes" to Current Market Conditions; Policymakers and the Public Must Not Lose Faith in the Free MarketModern energy policy relies upon an important tool which encourages market participants to meet consumer demand in the most cost-efficient way: market pricing. The free market swiftly provides buyers and sellers with price and supply information to which they can quickly respond. Industry appreciates the patience and restraint that the public and policymakers have shown in responding to current market conditions and the higher cost of gasoline. Unfortunately, in the short term there are no "silver bullets" to alleviate the higher costs of gasoline this summer. Putting the current situation in a broader, more positive perspective, however, the U.S. has some of the cleanest and least costly fuels in the world. NPRA recommends that policymakers take particular care in weighing the impact of so-called "boutique fuel" gasolines. In many cases, these programs represent a local area's attempt to address its own air quality needs in a more cost-effective way than with RFG, which is burdened by an overly prescriptive recipe and an oxygenation mandate. Boutique fuels only result in supply problems when a refinery problem or pipeline outage occurs. (As in the Midwest in 2000 and Phoenix in 2003.) In contrast, the current market situation results from high crude prices and strong demand. There is as much disagreement about the number of boutique fuels as there is lack of hard evidence about their impact. Better to study the situation, as H.R. 6 would require, than legislate in a knowledge vacuum, which might make matters worse. Refiners believe that the elimination of the 2% RFG oxygenation requirement and widespread availability of very low sulfur gasoline beginning in 2006 will eliminate the need for boutique fuels in many regions. Industry supports further study of the "boutique fuels" phenomenon, but urges members of the Committee to resist imposition of any fuel specification changes on top of those already in progress. Further changes in fuel specifications in the 2004 - 2010 timeframe could add greater uncertainty to a situation which already provides significant challenges to U.S. refiners. Refiners Are Committed to Safe and Secure FacilitiesNPRA and its members are absolutely committed to keeping all our facilities as secure as possible from threats of violence or terrorism. Contrary to what a few press articles would have us believe, industry is not standing idly by, waiting for the government to act before conducting comprehensive security vulnerability assessments and implementing strong facility security measures. Refiners and petrochemical manufacturers are heavily engaged - and were even before September 11 - in maintaining and enhancing facility security. NPRA has held or has co-sponsored more than a dozen conferences and workshops dedicated to helping refiners and petrochemical manufacturers strengthen facility security. NPRA has worked with the American Petroleum Institute, the Argonne National Laboratory, and representatives of the DHS Information Analysis & Infrastructure Protection Directorate to develop a sophisticated and effective methodology for conducting facility security assessments. The methodology is the product of many minds, and it is being used successfully in large and medium-sized facilities. A new edition of the methodology will be coming out soon, this one incorporating security information dealing with truck and rail transportation to and from our facilities. We also work closely with federal, state, and local governments to address security issues. Some of these agencies include the CIA, the FBI, the Department of Transportation, the Department of Energy, the Department of Defense, the Chemical Safety and Hazard Investigation Board, and of course the Department of Homeland Security and its various components, including the U.S. Secret Service, the Transportation Security Agency, and the U.S. Coast Guard, as well as various state and local emergency response and law enforcement officers. The U.S. Coast Guard has been particularly helpful, as refiners and petrochemical manufacturers have conducted security vulnerability assessments and implemented facility security plans pursuant to the requirements of the Maritime Transportation Security Act. NPRA estimates that more than half of all its members' facilities are subject to the Coast Guard's security regulations. The Coast Guard has made hundreds of site visits to refineries and petrochemical plants, and industry personnel are working closely with the Coast Guard to assure these facilities are kept secure. NPRA and its members strongly believe that federal security efforts must be conducted by experienced organizations such as these, and not delegated to other branches of government that lack law enforcement and intelligence capabilities and security resources. The Environmental Protection Agency (EPA) regulates the safe use, storage, management and disposal of many potentially dangerous substances, and will continue to do so. But EPA does not have facility security expertise. Security is not its mission. This is a role Congress has delegated to the Department of Homeland Security. NPRA is opposed to policies that would disrupt current security initiatives and splinter security responsibility away from the Department of Homeland Security. In short, refiners and petrochemical manufacturers have spent many hours of effort and millions of dollars to enhance physical and cyber security, and they will continue to do so. ConclusionThere is a very close connection between federal energy and environmental policies. Unfortunately, these policies are often debated and decided separately and thus in a vacuum. As a result, positive impacts for one policy area sometimes conflict with or even undermine goals and objectives in the other. Industry therefore requests that an updated energy policy be adopted incorporating the principle that, in the case of new environmental initiatives affecting fuels, environmental objectives must be balanced with energy supply requirements. We believe these regulations should contain an express statement of the impact on the domestic refining industry and U.S. fuel supply. As explained above, the refining industry is in the process of redesigning much of the current fuel slate to obtain desirable improvements in environmental performance. This task will continue because consumers desire higher-quality and cleaner-burning fuels. And our members want to satisfy their customers. We ask only that the programs be well-designed, well-coordinated, appropriately timed and cost-effective. The Committee can advance both the cause of cleaner fuels and preserve the domestic refining industry by adopting this principle as part of the nation's energy and environmental policies. A healthy and diverse U.S. refining industry serves the nation's interest in maintaining a secure supply of energy products. Rationalizing and balancing our nation's energy and environmental policies will protect this key American resource. Given the challenges of the current and future refining environment, the nation is fortunate to retain a refining industry with many diverse and specialized participants. Refining is a tough business, but the continuing diversity and commitment to performance within the industry demonstrate that it has the vitality needed to continue its important work, especially with the help of a supply-oriented national energy policy. RecommendationsWe make the following recommendations to address concerns regarding fuel supplies, environmental regulations, and market issues.
The industry looks forward to continuing to work with this Subcommittee, and thanks the Chairman for holding this important hearing. I would be glad to answer any questions raised by our testimony today. Attachments:
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