[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE NEW DOMESTIC ENERGY PARADIGM: DOWNSTREAM CHALLENGES FOR SMALL
ENERGY BUSINESSES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON AGRICULTURE, ENERGY, AND TRADE
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JUNE 26, 2014
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 113-073
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMEYER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Scott Tipton................................................ 1
Hon. Patrick Murphy.............................................. 2
WITNESSES
Mr. Russell Smith, Executive Vice President, Public Affairs,
Quantum Energy, Inc., Williston, ND............................ 4
Mr. Kevin Book, Managing Director, ClearView Energy Partners,
LLC, Washington, DC............................................ 5
Mr. Jared Blong, CEO/President, Octane Energy, Midland, TX....... 7
Mr. Greg Dotson, Vice President for Energy Policy, Center for
American Progress, Washington, DC.............................. 9
APPENDIX
Prepared Statements:
Mr. Russell Smith, Executive Vice President, Public Affairs,
Quantum Energy, Inc., Williston, ND........................ 24
Mr. Kevin Book, Managing Director, ClearView Energy Partners,
LLC, Washington, DC........................................ 36
Mr. Jared Blong, CEO/President, Octane Energy, Midland, TX... 44
Mr. Greg Dotson, Vice President for Energy Policy, Center for
American Progress, Washington, DC.......................... 56
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
THE NEW DOMESTIC ENERGY PARADIGM: DOWNSTREAM CHALLENGES FOR SMALL
ENERGY BUSINESSES
----------
THURSDAY, JUNE 26, 2014
House of Representatives,
Committee on Small Business,
Subcommittee on Agriculture, Energy and Trade,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:02 a.m., in
Room 2360, Rayburn House Office Building, Hon. Scott Tipton
[chairman of the Subcommittee] presiding.
Present: Representatives Tipton, Luetkemeyer, Huelskamp,
Murphy, and Schrader.
Chairman Tipton. I would like to call our hearing to order.
I need to start off by congratulating Mr. Murphy and the
Democrat Members on their victory at the baseball game last
night, even though there were many questionable umpire calls
that we certainly would like to have reviewed.
I would like to thank our witnesses for taking the time out
of your busy schedules to appear before our Committee to
discuss a topic that was all but unimaginable just a few short
years ago.
For decades, the consensus among geologists, energy
producers, and policymakers was that oil production in the
United States was in permanent and irreversible decline.
However, advances in new technologies and the adaptation of old
technologies for new purposes have now made it economical to
produce enormous quantities of oil and natural gas in the
United States, which has substantially increased the volume of
our Nation's proven reserves of oil and gas.
The potential benefits of this new domestic energy paradigm
to small businesses and the broader economy are significant. As
the Subcommittee has previously examined, the full upstream
development of our Nation's oil and gas resources could produce
more than 1.4 million direct and indirect energy-sector jobs
and another 1.4 million jobs outside the oil and gas industry.
Many of these energy-production-associated manufacturing
jobs will be created by small businesses. Of course, these jobs
will only materialize if the United States responsibly utilizes
the abundant resources it has at its disposal. Unfortunately,
that is presently not the case.
In previous hearings, the Committee has examined upstream
challenges to realizing America's full energy potential,
predominantly those created by government regulations and
bureaucratic inertia. These upstream impediments include
policies that have made it difficult to obtain access and
permits to drill for oil on Federal lands.
However, it now appears that additional challenges are
emerging further downstream that could likewise reduce the
potential production of oil in the United States and jeopardize
the new jobs and other economic benefits that would result from
that production.
Specifically, there is growing mismatch between the
increasing amount of light, sweet-grade crude being produced in
the United States and the available utilization capacity of the
midstream and downstream refining sector to process this grade
of crude into high-value products such as transportation fuels.
The reasons for this are many, but they include previous
assumptions that the United States would import most of the oil
it consumed, and those imports are different grades of oil than
what the U.S. is producing today. There are also regulatory
requirements and other burdens that make it difficult to
significantly expand refining capacity in the United States.
The solutions to these challenges are complex. They are not
only including building up the refining capacity but may also
include ending of our Nation's de facto ban on petroleum
exports, which proponents claim would address downstream
challenges to upstream oil production and help facilitate a
reduction in the price consumers pay at the pump for gasoline
and other transportation fuels.
In relation to the matter of oil exports, today's hearing
couldn't be more timely. As Members may know, according to
reports, the Obama administration may soon approve licenses for
two companies to export minimally produced petroleum
condensates. Whether this is a significant step or an interim
step in addressing the oil supply and refinery utilization
challenges and what impacts it will have on domestic fuel
prices is a question that I believe today's witnesses will help
answer.
I would now like to yield to Ranking Member Murphy for his
opening statement.
Mr. Murphy. Thank you, Mr. Chairman.
And thank you all for being here.
Excuse my voice. It was a very exciting baseball game, and
I got a little raspy last night.
Today, America is producing more oil than we have in
decades. In 2013, domestic oil production reached its highest
level since 1989 and helped satisfy nearly half of America's
oil demands. These developments in drilling are now leading to
changes in the American refining industry.
Over the last 10 years, refiners have faced several market
challenges based on various factors. Because of changes in the
U.S. market, refiners have had to confront possible long-term
reductions in demand, and they responded by cutting costs,
reducing capacity, and closing facilities.
But, now, new, cheaper crude oil is leading to the
expansion of existing refineries and the reopening of many
shuttered ones. After a period of refinery closings and several
decades after no new single large refinery had been built in
the United States, a few new refineries are being planned or
built in North Dakota, Texas, and Utah. These refineries and
expansions that are scheduled to be completed over the next few
years represent roughly $5 billion in investments in the
refining industry.
With new oil sources and types of crude, this industry must
adapt to the changing market. These new conditions are growing
our domestic refining capacity and making smaller refineries
more competitive.
Our hearing today will focus on how to make this industry
more efficient by analyzing the strategic investment and
operating choices by oil refineries in response to the changing
market. We will also look at how these decisions affect
downstream gas prices and small businesses.
The refining industry is subject to environmental rules
that are designed to increase energy efficiency and reduce
energy production's impact on our climate. Standards for
greenhouse gas emissions, Tier 3 rules, and renewable fuel
standards all play a part in the planning necessary to small
refiners and producers but also serve a critical purpose in
reaching our Nation's environmental policy goals.
I also look forward today to hearing about the ongoing
debate surrounding the ban on domestic oil exports. Some
experts claim that continuing the ban is critical for
protecting American jobs, while others claim that lifting the
ban could lower gas prices and help our economy.
As we examine the policies that make oil production and the
refining industry more efficient and that impact their business
decisions, it is important to understand the potential effect
that these changes have on small-business energy consumers. A
healthy economy requires a thriving small-business sector, so
we must ensure small firms continue benefiting from the recent
developments in the energy industry.
I thank the witnesses for being here today, and I look
forward to your comments.
Thank you, Mr. Chairman.
Chairman Tipton. Thank you, Mr. Murphy.
If the Committee members have an opening statement
prepared, I would ask that they submit it for the record.
I would like to be able to take a moment to be able to
explain our timing lights that are in front of you. The light
will start out as green. When you have 1 minute left, it will
turn to yellow. And then when it turns red, if I would
summarize your comments, we would appreciate it. We do have
votes that are going to be coming up shortly, and so, if we can
kind of stay on schedule, it would be much appreciated.
I would like to begin with our first witness. I would like
to welcome Mr. Russell Smith. He serves as executive president
of Quantum Energy, a small business in the process of building
five small-scale refineries in North Dakota. In addition to his
experience in the energy industry, Mr. Smith has also worked in
the technology, defense, and healthcare industries.
Mr. Smith, thank you for taking the time to appear today,
and please deliver your testimony.
STATEMENTS OF RUSSELL SMITH, EXECUTIVE VICE PRESIDENT, PUBLIC
AFFAIRS, QUANTUM ENERGY, INC., WILLISTON, NORTH DAKOTA; KEVIN
BOOK, MANAGING DIRECTOR, CLEARVIEW ENERGY PARTNERS, LLC,
WASHINGTON, D.C.; JARED BLONG, CEO AND PRESIDENT, OCTANE
ENERGY, MIDLAND, TEXAS; AND GREG DOTSON, VICE PRESIDENT FOR
ENERGY POLICY, CENTER FOR AMERICAN PROGRESS, WASHINGTON, D.C.
STATEMENT OF RUSSELL SMITH
Mr. Smith. Thank you, Mr. Chairman, Ranking Member Murphy,
and members of the Committee. Thank you for the opportunity to
come before you today. Much appreciated.
I would like to discuss some issues that are important for
small business, not only in the oil and gas industry, but also
in the agricultural, retail, services, and mom-and-pop business
community in the Williston Basin and the Bakken shale
formation.
Quantum Energy is here before you as a development-stage
company. We are currently in the capital acquisition process to
build five 21st-century energy centers that will consist each
of one 20,000-barrel-per-day microrefinery, a 100,000-barrel-
per-day natural gas, or NGL, stripping facility, and a CO2
recapture capability for use in downhole recovery enhancement.
As a development-stage company, we have had to make some
tough decisions in the early stages of our business planning
processes. The toughest of these decisions was facing the
reality that EPA emissions regulations have basically put a
limit on the feedstock size of new refineries to avoid being
classified as a major refinery.
That threshold is required because the emissions, if you
work backwards, limit us to 20,000 barrels per day. And that is
evidenced by the Montana-Dakota Resources new refinery
currently being built near Dickinson, Montana. That refinery,
when it comes on line later this year or early next year, will
be the first greenfield refinery built in the United States
since 1976, which is an important development and one we look
forward to, in essence, copying the process that they went
through.
The economic model that drives our current business plan is
built around a pressing need for local and regionally refined
supplies of diesel fuel in the Williston Basin and a very
pressing need for local and regionally refined propane in the
Upper Midwest and the northern mountain west States. Both
supply deficits have created distinctly higher prices for these
essential commodities.
The region currently has a daily need for over 55,000
barrels per day of diesel, a need which will grow over the
coming 18 to 24 months to exceed 75,000 barrels per day. The
region's sole legacy refinery meets only approximately 28,000
barrels per day of this need. This new microrefinery outside of
Dickinson will meet another 6,000 to 7,000 barrels per pay.
Our five 21st-century energy centers will, using a similar
design to the Dickinson refinery, each produce 6,000 to 7,000
per day, for an aggregate of 30,000 to 35,000 barrels per day
of new diesel. In aggregate, that will then mean that these
seven refineries will be meeting 85 to 90 percent of the
region's diesel requirements within the 24- to 36-month
timeframe.
Likewise, our NGL-stripping facilities will provide the
opportunity for relief from skyrocketing propane prices in the
greater region. Low- and middle-income families are struggling
under the burden of these prices, particularly in rural areas,
where propane is the most common home heating fuel.
We additionally believe that our NGL-stripping facilities
deliver a refined crude product that meets the language
contained in the 1970s-era rule that banned the export of
nonrefined crude from the lower 48. The language in that rule
that comes the closest to providing a definition of ``refined
crude'' surrounds crude that has passed through a distillation
tower. Our NGL-stripping facilities do utilize distillation
towers and, as such, we believe, meet that standard.
As the production in the Bakken continues to ramp up from a
current level near a million barrels per day to an anticipated
2 million barrels per day in the next 3 to 4 years, the
domestic refining capacity, which is already struggling to
handle the supply, may force a slowdown in production growth.
This will be harmful to producers, the local economies, and the
continued growth of good, well-paying jobs throughout the
region.
Therefore, in the absence of an abolition of the ban, we
strongly feel that locally refined and NGL-stripped crude made
available to the export markets can play a vital role in
alleviating any potential slowdown in the growth of Bakken
production.
In summary, local and regional refining capacity helps:
one, producers, large and small, through limiting impediments
to both increased drilling and production while opening
potential export markets in an age of a global economy; number
two, local and regional economic development by reducing prices
and increasing the local and regional supply of vital
commodities such as diesel and propane; and, third, low- and
middle-income families through provision of the above-mentioned
benefits.
Members of the Committee, we thank you for the opportunity
to appear before you, and we welcome any questions.
Chairman Tipton. Thank you, Mr. Smith.
I would now like to introduce Kevin Book. He serves as
managing director of ClearView Energy Partners, an economic
analysis firm with expertise on energy issues. In addition to
his work at ClearView, Mr. Book was appointed to serve on the
Department of Energy's National Petroleum Council Advisory
Committee.
Mr. Book, thank you for being here, and we look forward to
your testimony.
STATEMENT OF KEVIN BOOK
Mr. Book. Thank you, Chairman Tipton, Ranking Member
Murphy, and distinguished members of the Committee, for
inviting me to appear before you today.
My name is Kevin Book, and I head the research team at
ClearView Energy Partners, an independent firm headquartered
here in Washington, D.C., that provides macro-level analyses to
institutional investors and corporate strategic planners.
My testimony today suggests that, even as many Americans
celebrate the renewed production of light, sweet crude oil,
current trends may be creating an unstable equilibrium. Shale
oil production has been growing incredibly fast. Demand has
been growing fast, too. Newfound U.S. volumes have gone to
three principal outlets: increased refinery utilization;
displacement of imported light, sweet crude; and exports to
Canada.
In my written testimony, there is a picture, Figure 1,
which shows the growth of shale oil supply relative to those
three outlets, and it looks pretty balanced. But there are
several caveats.
First, petroleum refining is a manufacturing process that
requires a certain amount of downtime to ensure safety and
optimal performance. This limits the extent to which existing
capacity can absorb incremental crude volumes without capacity
expansions. Refiners have already ramped up their throughput
considerably.
Second, domestic production has already replaced nearly all
of the volumes of light, sweet crude previously imported into
the east coast and the Gulf of Mexico.
Third, during the course of the last 2 decades, much of the
U.S. refinery fleet was upgraded to process heavy, sour crude
that tends to yield a thicker cut of the middle distillates
that earn a premium relative to other products, such as
gasoline. As the U.S. crude mix gets lighter and sweeter, U.S.
producers must offer the Nation's newly upgraded refiners
discounts to encourage greater acquisition of a less suitable
feedstock.
Fourth, and perhaps most importantly, many government
agencies and private forecasters expect U.S. crude production
to continue growing in the years ahead, likely exhausting
import substitution here in the U.S. and eventually in Canada
and outgrowing the ability of U.S. and Canadian refineries to
increase their runs without expansions or modifications. This
creates the prospect that the U.S. could soon become saturated
with light, sweet crude, driving the price down here at home.
Despite high global prices, widening discounts to global
prices could discourage new upstream investment. Most producers
plan their drilling programs 6 to 12 months ahead, but the
smaller investments involved and faster completion of shale
wells theoretically offer them the ability to change their
drilling plans in the event that saturation leads to a
sustained atypical discount. My cursory examination of the
correlation between West Texas Intermediate and Bakken prices
and rig counts suggest somewhere between 4 and 8 months of skid
marks between a price collapse and a production slowdown.
It is no secret that shale oil has benefited producer
States in the Nation at large. A jobs multiplier may be
responsible, meaning that States don't just realize direct
economic benefits from upstream production activities but also
the benefits from activities indirectly associated with
production as well as the jobs induced by new income. Put
another way, oil and gas production jobs may have
disproportionate economic impact because of this multiplier.
And it may be worth considering the extent to which a jobs
multiplier could also work in reverse if saturation leads to a
production slowdown.
Current U.S. crude-oil export prohibitions tend to favor
refiners, especially low-complexity refiners that rely on
light, sweet crudes, by providing them with discounted
feedstock relative to their global competitors. Trade
statistics from the U.S. Bureau of Economic Analysis show that
the combination of importing less petroleum of all kinds and
exporting more refined products appears to be responsible for
roughly $40 billion per quarter in combined trade benefit.
It may be tempting to extrapolate from the status quo and
conclude that continuing current policies might perpetuate
these economic benefits, particularly if U.S. refiners add
capacity. On the other hand, that may not be true for several
reasons, even without liberalized crude-oil exports. Saturation
could lead producers to pare back upstream investment.
Alternatively, significant downstream capacity expansions could
exert upward pressure on feedstock costs from the demand side.
However they come about, higher costs could weaken the
business case for new refining capacity. That said, even if
U.S. crude prices rise, U.S. refiners appear likely to continue
to enjoy lower process energy costs, thanks to cheap natural
gas, contributing to their overall competitive advantage.
In conclusion, producers may be soon selling their crude at
deeper discounts relative global prices, while refiners must
consider whether to commit capital to new infrastructure,
predicated in large part on these feedstock discounts. I
believe that moving as quickly as possible towards a clear and
durable policy decision regarding crude-oil exports appears to
be in the interest of all parties.
Mr. Chairman, this concludes my prepared testimony. I look
forward to any questions at the appropriate time.
Chairman Tipton. Thank you, Mr. Book.
I would now like to introduce Jared Blong. He serves as
president and CEO of Octane Energy, a small business that
provides oil field services, headquartered in Midland, Texas.
Mr. Blong and his partner started their business last year and
currently employ 12 workers.
Mr. Blong, thank you for being here, and we look forward to
your testimony.
STATEMENT OF JARED BLONG
Mr. Blong. Thank you, Chairman Tipton, Ranking Member
Murphy, members of the Subcommittee. My name is Jared Blong,
and I serve as chief executive officer and president of Octane
Energy, a Midland, Texas-based small business that provides oil
field services to oil and gas exploration companies. It is an
honor to address you today on the critical subject of crude-oil
exports and the downstream challenges facing small energy
businesses.
Today I have the privilege of speaking to you not as a
representative of a special interest group or a research firm
but, instead, from the perspective of a small-business owner
from the heartland of the American energy industry--real boots-
on-the-ground perspective from a small-business owner who could
very well succeed or fail based on the policies you adopt.
Octane Energy is truly a small business. Our company was
founded in 2013 in response to the energy renaissance our
country is experiencing. We have a staff of 12, of which 50
percent are veterans of the American forces, and we hope to
double in size over the next 12 months.
Our company is on the front lines of the energy resurgence.
We see firsthand how this energy renaissance has positively
impacted jobs, how it has created greater sustainability in a
historically cyclical market, and how it is helping to achieve
energy security for our country.
But I also see unnecessary hurdles that could limit the
opportunities for U.S. businesses. For instance, the 1970s-era
policy banning oil exports is creating growing market
distortions and needs to be revisited. This policy prevents our
small business and others from growing as we otherwise could,
prevents us from creating jobs as we otherwise could, and, most
importantly, prevents our country from being as energy-secure
as it otherwise could.
Let me explain how.
First, I should state that our small business, like many
other small businesses involved in the energy industry, is
directly impacted by the rig count--that is, by the number of
rigs that are actually drilling for oil and gas in the United
States. The more rigs that are drilling in the United States,
the more people I can employ, as a general rule.
In addition to simply adding numbers to our team of people,
the quality of jobs is also very notable. As an example, in
Octane's consulting practice, we can conceivably add up to four
well-site leaders per rig at a typical remuneration of $220,000
per year per team member. We also are in the process of
establishing a drilling company, which will require up to 25
employees per rig, with an average annual pay of $76,000 per
employee.
Many of these folks we seek to employ are American veterans
who possess small-unit leadership skills and an intrinsic
appreciation for teamwork, sweat, and rigid operating
procedures that are crucial to exceeding mission objectives in
the energy industry.
Lifting the ban on oil exports would ensure sustainability
of these well-paying jobs in our company and in companies
around the industry. The same goes for catering companies that
feed rig hands, restaurants in those communities nearby, for
steel manufacturers that make drill pipe, for countless other
businesses that take part in supporting energy exploration and
production.
Creating a sustainable and increased rig count is directly
tied to lifting the export ban and will facilitate Octane
Energy's direct investment in the manufacturing of an American-
made rig fleet, which will also create secondary and tertiary
job growth. The $12 million to $15 million manufacturing
investment for each Octane rig would create and sustain jobs in
New York for the production of shale shakers, in Illinois for
the manufacture of mud pumps, and various locations in Texas
for drill pipe, automation, and iron, just to name a few.
Current U.S. policy is artificially suppressing that very
rig count and thereby suppressing U.S. jobs, manufacturing
investment, tax revenue, as well as oil and gas production--by
a lot, as it turns out. If it is suppressed, we have reduced
investment, which means fewer rigs. Fewer rigs means fewer rig
hands and support services, fewer oil field service companies
like Octane, and fewer people employed at well-paying jobs.
So, today, on this hill, America finds itself at a
crossroads: Do we cap oil production or allow exports?
At a time when unemployment sits at nearly 7 percent and
first-quarter GDP in negative territory, the energy sector has
sustained and added jobs for millions of Americans, both
directly and indirectly, through energy production, service and
equipment companies. As an example, the unemployment rate in
the Permian Basin is currently 2.3 percent and has been below 4
percent for the last half-decade.
By supporting the export of domestically produced crude,
U.S. lawmakers can counteract the national trends in the form
of increased jobs, GDP, tax revenues, not to mention helping
put veterans to work as they return from battle and transition
to civilian life.
I ask you to consider the course of our energy future. The
world has changed significantly since the OPEC oil embargo and
enactment of Federal regulations in the 1970s. Today I ask you
to take a stand for a fundamental principle: that the role of
government is to enable its people and to remove unnecessary
roadblocks that stand in the way of our national security and
prosperity.
Thanks for considering our views.
Chairman Tipton. Thank you, Mr. Blong.
And I would now like to yield to Ranking Member Murphy for
introduction of our next witness.
Mr. Murphy. Thank you, Mr. Chairman.
It is now my pleasure to introduce Mr. Greg Dotson, vice
president for energy policy at the Center for American
Progress. For more than 18 years, he was the lead environmental
and energy staffer to Representative Henry Waxman and top
staffer on the House Energy and Commerce Committee and the
House Committee on Oversight and Government reform.
Welcome, Mr. Dotson.
STATEMENT OF GREG DOTSON
Mr. Dotson. Chairman Tipton, Ranking Member Murphy, and
members of the Subcommittee, my name is Greg Dotson. I am the
vice president for energy policy at the Center for American
Progress. Thank you for the opportunity to testify today
regarding the future of the oil industry.
There are three main points I would like to make today. One
is that U.S. oil production is up and is expected to increase,
but this does not insulate the country from price shocks in the
global oil market. Second, lifting the crude-oil export ban
could have negative economic and environmental impacts on the
Nation. And, third, energy policy decisions should be made in a
way that helps to mitigate the serious threat of climate
change.
I am submitting a lengthier statement for the record, but
because the crude-oil export ban has been a topic that has come
up repeatedly, I will focus my oral testimony on that issue.
For decades, oil in the U.S. has been characterized by
ever-increasing demand and declining domestic production. We
were relying more and more on imported oil. But this has
changed in recent years. Since 2008, we have experienced a
transformation in our oil markets. New tailpipe standards for
cars and trucks are curbing pollution and bringing increasingly
efficient vehicles to market, and our oil consumption is no
longer on the rise.
New technology and policy have unlocked additional oil
supply. North Dakota is producing more oil than previously
understood to be possible because of new drilling technology.
Heavier and dirtier forms of oil, such as the Canadian tar
sands, are being brought to market. North America is awash in
oil for the time being.
But this new oil supply doesn't ease the challenge of our
Nation's dependence on oil. Global demand for oil is still on
the rise. Supply disruptions in far-flung areas of the world
still impact the prices we pay here. Just look at what is
happening due to the situation in Iraq.
Oil is a global commodity, and, absent unique regional
market conditions, prices are generally set by the world
market. Experiences in other countries show that price spikes
are not prevented or mitigated by higher levels of domestic oil
production.
The nonpartisan Congressional Budget Office examined
gasoline prices in Canada, the United States, and Japan over
the last decade. CBO found that gasoline prices in those
countries rose and fell in tandem with the world market, even
though Japan produced almost no oil, Canada was a net exporter,
and the United States produced less than half of its own oil.
More domestic supply did not protect Canadian consumers from
price shocks.
Some have cited a recent study by IHS to argue that lifting
restrictions on oil exports will reduce global oil prices and
save American consumers money through 2030. It would be prudent
to approach this study with a good deal of caution. The IHS
study essentially suggests that, rather than reduce our
dependence on oil, the United States should double down on our
dependence on oil. The study is not on strong ground in making
that recommendation, and I would like flag two points related
to that.
First, the study assumes that there is a vast domestic
resource base that will support a massive increase in oil
production for decades to come. This assumption differs from
that of the U.S. Energy Information Administration's Annual
Energy Outlook for 2014. The EIA's reference case projection is
a business-as-usual trend estimate given known technology and
technological and demographic trends. The reference case
projects that domestic oil production will peak in 2019 and
then begin to decline.
That is a point that is very important to emphasize and one
that I don't think you have heard earlier today. EIA suggests
that there may be more oil, much more oil than that, but they
also say there may much less oil than that. And that is a huge
uncertainty that should be resolved prior to taking rash action
on the crude-oil export ban.
There is another aspect of the study that deserves further
examination. The study assumes that the U.S. is able to boost
oil production to such a degree that it decreases world oil
prices significantly and that American households are able to
enjoy those reduced prices unabated through 2030. This
assumption deserves serious scrutiny.
The Congressional Budget Office has stated that, even if
the United States were to develop additional resources, this
process would take years, and oil producers around the globe
would likely respond by constraining their development,
dampening the effects of increased production on prices. CBO
stated, and I quote, ``Increasing production of oil in the
United States might not increase the world's oil supply
substantially or lower the price of oil significantly.''
That means that even if increased domestic production could
reduce oil prices, such price reductions could be short-lived,
severely undermining the policy argument advanced by the IHS
study. That is why we need to reduce our dependence on oil
overall, not just from other countries. The less oil we use as
a Nation, the less impact we will feel from international
disruptions in oil markets.
Thank you. I am happy to answer questions at the
appropriate time.
Chairman Tipton. Thank you, Mr. Dotson, for your testimony.
We will now move into the questioning phase, and I would
like to begin with Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Mr. Dotson made some interesting remarks there.
I was just kind of curious, I saw something the other day
that we have, like, 800 years' worth of oil that we have now
found here in the United States. Is that correct? Can anybody
answer that question?
Mr. Dotson. I think----
Mr. Luetkemeyer. What the volume of supply is that is known
and anticipated to be able to be touched and tapped in the next
100 years?
Mr. Dotson. Congressman, I would be happy to expand on my
remarks slightly. The----
Mr. Luetkemeyer. Well, Mr. Dotson, everything you said in
your--I wrote down the words ``could,'' ``may,'' ``might,''
``maybe,'' ``could happen.'' I never heard anything definitive
from you. I am looking for somebody who can give me a definite
answer on how much they think is underneath the ground here.
Mr. Book. I can give you a different answer that isn't
definite, which is that, in the history of oil production, we
have run out a bunch of times, and it has never happened. And
the reason is that our understanding of what can be
economically produced from existing technology is always
undercounting the success of our innovation and our ability to
respond to price signals.
We are in a pretty high-price environment right now, I
don't think anyone is missing that point, and the innovation is
going crazy. We are at the very beginning of our learning curve
on formations, but we have no idea of what the tails look like.
I think it is reasonable to expect, based on history, that we
are going to see far more than we currently think we are going
to get, not less.
Mr. Luetkemeyer. Well, it would seem to me, you know, to
follow your line of thought, Mr. Book, I think that that would,
you know, certainly undermine many of the arguments that Mr.
Dotson made about concerns about production down the road,
about prices, you know, production may decline. I don't know
where that remark comes from, but all of the things I have seen
is natural gas, coal, all the fossil fuels, including oil,
there is more and more that is being found.
And, Mr. Book, you make the point that, as we continue to
develop new technologies and new ways of getting it out of the
ground, it makes more of it available. We can go back to old
oil wells, if I am not mistaken, and pull some old oil back out
of those wells and make them profitable again. I assume that
that is still the case. I mean, I have been told this by many
people in the business.
I guess, Mr. Blong, you are in the business of putting
these rigs together. I am kind of curious, what does a rig cost
to put up and then to operate? You said 25 people to run it.
The actual physical-structure rig, what does it cost? And then
how much capital does it take to operate the rig?
Mr. Blong. So capital expenditures for a drilling rig, at
least of our design--and they vary, obviously, from company to
company, and those range, generally speaking, from $12 million
to $25 million. For our design, we are looking at deploying
from $12 million to $15 million per unit.
Mr. Luetkemeyer. So when you decide that you want to drill,
what is the anticipated amount of oil that you have to pull out
of the ground to be able to make that thing work? So many
barrels per day? Per month? Or how do you do that?
Mr. Blong. Right, so, fortunately for us, we work for the
companies that are extracting that oil from the ground, and we
are the means to that extraction. So, for us, the internal rate
of return on that well is important from a sustainability
standpoint for our company, because we want to continue
working. So if our customers are realizing the quantity of oil
that they want out of each wellbore, then it would make sense
for us to continue on and sustain those jobs and that sort of
thing.
Mr. Luetkemeyer. One of the comments you made, though, was
that, you know--and I think I saw it in your testimony or
somewhere--I mean, I think you made the point, as well, with
regards to being able to sort of turn these things off and on.
I mean, you could do it every 3 or 4 months, you could ramp it
up with a rig, and then you could ramp it down.
Is that possible? I mean, when you have the kind of
investment out there, are you looking to be able to have that
sort of flexibility, be able to move this around?
Mr. Blong. I don't recall that particular portion as my
testimony that was submitted.
Mr. Luetkemeyer. Maybe I misunderstood what you were
saying.
Mr. Blong. Yes, sir.
You know, I will speak in maybe a broader brush. In our
opinion, you know, the Permian is a really great case study for
the first portion of your question that you addressed and then
the secondary part. You know, we have been commercially
producing oil in the Permian Basin for almost a century, and we
continue to find new horizons to drill into, which makes our
basin somewhat unique in the North American landscape and,
really, the global drilling landscape, for that matter.
So ramping up and ramping down I don't think is really the
key question that we are asking our customers, that our
customers are asking of us. The question more is, how can we
delineate and develop this in almost a manufacturing
environment, where we gain efficiencies, thereby increasing
their rates of return so they can continue to deploy rigs and
capital into the field? That allows them to continue to
produce.
But the turning off and turning on, I wouldn't be able to
speak to that with any level of conviction.
Mr. Luetkemeyer. Okay.
I see my time is up, but I was kind of curious, also, about
the numbers of refineries and how that may be a chokepoint for
being able to access and produce and really flood the world
with oil and oil products, but I am sure the chairman will get
into that.
I thank you for your time and your testimony.
Thank you, Mr. Chairman.
Chairman Tipton. Thank you, Mr. Luetkemeyer.
I would now like to turn to Mr. Schrader for his questions.
Mr. Schrader. Thank you, Mr. Chairman.
Mr. Smith, just a little background. I am not an oilman.
The original ban set up in the 1970s, can you give a quick, you
know, why it was set up, what was the rationale, and why that
may not be applicable right now, in your opinion?
Mr. Smith. To the best of my understanding, having been
somewhat young at the time, the original rationale came out of
the Arab oil embargo. I think that was the motivation for the
act that was passed in 1975.
It was an interesting piece of legislation, in that, rather
than provide a legislative prescription for exported crude, it
was essentially an authorization bill that gave the
administration the authority to do a rulemaking.
And the rulemaking is somewhat vague. I actually have with
me a Congressional Research Service paper that looked into the
history of the bill, Mr. Schrader, and examined what
definitions existed in the bill. And it is interesting that the
language of the rule that was issued does not explicitly define
``refined crude.''
What it does define is ``crude.'' And that definition, I
will read it very quickly, sir. I think it is relevant.
``'Crude oil' is defined as a mixture of hydrocarbons that
existed in liquid phase in underground reservoirs and remains
liquid at atmospheric pressure after passing through surface
separating facilities and which has not been processed through
a crude oil distillation tower.''
That is the only definition of ``crude.'' But, by
inference, one could say that refined crude would be something
that had been passed through a distillation tower. That is the
part of the process that is involved in our natural gas
liquids, or NGL, stripping facilities.
Mr. Schrader. Okay.
Mr. Smith. And I think that, as that affects the ban
itself, it also impacts some of the downstream refining issues
that we have mentioned. Because some of the issues, Mr.----
Mr. Schrader. Can I just stop you there?
Mr. Smith. Yes, sir.
Mr. Schrader. I appreciate that. That is a very thorough
explanation, most of which went over my head, but I am sure my
staff will explain it to me later.
Mr. Dotson, would you comment also, your perspective also?
Mr. Dotson. On the crude-oil export ban?
Mr. Schrader. Yes.
Mr. Dotson. I think, you know, essentially what we are
seeing right now is a discussion that is happening within the
oil industry. And the producers see that they can perhaps get a
few additional dollars per barrel if they are able to bypass
the domestic refining sector and export directly overseas.
And I think, from the refiners' perspective, they say: We
have made hundreds of billions of dollars of investments in
this refining infrastructure. We have good-paying jobs today.
We have skilled workers. Don't bypass us.
In fact, the Congressional Research Service said that
lifting the crude-oil export ban could affect refining
operating margins and, they say, quote, ``may result in some
refineries ceasing operations.''
So I think there are economic reasons to really take a very
close look at this, and there are environmental reasons, as
well.
Mr. Schrader. Mr. Blong, do you--just trying to get
perspective here. Mr. Dotson has indicated there may be an
opportunity for increased excess capacity, refining capacity,
right now. Your testimony seemed to indicate the opposite a
little bit. Where are we on that, in your opinion?
Mr. Blong. We feel that the chokepoint, more than the
refining sector, is really in the transmission sector still--
pipelines getting that crude oil, or railcars, for that matter,
getting crude oil to market, wherever that market may be most
economically viable for that particular product and that
particular basin.
Contrasting Mr. Dotson's remarks, however, we have 10,000
operating companies, or producers, in the U.S. that we would
consider as independents, and they have no stake in refineries.
And so they are forced to essentially take a discount simply
because they don't have the organizational wherewithal or
financial structure to have that investment in a refinery,
whereas the super-majors, as we call it in the industry, or the
integrateds, have that excess.
And we feel like that is a disproportionate and maybe
somewhat governmentally augmented advantage that is given to
those integrated companies versus the small operators that are
really the ones driving this shale revolution.
Mr. Schrader. I guess a question for Mr. Blong, Mr. Book,
and Mr. Smith, from my standpoint, is, you know, if we go ahead
with the increased oil/gas production, there is a big concern
by a lot of people in America, regardless of where you
personally are on the issue, about greenhouse gas emissions.
So how do we deal with that concern? You know, the oil
could be a great export opportunity, could maybe drive prices
down worldwide, maybe we have centuries of it, but how do we
answer the concerns of folks about how do we keep that
production from destroying our climate at the same time?
Is that okay, Mr. Chairman, to ask those three guys?
Chairman Tipton. Go ahead.
Mr. Smith. One of the new technologies that is coming out,
it is very cutting-edge, it is one that we are strongly
examining using in our microrefineries, Mr. Schrader, is the
CO2 recapture capability. And there is a large market for that
in the downhole recovery enhancement that was mentioned by the
other Member earlier asking about reworking some of these old
wells.
This is a great opportunity to take that CO2 out of the
emissions that are a resultant from the refining process and
basically go bury it in the ground. There is a market for doing
that, because you are helping rework old wells and enhance the
production of existing wells. And so it is a get rid of it, get
rid of the bad stuff, in a really good way. And there is a
market for it.
Mr. Schrader. Mr. Book?
Mr. Book. Thank you for the question.
Generally speaking, producing hydrocarbons corresponds to
greater amounts of greenhouse gases. That is a fact. But there
are different ways of producing those hydrocarbons. More
venting and flaring, more greenhouse gases into the atmosphere.
Good operating practices here in the U.S. can make our crudes
potentially less greenhouse-gas-intensive than overseas crudes,
which would mean that if we were to export and displace other
production elsewhere, we might have small, but significant over
time, differential results.
Most of the impact really has to happen on the demand side.
And ultimately what you are seeing is that, along the way, some
of the interim steps include things like using carbon dioxide
as a way to get more oil out of the ground and storing that
carbon dioxide as a consequence of production in the geological
formation.
So there are small opportunities, but you wouldn't want to
oversell it.
Mr. Schrader. All right.
And Mr. Blong?
Mr. Blong. I can speak to our company from the drilling
perspective, really, most efficiently, and that is, you know,
innovation has really started to impact the notion of greening
up the oil patch, if I can use that term.
Drilling companies like ours and many counterparts are
looking at bi-fuel solutions where we are using that flare gas
that is typically seen if you drive through the oil patch and
see flares going about. You can recapture that energy in power
drilling rigs, which offsets an incredible diesel expenditure
as far as just sheer consumption.
Some other things that we are looking at implementing
specifically is waste-heat capture using the organic Rankine
Cycle to generate fuel-free, emission-free electricity off of
those bi-fuel motors, engines, generators, so that we are
capturing more of that energy and putting it to good use,
rather than it simply just being a waste product.
So, within the context of the drilling industry, those are
just a couple of examples of what we are trying to do to deal
with that more from an innovative perspective. And we see that
if we lead out in that effort that the production community
will follow suit.
Mr. Schrader. Thank you very much.
I yield back, Mr. Chairman.
Chairman Tipton. Thank you, Mr. Schrader.
Mr. Huelskamp?
Mr. Huelskamp. Thank you, Mr. Chairman.
I appreciate the opportunity to be at this hearing and
visit with the gentlemen here that are talking about the
restrictions on your business.
I am a cosponsor of the Bridenstine bill that was
referenced earlier, as I believe we need to lift the
restrictions to allow you to actually continue to do your
business and actually create some more American jobs, which are
in desperate need in many areas of the country.
But I want to shift gears to a very specific topic and, I
believe, a specific threat to the industry, and that is the
Endangered Species Act and the efforts by a number of
environmental groups to use that to impact and shut down parts
of your industry.
In May, the lesser prairie chicken, which I understand is a
very tasty bird, was listed as threatened. And in my district
in western Kansas, it has essentially shut down a number of
operations, not just temporarily till the mating season is
over, but we are hearing many cases where drilling rigs are
pulling out permanently, leases are going away, they are not
happening, because folks are not going to take that risk.
Because there is a $25,000 to $50,000 fine not only for killing
the bird, but if you would somehow impact the habitat, which is
very undefined.
But the truth is, with the lesser prairie chicken, here
supposedly the historical habitat area, that also happens to
match up with something called a drought. And, ladies and
gentlemen, until it rains--and I am trying to get this message
across to the Fish and Wildlife Service--until it rains, you
are not going to grow any habitat. And so hopefully it will
start raining.
But one thing I do want to note, that the impact is--
because of the sue-and-settle strategy, in which environmental
groups have sued, settled basically out of court with the
Federal Government and cut a deal that could lead to the
listing of 250 new threatened or endangered species--and I know
that, after the lesser prairie chicken, the next one is the
sage grouse, which will impact a lot of areas.
But the reality is that folks in this industry are not
going to take the risk of a $50,000 fine or going to jail for a
bird they may never see or for a habitat that is undefined. But
what we have seen, particularly with the sagebrush lizard,
which is not in my area, and I think it might be in Mr. Blong's
area, you had a voluntary conservation effort between the
industry, and it was able to say, hey, we don't need that, we
can take care of it ourselves without a Washington approach.
So, Mr. Blong, I don't know if you have any background with
the sagebrush lizard, but can you tell how your industry works
together to do this in a voluntary manner to preserve and
protect our species?
Mr. Blong. One of the things that we have seen in the
Permian Basin, in particular, which is really the epicenter of
the North American energy renaissance now, is an unusual
collaboration effort that has not historically been seen on
that front. And I would be reckless to say that it was simply
economically driven. I think the Permian Basin houses some of
the most entrepreneurial and innovative people in the country,
where opportunity exists, as we mentioned, to create jobs, but,
in light of that, we also see some of the finest stewards in
North America in our basin.
And if any of you have traveled there, it would appear to
the eye that there is not a whole lot to be stewards of. We
happen to live in a very flat north Chihuahuan desert with lots
of mesquite scrub brush.
So the fact that we are really taking the initiative to
meet with regulators not just simply in Washington but in
Austin and Santa Fe, as well, which are the other areas that
are affected by what we are doing, or trying to do, I would say
that operators, the service contractor community, both are
really taking an aggressive initiative to say: Listen, we can
collaborate and work together, because we all have a vested
interest. We actually all live here. Water matters to us. Our
surroundings matter to us. We are raising our children in this
place. So why on earth would we be so haphazard with our home,
our own backyard?
Mr. Huelskamp. Well, I appreciate your efforts on that. And
that is a great example where it can be done voluntarily and
together with folks in the oil and gas industry as well as the
ag industry, which I am in, as well.
Mr. Book and Mr. Smith, any thoughts on these endangered
species efforts, which I think are directly going to impact
your industry?
Mr. Smith. Yes, sir. I think it is also interesting to note
that a number of the new technologies that are coming out, the
things such as I mentioned before, like CO2 capture, much more
responsible drilling practices than, say, you would have seen
even 15, 20, 30 years ago, pose far less of a threat to birds
than wind farms, for which the Obama administration has
recently issued an exemption from the raptor act to allow for
wind farms to slaughter as many eagles and hawks and owls as
they want, while you or I, if we shot one on our ranch, would
go to Federal prison.
Mr. Huelskamp. Absolutely.
Mr. Book?
Mr. Book. Yeah, I think that Mr. Smith made perhaps the
most important point, which is that the operating practices
have become decreasing invasive to the habitat of species,
whether they be endangered, threatened, or just out there. You
are seeing less surface impact in drilling operations now.
And I think it is safe to say that, also, what Mr. Blong
pointed out is very true; there is an incentive for companies
to become able stewards of their operating environments. And
there are histories here. The sage grouse was managed locally
sufficiently that it was deemed to be maybe at risk but still
just a candidate. There are good stories, there are good-news
stories in the history of species management and oil production
alongside it.
Mr. Huelskamp. Those are great to see.
And your point, Mr. Blong--if I might, Mr. Chairman, one
last thing--the idea that the folks closest, that actually live
there actually know a little bit more than some lawyers in a
courtroom somewhere, where it was at, to make a decision about
what happens in your area or my home area.
We are working hard, but until it rains in my area
significantly, it doesn't matter, you are not going to grow
anything. And I just can't get the lawyers and the bureaucrats
to understand that. So I appreciate you shedding some light on
that.
I yield back, Mr. Chairman.
Chairman Tipton. Thank you, Mr. Huelskamp.
I now recognize Ranking Member Murphy for his questions.
Mr. Murphy. Thank you, Mr. Chairman.
From my understanding, it sounds like some companies are
finding ways around the restrictions to export crude oil. Can
any of you explain how this is happening and what it means for
the smaller competing refineries that are actually following
the rules?
Go just in order. Mr. Smith, go ahead. Or whoever wants to
answer it.
Mr. Smith. Yes, I am not really aware of any individual
companies that are specifically getting around the ban, Mr.
Murphy. What some companies are doing is developing splitter
refineries, which do partially refine the crude.
And, again, in response to the Member's question about the
export ban, it is that distillation process that occurs in a
splitter refinery. So you are actually taking different
components of the crude off the crude, if you will, lighter
components that are often more volatile than the heavier
components. And their position is, as is our position, sir,
that that is exportable crude and falls under the definitions
of the rule that was promulgated after the 1975 act.
Yesterday, the administration announced that they were
going to offer an exemption for certain condensates. We do not
yet know specifically whether those are lease condensates or
plant condensates or a combination thereof. Those are different
processes that result in those condensates. But our position
would also be that that exception to the ban was a valid
exception under the language in the rule.
Mr. Murphy. Does anyone want to add anything?
Mr. Book. Well, part of the problem in answering the
question, Congressman, is that we don't know what BIS actually
did, other than what we can read in the newspapers.
Simply put, what seems to have occurred is that a subset of
the oil being produced from shale formations is being processed
in a fashion that BIS has deemed acceptable for export once the
processing is complete.
So that is a subset of a subset, and it is not necessarily
a very big change, but there is a lot of question about where
the line might be. I know yesterday I spent a lot of time on
the phone with my clients, who were trying to make sense of it,
too.
But whether this compromises other refineries is entirely a
question of the scale of its impact.
Mr. Murphy. Okay.
Mr. Blong. If I may reword the question, Mr. Murphy, or at
least regurgitate the question, can we speak to several
producers getting around the ban, I think what we have really
seen more than anything else is American ingenuity in its
finest working and business folks understanding the context of
the law and creating innovations, much like Mr. Smith's company
has done, to facilitate continued growth.
I certainly would say, from our perspective, not that we
are legal experts by any stretch, but it seems like they have
taken what is written in the law and understood that well and
are trying to play within the confines of those rules, but
innovatively and creatively as they can.
Mr. Murphy. Just as a follow-up, it was recently reported
that the Obama administration approved recently the export of
unrefined oil, and that was the first time in, I guess, nearly
4 decades.
How does that affect your business plan and other--I guess,
any of your industries and that of the refining industry?
Mr. Blong. Based on all the reports that we have read
really in the last 24-plus hours, I think it is too early for
us to tell, really. I think we are trying to interpret what
exactly has taken place and what the impacts would be on our
clients and our businesses.
Mr. Murphy. That is votes, so we are going to run out of
time here. Just real quick, I want to kind of switch gears a
little bit.
This is the Small Business Committee. You sort of alluded
earlier, I guess, Mr. Dotson, to the super-majors and their
prowess in the market. What can we do on this Committee
specifically? If there was one regulation, if there was one
rule, if there was one thing we could do to help small
businesses enter the market, help you grow, help you expand,
and help new startups, what would that be?
Mr. Blong. I think lifting this export ban is the place to
start. It de-risks the investments of the producers, which de-
risks the investments of drilling companies and consulting
firms like ourselves and everyone else down the line.
And so, when the investment community sees that their
investment is de-risked and has sustainability, which I think
really is the conversation at hand today more than anything
else, at that point in time, then we can create jobs and have
direct investment into American manufacturing.
Mr. Murphy. Okay.
Mr. Book or Smith, do you care to comment?
Mr. Smith. With respect to small businesses, you know, we
firmly believe that the development of increased refining
capacity here onshore will benefit both small businesses in the
areas where the refinery capacity is increased and also small
businesses that live along the food chain that would
potentially benefit from a lifting of the export ban.
Mr. Book. I would have to say that the oil price drives the
bus, and investment follows the price. And with that investment
comes a series of those indirect and induced jobs, many of
which are supplied by small businesses.
And so what you want to do is keep the investment going.
And you can do that with policy that is clear so that you can
make investment decisions and count on what the future looks
like. Opening up U.S. crude to the world should help keep that
investment going.
Mr. Murphy. Okay.
Mr. Dotson, can you comment on that, as well, and maybe
talk about some of the recent EPA regulations, like Tier 3 and
GHG and RFS rules and if that will hurt small operators and
refining companies?
Mr. Dotson. Sure.
Just on the small-business point, I would say refining is
such a capital-intensive sector that having small businesses
enter that sector and compete is a very unlikely proposition.
As my co-panelists have said, production, though we are seeing
lots of small-business activity there. And that is booming
right now. And I don't know that there is--I would actually say
I am not sure that there is action necessary by Congress on
that boom, because it is growing so quickly. In fact, you will
read press articles about how the industry is actually having
problems identifying workers to participate and they are
growing so quickly.
With regard to the environmental regulations, I would say
140 million people in the United States still live in areas in
which there is more air pollution than is considered healthy.
And so EPA's mission in implementing the Clean Air Act is just
to attempt to protect public health.
They have finalized Tier 3. That is a set of emission
standards for cars and trucks, and it also requires cleaner
fuels to be produced. And it is really--it is something that is
great for the American people. It helps reduce illness, helps
prevent asthma attacks.
And it is also good for domestic manufacturing, because the
one area that the United States has a manufacturing edge is in
the manufacturing of emissions controls. And they celebrated
this victory. They see this as something that is good for
hundreds of manufacturing jobs, because they want us to
continually push for cleaner technology so they can manufacture
that technology and export it abroad.
Mr. Murphy. Okay.
Thank you.
Chairman Tipton. Thank you, Mr. Murphy.
Mr. Book, it seems a little--and I think we can offer this
to the entire panel here--it seems a little counterintuitive to
say that lower prices for domestic oil are a bad thing. Could
you explain to the Committee how lower domestic oil prices
wouldn't reduce fuel prices?
Mr. Book. Happy to do so, Mr. Chairman.
As one of the other panelists pointed out, global supply
and demand trends set the price of oil. And while you can
actually influence global price a little bit by adding to
supply, most of what happens here in terms of the prices that
we receive for gasoline at the pump, which is where consumers
meet the oil industry face-to-face, that is determined by the
global price, which has a lot to do with other things.
What happens here is that folks, like the folks to my left
and right, are making investments, and they are making
investments, again, based on the environment that the oil price
suggests. So if our oil price is for some reason artificially
constrained from reaching global prices and is lower, firms
will make that investment elsewhere.
And that doesn't happen necessarily right away, nor is it
obviously going to happen when prices are as high as they are
now. But bring Libya back on line. Solve some of the problems
in the world, and the global price falls. And that differential
will really make a difference.
Chairman Tipton. I think we tried setting prices in the
Nixon administration. That didn't work out too well for us as a
country at that time.
Any other comments in regards to that?
Mr. Smith. Not to sound like a broken record here, but
another issue that does impact gasoline prices specifically is
refining capacity. And that is one of the areas that we have
literally built our business plan around.
And I might mention, we are not the only kids on the block.
There are a number of other companies that have similar
business plans for developing additional refining capacity
onshore. And as goes increased refining capacity will go
lowered or stabilized gasoline prices at the pump.
Chairman Tipton. Now, when we are talking about
microrefinery that you were looking at, Mr. Smith, does that
have the potential to lower fuel prices? Propane is a big deal
in our part of the world out west.
Mr. Smith. Yes, sir. Two components to the answer to that
question.
In our specific case, we are building the microrefineries
to address local and regional diesel demand. The diesel prices
in the region are extremely high compared to the other parts of
the country. One of the reasons for that is they are hauling
the crude oil to the coasts, refining it, and then hauling it
back. The closest refinery to the Williston Basin would be in
Denver, 600 miles away, and most of them are in the 1,200- to
1,700-mile distance in terms of your supply chain for diesel.
Gasoline would follow, as well. And so, while we are primarily
producing for the local and regional market, others are in
other markets and would affect that.
The second part of the answer is the natural-gas-stripping
facilities specifically provide for an increased locally
produced supply of light gases, specifically propanes, butanes,
that can then be fractured into their various components and
delivered more locally to the market, thereby driving down
propane prices.
I also live in the mountain west, where propane is
extremely expensive. And we feel that the closer to the
consumer that you can place the refining processes, the better
for the consumer, the better for prices.
Chairman Tipton. Now, I do want to follow up a little bit
on the refining end of this. You know, I remember, 1972, I
think, we had the first Earth Day. The projections were we were
going to run out of all of our fossil fuels I think by the
1990s, at that particular point. I think we have had some great
testimony that the technologies have improved.
Mr. Blong, I embrace what you were saying. People that live
there and work there, I have talked to people with dirt under
their fingernails that work under these rigs, happen to love
their--you are holding up your hand--you know, that actually
love their families and love where they live and want to be
able to do it right.
But we haven't seen a major refinery built in this country
now for--is it 40 years? Is that correct?
Mr. Smith. 1976 was the last major. And the MD Resources
refinery outside of Dickinson that will open at the end of this
year, the beginning of next, will be the first greenfield
startup refinery in nearly 40 years, sir. And we are hoping to
be among the next after that.
Chairman Tipton. What, kind of, inhibited developing a new
technology to be able to do it better? Was it government
regulations?
Mr. Smith. It is not so much a technology inhibition, sir,
as it has been the really draconian lowering of the level of
emissions allowed by the EPA down to a 100--the cutoff is 100
tons per year of any gas or emission deemed to be a regulatable
gas.
And at 100 tons per year, the guys with the fat brains can
calculate backwards, and they have determined that you cannot
have a feedstock input to a refinery in excess of 20,000
barrels per day without exceeding that 100-ton threshold.
Raising that threshold would greatly increase the odds of
having larger refineries built.
Mr. Dotson. Mr. Chairman, can I just add that, while it is
true that we haven't had major development of a new refinery,
we have had consistent additions to capacity at existing
refineries. So we have seen a great consolidation in the
refining sector. In the last 14 years, we have added 1.4
million barrels per day of refining capacity. Today, we have
almost 18 million barrels a day of refining capacity, which is
at an all-time high. So we----
Chairman Tipton. But that was geared towards not a light,
sweet crude, but a heavy crude?
Mr. Dotson. A lot of the recent investments have tended to
focus on heavier crudes.
Chairman Tipton. Right. Okay.
I would like to follow up on Ranking Member Murphy's
question, because it is about small business. And, heartening
to me to hear about 12 employees, wanting to be able to expand,
the average $76,000 a year in wages that you are able to pay
the folks.
What is the potential impact on domestic fuel prices of
this limited decision that we just saw come out of the
Department of Commerce when it comes to completely lifting the
de facto ban on oil exports?
Mr. Book. I mean, the decision out of the Department of
Commerce is not at all clear. But if it is just a subset of a
subset of our crude, the impact on prices is probably
imperceptible. The impact of a wholesale lifting of the current
policy could be meaningful. It depends on how much crude ends
up being induced by the opportunity to come to market.
But if you think of it, sort of, in a static sense, that
every million barrels per day is roughly 10 bucks off the
global price of oil, you can start to feel 10 to 15 cents at
the pump when you get into that range.
Mr. Blong. With respect to the job creation by a de facto
lifting of the ban, we feel like that it is perhaps more
sentimentally driven, which will ultimately drive the economics
of the issue. But investors and operating companies, producers
have to have some reassurance that there is incentive for them
to continue to innovate and continue to deploy capital to
develop our Nation's resources so that folks like us can create
jobs alongside of them in cooperation.
Chairman Tipton. Okay. Thank you.
They have just called votes, but I do have one final
question I would like to ask Mr. Book.
Could you explain some of the tradeoffs involved in lifting
the ban on crude-oil exports? And would the economic benefits
of this decision be a net plus for the economy and for small
businesses?
Mr. Book. In general, if you increase the upstream
investment, you are going to benefit all businesses across the
country. There is a number of very well-documented studies that
show how it reaches outside the oil patch, but there were
comments by this panel this morning that do the same thing.
In terms of the tradeoffs, there are currently, yes, some
refiners that are benefiting from an artificially discounted
crude-oil price, and they would be probably somewhat undercut
in their current profits if that price were to go up. But it is
my testimony that that price could go up for other reasons,
even without the exports.
And even if that price went up, they would still have two
principal advantages. One, they would be able to buy the crude
net of transportation costs here in the U.S., which might give
them some advantage based on their proximity to the crude. And,
second, they have low-cost natural gas as a processed fuel,
which, in the fractions of a cent that make or break you in the
refining business, is a very big deal. We have significantly
cheaper natural gas and are likely to continue to have it for
many years to come.
Chairman Tipton. And I think there is certainly something
to be said for domestic energy security, given what we are
seeing going on in the Middle East right now in particular, to
be able to make sure that we have those resources to be able to
create our jobs here locally and make sure we keep the lights
on and the heat on during the winter months.
Gentlemen, I would like to thank you all once again for
taking the time to be able to be here and appearing before this
Committee. You have all provided valuable insight into how
decisions in Washington affect small businesses operating in
the real world.
The shale oil and gas production revolution does hold
promise to transform our economy and energy security. And, at
the same time, we should be mindful that they are one part of a
broader, comprehensive, all-of-the-above strategy that includes
utilization of all of our Nation's available resources,
including coal, hydropower, nuclear, and renewables.
Certainly want to be able to recognize, we just had the
70th anniversary, that we recognized on D Day, the efforts that
you have made with half of your employees, Mr. Blong, in terms
of being veterans, come out with some great skills. And
certainly I think it is an appropriate thing for us to maybe
have some legislation to make sure that we give access to those
jobs for our veterans that are coming out of our service. So
thank you for that.
I would like to ask unanimous consent that Members and the
public have 5 legislative days to submit comments and materials
into the hearing record.
Hearing none, so ordered.
The hearing is now adjourned. And thank you.
[Whereupon, at 11:08 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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