Statement of
Robert W. Gee
Assistant Secretary for Fossil Energy
U.S. Department of Energy
Before the
Subcommittee on
Energy Research, Development, Production, and Regulation
Committee on Energy and Natural Resources
U.S. Senate
September 14, 1999

Mr. Chairman and Members of the Committee:

I am pleased to appear before you today to talk about the Administration's legislative proposal to amend and extend to September 30, 2003, certain authorities of the Energy Policy and Conservation Act (EPCA), which are scheduled to expire on September 30, 1999.⁽¹⁾ I would also like to bring the Committee up to date on certain activities the Department has undertaken related to these authorities.

EPCA authorizes (in Titles I and II) two programs at the core of our nation's energy security: the Strategic Petroleum Reserve (SPR) and our participation in the International Energy Agency (IEA). It also provides authorities to support our long term efforts to reduce vulnerability through several energy efficiency and renewable energy and conservation programs. These programs (in Title III) were extended in P.L. 105-388 to September 30, 2003.

U.S. capability to draw down the Strategic Petroleum Reserve in a severe energy supply interruption is critical to U.S. national security and economic interests and is crucial to our relationship with the IEA. The U.S. plays a vital role in the development of emergency response policies within the IEA. It is imperative that Congress act expediently to pass legislation to amend and extend these provisions, without a lapse of authority. Such a lapse could have major implications over the next few months. The extension of EPCA authorities is needed, for instance, to facilitate U.S. company participation in a major exercise with Y2K implications that is being conducted by the IEA beginning at the end of September. Additionally, the timely extension of EPCA will be especially important this year if it is determined a Y2K-related drawdown is necessary.

In addition, as we promised this Committee, the Department of Energy conducted a review of its policies for the SPR. We issued a Federal Register Notice inviting public comment on various issues affecting the Reserve and subsequently published a Statement of Policy on the Strategic Petroleum Reserve in May 1998. S. 1051 reflects the Administration's Statement of Policy.

Finally, EPCA was enacted 24 years ago and includes many provisions pertaining to the SPR which are no longer necessary, and references programs that no longer exist. S. 1051 deletes or amends EPCA provisions accordingly.

Need for the Reserve

During the last 24 years the Strategic Petroleum Reserve has become the Nation's principal defense against oil price shocks related to supply interruptions. Additionally, U.S. leadership in stockpiling has been and remains critical to the accumulation of stocks in other International Energy Agency member countries. The SPR inventory is 563 million barrels of oil, which is currently held in four sites in Texas and Louisiana and is the equivalent of 60 days of imports. It is a significant deterrent to the use of oil embargoes as a political weapon as well as substantial protection against the effect of actual or imminent disruptions in crude oil supplies. For example, the Reserve vastly increased the flexibility of the United States to pursue the embargo of Iraq and Desert Storm in 1990-91without concern that the hostilities would precipitously disrupt the availability of oil.

Today, the potential for oil market disturbances remains, whether caused by wars, political unrest, natural disasters, or a failure in transportation logistics. Meanwhile, U.S. dependence on oil imports is expected to increase, with the world's oil reserves increasingly concentrated in a few regions. While the U.S. currently enjoys diversity of suppliers for its imports, we remain at potential risk. Supplier diversity will not limit the serious economic impact of a significant rise in oil prices. A strong and viable SPR is as relevant in today's market as it was when EPCA was passed in 1975.

Recent SPR Initiatives

This year the Administration undertook two new initiatives affecting the SPR- the use of royalty oil to fill the SPR and initiation of a study on the appropriate size of the SPR.

In February, Secretary Bill Richardson and Secretary of the Interior Bruce Babbitt announced that the Department of the Interior would take up to 28 million barrels of Federal royalty oil paid in kind and transfer it to the Department of Energy to help fill the SPR. Staff from the Department of Energy and Department of the Interior have worked together cooperatively to craft and implement this program. Under Phase I of the program, arrangements were made with four of the largest producers in the Gulf of Mexico for the transfer of approximately 9.2 million barrels of crude oil to the SPR in exchange for royalty oil. Deliveries began in April. In the second phase, the program has been expanded to offer the maximum feasible volume of oil and open the program to a larger number of bidders using a competitive bid process.

Phase II will be an ongoing solicitation of invitations for bids to transfer or exchange royalty oil for oil to be delivered to the SPR. In Phase II A of the program, the Department awarded contracts for 9.59 million barrels to four companies on June 15, 1999. Phase II A deliveries commenced on August 1, 1999, and will continue through February, 2000. The Phase II B request for offers will be issued in early November, 1999, with deliveries anticipated between February 1, 2000, and November 30, 2000.

As indicated in the May, 1998, Administration Statement of Policy on the Strategic Petroleum Reserve, an interagency group, led by the Department of Energy is revisiting the Department's 1990 study on the appropriate size of the SPR. Participants from the Department of Treasury, Council of Economic Advisors, Office of Management and Budget and Central Intelligence Agency, as well as the Department of Energy are involved in the project. A final report will be transmitted to Congress in the near future.

I would now like to turn to a discussion of the various amendments proposed in the Administration's bill to amend and extend EPCA.

SPR Amendments

The importance of extending SPR's basic authority under EPCA has already been discussed. In addition, the proposed Administration SPR amendments modernize EPCA by eliminating provisions which are no longer necessary or desirable and amending others to reflect the current state of the SPR program. S.1051 proposes to delete the provisions providing for the establishment of regional and industrial petroleum reserves. It deletes the requirement for an SPR Plan and Plan Amendments, and codifies the distribution portion of the Plan to require the sale of oil drawn from the Reserve to the highest bidder. The bill also would make a plan for expansion of the Reserve necessary only when the Secretary determines such an expansion is desirable and would eliminate the current minimum fill rate. In addition, the bill proposes that the requirement for a 30-day congressional review period for alternative financing contracts be deleted.

Regional Petroleum Reserves: The Act currently provides for the establishment of regional petroleum reserves in Federal Energy Administration regions that are dependent upon Petroleum imports for more that 20 percent of their consumption. The Act also permits the Secretary to substitute crude oil for products and to store the oil in a reserve "readily accessible to" rather than actually located in such regions. Based on analytical findings and substantially higher costs for regional storage, the Department of Energy and its predecessor organizations have consistently determined that the storage of crude oil in the centralized SPR would meet the requirements of all regions of the country in the event of a petroleum supply disruption. Because the need for a regional petroleum reserve is not foreseeable and funding for such a program is not justifiable based on its expected benefits, the Administration's bill deletes this requirement and references to regional and refined petroleum product storage.

Industrial Petroleum Reserve: The Act permits the Secretary to establish an Industrial Petroleum Reserve as part of the Strategic Petroleum Reserve, by requiring importers of petroleum products and refiners to store and maintain oil in readily available inventories. This provision has never been implemented, would shift the cost of the program to industry, and would be particularly onerous to administer. The Administration's bill deletes this provision and references to industrial petroleum reserves consonant with the Administration's stated policy that the Nation is best served by centralized, Government-owned, Government-controlled storage.

The Plan: The Act currently requires the Secretary to maintain a Strategic Petroleum Reserve Plan, and specifies the details that must be included in the Plan. This was appropriate when the Reserve was in its planning phase during the mid and late 1970's. Now the Reserve consists of four storage sites with a cumulative 700 million barrels of storage capacity, and the Plan that details those sites has been completed. The Act also requires that the Plan specify the levels of fill for certain years, all of which are now in the past. The Administration's bill proposes that the requirement for the Plan and Amendments be deleted. The one remaining part of the Plan which is still necessary is the Drawdown and Distribution Plan, Plan Amendment No. 4. The basic policy of distributing oil from the Reserve by competitive sale, contained in Amendment No. 4, is maintained in S. 1051 by making that policy part of the governing statutes.

It is the Administration's belief that free market sales are far superior to allocation as a method of distributing oil from the world's strategic reserves. While Plan Amendment No. 4 provides that public sales will be the primary method of distribution, it also allows the Secretary to allocate up to 10 percent of the sales volume. This allocation authority should be eliminated. The Department has never used this allocation authority, and its existence may encourage some consumers to count on the Government rather than the market for supplies in an emergency. It will also put elected officials in the difficult position of having to evaluate requests for preferential treatment from various constituent groups during a national emergency. S. 1051 reflects the Administration's belief in market mechanisms and the impracticality of allocation; it does so by codifying open market sales to the highest bidders as the method of distributing Strategic Petroleum Reserve oil.

Expansion: As the Committee is aware, a 1990 amendment of EPCA requires the Department to submit an SPR Plan Amendment detailing expansion of the Reserve to one billion barrels. While the Department did conduct the requisite studies, analyses, and public hearings to pick sites and complete such a Plan Amendment, final steps in the process were not taken because it was clear that such a plan could not be implemented within the time horizon for which the studies were relevant. Due to budget constraints and the need to decommission the Weeks Island site, setting a schedule date for reaching a capacity of 1 billion or even 750 million barrels was and is unrealistic. The proposed legislation requires that the Secretary report to the Congress on plans to expand the Reserve at the time such expansion becomes likely. This deferred requirement would replace the current statutory requirement.

Statutory Fill Rate: The Act contains a requirement for filling the Reserve at a rate of 75,000 barrels of oil per day until the Reserve has reached 750 million barrels. This requirement has been waived regularly by a number of Congresses at the request of several Administrations. Given that the Department has not met this requirement for many years and the capacity of the Reserve was reduced to 700 million barrels after decommissioning the Weeks Island site, the Administration bill deletes the requirement. The bill also proposes to delete the linkage which makes sales authority for Naval Petroleum Reserve No. 1 crude oil contingent upon an SPR fill rate of at least 75,000 barrels. Because Naval Petroleum Reserve No. 1 was sold in 1998, this provision is no longer applicable.

Alternative Financing: Another issue addressed by the Administration's bill is Congressional review of alternative financing contracts. Alternative financing contracts, including oil "leases" or similar arrangements, are a means to reduce the budgetary requirements for Strategic Petroleum Reserve oil. No contracts have ever been negotiated for alternatively financed acquisition and current law imposes some requirements on alternative financing contracts that diminish the chances that such contracts could be successfully negotiated. Specifically, the Act requires that contracts that would not otherwise require any Congressional action lie before the Congress for 30 legislative days before going into effect. This provision adds a time delay to already complicated contracts, and adds an element of uncertainty to contract negotiations. The Administration bill proposes deleting the requirement for a 30-day congressional lie before period after a contract is signed. Of course, if promising negotiations should occur we will discuss our plans with the appropriate Congressional committees before any contract is signed.

IEA Authorities

S. 1051 also extends to 2003 U.S. participation in the emergency preparedness activities of the IEA. The IEA, which is the main forum for energy cooperation among 24 countries, was created in 1974 under an Agreement on an International Energy Program. As a member of the IEA, the U.S. is obligated to maintain inventories of Government-owned or commercial stocks above minimum operating levels equivalent to 90 days of net imports. EPCA also provides limited antitrust defense for U.S. oil companies participating in the IEA's emergency preparedness programs to enable them to assist the IEA in planning or implementing a drawdown of government-controlled oil stocks.

Last year's amendment to EPCA's antitrust provisions, broadening the scope of U.S. oil company participation in IEA activities, has enabled the IEA to more fully engage its oil industry advisors in planning its response to future oil supply disruptions. Last fall's successful Emergency Response Exercise was the first major IEA activity at which U.S. companies made use of the broadened antitrust provisions. On September 28-30, the IEA will sponsor an oil disruption response simulation exercise to test its ability to respond to disruptions in world oil markets. One element of the exercise will focus on the potential impact on world oil supply of Y2K-related computer problems. In addition to energy security experts from the IEA's 24 member governments, representatives of major oil companies will play a key role in this exercise. Immediately following the exercise on October 1, the IEA and its oil company advisors will meet to turn the lessons learned during the simulation into policy and response options for addressing the Y2K problem.

We urge you to pass these authorities expeditiously to facilitate U.S. participation in these important programs.

Committees on Renewable Energy Commerce and Trade and Energy Efficiency Commerce and Trade

Title II of EPCA also provides the authority for the Committee on Renewable Energy Commerce and Trade (CORECT) and the Committee on Energy Efficiency Commerce and Trade (COEECT). COEECT is an interagency committee whose 15 Federal Agency members, in conjunction with private industry, develop and implement strategies for the export of U.S. energy efficiency technologies. CORECT, which has not received appropriations in the last two years, has curtailed its activities in the export of renewable energy technologies. The Administration strongly supports reauthorization of these programs to promote the export of U.S. energy technologies and products.

Conclusion

In summary, the energy programs extended by S. 1051 are central to our nation's energy and economic strategies. I urge you to reaffirm our commitment to these programs and ask for your assistance in the passage of this bill.

That concludes my prepared testimony. I will be glad to answer any questions.

Footnote 1 The Administration transmitted its proposed legislation to the Congress on March 15, 1999. It was subsequently introduced by Chairman Murkowski and Senator Bingaman, by request, as S. 1051.