Discussions between the state of Alaska and major producers over an Alaska natural gas pipeline "continue to make progress," Lee Raymond, ExxonMobil chairman, told a Senate committee hearing last Wednesday, but "it is absolutely critical from our point of view that all elements be clear and the interaction between the gas operation and the oil operation at Prudhoe Bay also be clear.
It is important to get it right, Raymond said. "The intent is to come to a successful conclusion, but we have to recognize that it would likely be the largest single project anywhere in the world." He noted that discussions over a proposed natural gas pipeline to the Lower 48 have been going on for 30 years, and "fortunately we didn't do it earlier because it would have been an economic disaster for both the companies and the state."
Raymond was one of a panel of five major oil company chiefs answering to a joint hearing of the Senate Energy and Commerce committees on oil company profits. Ross Pillari, president and CEO of BP America, said he believed "the [Alaska] project will get done shortly." Of the three majors with a stake in Prudhoe Bay, ConocoPhillips is the only one that has come to a preliminary agreement in principle with the state.
Raymond's comments came in response to questions from Sen. Lisa Murkowski (R-AK) who noted ExxonMobil's $15 billion commitment to a gas liquefaction project in Qatar, saying she wanted to make sure Alaska gas was not bypassed. She also questioned whether there would be opportunities for other producers to gain access to the pipeline through a later expansion.
The "issue of access to an expansion of the line really isn't the key question right now," Raymond responded. "The key question is to build the line to begin with. The facts are that even if we come to an agreement with the state on construction of the line, it will be 10 years from now before that gas flows." While Alaska gas can make a significant contribution years down the road, "the more important question is in the near to medium term when we have to start dealing with access to natural gas through LNG terminals; the facts are we need to do it all."
Natural gas was mentioned only fleetingly in the three-hour barrage of rhetoric from more than 30 senators in what the National Association of Manufacturers correctly described as a "theatrical exercise devoid of constructive steps toward easing high prices and supply shortages." The appearance of the chiefs of the five major integrated oil companies in response to a threat of a windfall profits tax, was unprecedented. Besides Raymond and Pillari, the other witnesses were David O'Reilly, chairman and CEO of Chevron Corp., James Mulva, chairman and CEO of ConocoPhillips, John Hofmeister, president and U.S. country chair of Shell Oil Co.
Sen Lamar Alexander (R-TN) queried the panel as to what steps could be taken to ensure that natural gas-fired power generation plants be sequenced according to their level of efficiency. The producer chiefs said that was a question that could better be addressed to gas distributors.
The senators generally railed against the high prices of oil, gasoline and diesel fuel, citing its impact on the poor and middle classes, while criticizing the profits and executive salaries and bonuses being made by the oil companies and the executives.
The oil company leaders noted the industry's profit averaged 8% of revenues, which is in line with other industries, but because the companies are so large, the profits appeared to be large. It was noted that Microsoft has a better profit margin.
The industry witnesses noted the increased worldwide demand for petroleum, particularly from China, and stressed potential actions, such as opening up access to drilling -- which they said was a problem all over the world -- streamlining permitting among various governmental agencies, and standardizing, for instance gasoline specs. All of that would help to increase supplies and lower prices.
Defending against charges they restricted refinery additions to bolster prices, the oil company witnesses clarified that while no new refineries had been built recently, most current refineries had been improved and expanded which was more efficient than building new greenfield projects. The increased capacity at ExxonMobil refineries over the last 10 years is equal to adding three refineries. Responding to complaints that refineries were making excess profits, the oil chiefs also pointed out it wasn't so long ago that the refinery business wasn't very profitable.
"Earnings go up and down; commodities are volatile," Raymond said, noting his company invested in long term projects in good and bad years. In the energy industry "time is measured in decades," in terms of planning and executing projects.
Shell's Hofmeister pointed out that as profits went up, the taxes the oil companies paid went up. Also, onshore rig costs have doubled in the past year and offshore rig costs have gone up as well.
Questioned as to whether they believed the oil companies should make a special contribution to funding the low income heating funds (LiHeap), Mulva said he did not believe it set a good precedent to look to one industry to fund a government program. He noted all the money the industry had spent and was still spending on repairs after the hurricanes and their contributions to restoration funds in the Louisiana area. "We need to spend all we can on adding to capacity," the ConocoPhillips executive said.
Asked if he was satisfied that the energy companies are going to invest their record profits, Sen. Pete Domenici (R-NM), co-chair of the joint hearing, said "I think they told us over and over they're investing it [earnings]. They went through how many billions a year [they're investing]. If you had a lot of time to follow through [on questions]...you'd ask them where. But I think the answers were pretty good."
Domenici said he didn't hear anything to suggest the energy companies have profited unfairly. "From what I heard today, I don't think one could say they earned it unfairly...I didn't find anything that I could say showed...that they're treating us unfairly." But he added "the question of gouging still remains, and I think further investigation should take place."
He believes oil and gas companies should join with the federal government to fund a major "concerted effort" on energy conservation. "We should follow up on that...There's a lot of resistance [to this idea], but I don't know why there should be."
Responding to the executives' requests for greater access to the Outer Continental Shelf (OCS), Domenici said, "we've got to address [the] offshore generally, [Lease] 181 separately or together quick." But he noted "we [the Senate] can't do it this year."
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