BLOGGER CONFERENCE CALL

TO DISCUSS ENERGY AND THE ENVIRONMENT

FEATURING
RED CAVANEY,
PRESIDENT AND CEO,
API

WEDNESDAY, APRIL 18, 2007

Transcript by:
Federal News Service
Washington, D.C.
 Following is the transcript of the conference call. It was moderated by Monte Lutz
of Edelman Public Relations, who introduced Red Cavaney.

RED CAVANEY: Well, I’d say good morning, good afternoon, good evening –
it’s all dependent upon where each of you respectively is. But we appreciate very much
your coming on. The purpose of this call, as was mentioned earlier, is to just allow you
access to us to help clarify or help answer or give you additional insights – (conference
call interruption) –

CONFERENCE CALL VOICEOVER: Jeff McIntire-Strasburg has joined the

conference.

MR. CAVANEY: – so having said that, I’m not into making speeches or anything
so why don’t we just go ahead and answer any questions that you may have.

MR. LUTZ: Great. And, Jeff, welcome. Thank you for joining us. Jeff
McIntire-Strasburg is from Treehugger and we just went through, briefly, a blog roll. We
have on the call Robert Rapier from The Oil Drum and R-Squared; Hank Green of
EcoGeek; Tom Fowler of NewsWatch: Energy which is Houston Chronicle; Marc
Gunther, Fortune; Mark Gongloff of The Wall Street Journal Energy Roundup; and
Carter Wood of ShopFloor.org.

So without further ado, we’ll open it up to your questions.

ROBERT RAPIER: Okay, this is Robert Rapier coming at you from sunny
Scotland. I’ve got a list of 34 questions. I promise not to ask all of them, but I’ve
solicited questions from readers at The Oil Drum and at my blog. And they made a list
and voted and so I’ve got a few to ask.

First one I wanted to ask about is tar sands. There was an article in the
Washington Post last year and – let’s see, the name of it was Canada Pays
Environmentally for U.S. Oil Thirst. And it painted a very grim picture in Canada of the
oil sand situation. It said, you know, rivers used to be blue are turning brown. And I
realize this is the American Petroleum Institute and you guys are not responsible for what
happens in Canada, but we are buying their oil and we’re using their oil. So how do you
respond to what’s going on in Canada with the tar sands and the environmental issues
there?

MR. CAVANEY: Well, I think first of all I’ve had an opportunity on a couple of
occasions to go up there and see the operations. Obviously you can’t see them all in the
course of just a couple of days. But the first thing I would say is that the scale is
immense beyond almost what anybody can believe. And then, number two, there’s a lot
of things that you’d on the job learning. You encounter things that you haven’t seen
before and work stops and goes forward. There’s no question – I think that there are
challenges out there.

2
 The industry has committed to, and if those of you are familiar with it know that
typically what we follow when we go into a new area where you’re trying new
technology in a new environment you’re committed to sort of continuous improvement.
You learn as you go forward. You go through trial and error. You tend to benefit.

And I think nobody that I know of that I’ve talked to from up there feels that the
circumstances that you’d find today are going to be the same circumstances you’d find,
you know, five, ten years from now as you tend to become more sophisticated, as you
tend to learn how to operate.

You know, we’re seeing, for example, more of a focus on the in situ method
which is where you’re underground during much of the recovery of the oil as opposed to
some of the less sophisticated methods that were sort of first generation – more the open
pit mine type of approach.

But I think it is something that ultimately we’re always answerable to the people
within the immediate environment in which we operate, and collectively we’re
answerable to the regulators and to the general public. So you know, we’re going to meet
the demands that are placed on us. We’re going to, in many cases, come up with the
solutions and sit down with government and get those worked out.

I think one of the big challenges that we’re already hearing about is as we become
concerned about carbon and so forth as you look at the discussions about climate change
and the like, one of the things that has to be dealt with up there is, you know, how are we
going to manage the carbon part of that equation up there as we try and continue to
convert those sands to valuable products that are demanded by the American and
Canadian consumers.

I can’t be much more specific than that. Again, we don’t write the regulatory
regimes, but we do do the standards for the industry, and lot of the things that we hear
come into that process and we’re able to observe it from here in that manner.

MR. RAPIER: Okay. Thank you.

MR. LUTZ: Again, just speak up if you have a question. State your name and
ask the question. It’s open.

TOM FOWLER: This is Tom Fowler from the Houston Chronicle. I was just
looking at the links that you all had to your site about issues of efficiency. And it seems
like most of it was talked about from a producer’s perspective in terms of the efficiency
of the facilities of, you know, the member companies. But I guess I was wondering, you
know, legislatively if you’ve taken positions when it comes to things like improvements
in vehicle efficiency, appliance efficiency and also there’s a number of existing programs
that, you know, here in Texas we’re certainly trying to increase them as well legislatively
to provide incentives for more energy efficiency in homes and businesses.

3
 And I guess, have you all taken specific stances on programs that you believe are
the most effective?

CONFERENCE CALL VOICEOVER: John Gartner has joined the conference.

MR. CAVANEY: John, welcome. This is Red Cavaney. Tom Fowler of

NewsWatch Energy of the Houston Chronicle just asked a question. I’ll respond there
and then I think we can fill you in on who else is on the call.

Tom, we’ve spoken out – myself personally in testimony – a lot about energy
efficiency. And I think the industry feels that if we’re going to look to a energy security
goal for the nation, one or the principle cornerstones has got to be energy efficiency. And
that isn’t just on the manufacturing sector, it’s across both from a manufacturers’
standpoint, the energy producers’ standpoint, from the standpoint of individual
consumers and commercial and industrial enterprises as well.

We’ve tried to provide some leadership there by undertaking some voluntary

efforts on our own so that when we talk about it, people understand we’re not just asking
them to make the sacrifices, but it’s something we all need to be doing.

We feel that every single sector should be responsible for continually improving
their efficiency. We don’t comment on individual regimes. For example, we’re not in
the auto business, so we don’t comment in great detail about how one might go about
addressing CAFÉ, but we do feel that the transportation sector, like any other, has a
responsibility to become more energy efficient. And whether it’s through some of the
proposals the administration’s put out or some of the things that may flow from some
Congressional action that’s envisioned here in the next year or two, we think those are
things that are important.

It’s the easiest way to add additional capacity is the barrel of oil or the BCF of
natural gas that you didn’t use that makes the difference. So we find also that that
message resonates very well with the individual consumer, but what we also find with the
exception, generally, of California – the consumer hasn’t had a lot of recent experience
on this and isn’t well-educated on it, and so there’s going to have to be whether it’s a
government private sector partnership or something. There needs to be more dialog and
more discussion about helping people understand what they can do that isn’t going to be
a huge burden to them, but are ways they can act a little smarter and, in fact you know,
reduce their energy bills – whether it’s for transportation sector, heating, whatever the
case may be.

So, yes, very important to us, and I think you’re going to see a lot of emphasis on
this going forward. I would suspect the energy bill in the Senate that they’re talking
about working on here before the break for August is going to have a fair amount in there
about energy efficiency, particularly for appliances and other things.

4
 MR. FOWLER: Just a follow-up, you said that you guys have done – taken your
own measures just as leadership. Can you break some of those out a little bit more, the
voluntary efforts on your part?

MR. CAVANEY: Sure. Probably the one that stands out most largely is our
refineries in 2002 committed to reducing by 10 percent over 10 years the energy intensity
of their operations, which is another way to get at greenhouse gas emissions. We’re now
four years into that program, and we’re on track, essentially reducing one percent per
year the energy intensity there. That’s a very significant savings when you look at the
size of the refinery community, so that’s one way.

Another one that we participate is we have 100 percent participation by all of our
members in EPA’s natural gas Star program, which has under it and attached to it some
methanes to markets and a lot of other activities which go ahead and show how we can
better utilize what, in fact, was waste products.

And probably the one thing that stands out most stark is co-generation. The re-
use of excess steam heat or surplus steam heat to regenerate electricity. That then
becomes electricity we didn’t have to buy from the grid or it creates a surplus of
electricity which we sell back to the grid, but we are far and away the world’s largest user
of that. I think we have over 150 individual installations and we’re hopeful that as they
go forward they’ll be able to do more work here.

There is one worrisome element to this is there’s a bit of concern that with the
recent determination about the New Source Review issue that as refineries and others
take a look at bringing on new co-generation whether it would, in fact, trigger the entire
facility to go under New Source Review which would be probably much more cost than
any savings you’d get out of it and so it may curb that. So that will be one little twist
we’re going to be working.

But that’s a little bit of the sampling of the things we’ve done and intend to do.

MR. FOWLER: All right. Thank you.

CARTER WOOD: This is Carter Wood from the NAM’s ShopFloor.org. Since
you’re speaking of refineries I wanted to ask you, and this I guess does deal with
environmental questions as well, the announcements, I guess, of new sites in Mississippi
and Louisiana for refineries. There’s lots of different concerns that go into these, but one
of these concerns is always kind of an environmentally-based, not in my back yard
attitude. And I’m wondering to what extent is the oil industry able to tell people that
refineries are safe, clean, not dangerous, they’re not going to ruin you and you’ll live a
long life?

MR. CAVANEY: Carter, I think if I’m not wrong, the two locations that you
cited are significant additions to existing refinery capacity. The industry has gradually,
since the Clean Air Act came into being in mid-70s and so forth, we have as a result of

5
basically just the sophistication of equipment and tighter regulations reduced by better
than half the number of refineries we have. But now, over the course of the next couple
of years, we’re going to end up actually exceeding the maximum refinery capacity which
is about 18 and a half million barrels a day that we had.

And the two sites that you’ve put forth are very large refineries now with large
additions to them. What we have found is – for a series of reasons, economics in
particular but ultimately local permitting – that it is extraordinarily difficult to permit a
new refinery and it doesn’t do a company any good to go into an environment where
you’re not wanted. So from a cost-effectiveness standpoint, we can put in new,
additional capacity at a cost about 60 percent if you put it on an addition to an existing
refinery as opposed to going to a whole new greenfield refinery. So most everything,
well virtually everything we’ve done since the middle of the 1970s, has been capacity
additions as are these two.

What happens is that you find in the communities where we operate is the
relationship’s been built up over a period of time. Typically you find those are good-
paying jobs. The industry has invested a lot in the community, and the objections to
adding capacity, generally, are not big issues. They’re looked as creating more jobs;
creating more of an established permanence; being able to be competitive in a global
market. So that’s the path that we’ve gone in here.

Now the bio-refineries that we see cropping up in many, many places are much
smaller in scale and, I think, much less complex in terms of getting those sited and there
have been some bio-refineries announced down in Louisiana and we’re now seeing them
expand a bit outside the traditional Midwest where they’ve had most of their early
successes.

MR. WOOD: Thank you. Ultimately that approaching of siting where you have,
where you have existing sites is limiting, though. I mean, we’re not going to be able to
address our needs, capacity needs, here in the United States if we follow that approach.

MR. CAVANEY: Well, we have a very interesting textbook case we could share
with you. You might recall during Hurricanes Katrina and Rita, just, well not quite two
years ago, there was a big hue and outcry because we had to, obviously, leave all the
platforms in the Gulf, so those operations became shut down from a production
standpoint, and then the refineries themselves that dotted along the coast, which is about
30 percent of the U.S. refining capacity, had to be shut down as well, and to bring them
back is obviously – takes quite a bit of time. And there was a huge outcry of, you know,
“what a stupid idea, why did the industry put all those refineries there,” let’s put them,
sprinkle them all around, we’ve got to get them in other parts of the country.

Well concurrent with that discussion is we’ve been trying to permit facilities,
including the number of LNG facilities, and at the time, if you took a look at it, you
couldn’t get a permit anywhere except back in the Gulf Coast where people are familiar
with you, where they understand, you know, how the operation goes, and so forth. So

6
this is not an issue that the industry really has control. The only known refinery effort
that’s been underway is out in Yuma, Arizona, where for over a decade, you know,
they’ve been trying to get the permits and the financial wherewithal to begin to put in a
new greenfield refinery. They have the support of the state and everything like that, and
they’re just not succeeding. So the problem is not that we wouldn’t welcome the
opportunity to move into other areas; it’s, frankly, that nobody, you know, wants to have
you some – (unintelligible) – talk about it, but in fact, the local communities won’t do a
thing to help you in that regard.

But that shouldn’t, in any way, mean that we’re not going to continue as we have
to reinvest in the existing refineries. There’s a wonderful opportunity we have whenever
we go through a regime, whether it’s bringing on board ultra low ultra diesel or sort of
taking the ultra low sulfur gasoline. When you go in, if you’re in the right kind of
environment, you end up being able to put some cost-effective additions on and that’s
why you can get the capacity and at a lower price. Between now and 2011, already
publicly announced, our capacity here in the U.S. is going to increase by 1.6 million
barrels [per day].

Add to that all biorefinery activity that you see going on to produce now corn
ethanol, and before too long, cellulosic ethanol, and I think you can see that we’ll be able
to satisfy, you know, whatever demand we see here in the U.S. market, as long as we can
continue to bring in some imports, and imports do play an important role because the
relationships that are established with those imports is basically what saved our bacon
when we went through the hurricanes because had it not been for our capacity to be able
to swing all those imports from elsewhere into the U.S. when those refineries were down,
we would not have been able to continue to serve the consumer, which was the case.

MR. WOOD: Thank you.

MARK GONGLOFF: This is Mark Gongloff with Wall Street Journal Online.
You mentioned ethanol, but actually you and John Felmy have expressed a lot of
skepticism about a widespread switch to ethanol use by 2017, but automakers and other
critics say that your industry could do a lot more to make that role that much more
realistic. In a Journal story a few months ago, Doug Durante of the Clean Fuel
Development Coalition said that it was time for the oil industry to step up, and in our
paper earlier this month, we had a story about how – that suggested oil companies were
making it really difficult for gas stations to provide ethanol, making it very costly and
difficult for gas stations to provide ethanol to drivers. How do you respond to these
charges?

MR. CAVANEY: Well, Mark, I think one thing – people that make these claims,
they have their own agenda, and not necessarily in line with what we’re trying to do. Let
me give you a couple of reasons for my comfort in saying this. We absorbed, last year,
every single bit of ethanol that could be produced in the United States, 5.4 billion gallons,
under the Renewable Fuels Standard, which we were one of the co-authors, along with
the American Farm Bureau, the corn growers and renewable fuels, and several

7
environmental groups. In the first year, we were only required to take four billion
gallons. We’re going to already know we’re on a path to exceed what’s going to be
produced this year. So where the problem gets to is there is a big difference – our
member companies bring nothing to the table on the corn ethanol circumstance, but they
are all highly active in research and elsewhere on cellulosic ethanol.

Most people within the USDA, U.S. Department of Agriculture, the renewable
fuels, American Farm Bureau, all of them estimate that at about 15 billion gallons, you
reach the ceiling on corn ethanol here in the United States because of its competition with
other very valued elements within, you know, their panoply of customers that they have
to serve. The reason that we picked 2017 is because people have put out the – whether it
was the president’s proposal or the one that’s now evolving under the authorship of
Chairman Bingaman and Senator Domenici, they put out multi-year commitments, but
once you get to 15, there is nobody who has yet put out a production scale volume of
cellulosic ethanol, and our point is to get people to focus on that particular inflection
point, if you will, because as you well know, crude oil, gasoline, it’s all in the futures
market. People are anticipating things.

What we’re very concerned about is we know that over time, for ethanol broadly
to be accepted by the American consumer, they’ve got to feel comfortable that they’re
going to get the same reliability and the same quality they used to before, and we’re very
concerned that if people don’t – elected officials and those that are going to be putting
these regulations in place, if they don’t square with the public and create off-ramps or
safety valves, if you will, in the event that cellulosic ethanol isn’t there, they’re going to
have a problem. We do not oppose the idea of being able to go forward. Our opposition
is, basically, to try and get people to pay attention to that hole.

Now let me talk about the other part. The autos have – how do I say – the big
three autos here in the U.S. have a unique circumstance where they have for a number of
years been producing these flexible fuel vehicles, and in the early years when they were
producing them, they never bothered to tell anybody that they were selling the cars to,
that they could also use ethanol. In part, one of the benefits they got from them was some
credits under CAFE. They’ve now come up with this E85 issue, 85 percent ethanol, 15
percent gasoline, as a way to, for lack of a better term, they use it as a marketing tool.
But what you look at is it’s principally made up of ethanol, ethanol is an alcohol, and
alcohol only has about 70 percent of the energy content that an equal volume of
hydrocarbons have, which is what gasoline is.

EPA, each year, puts out data, and their data will comport with that and show that
the energy content is only about 25 percent less than it would be if you used regular
gasoline. In the many years I’ve been in this industry, I have never had a consumer, an
elected official, tell me that I want to pay more for my fuel and I want to get less miles
per gallon, and that’s exactly what you get when you buy E85 because up to E10, which
is 10 percent of ethanol in the total gasoline pool, the refiners are probably, because it
adds octane enhancer and other values as a blend, it’ll be used up, and so right now we’re
a little over 140 billion gallons in the national gasoline pool, so the cap on how much

8
corn ethanol the agricultural interests feel they can move in that area and E10 match up
fairly close. So our point is, we think that E85 can ultimately have a place, and right
now, we have no objections. Most of our member companies have it in some facilities.
But E85 can only come into its own when you can get larger volumes of ethanol, and it’s
got to be cellulosic ethanol, into the system, and that’s not here yet.

As I mentioned, our companies have done a lot of research in this area, some of
them have actually investors in Iogen, which is one of the most notable of companies
that’s out there trying to commercialize cellulosic ethanol. We do not see that coming on
in large volumes at commercial scale to be used on a national basis within the next five
years or so. So there’s just a lot of things here that don’t square with circumstances such
as they are, so it’s not that we’re opposed to ethanol, or not that we’re not for ethanol; we
want to bring it on at a pace and with a degree of confidence that the consumer will stay
with us, because once we make that change, you don’t want to change back. So that’s
our approach, and I hope that clarifies it. If it doesn’t, please ask a follow-up question,
and I’ll try and address that as well.

MR. GONGLOFF: Well one thing about cellulosic ethanol is, you talked about
you don’t see that coming out on a commercial scale in five years or so, but I mean, you
know, it seems like it’s going to be even longer than that, and it may be never, and so
then I guess the question would be, what’s the next step?

MR. CAVANEY: I think most – many of the people we talk to, their feeling is
that the chemistry part of this is in pretty good shape. It’s really the scale and the scope
of the manufacturing and the infrastructure cost to deal with it that really is the big
challenge. I said five years just because I think that’s a very safe time. Some people feel
it could be a little bit longer, but you really never know, so there theoretically is no
reason why you can’t, and it may ultimately be that you just can’t get the scale to the
point where it makes economic sense and then the consumer’s not willing to pay, you
know, the difference, and then the government isn’t willing to provide an incentive at that
level, and then we will have to look at something else.

A couple things I might mention that’s being overlooked, and one of the reasons
we went to ultra low sulfur diesel is ever since the frightful experience the consumer had
in the late 1970s and early 1980s when Detroit introduced diesel in automobiles, in the
United States, auto manufacturers have not been able to sell diesel automobiles. They’ve
met good success in Europe, and now we’re seeing much more of that. But with the new
technology, it can be adapted, and using ultra low sulfur diesel, you can see that a diesel-
powered automobile here in the United States can realize as much as a 25 percent savings
on fuel just off the shelf, so to speak.

So it isn’t going to be only ethanol that’s going to make a difference on our

reliance on imported oil, other things, it’ll be improvements in CAFE or son or daughter
of CAFE, it’ll be I think a larger adaptation eventually here of diesels by the American
consumer for good performance, it’ll be these hybrids that are coming on, and a bunch of
various things. And everyone we talk to says there is no one silver bullet, and anybody

9
that focuses that way is going to miss a lot of opportunities to get to where a lot of people
want to go sooner rather than later.

MR.RAPIER: Hi, Robert Rapier again. I’d like to ask a follow-up on ethanol, if I
might.

MR. CAVANEY: Sure.

MR. RAPIER: Given that ethanol usage in the U.S. is now mandated, it’s not
entirely clear to me why it still needs a subsidy. But some, like Vinod Khosla has made
the argument, that the ethanol subsidy is really an oil company subsidy because they’re
the actual recipients of the blenders credit. So how do you respond to that, and what’s
your stance on keeping the subsidy?

MR. CAVANEY: First of all, that’s been in there for years and years and years,
long before we got involved anywhere near the scale we’re involved right now. We’re
agnostic about it; if you want to count the votes, I think you’ll see that most people who
live in the political arena think that it’s virtually impossible to take that credit out. In
most cases, we are the blenders, yes, so the credit comes to us, but the interesting thing is
the price of ethanol without that blenders credit is about 54 or 55 cents more than the
equivalent amount of gasoline, so all the blenders credit ends up doing is it makes the
price of ethanol, at least currently right now, at about the same price of gasoline, and so
therefore, bingo, there it goes.

If you took the blenders credit away, we’d have to pay the full price for the
gasoline – we’re certainly not going to sell it at no cost – so what happens is that gets
passed along to the consumer, you know, if you look at the way the industry operates, so
somewhere along the line, that thing gets introduced, but again, if it was Congress’s
intent and design to take that thing away, that’s their prerogative. We typically, on things
like tariffs and issues of this nature, we supported it, not in its passage, but we understood
the need for having it early on to try and get the industry large enough scale and basically
stable enough so that it could serve a national distribution chain, and that interpretation is
different in anybody’s eyes. We would say, today, you know, that they’ve pretty much
gotten there, at least in terms of corn based ethanol, so –

MR. RAPIER: But again, with the mandate, why is the subsidy needed? I mean,
you’re going to have to, you’re going to have to use it.

MR. CAVANEY: Well, as I said, we’re agnostic about it. If it’s in – if Congress
decides that they want to take that away, you know, we’re still going to use ethanol and
we’re going to do it, but obviously, the cost will go up. That’s all. Philosophically,
you’re absolutely right, but that’s, as I said, this was put in place before we got involved
at this level and we just didn’t deal with the issue. We weren’t asked to, as a matter of
fact.

Continuing, any additional questions?

10
 HANK GREEN: Of course. This is Hank Green from EcoGeek.org. I was just
wondering, sort of in the next 50 years, a broad scale of API’s existence –

CONFERENCE CALL VOICEOVER: Marc Gunther, Fortune Magazine, has

left the conference.

MR. GREEN: Okay. You’re looking at sort of two challenges, from my

perspective, and one is that the amount of oil in the world is decreasing so the cost of
getting is going to increase, and two, that America and the world we’re really starting to
try and decrease the amount of oil we use in order to decrease the amount of greenhouse
gases we produce, so in my opinion, it doesn’t look like a very good situation for API,
and so in the next 50 years, what do you see your organization, how do you see
yourselves countering that challenge?

MR. CAVANEY: You know, right now, over the last hundred-plus years,
hydrocarbons have served the American consumer well. We’ve been the one that’s
provided them. It was our investment that put in the infrastructure that allowed a pretty
remarkable system, you know, to operate, and I think added value to the American
economy. Our members are committed to being the supplier of the transportation fuels
that the American consumer needs, and we’re going to be in that business.

When you take a look out, each individual company makes those decisions by
themselves; every one of our major companies is one of the principals in the DOE
program on fuel cells, almost all of our companies, besides having active research
programs underway, have announced partnerships either in the biodiesel field or in the
cellulosic area and other things. They have been active in individual partnerships with
the autos, both the U.S.-based autos as well as the foreign autos, looking at advanced
internal combustion engines, looking at more technology on plug-ins and hybrids, just
going around, so we see ourselves as basically continuing to play that role, continuing to
rely on that investment to deliver up the product to the consumer. So we’ll evolve.

Right now, it happens to be ethanol that we’re moving into, you know, biodiesel
is also made, although more modest a scale, inroads onto that side of the transportation
equation, and as they have said is that the age of oil is not going to end for us just because
on some magic day somebody declares that, well, we’ve hit peak oil or whatever the case
may be. It’ll have a place in the globe because of its value as an energy source; it’ll just
look a lot different, and that’s going to be determined by public policy and consumer
preference, and we’re going to be very, very mindful of that and stay active. So we’ll be
here, and hopefully, if not us, our children or grandchildren will have a conversation like
this, you know, those 50 years in.

MR. RAPIER: Yeah, hi, this is Robert Rapier again. I have lots more questions,
I don’t want to hog the time, so if you have a lull, just call on me, because I’ve got just –

(Laughter.)

11
 MR. LUTZ: Thanks, Robert, let’s actually take – can we see if any of the other
folks, John Gartner, Jeff McIntire, that have not had a chance to ask a question have one,
and then we can come right back to you?

JEFF MCINTIRE: Yeah, this is Jeff McIntire-Strasburg from Treehugger. Just

over a year ago, eight energy companies, including Shell Oil, went to Congress and said
they want to see mandatory greenhouse gas emissions caps. I know your own programs,
your climate challenge programs, have focused on voluntary measures by industry. What
is API’s position on Congress implementing mandatory greenhouse emissions caps?

MR. CAVANEY: Let me take just a couple of posits and put that in context.

MR. MCINTIRE: Okay.

MR. CAVANEY: The first of these is that we think there are really three
important elements that are so interconnected you can’t deal with one without
acknowledging the other. One, of course, is the whole subject of climate change and
greenhouse gases. The other is what we call energy security, which is this other concern
that we have out there, and the third is economic security, the capacity to make sure that
we keep jobs going here and they’re not all exported elsewhere. So those are the three
that need to work together.

When you look at our position, as an industry, on the point you’ve just raised, is
we feel that at the beginning of the debate to ultimately result in legislation, not just the
public debate, but something that’s going to move in a direction, we think it’s important
that everything be on the table. And we also feel that it’s important we don’t come with
any pre-bias to that table and that we rely on a very transparent, very public and an
informed debate in trying to resolve what may be the most difficult energy/environmental
economic/decision the country has had to make in many a decade. And so we do not
have a bias. We have a very good result from our voluntary technology oriented efforts
that we’ve done. If you take a look at and compare our results here with those in Europe,
the EU-15, you’ll find that we gained more reductions in greenhouse gases under a
voluntary technology oriented approach than they did over there, but that passed.

We’re wanting to continue to be able to do voluntary stuff because we think

ultimately that’s how you push the technology, but we’re going to go open, we’ll sit
down, and whether it’s carbon tax, whether it’s cap and trade, it’s upstream or
downstream oriented, or whether you put it for, there’s an energy intensity reduction
target, you could reward people with incentives for reducing – there’s just a whole lot of
ways that you can deal with that, and so we want to be at the table, and we want to share
our experience, we’re willing and open to listen to others and we think, number one, that
the government should not pick winners and losers in advance of that discussion getting
underway, number two, we think that the market is the best place to solve and sort of all
these varying things, number three, we think that multiple approaches and multiple
opportunities, rather than one, is going to help get us there more cost-effectively. We

12
think, number four, that the problem needs to have global participation, not just U.S.
participation; it’s not going to be sufficient.

And the last thing we think is an important condition is, well this is on the top of
the minds of a lot of what we might call informed energy experts and people are aware of
what climate change is. We’ve done enough research on this topic to know that once you
get below the first question, people have no idea about what are the impacts or what are
the options that some of these opportunities are going to create, so we think there needs
to be a government public-private partnership focused on public education. While this
debate goes on, that needs to take place. This is so sufficiently complex that I think from
our perspective we don’t see this easily solved in this session of Congress or necessarily
the next. We think, like most energy legislation, if you’ll look back historically, you’ll
find out it takes several Congresses because usually the issues are very complex, and this
one more so than anything we’ve ever tackled. So I hope that’s been responsive, and I’ll
be glad to answer a follow-up if I’m not totally clear.

MR. MCINTIRE-STRASBURG: Oh, no, that’s good. Let me follow up real

quick, though. You’re right, it’s an incredibly complex issue. What is API’s position on
the overall consensus, though, on climate change, that it is largely human-caused? I
know there’s been some debate about that.

MR. CAVANEY: We’re not scientists that are experts in that area. We have
concluded that there’s sufficient signals that it’s important we get on with trying to
mitigate, you know, the outcomes that may flow from the path that we’re on, and so
we’re focused on being a part of that. Individual companies or individuals themselves
may elect to choose to put funds, participate in research and all, but from our standpoint,
you know, we’re moving forward with trying to be on the solution part of that ledger.
We think that there are valid and honest questions that are up there, but, you know, those
will be left to others to try and resolve and work on in the times ahead.

MR. MCINTIRE-STRASBURG: Okay. Thank you.

JOHN GARTNER: This is John Gartner. You mentioned earlier, I know we’ve
been talking about diesel a little bit and energy efficiency. Does API, as part of its
messaging and consumer awareness, plan on promoting ultra low sulfur diesel because of
the new environmental advantages of the fuel to reverse, as you mentioned, the
impression that was left from the 70s and 80s? I’m just wondering, since diesel
obviously can be a fuel in many capacities, not just transportation, if your organization
would be willing to take the lead and say, okay here’s why it’s good not only to use in
power generation but also as a transportation fuel to help change that awareness?

MR. CAVANEY: John, you’re right on. We’ve actually started, you may have
seen in some magazines and newspapers and importantly on a lot of television that are
what you called sort of public education, public awareness, public affairs show, we have
an ad running right now that has a big 18-wheeler out there and basically talks throughout
the whole feature is ultra low sulfur diesel, ULSD, and it talks about the significant gains,

13
and the reason why is because those trucks can begin to start to realize those gains right
away. The autos have yet – they’re going come out, as a matter of fact, I think starting
this summer and thereafter, so there aren’t enough of them out, but we intend to, when
they are starting to be available and there is promotion of their advantages by the auto
companies, we’re also going to be doing companion advertising ourself to help make
people aware of the opportunity of not only significantly cleaner – 97 percent of the
sulfur that used to be in diesel has now been removed, 90 percent less overall emissions
and you get this kicker of energy efficiency, so we think it’s a very good proposition and
we are going to be very active in that regard. But up until that period of time, we’re
going to focus on the truck transportation element.

Robert, you want to go ahead and throw one of yours in now?

MR. RAPIER: Okay. Very popular question was around peak oil. You
mentioned peak oil earlier, and you know, the oil drum focuses a lot around peak oil
discussions, when peak’s going to happen, and you probably are aware that the general
accounting office released a report, I don’t know, last month maybe, and it was about
developing the critical need to develop a strategy for addressing a peak and decline in oil
production. And it went through and it talked about some of the environmental
challenges, and when you look at what is in the pipeline here, it concerns me that we’re
probably going to accelerate our greenhouse gas emissions as we do deplete our oil
supplies.

I see us likely moving to a coal based transportation fuel economies, coal to

liquids. You can’t count me among those who is not on the cellulosic bandwagon; I
don’t think it’s going to deliver in the volumes that are needed to really contribute
substantially to our transportation fuel. So I see some real environmental challenges here
as oil production peaks, but the question is, what is your position on that? I mean, you
guys think we’re not going to peak for 30 or 40 years? I mean, a lot of people want to
know that, what exactly you believe as far as oil production peaking and declining.

MR. CAVANEY: Well from our standpoint, if there is to be a peak, the first
thing that’s I think not much understood, Robert, by many people, is the idea that peak to
them, they think of a sharp-topped mountain, where once you’re off the peak, swoosh,
you just slide down very, very quick, and you have to deal with the precipitive thing.
Most everybody who understands, at least visits the peak oil issue, understands that once
you hit that peak, you end up on sort of an undulating plateau, if you will, with a very
slow downward curve, and part of that is it’s a result of the fact that technology keeps
kicking in and your yield, you know, from existing fields, keeps increasing.

That’s one of the things that people who are peak oil theorists I don’t feel have
sufficiently factored in is, two things – the amount of what we would call current-day
technology exploration and production, and I’ll give you a couple data points here in a
minute, and then the second is the extent to which we apply some of these enhanced oil
recovery efforts to some of these fields. We’ve found some fields that have gone up
three and four hundred fold in terms of their output as a result of some of the new

14
technology. So we feel pretty comfortable that the government data talks about, that if
you took the median point – median or mean, I can’t remember; whichever it is – that
they would say, gee, peak oil might be around 2044, but then factor in things like what
happens if the tar sands really do become effective? What happens if shale gets
developed out in the Rockies area? It could be extended beyond. But whatever that
period of time is, I think hydrocarbons are going to continue to play an important role in
many of these, many of these areas, and we think we’re going to be able to get them.

Now, one thing that people have to square with, we think, there’s a concern that
the price goes up; well, the price of these products goes up in part because so much of the
domestic production areas are off-limits to us. For example, in most of the OCS area,
particularly all of the areas outside Gulf of Mexico, we don’t even really have a good
read on how much of the resource is out there. The government puts out, you know, its
own data, but that’s an estimate, so again, I think the way we look at it is, you see,
interestingly enough, a lot of the big majors have come back and are starting to do more
operations.

Here in the U.S., each of them would have their own reason why they’re doing
that, and I think the American public is going to pretty soon, if they continue to be
serious about this idea of relying less on imported oil, we’ve got plenty of oil and gas
opportunities out there, and we’ve certainly got the technology, as we proved in the Gulf
of Mexico, to do it in an environmentally sound way, so that will add another piece to
this, is when we start to find out, I think the Chevron and Devon finding last September
out in the ultra deep water and what they’ve seen out there was a real eye opener.

And the other thing I would point to is to the surprise of virtually everyone in
Washington and many people in the industry, last fall, right before Congress adjourned,
there was a bill put forth by a very unusual coalition that ended up opening some more
OCS acreage to exploration production, and it was done principally by, not the producers;
it was done by the users, and I think increasingly the user community and people are
going to see some value, so I think peak oil is an interesting thing to discuss, I think
people who raise it, they do it in all earnestness; I just don’t know that there’s a really
crisp answer.

I think one little phrase I use, sort of half jokingly, but man left the Stone Age not
because he ran out of stones, and someday we will leave the Age of Oil, but it won’t be
because we ran out of oil; it will be because some other technologies have come in that
have proven to be more cost-effective, more reliable and in various applications they will.
So we plan to be around, think we’ll be active, and technology has always ended up, from
1854 I think when the first peak oil theories were propounded, but having this technology
has been the tool that’s brought it in.

The other point I would say is if you look at most of the rest of the world where
oil is forecast to be, they are so underexplored that it’s not even (laughable–?). For
example, only three percent of the exploration that’s taken place in the Middle East, even
though they’ve got, you know 70 percent of the proven reserves, in Saudi Arabia alone,

15
which most people would argue has probably got a fair amount of oil there, they had
fewer than 300 new exploratory wells that have drilled, and less than 30 of them were
drilled since 1995. And so you think of the technology that was around in ’95 and what’s
available now, so I think there’s more to come in this area rather than less to come here in
the immediate term, in near term.

MR. RAPIER: Okay, thank you.

MR. CAVANEY: Sorry to take so much time. Anybody else got a question?

MR. GONGLOFF: I have one. Mark Gongloff again.

MR. CAVANEY: Yeah.

MR. GONGLOFF: You talked awhile ago about how you thought multiple
approaches rather than one was going to help us get to emission – to reducing greenhouse
gas emissions cost-effectively. One that is being touted by a lot of people on the right
and the left of the political aisle is a carbon tax – what is your – which would, of course,
raise the cost of your products significantly, probably, if it were to make much of a
difference in greenhouse gas emissions. What is your position on a carbon tax?

MR. CAVANEY: Well we, as I mentioned a little bit earlier, we are in a position
right now where we have said we’re not going to take a bias nor lean on a preference for
anything so that we’re seen to have a hidden agenda. We’re going to go up to Capitol
Hill and be a part of the negotiations with both the House and the Senate and provide
what we’ve got from experience, look at the studies and try and work through this. I will
tell you a couple things, though, as obviously you see a lot of the same stuff we do. Most
economists that look at this declare that a carbon tax would be the most efficient way to
get the maximum amount of reductions, but then the flipside of that is you talk to most
political advisers or elected officials themselves, and that’s the last vote that they’re ever
going to take, is related to a carbon tax, so it seems to me, Mark, that a lot of debate, a
lot more moving along on this whole issue of climate, has got to occur before this option
may, how do we say, gain a little more currency than it presently has. I just don’t see it
being a political starter in this Congress. But, you know, at the end of the day, when
people look at a whole range of options and they know they’ve got to take some action, it
may well look a lot better than it does to people today.

MR. GONGLOFF: All right, thank you.

MR. LUTZ: We have about 10 more minutes left here, and I’m going to just
interject now. We had a question that was submitted by Maria from Green Options,
Maria Energia and Green Options, and Red, you talked a little bit before about energy
efficiency. Maria’s question is, in your opinion, where is the United States’ biggest
opportunity to increase energy efficiency? For example, transportation, electricity or et
cetera?

16
 MR. CAVANEY: I’m not a broad enough expert to know that, as I said, we took
a look at this, and that’s why we ended up taking the position of not sticking our nose in
other people’s business and talking about well if you did this to CAFE it would be better
or if you did this to the utility industry. Each has unique experience, and our view is it
should be – that the government ought to provide leadership, the business community
ought to do the same, and that we ought to do it in a transparent way where we work with
the government to gain energy efficiency solutions. The government, you know, collects
data from us and then people will see whether or not they’re hitting their marks and are
they doing their fair share. It’s interesting, when you go back –

CONFERENCE CALL VOICEOVER: Mark Gongloff has left the conference.

MR. CAVANEY: When you look at, back in the 1970s and the early ‘80s
experience, that was the way DOE at that time ran their operation, is they went to each
industry and said, you design energy efficiency program, we want to take a look at it, and
then reporting the data and we’ll go from there. So I think they can be across the board.
The one that I think is not as well appreciated is how many things the individual
consumer can do that don’t disadvantage them or create a huge burden but end up not
only saving energy but also helping save them money, and that, we know just off the bat
and we promote this a fair amount, that when you look at how you drive a car, there’s
about 10 things that you can do that could save you up to 10, 11 miles per gallon and
they’re very easy things, not driving to 35 miles all the time, so those are the things that
we think the government has the credibility with industry to get out there and start to talk
about these things, and I think they will make a difference. So I would put this in the no
stone unturned, and I think that we’ll end up getting surprising gains in every sector
because to the business community, in most cases, energy efficiency is money that drops
to the bottom line.

MR. LUTZ: Great. Any final questions, then, from whoever’s on the call?

MR. RAPIER: Yeah, Robert Rapier, one final question from me, and then I
won’t ask any more.

MR. CAVANEY: That’s okay, Robert.

MR. RAPIER: I’ll save them for next time.

MR. CAVANEY: Okay.

MR. RAPIER: There was a study released today, just came out, I got it in the
email just a little while ago. Professor Mark Jacobson at Stanford, he’s a civil
environmental engineering professor, he’s described in the news release as one of the top
atmospheric chemists in the nation, and he’s saying that if we go to more ethanol in the
gasoline, it is going to result in more deaths from smog. He said he’s done the studies,
that we will kill people from smog as we increase our ethanol usage, especially in the big
cities, because it will increase smog. Comments on that?

17
 MR. CAVANEY: I saw that too, and I’ve asked our folks if we can try to get a
copy of the study and take a look at it and see where it is. Since the very beginning,
when we had our experience with MTBE as a blending agent in gasoline, we agree with
the EPA blue ribbon panel that was commissioned by President Clinton back in the late
1990s that came out, and one of their key recommendations was that we ought to look
extensively at the environmental and health effects of any fuel or fuel additive before
widespread adoption, and we have gone to EPA and gone to everybody, and we said,
we’re not here an alarmist, but we really do think that if you’re going to embrace
something this big, you need to take a look at it, because the last time Congress did this,
when they put in the Clean Air Act amendments in the early 1990s, it was clear to
everybody, and we’ve seen the Congressional record with people’s quotes in there, that
the additive that was going to be used was going to be MTBE, but yet, what ended up
happening was the industry got sued for these things and a lot of class actions and a lot of
liability followed from that, and we don’t want that to happen again, and so I think maybe
what this Mark Jacobson study may well do is help serve as a bit of catalyst to make sure
that we do take a good look at this so we fully understand what the results are going to
be, regardless of whether he’s correct or not. So that’s kind of where we are, and we’ve
said that publicly and will continue to say it. We ought to make sure that we know all the
potential impacts before we do anything in the fuel system that’s going to be this
widespread.

MR. LUTZ: Well that’s great. I think that’s all the time that we have. I would
say, if you have any additional questions, please email them to Juan, and we will follow
up with that and provide answers. Also wanted to let you know that we will be posting,
as last time as well, both the text and audio of the podcast on the EnergyTomorrow.org
website, so if you have any questions and you’re looking for those answers or want to
review the transcript or take another listen to the call, certainly in the next couple days,
we’ll be pushing as hard as we can to get that up there as fast as we can.

MR. CAVANEY: Thank you all for participating.

MR. LUTZ: Great. And if you’d like to participate in future calls, please email
Juan and we’ll talk about future issues as well.

(END)

18