[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE IMPACT OF FOREIGN OWNERSHIP AND FOREIGN INVESTMENT ON THE SECURITY
OF OUR NATION'S CRITICAL INFRASTRUCTURE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TRANSPORTATION
SECURITY AND INFRASTRUCTURE
PROTECTION
of the
COMMITTEE ON HOMELAND SECURITY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MAY 16, 2007
__________
Serial No. 110-36
__________
Printed for the use of the Committee on Homeland Security
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Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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COMMITTEE ON HOMELAND SECURITY
BENNIE G. THOMPSON, Mississippi, Chairman
LORETTA SANCHEZ, California, PETER T. KING, New York
EDWARD J. MARKEY, Massachusetts LAMAR SMITH, Texas
NORMAN D. DICKS, Washington CHRISTOPHER SHAYS, Connecticut
JANE HARMAN, California MARK E. SOUDER, Indiana
PETER A. DeFAZIO, Oregon TOM DAVIS, Virginia
NITA M. LOWEY, New York DANIEL E. LUNGREN, California
ELEANOR HOLMES NORTON, District of MIKE ROGERS, Alabama
Columbia BOBBY JINDAL, Louisiana
ZOE LOFGREN, California DAVID G. REICHERT, Washington
SHEILA JACKSON LEE, Texas MICHAEL T. McCAUL, Texas
DONNA M. CHRISTENSEN, U.S. Virgin CHARLES W. DENT, Pennsylvania
Islands GINNY BROWN-WAITE, Florida
BOB ETHERIDGE, North Carolina MARSHA BLACKBURN, Tennessee
JAMES R. LANGEVIN, Rhode Island GUS M. BILIRAKIS, Florida
HENRY CUELLAR, Texas DAVID DAVIS, Tennessee
CHRISTOPHER P. CARNEY, Pennsylvania
YVETTE D. CLARKE, New York
AL GREEN, Texas
ED PERLMUTTER, Colorado
VACANCY
Jessica Herrera-Flanigan, Staff Director & General Counsel
Rosaline Cohen, Chief Counsel
Michael Twinchek, Chief Clerk
Robert O'Connor, Minority Staff Director
______
SUBCOMMITTEE ON TRANSPORTATION SECURITY AND INFRASTRUCTURE PROTECTION
SHEILA JACKSON LEE, Texas, Chairwoman
EDWARD J. MARKEY, Massachusetts DANIEL E. LUNGREN, California
PETER A. DeFAZIO, Oregon GINNY BROWN-WAITE, Florida
ELEANOR HOLMES NORTON, District of MARSHA BLACKBURN, Tennessee
Columbia GUS M. BILIRAKIS, Florida
YVETTE D. CLARKE, New York PETER T. KING, New York (Ex
ED PERLMUTTER, Colorado Officio)
BENNIE G. THOMPSON, Mississippi (Ex
Officio)
Mathew Washington, Director
Erin Daste, Counsel
Natalie Nixon, Deputy Chief Clerk
Coley O'Brien, Senior Counsel
(ii)
C O N T E N T S
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Page
Statements
The Honorable Sheila Jackson Lee, a Representative in Congress
From the State of Texas, and Chairwoman, Subcommittee on
Transportation Security and Infrastructure Protection.......... 1
The Honorable Daniel E. Lungren, a Representative in Congress
From the State of California, Ranking Member, Subcommittee on
Transportation Security and Infrastructure Protection.......... 2
The Honorable Yvette D. Clarke, a Representative in Congress From
the State of New York.......................................... 26
Witnesses
Mr. Richard T. Garcia, Global Security Advisor, Corporate Affairs
Security, Shell International:
Oral Statement................................................. 6
Prepared Statement............................................. 7
Mr Michael Pfister, Senior Vice President and Chief Information
Officer, Halliburton Company:
Oral Statement................................................. 10
Prepared Statement............................................. 12
Mr. David Marchick, Covington and Burling LLP:
Oral Statement................................................. 14
Prepared Statement............................................. 16
THE IMPACT OF FOREIGN OWNERSHIP AND FOREIGN INVESTMENT ON THE SECURITY
OF OUR NATION'S CRITICAL INFRASTRUCTURE
----------
Wednesday, May 16, 2007
U.S. House of Representatives,
Committee on Homeland Security,
Subcommittee on Transportation Security and Infrastructure
Protection,
Washington, DC.
The subcommittee met, pursuant to call, at 2:50 p.m., in
Room 1539, Longworth House Office Building, Hon. Sheila Jackson
Lee [chairwoman of the subcommittee] presiding.
Present: Representatives Jackson Lee, DeFazio, Clarke, and
Lungren.
Ms. Jackson Lee. Good afternoon. Let me first of all thank
all of the witnesses for their patience. There is quite a bit
of activity on the floor of the House, and Members must be
engaged in that activity. Our ranking member is en route.
Let me acknowledge the presence of Mr. DeFazio of Oregon. I
thank him, and members are coming, but with the importance of
this hearing and the presence of the witnesses, we will begin.
Let me first of all ask the subcommittee to come to order.
The subcommittee is meeting today to receive testimony on
the impact of foreign ownership and foreign investment on our
Nation's critical infrastructure.
Under the rules of the House of Representatives and the
rules of the committee, visitors and guests are not permitted
to make undue noise or to applaud or in any way show their
pleasure or displeasure as to the actions of the Members of the
House. The Chair will continue to abide by those rules as we
proceed in this hearing so that all of the witnesses may be
heard, as well as the members of the committee.
Let me begin with my opening statement, I yield myself 5
minutes.
I would like to take this opportunity, as I said earlier,
to thank all of you for joining with us this afternoon so that
we can continue to address the questions of security and the
security of our Nation. In this hearing, we will continue our
exploration of foreign ownership and investment and how it
intersects with national security.
As we all know, early this year, this subcommittee took a
thorough look into how the Federal Government monitors and
evaluates foreign ownership of our critical infrastructure.
Today, the subcommittee is taking a different approach to this
issue.
I think it is important to note that the challenge of the
Department of Homeland Security and the challenge, of this
committee is to be proactive. It is important that we imagine
the possible and the impossible; and what that means is that
every hearing that may in some areas be viewed as impossible
are the actions that would generate from the testimony or the
suggestion of the title to be impossible. We who have the
responsibility of securing America can never consider that the
possible or the impossible is too small or too narrow for us to
review.
Today, we are exploring the vulnerabilities of critical
infrastructure owned by U.S. companies that have a significant
number of foreign investors and how it may compromise homeland
security preparedness, as well as the question of investment
and access and control. I think we all understand that when a
foreign entity establishes a lasting financial interest in a
country, it is able to exert influence on that country.
According to 2005 CEA data, foreign investors own over 9
trillion in stock in U.S. assets. These assets are composed of
four basic types and the largest portion is foreign direct
investment. This type of investment goes directly into
companies and infrastructures. The other three types of foreign
investment are corporate stocks, private bonds and the U.S.
Treasury bonds and bills. Each of these types comprises about 2
trillion of the total investment stocks. It is also important
to note that these investments have accumulated over decades,
even centuries.
Like most Americans, I wholeheartedly support capitalism
and free trade, of course, with various requirements that would
help all Americans. Yet, as events have shown, we need to
pursue a vigorous oversight agenda, especially in the area of
foreign investment and critical infrastructure. Dubai Ports
taught us that we need to not just focus on one area of
infrastructure, but we need to focus on all areas. And we need
to be open minded because we know the capitalistic system is
enormously creative. There are any number of subsets of what
can be sold and what can be invested in.
As the chairwoman of this subcommittee which bears the term
``infrastructure protection'' in its title, I intend to do just
that, evaluate how infrastructure is being protected to ensure
it is here and available when America needs it most in a time
of crisis.
As we all know, terrorists do not signal or call ahead
before they attack. We saw this in Madrid and London, amongst
other horrible incidents. Terrorists are creative, especially
in the ways in which they will attack us.
It is not inconceivable that a terrorist might try to
attack us not with brute force, but simply by pressing a
computer button or by crippling a key asset or some other
nonstated, but possibly unimaginable-type act.
Another example, foreign investment deals with energy.
Current European wind companies have been keen on investing in
the U.S. market. In fact, several of the largest turbine
producers are now selling to U.S. developers for projects, and
opening offices and manufacturing plants in the U.S.
Now, I know many will say that it is just wind turbines.
What is the big deal? Well, being from Houston, I can tell you
that energy is an important issue, and the security of energy
is important. We must make sure that these companies take the
necessary steps to protect new infrastructure as it becomes
more prevalent.
Today, we will address these basic questions. What are the
U.S. companies doing to control access to sensitive information
that if compromised, could possibly cripple our economy? What
steps are taken to protect information when U.S. corporations
operate outside the U.S.? For example, Halliburton recently set
up operations in Dubai. This committee is eager to know how
sensitive material or information that is housed in those
offices in a foreign land are to be protected.
I and other members of this subcommittee certainly are,
hopefully, perceived as being responsible and serious and
seriously committed to protecting the critical infrastructure
and understanding how the private sector is protecting our
vital assets.
The chairman of the full committee and the ranking member
of the full committee have had one voice on the question of
ensuring the security of this Nation. As I work with my ranking
member, we hope that as we work through many issues, that voice
will be one voice on the questions of securing the Nation.
Again, today, we want to explore what steps the private
sector has taken to protect its infrastructure, and I look
forward to witnesses' testimony learning how these different
entities protect themselves from threats and what role Congress
can play to fortify and protect the United States' assets.
Let me close by simply saying that, in addition to the
witnesses who are here, we know that many States have found in
the public sector a source of revenue by utilizing public
entities for investment of foreign operators, investors, and
sometimes owners. In the course of our work, we will be looking
at those issues as well, because frankly, the ability to lose
control during a time of crisis or tragedy has to be the
concern of this committee.
So, in the course of this hearing, I will put some of these
thoughts into the comments and questions that I will make. We
must stand ready and we must be prepared.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from California, for an opening
statement.
Mr. Lungren. Thank you very much, Madam Chairwoman. And I
noted you talked about the possible and the impossible. It may
be impossible for us to hold this hearing because of all of the
comings and goings that we are having on the floor of the House
today, and if we could just get the germaneness rule figured
out between now and the end of the day, we might be able to get
back to regular work.
I thank you for holding this hearing, and I welcome the
opportunity to discuss foreign ownership and foreign
investment, its impact on the critical infrastructure of the
country.
This Homeland Security Committee is all too familiar with
the concerns and fears that foreign ownership of U.S. critical
infrastructure assets create in our citizens. The 2006 purchase
of the operating rights at six U.S. ports, including the Ports
of New York, New Jersey, and Baltimore by the Dubai Ports World
Company, owned by the UAE, created a firestorm of public and
congressional opposition. I may be one of the few Members of
Congress who was not so worried at the time. Perhaps because I
was born and raised in a large port city, the city of Long
Beach, California, and for 10 years represented both Long Beach
and L.A. ports, it had dawned on me at an early age that ports
had foreign ships, foreign workers, and foreign investment; and
without that foreign investment in our ports of the United
States, we would not be in as good shape as we were otherwise.
I was one of those who thought that it is good that people
think it is good to be investing in the United States. I would
rather have them think this is the place to invest than
somewhere else. But nonetheless, the Dubai Ports World
controversy focused attention on the governmental process
established to review such sales and determine whether review
protects our economic and national security.
Of course, I am referring to the CFIUS, or Committee on
Financial Investment in the United States.
Amid growing concerns over foreign acquisition of American
businesses in 1988--that was my last year in Congress during my
first tour of duty here--Congress passed the Exon-Florio
provision, which gives the President the authority to block
proposed foreign acquisitions that threaten our national
security. Foreign acquisitions of U.S. Government assets do
pose a challenge to our government. It does create a delicate
balancing act in the worldwide economy. How do we attract vital
foreign investment to the U.S. without sacrificing or
diminishing our national security?
I do believe we have the proper procedures in place to
protect our critical infrastructure and assets by requiring
foreign acquisition to be closely reviewed and scrutinized by
CFIUS.
For over 30 years, this process has worked effectively,
guarding our capital markets, our high-valued infrastructure
assets, and most importantly, our national security. On only
one occasion of which I am aware, in 1990, the President
intervened and ordered a divestiture by a Chinese aerospace
company of a U.S. aircraft parts manufacturer.
Last year's debate on the Dubai purchase raised a number of
problems with the CFIUS review process. It demonstrates the
changes needed to be made in light of 9/11 and our Nation's
growing concern for security.
I believe important improvements were included in the
legislation we passed last year, H.R. 5337, and again in
February of this year, H.R. 556, at that time by a vote of 423
to zero.
One of the important things it does is, it elevates the
Secretaries of Homeland Security and Commerce to Vice Chairs of
CFIUS, which will ensure a broader definition of national
security threats in the CFIUS review. This legislation also
limits delegating these important CFIUS decisions below the
under secretary level.
I would just say with respect to American businesses that
operate overseas or bring some of their corporate structure
overseas, it is important for us to see how they protect assets
that we don't want to be revealed to others. But this is not
something new; this is what we did throughout the entire Cold
War. And then, in some cases, the most important technology we
were working with were computers, but it also had to do with
things as mundane as that which we used for offshore drilling,
that which we used for exploration of oil around the world. We
believed that some of those things ought to be limited at that
time because of it.
But we have to remember how fast the world works. I can
remember back in the 1980s, when we had something called a
global positioning satellite as a DOD project, and they were
coming around telling us that we ought to vote for it because
it would allow us to be able to determine where our military
people were, within 100 feet of where they were. For Mother's
Day, I just bought my wife a GPS. That shows how fast that
which we want to protect from suspicious eyes of others become
commonplace.
So that is the challenge we have, and I would be very
interested to find out how we deal with that from the
standpoint of our witnesses.
And I thank the gentlelady for yielding me this time.
Ms. Jackson Lee. I thank the gentleman for his remarks.
Other members of the subcommittee will be reminded, under
the committee rules, opening statements may be submitted for
the record.
Ms. Jackson Lee. At this time I would like to welcome our
panel of witnesses.
Our first witness will be Mr. Richard T. Garcia, Global
Security Advisor, Corporate Affairs Security, Shell
International.
Mr. Garcia began his position on August 1, 2005, after
retiring from the Federal Bureau of Investigation with 25 years
of service as the Assistant Director for the Los Angeles field
office.
Welcome, Mr. Garcia.
As the Global Security Advisor, Mr. Garcia coordinates with
other intelligence and law enforcement agencies, both domestic
and foreign, in an effort to obtain strategic intelligence
regarding potential criminal terrorist attacks against Shell
assets globally.
Mr. Garcia also manages security advisors in North America
and in Latin America, as well as the intelligence and
assessment team with offices in Washington, D.C., and London.
Our second witness is Mr. Michael Pfister, Senior Vice
President and Chief Information Officer at Halliburton. Mr.
Pfister was named Senior Vice President and Chief Information
Officer for Halliburton in January 2007. Previously, Mr.
Pfister was President and Chief Operating Officer in a
privately held health care firm in New Braunfels, Texas.
The final witness of this panel is David Marchick, Partner
at Covington & Burling. Mr. Marchick's practice focuses on
complex international trade, investment, transportation and
legislative matters. Mr. Marchick is also a leading expert on
the Exon-Florio amendment and has an active practice advising
U.S. and foreign companies on security approvals from the
Committee on Foreign Investment in the United States.
He is a coauthor of the book, National Security in Foreign
Direct Investments. He has testified in Congress on numerous
occasions on implementation of the legislation and played an
active role in congressional consideration of the legislation
that would amend the legislation in question.
Without objection, the witnesses' full statements will be
inserted in the record.
I now ask each witness to summarize his statement for 5
minutes, beginning with Mr. Garcia from Shell, if you would.
STATEMENT OF RICHARD T. GARCIA, GLOBAL SECURITY ADVISOR,
CORPORATE AFFAIRS SECURITY, SHELL INTERNATIONAL
Mr. Garcia. Madam Chair, members of the subcommittee, I am
pleased to appear before you today to testify on the impacts of
foreign ownership investment and the security of our Nation's
infrastructure.
Shell is active in more than 130 countries with 109,000
employees worldwide. Security plays a vital role in every one
of our operations. When we operate politically in stable,
geologically challenging regions, leading-edge security is
critical to our success. Shell has a century-old history in the
United States; one-third of Shell's assets and shareholders are
here in the United States.
Shell Oil Company, through its U.S. affiliates, owns more
than 10,000 miles of pipeline, 59 product terminals, nearly
1,000 storage tanks, as well as chemical facilities and oil
refineries. Shell U.S. operates oil and gas rigs onshore and
offshore around the country. We have 22,000 people working in
Shell offices from New York to Los Angeles, from the Arctic
Circle to the Gulf of Mexico. We invest heavily in the
personnel training systems and tools we need to protect our
people and our assets.
Since September 11th of 2001, Shell has invested in
facility protection, training, access monitoring, and
communications. Since 9/11, we have brought people into our
corporate affairs security office from the Federal Government,
law enforcement, military, and the Coast Guard. Shell U.S.
maintains strong ties with these and other agencies that allow
us to share information.
We also receive briefings from DHS and the State
Department's Overseas Security Advisory Council on security
issues important to Shell in the energy industry.
Our security team participates in various information-
sharing programs from the U.S. Government such as the FBI's
Texas coastal regional alert system, the intelligence of
terrorism network, which work with our information-sharing
programs in Houston and Los Angeles.
We also participate in the FBI's information-sharing
program, which is currently where I am a member of the national
board.
Shell Oil Company, which operates in the United States, is
a subsidiary of the Royal Dutch/Shell Group, a group global
company incorporated in the United Kingdom and headquartered in
the Netherlands.
I am here today because you would like Shell's perspective
on how foreign ownership or foreign investment impacts critical
infrastructure. Let me say, as far as Shell is concerned, it
does not affect us. I am aware of no instance where our foreign
ownership or foreign investment has had any negative impact on
keeping Shell's infrastructure and keeping it safe. I believe
our energy infrastructure is secure as it would be as if Royal
Dutch/Shell were based here in the United States.
A diplomatic relationship between the United States and the
Netherlands is one of the strongest unbroken relationships in
the world. The Netherlands was the first country to recognize
the American flag in November 1776, only 4 months after we
declared independence.
Shell has always had strong security measures in place
protecting our people and infrastructure. Within months of 9/
11, the oil and gas industry developed security protocols and
procedures for all segments of the industry, including
pipelines and terminals. Shell participates fully with the
Homeland Security Information Network, which allows DHS to get
information quickly and easily to those responsible for the
security of critical infrastructure.
Shell also participates fully in Homeport. Homeport has the
same function, but is focused on the maritime aspect of the
critical infrastructure, facilities with docks and wharves. It
is a Web-based portal for industry to access necessary
information or for the Coast Guard to push data quickly should
a threat materialize.
As you may be aware, the Federal Government has also
developed a credentialing program which will document
transportation workers who have access to sensitive areas and
equipment.
In addition, Shell maintains a global network and helps
with the relationship between the government and agencies
around the world to protect our people and assets because a
threat to our infrastructure is as likely to come from the
outside as it is to come from inside. Shell's network helps us
protect our U.S. infrastructure.
Finally, Shell's security measures here are strengthened by
the challenges being encountered around the world. Shell's
experience in keeping our people and our assets secure in
politically unstable regions and difficult climates sharpens
our expertise in keeping our people and our assets safe here in
the U.S. What we learn around the world, we apply here.
Shell is proudest of the safety and reliability of our U.S.
infrastructure, and it remains dedicated and committed to our
security.
Thank you for allowing me to be here to answer the
questions that you.
[The statement of Mr. Garcia follows:]
Prepared Statement of Richard T. Garcia
Chairwoman Jackson-Lee, Ranking Member Lungren and Members of the
Subcommittee: My name is Richard Garcia and I am an employee of Shell
Oil Company and serve as the Global Security Advisor for Shell
International. In that capacity, I coordinate with law enforcement
agencies in the United States and abroad to prevent attacks--both
criminal and terrorist--against Shell's personnel or assets. I manage
Shell's security advisors in North and Latin America. I also direct
Shell's Information and Assessment Team, which has offices in
Washington, D.C. and London. Prior to joining Shell, I was with the FBI
for 25 years. I headed both the Houston and Los Angeles FBI field
offices.
I am pleased to appear before you today to testify on the impact of
foreign ownership and foreign investment on the security of U.S.
infrastructure.
Shell is committed to protecting our assets and our people around
the world. Shell companies produce oil, gas, chemicals, lubricants and
alternative energies like wind and hydrogen around the globe. Security
plays a vital role in every one of our operations. When we operate in
politically unstable or geologically challenging regions, security is
mission critical to our success.
Shell has a century-old history in the United States. One third of
Shell's assets, and shareholders are here in the United States. Shell
Oil Company, through its U.S. affiliates, (Shell US) owns and operates
5,000 miles of pipeline and has partial ownership of 10,500 miles of
pipeline. We wholly or partially own 59 products terminals and 960
storage tanks with more than 67.8 million barrels of capacity.
Shell US owns and operates five refineries in the United States
with a combined capacity of 753,000 barrels per day. Six plants produce
15 billion pounds of chemicals annually for industrial use. Seven
blending and packaging facilities around the country prepare our
automotive consumer products like engine oils and lubricants. Shell US
operates oil and gas rigs onshore and offshore around the country. We
have 22,000 employees working at Shell sites and Shell offices from New
York to Los Angeles and from the Arctic Circle to the Gulf of Mexico.
Shell US invests heavily in the training, employees, systems and
tools we need to protect our people and our assets. Since September 11,
2001, we have invested in facility protection, training and
communications all the way from wellheads and offshore platforms to
tankers, ports, pipelines, refineries and storage tanks.
All of these steps were carried out in close partnerships with law
enforcement and security officials. Shell US maintains strong
relationships with federal, state and local law enforcement agencies in
the United States. Shell hires skilled security professionals who have
the experience, training and professional relationships to protect
Shell's people and infrastructure.
--------------------------------------------------------
Note: The companies in which
Royal Dutch Shell plc directly and
indirectly owns investments are separate
entities. In this Statement, the
expressions ``Shell'', ``Group'' and ``Shell
Group'' are sometimes used for
convenience where references are made to
Group companies in general. Likewise, the
words ``we'', ``us'' and ``our'' are
also used to refer to Group
companies in general or those who
work for them. These expressions are
also used where there is no purpose
in identifying specific companies.
Since 9-ll, Shell Oil Company has recruited professionals
into our Corporate Affairs Security office from the State Department,
the police and military and the Coast Guard. Shell US maintains strong
ties with these and other agencies that allow us to share information
back and forth. Shell Oil Company's security team also receives
briefings from Department of Homeland Security (DHS) and the State
Department's Overseas Security Advisory Council on security issues
important to Shell and the energy industry.
The U.S. security team participates in various information-sharing
programs from the U.S. Government such as the FBI's Texas Coastal
Regional Alert System and the Intelligence and Terrorism Alert Network,
which are information-sharing programs in Houston and Los Angeles. In
my previous employment with the FBI, I was responsible for the
expansion and enhancement of these two programs. The U.S. Security team
also participates with the FBI's InfraGard information sharing program
where I am currently on the National Board of Directors for InfraGard.
Shell Oil Company, which operates in the United States, is a
subsidiary the Royal Dutch Shell Group, a global energy company
incorporated in the United Kingdom and headquartered in The
Netherlands.
I am here today because you would like Shell's perspective on
whether foreign ownership or foreign investment impacts the security of
critical infrastructure. Let me say simply: It does not. I am aware of
no instance where our foreign ownership or foreign investment has had
any negative impact on keeping Shell's infrastructure and people safe
in the United States. I believe our energy infrastructure is as secure
as it would be if Royal Dutch Shell plc were headquartered here in the
United States.
The Dutch-American friendship goes back more than 200 years. The
Netherlands was the first country to recognize the American flag in
November 1776--four months after our nation declared independence. The
diplomatic relationship between the United States and The Netherlands
is one of the longest, unbroken diplomatic relationships in the world.
Before 9-11, She had strong security measures in place to protect
our people and infrastructure. But the world of corporate security
changed forever on 9/11, as we had to more seriously address the
possibility of intentional acts to harm our facilities and employees
instead of just accidental events. Since 9-11, the oil and gas industry
has forged a partnership with government at all levels to protect
hundreds of facilities across the country from the potential of
terrorist attacks. Shell is a full participant in that partnership.
Within months of the attack, the oil and gas industry developed
security measures for all segments of the oil and gas network--
including pipelines, refineries, terminals, and others. The American
Petroleum Institute and the National Petrochemical and Refiners
Association produced an industry-wide method for managers to identify
security vulnerabilities in their operations. The Security
Vulnerability Assessment methodology is a sophisticated, risk-based
tool used to identify the security hazards, threats and vulnerabilities
of a facility, and to evaluate the best measures to provide secure
facility operations. In other words, it provides the framework for a
complete security analysis of the facility and its operations. The SVA
covers both physical and cyber security, process safety, facility and
process design and operations, emergency response, management and law
enforcement.
In 2004, the oil and natural gas industry expanded the SVA
methodology to include pipeline, truck, rail and liquefied natural gas
(LNG) operations. DHS has recognized the SVA methodology and even uses
it to train its own employees and Shell US has provided personnel to
DHS to assist in this training. Shell US has participated fully in the
use and expansion of the SVA methodology.
The oil and gas industry and federal security personnel also
completed the ``Security Guidelines for the Petroleum Industry,'' to
help employers protect facilities and respond to changes in the threat
level. This guidance is now in routine use as a roadmap for companies
in deciding how best to protect all sectors of the industry against the
threat of attack. These are the working methods and countermeasures the
oil sector uses to protect all segments of the industry.
The guidelines are important because they allow companies to manage
security risks and provide a reference to federal security laws and
regulations that have an impact on petroleum operations. The Secretary
of Energy and later the Undersecretary for the Department of Homeland
Security have endorsed the industry guidelines. These security
protocols are constantly being updated. A third edition was published
in April 2005. Shell continues to use these guidelines.
As you may be aware, a new program currently being developed by the
US Government will aid in securing certain Shell US facilities even
further by the implementation of the Transportation Worker
Identification Credential (TWIC). With the TWIC program, appropriate
government background checks can be conducted to aid in identifying the
insider threat to Shell US facilities by properly clearing the workers
who have access to sensitive areas and equipment.
Shell US participates in the Homeland Security Information Network.
HSIN is a web-based portal that allows DHS to pass security related
information to the Critical Infrastructure Community. It is managed by
DHS. All members must be vetted by the Oil and Gas Sector Committee of
the DHS to be admitted. HSIN allows DHS to push data to the sector
quickly and easily.
Shell also participates fully in Homeport. Homeport has the same
function but is focused on the maritime aspect of the critical
infrastructure, facilities with docks and wharves. It is a web-based
portal for industry to access necessary information or for the Coast
Guard to push data should a threat materialize.
Membership in HSIN is focused at the corporate level for Shell
whereas Homeport is geared to the facility owner and operator.
In addition to Shell US' extensive security work within the oil and
gas industry and with law enforcement agencies, Shell has built a
global network that allows us to leverage our relationships with
governments and law enforcement agencies around the world to protect
Shell employees and assets. We exchange information, forge
partnerships, design systems and implement procedures in partnership
with governments and companies in other countries just as we do here.
Because a threat to our U.S. infrastructure is as likely to come from
outside the United States, as it is to come from the inside, Shell's
network helps us protect our U.S. infrastructure.
Finally, Shell's security measures in the United States are
strengthened by the challenges we encounter around in the world.
Shell's experience in keeping our people and our assets secure in
politically unstable region, geologically-challenging areas and
difficult climates sharpens our expertise in keeping our people and
infrastructure safe here in the United States. What we learn around the
world we apply here, just as what we learn here we apply around the
world. I believe Shell's global presence strengthens the security of
our U.S. assets.
Shell is committed to providing a reliable supply of fuels and
products to keep the economy growing. We are proud of the reliability
of our oil and gas infrastructure and remain committed to its security.
Thank you.
Ms. Jackson Lee. We are going to try to have you begin your
testimony and then recess after your testimony.
Mr. Marchick, if you will be patient, we would appreciate
it; and Mr. Ranking Member, I would like to ask unanimous
consent that we could continue this hearing without a quorum so
we can at least get through.
Mr. Lungren. Thanks.
STATEMENT OF MICHAEL PFISTER, SENIOR VICE PRESIDENT AND CHIEF
INFORMATION OFFICER, HALLIBURTON
Mr. Pfister. Thank you, Chairwoman Jackson Lee and Ranking
Member Lungren, members of the Committee on Homeland Security.
I am Michael Pfister, Senior Vice President and Chief
Information Officer of Halliburton Company. I am here today to
witness on behalf of Halliburton Company, founded by Earl P.
Halliburton in 1919 and incorporated in the State of Delaware.
Halliburton received correspondence by committee Chairman
Bennie Thompson, offering us an opportunity to testify before
this committee. That correspondence indicated that the topic of
the hearing would be the impact of foreign ownership and
foreign investment on the security of our Nation's critical
infrastructure.
Halliburton is not foreign owned, and we do not possess
critical infrastructure as we understand it. However, we would
like to be of whatever help we can to this committee, and we
might be of assistance relative to your introduction if we
describe how we protect our technology and our information from
being obtained and used by those who might wish to do our
country harm.
Halliburton and the energy industry for some time have been
responding to the reality of the global business environment
for which key employees travel around the world and need to
have access to very sensitive information in order to do their
jobs correctly. It also a given in today's world that threats
to the security of vital information comes from almost every
location around the globe. Hackers do not need to be near
important computer resources.
The IT security landscape for Halliburton assumes that all
of our important IT assets, regardless of which data center
they are located in, are under constant attack by hackers from
every location around the globe. In fact, in our world, we
intercept 16,000 viruses every day, and we respond to about
12,000 attacks per day upon our network perimeter. So we have
no choice but to take this information--information security
extremely seriously.
The IT industry has established security standards
practiced by the Federal Government and by corporations like us
that protect the perimeters of our networks, that protect the
transmission of our information through public carriers, and it
protects the centers that host the servers that run our
applications and store our important raw data.
Like the rest of the energy sector, Halliburton's IT
security relies on what we call defense in depth. It is
multiple layers of defense that are placed throughout the IT
system, and the idea behind this defense in depth is the idea
that any attacker would have to break through multiple
defensive countermeasures in order to successfully hack into
the system.
Modeled much after the security systems that have evolved
over the years, Halliburton operates industry standard
firewalls, antivirus and intruder prevention systems to
separate our internal network and all of the information on it
from the Internet. We perform perimeter audits to ensure that
our firewalls are doing their jobs. We regularly monitor for
suspicious activity, and we isolate that activity before it can
do any harm.
We utilize third-party security experts to test our
security systems' effectiveness, and we encrypt our digital
communications before we transport them through public
communication networks.
In addition to all of the technical security we deploy to
protect our information assets, there are other steps taken by
Halliburton to physically secure its confidential data and its
facilities. Our facilities have physical barriers such as
fencing, locked doors, locked traffic gates. We employ security
guards to prevent unauthorized access and entry to both
tangible and intangible property. We restrict access to our
facilities to persons having proper credentials, such as
electronic badges, and badge access records are automatically
retained and maintained and reviewed from time to time.
Visitors to our Halliburton facilities are required to sign in
and are escorted as they make their way through our facilities.
We store our trade secret information, such as drawings and
specifications that make us competitive, in a digital vault
that is referred to as the matrix database. And the control
access to this important trade secret information, the matrix
database, recognizes the degree of authorization that has been
granted to a user, and it appropriately limits the user's
access to authorize data in the system.
In addition, there are federally mandated export controls
that impact our security assets as well. Halliburton has
complex procedures in place to manage the export of our
company's technical data. These movements are screened either
through our company's system or by a member of the law
department's trade compliance group. And in doing so, we
believe that we may be helping to protect our country's
critical infrastructure while keeping assets out of the hands
of individuals who should not have them.
There is also a need in our business to control to the best
of our ability, the activities of employees that are entering
and leaving our company.
We have thousands of patents and many skills that we use to
remain one of the finest energy service companies in the world.
In our industry, there is a fairly constant turnover rate of
talented and educated individuals, and for that reason, we have
developed the following methods to protect Halliburton's
intellectual property: new employee packages, provided by our
H.R. department, include an intellectual property assignment
and a confidentiality agreement that requires the employee to
assign to Halliburton any IT that was developed during his
employment and that relates to company business, and to
maintain the secrecy and the confidentiality of any information
to which they might have been exposed.
Ms. Jackson Lee. Your time has expired.
Would you be kind enough to summarize or respond to our
questions?
Mr. Pfister. I want to close by saying that our success
depends upon a well-trained workforce. We provide a bunch of
training options to teach people how to take good care of our
proprietary information. Some of them are online; others are
instructor-led.
I want to thank you for allowing me to appear here today,
and I hope that we have provided some information that will be
of help to the committee. We take very seriously our
responsibility for protecting data and trade secrets and
intellectual property.
I will be happy to answer any questions after we get done,
and if I don't possess the information, we will get it for you
for the record.
[The statement of Mr. Pfister follows:]
Prepared Statement of Michael Pfister
Chairwoman Jackson-Lee, members of the Committee on Homeland
Security, I am Mike Pfister, Senior Vice President and Chief
Information Officer of Halliburton Company. I am here today as a
witness on behalf of Halliburton Company, founded by Earl P.
Halliburton in 1919 and incorporated in Delaware. Halliburton received
correspondence on May 9th from Committee Chairman, Congressman Bennie
Thompson, offering us an opportunity to testify before this committee.
That correspondence indicated that the topic of the hearing would be
``The Impact of Foreign Ownership and Foreign Investment on the
Security of Our Nation's Critical Infrastructure.'' Halliburton is not
foreign owned and does not possess critical infrastructure. However, we
would like to be of whatever help we can to this committee and I
believe that we might be able to be of assistance if we describe how we
protect our technology and information from being obtained and used by
those who might wish to do our country harm. With that in mind, I would
like to take a few minutes of your time to address Halliburton's
Information Technology and the safeguards we employ to protect our
assets.
Halliburton, and the energy industry--along with the Information
Technology (IT) industries--have, for some time, been responding to the
reality of a global business environment in which key employees travel
around the world and need to have access to very sensitive information
in order to do their job correctly. It is also a given in today's world
that threats to the security of vital business information come from
almost every location around the globe. Hackers do not need to be near
important computing resources. They take the path of least resistance
and use the power of the Internet to locate information, regardless of
where in the world it might be. The frequency and approaches that they
use are independent of where key information stores reside, or where
key employees office. For that reason, international business companies
that have key corporate leaders, such as our CEO, Mr. Dave Lesar, who
spend significant time outside the borders of the United States do not
materially increase the risk that through IT methods, important
information might be compromised. The IT security landscape for
Halliburton assumes that ``all important IT assets'', regardless of
which data center they are located in, are under constant attack by
hackers from every location. That assumption is already in place, and
preventive security measures are geared to that reality, regardless of
where key employees are at any moment.
Our customers do control most of the critical energy infrastructure
and we have worked with those customers and IT security vendors to
develop robust products and approaches to protect the information
stored in our databases and other data repositories. The IT industry
has established security standards, practiced by the federal government
and by corporations, that protect the perimeters of our networks, the
transmission of our information through public carriers, and the
centers that host the servers that run our applications and store our
raw data.
Like the rest of the energy sector, Halliburton's IT Security
relies on ``Defense in Depth''--multiple layers of defense are placed
throughout an IT system and address personnel, technology, and
operations for the duration of the system's lifecycle. The idea behind
the Defense in Depth approach is that any attacker should have to break
through multiple defensive countermeasures, in order to successfully
hack into the system. This increases the likelihood of being able to
identify and prevent an attack from occurring.
Halliburton operates industry--standard firewalls, antivirus, and
intrusion prevention systems to separate our internal network from the
Internet. Halliburton performs perimeter audits to ensure the firewalls
are doing their jobs. We regularly monitor for suspicious activity and
isolate that activity before it can do any harm. We utilize third party
security experts to test our security system's effectiveness. We
encrypt digital communications before transporting them through public
communications networks.
It is worth noting at this point that the energy sector
participates in the National Infrastructure Protection Plan. There is a
sector-focused project called LOGIIC (Linking the Oil and Gas Industry
to Improve Cyber Security). However, its focus has been on Supervisory
Control and Data Acquisition (SCADA) and other ``control systems'' that
control production and distribution of hydrocarbons. Halliburton does
not operate these systems. We also share industry best practices each
quarter through the American Petroleum Institute's Information
Technology Security Forum.
In additional to all the technical security we deploy to protect
our information assets, there are other steps taken by Halliburton to
physically secure its confidential data and its facilities.
Halliburton facilities have physical barriers
(fencing, locked doors, and locked traffic gates) and security
guards to prevent unauthorized entry and access to both
tangible and intangible property.
Halliburton restricts access to facilities to persons
having proper credentials, such as electronic badges. Badge
access records are automatically made and maintained.
Visitors to Halliburton facilities are required to
sign-in and then are escorted throughout the facility.
Halliburton marks certain documents as
``confidential'' or uses other appropriate headers / legends
when such documents contain confidential information of the
company.
Warning labels appear on computer log-in screens to
inform users that the system contains business confidential
information and is for company use.
Halliburton stores trade secret information (drawings,
specifications, etc.) in an electronic vault that is referred
to as the Matrix database. To control access to the trade
secret information, the Matrix database recognizes the degree
of authorization that has been granted to a user and
appropriately limits the user's access to authorized data in
the system.
Our internal controls over our own vital assets are engendered
largely to keep us competitive with others in the energy service field
and of the most benefit to our clients. However, there are federally
mandated export controls that impact our security practices as well.
Halliburton has procedures in place to screen the export of our
Company's technical data. These movements are screened either through
the Company's SAP system or manually by a member of the Law
Department's Trade Compliance Group. In so doing, we believe we may be
helping to protect critical infrastructure while keeping assets out of
the hands of individuals that should not have them.
So, I hope this brief technical disclosure helps this committee to
appreciate the significant investment that we have made to protect
information about our business from those with bad intentions.
There is also a need in our business to control, to the best of our
ability, the activities of employees that are entering and leaving the
company. We have thousands of patents and many skills that we use to
remain one of the finest energy service companies in the world.
In our industry, there is a fairly constant turn over rate of very
talented and educated individuals. For that reason, we have developed
the following methods to protect Halliburton's intellectual property.
New employee packages provided by Halliburton's Human Resources
(HR) department include an intellectual property assignment and
confidentiality agreement that requires the employee to assign to
Halliburton intellectual property developed during his/her employment
that relates to company business; and to maintain the secrecy of
proprietary confidential information he/she develops or to which he/she
is exposed.
When an employee who had access to Halliburton's valuable
proprietary information leaves the company, Halliburton's Law
Department works closely with the HR Department and the business units,
seeking to prevent the employee from taking that information for his or
her own benefit or that of another, e.g., a competitor. When
appropriate, access to our computer systems is disabled immediately. At
other times during exit interviews, key employees are reminded of their
continuing obligations under any applicable intellectual property and
confidentiality agreements, and are requested to return any Halliburton
proprietary information in their possession. When circumstances
warrant, the company will send a letter to the departing employee, and
possibly his new employer, formally reminding the ex-employee of his
obligations to the company. If Halliburton suspects that the departing
employee intends to or will be in a position to use Halliburton
information in violation of those obligations, the company will
consider taking legal action against the ex-employee and other
responsible parties. There is a Dispute Resolution Agreement in place
between the company and its employees that normally will require such
disputes with ex-employees to be submitted to binding arbitration.
In addition, when Halliburton engages a third party to provide
goods or services and Halliburton is required to disclose confidential
information to the third party, the third party is contractually
obligated to maintain the confidentiality of such information.
Typically, when a third party is engaged in Halliburton technology
development, all rights to the developed technology are assigned to
Halliburton, and again, the third party is required to maintain the
confidentiality of Halliburton's proprietary information. In some
cases, the developed technology could be jointly owned by Halliburton
and a co-developer, but in those cases as well, the parties will be
obligated to maintain the confidentiality of proprietary information
shared by one with the other.
The company provides a number of courses in its ``I-Learn'' catalog
that relate to protecting Halliburton's valuable proprietary
information, and to the proper handling of confidential information of
third parties that is lawfully in the company's possession. Some of
these courses are fully electronic, or on-line; others are instructor-
led. The ``I-Learn'' system has been developed by Halliburton to allow
its employees to easily learn about many topics often while sitting in
the comfort of their own offices.
I again thank you for allowing me to appear here today and
hopefully I have provided information that will be of help to this
committee. I would be happy to answer any questions you might have and
if I do not posses the information you want with me today, I will be
happy to provide it for your record.
Ms. Jackson Lee. Thank you very much.
The committee stands in recess.
[Recess.]
Ms. Jackson Lee. Thank you.
Mr. Marchick, would you please begin your testimony?
STATEMENT OF DAVID MARCHICK, COVINGTON & BURLING LLP
Mr. Marchick. Thank you, Madam Chairman, and it is a
pleasure to be here. I know from personal meetings with you how
much you have focused on this issue, how deeply you have
investigated this issue, and I appreciate the leadership you
have shown on this. I would like to make four points, Madam
Chair.
The first is that we want more foreign investment, not
less. Foreign investment is part of the lifeblood of the U.S.
economy. Employees, foreign companies employ about 5 million
Americans, paying higher wage jobs than American-owned
companies. It is critical to our technology and manufacturing
base. Foreign-owned companies own about 5 percent of all U.S.
assets, but they employ about 20 percent of all manufacturing
jobs, so it is critical to our manufacturing base. And as long
as we spend more than we save, we need the money to come from
somewhere, and it is better for foreign entities to invest in
fixed assets than in liquid assets because you simply can't
dump fixed assets like you can liquid assets. So we want them
to invest. It is good for our economy. It is good for R&D.
Second is the issue of critical infrastructure. This
committee, the Homeland Security Department and its
predecessors, going back for almost 15 years, have really
struggled with the concept of what critical infrastructure is.
During the Clinton administration, the Clinton administration
put out a study that the critical infrastructure covers about
eight sectors. In 2001, Congress passed the PATRIOT Act and
defined critical infrastructure as systems and assets that are
so vital to the U.S. national and economic security that their
destruction would have a debilitating impact on U.S. national
security.
Since that time, there have been four different reports
that have come out from the executive branch with four
different definitions of critical infrastructure and four
different lists of sectors.
Now why is this important? It is important because
investors and security managers, like Mr. Garcia, take guidance
from the government on what is critical infrastructure and what
is not; and foreign investors take guidance on that as well.
And so, unless there is clear guidance from the government as
to what critical infrastructure is, it will make it more
difficult and there will be more insufficiency for investors in
deciding whether to invest with the United States. Because if a
transaction--if a foreign investment implicates or covers
critical infrastructure, then there is a greater likelihood
that it has to go through the CFIUS review process. And if
companies don't know whether they have to go through that
process, it creates uncertainty, and uncertainty chills
investment.
So the third issue is that the CFIUS process since Dubai
Ports has changed significantly. Transactions are now regularly
going to very, very high levels in the government, sometimes
all the way up to the Secretary, sometimes all the way up to
the President, there is additional scrutiny. There has been an
increase in the number of mitigation agreements or conditions
imposed by the government.
The Homeland Security Department has taken a very active
role in this. Last year they negotiated--they required
companies to commit to 15 mitigation agreements, which is three
times the number of agreements required the previous year and
equal to all of the mitigation agreements in the previous 3
years.
So, as a result of the increased oversight from this
committee and others, there has been additional scrutiny of
foreign investments in the United States.
Frankly, in my view, not all of that is good, because
overregulating investment has a chilling impact; and I know,
from my practice, that there are investors who have decided not
to pursue investments because of the CFIUS process. So the
balance, the pendulum shifted dramatically after the Dubai
Ports controversy, and hopefully that pendulum will swing back
towards the middle.
The final issue is legislation. Mr. Frank and Mr. Bachus
and the Financial Services Committee put together a very good
bill with Mrs. Maloney and Ms. Pryce. This committee and
Chairman Thompson and Mr. King played a very important role in
shaping that legislation; they were original cosponsors.
You and Mr. Lungren played a very important role as well.
It gives the Homeland Security Department additional authority.
That legislation, I think, is very good legislation. It passed
unanimously in the House.
Today, in the Senate, Senator Dodd and Senator Shelby
marked up similar legislation based on the House bill with a
few changes. Hopefully, that will go through the Senate quickly
and come back to the House with a conference, and hopefully, we
can get a good bill.
That legislation further increases the scrutiny that
transactions will have to go through under the CFIUS process.
It requires additional scrutiny of government-owned
acquisitions. It requires additional reporting to Congress;
Congress will have a much greater oversight role. And it
requires additional factors to be considered in every
transaction, factors that now are much more relevant after
September 11th including investment in critical infrastructure.
So the hearing that you are pursuing today is a very
important hearing. Congressional oversight is very important,
and the most important thing is that, through hearings like
this, there is additional confidence in the integrity of the
CFIUS process, so we don't have another Dubai Ports, which is
not good for our country and not good for our relationships
with other countries.
[The statement of Mr. Marchick follows:]
Prepared Statement of David Marchick \1\
Chairman Jackson-Lee and Ranking Member Lungren
Thank you for the opportunity to testify before your committee
today on the important subject of foreign ownership of critical
infrastructure.
---------------------------------------------------------------------------
\1\ David Marchick is a partner at Covington & Burling LLP, a
Washington-based law firm. He has an active CFIUS practice and is co-
authored the book ``U.S. National Security and Foreign Direct
Investment (Peterson Institute, May 2006). Mr. Marchick represents U.S.
and foreign investors before the Committee on Foreign Investment in the
United States and the Congress. The views in this testimony are Mr.
Marchick's views and not those of Covington & Burling LLP or the firms
clients.
---------------------------------------------------------------------------
I plan to discuss three issues in my testimony:
First, the concept of ``critical infrastructure'' and the
implications of foreign ownership thereof;
Second, recent developments in the Committee on Foreign
Investment in the United States;
Third, CFIUS-reform legislation moving through the Congress.
Foreign Ownership of Critical Infrastructure
A significant amount of work has been undertaken in this Committee,
in the Department of Homeland Security and its predecessor agencies,
and in the private sector with respect to defining and protecting
critical infrastructure. This work dates back to the mid-1980s and
continues to evolve today.
There have been many iterations of the government's definition of
``critical infrastructure'' over the years. In 1996, for example,
President Clinton issued Executive Order 13010, which stated that
``certain national infrastructures are so vital that their incapacity
or destruction would have a debilitating impact on the defense or
economic security of the United States.'' EO 13010 listed eight sectors
as critical infrastructure, including telecommunications, electrical
power systems, gas and oil storage and transportation, banking and
finance, and transportation.
Building on this initial concept, the USA PATRIOT Act, and later
the Homeland Security Act, defined ``critical infrastructure'' as:
``[S]ystems and assets, whether physical or virtual, so vital
to the United States that the incapacity or destruction of such
systems and assets would have a debilitating impact on
security, national economic security, national public health or
safety, or any combination of those matters.'' \2\
---------------------------------------------------------------------------
\2\ Section 1016(e) of the USA PATRIOT Act, codified at 42 U.S.C.
Sec. 5195c.
---------------------------------------------------------------------------
This definition, by setting a high threshold, implies that a
relatively narrow list of assets would be deemed to ``have a
debilitating effect.'' Core communications assets or the electrical
grid certainly would meet this definition. But in the National Strategy
for the Physical Protection of Critical Infrastructure and Key Assets,
the White House identified twelve very broad sectors as critical
infrastructure, including agriculture and food, water, and public
health.\3\ In the book that I co-authored with Monty Graham of the
Peterson Institute, Mr. Graham estimated that these twelve sectors
cover some 25% of U.S. employment.\4\ Taking this effort one step
further, the Department of Homeland Security created a ``national
assets database,'' which contains tens of thousands of entries compiled
from various sources, including state and local officials. The
Information Assurance and Infrastructure Protection Division of DHS
reported that it had identified 1,700 ``critical assets'' in 2004. And
since 2001, there have been four different executive orders or reports,
each of which included different sectors as critical infrastructure.\5\
---------------------------------------------------------------------------
\3\ See National Strategy for the Physical Protection of Critical
Infrastructure and Key Assets, (February 2003), available at
www.whitehouse.gov (last visited May 20, 2006).
\4\ U.S. National Security and Foreign Direct Investment, by Edward
M. Graham and David M. Marchick, Peterson Institute, May 2006, p. 149.
\5\ See, E.O. 13228; the National Strategy for Homeland Security,
July 2002; the National Strategy for Physical Infrastructure
Protection, February 2003; and Homeland Security Presidential Directive
7, December 2003.
---------------------------------------------------------------------------
The definition of critical infrastructure matters because the
private sector makes key decisions--investment and resource allocation
decisions--based on guidance from the federal government. Yet the
evolving and increasingly broad definition of critical infrastructure,
coupled with little guidance from the government on the national
security issues associated with investment and management of such
infrastructure, has created ambiguity and uncertainty for U.S.
companies looking to increase their value by attracting foreign
partners as well as for direct foreign investors.
To be sure, we know from CFIUS practice, from statements by
Homeland Security officials, and from H.R. 556 and the Dodd/Shelby
bill, that protection of critical infrastructure is a top priority.
And, for investment in certain sectors--including the defense
industrial base, telecommunications carriers, and certain energy
assets, including nuclear--there is a clear nexus to national security,
there are established paradigms for assessing and, where necessary,
mitigating national security risks posed by foreign investors. Foreign
investors might reasonably expect to incur some national security-
related mitigation costs associated with their investment in these
sectors, and they should have some sense of what those costs will be
(especially for investments in the defense industrial base where there
are fairly standard terms for mitigation).
But these cases represent only a small percentage of investment in
critical infrastructure, as that term has been broadly defined. It is
far less clear that foreign ownership of other assets deemed to be
``critical infrastructure'' has any measurable impact on U.S. national
and homeland security. Let me offer three examples of how the absence
of guidance in this area is both troubling from a policy perspective
and potentially costly in the marketplace.
First, there are certain areas of ``critical infrastructure,''
broadly defined, that in the ordinary course simply should not raise
national security concerns.
For example, there has been great controversy in certain states
regarding the privatization of toll roads. While that debate is
understandable, it would be far more difficult to see how foreign
ownership of a toll road would raise national security issues. The same
logic applies to most investments in agriculture and food. Ben and
Jerry's is owned by a Dutch company, and Haagen-Dazs is owned by
Diageo, a British company. I can think of many great ways to describe
Cherry Garcia, but central to national security isn't one of them.
Second, regulations that preserve and protect the national interest
already govern a number of sectors identified as ``critical
infrastructure.'' For example, there already exist myriad federal,
state and local regulations to protect the food supply, to ensure the
integrity of the banking system, and to facilitate high-quality public
health services. This also is now true of investment in the chemical
sector. Ambiguity as to whether investment in such sectors might also
require a national security review because they technically are
``critical infrastructure'' unnecessarily complicates the investment
and resource allocation calculus of both sellers and buyers.
Third, there is a real risk of ``critical infrastructure'' mission
creep, particularly with respect to information technology products and
services. Increasingly, in practice, the government is defining
critical infrastructure to include not only the specifically identified
sectors, but also any product or service sold into that sector. This
produces a slippery analytic slope. An IT product that serves the exact
same function for Ben & Jerry's as it does for AT&T may, because its
customer is AT&T, be deemed part of critical infrastructure. This, in
turn, creates unequal costs for foreign investors. For example, take
two products that serve the same function on the IT networks of Ben &
Jerry's and AT&T. Both products have source code that is written by
engineers in Eastern Europe. Both products are incorporated into
hardware assembled in China, with the hardware comprised of component
parts made in a number of other countries all over the world. Both
products are sold by publicly traded U.S. companies, and both companies
use direct sales as well as distributors to reach their customers. One
company is then bought by a foreign, publicly-traded company with no
government ownership. Should that investment require a national
security review simply because, among the many diverse customers of the
product, some are located in ``critical infrastructure'' sectors?
To be sure, the answer to that question may be ``yes'' in some
instances. Moreover, Exon-Florio and the CFIUS process can adequately
identify and mitigate risks in those cases. However, even sophisticated
counsel frequently have difficulty identifying which instances these
concerns may arise, or the potential costs associated with those
issues. And this uncertainty is itself very costly, both for U.S.
sellers who have an interest in creating the largest possible market
for bidding and certainty with respect to closing, and for foreign
investors who, in formulating their bid, must assess additional costs
associated with their investment and how potential regulatory
uncertainty both in timing and result might affect their competitive
position vis-a-vis other bidders.
More can be done to provide clear guidance to foreign investors,
U.S. companies and their investment advisors. While the definitions and
classes of assets I described earlier may work for the physical
protection of critical infrastructure, they do not work for foreign
investment considerations. The Administration and Congress should work
together to determine how best to protect critical infrastructure,
regardless of who owns a particular company or asset. Security policies
and guidance could be developed on a sector-by-sector basis. A baseline
level of security requirements should be established. Then, if there
are particular national security issues associated with foreign
ownership in a particular asset, U.S. interests will be further
preserved by CFIUS, which is well equipped to mitigate the risk or
block the investment.
Recent Developments in CFIUS
Simultaneous with progress on CFIUS reform legislation in the
Congress, CFIUS has undertaken a number of changes in response to
concerns on the hill. These include:
Committing additional resources to staffing CFIUS
cases. Treasury has added a new CFIUS Deputy Assistant
Secretary and DHS has added case officers and lawyers to focus
on reviews and enforcement;
Involving more senior level officials within CFIUS;
Enhancing communications with Congress;
Expanding coordination among intelligence agencies;
Expanding the use of mitigation agreements and
introducing new, tougher terms in such agreements; and,
Enhancing enforcement of mitigation agreements,
including through on-site audits and consultations with parties
to such agreements.
In many respects, CFIUS has taken a much more cautious attitude
toward their work post-DPW. This caution has had a ripple effect on the
private sector, leading to more filings. In 2006, there were 113
filings (up 73 percent over 2005), 7 second-stage investigations (up
250 percent) and 5 withdrawals (up 150 percent) during the second-stage
investigation period. A number of other transactions were withdrawn
during the initial 30-day period. The dramatic increase in the number
of second-stage investigations and withdrawals suggests that foreign
investors are having a more difficult time closing transactions in a
timely fashion. The stakes are high--the value of just one-third of the
transactions that were submitted to CFIUS exceeded $95.5 billion in
2006.
CFIUS has also increased the number of ``mitigation'' or ``national
security'' agreements negotiated as a condition for approval. From
2003-2005, the Department of Homeland Security (DHS) was a party to
just 13 mitigation agreements, compared with 15 such agreements in 2006
alone. Foreign investors--particularly in the IT sector and other
sectors considered ``critical infrastructure''--now face a greater
likelihood of being compelled to enter into a mitigation agreement in
order to secure CFIUS approval.
The trend in filings has continued this year--there have been 54 to
date, putting CFIUS on track for almost 150 filings this year, a 130
percent increase over 2005. Transactions that raise real national
security issues should be filed and reviewed by CFIUS. But uncertainty
about what cases should be filed will cause more transactions to be
submitted for review than necessary. In turn, this forces CFIUS and the
intelligence agencies to conduct a full analysis of inconsequential
transactions, taking their focus off the transactions that really
matter to national security. I suspect that over time this dramatic
increase in filings post-DPW will level off to more normal levels, and
that some caution in the agencies at this time is to be expected. The
pendulum has swung too far post-DPW. For U.S. national security and
economic interests, I hope the pendulum will soon swing back toward the
middle.
Legislative Efforts to Amend Exon-Florio
In the wake of the Dubai Ports World controversy just over a year
ago, more than 20 bills were introduced in the House and Senate that
would have restricted or blocked foreign investment in one way or
another. Certain of these bills would have simply prohibited foreign
investment in critical infrastructure; others would have prohibited
foreign government ownership of certain assets in the United States.
Several bills would have amended Exon-Florio, the statute that gives
the President the power to block certain transactions that threaten
U.S. national security. One bill amending Exon-Florio passed the House,
and another passed the Senate, but the 109th Congress ran out of time
before the bills could be reconciled.
On February 28, the House passed unanimously H.R. 556, the National
Security Foreign Investment Reform and Strengthened Transparency Act of
2007, which was pulled together by Chairman Frank, Ranking Member
Bachus, Congresswoman Maloney and Congresswoman Pryce, among others,
and co-sponsored by Chairman Thompson and Ranking Member King of this
committee. Today, in the Senate, Chairman Dodd and Ranking Member
Shelby are marking up a bill based in large part upon H.R. 556.
Credit goes to you, Madame Chairman and Mr. Lundgren, and to
Chairman Thompson and Mr. King, for helping to shape a bipartisan,
balanced bill that enhances protection of national security while not
impeding foreign investment in the United States. This Committee had an
important role in shaping that legislation.
H.R. 556 would address many of the perceived shortcomings with the
CFIUS process without chilling foreign investment. It would:
Enhance Congressional oversight and reporting to
Congress without politicizing transactions;
Require higher-level involvement in CFIUS decisions;
Expand the factors that CFIUS must consider to reflect
post-September 11 imperatives, including protection of critical
infrastructure;
Heighten scrutiny for government-owned transactions
without impeding investments that don't raise real national
security issues; and,
Allow for transactions to be reopened based on
material intentional breaches of mitigation agreements where no
other adequate remedy exists. This provision--the so-called
``evergreen'' provision--is tough medicine and a provision
which foreign investors and key elements of the U.S. business
community oppose.
Chairman Dodd and Senator Shelby are marking up a bill in the
Senate Banking Committee that is substantially similar on H.R. 556,
making some modifications that in my view are very good changes. Among
other things, the Dodd/Shelby bill:
Adopts the concept of rotating lead agencies and vests
enhanced authority in those agencies to negotiate, monitor and
enforce mitigation agreements. For example, DOD would take the
lead on defense acquisitions; Homeland Security would lead on
investments in ports, airports and transportation companies;
Justice would take the lead where law enforcement issues were
paramount; and Commerce would take the lead on transactions
with significant export control issues;
Eliminates some of the unnecessary bureaucratic
provisions of H.R. 556, such as requiring two-thirds votes in
CFIUS for certain decisions. Unlike Congressional committees,
agencies don't typically vote; and,
Imposes the same confidentiality requirements on
Congress that exist within CFIUS.
I was pleased that the Senate decided to use the House bill as the
baseline. If the Dodd/Shelby bill passes the Senate without significant
changes, I am confident and hopeful that the House and the Senate could
work together, in a bipartisan fashion, to send sensible CFIUS reform
legislation to the President for signature.
The key, however, is that legislation advance U.S. national
security interests without impeding foreign direct investment that we
want and need. No bill would be better than a bad bill, but I am
hopeful that the House and Senate can put together a good bill for the
benefit of our economy and national security.
Conclusion
The United States very much needs additional investment in critical
infrastructure from both domestic and foreign sources. The more
investment, the more durable and resilient our telecommunications,
energy and other critical infrastructure will be.
According to the Treasury Department:
Foreign companies in the U.S. employed more than 5
million U.S. workers in 2005, providing 4.5% of all private
sector employment in the United States.
Manufacturing jobs accounted for 33% of the jobs
created by foreign companies in the U.S. (2004 data). The
manufacturing sector accounts for just 12% of overall U.S.
private sector employment. Thus, FDI is disproportionately
bolstering this important sector.
An additional 4.6 million U.S. jobs indirectly depend
on foreign investment in the U.S. (2005 data). Foreign
companies in the U.S. buy 80% of their inputs from U.S.
companies. This additional business indirectly supports almost
as many U.S. jobs as FDI creates directly.
Compensation at foreign companies in the U.S. is on
average 30% higher than the U.S. national average. Foreign-
owned firms paid U.S. workers an average of $63,428 in 2004.
Further, in 2000, foreign firms directly employed 5.7 million
people in the U.S. (5.1% of the private sector workforce) and
indirectly supported 6.5 million more jobs. In 2005, those figures had
fallen to 5.1 million (4.7% of the private sector workforce) and 4.6
million, respectively. Foreign firms? R&D spending as a share of total
R&D spending in the U.S. has also slightly declined since 2000.
We need more foreign investment, not less.
In some cases--a very narrow set of circumstances--foreign
investment does raise real national security issues. In those cases,
the CFIUS process works, and works well. Through hearings like this,
Madam Chairman, I am hopeful that the Congress will have additional
confidence in the integrity of the CFIUS process. And with good
legislation, the business uncertainty that has come in the wake of
Dubai Ports will be reduced or eliminated, facilitating enhanced
investments, new jobs and more economic activity in the United States.
Thank you for the opportunity to testify before your committee.
Ms. Jackson Lee. I thank the gentleman. We allowed you to
pontificate a little bit longer, and we thank you for your
expressions.
Let me thank the witnesses for their testimony--I thank
them for statements that open the door. And we are here to do
some fact-finding. We are not here to prejudge or presuppose,
and there are members on the committee who, I know, would have
differing opinions.
And let me indicate that we are going to move quickly. I
understand there are certain flight obligations, and I
understand also that we are in between and betwixt activities
on the floor.
But let me then pose a question in the context, as quickly
as I can, to indicate that we have a no--if you will, an
environment that we are in now, Mr. Garcia, Mr. Pfister, Mr.
Marchick, that is stable and steady; and your testimony
suggests somewhat that all is well.
And I started out by indicating that we don't deal with the
wellness of security; we deal with the fractures and the
possibility of fractures. And I think we have made it very
clear that we are not interested in violating or at least
undermining the free flow of the economy.
Frankly, another viable hearing would be the question of
China's dominance, and I know that Financial Services has
probably engaged in that in terms of the sizable investment
that they have here in the United States, particularly in the
financial institutions. That is not this committee's
jurisdiction per se unless we discuss issues involving critical
infrastructure. But these are very large questions that have to
be asked and answered, so I hope the witnesses will answer my
questions in the context that this is not an indictment of the
witnesses as much as it is a fact-finding effort.
And I will start first with Mr. Garcia.
I have had the pleasure of working with Mr. Garcia in
working with the management and leadership of the FBI. So I
imagine you have a fuller understanding, and I would like you
to--and I hope Shell will give you that latitude--to broaden
your answers and how it relates really to, your background in
the FBI.
Just to lay the groundwork, we know that you stated in your
testimony that one-third of Shell's assets and shareholders are
in the U.S., thereby implying that two-thirds of your assets
and shareholders are foreign. In addition to being a foreign-
owned company, Shell is global, which operates in more than 130
companies and employs 108,000 people. And I would assume some
of them are foreign nationals worldwide.
Would you please elaborate on the specific additional
security measures you take, both in terms of physical security
over critical infrastructure and data security over
information, because Shell is both foreign owned and a global
company.
And may I ask this question right here before so that we
can separate some of the issues that you will be answering as
it relates to Shell?
But the foreign ownership and foreign investment issue
sometimes relates to countries whose relationships with the
United States are not as long-standing as those that we have
with the Netherlands. Would you agree to that?
Mr. Garcia. That is correct.
Ms. Jackson Lee. Therefore, when you raise these questions,
when our committee raises these questions, we are not just
necessarily thinking that Shell has to be before us as a
witness, but we have to address it as it relates to investments
that may come from countries who have a short-term friendship
with us versus a long-term.
And if I can yield to you now for a response to my question
on the security measures.
Mr. Garcia. Thank you.
When I retired from the FBI and took employment with Shell
security, Shell security at that time was addressing all of the
issues since 9/11, addressing all of the regulatory issues and
regulatory information that was coming from Congress and other
governments to the U.S. for protection of infrastructure.
When I came on board, the position that I took, it was
brand new; it had not been there before. And the purpose of
that, my position in coming in there, was to look at the United
States infrastructure, look at how Shell is operating in order
to do what you are asking about: protection of the
infrastructure, protection of the critical assets that are here
and then how we interact with the rest of our partners around
the world, the two-thirds, as you mentioned there.
We have very strict procedures on how we deal with
information, how we deal with information-sharing between
agencies in the U.S. Government, information we share with our
expats or foreign nationals that work with Shell.
All of our facilities are controlled. All of our
facilities, as far as the people that are there, we know who
they are, we have background on them. We have no--we know
exactly the access that they have, and one facility in the U.S.
cannot be accessed by another person, even by a U.S. person
unless they have authorization, escorted if they do not have
authorization to be there on their own, or for what type of
reason they are going to be there.
The information we receive from these different things, we
look at it, we vet it, and we keep it within the close realm of
the security group.
And also maintained in its information in a classified type
of PKI encrypted system to where--and we only have access--that
is not just open to the Shell Group in the U.S. or even
overseas. We try to maintain these proper controls and limit
what the information is so that, therefore, it does not get
into the wrong hands. Only authorized personnel have access to
this information, and that is only a handful of people and,
some places, dependent on what exactly the information is.
Ms. Jackson Lee. Is everyone carded and everyone vetted
around your critical infrastructure in places other than the
United States and in the United States?
Mr. Garcia. That is correct. In those facilities they have
credentialing that goes into facilities there. I, myself,
cannot go to another foreign country, go into a facility and
just walk in; they cannot do it in our facility.
Ms. Jackson Lee. You might recall when Russia froze its gas
exports into Europe, the critical impact that occurred. Would
you imagine the possibility, the way you are structured now,
that happening by an individual act of an employee? Because we
have established that, at this point, our relationship with the
Netherlands is certainly a, collaborative, cooperative
relationship. But would you envision--or would you have the
ability if that was an individual act of an employee or set of
employees?
Mr. Garcia. The possibility to have it happen here in the
United States is slim. To have one employee just turn off a
particular major gas line takes more than just an individual
doing that. There are checks and balances that are established
that I am aware of, from the process at the refineries; and the
gas plants have some type of deviation from that. There is a
work blot-out; those who work are advised as--security, as
well--to make a determination as to what is going on here.
Nothing is 100 percent. You always have that lone wolf. You
always have that individual who can do something on their own
because you cannot be in the minds of everybody. But the
procedures and the checks and balances that they have in each
facility and how they do things help to try to mitigate that.
Ms. Jackson Lee. Thank you.
Mr. Pfister, let me raise the question of access and
control. And thank you very much for focusing most of your
testimony on technology. But let us go back to the question of
Dubai and the relocation or joint location, if you will, of
corporate headquarters.
As I understand, it is being reinterpreted to being
jointly--two joint locations, Houston and Dubai. But in the
course of your leadership, being in Dubai would suggest that
there would be lead space. There would also be the appropriate
resources for the joint corporate office to function.
What procedures do you have in place that would give us
comfort that any actions in Dubai by anyone who would be in
that particular area would not have access to critical
infrastructure that could impact America?
Mr. Pfister. Thank you for giving me the chance to clear
that up because there was a lot of misperception around that.
We didn't plan on moving the company to Dubai. We are a
proud American company, incorporated here since--
Ms. Jackson Lee. I am glad to allow you to restate that
again.
Mr. Pfister. The reality--the way the IT security
environment works is that, for decades, key employees have been
moving all over the world and where they move and where they
office and where they sit doesn't necessarily mean that the
information that they need to have access to sits in that same
location. In fact, it is much more likely for you to have your
key information, your critical information, to be stored in
data centers that have been physically secured in locations.
You are comfortable around the environmentals, you are
comfortable around access, you are comfortable about the
security that you can put around that. And, in fact, that is
the case in our computing environment. We take very good care
of all of our digital crown jewels, and we put them in places
where we have the fullest confidence that they will be well
protected and access will be controlled.
Ms. Jackson Lee. Would some of those be housed in the
offices in Dubai?
Mr. Pfister. Very few. Our particular security model is to
put as little technology as possible in those locations.
Generally we will put in, obviously, end-user devices such
as PCs and laptops, and then we will put in local networks to
allow them to talk to each other; but very seldom in other
locations, other than our major data centers, which for us
today, in an HP-managed facility in Toronto, in a Halliburton-
managed facility in Houston. Very seldom do we push anything
more complex than that.
Ms. Jackson Lee. I will raise some more questions with you
later.
Mr. Marchick, your testimony focused on the value of
investment, and I don't think we have a disagreement in that.
But I did note that you gave short shrift to the concept of the
purchase, or the proliferation of the purchase of roads, toll
roads, et cetera, noticing that this had been a phenomenon in
Europe for a long time. However, the framework of this hearing
is we must think of what could happen.
Do you still want to give short shrift to the idea of loss
of access and control or the interest that should be
established as to have certain markers, certain criteria,
certain oversight in terms of making sure that during a time of
crisis, man-made disaster or natural disaster, that the people
of the United States have access to these facilities or to
these roads?
Mr. Marchick. Madam Chairwoman, the first thing I want to
do is learn the critical lesson in Washington: Never disagree
with the Chairwoman.
Ms. Jackson Lee. We welcome your opinion.
Mr. Marchick. My view is that the government has a
responsibility to ensure that security is in place whether it
is a U.S. or a foreign investor, a U.S. or a foreign owner. And
with a toll road, that starts with the regulatory structure
that is in place or the structure that is in place for that
asset.
So, for example, if there are concerns about access to a
road in a time of emergency, there should be provisions in
place so that either the owner follows instructions of the
government in times of emergency or the government gets out of
the way and the State, local, Federal Government can take over
the entrance and exits to a toll road at a time of emergency;
but that the government should only intervene if there is a
marginal increase in the risk as associated with a foreign
investment.
And with a toll road, I frankly think it is hard to see how
a foreign investor could have a negative impact on a road. I
think there is a very legitimate policy debate, which I want to
stay out of, about whether roads should be privatized or not.
But whether it is owned by a Canadian company or a U.S.
company, or an Australian company or a U.S. company, I am not
sure makes that big of a difference. If it does, the government
should intervene and put security measures in place.
Ms. Jackson Lee. Let me yield to the distinguished
gentleman from California for 5 minutes.
Mr. Lungren. Mr. Garcia, when were you with the FBI in
L.A.?
Mr. Garcia. June of 2001 was when I first arrived there as
a special agent in charge, and I lived in Long Beach. Not to
mention that--
Mr. Lungren. You obviously have good judgment. I appreciate
that.
Ms. Jackson Lee. I won't take from your time, Mr. Lungren,
but he is now back in Houston, and he started in Houston.
Mr. Lungren. I know. I understand.
Mr. Garcia. I am a Texan.
Mr. Lungren. I understand that. You miss the humidity and
the sweat. I understand that.
In your testimony, you note that Shell participates in the
Homeland Security Information Network and Homeport. Is there
any difference that you can ascertain between the cooperation
and the relationship you have with the Department of Homeland
Security here as opposed to if you were not a subsidiary of a
foreign-owned corporation?
Mr. Garcia. If I understand your question: If we were a
foreign corporation strictly, not have U.S. ties, as Shell has
here in the United States, would there be any difference on how
DHS works with you? I would imagine that DHS is limited on what
they can share with anybody, depending on their nationality,
depending on the information that they have and that they are
actually trying to put out.
Mr. Lungren. But as a wholly owned subsidiary of a
corporation, do you have any--
Mr. Garcia. We have no restrictions whatsoever on how they
deal with us because of the fact that we are U.S. persons, too.
Mr. Lungren. Mr. Pfister, could you clear up for me, I
don't understand this idea of dual corporate structure Dubai,
Houston. What is--what do you have in Houston and what do you
have in Dubai in terms of corporate headquarters?
Mr. Pfister. Well, Houston is our principal place of
business. It is where we have the majority of our corporate
officers; it is where we conduct the majority of the strategy
settings and the design making of our company. So it is our
corporate headquarters.
Mr. Lungren. What is Dubai?
Mr. Pfister. Dubai is going to be the location of our
chairman and chief executive officer. It is our opinion that it
is in the best interest of the country for Halliburton to be as
strong in the energy business, and in order for us to do that,
we have to be as strong in the Eastern Hemisphere. You have
probably seen some of the statistics that are there; 60 percent
of the oil reserves are in the Eastern Hemisphere, so he is
moving over to Dubai.
We will probably consolidate some of the other managers
that are in that general region, and that will be his base.
Mr. Lungren. So you have got more business over there than
you have here?
Mr. Pfister. No, that is not the case now. We conduct well
into the majority of our business in North America today, but
we need more valuable portfolios because that is where most of
the reserves are.
Mr. Lungren. And reserves you can go after, I presume.
Mr. Pfister. Yes.
Mr. Lungren. Last time I checked, you can't go offshore,
Florida, California, offshore in the eastern part of the United
States. You can't go in ANWR. Am I right in those things?
Mr. Pfister. It is better probably to ask our Shell
representative, because we don't get involved in this debate,
but I think it is accurate.
Mr. Lungren. I can't understand why you would move to where
the business is. That is just bothersome.
No. I mean, you know, we have made it almost impossible for
us to go after new resources in the United States in our
environs, and I always remember the people who used to drive to
the protests against offshore drilling in California. Very few
of them came there via skateboard or walking. I guess it was
magically produced for them.
That is just a little thing I have. I mean, I grew up in
Long Beach, as you know, and Long Beach, we have manmade oil
islands. We have 2 billion proven reserves. We actually do
slant drilling there. We had the first, the beginnings of
injection wells for the purpose of boosting the city back up,
and then we got into the whole idea of using it for secondary
and tertiary recovery.
We are looking at the Signal Hill reserve, which I think is
the fourth oldest continuous operating reserve in the country,
and we actually have potential for opening up wells there
because we put more money into it. It is kind of interesting. A
lot of people get in their car and figure that comes there.
Anyway, Mr. Marchick, you were talking about the CFIUS
process and the ambiguity in which infrastructure will have an
impact on national security, complicating foreign investment.
We in the Congress responded to a concern that was expressed
that we needed to bring CFIUS up to date. One of the concerns I
had as we did that was, we should--would we be bringing too
many transactions within that ambit? Would that cause us to
spend too much time and attention and have our intelligence
communities focusing across the board on what would end up
being nonimportant issues, and therefore, not being able to
give the appropriate analysis to those which truly had a
national security interest within what we know have to be some
sort of reasonable time limits; otherwise, you are not going to
have the investment because we make it impossible.
How do you suggest we balance that? You talk about
ambiguity, which means you think we ought to have more
particularity. What kind of particularity would you talk about?
Mr. Marchick. The first thing to do is define what critical
infrastructure is for the purposes of foreign investments.
As I mentioned, during the Clinton administration there
were eight sectors defined as critical infrastructures. Now
there are 12, but there have been four different reports in the
last 4 years that define it differently and give different
sectors. That is all for the purpose of physical protection of
critical infrastructure.
Take a stadium, for example. You want to protect that from
being blown up or from some tragic circumstance, but who owns a
stadium, you know, doesn't have any impact on security. So I
think the most important thing to do----
Mr. Lungren. You obviously haven't been involved in the
debate on building a stadium in DC.
Mr. Marchick. Building or not building is a key issue, but
who owns it doesn't raise any security issues.
The key issue is for the government to provide guidance on
what they mean by critical infrastructure for the purposes of
foreign investment. They define agriculture as critical
infrastructure. Who owns a farm, whether it is owned by a
Canadian or an American, I can't see the difference from a
security perspective.
So in the Senate bill that passed the Senate today, the
Senate Banking Committee, there is a requirement for the CFIUS
agencies to provide guidance to the investment communities on
the type of transactions they are seeing. That would be very
helpful. Because right now there is a lot of ambiguity, and you
are forcing a lot of transactions into the CFIUS process that
don't need to be there. And you are requiring the intelligence
community, the Homeland Security Department and others to spend
a lot of time on those when they should be focused on the
transactions that really matter.
Ms. Jackson Lee. Thank you.
The gentleman's time has expired.
It is my pleasure to yield to the distinguished gentlelady
from New York, Brooklyn, New York for her 5 minutes.
Ms. Clarke. Thank you, Madam Chair.
It has been somewhat of a hectic day today, but I thought
it was very important to be at this subcommittee hearing. I
just want to share a couple of thoughts and raise a couple of
questions.
Since the very beginning, foreign investment has played a
vital role in the development of the United States; as the
world becomes increasingly global and the businesses around the
world find new ways to integrate, maintaining a strong level of
foreign investment will be as important as ever.
There is also a great deal that foreign companies can't do
to keep America secure. By working with the government and
reducing their vulnerabilities, companies can both improve the
economy and help maintain security. This, however, is dependent
on a strong, cooperative relationship with the government and
on maintaining sensitive information and systems in a safe way.
We must also keep in mind that not all investors have the
best interest of the U.S. at heart. Therefore, the government
must continue to play a role in determining which investments
could cause harm to come to Americans.
I wanted to direct my question to you, Mr. Pfister. How
exactly would you define critical infrastructure? That has been
a lot of the challenge. You know, I come from New York State
where, of course, the big issue around Dubai Ports became a
national issue and national concern. And I think defining
critical infrastructure and what it means in this global
environment that we are in, is really important.
Because I notice that you comment in your testimony that
Halliburton does not possess any critical infrastructure or
assets, I want to know whether you would consider various
energy facilities--you operate critical infrastructure; or what
about operations which involve supplying or building facilities
for our military overseas?
Can you just sort of give me a sense?
Mr. Pfister. Yes, ma'am. I would be happy to do that. Let
me kind of start off--all right. Is it better now? This must be
the microphone. I would be happy to answer those questions.
Let me explain kind of what our assets are that we do own.
We own people, obviously, with intellectual property between
their ears. We have got manufacturing plants all over the world
that build equipment, heavy equipment and tools that are mobile
enough to then drop-ship into different parts of the world, so
the big trucks and the skids and the boats that go out and
provide services in the more permanent critical infrastructure
that Homeland Security has appeared to focus more attention on
in the past.
We have technology centers where we do--we have
laboratories where we do research and development of our
products. And then again, we have the equipment, the actual
equipment.
So when we made the statement up at the--in my opening
statement that we were really not the owners or the operators
of critical infrastructure, we were using the more classical
definition that Homeland Security has had of refineries,
pipelines, LNG terminals, et cetera. We don't operate or own
any of those.
What we operate and own are tools that fit in trucks that
we drive around or we float to different locations to actually
help us.
And the complexity around them is that our primary
technology is in better understanding rock properties and fluid
properties, deep underground, and figuring out how to make
hydrocarbons flow faster out of that and get to the surface. So
our equipment is very specific, very niche-oriented to that.
So I don't know if that answers your question or not.
Ms. Clarke. It does to a certain degree. But being an avid
watcher of the television program 24, I will submit to you that
the tools that you utilize getting into the wrong hands or
being exposed to the wrong environment could pose a threat.
Just FYI
Let me follow up with this question: If Halliburton's
operations were run by an entity that wished to do harm to
America or shift U.S. policy, do you feel they would have a
means through your operations to accomplish this?
Mr. Pfister. Can you clear up the question just a little
bit? If Halliburton's operations were bought by someone else
and then controlled?
Ms. Clarke. By that entity.
Mr. Pfister. Well, it wouldn't be too different than some
of our competitors today. Schlumberger is not an American
corporation and yet we allow them to operate in the United
States and in other places around the world.
I guess you are asking me for my advice on whether foreign
ownership of the sort of business that we operate today would
create any incremental concerns.
Ms. Clarke. Vulnerabilities.
Mr. Pfister. I have a hard time seeing that being a large
increase in risk.
Ms. Clarke. OK.
Mr. Marchick. I would just note, it was the microphone of
the foreign company that didn't work.
Ms. Clarke. That is a good one.
Mr. Marchick, in your testimony, you express several
definitions for critical infrastructure. Which do you feel is
most appropriate, or do you have a separate definition you feel
would better fit?
Mr. Marchick. I think the definition in the PATRIOT Act is
a very good definition because it focuses on those systems and
assets whose destruction would have a debilitating impact on
the United States.
We know that, for example, in some sectors there is an
incremental risk in foreign investment. For example, in the
telecom sector because the Department of Justice wants to have
access to wiretaps that we want--they have a legitimate
interest in ensuring that they can conduct those wiretaps
without foreign persons knowing about them or without foreign
governments knowing about them, so you want to have American
citizens handling those wiretap processes.
Similarly, you want American citizens handling classified
information in defense companies.
But I think there is a very narrowly defined set of sectors
where there really is an incremental risk for foreign
investments, and in most of those sectors, if not all of them,
there are ways to mitigate that risk through, for example,
requiring that American citizens operate in key functions at a
port facility or in a telecommunications control center or in
the defense sector by making sure that all of the people that
have access to sensitive assets have background checks and
security screens, and there are access controls and badging and
escorts.
So I think that we shouldn't seek to ban foreign
investment. We should seek to mitigate the marginal increase in
risk associated with foreign ownership in those very narrow
sets of sectors where foreign ownership matters.
Ms. Clarke. Just to follow up, Madam Chair.
Mr. Marchick, in your experience, do you feel that CFIUS
takes into account the country in which the potential foreign
owners are based? Does it treat various countries differently,
and are you aware of any situations where CFIUS denied a filing
purely on the nationality of the company?
Mr. Marchick. CFIUS looks at a variety of factors in their
national security analysis. They start with looking at the
threat and whether there--if the buyer had harmful intent and
the capability, would they do something to harm the interest of
the United States.
They would then look at the vulnerability. What are the
assets that the company is buying and how could a person or
entity that has the intent to harm the United States take
action to harm the United States?
The country where the buyer comes from is a factor. British
companies are treated differently than companies from other
countries. Privately owned companies are treated differently
than government-owned companies. And the ownership does have a
significant impact on the national security risk analysis that
the CFIUS agencies undertake.
I am not aware of any specific ban outside of existing law
on companies from certain countries investing in the United
States, but I do know that certain countries that make
investments in the United States have higher scrutiny than
others.
Ms. Clarke. Thank you very much, Madam Chair.
I yield back the rest of my time.
Ms. Jackson Lee. I thank you.
I am aware of your schedule. We will be back before that
time. And we will recess for the last time. When we come back,
we will conclude the hearing.
[Recess.]
Ms. Jackson Lee. The subcommittee hearing is called to
order. Thank you so very much for your patience. I know it will
add to your happenings here on the Hill.
Let me first, in the absence of my ranking member--I know
that he has been called to another hearing which I am called
to, so we will finish at this time. Just--in his absence, as
well, I will make sure that he knows that he has a few friends
in Texas who believe in the energy industry and the value and
importance that it has for the United States.
With that in mind, Mr. Garcia, let me just quickly get a
quick question to you. Plain and simple, how are these lessons
applied to assets that are or affect critical infrastructure in
the United States?
The lessons that we are talking about, of course, are the
fact that you are a global company. If you could, just restate
for us how the lessons of being global can impact on the
securing of assets here in the United States which happen to be
under the control of foreign investors.
Mr. Garcia. Since 9/11, the United States has really
tightened its security measures on all aspects of life here.
Everybody is more conscious of what is going on--law
enforcement as well as companies, if they can take stringent
measures to try to protect against another attack since 9/11.
For attacks that take place overseas, we are in countries
where security measures are not as strict as in the United
States. The insurgents in Iraq and places in other locations,
we see what they do. We learn from what they are trying to do
and how to do it, and see what we can do to ensure that that
does not happen here in the United States.
We take those lessons learned by looking at and studying
what they do to ensure that we are covering our procedures,
that we have to plug that gap. We always try to look at the
``what ifs,'' as you suggested earlier. We do not just take
things for granted. Anything can possibly happen, so we always
look at the impossible and say, ``Do we have a coverage for
that or not?'' Using the overseas incidents that take place, we
look at that as well.
Ms. Jackson Lee. Mr. Marchick, let me just, as we excuse
you and thank you for your testimony, raise this last question
with you.
I, frankly, believe that we need legislation that is geared
toward the question of actual security of the infrastructure,
of the critical infrastructure; and certainly CFIUS has a lot
of elements in it. I will certainly be looking very closely at
the markup that the Senate has done today.
Give us, if you will again, your parameters or where you
believe there should be government intervention, and we hope
that you will not be inhibited by your clients. We are asking
for your wisdom and so--frankly, I think you started out by
saying, where there was a crisis or where there shows to be
some inconsistency or problems, there might be a need for
government intervention. Would you expand on that, please?
Mr. Marchick. Thank you very much.
Let me just state for the record that these are my
opinions. My clients have opinions all over the map, and
hopefully, I will not get fired by any of them after what I say
today.
It seems to me that the Federal Government, working with
industry, should develop security guidelines, security
mechanisms, security standards on a sector-by-sector basis,
addressing the risk that is inherent in that sector.
The Department of Homeland Security is doing that now in
the chemical sector, coming up with chemical security
guidelines and chemical security regulations, working with
industry. That is a very healthy exercise.
On top of that, if there are marginal increases in risk to
our national security associated with foreign investment, those
should be addressed through CFIUS; and CFIUS, I think, is well-
equipped to address those particular concerns, but it is that
marginal increase, that delta in security risk that is the only
thing that CFIUS should focus on.
The general vulnerabilities that exist in our energy
sector, for example, or our chemical sector should be addressed
across the board regardless of who owns the asset. And then on
top of that, if there are particular issues associated with a
particular foreign owner who raises issues, those should be
addressed through CFIUS. And I think that this committee and
the CFIUS committee and the Homeland Security Department can
work together to accomplish those twin goals.
Ms. Jackson Lee. So, if you will, as to an established
conflict that may generate between the United States and
another sovereign nation that might interfere with critical
assets or with that country's investment in the United States,
you are suggesting that that should be looked at isolated or it
should be looked at separately?
Mr. Marchick. I think it should be looked at with great
rigor to see if there are risks that a foreign owner would do
anything that would harm the security of the United States. And
we should never allow that to happen, but we should start by
ensuring that we have strong security measures in place across
the board; then--going back to the security philosophy that Mr.
Pfister and Mr. Garcia articulated--have a layered approach,
have additional security conditions to address particular
concerns that are associated with a foreign investment.
So you start with a basic building block of security for
our critical infrastructure, and if there are additional risks
associated with foreign investors, CFIUS should impose
conditions on that transaction to make sure that those security
issues are addressed.
Ms. Jackson Lee. So you add to CFIUS or you may look also
at a more narrow focus on homeland security?
Mr. Marchick. Exactly.
Ms. Jackson Lee. Let me thank you, Mr. Marchick. I
understand you have a flight.
Let me conclude with Mr. Pfister.
Let us try to probe again, just as we close this hearing,
to have a better understanding, because Dubai has created a
great deal of interest, and the presence of your CEO and other
personnel have created a great deal of interest. That, in
essence, Mr. Pfister, is an investment of sorts.
I assume that you are leasing property or buying a
building. You are possibly having access and control. So our
inquiry is equally, certainly for the safety of the personnel
and for the safety of whatever resources you utilize.
Can you again frame for us how you provide the protection
of any critical infrastructure that might be necessary to
ensure your work in Dubai or in Doha or wherever you might
happen to be?
Mr. Pfister. Yes, ma'am, I would be happy to.
To be quite frank with you, Dubai is one of the easier
places to secure and protect infrastructure, particularly of
the information technology. They are one of the more advanced
countries around the world in terms of providing capabilities
and digital technologies, once you have figured out how to
provide acceptable security in places like Africa and other
places--in Russia, Falkland Islands, and other places that the
energy industry operates.
Ms. Jackson Lee. So how do you proceed in those difficult
areas?
Mr. Pfister. So it is using the standards.
One of the phenomena around information technology security
is that security improvements are cumulative. The financial
industry creates new ways of protecting financial data, and it
immediately becomes available in commercial products that then
other industries are able to deploy. The health care industry
creates new technology approaches and commercial products that
we then embed in other industries. So, you know, this is not a
brand-new phenomenon.
With the advent of the Internet and when companies started
hooking their computer networks up to, you know, the globe,
that risk was introduced at that point in time; and so the
commercial IT security industry and companies participating in
groups like the API and others have been designing firewall
systems, prevention systems, approaches to secure computers and
assets that are almost mainstream at this point in time.
So Mr. Lesar's move to Dubai really does not materially
increase at all the risk that any of our key technologies or
our key intellectual property is going to be exposed to, any
more than it was in the last decade as we have had people
traveling all over the world, many times much more and to more
desolate places than Dubai.
Ms. Jackson Lee. Do you have enhanced security measures of
personnel? Do you have reinforced buildings? Do you do anything
differently?
Mr. Pfister. Well, we do the same types of security, from
the physical security aspects, that you heard about from our
Shell associate: guards; you know, big cement blocks as you
enter the building so that car bombs and things like that would
not get into the core of the building; the same card key
access; the same logging; those types of things. So it is
really not any different than the way we protect any other
location that has computers that might have access to critical
information.
Ms. Jackson Lee. Let me say that I think the test may be
the word ``rigor'' in that we should be rigorous when we are
looking at foreign ownership and foreign investors as it
relates to our security.
My last question to you, Mr. Garcia, is that--again, using
your expertise--we do know that oil companies--many of them are
in and invest in continents--South America, the continent of
Africa. We know in particular that there has been some well-
known publicized seizing of assets in the delta of Nigeria.
That obviously has a life of its own, but I want to pose a
question which is similar to the Russian incident that occurred
that impacted Europe.
If the resources were stymied such that there would be the
foreign investment by a foreign company but they would be
impacting the United States, what kind of intervention are you
all looking toward to prevent that kind of major impact? Even
though resources go all over the world, what are you looking
toward to prevent that kind of major impact on energy resources
coming to the United States?
Mr. Garcia. Congresswoman, the actual dynamics of the oil
flow's being cut off in various countries outside the United
States would probably be answered best by somebody in the
company that deals with that.
As far as the security issues there in Nigeria, I monitor
that with the Shell security group to see what measures can be
done and to see what assistance can be provided to them either
through the host country or through other types of training and
activities that can be done with the various U.S. embassy
personnel who are there, to help alleviate some of those
problems and some of those issues so that we do not get to this
position where it is not safe to do any business at all in that
particular country.
As far as the impact, I would imagine the impact of cutting
off any kind of reserves coming to the United States can be
detrimental to the United States economy depending on how much
is cut. As far as how and specifically what the impact would
be, some other witness will probably have to answer that on the
economics part.
Ms. Jackson Lee. Do you think, in the whole idea of
security and critical infrastructure around the world, that the
Federal Government, beyond the existing legislation, can be
more helpful?
Mr. Garcia. Well, the Federal Government right now is
working a lot with the Coast Guard on the international port
security program where they actually go to the various ports
around the world that service ships that come to the United
States--our tankers and other things that do come here. They
are doing a big push in working with the various countries that
these vehicles or vessels come from in order to try to ensure
that the security measures that are taken on in those host
ports overseas are helpful for what is coming to the United
States.
Some of the exceptions that are done are that the Coast
Guard will do inspections and boardings offshore well within
the safety region away from the United States so as to ensure
that the vessel itself is not something that is going to be
detrimental or dangerous to the United States when it comes to
our ports.
So the United States and the Federal Government are doing a
lot of things overseas to help in that aspect, and we, as an
industry, are trying to assist them on identifying weaknesses
and vulnerabilities that they should be looking at and are
trying to ensure that they search and look at those areas to
try to prevent some sort of an act.
Ms. Jackson Lee. Let me conclude and thank you very much
for the response.
Just in summary, this has been a challenging time to have a
hearing, but I thank you for giving us at least the beginnings
of our discussion on this issue. As I indicated, I think there
is more to explore. This hearing was to begin the discussion,
as we have started under the full committee with Chairman
Thompson.
How do you protect foreign infrastructure that may be in
the hands of a foreign owner that impacts the United States,
our national security or a foreign investor? There are a lot of
nuances that will take several panels and very long hours, but
I will end as I started.
Our challenge is to imagine the possible and the
impossible, and it is also to accept the premise of our
economy, which is an economy that welcomes investors, but at
the same time, as for the persons who we have the
responsibility of protecting, we have to ask the hard
questions.
So I believe that we have been given, even from your
testimony, a range of issues to think about and a range of
issues to look at--expanded legislation--in light of the long
list of critical infrastructure that we have, to be able to at
least give guidance to public entities, which are separate from
Mr. Garcia and Mr. Pfister.
And also to our corporate entities, which already probably
have a major leg forward, because statistics show that you have
about 85 percent of our critical infrastructure, both
domestically and then those that are owned by foreign investors
that are in the private sector; and you certainly have concern
about your own property and the needs and protection of your
own employees.
We know you are forward-thinking, and I think it is crucial
that we take up the responsibility for those issues that may
not be as far ahead as the private sector is, and I count that
as the raging new, if you will, basis of securing funding for
public entities, and that is the selling of the very roads upon
which we travel. That is a major issue, and I think that we
should certainly look at that.
You have given us a great deal of insight. We thank you for
your appearance here before our committee, and I believe that I
will follow up with my concluding remarks so that we can
finish.
As I have indicated, I thank the witnesses for their very
valuable testimony, and the members of the subcommittee may
have additional questions for the witnesses, and we will ask
you to respond expeditiously in writing to those questions, and
we will look forward to the answers in the response.
Ms. Jackson Lee. I am going to put into the record, with
the existing quorum, an article by a Times reporter in
Philadelphia, ``Foreign Companies Buying American Roads and
Bridges''--it happens to be a positive article--and an article
from the Dallas Morning News, ``Foreign Companies Buying U.S.
Roads and Bridges.'' Those are some of the other aspects of the
work that we have before us in this committee.
So let me thank all of the witnesses. With that, the
hearing is adjourned.
[Whereupon, at 5 p.m., the subcommittee was adjourned,
subject to the call of the Chair.]