Speeches

John Hofmeister's Speech in Sacramento

14/04/2008

John Hofmeister's remarks at the Low Carbon Fuels Expo in Sacramento, California

Let me just begin with a mention of the Shell Eco-marathon in Fontana last weekend where the winner came in at 2,800 miles per gallon. That was on a hydrocarbon fuel.

We also had some electric cars based on solar power, which did a little bit better than that, but in a different category, obviously. We had the innovation and technology of students from across America –including colleges from as far east as Penn State. Cal Poly was there. The winners were the Mater Dei High School students of Evansville, Indiana. Fantastic.

They came in second last year to Cal Poly, and they said as they left last year, “This will never happen again.”  And God bless them, they beat Cal Poly at their own game. So, if people don’t think our young people are interested in this, think again. The only issue, of course, is that there are not enough of them.  And I know you heard about that this morning.

Now let me try to build on some of the hard truths that you heard about this morning. There is no escaping the hard truths: increased demand, the challenges of getting more conventional energy, the challenges of carbon constraints, and the challenges of manpower. But, let me talk a little bit further about how at least one company sees the landscape as we look ahead.

We are looking at short-term, medium-term and long-term challenges. In the short term, we see no alternative but for more hydrocarbons to meet the demands of today and tomorrow. And in our industry, short term is anything, frankly, up to about 10 years out.

Now, that may seem like an eternity to some people in some businesses, but in this industry, 10 years is a very short period of time in which to introduce product, to introduce technology, to build infrastructure in which to obtain government licenses to operate. So, 10 years is a short term.

Medium term is 10 to 25 years out. That may seem like an extra eternity to many people, but, in reality, some of the things we are doing today won’t pay off for that length of time. In March of this year, we bid $2.1 billion on leases in the Chukchi Sea, off the Northwest Coast of Alaska. It is unlikely that we will see any hydrocarbon produced from those Chukchi leases in at least the next 12 to 15 years.

Unlikely because, frankly, there are no means by which we could move that product if we started drilling and pumping it in the next year or two. No way could we move that product south to the lower 48, because there’s no means of conveyance. And whether it’s gas or whether it’s liquids, we would still need means of conveyance which, from way up on the North Slope, will take a very long time indeed to reach the ultimate marketplace. So, medium term is anything up to about 25 years out.

Long term is from 20 to 25 years, perhaps out as far as 50 years or more. And believe me, in this industry, you can point to documented evidence of projects that looked like 10- to 15- to 20-year projects actually turning out to be much longer than even 50 years, one example of which is right here in the State of California. In the San Joaquin Valley region, a world-class oil field has been pumping oil for nearly 100 years.

And if you look at the reserves that are still in place (that is producible, recoverable reserves), there are still billions of barrels available in this state for production many years into the future – a world-class field that continues to produce.

So, when it comes to short, medium and long term, I think anything we talk about should be put in that parlance. What we often make the mistake of doing is thinking that solutions are around the corner. Ideas are around the corner. Innovation is around the corner. But to move to scale where society is impacted and value is created in the economy, and people are able to adjust, takes much longer. Just to check, to get here from Fontana, my wife and I decided to drive.

It’s a great grassroots way to just check in with how the hydrocarbon economy is structured in one of the most progressive lands in the world, the State of California. Leaving Fontana and coming up the 15 to the 395, to the 58 and up over the high desert, one of the first things that strikes you are all of the large vehicles pulling trailers full of off-road vehicles.

You see the off-road vehicles for weekend travel up and down the dunes of the high desert and the dune buggies indeed, and then when you get into the high desert, you see these brand-new subdivisions going up with very affordable homes, but a long distance from anywhere. How does one move from a long distance from anywhere? Well, there certainly is no transit system, so one is going to be relying upon personal mobility.

Moving up through the high desert you see the mining industries, you see the Air Force bases and the highways full of trucks on a Sunday – truck after truck moving goods across California from one place to another. And then, you come down into the San Joaquin Valley, where, without hydrocarbons, imagine the production level of the San Joaquin Valley.

Imagine all of the agricultural goods that would not be produced – from lack of either the fertilizers that are manufactured from hydrocarbons, or the automation, or the vehicle implementation of modern agriculture, not the least of which are the trucks crowding the 99 or the 5 on a Sunday afternoon.

Ladies and gentlemen, let’s not forget that the scale and complexity of what we have created over 100 years has to be reconciled with all of our aspirations for ideas and innovation. But it’s not good enough just to belabor the present, so let’s move on a little bit. What’s a company like Shell doing in the face of this kind of challenge of needing more hydrocarbons today, to keep our economy going, but yet with more demand for alternatives, particularly low-carbon alternatives, to deal with the carbon-constrained future, which we know is inevitable?

Well, we do a fair amount of work on biofuels and have been for many years. What we do today is primarily as a global distributor of food-based ethanol from sugar cane, or from corn. With nearly 800 million gallons a year of ethanol, that’s a fair amount of distribution, and about half of it is here in the United States. But instead of just distribution, we are now working on developing several biofuels technology streams.

We have different streams at work, ranging from one stream of ethanol from straw, working with a company called Iogen; two streams of ethanol from wood chips, including working in Germany with a company called Choren using a Fischer-Tropes technology, and a company called Codexis here in California, where we’re working on what are called “super enzymes.”

Those super critters will work more efficiently, more effectively and more quickly to break down the cellulose out of which the sugars can come. We’re working with another company in Hawaii called HR Biopetroleum, where algae become the source of biodiesel. Algae are very good at taking CO2 out of the atmosphere and, based upon the laboratory studies thus far, creating liquid fuels with a lower CO2 content, which can be used and added to diesel as part of biodiesel. It’s a long way from commerciality, but signs are very promising.

Another company, with which we just signed an agreement three weeks ago in Madison, Wisconsin, is working to go directly from biomass to biomass sugars, with the addition of certain additives and catalysts, to produce gasoline from biomass.

That gasoline coming directly from the biomass sugars can then be blended with normal gasoline, stored in the same tanks, pumped through the same pipes, distributed into the same vehicles that today use gasoline and then into a municipal waste stream, as well.

So, these are streams of biofuels that we’re working on in the here and now. But, there’s a concern, and the concern is that public policy says, “Do more faster. Do more faster. Go from the current 7 billion gallons a year to 35 billion gallons a year, as in the Energy Bill of 2007.

And along the way, start shifting toward more cellulosic ethanol” – without a particular understanding in the legislation as to not just what it takes to get the science right, because I have no doubt that we will get the science right, but also absolutely zero understanding of what it takes to go from alpha to beta to commercial-level production of the kind of volumes that are called for and the kind of volumes which, ultimately, need distribution, if they’re going to enter the market place.

Legislating our way forward on technological change may sound like brilliant governance, but, in reality, it could be sending market signals that have unintended consequences, that have anything but commercial outcomes. These are all matters that I believe reside in the public domain and need continuous discussion and debate, because I’m not sure this is a doable proposition, even though many well-intended people believe it is.

We’ll do our best to meet the law, but what we should be doing is having a much deeper kind of discussion like we’re having here these two days over what are the real implications of public policy when it comes to serving people’s energy needs in the future.

Enough about biofuels.

In the here and now, we’re also working very hard on wind. We have one gigawatt of wind production per day as it is, and we’re now moving forward with more wind farms in more states, limited, interestingly, by two things: limited first by the production of wind turbines, which creates constraint on growth in the market because of the need for greater numbers of wind turbines than can actually be produced. And second, and more difficult to address, we are constrained by the need to build transmission lines.

Wind exists largely where people don’t like to live, so the market for wind energy is elsewhere from the source. Without transmission lines, the electricity that is produced from wind can’t go anywhere. So as citizens and as participants in the post-industrial society, if we care about low-carbon fuels and CO2 management in the future, we had better do something that’s very industrial indeed.

We had better get accustomed to working for the implementation of industrial infrastructure, because electrons don’t just appear out of nowhere. Electrons must come through an infrastructure, whether you’re living in an industrial age, in a pre-industrial age, or in a post-industrial age.

And it really does worry me, having been back in this country now for three years, after living 10 years abroad, to see the ungodly resistance to infrastructure development in this country by virtually anybody who can.

And whether it’s liquefied natural gas regasification terminals on both coasts (which are, essentially, a no-go virtually everywhere you go), or whether it’s transmission lines, expansions of existing facilities, or tank farms, or pipelines, this country must have more energy infrastructure for its economy and its lifestyle to continue.

Also, in the short term, we must have CO2 management. Shell doesn’t just try to talk about CO2 management; we believe that if we don’t have a story to tell then how do we dare talk about it?   So, in 1997, we committed ourselves to a journey of reduction in our own CO2 footprint to below 1990 levels by 2010.

And we’re on track to achieve that, despite growing the business in many different dimensions, despite dealing now with unconventional oils in the oil sands of Canada.  We nonetheless are on track to meet our goal by 2010 and beyond that the challenge continues to be there. How do we shrink from there? And, as we approach that period, we will be looking at those options that help us continue to address our own CO2 footprint.

Let’s move to the medium term. In the medium term, we see continued work on biofuels and wind, but let’s start introducing hydrogen in the medium term. While Shell is an early mover in the hydrogen world, particularly hydrogen mobility, we’re not doing any hydrogen in stationary power development, although others are. We’re working on the mobility side, working to develop the logistics that will be required to support market tests for the early vehicles that are produced by manufacturers.

So, if General Motors, for example, our current partner, is introducing Equinox crossover vehicles in New York City, or in Los Angeles, for a market test, we want to be there with hydrogen stations. Preferably hydrogen stations in retail sites, because one thing we’ve certainly learned over the years is that when it comes to distributing fuels, location matters.

If you’re not in the right location, people won’t stop at your site. When it comes to hydrogen location, asking people to go across the rail tracks, through the gated fence to fill up at an industrial site for their retail use is a big ask. And, while that is mostly what happens today, the Shell view is we need to move that industrial site fueling location to a retail site.

That may sound simple to the uninitiated. To the initiated who have been at this fuels delivery game for a long time, it means convincing an independent business person who owns the gas station – even though it may have a Shell brand – it means convincing that person that it is worth putting hydrogen infrastructure into the ground in their retail station along the 5, or the 110, or wherever it may be, perhaps at their cost, or perhaps we would share the cost. That’s the easy part – convincing a business person to invest in new infrastructure.

The more challenging issues are the permitting requirements to be able to bring a new fuel – hydrogen – to a location that has never had it, to a community that may not know anything about it and may not even have regulations on its books that would allow the fire marshal or other permit-authorizing officials to actually engage in the conversation for the storage of hydrogen.

That was the situation in New York where, for three years, we worked with a particular city in the suburbs of New York to put hydrogen at a retail station. And after roughly three years, the final answer came back. “We choose not to write new regulations for the storage and distribution of hydrogen at retail stations.” End of discussion. We ultimately opened up an industrial site in White Plains, New York, so people could drive across the tracks, behind the fence, at the side of the factory and pick up their hydrogen – not ideal for consumer purposes.

But, building the hydrogen highway, so to speak, is going to be a long, drawn-out process. And this is something that I wanted to say about any clean fuel activity, whether it’s biofuels, whether it’s various forms (butenol or the kinds of biofuels I described), or whether it’s hydrogen. The issue that we have to come to grips with is the fact that these infrastructure issues are going to continue to get in the way, and the scale we’re talking about is so small.

What we Americans are used to is counter-intuitive to what clean fuels are all about. We are used to ubiquity. You can go anywhere in this country and find fuel. It’s also universal. Ubiquitous and universal mean that we can go anywhere in this country and anywhere in this state and buy fuel for basically any product that we own, whether it’s a dune buggy, a lawnmower or an automobile.

So, the universality and the ubiquity issue is something that the clean fuels movement has to consider and come to grips with. If we have special interests in certain kinds of fuel that require certain kinds of engines or certain kinds of technology for the fuel to be useful, so that it can be effectively used and affordable, we have a lot of work to do ahead of us, which affects the time scale, which is why I’ve moved to the long term.

In the long term – that is post 25 years – we will see more of the same: more biofuels, more hydrogen, but now we enter into something else that will compete with clean fuels. We enter into perhaps dramatic improvements in efficiency of the products that use hydrocarbons.

So, whether it is the CAFE standards that were part of the 2007 bill, or whether it is the genius of those youngsters in Fontana who have now gone from high school to college and have now gone from college to the workplace and are introducing their innovation and technology into the efficient use of hydrocarbons, we’re all working toward the same common good.

Whether it’s clean fuels or extraordinarily efficient use of hydrocarbons, doesn’t it accomplish much of the same? An automobile getting 42 or 52 miles per gallon and using less hydrocarbons is also a contributor to the clean fuels movement.

So, I think we need all the above over the long term, which will satisfy what I see as an undying need of Americans, and that is for ubiquitous, universal and affordable energy for as far into the future as we can see. When it comes to CO2 management, let’s remember that liquid fuel consumption is but a part of CO2 management over the longer term.

Shell did join the United States Climate Action Partnership, for the purpose of lobbying Congress through USCAP with 34 other organizations, 28 other companies and six NGOs for federal legislation, rather than state-by-state or regional legislation.

We hope to create a level playing field for the country to deal with CO2 emissions by capping and, ultimately, lowering the cap on CO2 emissions. By also including a market incentive, we believe this will, over a period of time, reduce CO2 in this country. 

And while it’s controversial – and as many people will disagree with me as will agree with me – we advocate, and USCAP advocates, a trading system. We see this as the most efficient vehicle for driving CO2 emissions downward, not to just cap emissions, but to drive them downward by rewarding with financial incentives those who can reduce their emissions more than others.

Yes, it’s complex. Yes, Europe is not a good example to point to for success. Yes, there will be unintended consequences and complexities not yet understood. But, nonetheless, by joining forces with these other companies, Shell believes that the CO2 management initiative has got to get a start at the federal level with federal legislation. 

We can start with stationary power production, which is a huge part of CO2 emissions in this country, keeping in mind that 20 long-ton coal cars of pulverized coal are burned in this country every minute. One coal car every three seconds to generate electricity – 20 coal cars every minute of every hour of every day of every week, every month, all year long. That is a huge amount of CO2 going into the atmosphere.

We can set in place caps on stationary power systems, then move toward caps on transportation fuels. But we can’t just look at the fuel – and this is where the complexity comes in. To look at a cap on emissions that just deals with the fuel producers is, in effect, naïve public policy.

Why? Because the fuel producers produce to meet a market. If the market is consuming that fuel in inefficient ways because the vehicles are not efficient, or if that market is such that it never shrinks or never stops growing because public policy does not encourage fewer miles driven by implementing mass transit, or congestion fees, or other user fees to reduce miles driven, then the transportation sector has a very difficult time contributing to lower CO2.

It’s a three-legged stool when it comes to transportation, isn’t it? It’s the fuel, the vehicle and it’s the miles driven. And all three have to be addressed if we’re going to try to address CO2 for transportation. But I believe we can. So, we’ve talked about stationary power and transportation.

But, let’s move on to something else, which we all live and breathe, and that is building construction. If we don’t have efficiency standards for buildings where we office, where we live, how we live, then we will also miss a major bet in CO2 reduction.

So, from a CO2 standpoint, over the short and medium and long term, we must begin somewhere, and somewhere begins now, from our point of view at Shell. But, we must address it holistically – from stationary power to transportation to building codes and uses of electricity in appliances, starting with incandescent light bulbs, which use three percent of the energy to produce light and waste 97 percent as heat.

Of course, our air conditioners take care of. We need to look at a range of solutions from air conditioners with high-efficiency motors and other kinds of technologies to buildings that retain cool or heat. Then there are other kinds of appliances, not the least of which is your favorite and mine: the brand new generation of HDTVs, which use on average twice as much electricity as the analog TVs they’re replacing.

Now that may change with time, but let’s be clear. As tens of millions of Americans load up their HDTVs in their homes and, of course, your son and your daughter want one in their room too – it’s not enough just to have one in the family room – and run their computers at the same time. And every household, office and hotel around this country continues to upgrade their electronics, think of that in terms of the electron demand going up.

And if it’s going up and being met with pulverized coal, the 110-ton train cars, 20 per minute, can become 22 or 23 or 25 per minute.  And think of that in terms of CO2 implications. So, without efficiency, without caps, without incentives, the CO2 management process, in my opinion, falls apart.

Let me leave it there. I am optimistic – which is the reason I am here – optimistic that good public policy thought in terms of short, medium and long term can go a long way toward addressing a clean fuels economy for the future. But it doesn’t just begin and end with oil companies.

It doesn’t just begin and end with coal companies. It doesn’t just begin and end in state legislatures. It doesn’t just begin and end at consumers. It’s the entirety wrapped up together. And if we don’t address it holistically and in ways that are commercially viable, and if we don’t address it in terms of universality, ubiquity and affordability, we’ll all be wasting our time.

Thank you very much.