Speech

Shell Final Report

14/02/2008

A National Dialogue on Energy Security: The Shell Final Report. John Hofmeister’s remarks at the U.S. Chamber of Commerce in Washington, D.C.

Ladies and gentlemen, I would like to offer a rather complicated triangulation of three sets of phenomena.

In a sense, these will bookend the kind of conversation we want to have this afternoon. Our conversation will envelop the lessons of our 50 cities, the comments from 15,000 fellow Americans, statements by 25 governors that we met, 20 big-city mayors and many, many other elected county councils, city councils and appointed members of regulatory and political organizations, as well as everyday citizens who talked to us along the way.

Let me start, if I may, with some basic facts, because these facts must inform the 21st century way forward and American energy security.

Fact number one – every second, the nation is consuming 10,000 gallons of oil. That’s a fact: 10,000 gallons a second of oil. So, when we think of alternatives to oil, we have to think about what percentage of the 10,000 gallons, which is the size of a backyard swimming pool.

Every minute, twenty 100-ton railcars of coal are being burned in this country to produce electricity.  While we are meeting here today, hundreds of railcars of coal will be burned to create electric power in this country. Today, we will use something like 60 billion cubic feet of natural gas. If we stacked those cubic feet on top of each other, we could go from here to the moon and back 25 times, in one day.

When we think about energy security, we have to create a framework about what kind of energy security we’re talking about. The basis on which our economy is built is the basis on which our lifestyle plays out – our lifestyle of comfort and mobility, and of technology and innovation. Without energy, it doesn’t happen. So, that’s one bookend.

A second bookend includes some outrageous statements, if you will. One outrageous statement: when was the last time the United States of America had a comprehensive, coherent, integrated and coordinated national energy strategy?

The answer is World War II when we had a simple, basic energy security strategy for the nation: produce everything we can produce and ration it to our consumers in order to support the war effort. And that’s what we did. But since World War II, there has been a lack of a coherent, comprehensive, integrated, national energy strategy for the United States of America – the world’s largest economy, the envy of the world in that regard.

Another outrageous statement is we choose to believe in this country that there is an energy marketplace. Let me suggest to you that that’s the wrong metaphor. To describe the energy marketplace as a true, free market doesn’t compute with the reality of what we face in the energy world.

For example, when nations, in their own sovereign interests, determine how much energy they will produce for the global marketplace, that puts a constraint on a free market.

When American energy companies, such as American oil companies, are prohibited by American public policy from exploring and producing oil in 85 percent of the Outer Continental Shelf (meaning that these companies are constrained to exploration in 15 percent of the Outer Continental Shelf) and prohibited by law from access of federal lands, that is not exactly the description of a free market.

Another outrageous statement – natural resource nationalism, where exporting nations determine the amount and at what price they will put their product for export into the global marketplace, or natural resource nationalism by developing nations, which are importing nations, that determine how they will subsidize the cost of energy in their country for the purposes of economic development (we see happening in the developing world, in particular).

This also obstructs a free marketplace. And so we have incentives to produce manufacturing and other value-creating enterprises in developing nations where the cost of energy is subsidized, rather than American enterprises that have to pay the full price of energy. For America to compete without its own definition of natural resource nationalism in the current environment makes it very, very uncompetitive for American business.

Let me also suggest that the efforts of 2005, 2006, and 2007 – the energy bills produced by Congress and signed by the President – are deeply appreciated, because each of those bills helps the situation. Thanks to many people here who interact with our elected officials, the Executive Branch, people like me, and people from across Shell.

Frankly, the people from across America will benefit from those policy improvements. But, they do not in total represent a coherent, integrated strategy that meets short-term, medium-term and long-term requirements of the nation.

In fact, if you analyze the particular policy initiatives, they serve well the long term. And they meet many more compelling issues in the medium term.

But, ladies and gentlemen, $3.15 a gallon for regular gasoline is an unfair price in this country when we are not developing our own natural resources and we are importing evermore product to meet the daily consumption needs of 10,000 gallons a second.

Here’s the issue.

While we constrain the development of our own natural resources, we are constrained by the effects of global competition for what’s available in the international marketplace. And China, India and every other country have the same right to bid for the global oil purchasing that they do, just as we do and the Europeans do.

But the irony is we, as a matter of public policy, constrain our own natural resource development. And that’s what is missing in the short-term strategy requirement of this century.

If we do not move (and I’ve said this to multiple presidential candidates who were interested in the subject), if the next president and the next Congress do not move immediately in the first days of the first term to open more access, to enable companies to drive more natural resource development, in particular oil and gas, I pity the next president’s re-election prospects four years hence, because the current situation can only get worse because economic demand is an imperative for the way in which the world’s largest economy operates. And without energy, it doesn’t operate as well.

But, here’s another issue that never gets talked about – $3.15 a gallon is for many, many Americans a non-event. They’re just glad to have it. It feeds their lifestyle of instant mobility, as and when they choose. But, when many of our fellow Americans are choosing among groceries and medicines and fuel to get to work or fuel to heat their homes, this price is unnecessary and unaffordable. And it can be remedied.

So, why did we embark on this tour? This is a very complicated subject, one in which we can only blame the industry itself (my own industry) for not having done a very good job over the last 20 years of expressing ourselves. We’ve gotten ourselves into a terrible predicament – and here it is.

Hurricanes Katrina and Rita, and the five other hurricanes of 2005, basically severely compromised supply lines in the United States in that period of time. Particularly after Katrina and Rita, with the loss of 25 percent of the nation’s producing capacity of oil and gas, what happened?

Well, one thing that happened is the energy companies (every one of them) were cheerleading their employees and thanking their employees for surviving the storm and rushing to the rescue of the companies to try to get production back up and running under the God-awful conditions of tropical weather, of severe damage, of emotional trauma (particularly in New Orleans and in Southern Louisiana and then in East Texas and Western Louisiana). And while we were working so hard to bring energy back to some level of normalcy, what else was happening?

Personally, I received 48 letters from attorneys general accusing my company of price gouging our fellow Americans. Also, political hearings were held on Capitol Hill, bringing executives up to explain how these unconscionable high prices could materialize; what these companies were doing to conspire to hold back supplies so that Americans would pay this horrible price? Hate mail from consumers was arriving by the day, E-mails, written mail and finally when I got the drawing of me hanging from a tall tree in effigy, I said, “Enough. We’ve got to change this game.”

And so, with my senior staff, we talked about alternatives because why would we want to live and work in a world with irreconcilable differences – with misunderstanding galore, with an industry that does so much good for America, but has had such a difficult time convincing America of the good that it does.

And we said, “You know what? Advertising our way into the future is probably burning our shareholders’ money fruitlessly but engaging our fellow Americans and going out and talking with people sounds like what normal people would do. So, let’s go.”  And, so we did.

We didn’t know how to get started. We hadn’t been doing something like this, but Shell in the U.K. had been doing something like this for decades.

And so we copied the practices of our Shell counterparts in the United Kingdom, brought that technology to the United States, which is very simple technology – invite a bunch of people to come together and ask a few questions to get a conversation started.

Don’t preach. Don’t teach. Listen and engage. And, don’t let people sit down. We had 10 chairs for about every 80 people, so that those who needed to sit down could.

But, the shoulder-to-shoulder, eyeball-to-eyeball engagement – as we are all accustomed to in social events – makes a big difference rather than being than seated in a theater-style where we were talking at one another. Instead we were talking with each other.

And, that lead to productive conversations from local people, local leaders, from business, government, local community organizations. And that brought an honest level of conversation to bear on three fundamental questions.

What does the future of energy look like? What can we do about the demand side of energy? And what can a company like Shell do to get more oil?

Very simple questions, but they led to hours and hours of dialogue and that’s all brought to you in the report on your chair. It was frightening. The more we got into it, the more frightened we were.

We, in the industry, see ourselves as experts. We know the geology, we know the geography, we know the technology, we know the risk, and we know the combination of human capital, financial capital and how to bring it together in what timeframe. And, boy can we deliver.

For example, today someone in Chicago is filling their tank with Shell gasoline that comes from ultra-deep water in the Gulf of Mexico that has somehow been lifted through thousands of feet of water, taken to shore (not by a pipeline but by a barge), put through a refinery, put through another pipeline all the way up from the Gulf Coast to Chicago, so that they can drive their children to school, to ballet and back home again.

That gallon of oil at three dollars and something, some would say is a bargain. But it doesn’t have to cost that much. Someone else in Chicago is deciding whether they should buy food at the grocery store or get two dollars worth of gas to get to work tomorrow. We don’t have to have it this way.

And that’s what came out of our dialogue – that is, Americans learn more and more about the myths of oil – and the myths are described in the final report – the myths that we are running out of oil. Ladies and gentlemen, there is more oil yet to be discovered and to be developed than has ever been imagined. When we think about conventional oil and gas, yes, the easy, conventional oil and gas has been largely produced in conventional ways.

But, even for conventional oil and gas, more of it could be produced in unconventional ways, such as enhanced oil recovery, combining climate change management by the use of CO2 made into a super critical liquid, pumped into old oil reservoirs, producing more oil and storing CO2 at the same time.

There’s a whole lot of conventional oil that could be redeveloped, fields that could be redeveloped and we know (and API tells us) that there are about 100 billion barrels of undeveloped conventional resource in the Outer Continental Shelf or on federal lands that we’re not allowed to get, which could be developed. So conventional oil and gas, 100 billion barrels is a lot and we should be able to go after it.

There’s unconventional oil and gas – the trillion barrels in the oil sands of Canada, the trillion or more barrels in the oil shale of Colorado, Utah and Wyoming, where the technology is being developed that could develop that kind of a hard oil resource. When I say hard oil, the molecules are locked in rock. They’re not even liquid.

But, by heating the rock, we have demonstrated that those molecules of oil and gas can be emitted from the rock and collected in conventional ways and turned into high-grade petroleum products. There are the trillion barrels of heavy oil in the Orinoco Basin in Venezuela. So, just in this hemisphere, there are three trillion barrels of developable resource. It’s a myth to say we’re running out of oil.

It’s just different and it may be harder to get, but there are other forms of energy beyond oil and gas. Natural gas is going at a premium. Today it’s $8.50 for a million BTUs of natural gas. That’s a lot when four or five years ago, two dollars was considered a high price. We’ve gone up four times in price in just a few years.

The outlook for natural gas is to be evermore challenging, evermore competitive because natural gas has half the CO2 of other hydrocarbons, particularly when compared with coal. And power producers like natural gas to make electricity. Well, we can augment natural gas supplies with liquefied natural gas, but we run into a problem.

Liquefied natural gas has to have infrastructure, we have to build regasification terminals on the East Coast or the West Coast or the Gulf Coast, in order to bring liquefied natural gas from markets where it is stranded.  We could cool and transport this stranded natural gas to produce in this country as regasified natural gas.

I spent the last 10 days around Long Island, New York and Albany, trying to work a project to get a regasification terminal called Broadwater approved by the New York state government. We have demonstrated alignment with the Coastal Zone Management Plan. The forces of opposition are out there working very hard because they don’t want the infrastructure, even though they may want the gas.

We, as Americans, have to come to grips with infrastructure because energy infrastructure, whether we like it or not, has to be part of our long-term, medium-term and short-term strategy.

And, here’s the issue with infrastructure. We are not demanding less energy. Think about what society is moving toward and as much as we can talk about appliance efficiency and light bulb efficiency, let’s also talk about our desire for more electrified goods.

If you have a large family, how many computers do you need? If you have a multi-bedroom home or a large home, how many TVs do you have? 

And, we love the new HDTVs, don’t we? But, do we recognize that the larger HDTVs require twice as much wattage as the analog devices that we’re now trading out? 

So, Americans’ love of computing power – whether it’s at school, whether it’s at a business or in our home or in our government – is only going to increase. It all takes electricity. So, liquefied natural gas is a way of augmenting the gas supply.

Coal is abundant. When we can produce enough coal to burn 20 carloads a minute, we know there’s a lot of coal out there. But, coal creates a lot of CO2 and other elements. But industry has developed the technology for what’s called “clean coal.” Clean coal means coal gasification. Coal gasification, combined with carbon capture and storage, could be a great way forward for more electricity from coal with less CO2 impact on our nation. So, those are just a few of the supply-side issues in the traditional forms of hydrocarbons.

But, we can also talk about answering more myths. Another myth is that biofuels are the silver bullets of the future, and that they are the magic solution. Well, as the paper says, Shell believes in biofuels, but we don’t believe in magic. There is a balance that has to be struck in the introduction of biofuels as a substitute for transport fuels, between the environmental implications and the source implications.

The source implications, from our Shell point of view, are better advantaged by using biomass waste, rather than food products (such as corn or sugar syrup) for the production of fuel.

Let’s not compete bellies with fuel tanks (although there is a correlation, I suppose, in the human body). But, let’s recognize that biomass waste with the proper technology offers vast quantities over time, which can help augment the liquid fuel supply.

But we can’t push a rope up a hill. In other words, the technologies that are appropriate to the enzymatic breakdown of cellulose are still in research and development. Once those are mastered, then we have to master the technology of manufacturing in vast quantities. And so vast quantities mean large-scale manufacturing. And you don’t go from the lab to large-scale manufacturing overnight.

But other alternatives can also help, particularly for producing electricity, such as wind. Shell has seven wind farms in five states (almost a gigawatt of wind) that are really demonstrating the power of wind. But the need for more wind-power generation requires the development of transmission systems, doesn’t it?  Where the wind blows may not be where the people are.

So we need to move the power of wind through electrical lines, and that requires new transmission lines that don’t exist. That, again, brings us to short-term infrastructure development where those transmission towers, ladies and gentlemen, do have to be in somebody’s back yard at some point. We have to get past some of this “protect my backyard” in order to make the energy future come together. Hydrogen and solar power represent potential breakthroughs down in the years-ahead long-term strategy, which could benefit us all.

But, we can’t just talk about energy production without talking about energy demand. And on the demand side, Shell believes that it’s time to have a national framework where governments (including global governments) take the lead on the management of greenhouse gases.

The reason we joined the United States Climate Action Partnership was for the purpose of coalescing diverse interests into a national framework, so that the country is united in its solution to cap greenhouse gases for this generation and for generations to come. We must start now. We could have started sooner, but we didn’t. We must start now. Greenhouse gas management in market-driven ways, within a regulatory framework, looks very promising for the world. We have to get on with it.

Other demand-side issues on efficiency. The technologies that we’re looking at down the road, whether it’s hydrogen fuel cell vehicles, whether it’s LED lighting rather than incandescent lighting, whatever it is that we’re looking at can only get better because here’s a reality.

Our incandescent light bulbs use three percent of the energy to produce light, 97 percent of the energy produces heat. But then, of course, we have our air conditioners to cool the room from all the heat that’s created by the incandescent light bulbs – not exactly a good use of energy.

Automobiles – when you buy a tank full of gas, 20 percent of what you are spending is useful for mobility. So, if you put $60 into your tank, $12 gives you mobility and $48 is wasted as heat. That’s the nature of the internal combustion engine. It’s not the kind of gas you’re buying, and it’s not that it’s a bad engine. It is the most efficient use of the molecules that can be had from the current combustion engines.

Aircraft – you get about eight percent fuel efficiency. So, eight percent of that jet fuel gives push and 92 percent comes out the back end as wasted heat. So, efficiency has to be part and parcel of what we do.

And then the last two points of our 12-point program: the education of our youth, the education of our population. There must be ways we can do a much better job as a nation of putting the knowledge and information out there of what energy means for our society. Where does it come from?  How does it work? How was it used responsibly?

We educate ourselves on every other dynamic of life in order to have a civil society – except energy. And we have become quite uncivil when it comes to energy. That game has to change.

And, finally, there are alternatives for which Shell has no expertise, which we believe deserve the respect of the nation as we look at alternative forms of non-hydrocarbon energy production, whether that’s hydropower, nuclear, geothermal. These are new areas of discovery, new areas of opportunity. Nuclear has had its history, but new nuclear may well be part of our future going forward.

So, ladies and gentlemen, you can see the myths and you can see the realities. We ask all Americans today to join Shell and, in the words of the Ohio participant in our town hall, join us in taking a lead to correct America’s energy security requirements.

Thank you very much.