Speeches

John Hofmeister's '07 Speech - Albany

06/08/2007

How the U.S. Can Ensure Energy Supply for the Future. John Hofmeister's remarks to the Albany Executives Association in Albany, New York.

Thank you, ladies and gentlemen, for the opportunity to speak to you. You may have heard I was a GE associate for a number of years.

I used to be in Erie, Pennsylvania; we used to compare winter snowfalls with Schenectady, New York.
 
I never quite made it to Schenectady during my GE career, but I know how deeply indebted the GE Company is to the people of Schenectady and I hope it has continued to be a good experience.
 
As I look around the room and check out the demographics a little bit, let me just say, weren’t the last 50 years wonderful?

Not just because many of us have lived a full life during those 50 years, but think about some of the wonderful things that have occurred during those last 50 years, including the incredible rise in the economic well being of this country.
 
The incredible advances in affordable health care over these 50 years. The tremendous improvement in quality of life, style of life. How many of us now have not only a furnace for the winter, but an air conditioner for the summer? 
 
How many of us have a car that not only has a heater in the winter, but an air conditioner in the summer?  So that the quality of life, the enjoyment of life has moved apace with the economic well being.
 
Underneath that economic growth and the well being that we have all experienced, ladies and gentlemen, is a common denominator – it’s been called “energy security.” 

We have enjoyed 50 years of sustained energy security with a little blip in the ‘70s (but only for a few weeks or months), which most of us can also recall. But, we otherwise have enjoyed energy security, which can be defined as available and affordable energy.
 
It’s always there when we need it and it has been our expectation growing up and living during these last 50 years that that’s normal.

And so that available, affordable energy has enabled our economic model in this country to work. Not just our industrial model, which we know is predicated on available and affordable energy, but also our new economic models – our information-age model.
 
Let me give you an example of a visit that we made to Seattle a few months ago on the information-age model.

While we were meeting with a group of senior Microsoft executives about their need for power in the future, Microsoft was talking about the expansion of its Internet business, in which they see the need to build six new information centers.
 
These are large networking centers full of switches and equipment from telecommunications to information processing.

These six new information centers (which they wanted to build in and around the Washington/Oregon area) would require the equivalent of a new 350-megawatt power plant.  Imagine that – information age business totally dependent upon what would be the equivalent of a new 350-megawatt power plant, but they had a problem and that’s why we were talking energy security.
 
The problem was they’re out of gas. In other words, there’s not enough natural gas to build new power plants without some change in the supply side. They’re out of hydro. In other words, there’s no interest in building new dams to make more hydropower. There are laws now that prevent pulverized coal-burning power plants from being built in that area for air quality reasons. 
 
So here’s a company, Microsoft, looking to expand its basic business in an information age, clean type of a post-industrial base, but not seeing the sufficient whereabouts of new energy to power up six new information centers without some change in the supply side.
 
In addition, these last 50 years have been wonderful because in addition to that affordable energy, that energy has also powered our lifestyle.

I gave a few examples a few minutes ago of the air conditioning in our homes, the appliances that we use, the lighting that we have, which provides security at night and all kinds of comfort during the day in offices and factories around our country.

So whether its lifestyle or whether it’s economic base, the point is the last 50 years have been predicated and built upon affordable, available energy security. Now, what about the next 50 years?
 
What do the next 50 years look like when it comes to a continuation of the energy security that we’ve known in the past?  Let me tell you a story about energy security. 
 
We all remember the Katrina-Rita summer of 2005.  But, in addition, there were five other hurricanes that came through the Gulf of Mexico in the summer of 2005, during which the companies operating in the Gulf of Mexico (such as Shell) shut down our platforms.  We also had to shut down our refineries in some cases on different occasions.
 
But, after Katrina went through the Louisiana/Mississippi/Alabama area, roughly 25 percent of the nation’s production capacity was offline – both the rigs out in the Gulf of Mexico, which were shut in, and the refineries along the Gulf Coast. 
 
One month later, along comes Rita and so really, from Galveston, Texas, now over across East Texas and West Louisiana, we now shut down those platforms and those refineries. 
 
So, while we were starting to bring back up some of the Louisiana facilities, we were now shutting down some of the Texas and West Louisiana facilities and we still had a 25 percent production outage with Rita.
 
So, over four weeks, we lost 25 percent of our production capacity to these storms – actually it was almost eight weeks – but the worst moment of all was on a Friday night, a week after Rita.  This is a true story.

Friday night, the week after Rita came through, I called the Secretary of Energy, Sam Bodman. I found him at his daughter’s wedding rehearsal dinner (not the best time to have a discussion with the Secretary of Energy) but, nonetheless, got hold of him. He said, “John this better be good.”

I said, “Secretary, it’s not good.” He said, “Why are you calling me?”  I said, “I’m calling you tonight, Mr. Secretary, to tell you that we’ve taken a look at the whole supply chain across the Gulf of Mexico.

“It turns out that our Motiva Refinery in Port Arthur, Texas (a joint venture between Shell and Saudi Refining), has the last – the last – 300,000 barrels of finished product that we could push this weekend into the Plantation and Colonial Pipelines, which run all the way up to Washington and Baltimore from East Texas.”

He said, “Why are you calling me?  You still haven’t said why you are calling me.”

I said, “Well, we don’t have any electricity and without electricity we can’t push the barrels out of our storage tanks into the pipeline and there are parts of the pipeline that don’t have electricity. But, I’m calling you to tell you we’re going to work all weekend to get emergency power generation set up, so that by Sunday night we can push barrels.

‘If we don’t push barrels by Sunday night, Mr. Secretary, here’s the real reason I’m calling you.  I want to tell you in advance that I’m going to call you Monday morning and ask you if you could please ask the President to declare a day of ‘National Reflection’ across this nation so frankly nobody drives.”

He said, “I’ll pray for you, John.”
 
Well, divine intervention may have helped, but Sunday night we started pushing barrels.

But, had we not pushed barrels Sunday night, by Monday morning – when word got out that Plantation and Colonial were essentially dry (in other words, a pipeline is like a garden hose, if you don’t push water into the garden hose, it doesn’t come out the other end even though the garden hose is full of water, so you have to have that constant pressure to move product out of the pipeline).

But, by Monday morning had we not gotten the electricity (which we did around 5 o’clock Sunday afternoon and started pushing barrels), those two pipelines would have been out of business.
 
And what would have happened across the Southeast of the nation, ladies and gentlemen, is one of those horrific experiences that this country doesn’t like at all called, “panic buying.” Panic buying petrifies this nation and creates the outage of product that otherwise doesn’t have to occur.

And so no gasoline being delivered to gas stations up the entire East Coast to Washington/Baltimore would have undoubtedly sparked more panic buying in the upper Midwest, perhaps the Northeast and, even though there wasn’t a supply problem, there would have been a supply problem, because we can’t keep everybody’s tanks full all the time.

The system isn’t set up for that. But, here we are hours away from a supply outage in the United States of America.  The land of plenty.
 
My point, ladies and gentlemen, is that supply-demand relationship when it comes to motor transport fuel is at a razor’s edge. It’s been at a razor’s edge since before those hurricanes.  Those hurricanes tipped it over the edge and what we experienced were real shortages that were offset by higher prices, which did a bit of market rationing.

But demand has continued to grow each year in 2006 and so far in 2007.  And if it were not today for record imports (not just of crude oil, but now of finished products), we would not be seeing the price stability that we have been enjoying these last number of weeks.
 
Some people believe that there’s a conspiracy among big oil companies to hold back production or to hold back product.  If there was a conspiracy to do such, we should be put in jail because it would be violating anti-trust laws. We do not conspire. I do not talk to other oil companies; they do not talk to me. Our job with our tens of thousands of employees is to supply the market.

The question people often ask in the cities that we visited in the last 12 months - and Albany happens to be the 41st city we’ve visited in the last 12 months - the question we often get, “Are we running out of gas and oil?  Is there really a shortage of gas and oil in this country?”
 
The answer is there is no shortage of natural resources in this country. There is currently a knife-edge relationship between supply and demand, because of the restrictions that we have in this country based on public policy in terms of crude oil and natural gas production, restrictions where we’re only allowed to access 15 percent of the Outer Continental Shelf.

Eighty-five percent of the Outer Continental Shelf is off limits to the oil and gas companies – not allowed to explore, not allowed to produce.
 
And when it comes to finished product production, we actually have been adding capacity to the nation.  Shell, for example, has added the equivalent of three new refineries in the last decade.  You often hear the media report that not a single new refinery has been built in 36 years.

That’s true if you define it as a green field startup.  But, it’s not true if you think about brown field additions.

So, Shell is not the only company that has been adding on to our refinery structure; we’ve added on the equivalent of three new refineries and we’ve been proposing to add on a 300,000-barrel-a-day expansion to the same Port Arthur facility I described a little bit ago as having had the last finished product after Rita went through East Texas.
 
So, there is not a lack of interest or a lack of desire to add refining capacity, but the challenges, the difficulties of getting the permits and the licenses and the crude supply.

What’s been holding back the Port Arthur expansion has been the crude supply, because we’re not just looking at a crude supply to meet next year, the following year, the following year. This is refinery expansion of multi-billions of dollars where you want to know you have a steady crude supply for the next 30 years.  Why else would you make the investment? 

You don’t invest billions to run out of crude in five or 10 years. So, you really need to know where the crude is coming from.
 
Now, here’s the issue, and you may have read a lot of newsprint over the weekend about energy bills in the Senate and in the House. The issue is when it comes to natural resources, we know in this country where there are 110 billion barrels of inaccessible crude oil and natural gas that is unavailable to us – 110 billion barrels.

We know where it is. We know how to get it out of the ground.  But it is off limits by public policy. In order to meet demand, we import. We bring oil in from other parts of the world. We have wonderful trading partners from around the world and they support our market regularly.

But, at the same time, we have transferred more than $1.5 trillion (and Thomas Friedman makes this point over and over).

We’ve transferred over $1.5 trillion in the last few years to parts of the world that are now using that money to develop their own capabilities, their own infrastructures, instead of investing that money in this country with new oil production, new natural gas production. That money is leaving the country rather than being re-invested in the country because of the purchase of exports.
 
But are we running out?  Is that insecurity real?  Well, we have 110 billion barrels that we know of and there are a whole lot of areas we haven’t explored yet in this country. In addition, there’s something called unconventional oil.

Shell’s active in the Alberta oil sands, currently producing 150,000 barrels a day with expansion plans to get up to 300,000 barrels a day; we could ultimately get up to a million barrels a day over some period of time.

The unconventional oil sands of Alberta represent an excess of a trillion barrels of known resource. A trillion barrels of known resource is more than most of the oil in the Middle East, which is conventional oil and gas.

But if the trillion barrels in Alberta were not enough, in the oil shale of Colorado, Utah, Wyoming, there’s another trillion barrels of resource. Shell is currently in a research project in Colorado looking at different methods of extracting that oil from oil shale without using mining technology.

In other words, using drilling and heating technologies to try to bring the molecules out as liquid and gas without mining it with excavation and trucks and retorts and so forth, but it will still take some time before we’ve perfected the technology.

We aren’t running out of oil and gas with a trillion barrels of known resource in Canada, a trillion barrels in Colorado and Utah and Wyoming plus the billions of barrels that we know about in this country – there’s plenty of oil and gas. Getting it to market is a matter of changing our current public policy.
 
But, if that weren’t enough, there are so many other resources – such as coal. This country has more coal than any other country in the world. And people say, “Well, coal is dirty.” 

Well, yes – burning coal to make electricity using pulverized coal and classic, traditional coal-burning technologies is not the cleanest form of use of coal.

But, there’s new technology called Integrated Gas Combined Cycle technology, which uses coal gasification, where instead of burning pulverized coal, you reduce the pulverized coal to the consistency of talcum powder. Imagine that – coal the consistency of talcum powder.

You introduce the talcum powder into a gasifier under intense pressure and intense heat; the molecules gasify, they don’t burn. So, we’ve changed the whole nature of the chemistry of energy from coal by gasifying it.
 
The gasifier also enables you to manage the emissions in a different way. So, rather than the pulverized coal emissions going up through the smokestack with scrubbers and with some other technologies, the gasifier enables you to capture the emissions and manage them in whatever ways you chose to.

For example, carbon capture and sequestration. Now, that technology is not yet fully developed, but carbon capture and sequestration offers the opportunity to sink CO2 into the ground, into geological formations where it can stay for infinity, so that CO2 doesn’t enter the atmosphere; it goes back into the earth.
 
The power generation from that coal gasification process is the equivalent of using natural gas, because what comes from the IGCC technology is syn gas (synthetic gas), which can then be used in the kind of gas turbines that we currently use. 
 
In addition to the coal gasification technology for power generation, there’s also another product called liquefied natural gas. Liquefied natural gas has been used around the world for some 40-odd years.

The U.S. has been using a little bit of it for about the last 30, coming into the country through places like Cove Point, Maryland, places like Elba Island, Georgia.

Shell has been active in liquefied natural gas for some 40 years. It is safe; it is reliable; it’s the cleanest form of fossil fuel and it takes gas from stranded gas fields – that is fields where there is no market such as off the coast of Northwestern Australia, or off the coast of Alaska or off the coast of other places. It turns that natural gas into a liquid. The liquid is brought by ship to a regasification terminal.
 
There’s lots of opportunity to augment our natural gas supply, which you in this part of the country are desperately running out of.

And if you look out over the next 10 years, there’s a serious supply-demand relationship issue that has to be faced in the Northeast of this country: all of the gas you get up in this part of the country either comes from Canada, or comes from the Gulf of Mexico.

Canada’s natural gas reserves have dropped significantly in recent years. From the Gulf of Mexico, pipelines are at maximum capacity – no more gas can come up those pipelines from the Gulf of Mexico. What would be needed are more pipelines.
 
An alternative to that is liquefied natural gas, which could be brought to the East Coast, but Elba Island and Cove Point are too far away to make a material difference in the Northeastern marketplace. So, we look at opportunities in the Northeast – one of which is a project called Broadwater.

This is something that we’re working on with Trans-Canada, which could bring substantive new natural gas to the most expensive electricity market in the country – meaning Long Island, Connecticut and New York – and we’ve run into issues. Issues like “not in my backyard” – issues where we have to come to grips with the infrastructure matters if we want to bring new energy supplies to parts of the country that need it.
 
So, there we’ve just talked about conventional oil and gas aplenty, unconventional oil and gas aplenty, coal aplenty with new technology so it’s called clean coal and liquefied natural gas aplenty. But is that enough to meet our energy demands of the future? Shell doesn’t think so. 

There’s more to energy than fossil fuel. There is, for example, ethanol or biofuel. Shell’s been in the biofuel business for 30-some-odd years – that’s not new to us. We do have to make choices between ethanol from food-based product or ethanol from biomass-based non-food product such as wood chips, or straw, or corn stalks instead of corn kernels.

Shell prefers cellulosic ethanol, which is plant-based, rather than food-based ethanol, but here we run into a bit of an issue and that is an issue of timing and technology. We know how to make corn ethanol, but there isn’t enough corn to make a serious dent in the motor fuel requirements of the nation.
 
Here’s a couple of statistics you might want to keep in mind. I’ve been talking for about 20 minutes, 25 minutes – in that period of time, ladies and gentlemen, this nation has used 10,000 gallons of oil a second. Not a minute, but a second, in the time I’ve been speaking.

So, in the time I’ve been speaking this nation has just consumed two million gallons of oil. In an hour, almost four million gallons of oil. In a day, almost 860 million gallons of oil.  So, when it comes to ethanol – ethanol making a material difference in motor transport fuels – corn-based ethanol at five to 10 percent of the fuel supply hardly makes a material difference, which says, “where’s it going to come from?” 

And that’s where we go back to cellulosic where, with time (and time may be 10 to 20 years with technology and with manufacturing process improvement), we can, perhaps, bring material amounts of ethanol to market.  But what about in the meantime?

Our economy needs 10,000 gallons a second just to maintain itself – not to take any growth into account.  Where’s that coming from? More imports or domestic resources? That’s a question for public policy.
 
But in addition to biofuels, there are more types of energy – there’s solar, there’s wind. Shell’s been active in wind for 10 years. Two weeks ago, we mentioned the possibility of building the world’s largest wind farm in Bristol County, Texas, working in partnership with others. We have wind farms now in seven states and wind works – except it doesn’t work all the time, because the wind doesn’t blow all the time. 

So, we have to have alternatives to wind – solar represents a possibility. But, as of today, we have not yet found the price break that makes solar commercial.  So, solar requires subsidy.

I might point out, by the way, that ethanol too requires a subsidy – 51 cents a gallon subsidy to the manufacturer of ethanol in order to make it so that it can be sold at a commercial price.
 
But, in addition to solar and in addition to wind, there’s hydrogen. Shell has a view that over the longer term, the internal combustion engine will have a competitor, namely the hydrogen fuel cell vehicle.

Hydrogen powering a battery, the battery powering the motors on the wheels where we could have all the get-up-and-go, all the mobility we would like, but power through a hydrogen-powered fuel cell vehicle, rather than an internal combustion engine.

It’s probably 10 years or so before we start to see large numbers of commercially available hydrogen fuel cell vehicles.  Perhaps 20 years before there are larger numbers.

But, in the meantime, we’d have to build a hydrogen infrastructure so that you can buy hydrogen at your local service station, which means we have to get all of the permits and all of the fire marshals and all of the public educated around the storage of hydrogen in our neighborhoods, so that we can have convenient re-fueling stations.

We also have to figure out how a hydrogen fuel cell vehicle can get up to about 300 miles between tanks, because that’s about what the manufacturers say it takes to get people to choose a vehicle.

They don’t like to stop that often and something around 300 miles is about the breakpoint.
 
So there we have it, right?  We have hydrogen, solar, wind, IGCC, coal; we have liquefied natural gas, unconventional gas and oil, and conventional gas and oil. Does that meet our needs of the future? We’re missing three more critical elements.
 
One is the critical issue of efficiency – efficiency in the manner in which we use energy. The culture of conservation is not just about fiddling thermostats and lightening up on accelerator pedals – that will do very little, by and large, to achieve a culture of conservation.

A culture of conservation is a belief. It’s in the mind, it’s in the heart, it’s in the soul that we can do better with energy efficiency. The molecules of energy not used are the most efficient molecules of all.
 
Here’s an example: the internal combustion engine, which we all know and love; it’s been great these last 50 years and continues to be valuable today. But the internal combustion engine uses only 20 percent of the gasoline for mobility; 80 percent is wasted as heat.

A jet airplane taking off on a runway is using about eight percent of the energy of the aviation fuel for mobility; 92 percent is wasted as heat.  In light bulbs, only a small single-digit percentage of the electricity being used is used to actually produce the light; the rest is being wasted as heat.

So, we waste a lot of heat with current inefficient technology and technology and a culture of conservation driving efficiency technology is a very critical plank to energy security in the future.
 
Point two – fossil fuels have been with us, will be with us, regardless of what anyone says; we cannot transition off 100 years of fossil fuel infrastructure by virtue of the legislature passing a law.

One hundred years of fossil fuel infrastructure (be it coal, gas or oil) will continue to be the dominant fuel infrastructure for quite a long period of time. Because we now know the greenhouse gas emission issue is with us, it is time to deal with the greenhouse gas emission issue in a meaningful way.

And so what Shell has said is, “Let’s stop the debate. Let’s move forward with government-led regulatory frameworks in which markets can operate, such as a cap-and-trade marketplace.

Let’s begin to manage the greenhouse gas issue in a material way, instead of continuing to talk about the issue because, day by day, the greenhouse gas emissions continue to accumulate in the atmosphere.
 
We can do things with technology – carbon capture and sequestration, cap and trade leading to more efficient markets in which energy is bought and sold. There may be other forms of regulatory management of greenhouse gas emissions. 

All options should be on the table. But it is time for society to move on.

It’s time for a company like Shell, which operates in 50 states, to look for a national leadership on greenhouse gas emissions and so we’ve joined the United States Climate Action Partnership with other companies such as GE and 33 other companies in which we actually call for the national government to please step up and develop a cap-and-trade system so we can begin to build a regulatory framework.
 
And finally, point three. We really need to educate ourselves. We don’t spend a lot of time educating ourselves on energy. After 50 wonderful years of available, affordable energy, it’s not that difficult to realize we take it for granted. It’s always been there. It’s always been affordable. 

We haven’t ever run out. We haven’t really been threatened, by and large. So we tend to take it for granted. Our children are basically taught energy comes from a light switch. Our children are taught gasoline comes from a gas station by virtue of watching what we do, watching how we live.

I do think it’s time to not just talk about it, but to do something about educating our children and educating ourselves.

So, Shell contracted with Scholastic. Scholastic created a semester’s worth of energy education, available on a website called, “Energize your Future.com,” in which teachers across America can download for free a semester’s worth of energy education, which teaches people where it comes from, how it’s used, what are the implications of energy, what are the technologies around energy.

Obviously, the idea is to interest young people in the math and science that surround energy, but also to teach about energy and energy future.
 
So, in my opinion, ladies and gentlemen, it’s Shell’s view that energy education, a culture of conservation and greenhouse gas management, coupled with the whole litany of energy products that I talked about will make the next 50 years every bit as energy secure as the last 50 years.