Speeches

John Hofmeister's '07 Speech in Boston

14/06/2007

How the U.S. Can Ensure Energy Supply for the Future. John Hofmeister's remarks to World Boston in Boston, Massachussetts.

Thank you, ladies and gentlemen.  It’s a pleasure to be here.  This is the kind of day we call a “good energy day” because the air conditioners are running when they don’t need to and people are really debating whether to turn on the heater or not to warm up their house.  It’s a good energy day. 

But that’s not what we’re here to talk about.  We’re here to talk about a more troubling and a more sobering and a more difficult set of issues that I think have to come to the front of the national debate on what we as a society, what we, as a country and in our respective states, are going to do about an unacceptable situation.

Two dollars and ninety-two cents at the Shell station down the road is an artificially inflated price driven by market conditions, not set by somebody sitting in Houston, Texas.  It was $3.50 a gallon just a few weeks ago in Chicago when I had the opportunity to speak to the Rainbow PUSH annual meeting. 

Three dollars and fifty cents a gallon for retail gasoline is an artificially inflated price, which devastates those who cannot afford it.  When they choose what they buy in the grocery store, compared to what they had to pay to fill their gas tank. 

And as an oil company executive, it is an embarrassment to think that prices have moved to that level well beyond what is required to meet demand, except for the fact that public policy in this country has inflated the cost of energy by making it unavailable or less available than it could otherwise be.

And, I’d like to develop that theme a bit.  But, let me say why it is so important that we as a nation face into this, because what’s at stake (particularly over the next decade) is the fundamentals of our American economy and how it operates and the fundamentals of the lifestyle we choose and the way we live.  

Because once energy passes a certain affordability level, then it puts at risk many of our economic strengths and it challenges a lifestyle, most importantly for those who are just getting started in life, or those who are somewhat stuck in a lower socioeconomic status.

Yesterday, I was sitting in Washington, D.C., at the board meeting of the National Association of Manufacturers with people like the chief executive of U.S. Steel, the chief executive of Arvin Meritor, an auto parts supplier company, and a number of other chief executives from major companies around the world, and we looked at some economic data. 

Some people think that America has moved beyond an industrial manufacturing society.  Well, here’s an interesting statistic.  For all of the reports of how our manufacturing sector has shrunk, the reality is the U.S. has never been more than 18 percent of global manufacturing and today we’re running at 17 percent of global manufacturing. 

So, the U.S. remains a major manufacturing country where it’s the largest sector in the country at 17 percent of our economy.

Manufacturing thrives on energy and as we discussed yesterday’s issues at the board meeting, energy has now moved ahead of health care as the primary worry of manufacturing executives. 

That puts jobs at risk because energy elsewhere (and this is another part of the dilemma we face, ladies and gentlemen), the United States and Europe and Canada and Japan – four regions of the world, representing less than 25 percent of the world’s population – are the only people in the world that pay the full cost of energy. 

The full cost of energy is absorbed by our consumers, our companies, because it’s a free enterprise system.  The costs of production, the costs of development, the costs of whatever, including many taxes, get passed on through to consumers and so we pay the full cost of energy.

Major, major parts of the world subsidize energy.  In the Middle East, you don’t pay $3.50 for a gallon of gasoline.  In China, you don’t pay $3.50 for a gallon of gasoline. 

You pay less than a dollar.  In many cases, it’s a quarter or up to about 50 cents, and manufacturers are paying (if at all) a subsidized price for electricity, for the gas that they use. 

So, in terms of American competitiveness, what does it do for the good of our society and our country to restrict the ability to produce natural resources in the United States where we have an ample supply of energy, which I’ll come on to in just a moment.

But here’s a fact, ladies and gentlemen. 

For all of the debate that is taking place about whether oil companies should or should not further develop natural resources in the Outer Continental Shelf, the fact is today we are only allowed access as oil and gas companies to 15 percent of the nation’s Outer Continental Shelf – 15 percent largely concentrated in the Gulf of Mexico with even major sections of the Gulf of Mexico off limits to exploration and production.

In addition to that, hundreds of millions of acres of federal land where essentially no one lives but nature, of course, lives, is off limits to the production of oil and gas by public policy.

So by limiting access to more natural resources of oil and gas in the Outer Continental Shelf or on federal lands, the demand for energy is unabated.  So how do we meet the demand? 

We meet the demand through imports - imports which are priced by associations such as OPEC, which can withhold production to achieve a price level that they seek, while we restrict access to the Outer Continental Shelf of the United States where we could produce oil and gas at far less cost and in large volumes, instead of paying for expensive imports and as Thomas Friedman and others say, “Transferring the wealth of our society to other parts of the world.” 

Now, having said that, there are wonderfully reliable trading partners, and not for a moment would I suggest we cease purchasing imports. Frankly, we couldn’t replace all of the imports with local, national production because we demand too much.

But, at roughly 21 million barrels a day of demand in this country, we’re bringing in nearly 65 percent of our production from imported oil – meaning that we’re only producing about eight and a half million barrels a day in this country. 

We’ll come on to a few other aspects of that in just a moment, but the point I’m trying to make in this introduction is that today’s price of energy is artificially high because we have, for public policy reasons, constrained the ability to explore and produce ample resources that we know are out there. 

In fact, we know – through the American Petroleum Institute and its member companies – we know there’s at least 110 billion barrels of known oil and gas reserves in the Outer Continental Shelf and on federal lands where we are denied access. 

As we look ahead and we think about the future, apart from what the Senate or the House may attempt to legislate, those who deal with the demand side are looking at demand- side expectations of energy demand growth which say that by 2025 that 21 million barrels a day will be more like 30 million barrels a day of demand – and where does that come from?

On a global basis, today’s global production is about 85 million barrels a day and global consumption is about 84 million barrels a day. 

On a demand-growth basis the projections from the IEA (the International Energy Association) suggest that global production and global demand will be about 120 million barrels a day by 2025 – that’s a 50 percent growth from today. 

Projecting that out further (barring some technological breakthroughs that might change the alternative projections in the future), that demand could be doubled by 2050 from today.

Now, are there the supplies out there?  Well, the answer is yes.  Where is it coming from?  Well, this country has ample supplies of conventional oil and gas (I mentioned 110 billion barrels we know is out there), but in addition to that this nation (as well as our near neighbors such as Canada) has trillions of barrels of unconventional oil.

For example, in the Alberta oil sands, more than a trillion barrels of known reserves; more than a trillion barrels of known reserves in the Colorado oil shale region – Colorado, Wyoming, Utah, which are developable, and technology and breakthroughs in drilling and in heating and in capturing those solid-state oils actually have moved forward. 

Shell, for example, has a research project in the Colorado oil shale where we’ve been able to produce liquid oil and gas from rock, oil shale rock, by heating that rock. 

And we’re not ready yet for commercial production, but we’re still testing the technologies that make that possible.  And we could see in the future a massive development, at some point, in which commercial-level scale operations could go forward in Colorado – a domestic oil energy resource.

In Canada today, Shell is producing about 150,000 barrels a day from the oil sands of Alberta, with plans underway to double that over the next few years to about 300,000 barrels a day, with what looks to be almost an endless resource of a trillion barrels in Alberta. 

So, we have unconventional oil and gas aplenty.

In addition to that, this nation is blessed with more coal than the whole rest of the world combined.  And you might say to yourself, “Oh please, don’t go down the coal path; we’ve been there.” 

But the reality is technology continues to help us in coal, as well, and so coal gasification, rather than the burning of pulverized coal, is a technology called “Integrated Gas Combined Cycle” (IGCC).

If we can develop (and we’re working on it), the sequestration of carbon emissions from the gasification of coal, it would enable us to essentially use coal through – not through burning it – but through gasifying it to create electricity or liquids from coal with CO2 sequestration yielding CO2-free electricity.

Now, what’s the difference between pulverized coal and gasified coal? 

The difference is pea-like gravel (coal that is shaped like peas) that is burned with the emissions going out the smoke stack or some scrubbing taking place along the way, versus reducing that pulverized coal to the consistency of talcum powder and introducing that talcum powder-like substance into a 2,500-degree Fahrenheit gasifier at 1,000 pounds of pressure per square inch and the molecules simply gasify. 

And the other elements (such as the CO2) can be captured and then moved off through pipes and sequestered under the earth.

The technology (except for the sequestration) is proven.  It’s happening today in parts of the world other than the United States.  The U.S. is working on it, but we are slow to take up the technology in part because burning of pulverized coal is less expensive and it’s where we have come from and, as we know, change is hard. 

But, if we have the gasified coal and we have the unconventional oil and gas and we have the conventional oil and gas, what else is there?

Well, as you know in this city, there’s liquefied natural gas.  You’re one of the largest users in the country of liquefied natural gas.  It is not without controversy.  We know that.  But there comes a point in modern society (and it is a democracy) where people will chose whether we do or we don’t embrace liquefied natural gas. 

But, here is a reality. 

Liquefied natural gas is in plentiful supply around the world because there are huge stranded gas fields where we can capture that gas off the Northwest Coast of Australia, or off of Nigeria, or off of Russia and that gas can be liquefied at cold temperatures (260 degrees Fahrenheit, minus), which can then be transported by ship and brought to the coast and regasified and it is a clean-burning fuel.

Why it is important, ladies and gentlemen, is our own gas fields are stressed.  Our gas fields in the Gulf of Mexico and across the Midwest and the far West are under stress in terms of the supply-demand relationship. 

And the popularity of combined cycle gas turbine technology is so huge and the affordability of combined cycle gas turbine technology is so powerful that the demand-supply curves cross (about five to seven years out) in which there will be more demand than there is known supply. 

And without augmenting that supply of natural gas with liquefied natural gas or LNG, we could see a tremendous price spike in natural gas.

Another comment from yesterday’s board meeting: today’s natural gas price is just under $8 a million BTU’s -- $8 for this time of year is high.  Five years ago we were running at $1.50 per million BTU’s; now we’re at $8.  Imagine if you’re a company dependent upon natural gas. 

As a home heating source, you probably as a consumer can see and feel the difference.

Imagine if you’re making electricity, instead of $1.50 it’s now $8 – this is summertime; it should be cheaper.  This is pre-hurricane season; it should be cheaper.  But the demand is so intense that we now have winter prices in the summer, which is rather unusual.  And it is a direct reflection of the demand-supply relationship.

So, liquefied natural gas can make a difference, but there’s a problem.  We are limited in the availability of regasification terminals. 

You have two here.  You’re fortunate.  You’re blessed.  Shell is working with a partner called TransCanada to put a liquefied natural gas terminal, regasification terminal in Long Island Sound – 11 miles off the coast of Connecticut, nine miles off the coast of Long Island.  We thought, “That’s not in anybody’s backyard.” 

But, it turns out it is; it’s in everybody’s backyard!  Everybody that uses the Long Island Sound says, “Not here.”  The Attorney General of Connecticut said, “John please, please. 

We know we need the gas.  We know we like that kind of power source.  But, please do not put your regasification terminal off of our coast.  Please.  Take it to Massachusetts.  Take it to Maine.”  I said, “But, Attorney General, if we took it to Massachusetts, they’d say, “Take it to Connecticut.”

Here’s the issue.  Infrastructure for energy is not popular.  We know that.  Infrastructure for energy is not wanted by many communities.  And many people think that we’ve moved on from this infrastructure age.  We’ve moved on from the industrial era where energy isn’t as necessary in this clean, future society of ours.  Think again.

Look at yesterday’s report on the energy inefficiency of computers – the report that 50 percent of the electricity going into your laptop is wasted as heat before it ever gets to the motherboard where it performs a function. 

Think of the inefficiency of computers.  We’ll come on to efficiency a little later.

But in a post-industrial, information-age economy – I’m sitting in Seattle, Washington, several months ago, meeting three senior executives from Microsoft talking about energy security and the question they’re asking of me is, “What would you do if you were in our situation?”  “What’s that?”  “Our business forecast says we need six new information centers located in Oregon and in Washington to meet the Internet traffic demand that we see in the growth of our Internet business.” 

Six new information centers that require the equivalent of a 350-megawatt new power source and they can’t get power commitments from the public utilities because there isn’t enough available. 

This is a hydropower part of the economy where they’re tapped out.  This is a state that prohibits coal-burning operations, so there’s no coal burning.  It’s a state that has no natural gas locally, so it has to be brought in, but doesn’t have an LNG regasification terminal. 

Here is a modern, post-industrial information-age company limited in its growth prospects because it needs a 350-megawatt power plant with no power source.

That’s the kind of dilemma we’re up against with LNG as a partial solution or gasified coal as a partial solution, or unconventional oil and gas as a partial solution, or conventional oil and gas as a partial solution.  But there’s more.

There are also alternatives.  Today, if you were on the floor of the Senate, you would be listening to discussion or debate about wind and solar and biofuels, hydrogen, and possibly other solutions.  For Shell, that’s important, because for 10 years we’ve been working on solar and wind and hydrogen. 

We have redefined ourselves as an energy company more than a decade ago and have been addressing the possibilities of solar, for example. 

We’ve learned a lot; we’re not newbies anymore in the solar world.  But we see real issues with solar where we have not yet seen the technological breakthrough that enables solar to be a commercial energy source. 

The sun, however (apart from all the other natural energy sources which I just talked about), is so much greater as a future energy source than any of the – or all of the – cumulative effects of fossil fuels.

The sun can be the globe’s ultimate energy source, which will be reported out by the National Petroleum Council later this summer.  But solar power has yet to achieve that breakthrough, which enables commercial production of electricity.  Shell had been in the solar photovoltaic cell business since 1997 and we sold it a year ago because silicone was our substrate. 

Silicone was the base upon which we built the solar energy business and we discovered after 10 years of experience it is not commercial (at least the technology that we were employing) because silicone itself is energy-intensive to make, silicone produces a minimal amount of electricity for the weight and the mass that exists, and from a pricing standpoint, without subsidies consumers wouldn’t purchase it.  So we said, “This is not for us.”

We’ve moved instead to a different technology, a thin-filmed technology called copper indium diselenide.  We’ll give that a try.  We don’t know if that will be the solution or not, but we’ll give it a good go.

Meanwhile, wind does work.  Wind is a good source of energy and can turn cash-positive rather quickly.  So, Shell’s involved in wind farms from Maui all the way to West Virginia. 

However, we just had a setback in West Virginia (public policy) this week.  Earlier this week the Supreme Court of West Virginia overturned a lower court ruling and said local residents do have the right to object to the wind farm’s construction on the basis that it could devalue their properties at some time in the future. 

So, it has to go back through the court system to decide if we can actually construct the wind farm where we have been permitted, we’ve been licensed but - due to the challenge of a couple of local homeowners whose individual properties might have diminished value – it has to be totally re-examined in that context. 

It doesn’t mean it’s going to go away, it doesn’t mean we won’t build it, but it means it is delayed until we find a solution, which we’re willing to do.

But, wind does work. We’re currently working on the design of a thousand-turbine wind farm for West Texas.  We met with the governor here this morning and Governor Patrick said, “We are interested in offshore wind farm development.”  I believe that was part of his campaign message.  We said we’d be happy to talk.

Hydrogen fuel cell technology represents another shift, another technological breakthrough that’s not quite ready yet. 

But, as a member of the Hydrogen Fuel Cell Technology Task Force of the Department of Energy, not only is Shell an enthusiast about the subject, but it’s doing a lot of preparatory work for the day when hydrogen fuel cell technology can, in fact, be the source of electricity for mobility purposes - in other words, hydrogen fuel cell vehicles. 

Today in Washington, D.C. on Benning Road, near RFK Stadium, if you were driving a General Motors hydrogen fuel cell vehicle, you could stop at the Shell station and purchase your re-supply of hydrogen gas for your electric hydrogen fuel cell vehicle.  You might not have one because they’re rather expensive at this stage. 

They are in pilot production, but the expectation is that over the next 10 years the price will drop dramatically and that we will see thousands of these vehicles by about 2012, tens of thousands by the mid-to-next decade, hundreds of thousands by the 2020s, and probably in the millions by the 2030s.

For Shell, that’s important.  We have retail stations all over the country (14,000 of them), which would need to be equipped with hydrogen if the preference of consumers is hydrogen fuel cell vehicles, instead of internal combustion engines. 

But (again), a public policy dilemma: do we allow hydrogen storage in your neighborhood where you can re-fill your hydrogen fuel cell vehicle with hydrogen gas, instead of gasoline?  A big, important question for local authorities all across the nation.

So, these kinds of fuel sources, ladies and gentlemen, all of which we are working on, all of which are being developed, all of which can make a difference, don’t answer what is today’s question. 

Today’s question is how do you deal with $2.92 a gallon or $3.50 in Chicago, when the alternatives that we’ve talked about such as solar, wind, hydrogen are 10, 20, 30 years into the future when the demand for gasoline today actually exceeds the supply?

In the U.S., we can refine about eight and a half million barrels a day and we’re out of capacity.  The demand today is greater than that.  We are only meeting today’s demand because of imports, which says we need more refining capacity. 

At today’s margins, refining investment could be a good decision, but here’s an issue. 

If you’re an investor and you’re ready to put up $3 or $4 billion to expand or build a refinery and the President of the United States and the Senate of the United States say we want 20 percent less gasoline in 10 years, would you make a multi-billion dollar bet on building a new refinery? 

That’s the dilemma we have from a public policy standpoint.  Shell would like to double its size of the Port Arthur refinery in Port Arthur, Texas, with a partner, Saudi Refining, but in the face of national policy which says 10 years from now we want 20 percent less gasoline, would we get a return on that investment justifying the investment of many billions of dollars when the national direction is to move away from gasoline?

But, how do we get gasoline next summer?  What do we do at the end of this summer if we have hurricanes that shut down refineries?  Where after Katrina and Rita went through in 2005, I found myself on the telephone on a Friday night talking to Secretary Bodman and I said, “Mr. Secretary” (he happened to be at this daughter’s wedding rehearsal dinner), I said, “Mr. Secretary, we have a problem. 

“We have the last 300,000 barrels of finished product to supply the Southeast Coast of the nation from Texas all the way up to Washington, D.C.  The pipelines that supply that entire Southeastern quadrant of the nation are dry on Monday morning if we can’t push this product into the pipeline over the weekend.”  He said, “So push it.” 

I said, “But Secretary, we have no electricity.  The hurricanes took out the power plant and shut down the grid and we’ve been working for seven days, 24-hours a day, to hook-up emergency generators to get electricity.”  He said, “Well why are you calling me now?  We’re not out of gas yet are we?” 

I said, “No.  But, if I call you Monday morning, it will not be to tell you of our success, it will be to ask you to please ask the President to declare a ‘Day of National Reflection’ so that nobody drives on Monday because if we don’t push product, the pipeline doesn’t have anything coming out the other end and it will only take a matter of hours until people discover there’s no gas.  And then what do Americans do? 

They immediately go buy more gas. 

So they drain their local stations out of fear that they would have a dry tank and then that would, in fact, set off a panic across the whole Southeast, move right up through the Middle Atlantic states and possibly hit the Northeast of the country, which is wet – which doesn’t depend on the pipeline, which is being fully supplied through New York and Providence and Boston with imports - but yet panic buying could take them dry, as well.” 

His response on that Friday night was, “John, I’ll pray for you over the weekend.” 

We did get electricity on Sunday afternoon and we started pushing barrels and that did make a difference.

But, the precariousness of the demand-supply equation is such that, as I said to Senator Durbin last Thursday, I said, “Senator Durbin, you are going to take up energy next week, please do not forget for all of your future deliberations of having new alternatives, new technologies come into effect. 

Do not forget that over the next 10 years the demand for gas and oil will grow and today’s high prices will look like a bargain if we don’t do something now about more access to gas and oil and more refined product.”

We need help now because this is where social justice kicks in. 

This is where those whose lives depend upon affordable energy are suffering the most, and something must be done because the high prices of today are not collusion among the oil companies, they are not price-gouging by local merchants or by oil companies; they are a frank reflection of the supply-demand disequilibrium. 

Usually we like to say equilibrium but it is disequilibrium, because the demand exceeds the supply and there’s no end in sight.

So what else do we do?  Three more points. 

Addressing the supply side of energy is obviously what a company like Shell does.  But, it’s not enough to just address the supply side.  We believe that our voice also needs to be heard addressing the demand side.  And this is where energy efficiency comes to play. 

I mentioned the inefficient computers.  We could also talk about the inefficient light bulbs; we could talk about inefficient HVAC systems, inefficient furnaces, inefficient automobiles and trucks. 

Technology can help us and Shell believes that there should be either a regulatory framework or a marketing framework that enables more efficient products to come into the economy for the use of consumers, because electricity coming from natural gas or electricity coming from fuel oil does impact the supply side.

If we reduce the demand of electricity through greater efficiency, or if we have more miles per gallon per vehicle through our regulatory framework, the molecule that is not used is the least expensive molecule of all. 

And if we had more unused molecules of energy, the price comes down for all of us.  So, energy efficiency becomes part of a necessary way forward.

In addition to that, greenhouse gas management is an issue that must be addressed by government.  Shell joined U.S. CAP (U.S. CAP is United States Climate Action Partnership). 

Shell, for the last decade, has been helping (well, 10 years ago we were part of the Kyoto Accord Negotiations), trying to provide language and technology and science to the negotiators of Kyoto because we believe then as we believe now that government-led frameworks are necessary to manage greenhouse gases going forward. 

We believe that a cap on emissions with a trading system is a good first step, but not the only step.  But a cap and trade system needs to be at least national, preferably global. 

Obviously, emission management led by government should be global.  But in the absence of global leadership, national leadership is just as important because leadership creates followers and if we just follow, we lead no one. 

So, even if the rest of the world cannot cope with the issue, we believe in Shell that the U.S. must cope with the issue. 

But we prefer global leadership on this issue from government.  We believe that a greenhouse gas management plan is necessary for society.  We want to be part of the solution, not part of the problem in that regard.

And, finally, it comes down to education.  We know too little about a subject that is so essential to our future viability, to our future economic well-being, to the quality of life that we have come to enjoy. 

And by education, I’m talking about the education of ourselves, and mostly education of our young people.  Educating our young people around the subject of energy is more than just talk at Shell. 

We’ve created a website for the nation’s teachers, a website called “Energize your Future,” where teachers across America at the middle school and high school level can download a curriculum, a semester’s worth of teaching materials to teach their students about energy – where it comes from, what it does, what kinds of forms of energy we have, what technology is doing.

It teaches some math and science around energy.  It is an attempt to instill in young minds the fact that energy is an issue for all of us.  It’s an issue for society, it’s an issue for the economy, it’s an issue for the well-being of the future.  And so by teaching energy we can then make more intelligent choices.

My fear, ladies and gentlemen, is in the Senate and in the House of Representatives. 

Because of the unknowns, we will end up with energy policy that does not meet the social justice requirements of the country.  And will be well intended and be well thought through, but will simply lack the knowledge base, for example, of the next 10-year period in which the price and economic relationship is so important to us all.

But, I do believe that the combination of conventional oil and gas, unconventional oil and gas, liquefied natural gas, coal gasification, biofuels (which we haven’t talked much about but perhaps we can in the Q & A period), biofuels, along with wind, solar, hydrogen, and education, greenhouse gas management and energy efficiency can provide an energy security strategy and plan for the nation.

Thank you.