Speeches

John Hofmeister's '07 Speech - Cincinnati

25/01/2007

John Hofmeister's remarks to the Cincinnati USA Regional Chamber of Commerce in Cincinnati, Ohio.

Thank you, ladies and gentlemen.

It’s wonderful to be here in Cincinnati today. And to talk to you about a subject which I think is really important for two particular reasons.

Energy and the use of energy are the basis of our economic model in this country. Without energy, our businesses can’t operate.

And, if energy is too expensive, the prices we all pay as consumers are an issue that affects the growth of our economies.

Secondly, our lifestyle – our lifestyle of mobility, our lifestyle of creature comfort (whether in the summer or the winter), the creature comforts that we’ve come to enjoy as part and parcel of where we live and how we live are critically dependent upon continued energy security.

So let me first define energy security and what does that mean?

Energy security as we think about it means that we know today that we have affordable and available energy to meet our needs.

Energy security means that our children know that they have affordable and available energy to meet their needs (and our grandchildren and their grandchildren and their grandchildren).

So energy security to a company like Shell, which has been around for more than 100 years, is of keen interest to future generations, so that we continue to supply energy that people can use for however and whatever they need to use it.

You may ask, “Why am I here? Why in Cincinnati? Why would I take time out to come and speak on this subject and spend time this evening in a Town Hall with Cincinnati leaders from various walks of life to talk about their views on energy security?”

Particularly when I represent an industry that many would say has achieved zero credibility in recent years. In a recent poll taken by the API of industry popularity, the oil industry was 25 out of 25 in terms of favorability index. True story.

Representing an industry and a company that even if we had all the permissions we needed, it would take another seven to 10 years to catch up with some of the energy demand that we see. And as you hear me talk about energy efficiency later in my remarks, the efficiencies that we’re promoting will take 10 or 20 years to have an impact on energy security in the future.

So why here to talk in Cincinnati? Well, one very big reason is Ohio is an energy state. It has been and continues to be an energy state in this country in which the thinkers of this state need to understand and we need to understand how people are thinking here.

So we’d like the thinkers in this state to know how we’re thinking and we’d like to know how the thinkers in this state are thinking as well. And so that’s why we’re here. We’re here to listen; we’re here to speak.

If we think about energy security, there’s some good news out there. The good news is there’s plenty of energy to be had. And as we think about the affordability and availability of the last 50 years (which have been very good for us), what we have to think about is the next 50 years.

And one thing I can assure you, it will be different than the last 50 years. But the good news still remains at the base of my conversation and that is we have plenty of energy. Let’s just cover a few points.

Conventional oil and gas - we’ve seen a shortage of it, driven particularly by hurricane issues in the Gulf of Mexico in 2005 where, for a period of time, 25 percent of the nation’s production capacity was off-line in the Gulf of Mexico because of hurricanes and hurricane damage; 25 percent also of our oil products capacity off-line not for days but for weeks and months, because of damage from hurricanes in the Gulf of Mexico.

And we learned a hard lesson. We learned a lesson of how vulnerable we really are and I’ll tell you a story.

On the Friday night after Rita went through east Texas (this was after Katrina and all of its damage, then came Rita with its damage).

On the Friday night the week following Rita, I called the Energy Secretary, Samuel Bodman, to say, “Secretary Bodman, I have to tell you that our Motiva Joint Venture in Port Arthur, Texas, has the last available 300,000 barrels of finished oil products available to push into the Colonial and Plantation Pipelines, which go up the Southeast part of the nation all the way to Washington, D.C. and Baltimore, Maryland.

“Mr. Secretary, the reason I’m calling you is because we don’t have any electricity to push those 300,000 barrels into the pipeline. We’re working around the clock to put emergency generating capacity into the plant to try to push those barrels.

“But, I’m calling you on Friday because, if by Monday we don’t have electricity, I will call you back to ask you to please ask the President to declare a ‘Day of National Reflection’ so that nobody drives. Because if those pipelines are dry come Monday morning, we’ll see panic buying before noon in Atlanta, in Charlotte, in Richmond, and then in Washington.

“And if we have panic buying from Atlanta to Washington, what’s going to happen in the Midwest; what’s going to happen in the Northeast when people think, ‘We’re out of gas?’ It’s that precarious, Mr. Secretary.”

I got him at his daughter’s wedding rehearsal dinner, not the best place for a conversation about national energy shortage and panic buying. He said, “John, I’m a little busy but I’ll pray for you this weekend.”

Fortunately, our folks got the emergency power connected and we pushed barrels about four o’clock Sunday afternoon, just in time to keep the pipeline wet. Now this is the United States of America – the land of plenty.

Hours away from a shortage that could have become a national disaster because once panic buying starts, how do you stop it? And our refineries were shut down, which was further panicking the psychology of consumers.

But coming back to the good news – the good news is there’s plenty of gas and oil (conventional gas and oil) in the Outer Continental Shelf and on federal lands – but there’s an issue. We don’t have access. Eight-five percent of the Outer Continental Shelf of America is off-limits to exploration and production.

We’re essentially allowed in the Gulf of Mexico and recently we’ve been allowed off the coast of Alaska, but the total that is being developed is 15 percent of what’s possible. That is, ladies and gentlemen, a public policy decision which affects our energy security in the future.

And in terms of federal lands, we know there are billions and billions of barrels of available oil and gas, which we are not allowed access to, which takes us into more imports.

Today, 18 million barrels of oil and gas will be consumed in this country; 10 million of those barrels will come from other countries, some of which are troubled countries in terms of the reliability of supply.

But if we can develop the Outer Continental Shelf and the resources in federal lands, this country has an ample supply of conventional oil and gas.

There’s also a tremendous amount of unconventional oil and gas, for example, in the oil sands of Alberta (not that far from this country).

Shell Canada, a subsidiary of Royal Dutch Shell, is developing oil sands in Canada and there’s oil shale in Colorado. Oil shale in Colorado represents a huge opportunity sometime in the next decade, or the decade beyond, to bring much oil and gas into the American economy.

Shell has a research project in Colorado where we’ve been for the last 20 years testing the technology that avoids mining this oil shale.

Instead of mining it, which creates all kinds of issues around the efficiency and the cost and the environmental concerns of mining vast quantities of oil shale (which are 1,000 feet below the surface of the earth), we’ve instead developed an in-situ heating methodology where we drill conventional holes, put heaters down in the holes, heat the oil in the shale so that it matures rapidly and drips off the rock and gas molecules flow from the rock.

And we can then pump them out of the ground using conventional means of pumping and storing. The research is moving forward positively.

We’re now in the form of testing freeze wall technology to protect the heated area for the oil and gas production but it’s still some years off before we make a financial decision to invest in this as a major production opportunity. But again, the good news is there’s plenty of unconventional oil and gas out there.

So we have conventional oil and gas; we have unconventional oil and gas; there’s also something else that helps our gas supply and that’s liquefied natural gas.

Around the world, there are vast tracts of gas where we can develop it as a natural resource, cool that gas into liquid form and ship it to ports around the country where it can be re-gasified from the liquid into its gaseous state. In this country, Shell has rights in Elba Island, Georgia and in Cove Point, Maryland, but those are only two terminals that are active.

If you look at the demand-supply curves for natural gas going forward and the popularity of natural gas as one of the cleanest forms of fossil fuel energy, one of the most efficient uses of hydrocarbon molecules (particularly for electricity production and the development of the efficient gas turbines that GE or other companies make), it is a wonderful way to produce electricity.

But the demand-supply curves say that because it’s such a wonderful form of producing electricity, over the next 10 years the number of planned turbine electricity production plants is going to outpace the supply of land-based or Gulf of Mexico-based natural gas production by somewhere between 10 and 20 percent.

One solution is keep raising the price, which means we’ll use other forms of energy because they will be, perhaps, cheaper. Another solution is to bring in liquefied natural gas from around the world, but we need re-gas terminals and there we have a problem.

Who wants a re-gas terminal in their community?

We’re working very hard right now with the State of New York to try to get approval of a project called Broadwater, which would be based not in nobody’s backyard but in the middle of the Long Island Sound (11 miles from Connecticut; nine miles from New York state) tying into an existing pipeline system bringing new energy to the nation’s most expensive energy marketplace.

The highest electricity prices; the highest natural gas prices are in Long Island and in Connecticut.

Here’s a chance to bring in a billion cubic feet a day of new gas supply to that region – but we have a problem. Nearly every elected official in the region is opposing it. We’re trying to persuade the communities that this is a safe, serious and secure form of new energy, which can impact prices and available supplies. So far we’re making progress, but it’s not an approved project yet.

And there are other such projects around the country that we’re working on and we do believe that we can augment the natural gas supply with liquefied natural gas, which eases the pressure in the Midwest, for example, eases the pressure on future prices by bringing in this liquefied natural gas.

But if we do that, there’s still more to be done. You know in this part of the country about coal. You know a lot about coal. We’d like to work with you on the subject of “clean coal.” Clean coal is different than pulverized coal in the sense that pulverized coal is burned to produce electricity; it’s difficult to contain the emissions.

Also, the molecular interaction (that is the destruction of the molecules to produce the heat to produce the electricity) is inefficient with pulverized coal compared to gasified coal. Gasified coal releases virtually all of the energy of the carbon molecule because the gasification process in the form in which the molecules are destroyed releases the vast amount of energy.

I’m a political scientist, so forgive my technical explanation of coal gasification. But think of taking that pulverized coal, which are little bits of gravel-like coal, down to the consistency of talcum powder. We all know the consistency of talcum powder and how dry it is.

Take that dry talcum powder-like coal substance, enter it into a gasifier that’s operating at 2,500 degrees Fahrenheit, more than 1,000 pounds of pressure per square inch and what happens to those molecules of dust?

They explode into the most efficient form of destruction, which then enables more efficient use of coal and the gasifier contains the explosion so you can then control the CO2, control the other emissions that come off of the coal destruction and manage those emissions according to whatever regulatory or according to whatever economic opportunity presents itself.

So, clean coal, liquefied natural gas, conventional oil and gas, unconventional oil and gas represent a huge energy security opportunity. But is that enough? No, there’s more.

As we think about the future, we heard the President the other night talk about cellulosic ethanol. There’s a whole future out there of biofuels. Shell’s been active in the biofuels business for decades.

Ethanol is the most prominent biofuel that we hear about but there’s also biodiesel, there’s butenol, there’s other forms of biofuel that can be developed.

Shell’s interest is primarily in cellulosic ethanol. Cellulosic ethanol is ethanol from straw or ethanol from corn stalks, instead of corn kernels, or ethanol from wood chips or municipal waste.

And so we have research and investment projects looking at paper and cardboard, which would otherwise go to a landfill or somehow be destroyed or perhaps reprocessed into more paper. Or, wood chips. How many wood chips enter landfills across this nation after storms and after landscaping projects and after construction projects?

Those woodchips can be turned into ethanol. Or all the straw that is wasted in today’s world can be turned into ethanol. Now we prefer cellulosic ethanol to corn ethanol (even though we will distribute corn ethanol) because it doesn’t affect the food chain. It, instead, is waste product that becomes fuel.

Now we are anxious to get on with this, but the research and development is still taking place. We support the President’s direction that he talked about in the State of the Union, but the details of how to achieve 35 billion gallons a year have a long way to go to be worked out. But we can see a 10 percent average fuel supply coming from ethanol in the future.

Ten percent means we can use the existing infrastructure. We don’t have to put in new pipes, new pumps, new kinds of storage facilities for what some people call E85. E85 is an ethanol product, mostly ethanol. Our concern about E85 (although some people are advocating it) is that the average energy efficiency of E85 is less than gasoline or less than 10 percent ethanol gasoline.

Also, it requires a new infrastructure. But we are, nonetheless, testing the product in our Chicago region and we’ll see what that consumer test reveals. But all kinds of biofuels are of interest to us because we’re a fuels company and our distributors are fuel distributors and so we believe that we can help the mobility supply line in the future through biofuels.

But in addition to that, Shell’s active in other forms of energy because we believe there’s a future in renewables as well. And so wind energy – today about 350 megawatts of electricity will be produced by Shell wind farms in the United States and other parts of the world.

We believe there’s still a lot of room for growth for more wind energy and the good news in this area is, ladies and gentlemen, in the United States of America we do have a lot of wind and there’s different ways of looking at that. But there’s a lot of wind here that we can capitalize on. And wind has been proven to be an efficient source of energy although it’s a variable source of energy as we also know.

But there’s also solar energy. Shell’s been active in solar energy for a decade. We recently sold our photovoltaic solar energy business based upon silicone technology to somebody who is very much into silicone so that we could move into a new technology called copper indium diselenide, which is significantly more efficient and more cost effective than silicone as a source of electricity from the sun.

And we have a joint venture with St. Gobain, which is a glass manufacturing company, and between the technology that Shell brings to the party and the glass manufacturer, we look forward to the future of testing photovoltaic cells from this copper indium diselenide product in markets around the world.

And let me now move to hydrogen. Now there are some cynics out there that say a hydrogen fuel source (a hydrogen power source) has great promise and always will. We take a little different view. We think that the promise is here. We think the promise is here to be developed.

Shell has a strategic partnership with General Motors currently testing hydrogen fuel cell vehicles in Washington, D.C. where you can go to a standard Shell station on Benning Road, near RFK Stadium, with a hydrogen fuel cell vehicle and fill up.

The hydrogen fuel tank, storage tank and pump looks just like a regular gas pump and we’re taking members of Congress around Washington in these hydrogen fuel cell vehicles so they can see it’s real, it’s possible, it’s doable. It was mentioned that I’m on our Energy Department’s Hydrogen Technology Advisory Task Force; we believe that there’s a play out there (a long-term play, perhaps) but there’s a play for hydrogen fuel cell vehicles.

A different alternative to the kind of mobility fuels we’ve been used to. These would essentially be electric cars, fueled by a hydrogen fuel cell.

We need two breakthroughs for this to occur.

One – hydrogen storage in the vehicle. We need to get enough hydrogen stored in the vehicle that consumers will actually buy it, which means we need about 300 miles per refueling cycle because people don’t like to stop more often than that to replenish their fuel supply.

Secondly, we need a hydrogen supply chain – a logistics supply chain where you know that if you’re leaving your city where you buy your hydrogen, there’s hydrogen down the road. And that takes some time to put in such a supply chain.

But now we have conventional oil and gas, unconventional oil and gas, liquefied natural gas, clean coal, biofuels, solar, wind, and hydrogen. Does that meet our energy security needs of the future? From a Shell point of view, we think three more aspects of energy security are critical to delivering energy security.

First among the critical requirements is a tremendously different approach to energy efficiency. We waste tremendous amounts of energy in our lifestyle in the manner in which we design buildings, in the manner in which we design vehicles, in the manner in which we use vehicles, in the manner in which our homes, our schools, our offices, our factories are operated.

And what Shell calls for is a “culture of conservation” that affects hearts and minds, which then affects technical requirements, standards, regulations, demands for efficiency coming from the market or coming from regulators – where a culture of conservation drives us as consumers to say, “Let’s use energy more efficiently.

Let’s design it into our appliances and design it into our homes and design it into our automobiles and let’s demand that from the producers of such equipment or such construction.” We believe that there are tremendous gains to be had and tremendous energy security to be achieved with a “culture of conservation” that puts energy efficiency high up on the priority list whenever it comes to energy usage.

The second point: we don’t educate ourselves on energy very well. We’ve looked at school curricula around the country. We have yet to find curricula within the school system that teach energy. Energy, as I described earlier, is the life blood of our economy and the source of our lifestyle, yet we don’t teach it.

We teach math and science and physics and geology and history and so many other things, but we don’t teach energy, which is at the heart of what we do in a modern society.

And so by addressing the school systems, the school curricula of middle school or high school children, we believe we can go a long way towards helping ourselves and our future generations manage energy more wisely, far better than we did the last 50 years. And we’re not just talking about it; we’re doing something about it.

We’ve developed a website called, “Energize Your Future,” which contains a semester’s worth of energy education that school systems can download and it’s free.

And we’re not selling Shell products; we’re selling energy information on this website. It’s a public service provision that’s part of our social agenda in which we worked with academicians in order to prepare the materials to address the school ages that we’re talking about – middle school and high school.

So teachers can download the teaching curricula, students can access the website and do their homework assignments and play energy games and watch energy films all about where energy comes from, how it develops, how it’s used, how it comes to market, how we need to be socially accountable for energy, which gets me to the third point.

The social responsibility around energy demands a CO2 greenhouse gas agenda for the future. You may have seen yesterday’s Financial Times. There was an op-ed from my boss, the Global CEO of Shell, Jeroen Van der Veer, who said, “It is time for government around the world to step up to create a regulatory framework which enables markets to operate with respect to greenhouse gas management.”

The time has come to stop talking about solutions and start putting solutions in effect.

And whether that means capping emissions and putting a trading system in place or other carbon management technology advances such as carbon sequestration, let’s have a level playing field where the supply side and the demand side of energy are being managed in a regulatory framework by government in such a way that not only nations but the world can move forward to address the CO2 issue affecting the environment.

So the combination, ladies and gentlemen, of carbon management, education of our children, energy efficiency in our homes, our schools, our factories, our lifestyles, unconventional oil and gas, conventional oil and gas, liquefied natural gas, solar, wind, hydrogen and clean coal – all of the above – from Shell’s point of view, offers energy security for the future not just for today but for generations as far out as we can imagine.

Thank you very much. And I would be happy to entertain comments, questions, rebuttal – whatever is on your mind.