Speeches

John Hofmeister's Energy Speech in Hartford

12/03/2007

John Hofmeister's remarks to the Word Affairs Council of Connecticut in Hartford, Connecticut.

Ladies and gentlemen, I really love the opportunity to talk to you about something near and dear and that’s energy security and whether we can achieve it or not.

Let me define it first. Energy security (for the purposes of this evening’s conversation) is energy that is available and affordable, not just for this generation and the next generation, but for every generation we can imagine as far into the future as we can think about.

That’s our operative definition for energy security for this evening’s discussion. Available and affordable energy for the future as far as we can imagine the future to be, which could be a very long time.

Why are we on this 50-city visitation? There’s a story behind it.

The story that’s behind it is the (to say it politely) the angst that occurred beginning in the fall of 2005, followed by the anger which occurred in 2006 and the sustained issue of extraordinary high prices for retail oil products and the sustained high crude oil price, which tends to drive those high gasoline prices and the inability of consumers, political leaders, oil companies and every other stakeholder we can think of to come to grips with this.

Because who is right? Who is responsible? And who can do something about it? But, in the face of it all, when I got the letter from a customer that showed me hanging from the gallows, I knew that something had to be done.

We looked around at the competition and what the competition were doing in terms of communicating their messages; we looked at our past and we looked around the world at how does Shell communicate in different markets around the world?

And we came to a conclusion that all the advertising in the world would probably not change a single opinion about who we are and what we do, because you don’t have time in a 30-second or even a 60-second ad to get your story across, other than throw some nice music at people, some nice images and perhaps a few words, which we’re all saturated with anyway – anyone who watches television or listens to the radio or reads the newspaper.

And so as the leadership team and I were sitting around last March, we talked about this and the angst and the anger and we could see even the likelihood of higher prices on the horizon in April and May, because across much of the country we were going to phase out MTBE because of a Congressional decision and move in ethanol, which was in very short supply (and still is, by the way).

And that was probably going to have an impact on further raising the prices because MTBE was going out of the system; ethanol coming into the system because of federal law and people would not know that.

And so we said, “Why don’t we go talk to the people? We have six million customers a day come to Shell stations and Jiffy Lube stores. Why don’t we go talk to the people who buy our products? Let’s talk to the leaders of communities in which our retail outlets are operating.”

Let’s talk to the elected officials in communities where legislators are considering issues around oil companies and let’s consider it in the context of energy security, because at any price what we need to protect are the two fundamental deliverables of energy.

One of those deliverables is the essence on which economies are built. We can’t build our economic base without energy, whether that’s an industrial base (looking at how factories are run, for example) or looking at the information-era base in which information age relies on energy as its core element in order for things to work electronically.

In fact, a few weeks ago, we were in Seattle and I had the opportunity to meet a couple of senior executives from Microsoft about their energy security at Microsoft. And they said, “We’re getting ready to build across the Northwest six new information centers based upon the projection of economic growth of our company. But, if we’re going to build these six information centers between Washington and Oregon we need the equivalent of a 350-megawatt new power plant, just for these six information centers.”

That’s a lot of energy to drive the Internet, to drive the servers which will help customers of Microsoft do what they do over the Microsoft Internet system.

The second critical aspect of energy (in addition to the economic base on which our economy is predicated) is our lifestyle.

The lifestyle we live - the comfort on a cold winter morning or a hot summer day, the ability to go where we choose to go, when we choose to go there with our personal mobility at our call and discretion, the desire or the thrill of a holiday, taking off on the plane to the Caribbean this time of year (not a bad place to go).

The lifestyle we choose is very much dependent upon that energy.

So what about energy security? Well, the last 50 years were pretty good. We can all look back over the last 50 years or 60 years (post World War II) and we can say, “We’ve had a good run on energy security.” Energy was available and it was affordable. Remember gasoline for 19.9¢ or 25.9¢ a gallon? Some probably do.

It was affordable. Electricity rates of three, four cents a kilowatt hour. Those prices used to exist. The last 50 years were good for energy security, but they created a dilemma. We fell in love with cheap energy and it was wonderful. But, what about the next 50 years?

Where do we go for the next 50 years of supply and still deliver available and affordable energy when many of the older oil fields of this country, the North Sea in Europe and so many of the oil fields that we’ve been accustomed to having access to are in decline?

For example, the major oil field in Mexico is dropping at the rate of 10 percent per year and accelerating in its decline. We’re getting three million barrels a day from Mexico, but they will soon become an importing nation, just to meet their own needs and meet their external contracts.

The next 50 years will be the test of energy security, but there’s some good news. The good news, ladies and gentlemen, is there’s all the energy to be had that we want if public policy will enable it.

Let’s start with conventional oil and gas. In this country alone, more than 100 billion barrels of known, available oil and gas in the Outer Continental Shelf and on federal lands that we know exists but we can’t get access to it. If we could get access to it, that’s 100 billion barrels.

That’s 30 some years of additional production of oil and gas to meet the sustained needs of just America. In addition to that, there’s more than a trillion barrels around the world of known, conventional oil and gas – where we know where it is; we know how to get it out of the ground and we can meet the needs of the future with that trillion barrels, except that more and more our country becomes dependent upon imports.

Some of those imports coming from politically unstable parts of the world where the insecurity of the stability drives the price of oil, making it unaffordable. And, the world will produce today about 85 million barrels of oil; the world will use just about 85 million barrels.

So the supply-demand equilibrium is just there. We can’t take much disequilibrium without the price spiking. So we watch continuously (traders do, too) over unrest, upset, possible disruptions in that equilibrium and that makes oil more expensive because of the nervousness of the trading market place.

But, if the U.S. produced its 100 billion barrels, if we continued to rely on the trillion barrels from other parts of the world, does that deliver energy security? Well, we don’t control international politics; we think it doesn’t.

So, there’s some good news on top of that. If we look at unconventional oil and gas, there’s even more of that than there is conventional oil and gas – the oil sands of Alberta (probably a trillion barrels of it), the oil shale of Colorado (probably a trillion barrels in Colorado), the heavy oil of Venezuela (probably a trillion barrels in Venezuela).

There’s three trillion barrels just in this hemisphere. That’s a lot of oil, now technologically difficult to acquire. For example, oil shale – Shell has had a research project going for nearly 20 years in the Colorado oil shale and we’re still not ready to make an investment decision on whether we can develop that in a commercial way and meet the environmental responsibilities that would be important to us.

But, we’re continuing the research and we’ll see how that develops. In Canada, the Canadian government made a strategic decision as a nation to develop the oil sands of Canada and Shell Canada (a listed company in Canada) is producing about 150,000 barrels a day and is positioned to double that over the next few years with a major investment project – difficult and complicated, but doable.

The heavy oil in Venezuela, well, we’ve seen in recent weeks the Orinoco Basin has been now nationalized by the government of Venezuela and the companies that are in the Orinoco are really questioning how they proceed; some of them don’t know yet. So, that’s an area of international tension. We’ll see how that develops.

But, if we develop the conventional oil and gas and we develop the unconventional oil and gas do we have energy security now? At Shell, we think the answer is no. We think there is more to do particularly in the area of liquefied natural gas.

The good news is in this world we have a lot of gas and a lot of that gas is a long way away from markets. In other words, there are huge gas fields off the Northwest Shelf of Australia, huge gas fields in Nigeria, huge gas fields in Russia where there’s no market for that gas.

That gas can be liquefied by cooling it to some minus 260 degrees Fahrenheit and the gas becomes liquid. The liquid can be transported by ship; the ships can deliver that liquid to a regasification terminal on a coast of this country and can augment the gas supply.

That’s important in this country, because if you do the demand-supply curves looking forward over the next 10 years (because we like natural gas so well, utilities have converted to integrated gas turbine electricity production – very efficient and very clean), the demand growth for natural gas in this country exceeds the supply over the next 10 years by quite a number, which will do what?

It will raise the price of gas, unless something is done. Liquefied natural gas becomes the way of augmenting the natural gas supply from the ground by bringing this LNG from other markets into the U.S. market. Shell has participating rights in a re-gas terminal in Maryland and a re-gas terminal in Georgia, gas terminals in Mexico – one in Baja, one in Alta Mira – and we’re proposing to put a gas terminal (with a partner here) in the Long Island Sound, called Broadwater.

This liquefied natural gas becomes an augmentation to the energy supply, so does that, then, deliver energy security? Not yet. We move to a different energy supply – coal. This nation has more coal than the whole rest of the world put together. We have coal for hundreds and hundreds of years but coal, what we know as old coal, is dirty coal. So is there something called clean coal?

The cynics would say, “No.” The scientists would say, “Yes.” Clean coal (IGCC – Integrated Gas Combined Cycle) coal gasification doesn’t burn coal, it gasifies coal. I’m not an engineer but let me try to explain the technology. If you took pulverized coal, which is normally burned to produce heat, which makes steam, which makes electricity – instead, take that pulverized coal and reduce it even further into what looks like talcum powder.

Imagine that – coal reduced to the quality of material that is the same as talcum powder, dried completely. Take that dried talcum powder coal and enter it into a Shell gasifier at 2,600 degrees Fahrenheit at over 1,000 PSI (pounds per square inch) and watch that molecule just explode.

Basically destroys the molecule, which creates hydrogen and then can become the same as natural gas. We call it syn gas, so it turns coal into gas and that gas then goes into the Integrated Gas Combined Cycle turbine and creates electricity.

What about the CO2? Well, there’s ways to manage the CO2 coming through the gasifier because it has technology that enables you to capture the CO2, instead of it going up the smokestack. And that can then be managed some ways. In some cases, it can be used in greenhouses.

We do that in the Netherlands today, with CO2 coming out of one of our refineries in the Netherlands. It can be sequestered. The technology around sequestration is evolving. It’s not solid science, yet, but it’s hopeful and we need more experimentation and more research, but sequestration of CO2 is a distinct possibility.

So now we have it – conventional oil and gas, unconventional oil and gas, liquefied natural gas and gasification of coal. Does that deliver our energy security for the future? No, not yet. There’s more. Shell has been at the biofuels game for more than 30 years. We’re the world’s largest distributor of biofuels, biodiesel, and ethanol.

We believe there is room in this marketplace – lots of room in this marketplace – for second-generation ethanol. Rather than ethanol from corn or sugar cane, we believe that ethanol from biomass (that is the corn stalk, rather than the corn kernel) through cellulosic breakdown is a better option than ethanol from food-based products.

The reason, obviously, is two-fold. One, the environmental effect (from a CO2 standpoint) of using corn-based ethanol isn’t much different than gasoline. On a comparative basis, cellulosic ethanol is a much cleaner fuel in terms of its burn. Secondly, it doesn’t affect the food chain.

The corn that goes into the fuel could otherwise go into chicken feed or tortillas or Doritos or whatever we use corn for (Coca-Cola, for example, high fructose corn syrup). So, rather than compete with the food chain, Shell’s view is, let’s go with the cellulosic ethanol using additional research and development to produce massive quantities of second-generation ethanol, rather than first generation.

Now, we’re distributing first generation because that’s what is available today. But, let’s work on the next generation, so that we can provide up to 10 percent of the fuel supply. And once we get to 10 percent, let’s see where we go from there.

So, biofuels – but, in addition, there’s solar energy. Shell’s been at solar energy for over a decade.

We recently made a technical decision to move away from silicone-based photovoltaic cell production to move toward what we call thin film cell production, which is a copper indium diselenide base, which is lighter and produces more electricity per panel than silicone ever would.

And, therefore, we’re shifting gears as we go – moving to a new generation of technology for solar photovoltaic production of panels.

In addition to that is wind. If you happen to see today’s Wall Street Journal front page, there’s an article on Shell wind in West Texas – it really blows out there. In fact, this country has a lot of wind (many ways to interpret that), but we have a lot of wind in this country.

We’d like to capture that wind and we’re talking a 1,000-turbine wind farm in West Texas – huge project, the biggest one we ever would have tackled. But, we already have wind farms in seven states. We’re working on a new wind farm in Maui.

We just started construction on a big wind farm in Mount Storm, West Virginia. Wind is a viable energy source as a supplement. The problem with wind energy is the wind doesn’t always blow. And so you have to have something else, because wind doesn’t make it all the time.

But, in addition to wind energy, something we’re very excited about as well is hydrogen fuel cell technology. Hydrogen fuel cells can be developed for two kinds of power – one is stationary power and the other is mobile power.

In Washington, D.C. today, you can go to a Shell station on Benning Road (three miles from the nation’s Capitol) and fill your hydrogen fuel cell vehicle with hydrogen from a regular Shell pump, designed specifically for hydrogen dispensing.

We had the President of the United States there about a year and a half ago. He loved it. And he saw the hydrogen fuel cell vehicle being re-fueled. How dangerous is it if you put the President of the United States right next to the hydrogen pump? Secret Service said, “Okay. No problem.”

And, it’s safe. It’s perfectly safe. And so is the storage and so is the use of the hydrogen in the car. The difficulty right now for consumers like you and me is the cars are very expensive.

They are really not being produced at scale to where citizens could afford them. But, 10, 15, 25, 30 years from now, that will be different and we believe hydrogen fuel cell vehicles will take their place alongside internal combustion and diesel mobility vehicles and it will supplement the fleet and may one day dominate the fleet. Who knows?

But there is an issue with hydrogen fuel cell vehicles. In fact, there are two issues. One is how much hydrogen can you store in a car because of the weight of the storage devices in which the hydrogen is kept.

And what we need to get to is about a 300 mile-per-tankful hydrogen fuel fill. That’s a challenge we haven’t mastered, yet. Second is where are you going to buy your hydrogen?

What we have to do is build a hydrogen system of distribution and dispensing, which we hope to use our retail Shell network in order to do that. But to put a hydrogen storage tank in a Shell station requires regulations in a community that will support the storage of hydrogen in your local Shell station.

I was talking to Senator Clinton a little bit ago about a hydrogen station in basically her backyard in New York and she said, “Oh I love the idea. How can I help?” And I said, “Well there isn’t anything you can do, Senator, but we’re having real problems. The problem is the city does not have a regulation that ever envisioned hydrogen storage in this city.

So we have to go to the rule writing process to write a rule which City Council will then have to pass if we’re going to get hydrogen stored in this station in your city.” She said, “Oh. How long will that take?” I said, “Anywhere from a year to a year and a half.” She said, “We can’t go faster?” I said, “I’m sorry. I don’t think we can.”

And she said, “Well, keep me posted.” So, we are in the process of writing a rule that the city can consider; the fire Marshall has to grant a permit. It’s going to take time. How many cities do we have in this country?

Think about that. Every village, every township, every county, every city – tens of thousands of regulations will have to be written in the way in which we’re organized. But nonetheless, hydrogen fuel cell, solar, wind, biofuel, conventional oil and gas, unconventional oil and gas, liquefied natural gas and clean coal. Are we there? Not yet.

I know you’re getting tired – three more things from Shell’s point-of-view. Number one, we cannot secure our energy future without simultaneously tackling the issue of greenhouse gas management. From Shell’s point-of-view, the debate’s over on greenhouse gas as a factor in global warming.

We’re not climatologists and we’re not scientists that deal with nature in this manner. But when 90 percent of the world’s leadership and when the vast majority of scientists say there is an effect, who are we to challenge that? So, our view is officially, “Let’s have a government-established framework of rules and regulations in which markets can operate to affect the CO2 that enters the environment through the decarbonization of fossil fuels.”

We support that. We’ve talked to the top of Congress about it; we’ve talked to Speaker Pelosi and we haven’t talked to Carl Reed, yet, but we believe that something should be done at a national level.

We know there are states interested in this as well. Shell is a company that operates in 50 states. Do we subscribe to 50 different rule-makings or should we have one national rule-making? We believe it should be national and then global so that greenhouse gas management is a part and parcel of energy security.

Secondly, we believe that the same kind of framework needs to exist that is a rules framework, sponsored by government, in which markets can operate to drive energy efficiency to much greater levels than we know today.

We call it a “culture of conservation,” where the hearts and the minds of people, the hearts and minds of families, children, students are determined to do differently in the future than we have done in the past, in terms of the use of energy and the manner in which products are designed – from cars to appliances to homes, the way in which energy is used in buildings, in factories, in all circumstances of life.

So that this culture of conservation at the behavioral level is supported by the framework in which markets can operate to make energy efficiency an attractive outcome in the marketplace of tomorrow to where we can get far more value from the molecule of energy than we do today.

And thirdly – education. Education of our children, education of our society in which people come to understand - Where does energy come from? How is it produced? How is it distributed? Why does it connect so intimately to our economy and our economic well being? How do we preserve it? What is the social aspect of energy?

All of the various aspects of energy which we just assume people know. And to the regret of my company (and I think to the regret of the industry and actually to the regret of the American people), we really don’t understand energy. We point fingers at one another.

We point fingers at big oil saying, “You guys, you just charge whatever you charge and you make whatever you make and you screw those American people.” When inside an energy company, when we lost the Gulf of Mexico seven times in 2005 to hurricanes and shut down production seven times in 2005 (just in the summer months) and with between Katrina and Rita we lost 25 percent of the refining capacity in this country for not just days but weeks and months, months.

Some refineries still aren’t back up from Katrina and Rita – that’s over 18 months ago.

Inside the oil companies we’re applauding our employees for their heroics at doing what they did under awful conditions to get fuel to Americans who needed it so that anybody who needed to buy gas in the fall of 2005 could buy gas.

So, we’re applauding our employees and we’re getting killed by the politicians and our own customers because we don’t understand each other’s point of view. Consequently, you’ve privileged me tonight with the opportunity to share my views with you.

Thank you very much.