Speeches

John Hofmeister's '07 Speech - Indianapolis

09/01/2007

How the U.S. Can Ensure Energy Supply for the Future. John Hofmeister's remarks to the Indianapolis Economic Club in Indianapolis, Indiana

Ladies and gentlemen, thank you for the opportunity to join you today.

And if I may reflect for a moment, it is my first visit to Indianapolis in quite some time. I had the pleasure of meeting your governor this morning. I said, “Governor Daniels, the last time I was here, I was meeting Governor Orr, in 1986.”

So, it has been a while. But, I can honestly say to you that I am the product of wandering Indiana. During the 1980s, I spent most of that decade living in Fort Wayne, working at the GE facility there, and wandering Indiana.

Whether it was Linton, or Tell City, or Decatur, or Goshen, South Bend, I saw a lot of the state and loved every minute of it. It is a pleasure to be invited to this distinguished forum.

We were pleased to be contacted by the Indianapolis Beautiful Committee prior to arriving and were happy to make a contribution to beautifying Indianapolis and helping with the tree planting that is part of your city. I am pleased also that Shell has a chance to speak to you about energy security in our country.

It is an issue of major importance, in our view, that the demand side, which is you, and the supply side, which Shell represents, come together to talk openly and honestly about what we share together: the use and distribution of what we have seen recently become an increasingly scarce resource.

Not scarce because there is not a lot of it – there is a lot of energy in the world – but scarce because the demand, ladies and gentlemen, is growing incessantly and in some respects faster than we can keep up with that growth and demand. And we will try to explain why.
 
The nation actually had a wonderful last 50 years when it comes to energy security and energy supply. How many of you in this room can remember a gallon of gasoline below 35 cents? I bet a few of you can.

Yes, look at the hands. How many of you have now paid over three dollars for gasoline? Even more hands. We enjoyed 50 years of ample, adequate supply for a number of reasons.

But, ladies and gentlemen, the next 50 years will be different.

I think it is important that we have a dialogue about how it will be different, why it will be different, and what we need to do in order to secure the energy future not only for those of us in this room, but for our children, and their children, and their grandchildren. We have that responsibility, today.
 
But here I am, representing a company and to some extent an industry, which in the opinion of some has zero credibility. I am talking to you about a product that you would probably not want to taste, touch, see, or smell.

I am meeting continuously with members of Congress saying, “More access, please. More access, please,” to the point that they are saying, “All right! Go away, please. Fine. Go somewhere else” – which we have done. We have gone to the export market, so we import oil rather than develop our own oil. I represent a company that does believe in efficiency and conservation.

But ladies and gentlemen, if we took the meaningful steps today, it would take 20 to 30 years to impact energy demand in the future.

And alternative energies – while we are working very hard to bring alternative energies to market – the reality is we have spent the last hundred years building an oil and gas infrastructure in this country, and building an alternative energy infrastructure is simply not going to happen in 10 or even 20 years.
 
Think about the size of this country’s demand for energy. Just in terms of motor fuels, 150 billion gallons per year are consumed in this country.

We know the ethanol folks – and we will come back to ethanol in a little bit – are talking about increasing the ethanol mandate from seven and a half billion gallons to something greater than that as part of the new agriculture bill in 2007.

We welcome discussion on that subject. Seven and a half billion gallons of ethanol was prescribed in the energy act of 2005, just a little over one year ago. Nobody knew then how to get to seven and a half billion gallons. Well, we are on our way.

There are a lot of distilleries under construction to produce ethanol. But seven and a half billion gallons, ladies and gentlemen, is five percent of the annual demand. If we doubled ethanol production to ten percent, it would still only meet ten percent of the demand for motor fuels.

Ethanol, while it is useful and helpful to extend the existing supplies, is really not the solution some would suggest in the way in which it is currently envisioned.
 
The reason we are out here doing this, really, is out of respect for you, our customers.

We do this out of respect for the 6 million Americans that come to purchase our products every day, whether at Shell branded stations or at Jiffy Lube stores, the many utilities that buy our natural gas, and the many other consumers of lubricant products in factories and in food processing plants across the country.

It is out of respect for you and the brand we try to bring to you and also out of respect for the tens of thousands of our employees who are really the face of Big Oil – though I do not think of them as Big Oil, but instead as my neighbor, my friend, my associate.

These men and women work every day under conditions that are sometimes very risky and sometimes very difficult in the tropical Gulf of Mexico, or the frozen turf of Alaska, to bring energy to the American people. Out of respect for you and respect for them, we are trying to bring an energy message about the future.
 
In 2005, we were traumatized – traumatized by Hurricane Katrina and Hurricane Rita – but that summer most of us who work in the Gulf of Mexico also shut down our platforms five additional times.

We vacated our platforms for Hurricane Dennis and Wilma. We did not hear a lot about those storms, but they shut down the Gulf of Mexico.

I had one very bad day in the fall of 2005, on the Friday after Rita went through Beaumont, Texas. A week later, I called secretary Bodman, Energy Secretary of the United States. I said, “Mr. Secretary, I am calling you on Friday, so that you would be aware that I may also call you on Monday.

It is Friday night, a week after Rita. We have determined that the Motiva Refinery (half of which is owned by Shell) in Port Arthur, Texas, has the last 300,000 barrels of finished product along the Gulf Coast to push into the Colonial and the Plantation Pipelines. These pipelines serve the entire southeast corner of the United States all the way up to Washington and Baltimore.

We do not have any power. We are working as fast as we can to restore emergency power, so that we can push those barrels this weekend, Mr. Secretary.

But if we are not successful, I am calling you, today, so that you can think about asking the President after I call you on Monday, if he could please declare a day of national reflection, so nobody drives, so nobody starts panic buying on the East Coast when those pipelines go dry.”

This is the United States of America. Forty-eight hours from panic buying, because of no supply going into those critical pipelines, the entire Gulf Coast was shut down. And there is no other source of product other than through New York Harbor where all the pipelines go north, not south. We were that close.

That was a very bad day. Fortunately, our people worked tremendously to get the electrical connections completed and we were able to push the barrels on Sunday afternoon, twelve hours before the pipeline went dry.
 
That is the kind of supply-demand relationship we have gotten to in recent years. We are living hand-to-mouth. In part, you say, “Well, why is the industry not investing in more manufacturing capacity?”

We intend to and we are. But it is only because in the last two to three years the manufacturing margins and the price of gas have supported the investment necessary to invest in more refining capacity.

The same Motiva Refinery that I have been describing that had the last 300,000 barrels is being developed. And shortly we will be making a decision, we hope, to put 325,000 barrels a day of new capacity into that Port Arthur refinery.

Other companies are making similar decisions, because we have gotten too close to the edge on the supply of finished products.
 
This is a supply-demand relationship that did not get tight overnight. Here is a reality that held back some of the issues of more investment, more recently. In the OPEC countries – when OPEC was formed, through the eighties, through the nineties – the OPEC countries regularly reported excess production capacity, unutilized, of 8 to 10 million barrels a day, which was always a security blanket.

If the world needed more oil, OPEC had capacity. And in the United States, we saw the development of the Gulf of Mexico and thought, “We are in very good shape.” But, two things happened, ladies and gentlemen. In addition to growing demand in the United States, Western Europe, and other parts of the world, we saw tremendous growth in India over the last half decade.

That 8 to 10 million barrel-a-day excess production capacity disappeared about 2002. And at the same time, the U.S. had not made a decision to expand production in the Gulf of Mexico for 25 years.

Production expansion in the Gulf of Mexico was prohibited by public policy until December of this past year when the Congress passed an OCS bill that allows us access to 8 million more acres than had been previously available to us as an industry – 25 years after the last grant.

So, the Gulf of Mexico has gotten tired; it is not producing what it can produce, ultimately. And we are well behind the curve in having had access to make more production possible. The good news is that Congress did pass that law; the President signed it.

But it is seven to ten years before that new acreage comes into production. In the meantime, we have this continuing issue of tight supply and continuously increasing demand, including that which is coming from Asia.
 
Now, in this country, there is a lot of good news. I really do have an optimistic message to share with you, today. The good news is we have a lot of reserves in this country that can be developed.

Conventional oil and gas on the Outer Continental Shelf – we know of 75 billion barrels that are available to us if public policy supported it.

So, yes I will plan to continue to knock on doors in Congress saying, “More access, please. More access, please.” That is part of what I think I must do, not only for my company, but also for this country. Whether they wish to hear it or not, they will hear from me, “More access, please.”
 
But, in addition to that, Shell is experimenting on unconventional oil research and development. In the Colorado Piceance Basin there are extensive reserves of oil shale that could be developed. We are researching that, but it will be some years before we know whether that is a commercially viable option.

We believe it will be, but we have to prove it. And we are currently in the midst of going through an in-situ development process where we do not have to mine the oil shale, but instead heat it in the ground and pump it out in traditional fashion. The oil sands of Canada make a huge difference in North America and actually in the world, because oil is a tradable commodity.
 
But, in addition to the conventional oil and gas and unconventional oil and gas that are out there, what else can we do? Well, there is liquefied natural gas. Indiana is quite a long way from the coast of the U.S., so liquefied natural gas may not come directly to Indiana any time in the envisioned future.

But liquefied natural gas is and can grow in the East Coast, West Coast and Gulf Coast, because liquefied natural gas is gas that is produced in remote regions of the world, liquefied by cooling it to minus 200 degrees plus Celsius, transported it in a ship and re-gasified once it reaches our shores.

Shell is active in Cove Point, Maryland, and Elba Island, Georgia, in bringing liquefied natural gas to America. We seek more liquefied gasification terminals –in particular, one in New York another in the Gulf of Mexico – but we have a little issue.

People speak positively about liquefied natural gas as long as the gasification plant is not in their state, or their back yard. Nobody wants it next door, for a variety of reasons – which in a democracy we can understand. And there should be an open discussion about it. But at some point, we either have to make it happen, or pay higher prices and have more insecure supply sources.
 
In addition to liquefied natural gas, there is also something called clean coal. We were pleased to read, and talk to the Governor, about Indiana’s clean coal initiative to produce thin gas from coal right here in Indiana through IGCC technology – that is, Integrated Gas Combined-Cycle Gasification of coal.

This nation has the world’s largest deposit of coal. A lot of that coal has been burned in a dirty fashion by pulverizing and burning it. Pulverized coal burned in conventional ways is a highly polluting use of coal. IGCC, which is coal gasification, basically gasifies that coal after it has been turned into a powder the consistency of talcum powder.

The molecules are gasified under intense heat and intense pressure, about 2,500 degrees. That is hot. And the gas that comes off of there can be separated from the carbon dioxide that comes off, or the sulfur, or the mercury, and then you are able to manage the pollutants.

In the case of the CO2, it can be managed in such a way as to sequester it, or use it in productive ways such as in agriculture, or in making fertilizer. So, there are a number of things that can be done. By that technology, we can burn coal cleanly. That is why it is called clean coal.
 
We are continuing to develop natural gas resources in this country, such as in Pinedale, Wyoming, the Barnett shale of Texas, the Fayetteville shale of Arkansas, and there is even shale here in this state and east of here.

There is a lot of natural gas yet to be developed, but know we have the access problem:  who will give us permission to drill on what land? In the case of federal lands, we are currently prohibited. Private lands we can of course develop, with the cooperation of the state and the property owner.
 
As we think about other sources of energy, the good news gets better. I have been covering what are often considered traditional fossil fuels. In addition, the industry and Shell in particular have been developing biofuels for a long time. Today, we are the world’s largest distributor of biofuels by volume.

By that I primarily mean ethanol and biodiesel. We currently are investing in second-generation ethanol. We know in the Corn Belt, there is a lot of interest in developing corn-based ethanol.

Shell, for a variety of reasons including long-term environmental impact and long-term efficiency, believes that second-generation, or cellulosic, ethanol is preferable in the long-term. Because we are a long-term company, we concentrate on the next generation.

While being a distributor of corn ethanol, we are developers of cellulosic ethanol, whether it is straw, cornstalks, grasses, wood chips, and even municipal waste. All of these, through enzyme research and distillation, can produce ethanol. It is currently our view that ethanol is really helpful up to about ten percent of the supply of motor fuel.

Beyond ten percent, ladies and gentlemen, the chemistry of the ethanol, which is essentially alcohol – you have heard me use the word distill, corn distilled equals spirits, right? The alcohol has a different chemistry to it, which in terms of the existing infrastructure of gas pumps, gas pipes, gas tanks, has to be taken into account.

If you are an advocate of E85, that is fine, but E85 requires infrastructure development to be able to handle the alcohol content of the fuel, otherwise we could have valves leaking, pipes deteriorating, and other unintended consequences of a good idea.

We are testing E85 in Chicago and are looking forward to the results of that test, but we also have to be totally transparent on the subject, and E85 ethanol yields about 25 percent fewer miles per gallon at about the same price of gasoline, including the subsidy that is part of the taxpayer subsidy that manufactures that ethanol.

In essence, it is 25 percent less energy produced for about the same cost, or more if you take away the subsidy going in. So, whether the market will accept E85 is something we think we need to test. But, we do believe biofuels are here to stay. We believe they will grow and we want to be part of supporting your mobility needs by providing them to you.
 
In addition to biofuels, there are other sources of energy we are working on, such as solar panels. Shell moved away from silicon-based solar panels last year. Instead, we are turning our technical research and development into a copper indium diselenide photovoltaic cell.

I was pleased this morning, to learn from the energy experts at Purdue that they too, have chosen CIS, or copper indium diselenide, as a preferred technology over silicon. We were reinforced in that - we smiled at each other. And we hope that we are both right as we move into a different technology for photovoltaic. We do believe that could be a viable business.
 
In addition to that, wind. Shell is building or running wind farms in seven states. From Maui, in Hawaii, where we are building a wind farm, to West Virginia, where we are also building a wind farm, and states in between – California, Iowa, Colorado, Texas. The good news about America, ladies and gentlemen, is that we do have a lot of wind. (And there are different ways of interpreting that.)

The wind is a CO2 -free source of good electricity and it is affordable – those projects are all commercially viable given the way they are operated. That is good news.
 
There is also hydrogen in the longer-term, and the development of what people call the hydrogen economy, including the hydrogen cell vehicle. Shell and General Motors are working in partnership to put together a hydrogen cell vehicle that is affordable and possible in the not-too-distant future.

In fact, in Washington, D.C., today, on Benning Road at a Shell station near RFK Stadium, there is a hydrogen storage tank and a hydrogen pump and a half a dozen GM fuel cell vans that are used to escort members of Congress and their staff to show them that hydrogen fuel cell vehicles are a reality and can become more so.

The President of the United States came to our station to see the hydrogen fuel cell vehicle in action. I talked to him about it and he enjoyed it. We did a ringer on him – this is worth telling. We wanted the President to see the fuel tank filled. So, we brought in a Texan to fill the fuel tank.

The President said, “What are you going to charge me for the hydrogen you are putting in that vehicle?” And the Texan – he did not know he was a Texan yet – looked up at the sky and said, “Well, Mr. President, it looks like it is going to rain today. I am going to charge you a lot. When the sun shines I do not charge so much.” And then the President heard the Texas accent and said, “I gotcha.”

So, the President has seen it and he believes in it. I think we will hear more about that (I hope) in the State of the Union Address. The Department of Energy and the Hydrogen Technology Task Force, of which Shell is a part, envision hundreds of hydrogen fuel cell vehicles on the roads of America over the next ten years, thousands of hydrogen fuel cell vehicles by 2015, hundreds of thousands of hydrogen fuel cell vehicles by 2020, and millions by 2030.

It will not, or it is not likely to replace the internal combustion engine, but as an alternative and as a source of quality mobility, we believe in it and hope to work on it.
 
So, here we are – conventional oil and gas, unconventional oil and gas, liquefied natural gas, clean coal technology, biofuels, wind, solar and hydrogen. Is all of that enough to meet our security needs of the future? Not quite yet. Three additional factors, ladies and gentlemen, that are essential to the energy security of this and future generations in Shell’s view include the following.
 
First is a focus on energy efficiency. We all know our homes, our schools, our offices, our factories, and our lifestyles are hugely energy inefficient. What we call for is actually a hearts-and- minds shift to a culture of conservation, a culture of energy efficiency where we simply do not tolerate waste and inefficiency.

Energy is a precious gift from nature and technology, and we need to be managing it wisely and designing it into our future lifestyles. We do not believe that asking you to take your foot off the accelerator, or asking you to jiggle your thermostat at home is going to make a material difference. That is not enough. But a culture of conservation where our generations learn to treat energy efficiently and wisely over the decades ahead will help.
 
Secondly, we must deal with the consequences of greenhouse gas emissions in our atmosphere. We believe it is the role of government to decide what to do. But as government decides what to do, in this country at least, let us have a national discussion on the topic. Let us not go state by state by state.

We worked with California state officials on AB-32, which is the nation’s first greenhouse gas regulatory framework in one state. Seven additional states have started to look seriously at the California legislation. If a company like Shell follows the public policy of 50 states in which we operate, we have to change what we do in perhaps every state.

We prefer a national dialogue and a national framework that government decides and of which we are all a part. We welcome the opportunity to be part of that discussion. We welcome the opportunity to bring our experience from around the world, in other regulatory regimes, to add to that discussion and debate.
 
And finally, ladies and gentlemen, we have done a bit of research to try to discover what is taught in our schools with respect to energy. What do young people learn, today, in elementary school, in middle school, in high school about energy – where it comes from, how it was created, how it is used, how social responsibility and energy come together?

And we are coming up a little bare. If we are not teaching our children about energy in the way in which we are teaching them about civics, physics, sociology, mathematics, English, history, then we are creating an unaware population of tomorrow expecting to live the way they have lived, today. But this whole discussion is about how that is not possible.

The next 50 years will be different from the last 50 years. We must also look at the curriculum. Shell has created a curriculum. Rather than just talk about it, we did something about it. You can go to Shell.com on the U.S. website and you can find a semester’s curricula targeted at middle and high school students. Teachers can download teaching instructions.

And we are not selling Shell – as much as I would like to! We are selling concepts on energy. There are quizzes and games, and the things that young minds can wrap themselves around in terms of what energy means to individuals and to society.
 
So, ladies and gentlemen, in addition to the forms of energy, we believe that conservation, greenhouse gas management, and the education of our young people are critical to the energy security that we all want for all of our generations to come.

Thank you very much.